-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UkabVK95C8T0oPRD8kkaXIJ3jacf8MrrEEzKhV8XLfaSeF4vuqEg1LjUI1oNf+ck d2YPrGf/7ruQRY96zPofuw== 0000077449-02-000003.txt : 20020503 0000077449-02-000003.hdr.sgml : 20020503 ACCESSION NUMBER: 0000077449-02-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20020202 FILED AS OF DATE: 20020503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEP BOYS MANNY MOE & JACK CENTRAL INDEX KEY: 0000077449 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531] IRS NUMBER: 230962915 STATE OF INCORPORATION: PA FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03381 FILM NUMBER: 02633052 BUSINESS ADDRESS: STREET 1: 3111 W ALLEGHENY AVE CITY: PHILADELPHIA STATE: PA ZIP: 19132 BUSINESS PHONE: 2152299000 10-K 1 r200110k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-K (Mark One) (x) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended February 2, 2002 OR ( ) Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (NO FEE REQUIRED) For the transition period from to ------ ------ Commission file number 1-3381 ------ The Pep Boys - Manny, Moe & Jack ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-0962915 ------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 3111 West Allegheny Avenue, Philadelphia, PA 19132 - --------------------------------------------- --------- (Address of principal executive office) (Zip code) 215-430-9000 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ----------------------- Common Stock, $1.00 par value New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 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 ----- ----- 1 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Yes No X ----- ----- As of the close of business on April 6, 2002, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $764,223,728. As of April 6, 2002, there were 53,646,131 shares of the registrant's common stock outstanding. 2 This Annual Report on Form 10-K contains "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward looking statements involve risks and uncertainties which could cause actual results to materially differ from those expressed in any such forward looking statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward Looking Statements." 3 DOCUMENTS INCORPORATED BY REFERENCE PART III Portions of the registrant's definitive proxy statement, which will be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year, for the Company's Annual Meeting of Shareholders presently scheduled to be held on May 29, 2002. 4 This Annual Report on Form 10-K for the year ended February 2, 2002 at the time of filing with the Securities and Exchange Commission, modifies and supersedes all prior documents filed pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities on or after the date of such filing, pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference this Annual Report. 5 PART I ITEM 1 BUSINESS GENERAL The Pep Boys - Manny, Moe & Jack and subsidiaries (the "Company") is a leading automotive retail and service chain. The Company operates in one industry, the automotive aftermarket. The Company is engaged principally in the retail sale of automotive parts, tires and accessories, automotive maintenance and service and the installation of parts. The Company's primary operating unit is its SUPERCENTER format. As of February 2, 2002, the Company operated 628 stores consisting of 615 SUPERCENTERS and one SERVICE & TIRE CENTER, having an aggregate of 6,507 service bays, as well as 12 non-service/non-tire format PEP BOYS EXPRESS stores. The Company operates approximately 12,841,000 gross square feet of retail space, including service bays. The SUPERCENTERS average approximately 20,700 square feet and the 12 PEP BOYS EXPRESS stores average approximately 9,600 square feet. The Company believes that its unique SUPERCENTER format offers the broadest capabilities in the industry and positions the Company to gain market share and increase its profitability by serving "do-it-yourself" (retail) and "do-it-for-me" (service labor, installed merchandise/commercial and tires) customers with the highest quality merchandise and service offerings. 6 As of February 2, 2002 the Company operated its stores in 36 states and Puerto Rico. The following table indicates by state the number of stores of the Company in operation at the end of fiscal 1998, 1999, 2000 and 2001 and the number of stores opened and closed by the Company during each of the last three fiscal years:
NUMBER OF STORES AT END OF FISCAL YEARS 1998 THROUGH 2001 1998 1999 2000 2001 Year Year Year Year State End Opened Closed End Opened Closed End Opened Closed End - ------ --- ------ ------ --- ------ ------ --- ------ ------ --- Alabama 1 - - 1 - - 1 - - 1 Arizona 23 - - 23 - - 23 - - 23 Arkansas 1 - - 1 - - 1 - - 1 California 132 4 - 136 - 1 135 - - 135 Colorado 8 - - 8 - - 8 - - 8 Connecticut 9 - - 9 - 1 8 - - 8 Delaware 6 - - 6 - - 6 - - 6 Florida 48 - - 48 - 1 47 - - 47 Georgia 26 - - 26 - - 26 - - 26 Illinois 25 - - 25 - 1 24 - - 24 Indiana 12 1 - 13 - 4 9 - - 9 Kansas 2 - - 2 - - 2 - - 2 Kentucky 4 - - 4 - - 4 - - 4 Louisiana 12 - - 12 - 2 10 - - 10 Maine 1 - - 1 - - 1 - - 1 Maryland 19 - - 19 - - 19 - - 19 Massachusetts 8 2 - 10 - 2 8 - - 8 Michigan 15 2 - 17 - 10 7 - - 7 Minnesota 2 1 - 3 - - 3 - - 3 Missouri 1 - - 1 - - 1 - - 1 Nevada 12 - - 12 - - 12 - - 12 New Hampshire 4 - - 4 - - 4 - - 4 New Jersey 25 3 - 28 - - 28 - - 28 New Mexico 8 - - 8 1 1 8 - - 8 New York 30 3 - 33 1 5 29 1 - 30 North Carolina 11 - - 11 - - 11 - - 11 Ohio 15 - - 15 - 2 13 - - 13 Oklahoma 6 - - 6 - - 6 - - 6 Oregon 1 2 - 3 - 3 - - - - Pennsylvania 46 - - 46 - - 46 - 1 45 Puerto Rico 23 2 - 25 2 - 27 - - 27 Rhode Island 3 - - 3 - - 3 - - 3 South Carolina 6 - - 6 - - 6 - - 6 Tennessee 7 - - 7 - - 7 - - 7 Texas 61 - - 61 - 1 60 - - 60 Utah 6 - - 6 - - 6 - - 6 Virginia 16 1 - 17 - - 17 - - 17 Washington 3 3 - 6 1 5 2 - - 2 ---- --- -- --- ---- -- ---- ---- -- ---- Total 638 24 - 662 5 39 628 1 1 628 === == == === == == === == === ===
7 DEVELOPMENT The Company's primary focus in fiscal 2001 was improving the performance of its existing stores. In addition during fiscal 2001, the Company opened 1 SUPERCENTER and closed 1 SUPERCENTER. In fiscal 2002, the Company plans to continue to focus much of its energy on improving the performance of its existing stores. As a result, the Company plans to open only two new stores, both of which will be SUPERCENTERS. If the two stores are opened, the Company anticipates spending approximately $4,023,540 in addition to the $674,211 it has already spent as of February 2, 2002 in connection with certain of these locations. The Company expects to fund the new stores from net cash generated by operating activities. PRODUCTS AND SERVICES Each Pep Boys SUPERCENTER and PEP BOYS EXPRESS store carries a similar product line, with variations based on the number and type of cars registered in the markets where the store is located. A full complement of inventory at a typical store includes an average of approximately 25,000 items. The Company's automotive product line includes: tires (not stocked at PEP BOYS EXPRESS locations); batteries; new and remanufactured parts for domestic and imported cars, including suspension parts, ignition parts, exhaust systems, engines and engine parts, oil and air filters, belts, hoses, air conditioning parts, lighting, wiper blades and brake parts; chemicals, including oil, antifreeze, polishes, additives, cleansers and paints; mobile electronics, including sound systems, alarms, mobile video, and remote vehicle starters; car accessories, including seat covers, floor mats, and exterior accessories; hand tools, including sockets, wrenches, ratchets, paint and body tools, jacks and lift equipment, automotive specialty tools and test gauges; as well as a selection of truck, van and sport utility vehicle accessories. In addition to offering a wide variety of high quality, name brand products, the Company sells an array of high quality products under various private label names. The Company sells tires under the names CORNELL (R) and FUTURA (R); and batteries under the name PROSTART (R). The Company also sells wheel covers under the name FUTURA (R); water pumps and cooling system parts under the name PROCOOL (R); air filters, anti-freeze, chemicals, cv axles, lubricants, oil, oil filters, oil treatments, transmission fluids and wiper blades under the name PROLINE (R); shock absorbers under the name PRO RYDER (R); alternators, battery booster packs, and starters under the name PROSTART (R); power steering hoses and power steering pumps under the name PROSTEER (tm); Brakes under the name PROSTOP (R); temperature gauges under the name PROTEMP (R); and paints under the name VARSITY (R). All products sold by the Company under various private label names accounted for approximately 34% of the Company's merchandise sales in fiscal 2001. Revenues from the sale of tires accounted for approximately 17.0% of the Company's total revenues in fiscal years 2001 and 2000, and 16.0% in fiscal year 1999. No other class of products accounted for as much as 10% of the Company's total revenues. 8 The Company has service bays in 616 of its 628 locations. Each service department can perform a variety of services which generally include: engine diagnosis and tune-ups, wheel and front end alignments, state inspection and emission services, air conditioning service, heating and cooling system service, fuel injection and throttle body service, and battery and electrical service; the repair and installation of parts and accessories including brake parts, suspension parts, exhaust systems, front-end parts, ignition parts, belts, hoses, clutches, filters, stereos and speakers, alarms, remote starters and various other merchandise sold in the Company's stores; installation and balancing of tires; and oil and lubrication services. Revenues from maintaining or repairing automobiles and installing products, accounted for approximately 19.2%, 19.1% and 18.4% of the Company's total revenues in fiscal years 2001, 2000 and 1999, respectively. The Company's commercial automotive parts delivery program was established to increase the Company's market share with the professional installer and to leverage its inventory investment. The program has strengthened the Company's position with the installed merchandise customer by taking greater advantage of the breadth and quality of its parts inventory as well as its experience supplying its own service bays and mechanics. As of February 2, 2002, 485 of the Company's stores provide commercial parts delivery, which represents approximately 77% of its stores. The Company has a point-of-sale system in all of its stores which gathers sales and gross profit data by stock-keeping unit from each store on a daily basis. This information is then used by the Company to help formulate its pricing, marketing and merchandising strategies. The Company has an electronic parts catalog and an electronic commercial invoicing system in all of its stores. The Company has an electronic work order system in all of its service centers. This system creates a service history for each vehicle, provides customers with a comprehensive sales document and enables the Company to maintain a service customer database. The Company primarily uses an "Everyday Low Price" (EDLP) strategy in establishing its selling prices. Management believes that EDLP provides better value to its customers on a day-to-day basis, helps level customer demand and allows more efficient management of inventories. On occasion, the Company employs a promotional pricing strategy on select items to drive increased customer traffic. The Company uses various forms of advertising to promote its category-dominant product offering, its state-of-the-art automotive service and repair capabilities and its commitment to customer service and satisfaction. The Company's advertising vehicles include, but are not limited to, television and radio commercials, newspaper advertisements, multi-page catalogs and various in-store promotions. All or most of the gross cost of the advertising directed by the Company is customarily borne by the suppliers of the products advertised. In fiscal 2001, approximately 52% of the Company's total revenues were cash transactions (including personal checks), and the remainder were credit and debit card transactions and commercial credit accounts. The Company does not experience significant seasonal fluctuation in the generation of its revenues. 9 STORE OPERATIONS AND MANAGEMENT All Pep Boys stores are open seven days a week. Each SUPERCENTER generally has a manager, a service manager and one or more assistant managers. Each PEP BOYS EXPRESS store has a manager and one or more assistant managers. Stores with the auto parts delivery program have a commercial sales manager in addition to the management previously mentioned. A store manager's average length of service with the Company is approximately seven years. The Company coordinates the operation and merchandising of each store through a network of district and regional managers. The regional managers report to the Divisional Vice Presidents of Operations, who report to the Company's Vice President of Customer Satisfaction, who reports to the Company's Senior Vice President - Store Operations, who reports to the Company's President & Chief Financial Officer, who reports to the Company's Chairman of the Board & Chief Executive Officer. Supervision and control over the individual stores are facilitated by means of the Company's computer system, operational handbooks and regular visits to the individual stores by the district operations managers and loss prevention personnel. All of the Company's advertising, accounting, purchasing and most of its management information systems and administrative functions are conducted at its corporate headquarters in Philadelphia, Pennsylvania. Certain administrative functions for the Company's western, southwestern, southeastern, midwestern and Puerto Rico operations are performed at various regional offices of the Company. See "Properties." INVENTORY CONTROL AND DISTRIBUTION Most of the Company's merchandise is distributed to its stores from its warehouses primarily by dedicated and contract carriers. Target levels of inventory for each product have been established for each of the Company's warehouses and stores and are based upon prior shipment history, sales trends and seasonal demand. Inventory on hand is compared to the target levels on a weekly basis at each warehouse. If the inventory on hand at a warehouse is below the target levels, the Company's buyers order merchandise from its suppliers. Each Pep Boys store has an automatic inventory replenishment system that automatically orders additional inventory when a store's inventory on hand falls below the target level. In addition, the Company's centralized buying system, coupled with continued advancement in its warehouse and distribution systems, has enhanced the Company's ability to control its inventory. 10 SUPPLIERS During fiscal 2001, the Company's ten largest suppliers accounted for approximately 45% of the merchandise purchased by the Company. No single supplier accounted for more than 15% of the Company's purchases. The Company has no long-term contracts under which the Company is required to purchase merchandise. Management believes that the relationships the Company has established with its suppliers are generally good. In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply and believes that adequate alternative sources of supply exist, at substantially similar cost, for virtually all types of merchandise sold in its stores. COMPETITION The business of the Company is generally highly competitive. The Company encounters competition from nationwide and regional chains and from local independent merchants. The Company's competitors include general, full range, discount or traditional department stores which carry automotive parts and accessories and/or have automotive service centers, as well as specialized automotive retailers similar to the Company. Generally, the specialized automotive retailers focus on either the "Do-it-yourself" or "Do-it-for-me" areas of the business. The Company believes that its operation in both the "Do-it-yourself" and "Do-it-for-me" areas of the business positively differentiates it from most of its competitors. However, certain of its competitors are larger in terms of sales volume, store size, and/or number of stores, have access to greater capital and management resources and have been operating longer in particular geographic areas than the Company. Although the Company's competition varies by geographic area, the Company believes that it generally has a favorable competitive position in terms of depth and breadth of product line, price, quality of personnel and customer service. The Company believes that the warranty policies in connection with the higher priced items it sells, such as tires, batteries, brake linings and other major automotive parts and accessories, are comparable or superior to those of its competitors. REGULATION The Company is subject to federal, state and local provisions relating to the protection of the environment, including provisions with respect to the disposal of oil at its store locations. Estimated capital expenditures relating to compliance with such environmental provisions are not deemed material. 11 EMPLOYEES At February 2, 2002, the Company employed 22,201 persons as follows:
Full-time Part-time Total Description Numbers % Numbers % Numbers % ------- ---- ------- ---- ------- ---- Store Sales 7,467 46.5 4,563 74.2 12,030 54.2 Store Service 6,573 41.0 1,472 23.9 8,045 36.2 ------- ----- ----- ----- ------- ----- STORE TOTAL 14,040 87.5 6,035 98.1 20,075 90.4 Warehouses 843 5.3 102 1.7 945 4.3 Offices 1,166 7.2 15 .2 1,181 5.3 ------- ------ ------- ------- ------- ------ TOTAL EMPLOYEES 16,049 100.0 6,152 100.0 22,201 100.0 ====== ===== ===== ===== ====== =====
The Company had no union employees as of February 2, 2002. At the end of fiscal 2000, the Company employed approximately 17,082 full-time and 6,054 part-time employees and at the end of fiscal 1999, the Company employed approximately 20,544 full-time and 7,443 part-time employees. 12 EXECUTIVE OFFICERS OF THE COMPANY The following table indicates the names, ages, years with the Company and positions (together with the year of election to such positions) of the executive officers of the Company:
- ----------------------------------------------------------------------------------------------------------------------------------- Years with Position with the Company and Name Age Company Date of Election to Position - ----- --- ------- ---------------------------- Mitchell G. Leibovitz 56 23 Chairman of the Board since 1994; Chief Executive Officer since 1990 George Babich Jr. 50 6 President since 2002; Chief Financial Officer since 2000 Mark L. Page 45 26 Senior Vice President - Store Operations since 1993 Frederick A. Stampone 46 19 Senior Vice President since 1987; Chief Administrative Officer since 1993; Secretary since 1988 Don Casey 50 2 Senior Vice President - Merchandising since 2000 Jeffrey D. Palmer 54 1 Senior Vice President - Marketing & Advertising since November 2001
Messrs. Leibovitz, Page and Stampone have been executive officers of the Company for more than the past five years. Mr. Babich was elected to his current position effective March 16, 2002. From March 2001 until March 2002, Mr. Babich served as Executive Vice President and Chief Financial Officer. From March 2000 until March 2001, Mr. Babich served as Senior Vice President - Finance and Chief Financial Officer. From September 1996 through March 2000, Mr. Babich served as Vice President - Finance. Mr. Casey rejoined the Company as Senior Vice President-Merchandising in July 2000. From June 1999 through June 2000, Mr. Casey was Vice President of Purchasing and Supply Chain for Discount Auto Parts, Inc. From February 1987 through May 1999, Mr. Casey served in various merchandising positions of increasing seniority with the Company. Mr. Palmer joined the Company as Senior Vice President-Marketing & Advertising in November, 2001. Prior to joining Pep Boys, Mr. Palmer was Vice President- Advertising for Home Depot from 1998 to 2001. From 1995 through 1998, Mr. Palmer was Vice President of Advertising & Marketing for Circuit City. Each of the officers serves at the pleasure of the Board of Directors of the Company. 13 ITEM 2 PROPERTIES The Company owns its five-story, approximately 300,000 square foot corporate headquarters in Philadelphia, Pennsylvania. The Company also owns the following administrative regional offices -- approximately 4,000 square feet of space in each of Melrose Park, Illinois and Bayamon, Puerto Rico. In addition, the Company leases approximately 4,000 square feet of space for administrative regional offices in each of Decatur, Georgia and Richardson, Texas. The Company owns a three-story, approximately 60,000 square foot structure in Los Angeles, California in which it occupies 7,200 square feet and either leases or intends to lease the remainder to tennants. Of the 628 store locations operated by the Company at February 2, 2002, 344 are owned and 284 are leased. The following table sets forth certain information regarding the owned and leased warehouse space utilized by the Company for its 628 store locations at February 2, 2002:
Warehouse Products Square Owned or Stores States Location Warehoused Footage Leased Serviced Serviced - --------- ---------- ------- ------ -------- ------- Los Angeles, CA All except 216,000 Owned 165 AZ, CA, NM, tires NV, UT, WA Los Angeles, CA Tires/parts 73,000 Leased 165 AZ, CA, NM, NV, UT, WA Los Angeles, CA All except 137,000 Leased 165 AZ, CA, NM, tires NV, UT, WA Atlanta, GA All 392,000 Owned 134 AL, FL, GA, LA, NC, PR, SC, TN, VA Mesquite, TX All 244,000 Owned 96 AR, AZ, CO, LA, NM, OK, TX Plainfield, IN All 403,000 Leased 91 IL, IN, KS, KY, MI, MN, MO, NY, OH, OK, PA, TN, VA Chester, NY All 400,400 Leased 142 CT, DE, MA, ---------- MD, ME, NH, NJ, NY, PA, RI, VA Total 1,865,400 ==========
The Company anticipates that its existing warehouse space will accommodate inventory necessary to support store expansion and any increase in stock-keeping units through the end of fiscal 2002. 14 ITEM 3 LEGAL PROCEEDINGS The Company is a defendant in an action entitled "Coalition for a Level Playing Field, L.L.C., et al. v. AutoZone, Inc., et al.," in the United States District Court for the Eastern District of New York. There are over 100 plaintiffs, consisting of automotive jobbers, warehouse distributors and a coalition of several trade associations; the defendants are AutoZone, Inc., Wal-Mart Stores, Inc., Advance Stores Company, Inc., CSK Auto, Inc., the Company, Discount Auto Parts, Inc., O'Reilly Automotive, Inc. and Keystone Automotive Operations, Inc. The plaintiffs allege that the defendants violated various provisions of the Robinson-Patman Act by, among other things, knowingly inducing and receiving various forms of discriminatory prices from automotive parts manufacturers. The plaintiffs are seeking compensatory damages, which would be trebled under applicable law, as well as injunctive and other equitable relief. The Company believes the claims are without merit and intends to vigorously defend this action. During the first quarter of fiscal 2002, an action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division. The action was subsequently removed to, and is currently pending in, the United States District Court for the District of Puerto Rico. Plaintiffs are distributors of a product that claims to improve gas mileage. The plaintiffs allege that the Company entered into an agreement with them to act as the exclusive retailer of the product in Puerto Rico that was breached when the Company determined to stop selling the product. The Company became aware of an FTC investigation regarding the accuracy of advertising claims concerning the product's effectiveness. The plaintiffs further allege that they were negotiating with the manufacturer of the product to obtain the exclusive distribution rights throughout the United States and that those negotiations failed. Plaintiffs are seeking damages including payment for the product that they allege Pep Boys ordered and expenses and loss of sales in Puerto Rico and the United States resulting from the alleged breach. The Company believes that the claims are without merit and intends to vigorously defend this action. The Company is also party to various other lawsuits and claims, including purported class actions, arising in the normal course of business. In the opinion of management, these lawsuits and claims, including the cases above, are not, singularly or in the aggregate, material to the Company's financial position or results of operations. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended February 2, 2002. 15 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of The Pep Boys - Manny, Moe & Jack is listed on the New York Stock Exchange under the symbol "PBY". There were 3,214 registered shareholders as of February 2, 2002. The following table sets forth for the periods listed, the high and low sale prices and the cash dividends paid on the Company's common stock.
- --------------------------------------------------------------------------------------------------------------- MARKET PRICE PER SHARE Market Price Per Share Cash Dividends Fiscal year ended February 2, 2002 High Low Per Share - ----------------------------------- ---- --- --------- First Quarter $ 7.00 $ 4.40 $.0675 Second Quarter 13.97 5.35 .0675 Third Quarter 13.70 8.80 .0675 Fourth Quarter 18.48 11.88 .0675 Fiscal year ended February 3, 2001 - ---------------------------------- First Quarter $ 7.69 $ 5.50 $.0675 Second Quarter 7.63 5.63 .0675 Third Quarter 6.44 4.19 .0675 Fourth Quarter 5.38 3.31 .0675
It is the present intention of the Company's Board of Directors to continue to pay regular quarterly cash dividends; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition and capital needs of the Company and other factors which the Board of Directors deems relevant. 16 ITEM 6 SELECTED FINANCIAL DATA The following tables sets forth the selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein. SELECTED FINANCIAL DATA (UNAUDITED) (dollar amounts in thousands, except per share amounts)
Year ended Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998 - -------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Merchandise sales $ 1,765,314 $ 1,957,480 $ 1,954,010 $ 1,991,340 $ 1,720,670 Service revenue 418,401 460,988 440,523 407,368 335,850 Total revenues 2,183,715 2,418,468 2,394,533 2,398,708 2,056,520 Gross profit from merchandise sales 514,906 (1) 452,038 (2) 538,957 492,443 (3) 474,239 (4) Gross profit from service revenue 102,490 (1) 79,813 (2) 84,078 79,453 66,081 Total gross profit 617,396 (1) 531,851 (2) 623,035 571,896 (3) 540,320 (4) Selling, general and administrative expenses 513,946 (1) 559,883 (2) 528,838 517,827 (3) 429,523 (4) Operating profit (loss) 103,450 (1) (28,032) (2) 94,197 54,069 (3) 110,797 (4) Non-operating income 4,289 2,245 2,327 2,145 4,315 Interest expense 51,335 57,882 51,557 48,930 39,656 Earnings (loss) before income taxes and extraordinary items 56,404 (1) (83,669) (2) 44,967 7,284 (3) 75,456 (4) Net Earnings (loss) before extraordinary items 36,100 (1) (53,148) (2) 29,303 4,974 (3) 49,611 (4) Extraordinary items (765) 2,054 - - - Net earnings (loss) 35,335 (1) (51,094) (2) 29,303 4,974 (3) 49,611 (4) BALANCE SHEET DATA Working capital $ 97,838 $ 109,207 $ 172,332 $ 241,738 $ 151,340 Current ratio 1.17 to 1 1.18 to 1 1.31 to 1 1.47 to 1 1.24 to 1 Merchandise inventories $ 519,473 $ 547,735 $ 582,898 $ 527,397 $ 655,363 Property and equipment-net 1,117,486 1,194,235 1,335,749 1,330,256 1,377,749 Total assets 1,812,652 1,906,204 2,072,672 2,096,112 2,161,360 Long-term debt (includes all convertible debt) 544,418 654,194 784,024 691,714 646,641 Stockholders' equity 617,790 594,766 658,284 811,784 822,635 DATA PER COMMON SHARE Basic earnings (loss) before extraordinary items $ .70 (1) $ (1.04) (2) $ .58 $ .08 (3) $ .81 (4) Basic earnings (loss) .69 (1) (1.00) (2) .58 .08 (3) .81 (4) Diluted earnings (loss) before extraordinary items .69 (1) (1.04) (2) .58 .08 (3) .80 (4) Diluted earnings (loss) .68 (1) (1.00) (2) .58 .08 (3) .80 (4) Cash dividends .27 .27 .27 .26 .24 Stockholders' equity 12.01 11.60 12.91 13.18 13.39 Common share price range: high 18.48 7.69 21.63 26.69 35.63 low 4.40 3.31 7.13 12.38 21.56 OTHER STATISTICS Return on average stockholders' equity 5.8% (8.2)% 4.0% 0.6% 6.2% Common shares issued and outstanding 51,430,861 51,260,663 50,994,099 61,615,140 61,425,228 Capital expenditures $ 25,464 $ 57,336 $ 104,446 $ 167,876 $ 284,084 Number of retail outlets 628 628 662 638 711 Number of service bays 6,507 6,498 6,895 6,608 6,208 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes pretax charges of $5,197 related to the Profit Enhancement Plan of which $4,169 reduced gross profit from merchandise sales, $813 reduced gross profit from service revenue and $215 was included in selling, general and administrative expenses. (2) Includes pretax charges of $74,945 related to the Profit Enhancement Plan of which $67,085 reduced the gross profit from merchandise sales, $5,232 reduced gross profit from service revenue and $2,628 was included in selling, general and administrative expenses. (3) Includes pretax charges of $29,451 ($20,109 net of tax or $.33 per share-basic and diluted), $27,733 of which reduced gross profit from merchandise sales with the remaining $1,718 included in selling, general and administrative expenses. These charges were associated with the closure and sale of 109 Express stores. (4) Includes pretax charges of $28,012 ($18,418 net of tax or $.30 per share-basic and diluted), $16,330 of which reduced gross profit from merchandise sales with the remaining $11,682 included in selling, general and administrative expenses. These charges were associated with closing nine stores, reducing the store expansion program, converting all Parts USA stores to the Pep Boys Express format, certain equipment write-offs, and severance and other non-recurring expenses. 17 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements arise principally from the capital expenditures related to existing stores, offices and warehouses, the need to finance the acquisition, construction and equipping of new stores and to purchase inventory. The primary capital expenditures for fiscal 2001 were attributed to capital maintenance of the Company's existing stores and offices. The Company opened one new store in fiscal 2001 compared to 5 stores in fiscal 2000 and 24 stores in fiscal 1999. In fiscal 2001, the Company significantly decreased its levels of capital expenditures by 55.6% as compared to fiscal 2000. In fiscal 2001, with a decrease in net inventory levels coupled with decreased levels of capital expenditures, the Company decreased its debt by $143,913,000 and increased its cash and cash equivalents by $7,986,000. In fiscal 2000, with an increase in net inventory levels offset, in part, by decreased levels of capital expenditures, the Company increased its debt by $28,739,000 and decreased its cash and cash equivalents by $10,490,000. In fiscal 1999, with decreased levels of capital expenditures and the use of cash to repurchase 11,276,698 common shares of stock (partially offset by a decrease in net inventory levels), the Company increased its debt by $20,029,000 and decreased its cash and cash equivalents by $96,063,000.
The following table indicates the Company's principal cash requirements for the past three years: (dollar amounts Fiscal Fiscal Fiscal in thousands) 2001 2000 1999 Total - --------------------------------------------------------------------------------------------------------------- Cash Requirements: Capital expenditures $ 25,464 $ 57,336 $104,446 $187,246 Net inventory (decrease) increase(1) (39,592) 80,148 (24,174) 16,382 - --------------------------------------------------------------------------------------------------------------- Total $(14,128) $137,484 $ 80,272 $203,628 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities (excluding the change in net inventory) $128,301 $ 99,739 $155,207 $383,247 - ---------------------------------------------------------------------------------------------------------------
(1) Net inventory (decrease) increase is the change in inventory less the change in accounts payable. In fiscal 2001, merchandise inventories decreased as the Company maintained its net store count and completed the exit of the two distribution centers closed in fiscal 2000 as part of the Profit Enhancement Plan. Additionally, the Company decreased the average number of stock-keeping units per store to approximately 25,000 in fiscal 2001 compared to 26,000 in fiscal 2000. In fiscal 1999, the average stock-keeping units per store were 25,000. In fiscal 2000, merchandise inventories decreased as the Company decreased its net store count by 34 and closed two distribution centers. In fiscal 1999, merchandise inventories increased, as the Company added an additional 24 stores and a new distribution center in Chester, New York. 18 The Company's working capital was $97,838,000 at February 2, 2002, $109,207,000 at February 3, 2001 and $172,332,000 at January 29, 2000. The Company's long-term debt, as a percentage of its total capitalization, was 47% at February 2, 2002, 52% at February 3, 2001 and 54% at January 29, 2000. As of February 2, 2002, the Company had an available line of credit totaling $100,690,000. The Company currently plans to open two new Supercenters in fiscal 2002. Management estimates the costs of opening the two Supercenters, coupled with capital expenditures relating to existing stores, warehouses and offices during fiscal 2002, will be approximately $43,000,000. The Company anticipates that its net cash provided by operating activities and its existing line of credit will exceed its principal cash requirements for capital expenditures and net inventory in fiscal 2002.
The following chart represents the Company's total contractual obligations as of February 2, 2002: (dollar amounts in thousands) Due in less Due in Due in Due after Obligation Total than 1 year 1-3 years 3-5 years 5 years - --------------------------------------------------------------------------------------------- Long-term debt $ 669,033 $124,615 $286,583 $257,564 $ 271 Operating leases 539,403 51,887 86,805 71,925 328,786 Unconditional purchase obligation 34,705 7,361 19,887 7,457 - - --------------------------------------------------------------------------------------------- Total cash obligations $1,243,141 $183,863 $393,275 $336,946 $329,057 - ---------------------------------------------------------------------------------------------
In addition to the amounts shown above, the Company has $37,887,000 of outstanding standby letters of credit used primarily to secure the Company's insurance claims. The letters of credit are renewable on an annual basis. The operating leases shown above are exclusive of any lease obligations for stores for which reserves were created in conjunction with the Profit Enhancement Plan. The Company anticipates that its net cash provided by operating activities, its existing line of credit and its access to capital markets will exceed its cash obligations presented in the table above. In November 2001, the Company repurchased the remaining $1,202,000 face value of its Liquid Yield Option Notes (LYONs) which were redeemed for a price of $677 per LYON. The book value of the repurchased LYONs was $814,000. In the third quarter of 2001, the Company reclassed the $50,000,000 Medium-Term Note and the remaining $43,005,000 of the $49,000,000 Medium-Term Note to current liabilities on the consolidated balance sheet. These Medium-Term Notes are redeemable at the option of the holder on July 16, 2002 and September 19, 2002, respectively. The Company anticipates being able to repurchase these notes with cash from operations and its existing line of credit. In September 2001, the Company repurchased $159,702,000 face value of its LYONs which were redeemed at the option of the holder at a price of $673 per LYON. The book value of the repurchased LYONs was $107,475,000 and the after-tax extraordinary loss was $993,000. In July 2001, the Company repurchased $3,000,000 face value of its LYONs at a price of $656 per LYON. The book value of the repurchased LYONs was $2,006,000. In June 2001, the Company obtained $90,000,000 in a Senior Secured Credit Facility. The facility, which is secured by certain equipment and real estate with a total book value as of February 2, 2002 of $108,663,000, was issued in two tranches. Tranche A is a term loan for $45,000,000 with an interest rate based on London Interbank Offered Rate (LIBOR) plus 3.65%. Tranche A is structured as a two-year term loan payable in equal installments with the final payment due in 2003. Tranche B is a term loan for $45,000,000 with an interest rate of LIBOR plus 3.95%. Tranche B is structured as a five-year term loan payable in equal installments with the final payment due in 2006. The Senior Secured Credit Facility is subject to certain financial covenants. The Company used the proceeds from the facility to repurchase the outstanding LYONs that were put back to the Company on the September 20, 2001 put date. 19 In May 2001, the Company sold certain operating assets for $14,000,000. The assets were leased back from the purchaser in a lease structured as a one-year term with three one-year renewal options. The resulting lease is being accounted for as an operating lease and the gain of $3,817,000 from the sale of the certain operating assets is deferred until the lease term is completed and the residual guarantee is satisfied, at which time the gain will be recorded in costs of merchandise sales and costs of service revenue. The Company used the proceeds from the sale to retire debt. In May 2001, the Company repurchased $77,600,000 face value of its LYONs at a price of $649 per LYON. The book value of the repurchased LYONs was $51,517,000 and the after-tax extraordinary gain was $228,000. In September 2000, the Company entered into a new revolving credit agreement. The new revolving credit agreement provides up to $225,000,000 of borrowing availability, which is collateralized by inventory and accounts receivable. Funds may be drawn and repaid anytime prior to September 10, 2004. Sixty days prior to each anniversary date, the Company may request and, upon agreement with the bank, extend the maturity of this facility an additional year. The interest rate on any loan is equal to the LIBOR plus 1.75%, and increases in 0.25% increments as the excess availability falls below $50,000,000. The revolver is subject to financial covenants. The Company recorded an after-tax extraordinary charge related to the restructuring of its revolving line of credit of $931,000 in the third quarter of fiscal 2000. In September 2000, the Company entered into a new real estate operating lease facility with leased property trusts, established as an unconsolidated special-purpose entity. The $143,000,000 real estate operating lease facility, which has an interest rate of LIBOR plus 1.85%, replaces $143,000,000 of leases, which had an interest rate of LIBOR plus 2.27%. The Company, as a result of replacing the existing operating leases, recorded a pretax charge to fiscal 2000 earnings of $1,630,000 of unamortized lease costs, which was recorded in the costs of merchandise sales section of the consolidated statement of operations. The $143,000,000 real estate operating lease facility has a four-year term with a guaranteed residual value. At February 2, 2002, the maximum amount of the residual guarantee relative to the real estate under the lease is approximately $92,372,000. The Company expects the fair market value of the leased real estate, subject to the purchase option or sale to a third party, to substantially reduce or eliminate the Company's payment under the residual guarantee at the end of the lease term. In September 2000, the Company retired $70,000,000 of Senior Notes, at par, using the proceeds from its new $225,000,000 revolving line of credit. The retired notes were issued in a private placement in February 1999 in two tranches. The first tranche was for $45,000,000 and had a coupon of 8.45% with a maturity of 2011. The second tranche was for $25,000,000 and had a coupon of 8.30% with a maturity of 2009. In June 2000, the Company repurchased $5,995,000 face value of the $49,000,000 Medium-Term Note, which was redeemable at the option of the holder on September 19, 2002. The after-tax extraordinary gain was $960,000. In April 2000, the Company repurchased $30,200,000 face value of its LYONs at a price of $520 per LYON. The book value of the LYONs was $19,226,000 and the after-tax extraordinary gain was $2,025,000. On February 1, 1999, the Company repurchased 11,276,698 of its common shares outstanding. The Company financed the share repurchase with $110,427,000 in cash and with the $70,000,000 proceeds received in connection with the private placement of Senior Notes issued on February 1, 1999 and retired in September 2000 as stated above. 20 EFFECTS OF INFLATION The Company uses the LIFO method of inventory valuation. Thus, the cost of merchandise sold approximates current cost. Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on revenues or results of operations during fiscal 2001, fiscal 2000 or fiscal 1999. IMPAIRMENT CHARGES During fiscal year 2000, the Company, as a result of its ongoing review of the performance of its stores, identified certain stores whose cash flow trend indicated that the carrying value may not be fully recoverable. An impairment charge of $5,735,000 was recorded for these stores in costs of merchandise sales on the consolidated statement of operations. The charge reflects the difference between carrying value and fair value. Fair value was based on sales of similar assets or other estimates of fair value developed by Company management. Management judgment is necessary to estimate fair value. Accordingly, actual results could vary from such estimates. PROFIT ENHANCEMENT PLAN In the third quarter 2000, the Company performed a comprehensive review of its field, distribution and Store Support Center infrastructure as well as the performance of each store. As a result of this review, the Company implemented a number of changes that it believed would improve its performance and recorded a charge of $71,234,000. The charges included expenses related to the closure of the 38 under-performing stores and two distribution centers, certain equipment write-offs, the abandonment of two development parcels and severance costs. The charges were recorded in costs of merchandise sales, costs of service revenue and selling, general and administrative expenses on the consolidated statement of operations as $62,665,000, $5,661,000 and $2,908,000, respectively. PLAN UPDATE The Profit Enhancement Plan has been progressing closely to the schedule originally estimated by the Company. Each of the 38 stores and one of the distribution centers identified for closure were closed on or before October 28, 2000. The second distribution center was closed on November 30, 2000. All employees were notified of their separation on or before October 28, 2000. The assets held for disposal were reclassed and depreciation was stopped on October 28, 2000 which was concurrent with the announcement of the Profit Enhancement Plan and the closure of the stores. The Company is progressing towards the disposal of the 38 stores, 11 of which were owned and 27 were leased by the Company, two distribution centers and two development parcels which were closed or abandoned in connection with the Profit Enhancement Plan. As of the end of fiscal 2001, the Company had successfully disposed of ten of the closed stores, the two distribution centers and one of the development parcels. The Company estimates the remaining closed or abandoned properties will be disposed of by the end of fiscal 2002. ASSETS HELD FOR DISPOSAL The assets held for disposal as of the end of fiscal 2001 and 2000 included the building and land of the remaining closed stores owned by the Company, additional development parcels, and equipment from the remaining closed stores. The carrying values of the building, land and equipment were $16,007,000 and $22,629,000 for fiscal years 2001 and 2000, respectively. 21 In fiscal 2001, the Company was able to sell three of the 13 owned properties for net proceeds of $4,103,000. The sales resulted in a loss of $691,000 which was recorded in costs of merchandise sales and selling, general and administrative expenses on the consolidated statement of operations. Additionally, the Company recorded a downward revision in the estimated values for certain properties of $1,496,000 in fiscal 2001. This expense was recorded in costs of merchandise sales on the consolidated statement of operations. In fiscal 2001, the Company recorded a loss for equipment held for disposal of $162,000, which was due primarily to a reduction in the Company's estimated proceeds. The Company is actively marketing the remaining ten owned properties and has made adjustments to property values in accordance with the change in market values. As a result, the Company has extended the original estimated time needed for selling the owned properties. It is expected that seven of these properties with a carrying value of $10,663,000 will be disposed of by the second quarter 2002, with the remaining three properties with a carrying value of $4,746,000 expected to be disposed of by the end of the third quarter 2002. The Company will continue to monitor the status for disposing of its owned properties and make any necessary adjustments. An adjustment was reflected in on-going expenses for the increased time required to maintain these properties. LEASE RESERVE As of the end of fiscal 2001, the Company was able to sublease three and exit the lease of an additional five leased properties. The Company expects the remaining 19 leased properties to be subleased or otherwise disposed of by the end of fiscal 2002. The Company increased the reserve for leases $1,644,000 during fiscal 2001. These changes in the reserve were a result of a $3,834,000 increase due primarily to an increase in the estimated amount of time it will take the Company to sublease certain properties and a decrease in estimated sublease rates. The reserve increase was offset, in part, by a $2,190,000 decrease due primarily to lower than estimated commissions and lease exit costs on subleases for certain properties. The effects of these adjustments were recorded in costs of merchandise sales and costs of service revenue. In fiscal 2000, the Company increased the lease reserve by $113,000. These changes in the reserve were a result of a $1,176,000 increase due to an increase in the estimated lease payments related to the closed stores. The increase was offset, in part, by a $1,063,000 decrease due primarily to an increase in the estimated sublease rates coupled with lower lease related expenses. ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit activities that will be continued. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed of. The on-going costs reserve includes general maintenance costs such as utilities, security, telephone, real estate taxes and personal property taxes which will be incurred until the properties are disposed. The reserve for on-going costs will diminish as sites are sold, sublet or otherwise disposed of and such activities are estimated to be completed by the end of fiscal 2002. In fiscal 2001, the Company increased the on-going expense reserve $595,000. This change was a result of a $1,214,000 increase in the reserve due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties offset, in part, by a $619,000 decrease due to lower than anticipated cost for utilities and security costs. In fiscal 2000, the Company increased the on-going expense reserve $361,000. This change was due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties. 22 SEVERANCE RESERVE The total number of employees separated due to the Profit Enhancement Plan was approximately 1,000. The 1,000 employees were composed of 76% store employees, 13% distribution employees, and 11% Store Support Center and field administrative employees. The total severance paid in connection with the Profit Enhancement Plan was $1,353,000. In fiscal 2001, the Company reversed $69,000 of severance due primarily to certain employees originally expected to be receiving severance failing to qualify to receive payments and lower than estimated final payments. Each reversal was recorded through the line it was originally charged in the consolidated statements of operations. In fiscal 2000, the Company reversed $272,000 of severance due to employees being accepted into positions in other locations of the Company and employees failing to qualify to receive payments. Each reversal was recorded through the line it was originally charged in the consolidated statements of operations. NON-RESERVABLE EXPENSES Non-reservable expenses are those costs which could not be reserved, but were incurred as a result of the Profit Enhancement Plan. These expenses related to costs incurred which had a future economic benefit to the Company such as the transferring of inventory and equipment out of properties closed by the Profit Enhancement Plan. The expenses of this nature incurred were $678,000 and $3,611,000 for fiscal 2001 and fiscal 2000, respectively. The fiscal 2001 expenses incurred related to the completion of the removal of inventory and equipment from the closed distribution centers. The fiscal 2000 expenses incurred were for inventory and equipment handling related to the closure of the 38 stores and two distribution centers. The fiscal 2000 expenses were offset by a recovery of certain benefit expenses related to the reduction in workforce. 23 PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Following are tables summarizing expenses related to the Profit Enhancement Plan for fiscal 2001 and fiscal 2000. The details and reasons for the original charge and changes to the charge are as described above in the respective reserve categories.
FISCAL 2001 (dollar amounts in thousands) Non-Reservable Income Statement Reserve Expense Total Classification Adjustments Incurred Expense - ----------------------------------------------------------------- Costs of merchandise sales $3,528 $ 641 $4,169 Costs of service revenue 804 9 813 Selling, general and administrative 187 28 215 - ----------------------------------------------------------------- Total expenses $4,519 $ 678 $5,197 - -----------------------------------------------------------------
FISCAL 2000 (dollar amounts in thousands) Non-Reservable Income Statement Original Reserve Expense Total Classification Charge Adjustments Incurred Expense - ----------------------------------------------------------------------------- Costs of merchandise sales $62,665 $ 939 $3,481 $67,085 Costs of service revenue 5,661 (177) (252) 5,232 Selling, general and administrative 2,908 (662) 382 2,628 - ----------------------------------------------------------------------------- Total expenses $71,234 $ 100 $3,611 $74,945 - -----------------------------------------------------------------------------
24 At the end of the third quarter 2000, the Company set up a reserve liability account which is included in accrued liabilities on the consolidated balance sheet. This liability account tracks all accruals including remaining rent on leases net of sublease income, severance, and on-going expenses for the closed properties. The following chart reconciles the change in reserve from the origination of the charge through the fiscal year ended February 2, 2002. All additions and adjustments were charged or credited through the appropriate line items on the statement of operations.
(dollar amounts Lease Fixed On-going in thousands) Expenses Assets Severance Expenses Total - ----------------------------------------------------------------------------------------- Original charges $ 7,916 $57,680 $ 1,694 $ 3,944 $71,234 Addition 1,176 1,074 - 361 2,611 Utilization (975) (58,754) (1,213) (1,345) (62,287) Adjustment (1,063) - (272) - (1,335) - ----------------------------------------------------------------------------------------- Reserve balance at Feb. 3, 2001 7,054 - 209 2,960 10,223 - ----------------------------------------------------------------------------------------- Addition 3,834 2,440 - 1,214 7,488 Utilization (5,548) (2,349) (140) (2,235) (10,272) Adjustment (2,190) (91) (69) (619) (2,969) - ----------------------------------------------------------------------------------------- Reserve balance at Feb. 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470 - -----------------------------------------------------------------------------------------
25 RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain items in the consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change - ----------------------------------------------------------------------------------------------------------------------------------- Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 Fiscal 2001 vs. Fiscal 2000 vs. Year ended (Fiscal 2001) (Fiscal 2000) (Fiscal 1999) Fiscal 2000 Fiscal 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales 80.8% 80.9% 81.6% (9.8)% 0.2% Service Revenue(1) 19.2 19.1 18.4 (9.2) 4.6 - ----------------------------------------------------------------------------------------------------------------------------------- Total Revenues 100.0 100.0 100.0 (9.7) 1.0 - ----------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales(2) 70.8 (3) 76.9 (3) 72.4 (3) (16.9) 6.4 Costs of Service Revenue(2) 75.5 (3) 82.7 (3) 80.9 (3) (17.1) 6.9 - ----------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 71.7 78.0 74.0 (17.0) 6.5 - ----------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 29.2 (3) 23.1 (3) 27.6 (3) 13.9 (16.1) Gross Profit from Service Revenue 24.5 (3) 17.3 (3) 19.1 (3) 28.4 (5.1) - ----------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 28.3 22.0 26.0 16.1 (14.6) - ----------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 23.6 23.2 22.1 (8.2) 5.9 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 4.7 (1.2) 3.9 469.0 (129.8) Non-operating Income 0.2 0.1 0.1 91.0 (3.5) Interest Expense 2.3 2.4 2.1 (11.3) 12.3 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (Loss) Before Income Taxes 2.6 (3.5) 1.9 167.4 (286.1) - ----------------------------------------------------------------------------------------------------------------------------------- Income Taxes 36.0 (4) 36.5 (4) 34.8 (4) 166.5 (294.8) - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) Before Extraordinary Items 1.7 (2.2) 1.2 167.9 (281.4) - ----------------------------------------------------------------------------------------------------------------------------------- Extraordinary Items - 0.1 - (137.2) N/A - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) 1.7 (2.1) 1.2 169.2 (274.4) - -----------------------------------------------------------------------------------------------------------------------------------
(1) Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. (2) Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. (3) As a percentage of related sales or revenue, as applicable. (4) As a percentage of earnings (loss) before income taxes. 26 FISCAL 2001 VS. FISCAL 2000 Total revenues for fiscal 2001, which included 52 weeks, decreased 10% compared to fiscal 2000, which included 53 weeks, due primarily to less stores in operation during 2001 vs. 2000 coupled with a decrease in comparable store revenues (revenues generated by stores in operation during the same months of each period) of 6%. Total revenues for fiscal 2001 compared to fiscal 2000, excluding the extra week, decreased by 8% on an overall basis and remained at a decrease of 6% on a comparable store basis. Comparable store merchandise sales decreased 6% while comparable store service revenue decreased 5% compared to 2000 on a 52 week basis. This decline in total and comparable revenue reflected the impact of the closure of the 38 stores and other steps taken in October 2000 in conjunction with implementing the Company's Profit Enhancement Plan. Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 29.2% in 2001 from 23.1% in 2000. This increase, as a percentage of merchandise sales, was due primarily to Profit Enhancement Plan charges recorded in 2001 of $4,169,000 compared to charges recorded in 2000 of $67,085,000 and $5,735,000 associated with the Profit Enhancement Plan and asset impairments, respectively. Higher merchandise margins and a decrease in warehousing costs, as a percentage of merchandise sales, offset, in part, by an increase in store occupancy costs, as a percentage of merchandise sales, also contributed to the increase in gross profit from merchandise sales. The improved merchandise margins, as a percentage of merchandise sales, were a result of a combination of improvement in the mix of sales, selectively higher retail pricing and lower product acquisition costs. The decrease in warehousing costs, as a percentage of merchandise sales, were a result of the effects of a supply chain initiative implemented in late fiscal 2000 to improve efficiencies. The increase in store occupancy costs, as a percentage of merchandise sales, was a result of higher utilities costs, particularly in California. Gross profit from service revenue increased, as a percentage of service revenue, to 24.5% in 2001 from 17.3% in 2000. This increase, as a percentage of service revenue, was due primarily to a decrease in service personnel costs, as a percentage of service revenue, coupled with Profit Enhancement Plan charges recorded in 2001 of $813,000 compared to $5,232,000 recorded in 2000. The decrease in service center personnel costs, as a percentage of service revenue, was a result of the steps taken in the Profit Enhancement Plan. Selling, general and administrative expenses increased, as a percentage of total revenues, to 23.6% in 2001 from 23.2% in 2000. This increase, as a percentage of total revenues, was due primarily to an increase in media expenses from 2000 to 2001 of $6,828,000 or 0.3% of total revenues, offset, in part, by a decrease in general office expense, as a percentage of total revenues, and Profit Enhancement Plan charges recorded in 2001 of $215,000 compared to $2,628,000 recorded in 2000. The increase in media expense, as a percentage of total revenues, was a result of lower vendor reimbursements. The decrease in general office expense, as a percentage of total revenues, was a result of lower legal expense, as a percentage of total revenues. Interest expense was $6,547,000 or 11.3% lower than last year due primarily to lower debt levels coupled with lower average interest rates. 27 Net earnings increased, as a percentage of total revenues, due primarily to a net Profit Enhancement Plan charge recorded in 2001 of $3,326,000 compared to net charges recorded in 2000 of $47,609,000 and $3,643,000 associated with Profit Enhancement Plan and asset impairments, respectively. Also contributing to the net earnings increase, as a percentage of total revenues, were increases in both gross profit from merchandise sales and service revenue, as a percentage of merchandise sales and service revenue, respectively, and a decrease in interest expense, as a percentage of total revenues. These gross profit increases were offset, in part, by an increase in selling, general and administrative expenses, as a percentage of total revenues, coupled with a net extraordinary loss of $765,000 in 2001 compared to a $2,054,000 net extraordinary gain in 2000. FISCAL 2000 VS. FISCAL 1999 Total revenues for fiscal 2000, which included 53 weeks, increased 1% over fiscal 1999, due primarily to the extra week of operation during fiscal 2000 vs. 1999. Comparable store revenues (revenues generated by stores in operation during the same months of each period) decreased 1%. Total revenues for fiscal 2000, excluding the extra week, decreased 1% on an overall basis and remained a decrease of 1% on a comparable store basis. Comparable store merchandise sales decreased 2% while comparable store service revenue increased 2% over fiscal 1999 on a 52 week basis. Gross profit from merchandise sales decreased, as a percentage of merchandise sales, to 23.1% in 2000 from 27.6% in 1999. This decrease, as a percentage of merchandise sales, was due primarily to the pretax charge from the Profit Enhancement Plan of $67,085,000 coupled with a $5,735,000 impairment charge, increases in warehousing and store occupancy costs offset, in part, by higher merchandise margins, as a percentage of merchandise sales. Gross profit from service revenue decreased, as a percentage of service revenue, to 17.3% in 2000 from 19.1% in 1999. The decrease was due to a $5,232,000 pretax charge from the Profit Enhancement Plan and an increase in service center personnel costs, as a percentage of service revenue. Selling, general and administrative expenses increased, as a percentage of total revenues, to 23.2% in 2000 from 22.1% in 1999. This increase was due primarily to increases in store and general office expenses, as a percentage of total revenues, coupled with the pretax charges from the Profit Enhancement Plan of $2,628,000. Interest expense was $6,325,000 or 12.3% higher than last year, due primarily to higher interest rates coupled with slightly higher average debt levels incurred during the year to fund the Company's capital expenditures. The Company's net loss in fiscal 2000, as compared with net earnings in fiscal 1999, was due primarily to decreases in gross profit from merchandise sales, as a percentage of merchandise sales, and gross profit from service revenue, as a percentage of service revenue, and an increase in selling, general and administrative expenses, as a percentage of total revenues, all of which included the effects of the Profit Enhancement Plan, coupled with an increase in interest expense, as a percentage of total revenues. NEW ACCOUNTING STANDARDS In 2001, the Emerging Issues Task Force (EITF) issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." This pronouncement deals with accounting for certain types of sales incentives and other consideration offered by companies to their customers. This pronouncement is effective in fiscal years beginning after December 15, 2001. The Company has analyzed the impact of adoption of this statement and it will have no material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. 28 In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This SFAS supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the reporting provisions of Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the Disposal of a Segment of a Business." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company has analyzed the impact of adoption of this statement and it will have no material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS 141, all business combinations should be accounted for using the purchase method of accounting; use of the pooling-of-interests method is prohibited. The provisions of the statement apply to all business combinations initiated after June 30, 2001. SFAS 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. Adoption of SFAS 142 will result in ceasing amortization of goodwill. All of the provisions of the statement are effective in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company has analyzed the impact of adoption of this statement and it will have no material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. In September 2000, the EITF issued EITF 00-23, "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. (FIN) 44." This pronouncement addressed practice issues and questions related to accounting for stock compensation primarily under APB No. 25 and FIN 44. The Company has incorporated the guidance provided by the interpretation with no material effect on its consolidated financial statements. In June 2000, the FASB issued FIN 44, "Accounting for Certain Transactions involving Stock Compensation." This interpretation provides additional guidance for application of APB No. 25, "Accounting for Stock Issued to Employees." The Company has incorporated the guidance provided by the interpretation with no material effect on its consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has adopted this statement in the first quarter of fiscal 2001 with no material effect on its consolidated financial statements. 29 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of its revolving credit agreement and senior secured credit facility, changes in the lenders' prime rate or LIBOR could affect the rates at which the Company could borrow funds thereunder. At February 2, 2002, the Company had outstanding borrowings of $142,467,000 against these credit facilities. The table below summarizes the fair value and contract terms of fixed rate debt instruments held by the Company at February 2, 2002:
(dollar amounts Average in thousands) Amount Interest Rate - ---------------------------------------------------------------- Fair value at February 2, 2002 $491,120 Expected maturities: 2002 93,103 6.5% 2003 81,000 6.6 2004 108,000 6.7 2005 100,000 7.0 2006 143,000 6.9 - -----------------------------------------------------------------
At February 3, 2001, the Company held fixed rate debt instruments with an aggregate fair value of $472,770. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 30 The Company believes that the following represent its more critical estimates and assumptions used in the preparation of the consolidated financial statements, although not inclusive: *The Company evaluates whether inventory is stated at the lower of cost or market based on historical experience with the carrying value and life of inventory. The assumptions used in this evaluation are based on current market conditions and the Company believes inventory is stated at the lower of cost or market in the consolidated financial statements. In addition, historically the Company has been able to return excess items to vendors for credit. Future changes by vendors in their policies or willingness to accept returns of excess inventory could require a revision in the estimates. *The Company has risk participation arrangements with respect to casualty and health care insurance. The amounts included in the Company's costs related to these arrangements are estimated and can vary based on changes in assumptions, claims experience or the providers included in the associated insurance programs. *The Company records reserves for future product returns and warranty claims. The reserves are based on current sales of products and historical claim experience. If claims experience differs from historical levels, revisions in the Company's estimates may be required. FORWARD-LOOKING STATEMENTS Certain statements made herein, including those discussing management's expectations for future periods, are forward-looking and involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond the control of the Company, including the strength of the national and regional economies and retail and commercial consumers' ability to spend, the health of the various sectors of the market that the Company serves, the weather in geographical regions with a high concentration of the Company's stores, competitive pricing, location and number of competitors' stores and product and labor costs. Further factors that might cause such a difference include, but are not limited to, the factors described in the Company's filings with the Securities and Exchange Commission. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The material in Item 7 of this filing titled "Quantitative and Qualitative Disclosures about Market Risk" are hereby incorporated herein by reference. 31 ITEM 8 FINANCIAL STATEMENT AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders The Pep Boys - Manny, Moe & Jack We have audited the accompanying consolidated balance sheets of The Pep Boys - Manny, Moe & Jack and subsidiaries as of February 2, 2002 and February 3, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended February 2, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Pep Boys - Manny, Moe & Jack and subsidiaries as of February 2, 2002 and February 3, 2001, and the results of their operations and their cash flows for each of the three years in the period ended February 2, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania March 21, 2002 32
CONSOLIDATED BALANCE SHEETS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 2, February 3, 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 15,981 $ 7,995 Accounts receivable, less allowance for uncollectible accounts of $725 and $639 18,052 16,792 Merchandise inventories 519,473 547,735 Prepaid expenses 42,170 28,705 Deferred income taxes 15,820 25,409 Other 52,308 50,401 Assets held for disposal 16,007 22,629 - ---------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 679,811 699,666 - ---------------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 277,726 278,017 Buildings and improvements 922,065 918,031 Furniture, fixtures and equipment 583,918 618,959 Construction in progress 10,741 15,032 - ---------------------------------------------------------------------------------------------------------------------------------- 1,794,450 1,830,039 Less accumulated depreciation and amortization 676,964 635,804 - ---------------------------------------------------------------------------------------------------------------------------------- Total Property and Equipment 1,117,486 1,194,235 - ---------------------------------------------------------------------------------------------------------------------------------- Other 15,355 12,303 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,812,652 $ 1,906,204 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 216,085 $ 204,755 Accrued expenses 241,273 226,952 Current maturities of convertible debt - 158,555 Current maturities of long-term debt 124,615 197 - ---------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 581,973 590,459 - ---------------------------------------------------------------------------------------------------------------------------------- Long-term debt, less current maturities 544,418 654,194 Deferred income taxes 64,027 66,192 Deferred gain on sale leaseback 4,444 593 Commitments and Contingencies Stockholders' Equity: Common stock, par value $1 per share: Authorized 500,000,000 shares; Issued 63,910,577 63,911 63,911 Additional paid-in capital 177,244 177,244 Retained earnings 601,944 581,668 ---------------------------------------------------------------------------------------------------------------------------------- 843,099 822,823 Less cost of shares in treasury - 10,284,446 and 10,454,644 shares 166,045 168,793 Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264 - ---------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 617,790 594,766 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 1,812,652 $ 1,906,204 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 33
CONSOLIDATED STATEMENTS OF OPERATIONS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 2, February 3, January 29, Year ended 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $1,765,314 $1,957,480 $1,954,010 Service Revenue 418,401 460,988 440,523 - ---------------------------------------------------------------------------------------------------------------------------------- Total Revenues 2,183,715 2,418,468 2,394,533 - ---------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 1,250,408 1,505,442 1,415,053 Costs of Service Revenue 315,911 381,175 356,445 - ---------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 1,566,319 1,886,617 1,771,498 - ---------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 514,906 452,038 538,957 Gross Profit from Service Revenue 102,490 79,813 84,078 - ---------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 617,396 531,851 623,035 - ---------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 513,946 559,883 528,838 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 103,450 (28,032) 94,197 Non-operating Income 4,289 2,245 2,327 Interest Expense 51,335 57,882 51,557 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings (Loss) Before Income Taxes 56,404 (83,669) 44,967 Income Tax Expense (Benefit) 20,304 (30,521) 15,664 - ---------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) Before Extraordinary Items 36,100 (53,148) 29,303 Extraordinary Items, Net of Tax of $(430) and $1,180 (765) 2,054 - Net Earnings (Loss) $ 35,335 $ (51,094) $ 29,303 - ---------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) per Share: Before Extraordinary Items $ .70 $ (1.04) $ .58 Extraordinary Items, Net of Tax (.01) .04 - - --------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) per Share $ .69 $ (1.00) $ .58 - --------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) per Share: Before Extraordinary Items $ .69 $ (1.04) $ .58 Extraordinary Items, Net of Tax (.01) .04 - - --------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) per Share $ .68 $ (1.00) $ .58 - ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) Accumulated Additional Other Total Common Stock Paid-in Retained Treasury Stock Comprehensive Benefits Stockholders' Shares Amount Capital Earnings Shares Amount Income Trust Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 30, 1999 63,847,640 $63,848 $175,940 $636,475 $(4,210) $(60,269) $811,784 Comprehensive income - Net earnings 29,303 Minimum pension liability adjustment, net of tax 4,210 Total comprehensive income 33,513 Cash dividends ($.27 per share) (13,693) (13,693) Repurchase of treasury stock (410) (11,276,698) $(182,065) 1,005 (181,470) Exercise of stock options and related tax benefits 27,630 28 774 (1,795) 495,000 7,991 6,998 Dividend reinvestment plan 35,307 35 533 (393) 60,490 977 1,152 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 29, 2000 63,910,577 63,911 177,247 649,487 (10,721,208) (173,097) - (59,264) 658,284 Comprehensive income - Net loss (51,094) (51,094) Cash dividends ($.27 per share) (13,793) (13,793) Dividend reinvestment plan (3) (2,932) 266,564 4,304 1,369 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, February 3, 2001 63,910,577 63,911 177,244 581,668 (10,454,644) (168,793) - (59,264) 594,766 Comprehensive income - Net earnings 35,335 35,335 Cash dividends ($.27 per share) (13,864) (13,864) Exercise of stock options and related tax benefits (94) 17,000 275 181 Dividend reinvestment plan (1,101) 153,198 2,473 1,372 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, February 2, 2002 63,910,577 $63,911 $177,244 $601,944 (10,284,446) $(166,045) $ - $(59,264) $617,790 - -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 35
CONSOLIDATED STATEMENTS OF CASH FLOWS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 2, February 3, January 29, Year ended 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Earnings (Loss) $ 35,335 $ (51,094) $ 29,303 Adjustments to Reconcile Net Earnings (Loss) to Net Cash Provided by Operating Activities: Extraordinary item, net of tax 765 (2,054) - Depreciation and amortization 84,693 99,308 97,012 Deferred income taxes 7,424 (24,575) 2,223 Accretion of bond discount 3,256 6,425 6,493 Loss on assets held for disposal 2,349 53,740 - Loss on asset impairment - 5,735 - (Gain) loss from sale of assets (1,116) 3,651 (538) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable, prepaid expenses and other (18,726) 9,802 (12,096) Decrease (increase) in merchandise inventories 28,262 35,163 (55,501) Increase (decrease) in accounts payable 11,330 (115,311) 79,675 Increase (decrease) in accrued expenses 14,321 (1,199) 32,810 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 167,893 19,591 179,381 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (25,464) (57,336) (104,446) Proceeds from sales of assets 26,760 14,380 2,479 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities 1,296 (42,956) (101,967) - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net (payments) borrowings under line of credit agreements (56,876) 117,535 10,000 Reduction of long-term debt (18,482) (75,028) (170) Reduction of convertible debt (161,056) (17,208) (72,294) Net proceeds from issuance of notes 87,522 - 76,000 Dividends paid (13,864) (13,793) (13,693) Purchase of treasury shares - - (181,470) Proceeds from exercise of stock options 181 - 6,998 Proceeds from dividend reinvestment plan 1,372 1,369 1,152 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Financing Activities (161,203) 12,875 (173,477) - ----------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash 7,986 (10,490) (96,063) Cash and Cash Equivalents at Beginning of Year 7,995 18,485 114,548 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 15,981 $ 7,995 $ 18,485 - ----------------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Income taxes paid $ 6,570 $ - $ - Interest paid, net of amounts capitalized 47,081 53,415 43,449 - -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 36 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended February 2, 2002, February 3, 2001 and January 29, 2000 (dollar amounts in thousands, except per share amounts) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS The Pep Boys-Manny, Moe & Jack and subsidiaries (the "Company") is engaged principally in the retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts through a chain of stores at February 2, 2002. The Company currently operates stores in 36 states and Puerto Rico. FISCAL YEAR END The Company's fiscal year ends on the Saturday nearest to January 31. Fiscal years 2001 and 1999 were comprised of 52 weeks, while fiscal year 2000 was comprised of 53 weeks. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost (last-in, first-out) or market. If the first-in, first-out method of valuing inventories had been used by the Company, the inventory valuation difference would have been immaterial on both February 2, 2002 and February 3, 2001. CASH AND CASH EQUIVALENTS Cash equivalents include all short-term, highly liquid investments with a maturity of three months or less when purchased. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: building and improvements, 5 to 40 years; furniture, fixtures and equipment, 3 to 10 years. SOFTWARE CAPITALIZATION In 1998, the Company adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In accordance with this standard, certain direct development costs associated with internal-use software are capitalized, including external direct costs of material and services, and payroll costs for employees devoting time to the software projects. These costs are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred. CAPITALIZED INTEREST Interest on borrowed funds is capitalized in connection with the construction of certain long-term assets. Capitalized interest amounted to $1, $489 and $1,098 in fiscal years 2001, 2000 and 1999, respectively. REVENUE RECOGNITION The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold. Service revenues are recognized upon completion of the service. The Company records revenue net of an allowance for estimated future returns. Return activity is immaterial to revenue and results of operations in all periods presented. SERVICE REVENUE Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. 37 COSTS OF REVENUES Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. PENSION EXPENSE The Company reports all information on its pension and savings plan benefits in accordance with Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred income taxes are determined based upon enacted tax laws and rates applied to the differences between the financial statement and tax bases of assets and liabilities. ADVERTISING The Company expenses the production costs of advertising the first time the advertising takes place. The Company nets cooperative advertising reimbursements against costs incurred. Net advertising expense for fiscal years 2001, 2000 and 1999 was $6,828, $0 and $346, respectively. No advertising costs were recorded as assets as of February 2, 2002 or February 3, 2001. STORE OPENING COSTS The costs of opening new stores are expensed as incurred. IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for impaired long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This standard prescribes the method for asset impairment evaluation for long-lived assets and certain identifiable intangibles that are either held and used or to be disposed of. The Company evaluates the ability to recover long-lived assets whenever events or circumstances indicate that the carrying value of the asset may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying value exceeds the fair value. In addition, the Company reports assets to be disposed of at the lower of the carrying amount or the fair market value less selling costs. During fiscal year 2000, the Company, as a result of its ongoing review of the performance of its stores, identified certain stores whose cash flow trend indicated that the carrying value may not be fully recoverable. An impairment charge of $5,735 was recorded for these stores in costs of merchandise sales on the consolidated statement of operations. The charge reflects the difference between carrying value and fair value. Fair value was based on sales of similar assets or other estimates of fair value developed by Company management. EARNINGS PER SHARE Earnings per share for all periods have been computed in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the year plus the assumed conversion of dilutive convertible debt and incremental shares that would have been outstanding upon the assumed exercise of dilutive stock options. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company is accounting for employee stock-based compensation plans in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," incorporating the guidance of Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 44 "Accounting for Certain Transactions involving Stock Compensation" and Emerging Issues Task Force (EITF) 00-23 "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FIN 44" and has provided disclosures required by SFAS No. 123. 38 COMPREHENSIVE INCOME Comprehensive income is reported in accordance with SFAS No. 130, "Reporting Comprehensive Income." Other comprehensive income includes minimum pension liability adjustments. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has adopted this statement in the first quarter of fiscal 2001 with no material effect on its consolidated financial statements. SEGMENT INFORMATION The Company reports segment information in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Company operates in one industry, the automotive aftermarket. In accordance with SFAS No. 131, the Company aggregates all of its stores and reports one operating segment. Sales by major product categories are as follows:
Year ended Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 - ---------------------------------------------------------------------------------------- Parts and Accessories $1,403,775 $1,547,020 $1,571,445 Tires 361,539 410,460 382,565 - ---------------------------------------------------------------------------------------- Total Merchandise Sales 1,765,314 1,957,480 1,954,010 Service 418,401 460,988 440,523 - ---------------------------------------------------------------------------------------- Total Revenues $2,183,715 $2,418,468 $2,394,533 ========================================================================================
Parts and accessories includes batteries, new and rebuilt parts, chemicals, mobile electronics, tools, and various car, truck, van and sport utility vehicle accessories as well as other automotive related items. Service consists of the labor charge for installing merchandise or maintaining or repairing vehicles. RECENT ACCOUNTING PRONOUNCEMENTS In 2001, the EITF issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." This pronouncement deals with accounting for certain types of sales incentives and other consideration offered by companies to their customers. This guidance is effective in fiscal years beginning after December 15, 2001. The Company has analyzed the impact of the adoption of this statement and it will not have a material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This SFAS supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the Disposal of a Segment of a Business." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company has analyzed the impact of the adoption of this statement and it will not have a material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. 39 In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS 141, all business combinations should be accounted for using the purchase method of accounting; use of the pooling-of-interests method is prohibited. The provisions of the statement apply to all business combinations initiated after June 30, 2001. SFAS 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. Adoption of SFAS 142 will result in ceasing amortization of goodwill. All of the provisions of the statement are effective in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company has analyzed the impact of the adoption of this statement and it will not have a material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. In September 2000, the EITF issued EITF 00-23, "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FIN 44." This pronouncement addressed practice issues and questions related to accounting for stock compensation primarily under APB No. 25 and FIN 44. The Company has incorporated the guidance provided by the interpretation with no material effect on its consolidated financial statements. In June 2000, the FASB issued FIN 44, "Accounting for Certain Transactions involving Stock Compensation." This interpretation provides additional guidance for APB No. 25, "Accounting for Stock Issued to Employees." The Company has incorporated the guidance provided by the interpretation with no material effect on its consolidated financial statements. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' consolidated financial statements to provide comparability with the current year's presentation. NOTE 2 - DEBT SHORT-TERM BORROWINGS In fiscal 2001, the Company had no short-term borrowing lines. In the third quarter of fiscal 2000, the Company, in conjunction with the acquiring of a new long-term revolving credit agreement, terminated its short-term borrowing line. The Company did have short-term borrowings during fiscal 2000 and the average and maximum month end balances were $4,232 and $13,000, respectively. 40
LONG-TERM DEBT - ------------------------------------------------------------------------------------------------------------ February 2, 2002 February 3, 2001 - ------------------------------------------------------------------------------------------------------------ Medium-term notes, 6.4% to 6.7%, due November 2004 through September 2007 $144,005 $144,005 Medium-term notes, 6.7% to 6.9%, due March 2004 through March 2006 100,000 100,000 7% notes due June 2005 100,000 100,000 6.92% Term Enhanced ReMarketable Securities, due July 2017 100,000 100,000 6.625% notes due May 2003 75,000 75,000 Senior Secured Credit Facility, due July 2003 and July 2006 71,625 - Revolving credit agreement 70,842 127,718 Other notes payable, 3.8% to 8% 7,561 7,668 - ------------------------------------------------------------------------------------------------------------ 669,033 654,391 Less current maturities 124,615 197 - ------------------------------------------------------------------------------------------------------------ Total long-term debt $544,418 $654,194 - ------------------------------------------------------------------------------------------------------------
In June 2001, the Company obtained $90,000 in a Senior Secured Credit Facility. The Facility, which is secured by certain equipment and real estate with a total book value as of February 2, 2002 of $108,633, was issued in two tranches. Tranche A is a term loan for $45,000 with an interest rate based on London Interbank Offered Rate (LIBOR) plus 3.65%. Tranche A is structured as a two-year term loan payable in equal installments with the final payment due in 2003. The weighted average interest rate on Tranche A was 6.7% at February 2, 2002. Tranche B is a term loan for $45,000 with an interest rate of LIBOR plus 3.95%. Tranche B is structured as a five-year term loan payable in equal installments with the final payment due in 2006. The weighted average interest rate on Tranche B was 6.9% at February 2, 2002. The Senior Secured Credit Facility is subject to certain financial covenants. In September 2000, the Company entered into a new revolving credit agreement. The new revolving credit agreement provides up to $225,000 of borrowing availability, which is collateralized by inventory and accounts receivable. Funds may be drawn and repaid anytime prior to September 10, 2004. Sixty days prior to each anniversary date, the Company may request and, upon agreement with the bank, extend the maturity of this facility an additional year. The interest rate on any loan is equal to the LIBOR plus 1.75%, and increases in 0.25% increments as the excess availability falls below $50,000. The revolver is subject to certain financial covenants. This revolver replaces the previous revolver the Company had with nine major banks, which provided up to $200,000 in borrowings. The Company recorded an after-tax extraordinary charge related to the extinguishment of its previous revolving credit agreement of $931. The weighted average interest rate on borrowings under the revolving credit agreement was 6.2% and 8.5% at February 2, 2002 and February 3, 2001, respectively. 41 In February 1998, the Company established a Medium-Term Note program which permitted the Company to issue up to $200,000 of Medium-Term Notes. Under this program the Company sold $100,000 principal amount of Senior Notes, ranging in annual interest rates from 6.7% to 6.9% and due March 2004 and March 2006. Additionally, in July 1998, under this note program, the Company sold $100,000 of Term Enhanced ReMarketable Securities with a stated maturity date of July 2017. The Company also sold a call option with the securities, which allows the securities to be remarketed to the public in July 2006 under certain circumstances. If the securities are not remarketed, the Company will be obligated to repay the principal amount in full in July 2017. The level yield to maturity on the securities is approximately 6.85% and the coupon rate is 6.92%. Between July and October 1997, the Company issued $150,000 in Medium-Term Notes with interest rates of 6.4% to 6.7% and maturity dates from November 2004 through September 2007. $50,000 of this debt is redeemable at the option of the holder on July 16, 2002 and $49,000 is redeemable at the option of the holder on September 19, 2002. In June 2000, the Company repurchased $5,995 face value of the $49,000 Medium-Term Note, which was redeemable at the option of the holder on September 19, 2002. The after-tax extraordinary gain was $960. In the third quarter of 2001, the Company reclassed the $50,000 Medium-Term Note and the remaining $43,005 of the $49,000 Medium-Term Note to current liabilities on the consolidated balance sheet. These Medium-Term Notes are redeemable at the option of the holder on July 16, 2002 and September 19, 2002, respectively. The other notes payable have a weighted average interest rate of 4.9% at February 2, 2002 and 5.4% at February 3, 2001, and mature at various times through August 2016. Certain of these notes are collateralized by land and buildings with an aggregate carrying value of approximately $7,260 and $7,398 at February 2, 2002 and February 3, 2001, respectively.
CONVERTIBLE DEBT - ------------------------------------------------------------------------------------------------------------ February 2, 2002 February 3, 2001 - ------------------------------------------------------------------------------------------------------------ Zero Coupon Convertible Subordinated Notes $ - $158,555 - ------------------------------------------------------------------------------------------------------------ - 158,555 Less current maturities - 158,555 - ------------------------------------------------------------------------------------------------------------ Total long-term convertible debt $ - $ - - ------------------------------------------------------------------------------------------------------------
On September 20, 1996, the Company issued $271,704 principal amount (at maturity) of Liquid Yield Option Notes (LYONs) with a price to the public of $150,000. The net proceeds to the Company were $146,250. The issue price of each such LYON was $552.07 and required no periodic payments of interest. The LYONs had a maturity date of September 20, 2011, at $1,000 per LYON, representing a yield to maturity of 4.0% per annum (computed on a semiannual bond equivalent basis). 42 In April 2000, the Company repurchased $30,200 face value of its LYONs at a price of $520 per LYON. The book value of the repurchased LYONs was $19,226 and the after-tax extraordinary gain was $2,025. In May 2001, the Company repurchased $77,600 face value of its LYONs at a price of $649 per LYON. The book value of the repurchased LYONs was $51,517 and the after-tax extraordinary gain was $228. In July 2001, the Company repurchased $3,000 face value of its LYONs at a price of $656 per LYON. The book value of the repurchased LYONs was $2,006. In September 2001, the Company repurchased $159,702 face value of its LYONs which were redeemed at the option of the holder at a price of $673 per LYON. The book value of the repurchased LYONs was $107,475 and the after-tax extraordinary loss was $993. In November 2001, the Company repurchased the remaining $1,202 face value of its LYONs which were redeemed for a price of $677 per LYON. The book value of the repurchased LYONs was $814. Several of the Company's debt agreements require the maintenance of certain financial ratios and compliance with covenants. Approximately $36,133 of the Company's net worth was not restricted by these covenants as of February 2, 2002. The Company was in compliance with all such ratios and covenants at February 2, 2002. The annual maturities, of all long-term debt for the next five years are $124,615 in 2002, $98,714 in 2003, $187,869 in 2004, $109,016 in 2005 and $148,548 in 2006. These maturities include amounts for early redemption, which is at the option of the holders. Any compensating balance requirements related to all revolving credit agreements and debt were satisfied by balances available from normal business operations. The Company was contingently liable for outstanding letters of credit in the amount of approximately $37,887 at February 2, 2002. NOTE 3 - LEASE AND OTHER COMMITMENTS In May 2001, the Company sold certain operating assets for $14,000. The assets were leased back from the purchaser in a lease structured as a one-year term with three one-year renewal options. The resulting lease is being accounted for as an operating lease and the gain of $3,817 from the sale of the certain operating assets is deferred until the lease term is completed and the residual guarantee is satisfied, at which time the gain will be recorded in costs of merchandise sales and costs of service revenue. In January 2001, the Company sold certain assets for $10,464. The assets were leased back from the purchaser on a month to month renewable term basis with a residual guarantee given by the Company at the end of the lease term. The resulting lease is being accounted for as an operating lease and the gain of $593 from the sale of the certain assets is deferred until the lease term is completed and the residual guarantee is satisfied, at which time the gain will be recorded in costs of merchandise sales. 43 In September 2000, the Company entered into a $143,000 real estate operating lease facility with leased property trusts, established as an unconsolidated special-purpose entity. The real estate operating lease facility, which has an interest rate of LIBOR plus 1.85%, replaces $143,000 of leases, which had an interest rate of LIBOR plus 2.27%. The Company, as a result of replacing the existing operating leases, recorded a pretax charge to fiscal 2000 earnings of $1,630 of unamortized lease costs, which was recorded in the costs of merchandise sales section of the consolidated statement of operations. The $143,000 real estate operating lease facility has a four-year term with a guaranteed residual value. At February 2, 2002, the maximum amount of the residual guarantee relative to the real estate under the lease is approximately $92,372. The Company expects the fair market value of the leased real estate, subject to the purchase option or sale to a third party, to substantially reduce or eliminate the Company's payment under the residual guarantee at the end of the lease term. The Company leases certain property and equipment under operating leases which contain renewal and escalation clauses. Future minimum rental commitments for noncancelable operating leases in effect as of February 2, 2002 are shown below. All amounts are exclusive of lease obligations and sublease rentals applicable to stores for which reserves in conjunction with the Profit Enhancement Plan have previously been established. The aggregate minimum rental commitments for such leases having terms of more than one year are approximately: 2002-$51,887; 2003-$44,925; 2004-$41,880; 2005-$35,888; 2006-$36,037; thereafter-$328,786. Rental expenses incurred for operating leases in 2001, 2000 and 1999 were $64,434, $63,206 and $59,890. In October 2001, the Company entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773 over the next four years. As of February 2, 2002, the remaining balance for this commitment was $34,705. NOTE 4 - STOCKHOLDERS' EQUITY SHARE REPURCHASE - TREASURY STOCK On February 1, 1999, the Company repurchased 11,276,698 of its common shares outstanding pursuant to a Dutch Auction self-tender offer at a price of $16.00 per share. The repurchased shares included 1,276,698 common shares which were repurchased as a result of the Company exercising its option to purchase an additional 2% of its outstanding shares. Expenses related to the share repurchase were approximately $1,638 and were included as part of the cost of the shares acquired. A portion of the treasury shares will be used by the Company to provide benefits to employees under its compensation plans and in conjunction with the Company's dividend reinvestment program. As of February 2, 2002, the Company has reflected 10,284,446 shares of its common stock at a cost of $166,045 as "cost of shares in treasury" on the Company's consolidated balance sheet. RIGHTS AGREEMENT On December 31, 1997, the Company distributed as a dividend one common share purchase right on each of its common shares. The rights will not be exercisable or transferable apart from the Company's common stock until a person or group, as defined in the rights agreement (dated December 5, 1997), without the proper consent of the Company's Board of Directors, acquires 15% or more, or makes an offer to acquire 15% or more of the Company's outstanding stock. When exercisable, the rights entitle the holder to purchase one share of the Company's common stock for $125. Under certain circumstances, including the acquisition of 15% of the Company's stock by a person or group, the rights entitle the holder to purchase common stock of the Company or common stock of an acquiring company having a market value of twice the exercise price of the right. The rights do not have voting power and are subject to redemption by the Company's Board of Directors for $.01 per right anytime before a 15% position has been acquired and for 10 days thereafter, at which time the rights become nonredeemable. The rights expire on December 31, 2007. 44 BENEFITS TRUST On April 29, 1994, the Company established a flexible employee benefits trust with the intention of purchasing up to $75,000 worth of the Company's common shares. The repurchased shares will be held in the trust and will be used to fund the Company's existing benefit plan obligations including healthcare programs, savings and retirement plans and other benefit obligations. The trust will allocate or sell the repurchased shares through 2023 to fund these benefit programs. As shares are released from the trust, the Company will charge or credit additional paid-in capital for the difference between the fair value of shares released and the original cost of the shares to the trust. For financial reporting purposes, the trust is consolidated with the accounts of the Company. All dividend and interest transactions between the trust and the Company are eliminated. In connection with the Dutch Auction self-tender offer, 37,230 shares were tendered at a price of $16.00 per share in fiscal 1999. At February 2, 2002, the Company has reflected 2,195,270 shares of its common stock at a cost of $59,264 as "cost of shares in benefits trust" on the Company's consolidated balance sheet. NOTE 5 - PROFIT ENHANCEMENT PLAN In the third quarter 2000, the Company performed a comprehensive review of its field, distribution and Store Support Center infrastructure as well as the performance of each store. As a result of this review, the Company implemented a number of changes that it believed would improve its performance and recorded a charge of $71,234. The charges included expenses related to the closure of the 38 under-performing stores and two distribution centers, certain equipment write-offs, the abandonment of two development parcels and severance costs. The charges were recorded in costs of merchandise sales, costs of service revenue and selling, general and administrative expenses on the consolidated statement of operations as $62,665, $5,661 and $2,908, respectively. PLAN UPDATE The Profit Enhancement Plan has been progressing closely to the schedule originally estimated by the Company. Each of the 38 stores and one of the distribution centers identified for closure were closed on or before October 28, 2000. The second distribution center was closed on November 30, 2000. All employees were notified of their separation on or before October 28, 2000. The assets held for disposal were reclassed and depreciation was stopped on October 28, 2000 which was concurrent with the announcement of the Profit Enhancement Plan and the closure of the stores. The Company is progressing towards the disposal of the 38 stores, 11 of which were owned and 27 were leased by the Company, two distribution centers and two development parcels which were closed or abandoned in connection with the Profit Enhancement Plan. As of the end of fiscal 2001, the Company had successfully disposed of ten of the closed stores, the two distribution centers and one of the development parcels. The Company estimates the remaining closed or abandoned properties will be disposed of by the end of fiscal 2002. ASSETS HELD FOR DISPOSAL The assets held for disposal as of the end of fiscal 2001 and 2000 included the building and land of the remaining closed stores owned by the Company, additional development parcels, and equipment from the remaining closed stores. The carrying values of the building, land and equipment were $16,007 and $22,629 for fiscal years 2001 and 2000, respectively. In fiscal 2001, the Company was able to sell three of the 13 owned properties for net proceeds of $4,103. The sales resulted in a loss of $691 which was recorded in costs of merchandise sales and selling, general and administrative expenses on the consolidated statement of operations. Additionally, the Company recorded a downward revision in the estimated values for certain properties of $1,496 in fiscal 2001. This expense was recorded in costs of merchandise sales on the consolidated statement of operations. In fiscal 2001, the Company recorded a loss for equipment held for disposal of $162, which was due primarily to a reduction in the Company's estimated proceeds. 45 The Company is actively marketing the remaining ten owned properties and has made adjustments to property values in accordance with the change in market values. As a result, the Company has extended the original estimated time needed for selling the owned properties. It is expected that seven of these properties with a carrying value of $10,663 will be disposed of by the second quarter 2002, with the remaining three properties with a carrying value of $4,746 expected to be disposed of by the end of the third quarter 2002. The Company will continue to monitor the status for disposing of its owned properties and make any necessary adjustments. An adjustment was reflected in on-going expenses for the increased time required to maintain these properties. LEASE RESERVE As of the end of fiscal 2001, the Company was able to sublease three and exit the lease of an additional five leased properties. The Company expects the remaining 19 leased properties to be subleased or otherwise disposed of by the end of fiscal 2002. The Company increased the reserve for leases $1,644 during fiscal 2001. These changes in the reserve were a result of a $3,834 increase due primarily to an increase in the estimated amount of time it will take the Company to sublease certain properties and a decrease in estimated sublease rates. The reserve increase was offset, in part, by a $2,190 decrease due primarily to lower than estimated commissions and lease exit costs on subleases for certain properties. The effects of these adjustments were recorded in costs of merchandise sales and costs of service revenue. In fiscal 2000, the Company increased the lease reserve by $113. These changes in the reserve were a result of a $1,176 increase due to an increase in the estimated lease payments related to the closed stores. The increase was offset, in part, by a $1,063 decrease due primarily to an increase in the estimated sublease rates coupled with lower lease related expenses. ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit activities that will be continued. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed of. The on-going costs reserve includes general maintenance costs such as utilities, security, telephone, real estate taxes and personal property taxes which will be incurred until the properties are disposed. The reserve for on-going costs will diminish as sites are sold, sublet or otherwise disposed of and such activities are estimated to be completed by the end of fiscal 2002. In fiscal 2001, the Company increased the on-going expense reserve $595. This change was a result of a $1,214 increase in the reserve due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties offset, in part, by a $619 decrease due to lower than anticipated cost for utilities and security costs. In fiscal 2000, the Company increased the on-going expense reserve $361. This change was due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties. SEVERANCE RESERVE The total number of employees separated due to the Profit Enhancement Plan was approximately 1,000. The 1,000 employees were composed of 76% store employees, 13% distribution employees, and 11% Store Support Center and field administrative employees. The total severance paid in connection with the Profit Enhancement Plan was $1,353. In fiscal 2001, the Company reversed $69 of severance due primarily to certain employees originally expected to be receiving severance failing to qualify to receive payments and lower than estimated final payments. Each reversal was recorded through the line it was originally charged in the consolidated statements of operations. 46 In fiscal 2000, the Company reversed $272 of severance due to employees being accepted into positions in other locations of the Company and employees failing to qualify to receive payments. Each reversal was recorded through the line it was originally charged in the consolidated statements of operations. NON-RESERVABLE EXPENSES Non-reservable expenses are those costs which could not be reserved, but were incurred as a result of the Profit Enhancement Plan. These expenses related to costs incurred which had a future economic benefit to the Company such as the transferring of inventory and equipment out of properties closed by the Profit Enhancement Plan. The expenses of this nature incurred were $678 and $3,611 for fiscal 2001 and fiscal 2000, respectively. The fiscal 2001 expenses incurred related to the completion of the removal of inventory and equipment from the closed distribution centers. The fiscal 2000 expenses were incurred for inventory and equipment handling related to the closure of the 38 stores and two distribution centers. The fiscal 2000 expenses were offset by a recovery of certain benefit expenses related to the reduction in workforce. 47 PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Below are tables summarizing expenses related to the Profit Enhancement Plan for fiscal 2001 and fiscal 2000. The details and reasons for the original charge and changes to the charge are as described above in the respective reserve categories.
FISCAL 2001 Non-Reservable Income Statement Reserve Expense Total Classification Adjustments Incurred Expense - ----------------------------------------------------------------- Costs of merchandise sales $3,528 $ 641 $4,169 Costs of service revenue 804 9 813 Selling, general and administrative 187 28 215 - ----------------------------------------------------------------- Total expenses $4,519 $ 678 $5,197 - -----------------------------------------------------------------
FISCAL 2000 Non-Reservable Income Statement Original Reserve Expense Total Classification Charge Adjustments Incurred Expense - ----------------------------------------------------------------------------- Costs of merchandise sales $62,665 $ 939 $3,481 $67,085 Costs of service revenue 5,661 (177) (252) 5,232 Selling, general and administrative 2,908 (662) 382 2,628 - ----------------------------------------------------------------------------- Total expenses $71,234 $ 100 $3,611 $74,945 - -----------------------------------------------------------------------------
48 At the end of the third quarter 2000, the Company set up a reserve liability account which is included in accrued liabilities on the consolidated balance sheet. This liability account tracks all accruals including remaining rent on leases net of sublease income, severance, and on-going expenses for the closed properties. The following chart reconciles the change in reserve from the origination of the charge through the fiscal year ended February 2, 2002. All additions and adjustments were charged or credited through the appropriate line items on the statement of operations.
Lease Fixed On-going Expenses Assets Severance Expenses Total - ----------------------------------------------------------------------------------------- Original charges $ 7,916 $57,680 $ 1,694 $ 3,944 $71,234 Addition 1,176 1,074 - 361 2,611 Utilization (975) (58,754) (1,213) (1,345) (62,287) Adjustment (1,063) - (272) - (1,335) - ----------------------------------------------------------------------------------------- Reserve balance at Feb. 3, 2001 7,054 - 209 2,960 10,223 - ----------------------------------------------------------------------------------------- Addition 3,834 2,440 - 1,214 7,488 Utilization (5,548) (2,349) (140) (2,235) (10,272) Adjustment (2,190) (91) (69) (619) (2,969) - ----------------------------------------------------------------------------------------- Reserve balance at Feb. 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470 - -----------------------------------------------------------------------------------------
NOTE 6 - PENSION AND SAVINGS PLANS The Company has a defined benefit pension plan covering substantially all of its full-time employees hired on or before February 1, 1992. Normal retirement age is 65. Pension benefits are based on salary and years of service. The Company's policy is to fund amounts as are necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of ERISA. The actuarial computations are made using the "projected unit credit method." Variances between actual experience and assumptions for costs and returns on assets are amortized over the remaining service lives of employees under the plan. 49 As of December 31, 1996, the Company froze the accrued benefits under the plan and active participants became fully vested. The plan's trustee will continue to maintain and invest plan assets and will administer benefit payments. Pension expense (income) includes the following:
Feb. 2, Feb. 3, Jan. 29, Year ended 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- Interest cost $ 1,895 $ 1,848 $ 1,826 Expected return on plan assets (2,162) (2,261) (1,915) Amortization of transition asset (214) (214) (214) Recognized actuarial loss 992 890 597 - ----------------------------------------------------------------------------------------------------------------------------- Total pension expense $ 511 $ 263 $ 294 - -----------------------------------------------------------------------------------------------------------------------------
Pension plan assets are stated at fair market value and are composed primarily of money market funds, stock index funds, fixed income investments with maturities of less than five years, and the Company's common stock. 50 The following table sets forth the reconciliation of the benefit obligation, fair value of plan assets and funded status of the Company's defined benefit plan:
Feb. 2, Feb. 3, Year ended 2002 2001 - -------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at beginning of year $25,726 $26,955 Interest cost 1,895 1,848 Actuarial loss (gain) 944 (2,041) Benefits paid (1,056) (1,036) - --------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $27,509 $25,726 - --------------------------------------------------------------------------------------------------------------- Change in Plan Assets: Fair value of plan assets at beginning of year $25,854 $26,974 Actual return on plan assets (net of expenses) 1,816 (84) Employer contributions 895 - Benefits paid (1,056) (1,036) - --------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $27,509 $25,854 - --------------------------------------------------------------------------------------------------------------- Reconciliation of the Funded Status: Funded status $ - $ 128 Unrecognized transition asset - (214) Unrecognized actuarial loss 3,960 3,663 - --------------------------------------------------------------------------------------------------------------- Net amount recognized at year-end as prepaid benefit cost $ 3,960 $ 3,577 - --------------------------------------------------------------------------------------------------------------- Weighted-Average Assumptions: Discount rate 7.25% 7.40% Expected return on plan assets 8.50% 8.50% - ---------------------------------------------------------------------------------------------------------------
The Company had no comprehensive income attributable to the change in the minimum pension liability in fiscal years 2001 and 2000. The Company recorded other comprehensive income, net of tax, attributable to the change in the minimum pension liability of $4,210 in fiscal year 1999. The Company has 401(k) savings plans which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participant's contributions or 3% of the participant's compensation. The Company's savings plans' contribution expense was $4,516, $4,947 and $5,644 in fiscal years 2001, 2000 and 1999, respectively. 51 NOTE 7 - NET EARNINGS PER SHARE For fiscal years 2001, 2000 and 1999, basic earnings per share are based on net earnings divided by the weighted average number of shares outstanding during the period. Diluted earnings per share assumes conversion of convertible subordinated notes, zero coupon convertible subordinated notes and the dilutive effects of stock options. Adjustments for convertible securities were antidilutive in 2001, 2000 and 1999, and therefore excluded from the computation of diluted EPS; all of these securities were retired as of the end of fiscal 2001 and will not effect future calculations. Options to purchase 3,940,587, 5,032,772 and 4,755,657 shares of common stock were outstanding at February 2, 2002, February 3, 2001 and January 29, 2000, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market prices of the common shares on such dates. The following schedule presents the calculation of basic and diluted earnings per share for income before extraordinary items: (In thousands, except per share amounts)
Fiscal 2001 Fiscal 2000 Fiscal 1999 ---------------------------------- ---------------------------------- --------------------------------- Earnings Shares Per share Earnings Shares Per share Earnings Shares Per share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator)(Denominator) Amount ----------- ------------ ------ ----------- ------------- ------ ---------- ------------ ------ Basic EPS Before Extraordinary Items Earnings available to common shareholders $36,100 51,348 $ .70 $(53,148) 51,088 $(1.04) $ 29,303 50,665 $.58 ====== ====== ==== Effect of Dilutive Securities Common shares assumed issued upon exercise of dilutive stock options - 687 - - - 175 ------- ------ ------- ------ ------- ------ Diluted EPS Before Extraordinary Items Earnings available to common shareholders assuming conversion $36,100 52,035 $ .69 $(53,148) 51,088 $(1.04) $ 29,303 50,840 $.58 ======= ====== ====== ======== ====== ====== ======== ====== ====
52 NOTE 8 - STOCK OPTION PLANS Options to purchase the Company's common stock have been granted to key employees and members of the Board of Directors. The option prices are at least 100% of the fair market value of the common stock on the grant date. On May 21, 1990, the stockholders approved the 1990 Stock Incentive Plan which authorized the issuance of restricted stock and/or options to purchase up to 1,000,000 shares of the Company's common stock. Additional shares in the amounts of 2,000,000, 1,500,000 and 1,500,000 were authorized by stockholders on June 4, 1997, May 31, 1995 and June 1, 1993, respectively. In April 2001, the Board of Directors amended the 1990 Stock Incentive Plan to extend the expiration date for the grant of non-qualified stock options and restricted stock thereunder to directors, officers and employees until March 31, 2005. Under this plan, both incentive and nonqualified stock options may be granted to eligible participants. Incentive stock options are fully exercisable on the second or third anniversary of the grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Nonqualified options are fully exercisable on the third anniversary of their grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of February 2, 2002, 478,367 remain available for grant. On June 2, 1999 the stockholders approved the 1999 Stock Incentive Plan which authorized the issuance of restricted stock and/or options to purchase up to 2,000,000 shares of the Company's common stock. Under this plan, both incentive and nonqualified stock options may be granted to eligible participants. The incentive stock options and nonqualified stock options are fully exercisable on the third anniversary of the grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of February 2, 2002, 102,000 shares remain available for grant.
Equity Equity compensation compensation plans approved plans not approved by shareholders by shareholders Total - -------------------------------------------------------------------------------------- Number of securities to be issued upon exercise of outstanding options 6,316,787 - 6,316,787 Weighted average exercise price of outstanding options $ 16.48 $ - $ 16.48 Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in top row) 580,367 - 580,367 - --------------------------------------------------------------------------------------
53 Stock option transactions for the Company's stock option plans are summarized as follows:
Fiscal 2001 Fiscal 2000 Fiscal 1999 ------------------------ ----------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - --------------------------------------------------------------------------------------------------------------------------- Outstanding - beginning of year 5,039,772 $19.63 5,413,622 $22.05 4,982,761 $23.02 Granted 1,757,000 6.75 1,160,450 6.34 1,558,450 16.08 Exercised (19,400) 8.77 - - (519,850) 12.50 Cancelled (460,585) 14.26 (1,534,300) 18.10 (607,739) 22.75 - --------------------------------------------------------------------------------------------------------------------------- Outstanding - end of year 6,316,787 16.48 5,039,772 19.63 5,413,622 22.05 - --------------------------------------------------------------------------------------------------------------------------- Options exercisable at year end 3,422,187 22.29 2,501,678 24.93 2,489,162 24.66 Weighted average estimated fair value of options granted 2.85 2.54 6.60 - ---------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at February 2, 2002:
Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at Feb. 2, 2002 Life Price at Feb.2, 2002 Price - --------------------------------------------------------------------------------------------------------------------------- $ 5.31 to $13.00 2,447,200 9 years $ 6.56 379,200 $ 6.56 $13.01 to $21.00 1,397,230 7 years 15.58 747,630 15.53 $21.01 to $29.00 1,436,792 5 years 23.30 1,259,792 23.34 $29.01 to $37.38 1,035,565 4 years 31.65 1,035,565 31.65 - --------------------------------------------------------------------------------------------------------------------------- $ 5.31 to $37.38 6,316,787 3,422,187 - ---------------------------------------------------------------------------------------------------------------------------
54 The Company applies APB No. 25, "Accounting for Stock Issued to Employees," and the guidance of FIN 44 "Accounting for Certain Transactions involving Stock Compensation" and EITF 00-23 "Issues Related to Accounting for Stock Compensation under APB Opinion No. 25 and FIN 44" in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for its stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates and recognized as compensation expense on a straight-line basis over the vesting period of the grant consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings (loss) and net earnings (loss) per share would have been reduced to the pro forma amounts indicated as follows:
- ----------------------------------------------------------------------------------------------------------- Fiscal 2001 Fiscal 2000 Fiscal 1999 - ----------------------------------------------------------------------------------------------------------- Net earnings (loss): Income (loss) before extraordinary items $32,208 $(57,365) $24,450 Extraordinary items (765) 2,054 - - ----------------------------------------------------------------------------------------------------------- Net income (loss) $31,443 $(55,311) $24,450 - ----------------------------------------------------------------------------------------------------------- Earnings (loss) per share - basic: Income (loss) before extraordinary items $ .63 $ (1.12) $ .48 Extraordinary items (.01) .04 - - ----------------------------------------------------------------------------------------------------------- Net income (loss) $ .62 $ (1.08) $ .48 - ----------------------------------------------------------------------------------------------------------- Earnings (loss) per share - diluted: Income (loss) before extraordinary items $ .62 $ (1.12) $ .48 Extraordinary items (.01) .04 - - ----------------------------------------------------------------------------------------------------------- Net income (loss) $ .61 $ (1.08) $ .48 - -----------------------------------------------------------------------------------------------------------
The pro forma effects on net earnings for fiscal years 2001, 2000 and 1999 are not representative of the pro forma effect on net earnings in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. The fair value of each option granted during fiscal years 2001, 2000 and 1999 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: (i) dividend yield of 1.29%, 0.90% and 0.78%, respectively; (ii) expected volatility of 39%, 40% and 34%, respectively; (iii) risk-free interest rate ranges of 2.8% to 5.5%, 5.8% to 6.7% and 5.0% to 6.5%, respectively; and (iv) ranges of expected lives of 4 years to 8 years for fiscal years 2001, 2000 and 1999. 55 NOTE 9 - INCOME TAXES The provision for income taxes includes the following:
Feb. 2, Feb. 3, Jan. 29, Year ended 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- Current: Federal $ 12,640 $ (6,300) $ 12,653 State 240 353 788 Deferred: Federal 6,680 (22,776) 2,074 State 744 (1,798) 149 - ---------------------------------------------------------------------------------------------------------------------------------- $ 20,304 $(30,521) $ 15,664 - ---------------------------------------------------------------------------------------------------------------------------------- A reconciliation of the statutory federal income tax rate to the effective rate of the provision for income taxes follows: Feb. 2, Feb. 3, Jan. 29, Year ended 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefits 1.2 1.2 1.4 Job credits (0.3) 0.3 (1.1) Other, net 0.1 - (0.5) - ----------------------------------------------------------------------------------------------------------------------------------- 36.0% 36.5% 34.8% - -----------------------------------------------------------------------------------------------------------------------------------
Items that gave rise to significant portions of the deferred tax accounts are as follows: Feb. 2, Feb. 3, 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Inventories $ 3,841 $ 8,431 Vacation accrual 4,990 5,014 Store closing reserves 1,968 5,661 Accrued leases 7,737 7,966 Real estate tax (2,188) (2,091) Insurance 4,621 4,009 Benefit accruals (5,693) (2,347) Carry forward credits - (2,401) Other 544 1,167 - ----------------------------------------------------------------------------------------------------------------------------------- $ 15,820 $ 25,409 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $ 69,093 $ 68,709 State taxes (2,643) (2,040) Legal (2,438) - Other 15 (477) - ----------------------------------------------------------------------------------------------------------------------------------- $ 64,027 $ 66,192 - ----------------------------------------------------------------------------------------------------------------------------------- Net deferred tax liability $ 48,207 $ 40,783 - -----------------------------------------------------------------------------------------------------------------------------------
56 NOTE 10 - CONTINGENCIES The Company is a defendant in an action entitled "Coalition for a Level Playing Field, L.L.C., et al. v. AutoZone, Inc., et al.," in the United States District Court for the Eastern District of New York. There are over 100 plaintiffs, consisting of automotive jobbers, warehouse distributors and a coalition of several trade associations; the defendants are AutoZone, Inc., Wal-Mart Stores, Inc., Advance Stores Company, Inc., CSK Auto, Inc., the Company, Discount Auto Parts, Inc., O'Reilly Automotive, Inc. and Keystone Automotive Operations, Inc. The plaintiffs allege that the defendants violated various provisions of the Robinson-Patman Act by, among other things, knowingly inducing and receiving various forms of discriminatory prices from automotive parts manufacturers. The plaintiffs are seeking compensatory damages, which would be trebled under applicable law, as well as injunctive and other equitable relief. The Company believes the claims are without merit and intends to vigorously defend this action. The Company is also party to various other lawsuits and claims, including purported class actions, arising in the normal course of business. In the opinion of management, these lawsuits and claims, including the cases above, are not, singularly or in the aggregate, material to the Company's financial position or results of operations. NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
February 2, 2002 February 3, 2001 ------------------------ ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - -------------------------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 15,981 $ 15,981 $ 7,995 $ 7,995 Accounts receivable 18,052 18,052 16,792 16,792 Liabilities: Accounts payable 216,085 216,085 204,755 204,755 Long-term debt including current maturities 669,033 635,080 654,391 472,770 Zero coupon convertible subordinated notes - - 158,555 148,525 - --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE The carrying amounts approximate fair value because of the short maturity of these items. LONG-TERM DEBT INCLUDING CURRENT MATURITIES AND ZERO COUPON CONVERTIBLE SUBORDINATED NOTES INCLUDING CURRENT MATURITIES 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 fair value estimates presented herein are based on pertinent information available to management as of February 2, 2002 and February 3, 2001. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from amounts presented herein. 57
QUARTERLY FINANCIAL DATA (UNAUDITED) The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings(Loss) Net Net Earnings Per Share Before Earnings Operating (Loss) Before Net Extraordinary (Loss) Cash Market Price Year Ended Total Gross Profit Extraordinary Earnings Items Per Share Dividends Per Share Feb. 2, 2002 Revenues Profit (Loss) Items (Loss) Basic Diluted Basic Diluted Per Share High Low - ----------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $551,383 $155,537 $27,039 $ 9,108 $ 9,108 $ .18 $ .18 $ .18 $ .18 $.0675 $ 7.00 $ 4.40 2nd Quarter 572,874 164,104 31,964 12,285 12,519 .24 .24 .24 .24 .0675 13.97 5.35 3rd Quarter 551,255 155,706 27,362 11,016 10,022 .21 .21 .19 .19 .0675 13.70 8.80 4th Quarter 508,203 142,049 17,085 3,691 3,686 .07 .07 .07 .07 .0675 18.48 11.88 - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended Feb. 3, 2001 - ----------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $614,809 $159,816 $19,501 $ 4,407 $6,447 $ .09 $ .09 $ .13 $ .13 $.0675 $ 7.69 $ 5.50 2nd Quarter 633,887 157,622 18,593 3,409 4,376 .07 .07 .09 .09 .0675 7.63 5.63 3rd Quarter 622,382 66,358 (82,571) (62,271) (63,209) (1.22) (1.22) (1.24) (1.24) .0675 6.44 4.19 4th Quarter(1) 547,390 148,055 16,445 1,292 1,292 .03 .03 .03 .03 .0675 5.38 3.31 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Included 14 weeks due to the 53 week fiscal year Under the Company's present accounting system, actual gross profit from merchandise sales can be determined only at the time of physical inventory, which is taken at the end of the fiscal year. Gross profit from merchandise sales for the first, second and third quarters is estimated by the Company based upon recent historical gross profit experience and other appropriate factors. Any variation between estimated and actual gross profit from merchandise sales for the first three quarters is reflected in the fourth quarter's results. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The material contained in the registrant's definitive proxy statement, which will be filed pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year (the "Proxy Statement"), under the captions "(ITEM 1) ELECTION OF DIRECTORS," other than "-Report of the Audit Committee of the Board of Directors," and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" is hereby incorporated herein by reference. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I, in accordance with General Instruction G(3) to Form 10-K. ITEM 11 EXECUTIVE COMPENSATION The material in the Proxy Statement under the caption "EXECUTIVE COMPENSATION," other than the material under "-Report of the Compensation Committee of the Board of Directors on Executive Compensation" and "-Performance Graph," is hereby incorporated herein by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The material in the Proxy Statement under the caption "SHARE OWNERSHIP" is hereby incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The material in the Proxy Statement under the caption "EXECUTIVE COMPENSATION-Certain Relationships and Related Transactions" is hereby incorporated herein by reference. 58 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a). Page ---- 1. The following consolidated financial statements of The Pep Boys - Manny, Moe & Jack are included in Item 8. Independent Auditors' Report 32 Consolidated Balance Sheets - February 2, 2002 and February 3, 2001 33 Consolidated Statements of Operations - Years ended February 2, 2002, February 3, 2001 and January 29, 2000 34 Consolidated Statements of Stockholders' Equity Years ended February 2, 2002, February 3, 2001 and January 29, 2000 35 Consolidated Statements of Cash Flows - Years ended February 2, 2002, February 3, 2001, and January 29, 2000 36 Notes to Consolidated Financial Statements 37 2. The following consolidated financial statement schedule of The Pep Boys - Manny, Moe & Jack is included. Schedule II Valuation and Qualifying Accounts and Reserves 65 All other schedules have been omitted because they are not applicable or not required or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits
(3.1) Articles of Incorporation, Incorporated by reference from as amended the Company's Form 10-K for the fiscal year ended January 30, 1988. (3.2) By-Laws, as amended Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-39225). (3.3) Amendment to By-Laws Incorporated by reference from (Declassification of Board of Directors) the Company's Form 10-K for the fiscal year ended January 29, 2000. (4.1) Indenture, dated as of March 22, Incorporated by reference from 1991 between the Company and the Registration Statement on Bank America Trust Company of Form S-3 (File No. 33-39225). New York as Trustee, including Form of Debt Security (4.2) Indenture, dated as of June Incorporated by reference from 12, 1995, between the Company the Registration Statement on and First Fidelity Bank, Form S-3 (File No. 33-59859). National Association as Trustee, including Form of Debenture 59 (4.3) Indenture, dated as of July 15, 1997, Incorporated by reference from between the Company and PNC the Registration Statement on Bank, National Association, as Form S-3 (File No. 333-30295). Trustee, providing for the issuance of Senior Debt Securities, and form of security (4.4) Indenture, dated as of February 18, 1998 Incorporated by reference from between the Company and PNC the Registration Statement on Bank, National Association, as Form S-3/A (File No. 333-45793). Trustee, providing for the issuance of Senior Debt Securities, and form of security (10.1)* Medical Reimbursement Plan of Incorporated by reference from the Company the Company's Form 10-K for the fiscal year ended January 31, 1982. (10.2) Rights Agreement dated as of Incorporated by reference from December 5, 1997 between the the Company's Form 8-K dated Company and First Union December 8, 1997. National Bank (10.3)* Directors' Deferred Compensation Incorporated by reference from Plan, as amended the Company's Form 10-K for the fiscal year ended January 30, 1988. (10.4) Dividend Reinvestment and Stock Purchase Incorporated by reference from Plan dated January 4, 1990 the Registration Statement on Form S-3 (File No. 33-32857). (10.5)* The Pep Boys - Manny, Moe & Incorporated by reference from Jack Trust Agreement for the the Company's Form 10-K for the Executive Supplemental Pension fiscal year ended February 1, Plan and Certain Contingent 1992. Compensation Arrangements, dated as of February 13, 1992 (10.6)* Amendment to the Executive Incorporated by reference from Supplemental Pension Plan the Company's Form 10-K for the (amended and restated effective fiscal year ended February 1, January 1, 1988), dated as of 1992. February 13, 1992 (10.7)* Consulting and Retirement Incorporated by reference from Agreement by and between the the Company's Form 10-K for the Company and Benjamin Strauss, fiscal year ended February 1, dated as of February 2, 1992 1992. (10.8) Flexible Employee Benefits Trust Incorporated by reference from the Company's Form 8-K dated May 6, 1994. (10.9)* The Pep Boys Savings Plan - Puerto Rico Incorporated by reference from the Company's Form 10-K for the year ended January 31, 1998. 60 (10.10)* Form of Employment Agreement dated as of Incorporated by reference from June 1998 between the Company and certain the Company's Form 10-Q for the officers of the Company. quarter ended October 31, 1998. (10.11)* Employment Agreement between Mitchell G. Leibovitz Incorporated by reference from and the Company dated as of June 3, 1998. the Company's Form 10-Q for the quarter ended October 31, 1998. (10.12) The Pep Boys - Manny, Moe & Jack Incorporated by reference from Annual Incentive Bonus Plan, as amended and restated. the Company's Form 10-K for the year ended January 30, 1999. (10.13) Amendments to The Pep Boys Savings Plan - Puerto Rico Incorporated by reference from the Company's Form 10-Q for the quarter ended May 1, 1999. (10.14)* The Pep Boys - Manny, Moe and Jack Incorporated by reference from 1999 Stock Incentive Plan - Amended the Company's Form 10-Q for the and Restated as of August 31, 1999. quarter ended October 30, 1999. (10.15) Loan and Security Agreement between the Company and Incorporated by reference from Congress Financial Corporation dated September 22, 2000. the Company's Form 8-K filed October 18, 2000. (10.16) Participation Agreement between the Company and Incorporated by reference from The State Street Bank and Trust (Trustee) dated the Company's Form 8-K filed September 22, 2000. October 18, 2000. (10.17) Master Lease Agreement between the Company and Incorporated by reference from The State Street Bank and Trust (Trustee) dated the Company's Form 8-K filed September 22, 2000. October 18, 2000. (10.18) Sale-leaseback agreement between the Company Incorporated by reference from and ARI Fleet LT dated January 31, 2001. the Company's Form 10-K for the year ended February 3, 2001. (10.19)* The Pep Boys - Manny, Moe and Jack Incorporated by reference from 1990 Stock Incentive Plan - Amended the Company's Form 10-K for the and Restated as of March 26, 2001. year ended February 3, 2001. (10.20) Credit Agreement between the Company Incorporated by reference from and GMAC Business Credit, LLC dated the Company's Form 8-K filed June 29, 2001. July 13, 2001. (10.21)* The Pep Boys Savings Plan - Amended and Restated as of April 25, 2001. (10.22) Amendment No. 1 dated as of June 29, 2001 to the Loan and Security Agreement dated September 22, 2000 between the Company and Congress Financial Corporation. (10.23)* The Pep Boys - Manny, Moe & Jack Pension Plan - Amended and Restated as of September 10, 2001. (10.24) Advertising Purchase Agreement between the Company and ICON International, Inc. dated October 3, 2001. (10.25) Amendment No. 2 dated as of December 13, 2001 to the Loan and Security Agreement dated September 22, 2000 between the Company and Congress Financial Corporation (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent
* Management contract or compensatory plan or arrangement. (b) None 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE PEP BOYS - MANNY, MOE & JACK (Registrant) Dated: May 3, 2002 by: /s/ George Babich Jr. -------------- --------------------- George Babich Jr., President and Chief Financial Officer 62 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - ---------- -------- ---- /s/ Mitchell G. Leibovitz Chairman of the Board May 3, 2002 Mitchell G. Leibovitz and Chief Executive Officer (Principal Executive Officer) /s/ George Babich Jr. President and May 3, 2002 George Babich Jr. Chief Financial Officer (Principal Financial Officer) /s/ Bernard K. McElroy Chief Accounting Officer May 3, 2002 Bernard K. McElroy and Treasurer (Principal Accounting Officer) /s/ Peter A. Bassi Director May 3, 2002 Peter A. Bassi /s/ Lennox K. Black Director May 3, 2002 Lennox K. Black /s/ Bernard J. Korman Director May 3, 2002 Bernard J. Korman /s/ J. Richard Leaman, Jr. Director May 3, 2002 J. Richard Leaman, Jr. /s/ William Leonard Director May 3, 2002 William Leonard /s/ Malcolmn D. Pryor Director May 3, 2002 Malcolmn D. Pryor /s/ Lester Rosenfeld Director May 3, 2002 Lester Rosenfeld /s/ Jane Scaccetti Director May 3, 2002 Jane Scaccetti /s/ Benjamin Strauss Director May 3, 2002 Benjamin Strauss /s/ John T. Sweetwood Director May 3, 2002 John T. Sweetwood
63 FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-K 64
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands) - ---------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - ---------------------------------------------------------------------------------------------------------------------------- Additions Additions Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Descriptions Period Expenses Accounts Deductions* Period - ---------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year Ended February 2, 2002 $639 $1,674 $ - $1,588 $725 - ---------------------------------------------------------------------------------------------------------------------------- Year Ended February 3, 2001 $826 $1,859 $ - $2,046 $639 - ---------------------------------------------------------------------------------------------------------------------------- Year Ended January 29, 2000 $996 $3,254 $ - $3,424 $826 - ----------------------------------------------------------------------------------------------------------------------------
*Uncollectible accounts written off. 65 INDEX TO EXHIBITS Index of Financial Statements, Financial Statement Schedule and Exhibits Page ---- 1. The following consolidated financial statements of The Pep Boys - Manny, Moe & Jack are included in Item 8. Independent Auditors' Report 32 Consolidated Balance Sheets - February 2, 2002 and February 3, 2001 33 Consolidated Statements of Operations- Years ended February 2, 2002, February 3, 2001 and January 29, 2000 34 Consolidated Statements of Stockholders' Equity Years ended February 2, 2002, February 3, 2001 and January 29, 2000 35 Consolidated Statements of Cash Flows - Years ended February 2, 2002, February 3, 2001 and January 29, 2000 36 Notes to Consolidated Financial Statements 37 2. The following consolidated financial statement schedule of The Pep Boys - Manny, Moe & Jack is included. Schedule II Valuation and Qualifying Accounts and Reserves All other schedules have been omitted because they are not applicable or not required or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits (10.21) The Pep Boys Savings Plan - Amended and Restated as of April 25, 2001. (10.22) Amendment No. 1 dated as of June 29, 2001 to the Loan and Security Agreement dated September 22, 2000 between the Company and Congress Financial Corporation. (10.23) The Pep Boys - Manny, Moe & Jack Pension Plan - Amended and Restated as of September 10, 2001. (10.24) Advertising Purchase Agreement between the Company and ICON International, Inc. dated October 3, 2001. (10.25) Amendment No. 2 dated as of December 13, 2001 to the Loan and Security Agreement dated September 22, 2000 between the Company and Congress Financial Corporation (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent 66 EX-10 4 exh1021.txt 10/25/94 12/27/94 3/7/96 4/8/96 7/2/97 12/15/97 4/22/98 10/5/98 05/11/00 04/25/01 The Pep Boys Savings Plan Table Of Contents I: Introduction 1 II: Definitions And Construction 2 III: Participation And Service 13 IV: Employer Contributions 16 V: Allocations To Participants' Accounts 30 VI: Payment Of Benefits 36 VII: Trust Fund 47 VIII: Administration 50 IX: Miscellaneous 58 X: Amendments And Action By Employer 60 XI: Successor Employer And Merger Or Consolidation Of Plans 62 XII: Plan Termination 63 XIII: Determination Of Top-Heavy Status 64 Appendix A 1 Appendix B 2 Appendix C 3 h:\docs\legal\plandocs\pepboyssavplan.doc I: Introduction The Pep Boys Savings Plan was established by The Pep Boys - Manny, Moe & Jack, a Pennsylvania corporation, effective September 1, 1987, for the benefit of certain of its salaried and hourly employees and its Participating Employers, and their beneficiaries. It is to be maintained according to the terms of this instrument. The Committee has the authority to manage the administration of this Plan. The assets of this Plan are held in trust by the Trustee in accordance with the terms of the Trust Agreement, which is considered to be an integral part of this Plan. The Committee shall direct the Trustee as to the investment of the assets in the Trust Fund in accordance with the terms of the Plan and Trust. The Plan is intended to be a discretionary "profit sharing"plan as defined in Section 401(a)(27) of the Code. The Plan is hereby amended effective January 1, 1989 to reflect various provisions of the Tax Reform Act of 1986, as amended, and other legislation (or such earlier date as required by law). The effective date of any other changes to the Plan shall be as noted herein. Effective January 1, 1997 (except as otherwise indicated herein for specified provisions or as required by law), the Plan is further amended to reflect: * The Uniformed Services and Reemployment Rights Act of 1994; * The Uruguay Round Agreement Act ("GATT") of 1994; * The Small Business and Job Protection Act of 1996; * The Taxpayer Relief Act of 1997; and * The Internal Revenue Service Restructuring and Reform Act of 1998. The rights of those individuals (or their beneficiaries) who terminated employment prior to the effective date of any changes to the Plan, are governed by the terms and conditions of the Plan then in effect. II: Definitions And Construction 2.1 Definitions. The following words and phrases, when used in this Plan, shall have the following meanings: Accounts means a Participant's Pre-Tax Contribution Account, Matching Contribution Account, Discretionary QNEC Account and Rollover Account. Administrative Delegate means one or more persons or institutions to which the Committee has delegated certain administration functions pursuant to a written agreement. Affiliate means any employer which has not adopted this Plan and is not a Participating Employer, but which is included as a member with the Employer in a controlled group of corporations, or which is a trade or business (whether or not incorporated) included with the Employer in a brother-sister group or combined group of trades or businesses under common control or which is a member of an affiliated service group in which the Employer is a member, determined in each instance in accordance with Sections 414(b), (c), (m) and (o) of the Code. Annual Additions means, with respect to each Limitation Year, the total of the Employer contributions and forfeitures allocated to a Participant's Accounts pursuant to the provisions of this Plan, plus the total of any Participant contributions for such Limitation Year, plus amounts described in Sections 415(l)(1) and 419A(d)(2) of the Code, if any. Annual Additions also shall include any additions to the account of a Participant under any other qualified defined contribution plan maintained by the Employer or an Affiliate. For purposes of determining Annual Additions, Compensation for any Limitation Year shall mean the Compensation paid to a Participant by the Employer and any Affiliate and shall include a Participant's earned income, wages, salaries, and fees for professional services and other amounts received for personal services actually rendered in the course of employment with the Employer or Affiliate (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses), and excluding the following: (1) Employer or Affiliate contributions to a plan of deferred compensation which are not includable in the Employee's gross income for the taxable year in which contributed, or Employer or Affiliate contributions which are deductible by the Employee, or any distribution from a plan of deferred compensation; (2) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (3) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (4) Other amounts which receive special tax benefits or contributions made by the Employer or an Affiliate (whether or not under a salary reduction agreement) towards the purchase of an annuity described in Section 403(b) of the Code (whether or not the amounts are actually excludable from the gross income of the Employee). Effective January 1, 1998, amounts described in this paragraph (4) shall not be excluded from compensation for purposes of Annual Additions. Beneficiary means a person or persons (natural or otherwise) designated by a Participant in accordance with the provisions of Section 6.6 (or deemed to have been designated) to receive any death benefit which shall be payable under this Plan. Board of Directors means the Board of Directors of The Pep Boys - Manny, Moe & Jack. Calendar Quarter means the three consecutive month periods beginning each January 1, April 1, July 1 and October 1. Code means the Internal Revenue Code of 1986, as it may be amended, and includes any regulations issued thereunder. Committee means the individuals appointed under Section 8.1 to administer the Plan. Company means The Pep Boys - Manny, Moe & Jack, a corporation organized and existing under the laws of Pennsylvania, or its predecessor company, its successor or successors which elect to continue this Plan. Company Stock means the Company's Common Stock, par value of $1.00 per share. Company Stock Fund means a fund established by the Company for investment purposes which is comprised of Company Stock and a small amount of cash. Compensation means the total of all remuneration paid during a Plan Year to a Participant by the Employer for personal services, including overtime pay, bonuses and commissions, as reported to a Participant on Box 1 of Form W-2 (Box 10 prior to 1993) and unless specifically excluded hereunder, Pre-Tax Contributions, if any, authorized by a Participant under this Plan or salary reduction contributions under a Code Section 125 cafeteria plan, but excluding reimbursement for business, travel or entertainment expenses incurred by the Participant and not reported to the Internal Revenue Service as wages; excluding the amount of any "opt-out bonus" under the Company's cafeteria (Code Section 125) plan; and excluding the amount of any fringe benefits reported to the Internal Revenue Service as wages. A Participant's Compensation for any Plan Year beginning prior to January 1, 1994, in excess of $200,000 (as adjusted each Plan Year by the Secretary) shall not be taken into account for any purposes under the Plan, as required under Section 401(a)(17) of the Code. Effective January 1, 1994, Compensation for any Plan Year shall not exceed $150,000 (such amount to be indexed each year by the Secretary). For purposes of the preceding two sentences, a Participant who has Compensation in excess of $200,000 or $150,000 respectively (in each case as adjusted by the Secretary) may continue to participate under the terms of the Plan after having received $200,000 or $150,000 of Compensation during the Plan Year as long as the aggregate amount of Compensation taken into account under the terms of the Plan for any Plan Year does not exceed $200,000 or $150,000 (in each case as adjusted by the Secretary) as applicable. Notwithstanding any provision in this Plan to the contrary, for purposes of determining Pre-Tax Contributions and Matching Contributions for a Participant, Compensation shall include such individual's Compensation beginning with the first payroll period following satisfaction of the service requirements of Section 3.1; or the date the Participant elects to authorize Pre-Tax Contributions to the Plan, if later. For purposes of Sections 4.4 and 4.6, Compensation shall mean any definition of compensation permissible under Section 414(s) of the Code and regulations thereunder for such period as is determined by the Committee in its sole discretion. Direct Rollover means a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. Disability means a medically determinable physical or mental impairment of a permanent nature which prevents a Participant from performing his customary employment duties without endangering his health and which would qualify the Participant for a Disability retirement benefit from the Company's Pension Plan. Discretionary QNECs means the discretionary qualified nonelective contributions made by the Employer on a Participant's behalf pursuant to Section 4.1(d). Discretionary QNEC Account means the account maintained for a Participant to record his share of Discretionary QNECs under Section 5.2(b)(iii) and adjustments relating thereto. Distributee means a Participant or Former Participant. In addition, the Participant's or Former Participant's Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are Distributees with regard to the interest of the Spouse or former Spouse. Early Retirement Date means separation from service with the Employer and any Affiliate on or after attainment of age 55 and completion of five years of credited service, as defined in the Company's Pension Plan. A Participant is credited with a year of credited service for each Plan Year in which he completed 1,000 Hours of Service with the Employer. Effective Date means September 1, 1987, which is the date on which the provisions of this Plan became effective. Eligible Employee means an Employee performing services for the Employer, including any officer or director who shall so qualify. Notwithstanding the foregoing, in no event shall an individual be an Eligible Employee if the individual is a bonafide resident of Puerto Rico within the meaning of the Puerto Rico Internal Revenue Code of 1994, as amended, as determined by the Employer. A Leased Employee shall not be deemed to be an Eligible Employee. Any Employee whose terms of employment are covered by a collective bargaining agreement that does not provide for participation in the Plan, shall not be deemed to be an Eligible Employee. Eligible Participant means as of each Entry Date, for purposes of Sections 4.5 and 4.6, each Eligible Employee who has met the requirements for participation in the Plan regardless of whether he has authorized the Employer to make Pre-Tax Contributions on his behalf to the Plan. For purposes of Section 4.7 and 4.8, Eligible Participant means each Eligible Employee who has met the requirements for participation in the Plan regardless of whether he has authorized the Employer to make Pre-Tax Contributions on his behalf to the Plan and who is otherwise eligible to receive a Matching Contribution in accordance with Section 4.1(c). Eligible Retirement Plan means: (i) an individual retirement account described in Section 408(a) of the Code; (ii) an individual retirement annuity described in Section 408(b) of the Code; (iii) an annuity plan described in Section 403(a) of the Code; or (iv) a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving Spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. Eligible Rollover Distribution means any distribution of all or any portion of the balance to the credit of the Distributee, but does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); the portion of any hardship distribution described in Section 401(k)(2)(B)(i)(IV); and any other distribution that does not qualify as an Eligible Rollover Distribution as defined in Section 401(a)(31)(C) of the Code. An Eligible Rollover Distribution shall include an unpaid loan that is offset against a Participant's total Account balance when he receives a distribution at Termination of employment in accordance with Section 6.9(h) of the Plan. Employee means any individual employed by the Employer as a common law employee, but does not include any individual that the Employer treats as an independent contractor even if such individual would be classified as an employee of the Employer under common law. Employer means the Company and any Participating Employer, which with the approval of the Board of Directors, has adopted this Plan. The Participating Employers are listed on Appendix A. Entry Date means, effective January 1, 1993, the first day of each Calendar Quarter. Prior to January 1, 1993, the Entry Date was January 1 and July 1 of each Plan Year. ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any regulations promulgated thereunder. Excess Aggregate Contributions means with respect to each Plan Year, the amount determined for Highly Compensated Eligible Participants under the procedure set forth in Treas. Reg. 1.401(m)-1(e)(2) or any successor thereto. Excess Contributions means with respect to each Plan Year, the amount determined for Highly Compensated Eligible Participants under the procedure set forth in Treas. Reg. 1.401(k)-1(f)(2) or any successor thereto. Family Member means the spouse and lineal ascendants or descendants (and their spouses) of a Highly Compensated Eligible Participant. Fiduciary means the Employer, the Board of Directors, the Committee or the Trustee, but only with respect to the specific responsibilities of each with respect to Plan and Trust administration. Former Participant means any former Employee who has credits in his Accounts as of the close of any Plan Year. Highly Compensated Eligible Participant means those Eligible Participants who are Highly Compensated Employees. Highly Compensated Employee means the individuals described in (a) and (b): (a) Employees who were five percent owners, as defined in Section 416(i)(1) (iii) of the Code, at any time during the determination year or the look-back year; and (b) Employees with compensation greater than $80,000 (as adjusted at the same time and in the same manner as Section 415(d) of the Code) during the look-back year. (c) For purposes of determining whether an Employee is highly compensated, the determination year is the Plan Year for which the determination is being made. The look-back year is the twelve month period preceding the determination year. (d) For purposes of defining Highly Compensated Employee, compensation means compensation as defined in Section 415(c)(3) of the Code, including elective contributions. The dollar limits are those for the calendar year in which the determination or look-back year begins. (e) The Plan shall take into account Employees of all companies aggregated under Sections 414(b), (c), (m) and (o) of the Code, in determining who is highly compensated. Also, for this purpose, the term "Employee" shall include Leased Employees. Hours of Service means: (a) Performance of Duties. The actual hours for which an Employee is paid or entitled to be paid for the performance of duties by the Employer; (b) Nonworking Paid Time. Each hour for which an Employee is paid or entitled to be paid by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity, disability, layoff, jury duty, military duty or leave of absence; provided, however, no more than 501 Hours of Service shall be credited to an Employee on account of any single continuous period during which he performed no duties; and provided further that no credit shall be given for payments made or due under a plan maintained solely for the purpose of complying with applicable workmen's or unemployment compensation or disability insurance laws or for payments which solely reimburse an Employee for medical or medically related expenses incurred by the Employee; (c) Back Pay. Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer; provided, however, Hours of Service credited under paragraphs (a), (b) and (c) above shall not be recredited by operation of this paragraph; (d) Equivalencies. With respect to full-time Employees only, the Committee has adopted the following equivalency method for counting Hours of Service that are permissible under regulations issued by the Department of Labor: (1) 45 Hours of Service for each week in which an Employee is credited with at least one Hour of Service. Actual Hours shall be counted for those Employees who are not employed on a full time basis. The adoption of any equivalency method for counting Hours of Service shall be evidenced by a certified resolution of the Committee, which shall be attached to and made part of the Plan. Such resolution shall indicate the date from which such equivalency shall be effective; and (e) Miscellaneous. Unless the Committee directs otherwise, the methods of determining Hours of Service when payments are made for other than the performance of duties and of crediting such Hours of Service to Plan Years set forth in Regulations 2530.200b-2(b) and (c) promulgated by the Secretary of Labor shall be used hereunder and are incorporated by reference into the Plan. Participants on military leaves of absence who are not directly or indirectly compensated or entitled to be compensated by the Employer while on such leave shall be credited with Hours of Service as required by Section 9 of the Military Selective Service Act. Notwithstanding any other provision of this Plan to the contrary, an Employee shall not be credited with Hours of Service more than once with respect to the same period of time. Eligible Employees shall be credited with any Hours of Service required to be credited to them in accordance with the Family and Medical Leave Act and The Uniformed Services Employment and Reemployment Rights Act of 1994. Income means the net gain or loss of the Trust Fund from investments, as reflected by interest payments, dividends, realized and unrealized gains and losses on securities, other investment transactions and expenses paid from the Trust Fund. In determining the Income of the Trust Fund for any period, assets shall be valued on the basis of fair market value, except for any investment that the Committee determines shall be valued on the basis of book or contract value. Investment Manager means an investment adviser, bank or insurance company, meeting the requirements of Section 3(38) of ERISA appointed by the Company to manage the Plan's assets in accordance with the Trust Agreement. Leased Employee means any person who is not an Employee of the Employer and who provides services to the Employer if: (a) such services are provided pursuant to an agreement between the Employer and any leasing organization; (b) such person has performed such services for the Employer (or for the Employer and Affiliates) on a substantially full-time basis for a period of at least one year; and (c) (prior to January 1, 1997) such services are of a type historically performed in the business field of the Employer by Employees. Effective January 1, 1997, such services are performed under primary direction or control of the Employer. Notwithstanding the foregoing, a person shall not be deemed to be a Leased Employee if he is covered by a plan maintained by the leasing organization and Leased Employees (as determined without regard to this paragraph) do not comprise more than 20% of the Employer's nonhighly compensated workforce. Such plan must be a money purchase pension plan providing for nonintegrated employer contributions of ten percent of compensation and also providing for immediate participation and vesting. Limitation Year means the Plan Year. Matching Contributions means the contributions made by the Employer pursuant to Section 4.1(c). Matching Contribution Account means the account maintained for a Participant to record his share of Matching Contributions under Section 5.2(b)(ii) and adjustments relating thereto. Normal Retirement Date means the date on which a Participant attains age 65. Participant means an Eligible Employee participating in the Plan in accordance with the provisions of Section 3.2. Participating Employer means any direct or indirect subsidiary of the Company or any other entity designated by the Board of Directors, which has adopted this Plan with the approval of the Company, including but not limited to Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc., but solely for purposes of allowing Eligible Employees (employees who are not bonafide residents of Puerto Rico) who are Eligible Participants to participate in the Plan. Plan means the Pep Boys Savings Plan, as amended from time to time. Plan Year means the 12 consecutive month period commencing January 1 and ending December 31; provided that the first Plan Year shall be a short Plan Year from September 1, 1987 through December 31, 1987. Pre-Tax Contributions means the contributions made by the Employer on a Participant's behalf pursuant to Section 4.1(a). Pre-Tax Contribution Account means the account maintained for a Participant to record his share of Pre-Tax Contributions under Section 5.2(b) (i) and adjustments relating thereto. Retirement means Termination of employment with the Employer at or after Normal Retirement Date. Rollover Account means the account maintained for a Participant to record the amount of contributions he has rolled over to the Plan pursuant to Section 4.9 and adjustments relating thereto. Spouse (surviving spouse) means the spouse or surviving spouse of the Participant or Former Participant; provided that a former spouse will be treated as the spouse or surviving spouse to the extent provided under a qualified domestic relations order as described in Section 414(p) of the Code. Terminated or Termination means a termination of employment with the Employer or with an Affiliate for any reason other than a transfer of employment from the Employer to an Affiliate or from an Affiliate to another Affiliate. A transfer of employment from the Employer or Affiliate to Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. shall not constitute a Termination of employment. Trust (or Trust Fund) means the fund known as the "Pep Boys Savings Plan Trust," maintained by the Trustee in accordance with the terms of the Trust Agreement, as amended from time to time, which constitutes a part of this Plan. Trustee or Trustees means any corporation or individuals appointed by the Board of Directors of the Company to administer the Trust. Valuation Date means, effective July 1, 1993, the last business day of each month. Prior to July 1, 1993, Valuation Date means the last business day of each Calendar Quarter or more frequently as the Trustee shall determine. Effective October 1, 1998, Valuation Date means any business day that the New York Stock Exchange is open for business and any other date chosen by the Committee. Year of Eligibility Service means a 12 consecutive month period beginning on the date an Eligible Employee's employment commences (the "initial eligibility computation period"), provided such Eligible Employee is credited with at least 1,000 Hours of Service. If an Eligible Employee is not credited with 1,000 Hours of Service in the initial eligibility computation period, then the eligibility computation period shall be the Plan Year, beginning with the Plan Year that includes the first anniversary of the Eligible Employee's initial eligibility computation period. 2.2 Construction. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, unless the context clearly indicates to the contrary. III: Participation And Service 3.1 Eligibility to Participate. Any Eligible Employee who was employed by the Employer on December 31, 1988 shall continue as a Participant as of January 1, 1989. Each other Eligible Employee shall be eligible to become a Participant as of the date on which he attains age 21 and is credited with a Year of Eligibility Service. 3.2 Commencement of Participation. Each Eligible Employee who has satisfied the requirements of Section 3.1 shall commence participation in the Plan on the Entry Date coincident with or next following the date he satisfies such requirement. Each Eligible Employee who is eligible for participation in the Plan shall become a Participant by filing the appropriate forms with the Committee, and shall supply such information as is reasonably necessary for the administration of this Plan. Effective October 1, 1998, an Eligible Participant who does not elect to make Pre-Tax Contributions to the Plan as of the first Entry Date that is coincident with or next following the date he has met the eligibility requirements of Section 3.1, may elect to commence to make Pre-Tax Contributions to the Plan, as soon as practicable following any subsequent payroll period. 3.3 Cessation of Participation. An Eligible Employee shall cease to be a Participant upon the earliest of: (i) the date on which he retires under the retirement provisions of the Plan; (ii) the date on which his employment with the Employer terminates for any reason, including death or Disability; or (iii) the date on which he ceases to be an Eligible Employee. 3.4 Special Rules for Eligibility Purposes. For purposes of determining an Eligible Employee's eligibility to participate in the Plan, Hours of Service shall include an Employee's Hours of Service (i) with an Affiliate after it became an Affiliate hereunder; (ii) while an Employee, but not an Eligible Employee, of the Employer or an Affiliate, after it became an Affiliate hereunder; or (iii) while a Leased Employee of the Employer or an Affiliate. 3.5 Participation and Service upon Reemployment. Upon the reemployment of any person after the Effective Date who had previously been employed by the Employer on or after the Effective Date, the following rules shall apply in determining his participation in the Plan and his Years of Service under Section 3.4. If the reemployed Employee was not a Participant in the Plan during his prior period of employment, he must meet the requirements of Section 3.1 for participation in the Plan as if he were a new Employee. Any Years of Eligibility Service in which he was credited with 1,000 Hours of Service during his prior period of employment shall be reinstated upon his reemployment. If the reemployed Employee was a Participant during his prior period of employment, he shall resume participation in the Plan as soon as administratively practicable following his reemployment by the Employer. 3.6 Transfers to Affiliates and Change in Status. A Participant's status as such under the Plan shall be modified upon and after the date as of which a Participant (i) is transferred to an Affiliate; (ii) becomes a Leased Employee; (iii) becomes an Employee whose terms of employment are covered by a collective bargaining agreement that does not provide for participation in this Plan; or (iv) ceases for any other reason to be an Eligible Employee while still employed by the Employer. The Participant shall share in Employer contributions only to the extent of his Compensation up to the time such transfer or change in status occurs and shall not thereafter, unless he later is transferred back to the Employer or again becomes an Eligible Employee and becomes eligible under the terms of the Plan to share in such allocations. He, however, shall share in Income allocations pursuant to Section 5.2(a). 3.7 Transfers From Affiliates and Change in Status. Any Employee who transfers to the Employer from an Affiliate or who becomes an Eligible Employee eligible for participation in the Plan, shall be eligible to participate in the Plan and to make Pre-Tax Contributions to the Plan on the later of the first Entry Date coincident with or next following his satisfaction of the eligibility requirements of Section 3.1 or as soon as practicable following the next payroll period that he elects to contribute that is coincident with or next following his change in status. The Participant shall share in Employer contributions only to the extent of his Compensation after such transfer or change in status occurs if he becomes an Eligible Employee and becomes eligible under the terms of the Plan to share in such allocations. IV: Employer Contributions 4.1 Employer Contributions. (a) Pre-Tax Contributions. (i) Subject to the limitations of Sections 4.4 and 5.3, each Participant shall have the option to authorize the Employer, in writing and in accordance with procedures established by the Committee, to contribute to the Plan for a Plan Year on his behalf, an amount equal to any whole percentage of his Compensation from one percent (1%) up to twelve percent (12%) (as determined without regard to this Section 4.1(a)) for such Plan Year. Effective October 1, 1998, the foregoing limitation of twelve percent (12%) is increased to fifteen percent (15%). Such authorization shall be in the form of an election by the Participant to have his Compensation reduced by payroll withholding. Payroll deduction shall commence as soon as practicable following the Entry Date on which an Eligible Employee becomes a Participant or the date the Participant elects to make Pre-Tax Contributions to the Plan. Such withheld amounts are to be transmitted by the Employer to the Trustee as of the earliest date on which such amounts can reasonably be segregated from the Employer's general assets. Effective February 3, 1997, such withheld amounts are to be transmitted by the Employer to the Trustee no later than the date required by DOL Reg. Section 2510.3-102(b). The amount of such contributions, together with contributions under Sections 4.1(c) and (d), shall not exceed the maximum amount allowable as a deduction under the Code for the Plan Year. (ii) Notwithstanding the foregoing, the Participant shall be prohibited from authorizing any Pre-Tax Contributions to be made on his behalf under this Plan and elective contributions under any other plan, in excess of the applicable limit under Section 402(g) of the Code in effect for the Plan Year to which such Pre-Tax Contributions relate. In the event a Participant has made excess deferrals under the Plan (or, if not, has determined that excess deferrals will be considered to exist under this Plan), then not later than the first day of April following the close of the Participant's taxable year, the Participant may notify the Plan of the amount of the excess deferrals hereunder. The Participant shall be deemed to have notified the Plan of excess deferrals to the extent he has excess deferrals for the taxable year calculated by taking into account only elective deferrals under the Plan and other plans of the Employer or Affiliate. The Employer may notify the Plan on behalf of the Participant under these circumstances. Not later than the first April 15 following the close of the taxable year, the Plan shall distribute to the Participant the amount designated above, including any Income allocated thereto. The Income attributable to a Participant's excess deferral pursuant to this Section 4.1(a)(ii) for the Plan Year during which such excess deferral arose shall be determined in accordance with Treas. Reg. 1.402(g)-1(e)(5)(ii). Unless provided for by the Committee, any Income attributable to a Participant's excess deferrals for the period between the end of the Plan Year and the date of distribution shall be disregarded. Excess deferrals to be distributed for a Plan Year shall be reduced by Excess Contributions previously distributed for the Plan Year beginning in such taxable year as set forth in Section 4.5. Matching Contributions allocated by reason of any excess deferral distributed pursuant to this Section, together with any income allocated thereto for the calendar year to which the excess deferral relates, shall be forfeited at the time such distribution is made. For this purpose, however, the excess deferrals that are returned to the Participant shall be deemed to be first those Pre-Tax Contributions for which no Matching Contribution was made and second those Pre-Tax Contributions for which a Matching Contribution was made. Accordingly, if the Pre-Tax Contributions that are returned to the Participant as excess deferrals were not matched, no Matching Contributions will be forfeited. A Participant who has excess deferrals for a taxable year may receive a corrective distribution of excess deferrals during the same year. This corrective distribution shall be made only if: (A) The Participant designates the distribution as an excess deferral. The Participant shall be deemed to have designated the distribution to the extent the Participant has excess deferrals for the taxable year calculated by taking into account only elective deferrals under the Plan and other plans of the Employer and Affiliate. The Employer may make the designation on behalf of the individual under these circumstances. (B) The correcting distribution is made after the date on which the Plan received the excess deferral. (C) The Plan designates the distribution as a distribution of excess deferrals. The term "excess deferrals" means the excess of an individual's elective deferrals for any taxable year, as defined in Treas. Reg. 1.402(g)-1(b), over the applicable limit under Section 402(g)(1) for the taxable year. Notwithstanding the foregoing, the Committee may further limit a Participant's right to make Pre-Tax Contributions to the Plan if in the sole judgment and discretion of the Committee, such limits are necessary to ensure the Plan's compliance with the requirements of Sections 401(k) and (m) of the Code. (b) Change in Amount of Pre-Tax Contributions. Effective as of any Entry Date, upon written notice to the Committee to be effective as of the full payroll period following the processing of such notice, each Participant shall have the option to change the amount of Pre-Tax Contributions he has authorized the Employer to contribute to the Plan on his behalf pursuant to Section 4.1(a) in accordance with rules established therefore by the Committee. Effective October 1, 1998, a Participant may change the amount of Pre-Tax Contributions he has authorized to have contributed to the Plan on his behalf as of any subsequent payroll period to be effective as soon as practicable thereafter. Notwithstanding the foregoing, a Participant may authorize the Employer to cease making Pre-Tax Contributions on his behalf at any time, effective as of the next full payroll period following the processing of written notice to the Committee. A Participant who has ceased making Pre-Tax Contributions may again authorize Pre-Tax Contributions to be made to the Plan on his behalf as of any Entry Date upon written notice to the Committee, to be effective as of the next full payroll following the processing of such notice. Prior to January 1, 1993, all changes to Pre-Tax Contribution elections (other than a voluntary suspension of Pre-Tax Contributions) were effective as of any January 1 or July 1. Effective October 1, 1998, a Participant who has ceased making Pre-Tax Contributions may again authorize Pre-Tax Contributions to be made to the Plan on his behalf as of any subsequent payroll period to be effective as soon as practicable thereafter. (c) Matching Contributions. Subject to the limitations of Sections 4.5 and 5.4, the Employer shall contribute for each Plan Year, an amount, if any, to be determined by the Board of Directors. Unless and until changed by the Board of Directors, such amount shall be as follows: The lesser of (i) 50% of the Participant's Pre-Tax Contributions for each Calendar Quarter in which he contributed; and (ii) three percent (3%) of the Participant's Compensation for the Calendar Quarter. Effective October 1, 1998, the Employer's contribution shall be equal to the lesser of (i) 50% of the Participant's Pre-Tax Contributions for the payroll period in which he contributed; or (ii) three percent (3%) of the Participant's Compensation for the payroll period. In order to share in the allocation of the Employer's Matching Contribution, a Participant must be employed by the Employer on the last day of the Plan Year (or on a leave of absence under the Family and Medical Leave Act) or have Terminated employment during the Plan Year due to Normal Retirement, Early Retirement or Disability prior to the last day of the Plan Year. A Participant who becomes ineligible to participate in the Plan because the individual transfers employment to an Affiliate or becomes a bonafide resident of Puerto Rico shall be eligible for an allocation of the Employer's Matching Contribution, notwithstanding the preceding sentence, provided that the individual is employed by the Employer or an Affiliate on the last day of the Plan Year (or on a leave of absence under the Family and Medical Leave Act). The Matching Contribution shall be made once each Plan Year, but based on the Pre-Tax Contributions that are made in each Calendar Quarter by those Participants eligible to share in the allocation of the Matching Contribution. The amount of such contributions shall not exceed the maximum amount allowable as a deduction under the Code for such Plan Year and shall be subject to the limitations of Section 5.4. Effective October 1, 1998, the Matching Contribution shall be allocated once each Plan Year, but based on the Pre-Tax Contributions that are made in each payroll period by those Participants eligible to share in the allocation of the Matching Contribution. (d) Discretionary QNECs. Subject to the limitations of Sections 4.4 and 5.3, the Employer shall contribute for each Plan Year an amount, if any, as determined by the Board of Directors on behalf of some or all Participants who are not Highly Compensated Eligible Participants. The amount of such contribution, together with contributions under Sections 4.1(a) and (c), shall not exceed the maximum amount allowable as a deduction under the Code for such Plan Year. It is intended that this contribution shall constitute a qualified nonelective contribution within the meaning of Treas. Reg. 1.401(k)-1(g)(13) (ii) or any successor thereto. Effective for the Plan Year beginning January 1, 1997, the Employer shall make an additional contribution to the Plan on behalf of certain Participants who (i) are not Highly Compensated Employees, (ii) are employed as active hourly Employees of the Employer at the Los Angeles, Phoenix and Dallas distribution centers and whose wages are frozen; and (iii) are actively employed by the Employer on December 31, 1997 (or who are on a leave under the Family and Medical Leave Act as of such date). The Participants eligible for this additional contribution are set forth in Appendix B to the Plan. Effective January 1, 1998, unless and until modified by the Board of Directors, for each Plan Year the Employer shall make an additional contribution to the Plan on behalf of Participants who (i) are not Highly Compensated Employees, (ii) are employed as active hourly Employees of the Employer at the Los Angeles, Phoenix and Dallas distribution centers; (iii) are actively employed by the Employer on December 31 of the Plan Year to which such contribution relates (or who are on a leave under the Family and Medical Leave Act as of such date); (iv) were ineligible to receive an increase in their hourly rate of pay for the 1996 calendar year (determined by comparing the hourly rate of pay in effect on December 31 of the applicable Plan Year to the hourly rate in effect on January 1 of the applicable Plan Year); and (v) are making Pre-Tax Contributions to the Plan as of December 31 of the applicable Plan Year to which the additional contribution relates. Effective December 31, 1998, the additional contribution authorized to be made on behalf of hourly employees at the Phoenix location, permanently ceased. The amount of the additional contribution in shares shall be equal to $500.00 divided by the average of the mean between the highest and lowest quoted selling prices of the Company's Common Stock on the New York Stock Exchange for each day of the last ten (10) trading days of December of the applicable Plan Year, rounded to the nearest 1/1000th of a share. The additional contribution shall be allocated to each eligible Participant's Matching Contribution Account. Effective October 1, 1998, the additional contribution shall be made in cash. The amount of the additional contribution to be allocated to each Eligible Participant's Matching Contribution Account shall be equal to $500.00 in cash, which amount shall be allocated immediately to the purchase of units on behalf of each such Eligible Participant in the Company Stock Fund. 4.2 Minimum Employer Contributions. Effective January 1, 1998, for each Plan Year, the Employer shall make contributions to the Plan in the form of Employer contributions (within the meaning of Section 404 of the Code), in cash or company stock, at least equal to a specified dollar amount, on behalf of those individuals who are entitled to an allocation under Section 5.3. Such amount shall be determined by the Chief Financial Officer of the Company, by appropriate resolution, on or before the last day of the Employer's taxable year that ends within such Plan Year. The Minimum Employer Contribution for a Plan Year shall be paid by the Employer in cash or company stock in one or more installments without interest. The Employer shall pay the Minimum Employer Contribution at any time during the Plan Year, and for purposes of deducting such contribution, shall make the contribution, not later than the time prescribed by the Code for filing the Company's income tax return including extensions, for its taxable year that ends within such Plan Year. Notwithstanding any provision of the Plan to the contrary, the Minimum Employer Contribution made to the Plan by the Employer (i) shall not revert to, or be returned to, the Employer and (ii) can be made whether or not the Employer has current or accumulated profits. 4.3 Time and Manner of Contribution. All Employer contributions shall be paid directly to the Trustee, and except as provided in Section 4.1(a), a contribution for any Plan Year shall be made not later than the date prescribed by law for filing the Employer's federal income tax return, including extensions, for such Plan Year. 4.4 Conditions on Employer Contributions. To the extent permitted or required by ERISA and the Code, contributions under this Plan are subject to the following conditions: (a) If the Employer makes a contribution, or any part thereof, by good faith mistake of fact, such contribution or part thereof, or its then current value if less, shall be returned to the Employer within one year after such contribution is made; (b) Contributions to the Plan are specifically conditioned upon their deductibility under the Code; to the extent a deduction is disallowed for any such contribution, such amount, or its then current value if less, shall be returned to the Employer within one year after the disallowance of the deduction; and (c) The amount of any Employer contribution shall be subject to the limitations prescribed in Section 5.4. 4.5 Limitations on Pre-Tax Contributions. Effective January 1, 1997, the amount of Pre-Tax Contributions made in each Plan Year on behalf of all Eligible Participants under the Plan shall comply with either (a) or (b) and (c), if applicable, below. (a) The average deferral percentage for the Highly Compensated Eligible Participants for the current Plan Year shall not exceed the average deferral percentage of all other Eligible Participants for the immediately preceding Plan Year multiplied by 125%; or (b) The average deferral percentage for Highly Compensated Eligible Participants for the current Plan Year shall not be greater than the average deferral percentage of all other Eligible Participants for the immediately preceding Plan Year multiplied by 200% and the excess of the average deferral percentage for Highly Compensated Eligible Participants for the current Plan Year over all other Eligible Participants for the immediately preceding Plan Year shall not exceed two percentage points. Compliance with (a) and (b) above, shall be determined in accordance with the rules set forth in Section 401(k)(3) of the Code and Treas. Reg. Section 1.401(k)-1(b), or any successors thereto. (c) Notwithstanding the foregoing, if this Section 4.5 and Section 4.7 are both satisfied by use of the limitation set forth in subsection (b) above, the average deferral percentages for the Highly Compensated Eligible Participants and the average contribution percentages for the Highly Compensated Eligible Participants, as defined in Section 4.7, also must satisfy the aggregate limit test set forth in Treas. Reg. 1.401(m)-2(b)(3). Notwithstanding the above, for the Plan Years commencing January 1, 1997, and January 1, 1998, the Committee has elected in accordance with Section 401(k) (3)(A) of the Code to determine the foregoing limitations with respect to the average deferral percentage for all Eligible Participants (other than Highly Compensated Eligible Participants) based on the current Plan Year as opposed to the immediately preceding Plan Year. Effective for the Plan Year commencing January 1, 1999, and for each Plan Year thereafter, until modified by the Committee, the Committee has elected in accordance with Section 401(k)(3)(A) of the Code to determine the foregoing limitations with respect to the average deferral percentage for all Eligible Participants (other than Highly Compensated Eligible Participants) based on the prior Plan Year as described in (a) and (b) above. The average deferral percentage shall equal the sum of the individual deferral percentages for Participants in the applicable Highly Compensated or Non-Highly Compensated Eligible Employee category, divided by the total number of Eligible Employees in such group. The individual deferral percentage shall be equal to the amount of the Participant's Pre-Tax Contributions for the Plan Year, divided by his Compensation for such Plan Year. For purposes of computing the deferral rates, if any Employer or Affiliate maintains any other cash or deferred arrangement which is aggregated with this Plan for purposes of applying Section 401(a)(4) or 410(b) of the Code, all such cash or deferred arrangements shall be treated as one plan. The individual deferral percentage for any Highly Compensated Employee for the Plan Year who is eligible to have Pre-Tax Contributions allocated to him under two or more arrangements described in Section 401(k) of the Code that are maintained by an Employer or its Affiliates shall be determined as if such Pre-Tax Contributions were made under a single arrangement. If the Committee determines, in its sole discretion, with respect to any Plan Year, that the Plan will (or may) fail (a), (b) or (c) above, the Committee shall take any action that it deems appropriate, including imposing a uniform limitation on Pre-Tax Contributions made by Highly Compensated Eligible Participants, for the Plan to satisfy (a), (b) or (c) above. If the amount of Pre-Tax Contributions authorized by Highly Compensated Eligible Participants in a Plan Year would not comply with (a), (b) or (c) above, then by the last day of the following Plan Year, the Committee may determine that the Excess Contributions for such Plan Year shall be distributed to the applicable Highly Compensated Eligible Participants, including any Income attributable to such Excess Contributions. Pre-Tax Contributions that are distributed from the Plan shall continue to be treated under Section 415 as Annual Additions for the Participant from whose Account they are distributed. The Committee shall determine the amount of the Excess Contributions attributable to each Highly Compensated Eligible Participant as the amount (if any) by which the Highly Compensated Eligible Participant's Pre-Tax Contributions must be reduced for the average deferral percentage to equal the highest permitted average deferral percentage under the Plan. The highest permitted average deferral percentage permitted under the Plan shall be determined by reducing the individual deferral percentage of the Highly Compensated Eligible Participant with the highest individual deferral percentage to equal the individual deferral percentage of the Highly Compensated Eligible Participant with the next highest individual deferral percentage. If a lesser reduction would permit the Plan to meet the requirements of (a), (b) or (c) above, such lesser reduction shall be made. The Committee shall repeat this process until the Plan meets the requirements of (a), (b) or (c) above. The Committee shall distribute the amount of the Excess Contributions plus Income, as determined above, to Highly Compensated Eligible Participants, in the amount necessary so that the Highly Compensated Eligible Participant who authorized the highest dollar amount of Pre-Tax Contributions is reduced to equal the next highest dollar amount of Pre-Tax Contributions (or a lesser amount if a lesser amount may be distributed in order to comply with (a), (b) or (c) above) authorized by the Highly Compensated Eligible Participant with the next highest dollar amount of Pre-Tax Contributions. The foregoing steps shall be repeated until the total amount of Excess Contributions have been distributed. Recalculation of the average deferral percentage test following the distribution of Excess Contributions, shall not be required. Any Matching Contribution allocable to an Excess Contribution that is returned to the Participant pursuant to this Section 4.5 shall be forfeited notwithstanding the provisions of Section 6.3. For this purpose, however, the Excess Contributions that are returned to the Participant shall be deemed to be first those Pre-Tax Contributions for which no Matching Contribution was made and second those Pre-Tax Contributions for which a Matching Contribution was made. Accordingly, unmatched Pre-Tax Contributions shall be returned as Excess Contributions before matched Pre-Tax Contributions. Alternatively, the Committee may take such other actions as may be permissible under the Code to ensure the Plan's compliance with the requirements of Section 401(k) of the Code, including, without limitation the allocation of the Employer's contribution to some or all Eligible Participants who are not Highly Compensated Eligible Participants in accordance with Section 4.1(c). 4.6 Income Attributable to Excess Contributions. The Income attributable to a Participant's Excess Contributions pursuant to Section 4.5 for the Plan Year during which such Excess Contributions arose shall be determined in accordance with Treas. Reg. 1.401(k)-1(f)(4)(ii). Unless provided for by the Committee, any gain or loss on a Participant's Excess Contributions for the period between the end of the Plan Year and the date of distribution shall be disregarded. 4.7 Limitations on Matching Contributions. Effective January 1, 1997, the amount of Matching Contributions made in each Plan Year on behalf of all Eligible Participants under the Plan shall comply with either (a) or (b) and (c), if applicable, below. (a) The average contribution percentage for the Highly Compensated Eligible Participants for the current Plan Year shall not exceed the average contribution percentage of all other Eligible Participants for the immediately preceding Plan Year multiplied by 125%; or (b) The average contribution percentage for Highly Compensated Eligible Participants for the current Plan Year shall not be greater than the average contribution percentage of all other Eligible Participants for the immediately preceding Plan Year multiplied by 200% and the excess of the average contribution percentage for Highly Compensated Eligible Participants for the current Plan Year over all other Eligible Participants for the immediately preceding Plan Year shall not exceed two percentage points. Compliance with (a) and (b) above, shall be determined in accordance with the rules set forth in Section 401(m)(2) of the Code and Treas. Reg. 1.401(m)-1(b), or any successors thereto. (c) Notwithstanding the foregoing, if this Section 4.7 and Section 4.5 are both satisfied by use of the limitation set forth in subsection (b) above, the average contribution percentages for the Highly Compensated Eligible Participants and the average deferral percentages for the Highly Compensated Eligible Participants, as defined in Section 4.5, also must satisfy the aggregate limit test set forth in Treas. Reg. 1.401(m)-2(b)(3). Notwithstanding the above, for the Plan Years commencing January 1, 1997, and January 1, 1998, the Committee has elected in accordance with Section 401(m) (2)(A) of the Code to determine the foregoing limitations with respect to the average contribution percentage for all Eligible Participants (other than Highly Compensated Eligible Participants) based on the current Plan Year as opposed to the immediately preceding Plan Year. Effective for the Plan Year commencing January 1, 1999, and for each Plan Year thereafter, until modified by the Committee, the Committee has elected in accordance with Section 401(m) (2)(A) of the Code to determine the foregoing limitations with respect to the average contribution percentage for all Eligible Participants (other than Highly Compensated Eligible Participants) based on the prior Plan Year as described in (a) and (b) above. The average contribution percentage shall equal the sum of the individual contribution percentages for Participants in the applicable Highly Compensated or Non-Highly Compensated Eligible Employee category, divided by the total number of Eligible Employees in such group. The individual contribution percentage shall be equal to the amount of the Participant's Matching Contributions for the Plan Year, divided by his Compensation for such Plan Year. For purposes of computing the contribution rates, if any Employer or Affiliate maintains any other cash or deferred arrangement which is aggregated with this Plan for purposes of applying Section 401(a)(4) or 410(b) of the Code, all such cash or deferred arrangements shall be treated as one plan. The individual contribution percentage for any Highly Compensated Employee for the Plan Year who is eligible to have Matching Contributions and Pre-Tax Contributions allocated to him under two or more arrangements described in Sections 401(a) or 401(m) of the Code that are maintained by the Employer or its Affiliates shall be determined as if such contributions were made under a single arrangement. If the Committee determines, in its sole discretion, with respect to any Plan Year, that the Plan will (or may) fail (a), (b) or (c) above, the Committee shall take any action that it deems appropriate for the Plan to satisfy (a), (b) or (c) above. If the amount of Matching Contributions made on behalf of Highly Compensated Eligible Participants in a Plan Year would not comply with (a), (b) or (c) above, then by the last day of the following Plan Year, the Committee may determine that the Excess Aggregate Contributions for such Plan Year shall be distributed (or forfeited, if otherwise not vested) to the applicable Highly Compensated Eligible Participants, including any Income attributable to such Excess Aggregate Contributions. Excess Aggregate Contributions that are distributed are treated as Annual Additions under Section 415 of the Code. Forfeited Matching Contributions that are reallocated to the Accounts of other Participants for the Plan Year in which the forfeiture occurs are treated under Section 415 as Annual Additions for the Participant to whose Accounts they are reallocated and for the Participant from whose Accounts they are forfeited. The Committee shall determine the amount of the Excess Aggregate Contributions attributable to each Highly Compensated Eligible Participant as the amount (if any) by which the Highly Compensated Eligible Participant's Matching Contributions must be reduced for the average contribution percentage to equal the highest permitted average contribution percentage under the Plan. The highest permitted average contribution percentage permitted under the Plan shall be determined by reducing the individual contribution percentage of the Highly Compensated Eligible Participant with the highest individual contribution percentage to equal the individual contribution percentage of the Highly Compensated Eligible Participant with the next highest individual contribution percentage. If a lesser reduction would permit the Plan to meet the requirements of (a), (b) or (c) above, such lesser reduction shall be made. The Committee shall repeat this process until the Plan meets the requirements of (a), (b) or (c) above. The Committee shall distribute (or cause to be forfeited if otherwise not vested) the amount of the Excess Aggregate Contributions plus Income, as determined above, to Highly Compensated Eligible Participants, in the amount necessary so that the Highly Compensated Eligible Participant who received the highest dollar amount of Matching Contributions is reduced to equal the next highest dollar amount of Matching Contributions (or a lesser amount if a lesser amount may be distributed in order to comply with (a), (b) or (c) above) received by the Highly Compensated Eligible Participant with the next highest dollar amount of Matching Contributions. The foregoing steps shall be repeated until the total amount of Excess Aggregate Contributions have been distributed. Recalculation of the average contribution percentage test following the distribution of Excess Aggregate Contributions, shall not be required. Alternatively, the Committee may take such other actions as may be permissible under the Code to ensure the Plan's compliance with the requirements of Section 401(m) of the Code, including, without limitation the allocation of the Employer's Discretionary QNEC to some or all Eligible Participants who are not Highly Compensated Eligible Participants in accordance with Section 4.1(d). 4.8 Income Attributable to Excess Aggregate Contributions. The Income attributable to a Participant's Excess Aggregate Contributions pursuant to Section 4.7 for the Plan Year during which such Excess Aggregate Contributions arose shall be determined in accordance with Treas. Reg. 1.401(m)-1(e)(3)(ii). Unless provided for by the Committee, any gain or loss on a Participant's Excess Aggregate Contributions for the period between the end of the Plan Year and the date of distribution shall be disregarded. 4.9 Requirements for Qualified Non-Elective Contributions and Qualified Matching Contributions. Any contributions that are designated as qualified non-elective contributions or as qualified matching contributions shall meet the requirements of Treas. Reg. Sections 1.401(k)-1(b)(5) and 1.401(m)-1(b)(5). In addition, qualified non-elective contributions and qualified matching contributions shall be fully vested at all times. Such contributions shall be distributed from the Plan only in accordance with the events enumerated in the Plan provided however, that in no event shall such amounts be available for hardship withdrawal. 4.10 Rollovers. A Participant or an Eligible Employee, with the prior discretionary approval of the Committee, may transfer, or have transferred to the Trust any property which has been distributed to him whether such amount is (i) transferred directly from the Trust of another plan that is qualified under Section 401(a) of the Code, as an eligible rollover distribution to this Plan; (ii) transferred by the Participant after his receipt of such amount from a plan qualified under Section 401(a) of the Code; or (iii) transferred from a "conduit" Individual Retirement Account established by the Participant upon his receipt of such amount from a plan qualified under Section 401(a) of the Code; provided, however, that such amount qualifies as a rollover amount as defined by the Code at the time of the transfer. The amount of cash or the fair market value of any other property transferred to the Trust pursuant to this Section 4.10 shall be credited to the Participant's Rollover Account as of the Valuation Date next following such transfer to the Trust and shall be nonforfeitable at all times. 4.11 Rollovers from the Plan. Notwithstanding any provision of the Plan to the contrary, effective January 1, 1993, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan, specified by the Distributee, in a Direct Rollover. Each Eligible Rollover Distribution shall be made payable to the Eligible Retirement Plan and delivered to the Distributee or paid directly to the Eligible Retirement Plan. 4.12 In Writing Requirement. Notwithstanding any provision in this Plan to the contrary, salary reduction agreements and cancellations or amendments thereto, investment elections, changes or transfers, loans, withdrawal decisions, and any other decision or election by a Participant (or Beneficiary) under this Plan may be accomplished by electronic or telephonic means which are not otherwise prohibited by law and which are in accordance with procedures and/or systems approved or arranged by the Committee or its delegates. 4.13 Military Service. Notwithstanding any provision of this Plan to the contrary, effective December 12, 1994, contributions, benefits and service credit with respect to qualified military service shall be provided in accordance with Section 414(u) of the Code. V: Allocations To Participants' Accounts 5.1 Individual Accounts. The Committee shall create and maintain adequate records to disclose the interest in the Trust of each Participant, Former Participant and Beneficiary. Such records shall be in the form of individual Accounts and credits, and charges shall be made to such Accounts in the manner herein described. While such Accounts shall distinguish between Matching Contributions and adjustments thereto and Pre-Tax Contributions and adjustments thereto and Discretionary QNECs and adjustments thereto, there shall be one Account maintained for each Participant reflecting the Matching Contributions, Pre-Tax Contributions and Discretionary QNECs made to the Plan by or on behalf of each Participant. There also shall be maintained one Account for each Participant reflecting his Rollover Account, if any. The maintenance of individual Accounts is for accounting purposes only, and a segregation of the assets of the Trust Fund with respect to each Account shall not be required. 5.2 Account Adjustments. The Accounts of Participants, Former Participants and Beneficiaries shall be adjusted in accordance with the following: (a) Income. The Income of the Trust Fund shall be allocated as of each Valuation Date to the Accounts of Participants, Former Participants and Beneficiaries who have unpaid balances in their Accounts on a Valuation Date in proportion to the balances in such Accounts immediately after the next preceding Valuation Date, but after (i) first reducing each such Account by 100% of any distributions, loans or withdrawals from such Accounts during the interim period; and (ii) increased by fifty percent (50%) of Pre-Tax Contributions, rollover contributions and loan repayments that are made after the last Valuation Date and during the month that includes the subsequent Valuation Date. For purposes of this subsection, to the extent that the Participant has directed the management of his Account(s) pursuant to Section 7.2, or taken a loan from his Account(s) pursuant to Section 6.9, then, to such extent, the Income with respect to his Accounts shall be separately determined by reference to such investments. Otherwise, all valuations hereunder shall be based on the fair market value of the assets in the Trust Fund on the Valuation Date. Effective October 1, 1998, the Accounts of Participants, Former Participants and Beneficiaries shall be adjusted in accordance with the procedures that are set forth in Appendix C to the Plan, attached hereto. The Committee may, for administrative purposes, establish unit values for one or more investment fund(s) (or any portion thereof) and maintain the accounts setting forth each Participant's interest in such investment fund(s) (or any portion thereof) in terms of such units, all in accordance with such rules and procedures as the Committee shall deem to be fair, equitable and administratively practicable. In the event that unit accounting is thus established for any investment fund (or any portion thereof) the value of a Participant's interest in that investment fund (or any portion thereof) at any time shall be an amount equal to the then value of a unit in such investment fund (or any portion thereof) multiplied by the number of units then credited to the Participant. (b) Employer Contributions. The Employer's contribution for each Plan Year shall be allocated among the Pre-Tax Contribution Accounts, Matching Contribution Accounts and Discretionary QNEC Accounts of those eligible Participants as set forth below: (i) Pre-Tax Contributions. The Employer's Pre-Tax Contribution for the Plan Year made pursuant to Section 4.1(a) shall be credited directly to the Pre-Tax Contribution Account of each Participant who authorized a Pre-Tax Contribution. (ii) Matching Contributions. The Employer's Matching Contribution for the Plan Year made pursuant to Section 4.1(c) shall be allocated to the Matching Contribution Accounts of those Participants described in Section 4.1(c). (iii) Discretionary QNECs. The Employer's Discretionary QNEC for the Plan Year made pursuant to Section 4.1(d), shall be credited directly to the Discretionary QNEC Accounts of some or all Eligible Participants who are not Highly Compensated Eligible Participants as of the last day of the Plan Year and who are designated to receive an allocation of such contribution. (c) Deemed Date of Allocation. All credits or deductions made under this Article to Participants' Accounts shall be deemed to have been made no later than the last day of the Plan Year though actually determined thereafter. 5.3 Allocation of Minimum Employer Contributions. The Minimum Employer Contribution for the Plan Year shall be allocated as follows: (a) First, the Minimum Employer Contribution for the Plan Year shall be allocated during the Plan Year to each individual who is an Eligible Participant on the first day of the Plan Year as Pre-Tax Contributions pursuant to Section 4.1(a) and as Matching Contributions pursuant to Section 4.1(c). These allocations shall be made to each such Participant's Pre-Tax Contribution Account and Matching Contribution Account, respectively. (b) Second, the balance of the Minimum Employer Contribution remaining after the allocation in Section 5.3(a) shall be allocated to the Matching Contribution Account of each individual who is not a Highly Compensated Employee (as defined in Section 2.1 of the Plan) and who is an Eligible Participant on the first day of the Plan Year and is employed on the last day of the Plan Year (or who is on a leave of absence under the Family and Medical Leave Act), in the ratio that such Eligible Participant's Pre-Tax Contributions during the Plan Year bears to the Pre-Tax Contributions of all such Eligible Participants during the Plan Year. (c) Third, notwithstanding Section 5.4 of the Plan, if the total contributions allocated to a Participant's Accounts including the Minimum Employer Contribution exceeds the Participant's maximum Annual Addition limit for any Plan Year, then such excess shall be held in a suspense account. Such amounts shall be used to reduce Employer contributions in the next, and succeeding, Plan Years. (d) Fourth, the balance of the Minimum Employer Contribution remaining after the allocation under Section 5.3(a), (b) and (c) shall be allocated as a nonelective contribution to each individual who is not a Highly Compensated Employee (as defined in Section 2.1 of the Plan) and who is an Eligible Participant on the first day of the Plan Year, in the ratio that such Eligible Participant's Compensation for the Plan Year bears to the Compensation for the Plan Year of all such Eligible Participants. Contributions made pursuant to this subsection 5.3(d) shall be allocated to the Eligible Participant's Matching Contribution Account and are distributable only in accordance with the distribution provisions of the Plan applicable to Matching Contributions. Contributions made pursuant to this subsection shall be vested at all times. Such contribution shall be invested in the Trust Fund in the manner designated by the Eligible Participant. Notwithstanding the definition of Participant in Section 2.1 of the Plan, an individual who receives an allocation of a contribution pursuant to this subsection shall be treated as a Participant for all purposes of the Plan with respect to such contribution. (e) Each installment of the Minimum Employer Contribution shall be held in a contribution suspense account unless, or until, allocated on or before the end of the Plan Year in accordance with this Section 5.3. Such suspense account shall not participate in the allocation of investment gains, losses, income and deductions of the Trust Fund as a whole, but shall be invested separately and all gains, losses, income and deductions attributable to such investment shall be applied, to the extent the Plan pays Plan expenses, to reduce Plan expenses, and thereafter, to reduce Employer contributions. (f) The Minimum Employer Contribution allocated to the Matching Contribution Account of an Eligible Participant pursuant to Section 5.3(b) shall be treated in the same manner as Matching Contributions for all purposes of the Plan. (g) Notwithstanding any of the foregoing provisions to the contrary, any allocation of Pre-Tax Contributions shall be made under either Section 5.2(b)(i) or this Section 5.3, but not both Sections. Similarly, any allocation of a Matching Contribution shall be made under either Section 5.2(b)(ii) or this Section 5.3, as appropriate, but not both Sections. 5.4 Maximum Annual Additions. The maximum Annual Additions that may be contributed or allocated to a Participant's Accounts under the Plan for any Limitation Year shall not exceed the lesser of: (i) $35,000, as indexed for increases in the cost-of-living in accordance with Section 415(d) of the Code, or (ii) 25 percent of the Participant's compensation, within the meaning of Section 415(c)(3) of the Code, for the Limitation Year. The compensation limitation referred to shall not apply to: (i) Any contribution for medical benefits (within the meaning of Section 419A(f)(2) of the Code) to be paid to the Participant after separation from service which is otherwise treated as Annual Additions, or (ii) Any amount otherwise treated as Annual Additions under Section 415(l)(1) of the Code. If the total Annual Additions on behalf of a Participant for a Limitation Year would exceed the limitations described herein as a result of a reasonable error in determining the amount of Pre-Tax Contributions that a Participant may make to comply with this Section 5.4, as a result of the allocation of forfeitures or as a result of a reasonable error in estimating a Participant's Compensation for purposes of this Section, such excess Pre-Tax Contributions may be distributed to the Participant to the extent that such distribution would reduce the excess Annual Additions as permitted under Section 415 of the Code. Any Pre-Tax Contributions so distributed shall be deemed first to consist of Pre-Tax Contributions for which no corresponding Matching Contributions were made; and second from Pre-Tax Contributions for which Matching Contributions were made. If Pre-Tax Contributions are distributed, then such amounts shall be disregarded under Section 4.5, 4.6, 4.7 and 4.8 and for purposes of the limitations of Section 402(g) of the Code. Effective for Limitation Years beginning after December 31, 1995, any gains attributable to such excess Pre-Tax Contributions that are so distributed, that are not also distributed, shall be considered as an Employer contribution for the Limitation Year in which the excess Pre-Tax Contributions were made. Any Matching Contributions attributable to Pre-Tax Contributions that are distributed herein shall be held unallocated in a suspense account. If the total Annual Additions on behalf of a Participant for a Limitation Year would still exceed the limitations described herein after distribution of excess Pre-Tax Contributions above, the excess amounts in the Participant's Accounts shall be held unallocated in a suspense account for the Limitation Year and allocated and reallocated in the next Limitation Year to all Participants in the Plan. Such excess amounts must be used to reduce Employer Contributions for the next Limitation Year (and succeeding Limitation Years, as necessary) for all of the Participants in the Plan or applied to the payment of Plan expenses. However, if the allocation or reallocation of the excess amounts pursuant to the provisions of the Plan causes the limitations of Section 415 to be exceeded with respect to a Participant for the Limitation Year, then these amounts shall be held unallocated in a suspense account. If a suspense account is in existence at any time during a particular Limitation Year, other than the Limitation Year described in the preceding sentence, all amounts in the suspense account must be allocated and reallocated to Participants' Accounts (subject to the limitations of Section 415) before any Employer contributions which would constitute Annual Additions may be made to the Plan for that Limitation Year. 5.5 Defined Contribution and Defined Benefit Plans. Notwithstanding any other provision of the Plan to the contrary, for Limitation Years beginning prior to January 1, 2000, the total Annual Additions on behalf of a Participant for any Limitation Year shall not cause the sum of that Participant's defined contribution plan fraction and defined benefit plan fraction (as those terms are defined in Section 415 of the Code and regulations thereunder) to exceed 1.0. If the sum of such fractions would exceed 1.0 for any Limitation Year, the excess amount will be eliminated first by making appropriate adjustments under any defined benefit plan maintained by the Employer and then under this Plan. 5.6 No Rights Created by Allocation. Any allocation made and credited to the Account of a Participant, Former Participant or Beneficiary under this Article shall not cause such Participant, Former Participant or Beneficiary to have any right, title or interest in or to any assets of the Trust Fund except at the time or times, and under the terms and conditions, expressly provided in this Plan. VI: Payment Of Benefits 6.1 Normal Retirement or Termination. If a Participant's employment is Terminated by reason of his Normal Retirement or Termination, then such Participant shall be entitled to receive the entire amount credited to his Accounts in the manner and at the time provided in Sections 6.4 and 6.5. 6.2 Death. In the event that the Termination of employment of a Participant is caused by his death, or in the event that a Participant or Former Participant who is entitled to receive distributions pursuant to Section 6.1 dies prior to receiving the full amount of such distributions, the entire amount credited to his Accounts shall be paid to his Beneficiary in the manner and at the time provided in Sections 6.4 and 6.5. 6.3 Vesting. A Participant shall be fully vested at all times in his Accounts. 6.4 Time of Payment of Benefits. (a) A distribution to a Participant of his Accounts on account of Retirement pursuant to Section 6.1 on or after Normal Retirement Date shall be made as soon as practicable following the Valuation Date coincident with or next following such Retirement after receipt by the Committee of the applicable forms. (b) Distribution of a Participant's or Former Participant's Accounts, payable on account of the death of a Participant or Former Participant pursuant to Section 6.2, shall be distributed as follows: (1) In the case of a Participant's death prior to commencement of his benefits in a single lump sum payment, as soon as practicable following such death, but no later than December 31 of the year in which occurs the fifth anniversary of the Participant's or Former Participant's death, (but no earlier than the Valuation Date coincident with or next following his date of death). (2) Notwithstanding subsection (1) above, in the case of a Participant's or Former Participant's death prior to commencement of his benefits, if such Participant's Beneficiary is his Spouse, then such distribution shall not be required to begin prior to the date on which the Participant or Former Participant would have attained age 70 1/2, had he lived. At such time, distribution must be made in the form provided for in Section 6.5. Prior to the date on which the Participant or Former Participant would have attained age 70 1/2, the Spouse may elect to receive the Participant's or Former Participant's Accounts, upon written notice to the Committee in a lump sum. (3) Any amount payable to a child pursuant to the death of a Participant or Former Participant shall be treated as if it were payable to the Participant's or Former Participant's Spouse if such amount would become payable to the Spouse upon such child reaching majority (or other designated event permitted by regulations). (c) Subject to subsection (e) of this Section 6.4, a distribution to a Participant of his Accounts, payable on account of other Termination of employment pursuant to Section 6.1, shall be made as soon as practicable following the Valuation Date coincident with or next following such Termination after receipt by the Committee of the applicable forms. In the case of a distribution of a Participant's Accounts that does not exceed $3,500, if the Participant fails to complete all forms or applications needed to properly process the distribution pursuant to rules set by the Committee, then the distribution shall be automatically made as soon as administratively feasible after the first day of the Calendar Quarter that is coincident with or next follows the date that is 90 days following the event giving rise to the distribution. If the Participant's Accounts exceed $3,500, distribution of benefits shall not commence unless the Participant consents to such distribution in writing. Effective with respect to any Participant whose employment Terminates on or after January 1, 1998, the foregoing references to $3,500 shall be increased to $5,000. (d) If the vested percentage of a Participant's Accounts exceed $3,500 (determined at the time of any distribution) a distribution from a Participant's Accounts may not be made prior to a Participant's Normal Retirement Date (other than as a result of death) without obtaining the Participant's consent, at such time and in such manner as may be required by the Code and applicable regulations thereunder, to such distribution being made prior to his Normal Retirement Date. If the Former Participant does not consent to such distribution, benefits shall remain in the Trust Fund and shall continue to receive Income allocations pursuant to Section 5.2(a) and shall not be distributed to the Participant (or his Beneficiary) until his attainment of age 70 1/2 or the Valuation Date coincident with or next following his death, if sooner. Prior to the date on which the Former Participant attains age 70 1/2, the Former Participant may elect to receive all of his Accounts upon written notice to the Committee in a single lump sum. Effective with respect to any Participant whose employment Terminates on or after January 1, 1998, the foregoing references to $3,500 shall be increased to $5,000. (e) Notwithstanding any other provision of this Plan to the contrary, unless the Participant or Former Participant elects otherwise, payment of benefits under this Plan shall commence not later than sixty (60) days after the close of the Plan Year in which the latest of the following events occurs: (a) the Participant or Former Participant attains age 65; (b) the tenth (10th) anniversary of the Plan Year in which the Participant or Former Participant commenced participation in the Plan; or (c) the Termination of the Participant's service with the Employer. (f) Distribution to a Participant who continues to be employed by the Employer following his attainment of age 70 1/2 of his Accounts must commence no later than April 1 of the calendar year following the calendar year in which the Participant or Former Participant attains age 70 1/2. The foregoing shall not apply to any Participant who (i) has attained age 70 1/2 before January 1, 1988 and (ii) is not a five percent (5%) owner of the Employer, as defined in Section 416(i)(1)(B) of the Code at any time during the Plan Year ending with or within the calendar year in which he attains age 66 1/2 and any subsequent Plan Year. Effective January 1, 1997, distribution of his Accounts to a Participant who is not a five percent (5%) owner of the Employer as defined in Section 416(i)(1)(B) with respect to the Plan Year ending in the calendar year in which he attains age 70 1/2, who continues to be employed by the Employer following attainment of age 70 1/2, must commence no later than April 1 of the calendar year following the calendar year in which the Participant retires. Distribution to a five percent owner, as described in the preceding sentence, or to a Terminated Participant, must continue to commence no later than April 1 of the calendar year following the calendar year in which he attained age 70 1/2. (g) Distribution to an alternate payee of a Participant or Former Participant, pursuant to a qualified domestic relations order ("QDRO"), as defined in Section 414(p) of the Code, shall be made as soon as practicable following the finalization of the QDRO, or such later date as the QDRO may authorize. (h) Effective September 1, 1994, the value of Company Stock or the value of other investment funds shall be determined as of a date that is as close as administratively feasible to the date on which payment is made. Payments shall be made as soon as practicable following the Valuation Date coincident with or next following the distributable event if the necessary paperwork is returned. Prior to September 1, 1994, the Account value for distribution was determined as of the end of the preceding Calendar Quarter coincident with or next following the distributable event. Effective October 1, 1998, the value of Company Stock or the value of other investment funds shall be determined as of the Valuation Date that the payment is processed. 6.5 Mode of Payment of Benefits. Any amount to which a Participant, Former Participant or Beneficiary shall become entitled to hereunder shall be distributed to him in a lump sum. All distributions pursuant to this Section shall be made in cash, securities or other property as the Committee in its sole and absolute discretion may determine, to the extent permitted by the Code and regulations thereunder. All distributions shall be made in a lump sum. All distributions shall satisfy the incidental death limitations of Section 401(a)(9)(G) of the Code, including the minimum distribution incidental benefit requirement and the pre-retirement incidental benefit requirement as set forth in Treas. Reg. Section 1.401-1(b)(ii). 6.6 Designation of Beneficiary. Each Participant or Former Participant (or beneficiary thereof) from time to time may designate any person or persons (who may be designated contingently or successively and who may be an entity other than a natural person) as his Beneficiary or Beneficiaries to whom his Plan benefits are to be paid if he dies before receipt of all such benefits. Each Beneficiary designation shall be made on a form prescribed by the Committee and will be effective only when filed with it during the Participant's or Former Participant's lifetime. Each Beneficiary designation filed with the Committee will cancel all Beneficiary designations previously filed with it by that Participant or Former Participant. The revocation of a Beneficiary designation, no matter how effected, shall not require the consent of any designated Beneficiary. If any Participant or Former Participant fails to designate a Beneficiary in the manner provided above, or if the Beneficiary designated dies before such Participant's or Former Participant's death or before complete distribution of the Participant's or Former Participant's benefits, such Participant's or Former Participant's benefits shall be paid in the following order of priority: first, to the Participant's or Former Participant's surviving spouse, if any; second, to the Participant's or Former Participant's surviving children, if any, in equal shares; third, to the estate of the last to die of such Participant or Former Participant and his Beneficiary or Beneficiaries. Notwithstanding the foregoing, the surviving spouse of a Participant or Former Participant shall be deemed to be the Participant's or Former Participant's designated Beneficiary, and shall be entitled to receive any distribution on account of the Participant's or Former Participant's death in a lump sum, unless the Participant or Former Participant designates a Beneficiary other than the surviving spouse and such surviving spouse consents irrevocably in writing to the designation of such alternate Beneficiary and the Spouse's consent acknowledges the effect of such designation and is witnessed by a notary public or a member of the Committee. The requirements of this paragraph may be waived if it is established to the satisfaction of the Committee that the consent may not be obtained because there is no Spouse or because the Spouse cannot be located or because of such other circumstances as may be prescribed by regulation. 6.7 Information Required from Beneficiary. If at, after or during the time when a benefit is payable to any Beneficiary, the Committee upon request of the Trustee or at its own instance, delivers by registered or certified mail to the Beneficiary at the Beneficiary's last known address a written demand for his then address, or for satisfactory evidence of his continued life, or both, and, if the Beneficiary fails to furnish the information to the Committee within three years from the mailing of the demand, then the Committee shall distribute to the party next entitled thereto under Section 6.7 above as if the Beneficiary were then deceased. 6.8 In-Service Withdrawals: (a) Non-Hardship. (1) A Participant or Eligible Employee may elect to withdraw an amount equal to all or any part of his interest in his Rollover Account, including earnings, for any reason, (2) Upon attainment of age 59 1/2, a Participant may elect to withdraw an amount equal to all or any portion of his interest in his Pre-Tax Contribution Account including earnings, for any reason, and (3) Upon attainment of age 70 1/2, a Participant may also elect to withdraw an amount equal to all or any portion of his interest in his Matching Contribution Account including earnings, for any reason. (b) Hardship. On account of financial hardship, as defined below, a Participant may make a withdrawal from his Pre-Tax Contribution Account attributable to all of his Pre-Tax Contributions (as of the last completed valuation) and Income allocated as of December 31, 1988 to his Pre-Tax Contribution Account. (c) Procedures: (1) The amount available for withdrawal shall be based on the most recently completed monthly valuation and shall be withdrawn on a prorata basis from the investment funds in which the underlying contributions are invested. (Prior to September 1, 1994 the amount available for withdrawal was determined as of the last completed quarterly valuation). The amount charged against a Participant's Pre-Tax Contribution Account and/or Rollover Account shall be based on the value of Company Stock or value of other investment funds determined as of a date as close as administratively feasible to the date of payment (prior to September 1, 1994, as of the end of the preceding Calendar Quarter). Effective October 1, 1998, the amount available shall be determined as of the Valuation Date that the withdrawal is processed. (2) The existence of a financial hardship and the amount necessary to meet such hardship, shall be determined by the Committee in accordance with the rules set forth below. Notwithstanding the foregoing, a hardship withdrawal by a Participant hereunder may not include any amounts attributable to "qualified non-elective" and "qualified matching" contributions as defined under Section 401(k) of the Code. An immediate and heavy financial need shall be limited to a need for funds for any of the following purposes: (A) medical expenses described in Section 213(d) of the Code and incurred by the Participant, his Spouse, or any of the Participant's dependents (as defined in Section 152 of the Code), or expenses necessary for these individuals to obtain medical care described in Section 213(d) of the Code, as long as such expenses are ineligible for reimbursement under any health care plans; (B) costs directly related to the purchase (excluding mortgage payments) of a principal residence of the Participant; (C) the payment of tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for the employee, or the Participant's Spouse, children, or dependents (as defined in Section 152 of the Code); or (D) payments necessary to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence. (3) If the following criteria are met, the Participant will be deemed to have a financial need for a hardship withdrawal to be made: (A) the distribution is not in excess of the amount of the immediate and heavy financial need of the Participant including any associated taxes or penalties; and (B) the Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under all plans maintained by the Employer or any Affiliate. (4) Following payment of any hardship distribution to a Participant hereunder, such Participant may not make Pre-Tax Contributions (and the Participant shall be precluded from making any employee contributions to all other plans maintained by the Employer as defined in Treas. Reg. Section 1.401(k)-1(d)(2)(iv)(B)(4)), during the twelve calendar months immediately following the effective date of such hardship withdrawal. A Participant may reenroll in the Plan as of the next Entry Date following the suspension period. Effective October 1, 1998, a Participant may reenroll in the Plan as soon as practicable following the suspension period. In addition, the Participant may not make any Pre-Tax Contributions to the Plan for the Participant's taxable year immediately following the taxable year of the hardship withdrawal, in excess of the applicable limit under Section 402(g) of the Code for such next taxable year less the amount of such Participant's Pre-Tax Contributions for the taxable year of the hardship distribution. A similar suspension shall apply if any Participant receives a hardship withdrawal under any other tax-qualified plan maintained by the Employer or any Affiliate in respect of which such a suspension penalty applies. Suspension of a Participant's eligibility to make Pre-Tax Contributions under this Plan shall have no effect on the Participant's right to receive Matching Contributions with respect to Pre-Tax Contributions made before or after the suspension period. 6.9 Loans to Participants. The Committee may direct the Trustee to lend a Participant or an Eligible Employee an amount not in excess of the lesser of (i) 50% of his vested Accounts, determined as of the most recently completed monthly valuation which as of October 1, 1998 shall be determined as of any Valuation Date (prior to October 1, 1998, the amount was determined as of the most recently completed Valuation); or (ii) $50,000 (reduced by the excess, if any, of the highest outstanding balances of all other loans from the Plan during the one-year period ending on the day before the loan was made over the outstanding balance of loans from the Plan on the date on which such loan was made). Notwithstanding the preceding sentence, the actual amount available for the loan to a Participant shall be 95% of the amount determined in accordance with the preceding sentence as of the Valuation Date that the Participant applied for the loan. A Participant may have only one loan outstanding at any time. Effective October 1, 1998, a Participant may have two loans outstanding at any time. Subject to the rules of the Committee set forth below, the Trustee, upon application by a Participant, may make a loan to such Participant for any reason. In addition to such rules as the Committee may adopt, all loans shall comply with the following terms and conditions: (a) An application by a Participant for a loan from the Plan shall be made in writing to the Committee (on a form prescribed by it) whose action thereon shall be final. (b) The period of repayment for any loan shall be arrived at by mutual agreement between the Committee and the borrower, but such period in no event shall exceed five years. Effective October 1, 1998, a Participant may have a loan for up to 30 years to purchase a dwelling unit which shall be used as the Participant's principal residence. Repayment of interest and principal shall commence at the discretion of the Committee, but in no event later than the first day of the third month commencing after the loan was received by the Participant. Repayment of interest and principal shall be according to a substantially level amortization schedule of payments. Payment of interest and principal shall be by payroll deduction. After 26 bi-weekly repayments are made, a Participant may elect to prepay the remaining balance of his loan in one lump sum payment. Effective October 1, 1998, a Participant may elect to prepay the balance of his loan at any time regardless of the number of repayments made. (c) Each loan shall be made against collateral being the assignment of the borrower's right, title and interest in and to the Trust Fund to the extent of the borrowed amount supported by the borrower's collateral promissory note for the amount of the loan, including interest, payable to the order of the Trustee. (d) Each loan shall bear an interest rate determined in the discretion of the Committee, which rate shall be intended to be commensurate with current fixed rates charged by institutions in the business of lending money for similar types of loans. (e) The minimum amount available for any loan is $500.00. (f) The procedure to be followed by a Participant in applying for a loan shall be determined by the Committee and documented by a duly approved resolution of the Committee. Such resolution shall be attached to and shall be deemed to be a part of the Plan. (g) Notwithstanding anything herein to the contrary, the Committee may direct the Trustee to lend a Former Participant who is a "party in interest" as that term is defined in Section 3(14) of ERISA, an amount not to exceed the amount set forth in the first paragraph of this Section 6.9, but only to the extent required by ERISA. If the Committee directs the Trustee to make a loan to a Former Participant, the rules set forth in Section 6.9 shall apply to such loan, provided, however, that repayment of such loan shall not be by payroll deduction. Repayment shall be made by the Former Participant by check, payable to the Trustee, based on a monthly repayment schedule established by the Committee when the Former Participant makes application for the loan. (h) In the event of (i) default on the loan or (ii) the Participant's Termination of employment prior to repayment of the entire loan balance, the Participant shall have the option to repay the remaining loan balance in full as soon as the necessary paperwork shall be processed. If the loan is not repaid, the Participant shall have the option to continue to repay the loan as a Former Participant in accordance with the rules and procedures determined by the Committee. If repayment is not made or in the event of default, and a Participant does not elect to repay his loan in full, there shall be distributed to the Participant upon his Termination of employment the sum of (i) the value of the Participant's Accounts, without regard to the amount of any outstanding loan (including any accrued interest thereon) plus (ii) the Participant's promissory note. Default means a Participant's failure to repay the loan when due in accordance with the procedures outlined in subsection (b) hereof. Effective with respect to any Participant who Terminates employment or defaults on his loan on or after October 1, 1998, the Participant or Former Participant shall have the option to repay the loan in full within a reasonable time period determined by the Committee. A Former Participant shall not have the option to continue to repay the loan on an ongoing basis. If repayment is not made in full within the applicable time period, then there shall be distributed to the Former Participant (i) the promissory note; plus (ii) the value of his Accounts without regard to the amount of any outstanding loan (including any accrued interest thereon). (i) Loans shall be processed from a Participant's Accounts in the following order on a prorata basis from the funds in which invested: (1) Rollover Account; (2) Pre-Tax Contribution Account; (3) Matching Contribution Account. Effective October 1, 1998, the amount charged against a Participant's Accounts shall be determined as of the Valuation Date that the loan is paid to the Participant. (j) The amount charged against a Participant's Pre-Tax Contribution Account, Rollover Account or Matching Contribution Account shall be based on the value of Company Stock or value of other investment funds determined as of a date as close as administratively feasible to the date the loan is paid to the Participant. (Prior to September 1, 1994, as of the end of the month in which the Participant applied for the loan.) (k) Repayments shall be in reverse order to the order set forth in subsection (i) and invested according to a Participant's current investment elections. (l) A Participant who becomes ineligible to participate in the Plan because the individual transfers employment to an Affiliate or becomes a bonafide resident of Puerto Rico shall continue to be able to make loans from the Plan in accordance with this Section 6.9. Such a Participant shall be treated as a "party in interest" pursuant to subsection (g) hereof. (m) Effective October 1, 1998, a loan initiation fee shall be charged against the loan amount requested by the Participant. (n) A Participant who takes an approved leave of absence may discontinue payments on a loan for the period of absence for up to 12 months. Upon return to employment, the Participant must repay the missed payments within the original loan term. (o) A Participant who is on a leave of absence for military duty, may suspend his loan repayments as permitted under Code Section 414(u)(4). VII: Trust Fund 7.1 Exclusive Benefit of Employees and Beneficiaries. All contributions under this Plan shall be paid to the Trustee and deposited in the Trust Fund. All assets of the Trust Fund, including investment Income, shall be retained for the exclusive benefit of Participants, Former Participants and Beneficiaries and shall be used to pay benefits to such persons or to pay administrative expenses of the Plan and Trust Fund to the extent not paid by the Employer. Except as provided in Section 4.3, 5.3 or 12.2, the assets of the Trust Fund shall not revert to or inure to the benefit of the Employer. 7.2 Investment Directions by Participants. A Participant or Former Participant may direct the investment of amounts held under his Pre-Tax Contribution Account and Rollover Account in multiples of ten percent (10%) and in accordance with the terms, conditions and procedures established by the Committee. Effective October 1, 1998, investments of a Participant's or Former Participant's Pre-Tax Contribution Account and Rollover Account may be made in multiples of one percent (1%) or in specific dollar amounts. Notwithstanding Sections 5.2(a) and 8.4, all earnings and expenses, including commissions and transfer taxes, realized or incurred in connection with any investments pursuant to a Participant's or Former Participant's directions shall be credited or charged to the Participant's or Former Participant's Account for which the investment is made. A Participant or Former Participant who fails to designate an investment option for his Pre-Tax Contribution Account and Rollover Account shall be deemed to have elected to have such Accounts invested in the Stable Value Fund. If a Participant or Former Participant exercises his option to direct the investment of his Pre-Tax Contribution Account and Rollover Account, then to the extent permitted by ERISA no person who is otherwise a fiduciary under the Plan shall be liable under ERISA for any loss, or by reason of any breach which results from such Participant's exercise of such option. The funds available for this purpose shall include the Company Stock Fund and at least three other additional funds. A Participant may elect to change the investment (both future and existing contributions) of his Pre-Tax Contribution Account and Rollover Account effective as of the first day of any Calendar Quarter following written notification to the Committee (using the value of Accounts determined as of the last business day of the immediately preceding Calendar Quarter). (Prior to January 1, 1993, investment changes were as of any semi-annual Valuation Date.) Effective October 1, 1998, a Participant or Former Participant may elect to change the investment (both future and existing contributions) of his Pre-Tax Contribution Account and Rollover Account effective as of any Valuation Date. 7.3 Investment of Matching Contributions. (a) The Trustee shall invest one-half of the Matching Contributions allocated to each Participant's Matching Contribution Account in the Company Stock Fund and one-half in that fund which, in the opinion of the Committee, provides the highest degree of protection for principal and a reasonable rate of return consistent with the objective of preservation of principal. Effective January 1, 1993, all Matching Contributions shall be invested in Company Stock. (b) All dividends or other distributions with respect to the Company Stock Fund shall be applied to purchase additional Company Stock. (c) The Trustee may acquire Company Stock from any source, including the public market, in private transactions, the trustee of The Pep Boys - Manny, Moe & Jack Flexitrust, or, if the Company agrees, from the Company (from either treasury shares or authorized but unissued shares). If the Trustee purchases Common Stock from the Company, the purchase price shall be the mean between the highest and lowest quoted selling prices of the Common Stock on the New York Stock Exchange on the date of purchase, except as provided at subsection (e). (d) A Participant or Former Participant who has satisfied the age requirement for an Early Retirement Date may irrevocably elect in writing on a form provided by the Committee that all future Matching Contributions allocable to him after the Valuation Date following timely delivery of his election be invested in the investment category established by the Committee, which in the opinion of the Committee, provides the highest degree of protection for principal and a reasonable rate of return consistent with the objective of preservation of principal. In that case, the portion of the Participant's or Former Participant's Matching Contribution Account invested in Company Stock shall be liquidated in four installments, each equal to one-fourth of the number of shares of Company Stock allocated to his Matching Contribution Account, as of four semi-annual Valuation Dates next following the Participant's or Former Participant's election. The proceeds shall be deposited in the investment category designed to protect principal. A Participant or Former Participant may not subsequently transfer Matching Contributions back into the Company Stock Fund. Effective October 1, 1998, a Participant or Former Participant who has satisfied the age requirement for Early Retirement Date, may elect as of any Valuation Date, that all or any portion of the Participant's or Former Participant's Matching Contribution Account, allocated to him as of any Valuation Date, that is invested in Company Stock, be invested in any investment category available for investment. (e) To the extent the Matching Contribution must be invested in Company Stock, the Company shall make the contribution in Company Stock rather than cash. Each share of Company Stock contributed shall be valued for purposes of determining the number of shares to be contributed at the average of the mean between the highest and lowest quoted selling prices of the Common Stock on the New York Stock Exchange for each day in the last ten business days of December of the Plan Year for which the contribution is made. Pursuant to Section 4.1(c), a Participant must be employed on the last day of the Plan Year to share in the allocation of the Company's Matching Contribution for the applicable payroll period (or meet one of the exceptions noted in Section 4.1(c)). Effective September 30, 1998, the Company shall make the Company's Matching Contribution attributable to the first three Calendar Quarters of 1998 and for each payroll period thereafter, to the Company Stock Fund in cash. Each Participant shall be assigned a unit value in the Company Stock Fund as of September 30, 1998 in accordance with Section 5.2 of the Plan. The Company's Matching Contribution shall no longer be determined based on a specific number of shares and their corresponding value. The Company's Matching Contribution shall be applied immediately to purchase units on behalf of each such eligible Participant in the Company Stock Fund as of that Valuation Date. VIII: Administration 8.1 Duties and Responsibilities of Fiduciaries; Allocation of Responsibility Among Fiduciaries for Plan and Trust Administration. A Fiduciary shall have only those specific powers, duties, responsibilities and obligations as are specifically given him under this Plan or the Trust. In general, the Employer, shall have the sole responsibility for making the contributions provided for under Section 6.1. The Board of Directors shall have the sole authority to appoint and remove the Trustee and the Committee and to amend or terminate, in whole or in part, this Plan or the Trust. The Committee shall have the sole responsibility for the administration of this Plan, which responsibility is specifically described in this Plan and the Trust. The Committee shall direct the Trustee as to the investment of the assets in the Trust Fund in accordance with the terms of the Plan and Trust. Except as provided in the Trust Agreement and within the scope of any funding and investment policies designated by the Committee the Trustee shall have the sole responsibility for the administration of the Trust and the management of the assets held under the Trust. It is intended that each Fiduciary shall be responsible for the proper exercise of his own powers, duties, responsibilities and obligations under this Plan and the Trust and generally shall not be responsible for any act or failure to act of another Fiduciary. A Fiduciary may serve in more than one fiduciary capacity with respect to the Plan (including service both as Trustee and as a member of the Committee). 8.2 Allocation of Duties and Responsibilities. The Committee shall be appointed by the Board of Directors and shall have the sole responsibility for actual administration of the Plan, as delegated by the Board of Directors. The Committee may also adopt amendments to the Plan, which upon advice of counsel, it deems necessary or advisable to comply with ERISA or the Code, or any other applicable law, or to facilitate the administration of the Plan. The Committee may designate persons other than their members to carry out any of its duties and responsibilities. Any duties and responsibilities thus allocated must be described in the written instrument. If any person other than an Eligible Employee of the Employer is so designated, such person must acknowledge in writing his acceptance of the duties and responsibilities thus allocated to him. All such instruments shall be attached to, and shall be made a part of, the Plan. 8.3 Administration and Interpretation. Subject to the limitations of the Plan, the Committee shall have complete authority and control regarding the administration and interpretation of the Plan and the transaction of its business, and shall, from time to time, establish such rules as may be necessary or advisable in connection therewith. To the extent permitted by law, all acts and determinations of the Committee, as to any disputed question or otherwise, shall be binding and conclusive upon Participants, Former Participants, Employees, Spouses, Beneficiaries and all other persons dealing with the Plan. The Committee may deem its records conclusively to be correct as to the matters reflected therein with respect to information furnished by an Employee. All actions, decisions and interpretations of the Committee in administering the Plan shall be performed in a uniform and nondiscriminatory manner. 8.4 Expenses. The Employer shall pay all expenses authorized and incurred by the Committee in the administration of the Plan except to the extent such expenses are paid from the Trust. 8.5 Claims Procedure: (a) Filing of Claim. Any Participant, Former Participant or Beneficiary under the Plan ("Claimant"), may file a written claim for a Plan benefit with the Committee or with a person named by the Committee to receive claims under the Plan. (b) Notification on Denial of Claim. In the event of a denial or limitation of any benefit or payment due to or requested by any Claimant, he shall be given a written notification containing specific reasons for the denial or limitation of his benefit. The written notification shall contain specific reference to the pertinent Plan provisions on which the denial or limitation of benefits is based. In addition, it shall contain a description of any additional material or information necessary for the Claimant to perfect a claim and an explanation of why such material or information is necessary. Further, the notification shall provide appropriate information as to the steps to be taken if the Claimant wishes to submit his claim for review. This written notification shall be given to a Claimant within 90 days after receipt of his claim by the Committee unless special circumstances require an extension of time to process the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of said 90-day period and such notice shall indicate the special circumstances which make the postponement appropriate. Such extension shall not extend to a date later than 120 days after receipt of the request for review of a claim. (c) Right of Review. In the event of a denial or limitation of benefits, the Claimant or his duly authorized representative shall be permitted to review pertinent documents and to submit to the Committee issues and comments in writing. In addition, the Claimant or his duly authorized representative may make a written request for a full and fair review of his claim and its denial by the Committee provided, however, that such written request must be received by the Committee (or his delegate to receive such requests) within sixty days after receipt by the Claimant of written notification of the denial or limitation of the claim. The sixty day requirement may be waived by the Committee in appropriate cases. (d) Decision on Review. (i) A decision shall be rendered by the Committee within 60 days after the receipt of the request for review, provided that where special circumstances require an extension of time for processing the decision, it may be postponed on written notice to the Claimant (prior to the expiration of the initial 60 day period), for an additional 60 days, but in no event shall the decision be rendered more than 120 days after the receipt of such request for review. (ii) Notwithstanding subparagraph (i), if the Committee specifies a regularly scheduled time at least quarterly to review such appeals, a Claimant's request for review will be acted upon at the specified time immediately following the receipt of the Claimant's request unless such request is filed within 30 days preceding such time. In such instance, the decision shall be made no later than the date of the second specified time following the Committee's receipt of such request. If special circumstances (such as a need to hold a hearing) require a further extension of time for processing a request, a decision shall be rendered not later than the third specified time of the Committee following the receipt of such request for review and written notice of the extension shall be furnished to the Claimant prior to the commencement of the extension. (iii) Any decision by the Committee shall be furnished to the Claimant in writing and in a manner calculated to be understood by the Claimant and shall set forth the specific reason(s) for the decision and the specific Plan provision(s) on which the decision is based. 8.6 Records and Reports. The Committee shall exercise such authority and responsibility as it deems appropriate in order to comply with ERISA and governmental regulations issued thereunder relating to records of Participants' account balances and the percentage of such account balances which are nonforfeitable under the Plan; notifications to Participants; and annual reports and registration with the Internal Revenue Service. 8.7 Other Powers and Duties. The Committee shall have such duties and powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following: (a) to construe and interpret the Plan, decide all questions of eligibility and determine the amount, manner and time of payment of any benefits hereunder; (b) to prescribe procedures to be followed by Participants, Former Participants or Beneficiaries filing applications for benefits; (c) to prepare and distribute information explaining the Plan; (d) to receive from the Employer and from Participants, Former Participants and Beneficiaries such information as shall be necessary for the proper administration of the Plan; (e) to furnish the Employer, upon request, such annual reports with respect to the administration of the Plan as are reasonable and appropriate; (f) to receive, review and keep on file (as it deems convenient or proper) reports of the financial condition, and of the receipts and disbursements, of the Trust Fund from the Trustees; (g) to appoint or employ advisors including legal counsel to render advice with regard to any responsibility of the Committee under the Plan or to assist in the administration of the Plan; (h) to determine the status of qualified domestic relations orders under Section 414(p) of the Code; (i) to engage an Administrative Delegate who shall perform, without discretionary authority or control, administrative functions within the framework of policies, interpretations, rules, practices, and procedures made by the Committee. Any action made or taken by the Administrative Delegate may be appealed by an affected Participant to the Committee in accordance with the claims review procedures provided in Section 8.5. Any decisions which call for interpretations of Plan provisions not previously made by the Committee shall be made only by the Committee. The Administrative Delegate shall not be considered a fiduciary with respect to the services it provides; and (j) To take any actions necessary to correct the Plan retroactively as may be necessary, including the exclusion of any employees who have been excluded inadvertently from participation in the Plan, the application of incorrect vesting, failures pertaining to Sections 415(b) and 401(a)(17) of the Code and any other operational failure consistent with correction methodology set forth in IRS Rev. Proc. 2000-17 or any successor thereto. The foregoing list of express duties is not intended to be either complete or conclusive, and the Administrative Committee shall, in addition, exercise such powers and perform such other duties as it may deem necessary, desirable, advisable or proper for the supervision and administration of the Plan. Except as otherwise provided herein, the Committee shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. 8.8 Rules and Decisions. The Committee may adopt such rules as it deems necessary, desirable, or appropriate. All rules and decisions of the Committee shall be applied uniformly and consistently to all Participants in similar circumstances. When making a determination or calculation, the Committee shall be entitled to rely upon information furnished by a Participant, Former Participant or Beneficiary, the Employer, the legal counsel of the Employer, or the Trustee. 8.9 Authorization of Benefit Payments. The Committee shall issue proper directions to the Trustee concerning all benefits which are to be paid from the Trust Fund pursuant to the provisions of the Plan. Benefits under this Plan shall be paid only if the Committee deems in its discretion, that the applicant is entitled to them. 8.10 Application and Forms for Benefits. The Committee may require a Participant, Former Participant or Beneficiary to complete and file with it an application for a benefit, and to furnish all pertinent information requested by it. The Committee may rely upon all such information so furnished to it, including the Participant's, Former Participant's or Beneficiary's current mailing address. 8.11 Facility of Payment. Whenever, in the Committee's opinion, a person entitled to receive any payment of a benefit or installment thereof hereunder is under a legal disability or is incapacitated in any way so as to be unable to manage his financial affairs, the Committee may direct the Trustee to make payments to such person or to his legal representative or to a relative or friend of such person for his benefit, or he may direct the Trustee to apply the payment for the benefit of such person in such manner as it considers advisable. 8.12 Investment Policies. The investment policies of the Plan shall be established and may be changed at any time by the Committee, which shall thereupon communicate such policies to any persons having authority to manage the Plan's assets. The Investment Manager shall have the authority to invest in any collective investment fund maintained exclusively for the investment of assets of exempt, qualified employee benefit trusts. The assets so invested shall be subject to all the provisions of the instrument establishing such collective investment fund, as amended from time to time, which is hereby incorporated herein by reference and deemed to be an integral part of the Plan and corresponding Trust. The Committee, whose membership is to be determined by the Board of Directors, is the named fiduciary to act on behalf of the Company in the management and control of the Plan assets and to establish and carry out a funding policy consistent with the Plan objectives and with the requirements of any applicable law. The Committee shall carry out the Company's responsibility and authority: (a) To appoint as such term is defined in Section 3(38) of ERISA, one or more persons to serve as Investment Manager with respect to all or part of the Plan assets, including assets maintained under separate accounts of an insurance company. (b) To allocate the responsibilities and authority being carried out by the Committee among the members of the Committee. (c) To take any action appropriate to assure that the Plan assets are invested for the exclusive purpose of providing benefits to Participant and their Beneficiaries in accordance with the Plan and defraying reasonable expenses of administering the Plan, subject to the requirements of any applicable law. (d) To establish any rules it deems necessary. The Committee including each member and former member to whom duties and responsibilities have been allocated, may be indemnified and held harmless by the Employer with respect to any breach of alleged responsibilities performed or to be performed hereunder. 8.13 Indemnification. The Employer shall indemnify each individual who is an officer, director or Employee of the Employer and who may be called upon or designated to perform fiduciary duties or to exercise fiduciary authority or responsibility with respect to the Plan and shall save and hold him harmless from any and all claims, damages, and other liabilities, including without limitation all expenses (including attorneys' fees and costs), judgments, fines and amounts paid in settlement and actually and reasonably incurred by him in connection with any action, suit or proceeding, resulting from his alleged or actual breach of such duties, authority or responsibility, whether by negligence, gross negligence or misconduct, to the maximum extent permitted by law, provided, however, that this indemnification shall not apply with respect to any actual breach of such duties, authority or responsibility, if the individual concerned did not act in good faith and in the manner he reasonably believed to be in (or not opposed to) the best interest of the Employer, or, with respect to any criminal action or proceeding, had reasonable cause to believe his conduct was unlawful. 8.14 Resignation or Removal of the Committee. An Committee member may resign at any time by giving ten days' written notice to the Employer and the Trustee. The Board of Directors may remove any member of the Committee by giving written notice to him and the Trustee. Any such resignation or removal shall take effect at a date specified on such notice, or upon delivery to the Committee if no date is specified. IX: Miscellaneous 9.1 Nonguarantee of Employment. Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any Employee, or as a right of any Employee to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge any of its Employees, with or without cause. 9.2 Rights to Trust Assets. No Employee or Beneficiary shall have any right to, or interest in, any assets of the Trust Fund upon Termination of his employment or otherwise, except as provided from time to time under this Plan, and then only to the extent of the benefits payable under the Plan to such Employee out of the assets of the Trust Fund. All payments of benefits as provided for in this Plan shall be made solely out of the assets of the Trust Fund. 9.3 Nonalienation of Benefits. Except as may be permitted by law, and except as may be required under certain judgments and settlements described in Section 401(a)(13)(C) and (D) of the Code and as may be required or permitted by a qualified domestic relations order as defined in Section 414(p) of the Code or pursuant to a Plan loan pursuant to Section 6.9, benefits payable under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, including any such liability which is for alimony or other payments for the support of a spouse or former spouse, or for any other relative of the Employee, prior to actually being received by the person entitled to the benefit under the terms of the Plan; and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to benefits payable hereunder shall be void. The Trust Fund shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person entitled to benefits hereunder. 9.4 Discontinuance of Employer Contributions. In the event of permanent discontinuance of contributions to the Plan by the Employer, the Accounts of all Participants shall, as of the date of such discontinuance, shall continue to be fully-vested and nonforfeitable. 9.5 Lost Participants. If, after reasonable efforts of the Committee to locate a Participant or Beneficiary, including sending a registered letter, returned receipt requested to the last known address, the Committee is unable to locate the Participant or Beneficiary, then the amounts distributable to such Participant or Beneficiary shall, pursuant to applicable state or Federal laws, either (1) be treated as a forfeiture under the Plan and used to reduce the Company's contribution to the Plan (if a Participant or Beneficiary is located subsequent to a forfeiture, the benefits shall be reinstated by the Committee and shall not count as an Annual Addition under Section 415 of the Code), or (2) if the Plan is joined as a party to any escheat proceedings involving the unclaimed benefits, be paid in accordance with the final judgment as if the final judgment were a claim filed by the Former Participant or Beneficiary. X: Amendments And Action By Employer 10.1 Amendments Generally. The Company reserves the right to make from time to time any amendment or amendments to this Plan or Trust which do not cause any part of the Trust Fund to be used for, or diverted to, any purpose other than the exclusive benefit of Participants, Former Participants or their Beneficiaries; provided, however, that the Company may make any amendment it determines necessary or desirable, with or without retroactive effect, to comply with ERISA. No amendment to the Plan shall decrease a Participant's Accounts or eliminate an optional form of distribution except as may be permitted by the Code or ERISA. 10.2 Amendments to Vesting Schedule. Any amendment to the Plan which alters the vesting provisions set forth in Section 6.3 shall be deemed to include the following terms: (a) The vested percentage of a Participant in that portion of his Accounts under the Plan derived from Employer contributions made for Plan Years ending with or within the later of the date such amendment is adopted or the date such amendment becomes effective shall not be reduced; and (b) Each Participant having not less than three years of service at the later of the date such amendment was effective shall be permitted to elect irrevocably to have his vested percentage computed under the Plan without regard to such amendment. Such election must be made within 60 days from the later of (i) the date the amendment was adopted, (ii) the date the amendment became effective, or (iii) the date the Participant is issued written notice of such amendment by the Committee. Notwithstanding the preceding sentence, no election need be provided for any Participant whose nonforfeitable percentage in his Accounts derived from Employer contributions under the Plan, as amended at any time, cannot be less than such percentage determined without regard to such amendment. 10.3 Action by Company. Any action by the Company under this Plan shall be by a duly adopted resolution of the Board of Directors, or by any person or persons duly authorized by a duly adopted resolution of that Board to take such action. Any company that has adopted this Plan with approval of the Board of Directors shall be deemed, by the continuing participation of such company in the Plan to accept any action of the Board of Directors. XI: Successor Employer And Merger Or Consolidation Of Plans 11.1 Successor Employer. In the event of the dissolution, merger, consolidation or reorganization of the Employer, provision may be made by which the Plan and Trust will be continued by the successor; and, in that event, such successor shall be substituted for the Employer under the Plan. The substitution of the successor shall constitute an assumption of Plan liabilities by the successor, and the successor shall have all of the powers, duties and responsibilities of the Employer under the Plan. 11.2 Plan Assets. There shall be no merger or consolidation of the Plan with, or transfer of assets or liabilities of the Trust Fund to, any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants of the Plan, unless each Participant would (if either this Plan or the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if this Plan had then terminated), and unless a duly adopted resolution of the Board of Directors of the Company authorizes such merger, consolidation or transfer of assets. XII: Plan Termination 12.1 Right to Terminate. In accordance with the procedures set forth herein, the Company may terminate the Plan at any time in whole or in part. A distribution may not be made from the Plan due to the termination of the Plan if the Employer established or maintains a successor plan, as such terms are defined in Treas. Reg. Section 1.401(k)-1(d)(3). To the extent permitted by section 401(k) of the Code and regulations thereunder, in the event of the dissolution, merger, consolidation or reorganization of the Employer, the Plan shall terminate and the Trust Fund shall be liquidated unless the Plan is continued by a successor to the Employer in accordance with Section 11.1. 12.2 Liquidation of the Trust Fund. Upon the complete or partial termination of the Plan, the Accounts of all Participants affected thereby shall become fully vested and nonforfeitable, to the extent funded, and the Committee shall direct the Trustee to distribute the assets remaining in the Trust Fund, after payment of any expenses properly chargeable thereto, to Participants, Former Participants and Beneficiaries in proportion to their respective Account balances. 12.3 Manner of Distribution. To the extent that no discrimination in value results, any distribution after termination of the Plan may be made, in whole or in part, in cash, or in securities or other assets in kind, as the Committee may determine. All non-cash distributions shall be valued at fair market value at date of distribution. XIII: Determination Of Top-Heavy Status 13.1 General. Notwithstanding any other provision of the Plan to the contrary, for any Plan Year in which the Plan is Top-Heavy or Super Top-Heavy, as defined below, the provisions of this Article shall apply, but only to the extent required by section 416 of the Code and the regulations thereunder. 13.2 Top-Heavy Plan. This Plan shall be Top-Heavy and an Aggregation Group shall be Top-Heavy if as of the Determination Date for such Plan Year the sum of the Cumulative Accrued Benefits and Cumulative Accounts of Key Employees for the Plan Year exceeds 60% of the aggregate of all the Cumulative Accounts and Cumulative Accrued Benefits. The Cumulative Accrued Benefits and Cumulative Accounts of those Participants who have not performed any service for the Employer during the five year period ending on the Determination Date, shall be disregarded. (a) If the Plan is not included in a Required Aggregation Group with other plans, then it shall be Top-Heavy only if (i) when considered by itself it is Top-Heavy and (ii) it is not included in a Permissive Aggregation Group that is not a Top-Heavy Group. (b) If the Plan is included in a Required Aggregation Group with other plans, it shall be Top-Heavy only if the Required Aggregation Group, including any permissively aggregated plans, is Top-Heavy. 13.3 Super Top-Heavy Plan. This Plan shall be Super Top-Heavy if it would be Top-Heavy under Section 13.2, but substituting 90% for 60%. 13.4 Cumulative Accrued Benefits and Cumulative Accounts. The determination of the Cumulative Accrued Benefits and Cumulative Accounts under the Plan shall be made in accordance with Section 416 of the Code and the regulations thereunder. The determination of the Plan's Top-Heavy status shall relate to the proper Determination Date and Valuation Date. 13.5 Definitions. (a) "Aggregation Group" means either a Required Aggregation Group or a Permissive Aggregation Group. (b) "Determination Date" means with respect to any Plan Year, the last day of the preceding Plan Year or in the case of the first Plan Year of any plan, the last day of such Plan Year or such other date as permitted by the Secretary of the Treasury or his delegate. (c) "Employer" means the Company and each Participating Employer that adopts this Plan and all members of a controlled group of corporations (as defined in Section 414(b) of the Code), all commonly controlled trades or businesses (as defined in Section 414(c) of the Code), all affiliated service groups (as defined in Section 414(m) of the Code) and any other affiliated entities (as provided in Section 414(o) of the Code) of which the Employer is a part. (d) "Key Employee" means those individuals described in Section 416(i)(l) of the Code and the regulations hereunder. (e) "Non-Key Employee" means those individuals who are not Key Employees and includes former Key Employees. (f) "Permissive Aggregation Group" means a Required Aggregation Group plus any other plans selected by the Company provided that all such plans when considered together satisfy the requirements of Sections 401(a)(4) and 410 of the Code. (g) "Required Aggregation Group" means a plan maintained by the Employer in which a Key Employee is a participant or which enables any plan in which a Key Employee is a participant to meet the requirements of Code Section 401(a)(4) or Code Section 410. (h) "Valuation Date" means the first day of each Plan Year. 13.6 Vesting. For each Plan Year in which the Plan is Top-Heavy or Super Top-Heavy, the minimum vesting requirements of Code Section 416(b) shall be satisfied as set forth in Section 6.3. 13.7 Minimum Contributions. For each Plan Year in which the Plan is Top-Heavy or Super Top-Heavy, minimum Employer contributions for a Participant who is a Non-Key Employee shall be required to be made on behalf of each Participant who is employed by the Employer on the last day of the Plan Year, regardless of his level of Compensation and regardless of the number of Hours of Service he has completed during such Plan Year. The amount of the minimum contribution shall be the lesser of the following percentages of compensation (as defined in Section 2.1 for purposes of Annual Additions) but limited in amount under Section 401(a)(17) of the Code: (i) Three percent, or (ii) The highest percentage at which Company contributions are made under the Plan for the Plan Year on behalf of any Key Employee. (A) For purposes of subparagraph (ii), all defined contribution plans included in a Required Aggregation Group shall be treated as one plan. (B) Paragraph (ii) shall not apply if the Plan is included in a Required Aggregation Group and the Plan enables a defined benefit plan included in the Required Aggregation Group to meet the requirements of Section 401(a)(4) or 410 of the Code. For purposes of the minimum contribution requirement, any Pre-Tax Contributions made on behalf of a Key Employee shall be counted as Employer contributions with respect to such Key Employee, but any Pre-Tax Contributions made on behalf of a Non-Key Employee shall not be counted as Employer contributions with respect to such Non-Key Employee. This Section shall not apply to the extent a Participant other than a Key Employee is covered by another qualified plan(s) of the Employer and the Employer has provided that the minimum contribution requirements applicable to this Plan will be satisfied by the other plan(s). 13.8 Defined Benefit and Defined Contribution Plan Fractions. For any Plan Year beginning prior to January 1, 2000, in which the Plan is Super Top-Heavy, or for any Plan Year in which the Plan is Top-Heavy and the additional minimum contributions or benefits required under Section 416(h) of the Code are not provided, the dollar limitations in the denominator of the defined benefit plan fraction and defined contribution plan fraction as defined in Section 415(e) of the Code shall be multiplied by 100 percent rather than 125 percent. If the application of the provisions of this Section 13.8 would cause any Participant to exceed 1.0 for any Limitation Year, then the application of this Section 13.8 shall be suspended as to such Participant until such time as he no longer exceeds 1.0. During the period of such suspension, there shall be no Employer contributions, forfeitures or voluntary nondeductible contributions allocated to such Participant under this Plan or under any other defined contribution plan of the Employer and there shall be no benefit accruals for such Participant under any defined benefit plan of the Employer. Appendix A Participating Employers The Pep Boys - Manny, Moe & Jack The Pep Boys - Manny, Moe & Jack of California Pep Boys - Manny, Moe & Jack of Delaware, Inc. (effective 1/29/95) Pep Boys - Many, Moe & Jack of Puerto Rico, Inc. (effective 11/1/97) Appendix B Paste Chart Here Appendix C The Trustee shall, following the end of each Valuation Date, value all assets of the Trust Fund, allocate net gains or losses, and process additions to and withdrawals from Account balances in the following manner: 1. The Trustee shall first compute the fair market value of securities and/or the other assets comprising each investment fund designated by the Committee for direction of investment by the Participants and Former Participants of this Plan. Each Account balance shall be adjusted each business day by applying the closing market price of the investment fund on the current business day to the share/unit balance of the investment fund as of the close of business on the current business day. 2. The Trustee shall then account for any requests for additions or withdrawals made to or from a specific designated investment fund by any Participant or Former Participant, including allocations of contributions and forfeitures. In completing the valuation procedure described above, such adjustments in the amounts credited to such Accounts shall be made on the business day to which the investment activity relates. Contributions received by the Trustee pursuant to this Plan shall not be taken into account until the Valuation Date coinciding with or next following the date such contribution was both actually paid to the Trustee and allocated among the Accounts of Participants and Former Participants. 3. Notwithstanding paragraphs 1 and 2 above, in the event a pooled investment fund is created as a designated fund for Participant or Former Participant investment election in this Plan, valuation of the pooled investment fund and allocation of earnings of the pooled investment fund shall be governed by the Administrative Services Agreement for such pooled investment fund. It is intended that this section operate to distribute among each Participant Account in the Trust Fund, all income of the Trust Fund and changes in the value of the assets of the Trust Fund. EX-10 5 exh1022.txt AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT As of June 29, 2001 Congress Financial Corporation 1133 Avenue of the Americas New York, New York 10036 Ladies and Gentlemen: Congress Financial Corporation ("Lender") and The Pep Boys - Manny, Moe & Jack, a Pennsylvania corporation ("Pep Boys"), The Pep Boys Manny, Moe & Jack of California, a California corporation ("PBY-California"), Pep Boys Manny Moe & Jack of Delaware, Inc., a Delaware corporation ("PBY-Delaware"), and Pep Boys - - Manny, Moe & Jack of Puerto Rico, Inc., a Delaware corporation ("PBY-Puerto Rico"; and together with PBY, PBY-California and PBY-Delaware, each individually, a "Borrower" and collectively, "Borrowers" as hereinafter further defined), PBY Corporation, a Delaware corporation ("PBY") and Carrus Supply Corporation, a Delaware corporation ("Carrus" and, together with PBY, each individually, a "Guarantor" and collectively, "Guarantors" as hereinafter further defined) have entered into certain financing arrangements pursuant to which Lender may make loans and advances and provide other financial accommodations to Borrower as set forth in the Loan and Security Agreement, dated September 22, 2000, as amended by this Amendment No. 1 to Loan and Security Agreement (this "Amendment"), dated as of the date hereof (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement") and the agreements, documents and instruments at any time executed and/or delivered in connection therewith or related thereto, including, but not limited to, this Amendment, but excluding the Synthetic Lease Facility Agreements, (all of the foregoing together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the "Financing Agreements"). Borrowers and Guarantors have requested that Lender consent to the Borrowers entering into the Equipment Term Loan Documents (as defined below) and enter into certain amendments to the Financing Agreements in connection therewith. Lender is willing to agree to the foregoing, subject to the terms and conditions contained herein. In consideration of the foregoing, the mutual agreements and covenants contained herein, and other good and valuable consideration, the adequacy and sufficiency of which are hereby acknowledged, Lender, each Borrower and each Guarantor agree as follows: 1. Definitions. (a) Additional Definitions. As used herein, the following terms shall have the respective meanings given to them below and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation of, each of the following definitions: (i) "Equipment Term Loan Agent" shall mean GMAC Business Credit, LLC, as Agent, under the $90,000,000 Credit Agreement, dated as of June 29, 2001, among Pep Boys and GMAC Business Credit, LLC as Agent and Lender. (ii) "Equipment Term Loan Documents" shall mean each of the documents listed on the attached Schedule A, dated as of June 29, 2001 between Equipment Term Loan Agent, and the Borrowers, as in effect on June 29, 2001, and as such documents may be hereafter amended to the extent permitted under the Intercreditor Agreement dated as of June 29, 2001 by and between Equipment Term Loan Agent and Lender, as amended. (c) Interpretation. For purposes of this Amendment, unless otherwise defined herein, all terms used herein shall have the respective meanings assigned to them in the Loan Agreement. 2. Consents. Notwithstanding anything to the contrary contained in the Loan Agreement or the other Financing Agreements, and subject to the terms and conditions contained herein and the other Financing Agreements, Lender hereby consents to the Borrowers entering into the Equipment Term Loan Documents. 3. Amendments to Loan Agreement. (a) Use of Proceeds. Section 6.6(b)(ii) of the Loan Agreement is hereby deleted in its entirety and the following substituted therefor: "(ii) for other working capital purposes (which may include the payment of current maturities of long-term indebtedness permitted to be incurred hereunder)." (b) Encumbrances. Section 9.8(a) of the Loan Agreement is hereby amended by adding thereto, immediately following Section 9.8(a)(xv), the following new subsection: "(xvi") liens and security interests on equipment, real property, fixtures or goods (but excluding Inventory) of Pep Boys, pursuant to, and as more particularly described in, the Equipment Term Loan Documents." (i) Section 9.8(b) of the Loan Agreement is hereby amended to replace the reference in the first sentence to "Sections 9.8 (a)(i) through (xiv)" with "Sections 9.8 (a)(i) through (xiv) and Section 9.8(a)(xvi)." (c) Indebtedness. Section 9.9 of the Loan Agreement is hereby amended by adding thereto, immediately following Section 9.9(p), the following new subsection: "(q) Indebtedness of Pep Boys pursuant to the Equipment Term Loan Documents." (d) Guarantees. Section 9.10 of the Loan Agreement is hereby amended by adding thereto, immediately following Section 9.10(q), the following new subsection: "(r) Indebtedness of The Pep Boys Manny Moe & Jack of California and Pep Boys-Manny, Moe & Jack of Delaware, Inc. under the Guaranty, dated as of June 29, 2001, as in effect on such date, in favor of the Equipment Term Loan Agent, guaranteeing the obligations of Pep Boys, provided, that, all of the conditions set forth in Sections 9.10(n)(i) and (ii) are satisfied with respect thereto." 4. Collateral. To secure payment and performance of all obligations, each Borrower and Guarantor hereby grants to Lender and hereby confirms, reaffirms and restates its prior grant to Lender under the Loan Agreement and the other Financing Agreements, a continuing security interest and lien upon, and a right of set-off against, and hereby assigns to Lender, as security, all of the Collateral. 5. Additional Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by each Borrower and Guarantor to Lender pursuant to the other Financing Agreements, each Borrower and Guarantor hereby jointly and severally represents, warrants and covenants with and to Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Financing Agreements: (a) No Event of Default or condition or event which with notice or passage of time or both would constitute an Event of Default exists or has occurred as of the date of this Amendment (after giving effect to the amendments made and consents and waivers granted by Lender pursuant to this Amendment). As of the date of any Borrower entering into the Equipment Term Loan Documents and after giving effect to such transaction, the aggregate amount of outstanding Exempted Debt represented by such transaction, when aggregated with all other outstanding Exempted Debt shall not exceed the Exempted Debt Limit, and such transaction is and shall be in compliance with the terms and conditions set forth in the Pep Boys Indentures. (b) This Amendment and each other agreement or instrument to be executed and delivered by Borrowers and Guarantors hereunder has been duly executed and delivered by each Borrower and Guarantor and is in full force and effect as of the date hereof, and the agreements and obligations of each Borrower contained herein and therein constitute legal, valid and binding obligations of each Borrower and Guarantor enforceable against each Borrower and Guarantor in accordance with their terms. (c) Neither the execution and delivery of the Equipment Term Loan Documents, nor the consummation of the transactions contemplated by the Equipment Term Loan Documents, nor compliance with the provisions of the Equipment Term Loan Documents or instruments thereunder shall result in (i) the creation or imposition of any lien, claim, charge or encumbrance upon any of the Collateral, except in favor of Lender or as expressly permitted by Section 9.8 of the Loan Agreement (after giving effect to this Amendment) and by the other Financing Agreements or (ii) the incurrence, creation, assumption of any Indebtedness of Borrower or Guarantor, except as expressly permitted under Section 9.9 and 9.10 of the Loan Agreement (after giving effect to this Amendment) and by the other Financing Agreements. (d) No court of competent jurisdiction has issued any injunction, restraining order or other order which prohibits consummation of the transactions contemplated in respect of the Equipment Term Loan Documents, and no governmental or other action or proceeding has been threatened or commenced in the United States of America, seeking any injunction, restraining order or other order which seeks to void or otherwise modify the transactions described in the Equipment Term Loan Documents. Neither the execution and delivery of the Equipment Term Loan Documents, nor the consummation of the transactions contemplated by the Equipment Term Loan Documents, nor compliance with the provisions thereof, shall violate any Federal or state securities laws or any other law or regulation or any order or decree of any court or governmental instrumentality in respect or shall conflict with or result in the breach of, or constitute a default in any respect under, any indenture, or other material mortgage, agreement, instrument or undertaking to which any Borrower or Guarantor is a party or may be bound, or violate any provision of the organizational documents of any Borrower or Guarantor. (e) Each Borrower and Guarantor shall take such steps and execute and deliver, and cause to be executed and delivered, to Lender, such additional UCC financing statements and termination statements, and other and further agreements, documents and instruments as Lender may require in order to more fully evidence, perfect and protect Lender's security interest in Collateral. (f) The Equipment Term Loan Documents have been duly authorized, executed and delivered by each Borrower and are in full force and effect as of the date hereof. 6. Conditions to Effectiveness of Consent and Amendment. The effectiveness of the amendments and consents pursuant to this Amendment shall be subject to the satisfaction of each of the following conditions precedent: (a) Lender shall have received an executed original or executed original counterparts of this Amendment (as the case may be), duly authorized, executed and delivered by the respective parties hereto; (b) Lender shall have received an executed original or executed original counterparts of the Intercreditor Agreement between Equipment Term Loan Agent and Lender, duly authorized, executed and delivered by the respective parties thereto; (c) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgments, releases, terminations and such other documents and agreements from third persons which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral; (d) Lender shall have received, in form and substance satisfactory to Lender, a true and complete copy of the Equipment Term Loan Documents, duly authorized, executed and delivered by and to the appropriate parties thereto and all notices, instruments, documents and agreements relating thereto, including all exhibits and schedules thereto, together with evidence that the transactions contemplated under the terms and conditions of the Equipment Term Loan Documents have been consummated prior to or contemporaneously with the execution of this Amendment; and (e) no Event of Default shall exist or have occurred and no event or condition shall have occurred or exist which notice or passage of time or both would constitute an Event of Default (after giving effect to the amendments made and consents granted by Lender pursuant to this Amendment). 7. Additional Events of Default. The parties hereto acknowledge, confirm and agree that the failure of any Borrower or Guarantor to comply with the covenants and agreements contained herein shall constitute an Event of Default under the Financing Agreements (subject to the applicable cure period, if any, with respect thereto provided for in the Loan Agreement as in effect on the date hereof). 8. Effect of this Amendment. Except as modified pursuant hereto, no other waivers, changes or modifications to the Financing Agreements are intended or implied, and in all other respects, the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of conflict between the terms of this Amendment and the other Financing Agreements, the terms of this Amendment shall control. 9. Further Assurances. The parties hereto shall execute and deliver such additional documents and take such additional actions as may be necessary to effectuate the provisions and purposes of this Amendment. 10. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the laws of the State of New York (without giving effect to principles of conflicts of laws). 11. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. Any acknowledgment or consent contained herein shall not be construed to constitute a consent to any other or further action by any Borrower or Guarantor or to entitle any Borrower or Guarantor to any other consent. The Loan Agreement and this Amendment shall be read and construed as one agreement. 12. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties thereto. Very truly yours, /s/ THE PEP BOYS - MANNY, MOE & JACK /s/ THE PEP BOYS MANNY MOE & JACK OF CALIFORNIA /s/ PEP BOYS - MANNY, MOE & JACK OF DELAWARE, INC. /s/ PEP BOYS - MANNY, MOE & JACK OF PUERTO RICO, INC. GUARANTORS /s/ PBY CORPORATION /s/ CARRUS SUPPLY CORPORATION AGREED AND ACCEPTED: /s/ CONGRESS FINANCIAL CORPORATION SCHEDULE A Equipment Term Loan Documents 1. $90,000,000 Credit Agreement dated as of June 29, 2001 among The Pep Boys-Manny, Moe & Jack and GMAC Business Credit, LLC as Lead Arranger, Syndication Agent and as the Agent for the Lenders and as a Lender. 2. Security Agreement dated as of June 29, 2001 by The Pep Boys-Manny, Moe & Jack, The Pep Boys Manny Moe & Jack of California and Pep Boys-Manny, Moe & Jack of Delaware, Inc. in favor of GMAC Business Credit, LLC as Lead Arranger, Syndication Agent and as Agent. 3. Guaranty dated as of June 29, 2001 by The Pep Boys Manny Moe & Jack of California and Pep Boys-Manny, Moe & Jack of Delaware, Inc. in favor of GMAC Business Credit, LLC. 4. Mortgages and Deeds of Trust dated as of June 29, 2001 in favor of GMAC Business Credit, LLC encumbering the Mortgaged Properties comprising the Collateral (each as defined in the Credit Agreement referenced in item 1 above), each substantially in the form of Exhibit M to the Credit Agreement. EX-10 6 exh1023.txt 10/11/93 11/2/93 2/28/94 9/21/94 12/27/94 3/7/96 1/10/97 1/30/97 12/18/97 5/12/00 4/25/01 9/10/01 The Pep Boys - Manny, Moe & Jack Pension Plan Table Of Contents Article I. Introduction 1 Article II. Definitions 3 Article III. Participation And Service 15 Article IV. Plan Benefits 18 Article V. Vesting 29 Article VI. Funding 30 Article VII. Amendment And Termination 32 Article VIII. Administration 34 Article IX. Limitations On Contributions And Benefits 41 Article X. Merger, Transfer Or Consolidation Of Plans 46 Article XI. Miscellaneous 47 Article XII. Determination Of Top-Heavy Status 49 Article XIII. ERISA Transition Provisions 53 Appendix A 60 Article I. Introduction THE PEP BOYS - MANNY, MOE & JACK Pension Plan (the "Plan") is established and maintained in accordance with the terms of this instrument. The assets of this Plan are held by the Trustee in accordance with the terms of the Trust Agreement, which is considered to be an integral part of this Plan. Except as provided herein or in the Trust Agreement, the Trustee has the exclusive authority to manage and control the assets of this Plan. Except as otherwise noted herein, this amended and restated version of the Plan applies to those Participants who are credited with an Hour of Service with the Employer on or after January 1, 1989. The Plan is further amended effective January 1, 1989 to comply with the Tax Reform Act of 1986, as amended, ("TRA 86") except for those provisions that became effective in years prior to 1989 as described below, or as specifically noted in the Plan. * Titles XI and XVIII of TRA '86; * Subtitle C of Title IX of OBRA '86; * Optional Form of Benefit Regulations; * Temporary regulations under Section 414(q) and (s); * Proposed regulations under Sections 401(a)(9); * Notice 87-20, regarding amendments to Sections 411(a)(11)(B) and 417(e)(3) of the Code made by Section 1139 of TRA '86; and * Notice 87-21, regarding changes to Section 415 of the Code made by TRA '86. Effective January 1, 1997 (except as otherwise indicated herein for specified provisions or as required by law), the Plan is further amended to reflect: * The Uniformed Services and Reemployment Rights Act of 1994; * The Uruguay Round Agreement Act ("GATT") of 1994; * The Small Business and Job Protection Act of 1996; * The Taxpayer Relief Act of 1997; and * The Internal Revenue Service Restructuring and Reform Act of 1998. The rights of those individuals (or their beneficiaries) who terminated employment prior to the effective date of any changes to the Plan, are governed by the terms and conditions of the Plan then in effect. Article II. Definitions 2.1 Definitions. When used in this Plan, the following initially capitalized words and phrases shall have the meanings indicated herein: Accrued Annual Pension means as of any applicable date, the pension determined in accordance with the provisions of Section 4.1 that the Participant would be entitled to receive commencing on his Normal Retirement Date based on his Compensation and Years of Credited Service through the applicable date. An Accrued Annual Pension to which a Former Participant is entitled shall not be increased or decreased by reason of any amendments to the Plan adopted on or after the date he ceased to be a Participant or the date of his Termination. The Accrued Annual Pensions of all Participants shall be frozen as of December 31, 1996. Actuarial Equivalent(ce) or Actuarially Equivalent means a benefit of equivalent current value to the benefit which would otherwise have been provided on the basis of the following assumptions and determined as of the applicable Annuity Starting Date: (a) For lump sum distributions, the UP-1984 Table of Mortality and the immediate or deferred interest rate, as applicable, used by the Pension Benefit Guaranty Corporation (in effect on January 1 of the Plan Year in which the distribution occurs) for valuing benefits in pay status for plans terminating at the same time, shall be used. The Actuarial Equivalent value of a lump sum distribution that is payable to a Former Participant prior to Early Retirement Date, shall be the Actuarial Equivalent value of the benefit determined as of Normal Retirement Date (using the applicable PBGC rate). (b) For purposes of any lump sum distribution that is made to any Participant on or after January 1, 1998, the Actuarial Equivalent value for such lump sum distribution shall be determined by using the annual interest rate on 30-year Treasury securities, as specified by the Commissioner, that is in effect for the month of November which precedes the applicable Plan Year (the "stability period") in which the lump sum distribution is made, and by using the applicable mortality table under Section 417(e)(3) of the Code and Treasury Regulation Section 1.417(e)-1(d)(2). The Actuarial Equivalent value of a lump distribution that is payable to a Former Participant prior to Early Retirement Date, shall be the Actuarial Equivalent value of the benefit determined as of Normal Retirement Date (using the applicable 30-year Treasury security rate). (c) For conversions under Section 4.6(b), for optional forms paid according to Section 4.6(e), early retirement under Section 4.3, conversions with respect to annuity payments made pursuant to qualified domestic relations orders and adjustments under Section 9.4, the UP-1984 Table of Mortality at 7 1/2 percent interest, shall be used. For purposes of establishing present value for Top-Heavy determinations, interest at 7 1/2 percent shall be used and the UP-1984 Table of Mortality. (d) Effective January 1, 2000, for purposes of Section 9.4 regarding conversion of an annuity that is not subject to Section 417(e) of the Code, the greater of (a) the equivalent annual benefit using interest at 7 1/2% and the UP-1984 Table of Mortality; or (b) the equivalent annual benefit using interest at 5% and the applicable mortality table under Section 417(e)(3) of the Code and Treas. Reg. Section 1.417(e)-1(d)(2) shall apply. Effective January 1, 2000, for purposes of Section 9.4 regarding conversion of an annuity that is subject to Section 417(e) of the Code, the greater of (a) the equivalent annual benefit using interest at 7 1/2% and the UP-1984 Table of Mortality; or (b) the equivalent annual benefit using the annual interest rate for 30-year Treasury Securities as specified by the Commissioner of the Treasury, in effect for the month of November (the "look back month") of the Plan Year preceding the Plan Year of determination (the "stability period") and the applicable mortality table under Section 417(e)(3) of the Code and Treas. Reg. Section 1.417(e)-1(d)(2), shall apply. Actuary means an enrolled actuary qualifying as such in accordance with Title III of ERISA or any firm or entity employing such enrolled actuaries. Administrative Committee means the individual or group of individuals appointed to manage the administration of this Plan. Affiliate means any employer which has not adopted this Plan and is not a Participating Employer, but which is included as a member with the Employer in a controlled group of corporations, or which is a trade or business (whether or not incorporated) included with the Employer in a brother-sister group or combined group of trades or businesses under common control or which is a member of an affiliated service group in which the Employer is a member, determined in each instance in accordance with the appropriate sections of the Code. Annuity Starting Date means the first day on which benefits are payable as an annuity or in the case of benefits not payable as an annuity, the first day on which all events have occurred which entitle the Participant or Former Participant to the benefits. Beneficiary means the individual or entity designated to receive any death benefits payable under the Plan. Anything herein to the contrary notwithstanding, in the case of a married Participant or Former Participant, no Beneficiary designation which designates a Beneficiary other than the Participant's Spouse shall be effective unless such designation constitutes a valid waiver of the qualified joint and survivor annuity. In the event that the Participant failed to designate a Beneficiary or is predeceased by all designated primary and contingent Beneficiaries, death benefits under this Plan shall be payable to the following classes of recipients, each class to take to the exclusion of all subsequent classes, and all members of each class to share equally: (1) Surviving Spouse; (2) lineal descendants (including adopted children and step-children), by right of representation; (3) surviving parents; (4) surviving brothers and sisters; (5) Participant's estate. Board of Directors means the board of directors of the Company. Break in Service or One-Year Break in Service means a Plan Year during which an individual is not credited with more than 500 Hours of Service. An Eligible Employee will not be deemed to have incurred a Break in Service if he is absent from employment by reason of (1) pregnancy of the Eligible Employee, (2) birth of a child of the Eligible Employee, (3) placement of a child in connection with the adoption of the child by an individual, or (4) caring for the child during the period immediately following the birth or placement for adoption. During the period of absence the Eligible Employee shall be credited with the number of hours that would be generally credited but for such absence or if the general number of work hours is unknown, eight Hours of Service for each normal workday during the leave (whether or not approved). These hours shall be credited to the Plan Year in which the leave of absence commences if crediting of such hours is required to prevent the occurrence of a Break in Service in such computation period, and in other cases in the immediately following Plan Year. No more than 501 Hours of Service shall be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). An Employee shall not be deemed to have incurred a Break in Service if he is on an unpaid leave of absence under the Family and Medical Leave Act and returns to employment within the time period prescribed by law. Code or IRC means the Internal Revenue Code of 1986, as amended, and includes any regulations issued thereunder. Company means the PEP BOYS - MANNY, MOE & JACK, a Pennsylvania corporation. Compensation means, effective with respect to any Participant who is credited with an Hour of Service on or after January 1, 1993, for any Plan Year, total income reported to the Participant as wages for the Employee on Box 1 of Form W-2 (Box 10 prior to 1993) less any expense reimbursements and taxable fringe benefits, including any amounts that the Participant has authorized the Employer to make on his behalf to a 401(k) plan as elective deferrals or to a cafeteria plan under Section 125 of the Code. Effective January 1, 1989, with respect to Participants who Terminated employment on or after that date, Compensation shall be limited to the amount permitted under the applicable limitation of Section 401(a)(17) of the Code, as amended, in effect for any Plan Year (adjusted each year to reflect such higher amount as may be permitted each year under the Code). Notwithstanding the foregoing, in applying the limits imposed by Section 401(a)(17) for Plan Years beginning on or after January 1, 1989 and ending on or before January 1, 1994, with respect to Participants who Terminated employment on or after January 1, 1989, Compensation up to $235,840 may be taken into account for each Plan Year. Effective January 1, 1994, Compensation shall be limited to $150,000 (adjusted each year to reflect such higher amount as may be permitted each year under the Code). Direct Rollover means a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. Disability means a medically determinable physical or mental impairment of a permanent nature which prevents a Participant from performing his customary employment duties without endangering his health. Distributee means a Participant or Former Participant. In addition, the Participant's or Former Participant's Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are Distributees with regard to the interest of the Spouse or former Spouse. Early Retirement Age means the date on which a Participant has attained age 55 and completed five Years of Credited Service. Early Retirement Date means the first day of any month following attainment of his Early Retirement Age. Effective Date of this amended and restated Plan means January 1, 1989, except as otherwise provided in the Plan. The original effective date of the Plan is December 15, 1942. Eligible Employee means an Employee performing services for the Employer, including any officer or director who shall so qualify. Eligible Employee shall not include any individual who qualifies as a Leased Employee and any individual whose terms and conditions of employment are covered by a collective bargaining agreement that does not provide for participation in the Plan. Notwithstanding the foregoing, (i) any individual initially hired or rehired by the Employer or an Affiliate on or after February 2, 1992, shall not be deemed to be an Eligible Employee and shall not be eligible to participate or resume participation in the Plan; and (ii) any individual whose employment status as of February 1, 1992, is covered by a collective bargaining agreement that does not provide for participation in the Plan and whose employment status changes on or after February 2, 1992 so that he (A) is no longer covered by a collective bargaining agreement that does not provide for participation in the Plan, and (B) would otherwise be eligible to participate in the Plan, shall not be deemed to be an Eligible Employee and shall not be eligible to participate in the Plan. Eligible Retirement Plan means: (i) an individual retirement account described in Section 408(a) of the Code; (ii) an individual retirement annuity described in Section 408(b) of the Code; (iii) an annuity plan described in Section 403(a) of the Code; or (iv) a qualified trust described in Section 401 (a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving Spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. Eligible Rollover Distribution means any distribution of all or any portion of the balance to the credit of the Distributee, but does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); the portion of any hardship distribution described in Section 401(k)(2)(B)(i)(IV) of the Code; and any other distribution that does not qualify as an Eligible Rollover Distribution, as defined in Section 401(a)(31) (C) of the Code. Employee means any individual employed by the Employer as a common law employee, but does not include any individual that the Employer treats as an independent contractor even if such individual would be classified as an employee of the Employer under common law. Employer means the Company and any Participating Employer, which with the approval of the Board of Directors, has adopted this Plan. Entry Date means January 1 and July 1 of each Plan Year. ERISA means the Employee Retirement Income Security Act of 1974, as amended, and includes any regulations issued thereunder. Final Average Compensation means the average monthly Compensation for the five consecutive Plan Years, out of the last ten Plan Years that a Participant completes, coincident with or prior to the date of determination (or actual period of employment if shorter than five years) in which a Participant was employed by the Employer for which such average is the highest. Former Participant means any Eligible Employee, who was a Participant in the Plan and with respect to whom a benefit remains payable from the Plan. Fund means the trust or account consisting of the assets of the Plan. Highly Compensated Employee means the individuals in (a) and (b): (a) Employees who were five percent owners, as defined in Section 416(i)(1)(iii) of the Code, at any time during the determination year or the look-back year; and (b) Employees with compensation greater than $80,000 (as adjusted at the same time and in the same manner as Section 415(d) of the Code) during the look-back year. (c) For purposes of determining whether an Employee is highly compensated, the determination year is the Plan Year for which the determination is being made. The look-back year is the twelve month period preceding the determination year. (d) For purposes of defining Highly Compensated Employee, compensation means compensation as defined in Section 415(c)(3) of the Code, including elective contributions. The dollar limits are those for the calendar year in which the determination or look-back year begins. (e) The Plan shall take into account Employees of all companies aggregated under Sections 414(b), (c), (m) and (o) of the Code, in determining who is highly compensated. Also, for this purpose, the term "Employee" shall include Leased Employees. Hours of Service means: (a) Performance of Duties. The actual hours for which an Eligible Employee is paid or entitled to be paid for the performance of duties by the Employer; (b) Nonworking Paid Time. Each hour for which an Eligible Employee is paid or entitled to be paid by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity, disability, layoff, jury duty, military duty or leave of absence; provided, however, no more than 501 Hours of Service shall be credited to an Eligible Employee on account of any single continuous period during which he performed no duties; and provided further that no credit shall be given for payments made or due under a plan maintained solely for the purpose of complying with applicable workers' or unemployment compensation or for payments which solely reimburse an Eligible Employee for medical or medically related expenses incurred by the Eligible Employee; (c) Back Pay. Each hour for which pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer; provided, however, Hours of Service credited under paragraphs (a) and (b) above shall not be recredited by operation of this paragraph; (d) Equivalencies. The Administrative Committee shall have the authority to adopt any of the following equivalency methods for counting Hours of Service that are permissible under regulations issued by the Department of Labor: (1) Working Time; (2) Periods of Employment or (3) Earnings. The adoption of any equivalency method for counting Hours of Service shall be evidenced by a certified resolution of the Administrative Committee, which shall be attached to and made part of the Plan. Such resolution shall indicate the date from which such equivalency shall be effective. (e) Miscellaneous. Unless the Administrative Committee directs otherwise the methods of determining Hours of Service when payments are made for other than the performance of duties and of crediting such Hours of Service to Plan Years set forth in Regulations 2530.200b-2(b) and (c) promulgated by the Secretary of Labor, shall be used hereunder and are incorporated by reference into the Plan. Participants on military leaves of absence who are not directly or indirectly compensated or entitled to be compensated by the Employer while on such leave shall be credited with Hours of Service as required by Section 9 of the Military Selective Service Act. Notwithstanding any other provision of this Plan to the contrary, an Eligible Employee shall not be credited with Hours of Service more than once with respect to the same period of time. Eligible Employees shall be credited with any Hours of Service required to be credited to them in accordance with the Family and Medical Leave Act and The Uniformed Services Employment and Reemployment Rights Act of 1994. Investment Manager means an investment adviser, bank or insurance company which meets the requirements of Section 3(38) of ERISA. Leased Employee means any person who is not an Employee of the Employer and who provides services to the Employer if: (a) such services are provided pursuant to an agreement between the Employer and any leasing organization; (b) such person has performed such services for the Employer (or for the Employer and Affiliates) on a substantially full-time basis for a period of at least one year; and (c) such services are performed under primary direction or control of the Employer. Notwithstanding the foregoing, a person shall not be deemed to be a Leased Employee if he is covered by a plan maintained by the leasing organization and Leased Employees (as determined without regard to this paragraph) do not comprise more than 20% of the Employer's nonhighly compensated workforce. Such plan must be a money purchase pension plan providing for nonintegrated employer contributions of ten percent of compensation and also providing for immediate participation and vesting. Limitation Year means the Plan Year. Normal Annual Pension means the lifetime annual pension determined in accordance with the provisions of Section 4.1. Normal Retirement Age means the Participant's 65th birthday. Normal Retirement Date means the first day of the month coincident with or next following Normal Retirement Age. Participant means an Eligible Employee participating in the Plan in accordance with the provisions of Article III. Participating Employer means any direct or indirect subsidiary of the Company or any other entity designated by the Board of Directors, which has adopted this Plan with the approval of the Company. Participating Employers shall be limited to those direct or indirect subsidiaries of the Company that would be Affiliates except for the fact that they have adopted the Plan. Plan means THE PEP BOYS - MANNY, MOE & JACK Pension Plan, as herein set forth and as it may be amended hereafter. This Plan also includes the PEP BOYS - MANNY, MOE & JACK of California Pension Plan, the assets and liabilities of which were merged with and into this Plan, effective as of December 31, 1987. Plan Year means the period from January 1 through December 31 of each year. Spouse (Surviving Spouse) means the spouse or surviving spouse of the Participant or Former Participant; provided that a former spouse will be treated as the spouse or surviving spouse to the extent provided under a qualified domestic relations order as described in Section 414(p) of the Code. Terminated (or Termination) means a termination of employment with the Employer or with an Affiliate for any reason other than a transfer of employment from the Employer to an Affiliate or from an Affiliate to another Affiliate. Trust Agreement means the agreements forming a part of the Plan pursuant to which the assets of the Plan are held and managed by the Trustee. Trustee means the trustee or trustees named in the Trust Agreement, or any successor thereto. Years of Credited Service means the periods of employment taken into account in determining a Participant's Accrued Annual Pension or Normal Annual Pension under this Plan. A Participant shall be credited with a Year of Credited Service for each Plan Year in which he has completed 1,000 Hours of Service with the Employer. A Participant shall be credited with a partial Year of Credited Service, to the completed month, for the portion of a Plan Year during which he was not a Participant for the entire Plan Year, provided that the number of Hours completed by the Participant during such portion of a Plan Year equal or exceed the product of (i) 83.33 and (ii) the number of full months the Participant was actually a Plan Participant in such Plan Year. A Participant who was employed by the Employer between December 15, 1978 and December 31, 1978, shall be credited with .04167 of a Year of Credited Service for such period. A Participant shall not earn Years of Credited Service prior to the Entry Date on which he first became a Participant except that any Participant who was employed on December 14, 1976, shall earn Years of Credited Service for his pre-participation eligibility waiting period to the extent that such service would have been credited as Years of Credited Service, if the eligibility requirements in effect on December 15, 1976 had been in effect when such Participant's employment commenced with the Employer. Effective as of December 31, 1996, a Participant shall not earn any additional Years of Credited Service under the Plan. Year of Service means (a) when applied to eligibility provisions, (i) the 12-month period commencing on an individual's date of employment with the Employer in which he is credited with 1,000 or more Hours of Service, and (ii) thereafter, the Plan Year which includes the first anniversary of the Eligible Employee's initial date of employment and successive anniversaries of such Plan Year, in which he is credited with 1,000 or more Hours of Service; and (b) when applied to vesting provisions, each Plan Year in which an Eligible Employee is credited with 1,000 Hours of Service. An Employee who was credited with 1,000 Hours of Service in the 12 consecutive month period beginning (i) December 15, 1977 and ending on December 14, 1978; and (ii) beginning January 1, 1978 and ending December 31, 1978, shall earn a Year of Service for such additional time periods. Years of Service completed prior to December 15, 1976 shall be disregarded if such service would have been disregarded under the break in service rules then in effect. For purposes of determining an Eligible Employee's eligibility to participate in the Plan pursuant to Section 3.1 and vesting pursuant to Section 5.1, Years of Service shall include an Eligible Employee's Years of Service (i) as a Leased Employee of the Employer or an Affiliate (after the employer became an Affiliate) and not described in Section 414(n)(5) or (ii) as an Employee of the Employer or an Affiliate (after the employer became an Affiliate) covered by the terms of a collective bargaining agreement that does not provide for participation in this Plan, (iii) while a common law Employee of the Employer who is not deemed to be an Eligible Employee or as a common law Employee of an Affiliate, or (iv) while an Employee of a predecessor organization of the Employer in any case where the Employer maintains the plan of such predecessor organization. 2.2 Construction. The masculine gender, where appearing in this Plan, shall be deemed to include the feminine gender, unless the context clearly indicates to the contrary. Titles of sections are inserted for convenience and shall not affect the meaning or construction of the Plan. Article III. Participation And Service 3.1 Eligibility to Participate. (a) Eligibility Prior to February 2, 1992. Each Eligible Employee who was a Participant in the Plan on December 31, 1988 shall continue as a Participant on January 1, 1989 if he is still employed on that date. Each other Eligible Employee shall commence participation in the Plan on the Entry Date coincident with or next following attainment of age 21 and completion of one Year of Service. (b) Eligibility After February 1, 1992. Any individual hired or rehired by the Employer or an Affiliate on or after February 2, 1992, shall not be eligible to commence or resume participation in the Plan. Notwithstanding any provision of this Plan to the contrary, any individual whose employment status as of February 1, 1992, is covered by the terms of a collective bargaining agreement that does not provide for participation in the Plan and whose employment status changes on or after February 2, 1992 so that he is no longer covered by a collective bargaining agreement that does not provide for participation in the Plan, shall not be eligible to participate in the Plan. 3.2 Cessation of Participation. An Eligible Employee shall cease to be a Participant upon the earliest of: (a) the date on which he retires under the retirement provisions of the Plan; (b) the date on which he ceases to satisfy the eligibility requirements of Section 3.1; or (iii) the date on which his employment Terminates for any reason including death, or Disability. 3.3 Changes in Status and Transfers to Affiliates. (a) An Employee who transfers from an Affiliate to the Employer and becomes an Eligible Employee or an Employee of the Employer who becomes an Eligible Employee shall be eligible to participate in the Plan on the date as of which he has satisfied the eligibility requirements of Section 3.1. He shall commence participation in the Plan on the later of his transfer or change in status or the Entry Date next following the date he has satisfied the eligibility requirements of Section 3.1. (b) A Participant's status as such under the Plan shall be changed, as provided below, upon and after the occurrence of: (1) In the case of a Participant whose employment was not covered by a collective bargaining agreement at the time the Participant became such, the date as of which the Participant's employment becomes covered by a collective bargaining agreement that excludes such individual from participation in this Plan; (2) The date as of which a Participant becomes a Leased Employee; or (3) The date as of which a Participant is transferred to or hired by an Affiliate. (c) The Participant's status under the Plan upon and after the occurrence of one of the above events shall be modified as follows: (1) The Participant's Accrued Annual Pension shall not be increased or decreased thereafter by reason of the Participant's continued employment with the Employer or with an Affiliate or by reason of any increases or decreases in Compensation after such date; (2) The Participant will remain eligible for the benefits provided by Article IV, if at the time his employment with the Employer or an Affiliate ceases, he has satisfied the age, service and other requirements of this Plan for such benefits; and (3) The Participant will continue to be credited with additional Years of Service if he continues to be employed by the Employer or an Affiliate except as otherwise provided for under the Plan. 3.4 Reemployment. A Participant who Terminated employment with the Employer and is reemployed by the Employer shall again be eligible to become a Participant on the date he again performs an Hour of Service for the Employer. A former Eligible Employee who is reemployed by the Employer prior to incurring five consecutive one year Breaks in Service, shall become eligible to become a Participant on the Entry Date he has satisfied the age and service requirements of Section 3.1 or the date he is reemployed by the Employer, if later. A former Eligible Employee who is reemployed after incurring five consecutive one year Breaks in Service shall be treated as a new Eligible Employee and must meet the requirements of Section 3.1 for purposes of eligibility to participate. Article IV. Plan Benefits 4.1 Normal Retirement. A Participant may retire on his Normal Retirement Date. Each Participant who retires on his Normal Retirement Date, and who has not received benefits, under other provisions of the Plan, shall be entitled to receive the greater of a Normal Annual Pension or an Accrued Annual Pension determined as of any previous date on which the Participant was eligible for early retirement pursuant to Section 4.3. Any Former Participant whose rights and interests in the Plan are vested, and who has not received benefits under other provisions of the Plan, shall be entitled to receive an Accrued Annual Pension commencing on his Normal Retirement Date and continuing during his lifetime. The Plan may suspend the benefits of a Participant who continues in the service of the Employer after Normal Retirement Date, provided that if such Participant is an Eligible Employee, such Eligible Employee receives payment from the Employer for 80 Hours of Service during a calendar month. Any Participant whose Normal Annual Pension is suspended shall be notified in writing by personal delivery or first class mail during the first month or payroll period for which payment of benefits is suspended. The Normal Annual Pension payable to each Participant or Former Participant shall be equal to .008 of the Participant's Final Average Compensation, multiplied by his Years of Credited Service, multiplied by 12. Notwithstanding the foregoing, in no event shall (i) a Participant's monthly benefit hereunder exceed $1,666.67; nor (ii) a Participant's monthly benefit hereunder be less than his Accrued Annual Pension as of December 31, 1988, (with Final Average Compensation and Years of Credited Service determined as of such date) without the limitations on Compensation that became effective on January 1, 1989. In addition, the monthly benefit payable to any Participant who is employed by the Employer on or after January 1, 1994 shall not be less than his Accrued Annual Pension determined as of December 31, 1993, (with Final Average Compensation and Years of Credited Service determined as of such date) based on the limitations on Compensation that were in effect under Section 401(a) (17) of the Code prior to January 1, 1994. A Participant or Former Participant to whom Article XIII of the Plan relates, shall receive the greater of the benefit described in this Section 4.1 or the benefit set forth in Section 13.2. Effective as of December 31, 1996, the Normal Annual Pensions of all Participants under the Plan shall be frozen and no additional benefits shall accrue after that date. 4.2 Deferred Retirement. A Participant who continues in employment beyond his Normal Retirement Date may retire on the first day of any succeeding calendar month that coincides with or next follows the month in which his actual retirement occurs. A Participant's deferred retirement benefit shall be determined either under (a) or (b), whichever produces the greater benefit: (a) by continuing to apply the formula set forth in Section 4.1 to his Compensation and Years of Credited Service after his Normal Retirement Date; or (b) by applying an actuarial adjustment to the Normal Annual Pension as of the end of the immediately preceding Plan Year, determined on a year-by-year basis in accordance with Prop. Treas. Reg. Section 1.411(b)-2(b)(2). 4.3 Early Retirement. By written notice delivered to the Administrative Committee before the date his pension is to commence, effective January 1, 1989, a Participant who has attained Early Retirement Date and whose employment Terminates on or after January 1, 1989, may elect to receive an early retirement pension after Termination. In such event he shall be entitled to either: (a) A deferred pension commencing at his Normal Retirement Date equal to the Accrued Annual Pension determined on the basis of his Compensation and Years of Credited Service to the date of his early retirement hereunder; or (b) A pension commencing as of the first day of any month coincident with or next following his Early Retirement Date which is equal to the Actuarial Equivalent of the benefit calculated under Section 4.1 payable at the Participant's Normal Retirement Date. 4.4 Disability Benefit. A Participant who becomes Disabled shall be eligible to receive a pension commencing at his Normal Retirement Date in an amount equal to his Accrued Annual Pension, determined as of his Disability Date. In lieu of the foregoing, a Participant may elect to receive his Accrued Annual Pension as of the first day of any month following his Disability, which shall be the Actuarial Equivalent of the Participant's benefit payable at his Normal Retirement Date. 4.5 Termination Benefit. A Participant who Terminates his employment with a vested interest in his Accrued Annual Pension shall be eligible to receive his benefit in accordance with Section 4.1 or Section 4.3, as applicable. A Former Participant who Terminated employment on or after January 1, 1989 who met the service requirement for early retirement when he Terminated employment, may elect to receive an early retirement pension as of the first day of any month coincident with or next following attainment of age 55. 4.6 Form of Payments. (a) Single Participants. If a Participant or Former Participant is single on the Annuity Starting Date, the normal form of payment, unless elected otherwise, shall be a single life annuity with payments guaranteed for 120 months. (b) Married Participants. If a Participant or Former Participant is married on the Annuity Starting Date, the normal form of payment, unless elected otherwise, with the consent of the Participant's or Former Participant's Spouse, pursuant to subsection (d), shall be a qualified joint and survivor annuity, which shall be the Actuarial Equivalent of the normal form for single Participants described in Section 4.6(a), as applicable, payable for life to the Participant or Former Participant and thereafter, for the life of the Participant's or Former Participant's Surviving Spouse in an amount equal to 50% of the amount that was payable to the Participant or Former Participant. (c) Notice and Information to Participants. The Administrative Committee shall furnish each Participant or Former Participant with the following information regarding benefits payable under the Plan in written nontechnical language: (1) A general description or explanation of the automatic post-retirement Spouse's benefit described in Section 4.6(b) and single life annuity benefit with payments guaranteed for 120 months described in Section 4.6(a) and notification of the Participant's or Former Participant's right to waive the right to receive his benefits in a qualified joint and survivor annuity or single life annuity with payments guaranteed for 120 months and the right to make or revoke a previous election to waive the qualified joint and survivor annuity or single life annuity with payments guaranteed for 120 months. (2) A general explanation of the relative financial effect on a Participant's or Former Participant's benefits of any of the foregoing elections. (3) Notification of the availability, upon written request of a Participant or Former Participant of an explanation of the financial effect of any of the foregoing elections upon the requesting Participant's or Former Participant's benefits under the Plan and notification that each Participant or Former Participant may make only one such request. (4) A general explanation of the rights of a Participant's or Former Participant's Spouse. The Administrative Committee shall provide a Participant or Former Participant with the information described in this Section no earlier than 90 days prior to each Participant's or Former Participant's Annuity Starting Date. (d) Election and Revocation of Spouse's Annuities. A Participant or Former Participant who is entitled to receive his benefits or Spouse's benefits in the form described in Section 4.6(a) or (b) may elect to receive such benefits in any other form permitted by the Plan by giving written notification to the Administrative Committee during the election period of his intent to receive his benefits in such other form. Any election to waive the qualified joint and survivor annuity under Section 4.6(b) shall not take effect unless the Spouse of the Participant or Former Participant consents in writing to such election and the Spouse's consent acknowledges the effect of such election and is witnessed by a notary public or a representative of the Administrative Committee. The requirements with respect to spousal consent may be waived if it is established to the satisfaction of the Administrative Committee that the consent may not be obtained because there is no Spouse or because the Spouse cannot be located or because of such other circumstances as may be prescribed by regulation. Any consent necessary under this provision will be irrevocable and valid only with respect to the Spouse who signs the consent. Any election made under this Section may be revoked by the Participant or Former Participant during the specified election period. Such revocation shall be effected by written notification to the Administrative Committee. Following such revocation, another election under this Section may be made at any time during the specified election period. A revocation of a prior waiver may be made at any time by a Participant or Former Participant without the consent of the Spouse before the Annuity Starting Date. Any actual or constructive election under this paragraph (d) having the effect of providing a Spouse's benefit shall automatically be revoked if the electing person ceases to have a Spouse during the election period. However, if the electing person subsequently remarries, the spousal consent requirements will automatically be reinstated at that time. The election period shall begin no earlier than 90 days before the Annuity Starting Date. The election period shall not end earlier than 30 days following the date in which the explanation described in (c) is provided. Notwithstanding the preceding sentence, the Participant with the consent of his Spouse, if applicable, may elect to waive the 30 day minimum election period noted above, provided that he may revoke any election to waive the normal form of benefits until the Annuity Starting Date or, if later, the end of the seven day period beginning after the date the explanation described in (c) is provided. If the Participant waives the 30 day election period, the actual payment of benefits shall not occur until at least seven days following the date the explanation described in (c) is provided. (e) Optional Forms. In lieu of the normal form of benefit set forth in Sections 4.6(a) and (b), a Participant or Former Participant may elect one of the optional forms of payment described below. All optional forms of payment shall be the Actuarial Equivalent of the normal form for single Participants set forth in Section 4.1, determined as of the Annuity Starting Date. (1) Life Annuity Option Guaranteed for 120 months. A Participant or Former Participant may elect to have his pension paid in the form of a straight life annuity with payments guaranteed for 120 months. Under such annuity, payments will be made monthly during the Participant's or Former Participant's lifetime in an amount equal to the Participant's or Former Participant's Normal Annual Pension or Accrued Annual Pension. If the Participant or Former Participant should die before receiving 120 months of payments, the remaining payments shall be payable to a Beneficiary designated by such Participant or Former Participant for the remainder of the guaranteed period. (2) Life Annuity Option. A Participant or Former Participant may elect to have his pension paid in the form of a straight life annuity. Under such annuity, payments will be made monthly during the Participant's or Former Participant's lifetime in an amount equal to the Participant's or Former Participant's Normal Annual Pension or Accrued Annual Pension. (3) Additional Options. A Participant or Former Participant to whom the provisions of Article XIII apply may elect to have his Normal Annual Pension or Accrued Annual Pension paid in the forms set forth therein. Any election of an optional form of payment may be revoked by the Participant or Former Participant prior to the first day on which such optional form is scheduled to be paid. If the Surviving Spouse or other joint annuitant, whichever is applicable, dies before the first day on which an optional form is scheduled to be paid, the optional form is replaced by the normal form that would have been paid absent the election of an optional form. Any election of an optional form of benefit provided shall provide that any death benefit payable hereunder shall comply with the incidental death benefit requirements of Section 401(a)(9)(G) of the Code and regulations thereunder. 4.7 Death Prior to the Annuity Starting Date. If a Participant or Former Participant dies prior to the Annuity Starting Date, a death benefit may be payable under the circumstances described below. (a) On the death of a vested Participant or Former Participant who has reached his Early Retirement Date, his Spouse shall, if his Spouse has survived him and they have been married through the one-year period ending on the date of death, be entitled to receive immediately a monthly benefit equal to one-half (1/2) of the Participant's Accrued Annual Pension or Normal Annual Pension determined as of the date of his death, payable as a qualified joint and 50% survivor annuity set forth in Section 4.6(b) and reduced for early payment, as applicable, in accordance with Section 4.3. (b) On the death of a vested Participant or Former Participant who has not reached his Early Retirement Date, but who is entitled to a vested interest in his Accrued Annual Pension, his Spouse shall, if his Spouse has survived him and they have been married through the one-year period ending on the date of death, be entitled to receive a monthly benefit, payable on the Participant's earliest retirement date under the Plan, equal to one-half (1/2) of the Participant's Accrued Annual Pension determined as of the date of his death, payable as a qualified joint and 50% survivor annuity set forth in Section 4.6(b) and reduced for early payment, as applicable, in accordance with Section 4.3. (c) A Participant's or Former Participant's Surviving Spouse shall have the right to elect to defer payment of the Spouse's survivor benefit until the date the Participant would have reached his Normal Retirement Date, had he lived. 4.8 Form of Pension Payments. Payments shall be paid monthly as of the first of the month, except that the Administrative Committee shall direct that payments which would otherwise be less than $20 per month be made quarterly, semi-annually or annually. 4.9 Restrictions and Limitations on Distributions. Distribution of benefits to a Participant or Former Participant must commence no later than April 1 of the calendar year following the calendar year in which the Participant or Former Participant attains age 70 1/2; provided, however, that distribution to a Participant or Former Participant who attained age 70 1/2 before January 1, 1988 and is not a five percent owner as defined in Section 416(i) of the Code (with respect to the Plan Year ending in the calendar year in which the Participant or Former Participant attains age 66 1/2 or any succeeding Plan Year) must commence no later than April 1 of the calendar year following the later of the calendar year in which the Participant or Former Participant attains age 70 1/2 or the calendar year in which the Participant or Former Participant retires. To the extent a Participant continues to accrue additional benefits, his Accrued Annual Pension shall be redetermined annually to include such additional accruals, but shall not be offset by the Actuarial Equivalent value of any payments previously made. The Annuity Starting Date of such Participant shall be deemed to occur at the date the first payment required by this Section is due to be paid. Any additional accruals after benefits commence hereunder shall be paid in accordance with the election made by the Participant pursuant to Section 4.6. Any Participant who attains age 70 1/2 prior to January 1, 2000, who commenced to receive his benefits pursuant to the foregoing provisions while still employed by the Employer, will continue to be paid in accordance with the forgoing. Effective with respect to any Participant who attains age 70 1/2 on or after January 1, 2000, distribution of benefits to a Participant or Former Participant shall commence no later than April 1 of the calendar year following the calendar year in which occurs the later of the Participant's or Former Participant's attainment of age 70 1/2 or the Participant's or Former Participant's retirement; or at the election of the Participant no later than April 1 of the calendar year following the calendar year in which the Participant or Former Participant attains age 70 1/2. Any election that a Participant makes to either commence payment as of the April 1 following the calendar year in which he attains age 70 1/2; or to defer payment until no later than the April 1 following the calendar year in which he retires, if later, shall be irrevocable. Effective January 1, 2000, the Normal Annual Pension of any Participant who retires in a calendar year after the calendar year in which he attains age 70 1/2, shall be actuarially adjusted to reflect the delay, if any, in payment for the period beginning with the April 1 following the calendar year in which the Participant attained age 70 1/2; or January 1, 2000, if later, and ending with the date on which the Participant's or Former Participant's Normal Annual Pension commences to be paid. The actuarial increase shall not be less than the Actuarial Equivalent of the Participant's Normal Annual Pension that would have been payable as of the April 1 following the calendar year in which the Participant attained age 70 1/2; plus the Actuarial Equivalent of any additional benefits accrued by the Participant after that date; reduced by the Actuarial Equivalent of any distribution made with respect to the Participant's retirement benefits after that date. The Annuity Starting Date of such Participant shall be deemed to occur when benefits commence to be paid to the Participant. 4.10 Restrictions on Death Distributions. Distributions pursuant to the death of a Participant or Former Participant shall be distributed no later than December 31 of the calendar year in which occurs the fifth anniversary of the Participant's or Former Participant's death. However, if such distribution had already commenced in the form of payments over a period permitted by Section 4.5, the remaining benefits may be distributed over such period. The first sentence of the preceding paragraph shall not apply if either condition of (a) or (b) as set forth below are satisfied: (a) If the Participant's or Former Participant's designated Beneficiary is the Surviving Spouse of such Participant or Former Participant, such distribution shall not be required to begin prior to the later of (i) December 31 of the calendar year following the calendar year in which the Participant or Former Participant died, or (ii) December 31 of the calendar year in which the Participant or Former Participant would have attained age 70 1/2, and at such time may be distributed over the life of such Spouse (if the Surviving Spouse dies prior to commencement of distributions to such Spouse, then this subsection (a) shall be applied as if the Surviving Spouse were the Participant or Former Participant); (b) If the Participant's or Former Participant's distribution, or any portion thereof, is payable to a designated Beneficiary, such distribution or portion thereof may be distributed in accordance with regulations over the life of such designated Beneficiary if such distribution or portion thereof begins not later than December 31 of the calendar year in which occurs the first anniversary of the Participant's or Former Participant's death. For purposes of subsections (a) and (b), life expectancy shall be calculated in accordance with the provisions of Section 72 of the Code. Any amount payable to a child pursuant to the death of a Participant or Former Participant shall be treated as if it were payable to the Participant's or Former Participant's Surviving Spouse if such amount would become payable to the Surviving Spouse upon such child reaching majority (or other designated event permitted by regulations). 4.11 Cash-Out of Small Benefits. (a) Notwithstanding any other provision of this Article IV, the Actuarial Equivalent value of the Accrued Annual Pension or Normal Annual Pension payable as a single life annuity with payments guaranteed for 120 months payable to a Participant or Former Participant who is fully vested shall be distributed to the Former Participant no later than the end of the second Plan Year after his retirement or termination at his election, if such Actuarial Equivalent value of his entire Accrued Annual Pension or Normal Annual Pension is $3,500 or less, and effective with respect to any Participant who Terminates on or after January 1, 1998, if such Actuarial Equivalent value of his entire Accrued Annual Pension or Normal Annual Pension is $5,000 (determined at the time of any prior distribution) or less. A Participant who has a zero vested interest in his Accrued Annual Pension shall be deemed to have received a distribution of his Accrued Annual Pension immediately upon his Termination of employment. Effective with respect to any Former Participant whose employment Terminated prior to January 1, 1998, if the Actuarial Equivalent value of such Participant's Accrued Annual Pension or Normal Annual Pension, payable as a single life annuity with payments guaranteed for 120 months, determined as of any date after 1997 does not exceed $5,000, then if the Participant consents in writing, with the consent of his Spouse if applicable (in accordance with Section 4.6(d) of the Plan), such Actuarial Equivalent value may be distributed to the Former Participant as soon as practicable following receipt by the Administrative Committee of such written consent. (b) Notwithstanding any other provision of this Article IV, the Actuarial Equivalent value of the Spouse's death benefit payable to the Spouse of a Participant or Former Participant pursuant to Section 4.7 shall be distributed to such Spouse as soon as practicable following the Participant's or Former Participant's death if such Actuarial Equivalent value is $3,500 or less. Effective with respect to any Participant or Former Participant whose death occurs on or after January 1, 1998, the foregoing reference to the Actuarial Equivalent value of $3,500, shall be increased to $5,000 (determined at the time of any prior distribution). Effective with respect to any Former Participant whose death occurred prior to January 1, 1998, if the Actuarial Equivalent value of the Spouse's death benefit determined as of any date after 1997, exceeds $3,500, but does not exceed $5,000 (determined at the time of any prior determination), then if the Spouse consents in writing, such Actuarial Equivalent value may be distributed to the Spouse as soon as practicable following receipt by the Administrative Committee of such written consent. 4.12 Rollovers from the Plan. Notwithstanding any provision of the Plan to the contrary, effective January 1, 1993, a Distributee may elect, at the time and in the manner prescribed by the Administrative Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan, specified by the Distributee, in a Direct Rollover. 4.13 Payments to an Alternate Payee. Payments to an Alternate Payee pursuant to a qualified domestic relations order under Section 414(p) of the Code shall not be made prior to the date that the Participant or Former Participant has reached or would have reached his earliest retirement date under the Plan, except for any small payments provided under Section 4.11. 4.14 Military Service. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service shall be provided in accordance with Section 414(u) of the Code. Article V. Vesting 5.1 Vesting Schedule. A Participant's right to a Normal Annual Pension or an Accrued Annual Pension shall be fully vested and nonforfeitable if he is living and employed by the Employer or an Affiliate on his Normal Retirement Age. Prior thereto, the rights and interests of a Participant or Former Participant in and to his Accrued Annual Pension under the Plan shall become fully vested and nonforfeitable in accordance with the following schedule: Years of Service Vested Percentage Forfeited Percentage less than 5 years 0% 100% 5 years of more 100% 0% Each Participant who is employed on December 31, 1996 shall be 100% vested in his Accrued Annual Pension, which he had accrued as of December 31, 1996. 5.2 Forfeitures. Notwithstanding Section 5.1, and except as otherwise provided under the Plan, a Participant's or Former Participant's rights and interests in the Plan, shall be forfeited, if prior to full vesting under Section 5.1, he dies before Normal Retirement Date or actual retirement date, whichever is later. All forfeitures shall occur immediately upon Termination of employment and shall not be used to increase the benefits of any Participant. 5.3 Reemployment. (a) Upon the reemployment of a Participant who was vested when he Terminated employment, his Years of Service and Years of Credited Service shall be reinstated as of his date of reemployment. (b) Upon the reemployment of a Participant or Employee who was not vested when he Terminated employment, his Years of Service and Years of Credited Service shall be reinstated as of his date of reemployment unless the number of his consecutive One-Year Breaks in Service equals or exceeds the greater of five years or the number of his Years of Service with which he was credited prior to such consecutive One-Year Breaks in Service. Article VI. Funding 6.1 Contributions by Employer. The Employer shall contribute to the Fund on account of each Plan Year an aggregate amount, in cash or other property, determined pursuant to a funding method and actuarial assumptions, which shall be selected by the Administrative Committee, and which shall be, in the opinion of an Actuary who shall be appointed by the Administrative Committee, designed to fund the Plan's benefits on a sound actuarial basis. Such amount shall also be sufficient to satisfy the Plan's "minimum funding standard" within the meaning of the Code for that Plan Year. The Employer's contribution for each Plan Year shall be made no later than the time permitted under the Code and regulations promulgated by the Secretary of the Treasury. 6.2 Insurance. The Employer may enter into a contract or contracts with an insurance company, qualified to perform services under the laws of more than one state, which shall become part of this Plan, for purposes of providing the benefits and funding the Plan. 6.3 Investment Policies. The investment policies of the Plan shall be established and may be changed at any time by the Administrative Committee, which shall thereupon communicate such policies to any persons having authority to manage the Plan's assets. The Investment Manager shall have the authority to invest in any collective investment fund maintained exclusively for the investment of assets of exempt, qualified employee benefit trusts. The assets so invested shall be subject to all the provisions of the instrument establishing such collective investment fund, as amended from time to time, which is hereby incorporated herein by reference and deemed to be an integral part of the Plan and corresponding Trust. The Administrative Committee, whose membership is to be determined by the Board, is the named fiduciary to act on behalf of the Company in the management and control of the Plan assets and to establish and carry out a funding policy consistent with the Plan objectives and with the requirements of any applicable law. The Administrative Committee shall carry out the Company's responsibility and authority: (a) To appoint as such term is defined in Section 3(38) of ERISA, one or more persons to serve as Investment Manager with respect to all or part of the Plan assets, including assets maintained under separate accounts of an insurance company; (b) To allocate the responsibilities and authority being carried out by the Administrative Committee among the members of the Administrative Committee. (c) To take any action appropriate to assure that the Plan assets are invested for the exclusive purpose of providing benefits to Participant and their Beneficiaries in accordance with the Plan and defraying reasonable expenses of administering the Plan, subject to the requirements of any applicable law. (d) To establish any rules it deems necessary. The Administrative Committee including each member and former member to whom duties and responsibilities have been allocated, shall be indemnified and held harmless by the Employer with respect to any breach of alleged responsibilities performed or to be performed hereunder. Article VII. Amendment And Termination 7.1 Amendments Generally. The Company, by action of the Board of Directors or to the extent indicated under Section 8.2, by the Administrative Committee, reserves the right to make from time to time any amendment or amendments to this Plan or Trust Agreement that do not cause any part of the Fund to be used for, or diverted to, any purpose other than the exclusive benefit of Participants or Former Participants. Except as may be permitted by ERISA or the Code, no amendment to the Plan shall decrease a Participant's or Former Participant's accrued benefits or eliminate an optional form of benefit as those terms are defined in the Code. 7.2 Amendments to Vesting Schedule. Any future amendment to the Plan which alters the vesting schedule set forth in Section 5.1 or which affects a Participant's nonforfeitable percentage in and to his rights and interests in benefits provided by Employer contributions shall be deemed to include the following terms: (a) The vested percentage of a Participant applicable to his Accrued Annual Pension under the Plan determined as of the later of the date such amendment is adopted or the date such amendment becomes effective shall not be reduced unless the amendment is for purposes of conforming the Plan to requirements of the Code, or any other applicable law; and (b) A Participant with at least three Years of Service on the later of the adoption or effective date of any amendment to the Plan may elect to have his nonforfeitable interest computed under the Plan without regard to such amendment. Such election must be made within 60 days from the later of date on which the amendment was adopted, the amendment was effective or the Participant was issued written notice of such amendment by the Administrative Committee. 7.3 Termination, Discontinuance of Contributions or Curtailment. Subject to the provisions of Title IV of ERISA, the Plan may be terminated or curtailed, or the Employer's obligation to contribute to the Fund may be discontinued, in whole or in part, at any time without the consent of any other person by action of the Board of Directors. 7.4 Distributions on Termination. In the event that the Plan is completely or partially terminated, the rights of all affected, actively employed Participants to their Accrued Annual Pensions to the date of such termination shall become fully vested and nonforfeitable only to the extent funded. The assets of the Plan available to provide benefits shall be allocated among the persons who are entitled or who may become entitled to benefits under the Plan, subject to and in the manner prescribed by the applicable provisions of Title IV of ERISA. Any other provision of the Plan to the contrary notwithstanding, if there remain any assets of the Plan after all liabilities of the Plan to Participants or Former Participants and their Beneficiaries have been satisfied or provided for, such residual assets shall thereupon be distributed to the Employer subject to and in accordance with Title IV of ERISA. 7.5 Action by Company. Any action by the Company under the Plan shall be by a duly adopted resolution of the Board of Directors or by any person or persons duly authorized by a duly adopted resolution of that Board to take such action. Article VIII. Administration 8.1 Duties and Responsibilities of Fiduciaries; Allocation of Responsibility Among Fiduciaries for Plan and Trust Administration. A Fiduciary shall have only those specific powers, duties, responsibilities and obligations as are specifically given him under this Plan or the Trust. In general, the Employer, shall have the sole responsibility for making the contributions provided for under Section 6.1. The Board of Directors shall have the sole authority to appoint and remove the Trustee and the Administrative Committee and, except as provided in Section 8.2, to amend or terminate, in whole or in part, this Plan or the Trust. The Administrative Committee shall have the sole responsibility for the administration of this Plan, which responsibility is specifically described in this Plan and the Trust. The Administrative Committee also shall have the right to appoint and remove any Investment Manager which may be provided for under the Trust and to designate investment and funding policies under which the Trustee and any Investment Manager shall act, which provisions are described in Section 6.3. Except as provided in the Trust agreement and within the scope of any funding and investment policies designated by the Administrative Committee the Trustee shall have the sole responsibility for the administration of the Trust and the management of the assets held under the Trust. It is intended that each Fiduciary shall be responsible for the proper exercise of his own powers, duties, responsibilities and obligations under this Plan and the Trust and generally shall not be responsible for any act or failure to act of another Fiduciary. A Fiduciary may serve in more than one fiduciary capacity with respect to the Plan (including service both as Trustee and as a member of the Administrative Committee). 8.2 Allocation of Duties and Responsibilities. The Administrative Committee shall be appointed by the Board of Directors and shall have the sole responsibility for actual administration of the Plan, as delegated by the Board of Directors. The Administrative Committee may also adopt amendments to the Plan, which upon advice of counsel, it deems necessary or advisable to comply with ERISA or the Code, or any other applicable law, or to facilitate the administration of the Plan. The Administrative Committee may designate persons other than their members to carry out any of its duties and responsibilities. Any duties and responsibilities thus allocated must be described in the written instrument. If any person other than an Eligible Employee of the Employer is so designated, such person must acknowledge in writing his acceptance of the duties and responsibilities thus allocated to him. All such instruments shall be attached to, and shall be made a part of, the Plan. 8.3 Administration and Interpretation. Subject to the limitations of the Plan, the Administrative Committee shall have complete authority and control regarding the administration and interpretation of the Plan and the transaction of its business, and shall, from time to time, establish such rules as may be necessary or advisable in connection therewith. To the extent permitted by law, all acts and determinations of the Administrative Committee, as to any disputed question or otherwise, shall be binding and conclusive upon Participants, retired Participants, Employees, Spouses, Beneficiaries and all other persons dealing with the Plan. The Administrative Committee may deem its records conclusively to be correct as to the matters reflected therein with respect to information furnished by an Employee. All actions, decisions and interpretations of the Administrative Committee in administering the Plan shall be performed in a uniform and nondiscriminatory manner. 8.4 Expenses. The Employer shall pay all expenses authorized and incurred by the Administrative Committee in the administration of the Plan except to the extent such expenses are paid from the Trust. 8.5 Claims Procedure: (a) Filing of Claim. Any Participant, Former Participant or Beneficiary under the Plan ("Claimant"), may file a written claim for a Plan benefit with the Administrative Committee or with a person named by the Administrative Committee to receive claims under the Plan. (b) Notification on Denial of Claim. In the event of a denial or limitation of any benefit or payment due to or requested by any Claimant, he shall be given a written notification containing specific reasons for the denial or limitation of his benefit. The written notification shall contain specific reference to the pertinent Plan provisions on which the denial or limitation of benefits is based. In addition, it shall contain a description of any additional material or information necessary for the Claimant to perfect a claim and an explanation of why such material or information is necessary. Further, the notification shall provide appropriate information as to the steps to be taken if the Claimant wishes to submit his claim for review. This written notification shall be given to a Claimant within 90 days after receipt of his claim by the Administrative Committee unless special circumstances require an extension of time to process the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of said 90-day period and such notice shall indicate the special circumstances which make the postponement appropriate. Such extension shall not extend to a date later than 120 days after receipt of the request for review of a claim. (c) Right of Review. In the event of a denial or limitation of benefits, the Claimant or his duly authorized representative shall be permitted to review pertinent documents and to submit to the Administrative Committee issues and comments in writing. In addition, the Claimant or his duly authorized representative may make a written request for a full and fair review of his claim and its denial by the Administrative Committee provided, however, that such written request must be received by the Administrative Committee (or his delegate to receive such requests) within sixty days after receipt by the Claimant of written notification of the denial or limitation of the claim. The sixty day requirement may be waived by the Administrative Committee in appropriate cases. (d) Decision on Review. (i) A decision shall be rendered by the Administrative Committee within 60 days after the receipt of the request for review, provided that where special circumstances require an extension of time for processing the decision, it may be postponed on written notice to the Claimant (prior to the expiration of the initial 60 day period), for an additional 60 days, but in no event shall the decision be rendered more than 120 days after the receipt of such request for review. (ii) Notwithstanding subparagraph (i), if the Administrative Committee specifies a regularly scheduled time at least quarterly to review such appeals, a Claimant's request for review will be acted upon at the specified time immediately following the receipt of the Claimant's request unless such request is filed within 30 days preceding such time. In such instance, the decision shall be made no later than the date of the second specified time following the Administrative Committee's receipt of such request. If special circumstances (such as a need to hold a hearing) require a further extension of time for processing a request, a decision shall be rendered not later than the third specified time of the Administrative Committee following the receipt of such request for review and written notice of the extension shall be furnished to the Claimant prior to the commencement of the extension. (iii) Any decision by the Administrative Committee shall be furnished to the Claimant in writing and in a manner calculated to be understood by the Claimant and shall set forth the specific reason(s) for the decision and the specific Plan provision(s) on which the decision is based. 8.6 Records and Reports. The Administrative Committee shall exercise such authority and responsibility as it deems appropriate in order to comply with ERISA and governmental regulations issued thereunder relating to records of Participants' account balances and the percentage of such account balances which are nonforfeitable under the Plan; notifications to Participants; and annual reports and registration with the Internal Revenue Service. 8.7 Other Powers and Duties. The Administrative Committee shall have such duties and powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following: (a) to construe and interpret the Plan, decide all questions of eligibility and determine the amount, manner and time of payment of any benefits hereunder; (b) to prescribe procedures to be followed by Participants, Former Participants or Beneficiaries filing applications for benefits; (c) to prepare and distribute information explaining the Plan; (d) to receive from the Employer and from Participants, Former Participants and Beneficiaries such information as shall be necessary for the proper administration of the Plan; (e) to furnish the Employer, upon request, such annual reports with respect to the administration of the Plan as are reasonable and appropriate; (f) to receive, review and keep on file (as it deems convenient or proper) reports of the financial condition, and of the receipts and disbursements, of the Trust Fund from the Trustees; (g) to appoint or employ advisors including legal and actuarial counsel to render advice with regard to any responsibility of the Administrative Committee under the Plan or to assist in the administration of the Plan; (h) to determine the status of qualified domestic relations orders under Section 414(p) of the Code; and (i) To take any actions necessary to correct the Plan retroactively as may be necessary, including the exclusion of any employees who have been excluded inadvertently from participation in the Plan, the application of incorrect vesting, failures pertaining to Sections 415(b) and 401(a)(17) of the Code and any other operational failure consistent with correction methodology set forth in IRS Rev. Proc. 2000-17 or any successor thereto. The foregoing list of express duties is not intended to be either complete or conclusive, and the Administrative Committee shall, in addition, exercise such powers and perform such other duties as it may deem necessary, desirable, advisable or proper for the supervision and administration of the Plan. Except as otherwise provided hereunder, the Administrative Committee shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. 8.8 Rules and Decisions. The Administrative Committee may adopt such rules as it deems necessary, desirable, or appropriate. All rules and decisions of the Administrative Committee shall be applied uniformly and consistently to all Participants in similar circumstances. When making a determination or calculation, the Administrative Committee shall be entitled to rely upon information furnished by a Participant, Former Participant or Beneficiary, the Employer, the legal counsel of the Employer, or the Trustee. 8.9 Authorization of Benefit Payments. The Administrative Committee shall issue proper directions to the Trustee concerning all benefits which are to be paid from the Trust Fund pursuant to the provisions of the Plan. Benefits under this Plan shall be paid only if the Administrative Committee, deems in its discretion, that the applicant is entitled to them. 8.10 Application and Forms for Benefits. The Administrative Committee may require a Participant, Former Participant or Beneficiary to complete and file with it an application for a benefit, and to furnish all pertinent information requested by it. The Administrative Committee may rely upon all such information so furnished to it, including the Participant's, Former Participant's or Beneficiary's current mailing address. 8.11 Facility of Payment. Whenever, in the Administrative Committee's opinion, a person entitled to receive any payment of a benefit or installment thereof hereunder is under a legal disability or is incapacitated in any way so as to be unable to manage his financial affairs, the Administrative Committee may direct the Trustee to make payments to such person or to his legal representative or to a relative or friend of such person for his benefit, or he may direct the Trustee to apply the payment for the benefit of such person in such manner as it considers advisable. 8.12 Indemnification. The Employer shall indemnify each individual who is an officer, director or Employee of the Employer and who may be called upon or designated to perform fiduciary duties or to exercise fiduciary authority or responsibility with respect to the Plan and shall save and hold him harmless from any and all claims, damages, and other liabilities, including without limitation all expenses (including attorneys' fees and costs), judgments, fines and amounts paid in settlement and actually and reasonably incurred by him in connection with any action, suit or proceeding, resulting from his alleged or actual breach of such duties, authority or responsibility, whether by negligence, gross negligence or misconduct, to the maximum extent permitted by law, provided, however, that this indemnification shall not apply with respect to any actual breach of such duties, authority or responsibility, if the individual concerned did not act in good faith and in the manner he reasonably believed to be in (or not opposed to) the best interest of the Employer, or, with respect to any criminal action or proceeding, had reasonable cause to believe his conduct was unlawful. 8.13 Resignation or Removal of the Administrative Committee. An Administrative Committee member may resign at any time by giving ten days' written notice to the Employer and the Trustee. The Board of Directors may remove any member of the Administrative Committee by giving written notice to him and the Trustee. Any such resignation or removal shall take effect at a date specified on such notice, or upon delivery to the Administrative Committee if no date is specified. Article IX. Limitations On Contributions And Benefits 9.1 Determination by Internal Revenue Service. Contributions to the Trust Fund are conditioned specifically upon the initial qualification of the Plan under the Code and if the Plan does not so initially qualify, such contribution or part thereof shall be returned to the Employer within one year after such denial of initial qualification. 9.2 Conditional Contributions. To the extent permitted under ERISA and the Code, all contributions to the Plan are subject to the following conditions: (a) All contributions made to the Plan by the Employer shall be conditioned upon the deductibility of such contributions under the Code. To the extent that any such deduction is disallowed by the Internal Revenue Service, the Employer by action of the Administrative Committee shall have the right to demand and receive the return of the related contribution to the extent disallowed within one year after the disallowance of said deduction. (b) If the Employer makes a contribution, or any part thereof, by mistake of fact, such contribution or part thereof shall be returned to the Employer within one year after such contribution is made. 9.3 Twenty-Five HCE Limitation. (a) Effective for Plan Years commencing on or after January 1, 1991, the annual payments made by the Plan to any Participant who is one of the 25 highest-paid Highly Compensated Employees, for any Plan Year (a "restricted Participant") shall not exceed the "restricted amount", subject to the provisions of subsections (b) and (c) below. For purposes of this Section 9.3, the "restricted amount" shall mean the excess of the accumulated amount of distributions made as of any year to a restricted Participant over the accumulated amount of the payments that would have been paid as of that year under a straight life annuity that is the Actuarial Equivalent of such individual's Accrued Annual Pension under the Plan and all other benefits to which the restricted Participant is entitled under the Plan. The accumulated amount is the amount of a payment increased by a reasonable amount of interest from the date a payment was made (or would have been made) until the date of the determination of the restricted amount. (b) The restrictions set forth in the foregoing subsection (a) shall not apply if any of the following conditions apply: (1) The value of the benefits payable to or on behalf of the restricted Participant is less than one percent (1%) of the value of current liabilities of the Plan before the distribution; (2) After taking into account payment to or on behalf of the restricted Participant of all benefits payable to or on behalf of that restricted Participant under the Plan, the value of Plan assets is not less than 110% of the value of current liabilities of the Plan, as defined in Section 412(l)(7) of the Code; or (3) The value of the benefits payable to or on behalf of the restricted Participant does not exceed the amount described in Section 411(a)(11)(A) of the Code. (c) Notwithstanding the foregoing, the Plan may distribute amounts in excess of the restricted amount if the restricted Participant enters into an adequately secured written agreement with the Plan providing for the repayment of the restricted amount to the Plan to the extent necessary for the distribution of assets upon termination of the Plan to satisfy Section 401(a)(4) of the Code and the regulations thereunder. A restricted Participant shall be permitted to secure the repayment of the restricted amount by any of the following methods: (1) By depositing in escrow with an acceptable depository promptly upon distribution of the restricted amount to the Participant, property having a fair market value equal to at least 125% of the restricted amount; provided, however, that (i) if the market value of any property that has been placed in escrow falls below 110% of the restricted amount, the Participant shall be obligated to deposit additional property to bring the value of the property held by the depository up to 125% of the restricted amount, (ii) that the Participant shall be entitled to receive any income from the property placed in escrow, subject to the obligation to maintain the value of the property as described above, and (iii) that the Participant may receive amounts in the escrow account in excess of 125% of the restricted amount; (2) By posting a bond equal to at least 100% of the restricted amount, which bond must be provided by an insurance company, bonding company or other surety approved by the United States Treasury Department as an acceptable surety for federal bonds; or (3) By obtaining a bank letter of credit in an amount equal to at least 100% of the restricted amount. The Employer, in lieu of the Participant, may provide thecollateral, pay the costs, and/or pay the premiums associated with any of the security arrangements set forth above, and shall be permitted to indemnify the depository, insurance company, bonding company, surety, or bank, as applicable, on behalf of the Participant. The restricted Participant shall agree that the depository may not redeliver to the restricted Participant (or to the Employer, if applicable), any property held under an escrow agreement (other than amounts in excess of 125% of the restricted amount then in effect), and a surety or bank may not release any liability on a bond or letter of credit (other than liability in excess of 100% of the restricted amount then in effect), unless the Administrative Committee certifies to the depository, surety or bank, as applicable, that the Participant is no longer a restricted Participant or is no longer obligated to repay an amount under the repayment agreement due to any of the following events: (i) the value of Plan assets equals or exceeds 110% of the value of the Plan's current liabilities; (ii) the value of the Participant's future nonrestricted limit constitutes less than 1% of the value of the Plan's current liabilities; or (iii) the value of the Participant's future nonrestricted limit does not exceed $5,000; or (iv) the Plan has terminated and the benefit received by the Participant is nondiscriminatory under Code Section 401(a)(4). For purposes of this subsection 9.3(c), the term "nonrestricted limit" shall mean the payments that could have been distributed to the restricted Participant, commencing when distribution commenced to the restricted Participant, had the restricted Participant received payments in the form of a straight life annuity that is the Actuarial Equivalent of the Accrued Annual Pension and other benefits to which the restricted Participant is entitled under the Plan. Such a certification by the Administrative Committee as described herein shall terminate the repayment agreement between the Participant and the Plan. 9.4 General Limitation on Benefits. In addition to the limitations possibly applicable by reason of Section 9.3, and any other provision of the Plan to the contrary notwithstanding, the annual benefit payable to any Participant or Former Participant shall not exceed the limitations imposed by Section 415 of the Code. The provisions of Section 415 of the Code are incorporated into this Plan by reference. For Limitation Years beginning prior to January 1, 2000, if a Participant's participation in other plans maintained by the Employer or an Affiliate would result in a violation of the limitations of Section 415 of the Code, the Participant's benefit under this Plan shall be reduced to the extent necessary to satisfy Section 415 of the Code. Effective for the Limitation Year beginning January 1, 1995 with a final implementation date of January 1, 2000 (pursuant to Revenue Ruling 98-1), the provisions of Code Section 415, as amended by the Retirement Protection Act of 1994 and further amended by the Small Business Job Protection Act of 1996, are incorporated herein by reference. For purposes of applying the limitations of Section 415 of the Code and regulations thereunder, compensation shall be determined in accordance with Treas. Reg. Sections 1.415-2(d)(1), (2), (3), (4) and (6). 9.5 Suspension of Benefits on Reemployment. (a) In the event that any person receiving benefits under the Plan by reason of retirement is reemployed by the Employer, the Plan shall suspend the payment of benefits as of the first day of the month following the first month in which an Eligible Employee receives payment from the Employer for at least 80 Hours of Service performed during a calendar month during such person's reemployment; (b) Benefits suspended hereunder shall resume as of the first day of the third month commencing after the earlier of the day the reemployed person Terminates employment with the Employer or, if such person is an Eligible Employee, receives payment from the Employer for any Hours of Service performed for fewer than 80 Hours of Service during a calendar month in such reemployed status; (c) Any person whose benefits are suspended under this Section shall be entitled to receive a pension on subsequent retirement or Termination that is not less than the pension received as of the date of suspension hereunder. The person's resumed pension shall be determined on the basis of the Participant's Compensation and Years of Credited Service before the suspension hereunder and Compensation and Years of Credited Service after his reemployment, reduced however, by the value of any pension benefits paid to him previously either (i) prior to his Normal Retirement Date; or (ii) while reemployed by the Employer under circumstances in which his benefits should have been suspended under paragraph (a), but were not. (d) Any Participant whose benefits are suspended pursuant to the foregoing shall be notified in writing of the suspension by personal delivery or first class mail during the first calendar month or payroll period in which benefits are suspended. (e) The Annuity Starting Date with respect to a Participant who is reemployed after commencement of his benefits at Normal Retirement Date, shall be the date his benefits originally commenced for benefits accrued before and after the suspension. (f) The Annuity Starting Date with respect to a Participant who is reemployed after commencement of his benefits at Early Retirement Date shall be: (1) the date his benefits originally commenced with respect to the benefits accrued prior to the suspension; and (2) with respect to the benefits he accrued after his reemployment (if any), and the suspension of his original benefit payments hereunder, the date such subsequent accruals commence to be paid. The provisions of Section 4.6(d) of the Plan shall apply to such subsequent accruals as a second Annuity Starting Date. Article X. Merger, Transfer Or Consolidation Of Plans 10.1 Plan Assets. There shall be no merger or consolidation of the Plan with, or transfer of assets or liabilities of the Fund to, any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants of the Plan, unless each Participant would (if either this Plan or the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if this Plan had then terminated), and unless a duly adopted resolution of the Board of Directors authorizes such merger, consolidation or transfer of assets. Article XI. Miscellaneous 11.1 Mandatory Commencement of Benefits. Notwithstanding any provision of this Plan to the contrary, payment of benefits under this Plan shall commence upon the written election of a Participant or Former Participant not later than sixty days after the close of the Plan Year in which the latest of the following events occurs: (a) the Participant attains Normal Retirement Date; (b) the tenth anniversary of the Plan Year in which the Participant commenced participation in the Plan; or (c) the Termination of the Participant's service with the Employer. 11.2 Nonguarantee of Employment. Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any Eligible Employee, or as a right of any Eligible Employee to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge any of its Eligible Employees with or without cause. 11.3 Rights to Fund Assets. No Eligible Employee or Beneficiary shall have any right to, or interest in, any assets of the Fund upon Termination of his employment or otherwise, except as provided from time to time under this Plan, and then only to the extent of the benefits payable under the Plan to such Eligible Employee out of the assets of the Fund. All payments of benefits as provided for in this Plan shall be made solely out of the assets of the Fund. 11.4 Nonalienation of Benefits. Except as may be permitted by law and except as may be required under certain judgments and settlements described in Section 401(a)(13)(C) and (D) of the Code; or as may be required or permitted by a qualified domestic relations order as defined in Section 414(p) of the Code, benefits payable under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, including any such liability which is for alimony or other payments for the support of a spouse or former spouse, or for any other relative of the Employee, prior to actually being received by the person entitled to the benefit under the terms of the Plan; and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to benefits payable hereunder shall be void. The Fund shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person entitled to benefits hereunder. 11.5 Inability to Locate Payee. Each person entitled to receive benefits under the Plan shall be responsible for informing the Administrative Committee of his mailing address for purposes of receiving such benefits. If the Administrative Committee is unable to locate any person entitled to receive benefits under the Plan, such benefits shall not be forfeited but shall be carried as a contingent liability of the Plan and shall be payable when a proven and legitimate claim therefor has been submitted to the Administrative Committee. 11.6 Applicable Law. This Plan shall be construed, interpreted, administered and enforced in accordance with the laws of the Commonwealth of Pennsylvania, except to the extent superseded, only when required, by ERISA as in effect from time to time. Article XII. Determination Of Top-Heavy Status 12.1 General. Notwithstanding any other provision of the Plan to the contrary, for any Plan Year, in which the Plan is Top-Heavy or Super Top-Heavy, as defined below, the provisions of this Article 12 shall apply, but only to the extent required by Section 416 of the Code and the regulations thereunder. 12.2 Top-Heavy Plan. This Plan shall be Top-Heavy and an Aggregation Group shall be Top-Heavy if as of the Determination Date for such Plan Year, the sum of the Cumulative Accrued Benefits and Cumulative Accounts of Key Eligible Employees for the Plan Year exceeds 60% of the aggregate of all the Cumulative Accounts and Cumulative Accrued Benefits. The Cumulative Accrued Benefits and Cumulative Accounts of those Participants who have not performed any service for the Employer during the five year period ending on the Determination Date, shall be disregarded. (a) If the Plan is not included in a Required Aggregation Group with other plans, then it shall be Top-Heavy only if (i) when considered by itself it is Top-Heavy and (ii) it is not included in a Permissive Aggregation Group that is not Top-Heavy. (b) If the Plan is included in a Required Aggregation Group with other plans, it shall be Top-Heavy only if the Required Aggregation Group, including any permissively aggregated plans, is Top-Heavy. 12.3 Super Top-Heavy Plan. This Plan shall be Super Top-Heavy if it would be Top-Heavy under Section 12.2, but substituting 90% for 60%. 12.4 Cumulative Accrued Benefits and Cumulative Accounts. The determination of the Cumulative Accrued Benefits and Cumulative Accounts under the Plan shall be made in accordance with Section 416 of the Code and the regulations thereunder. 12.5 Definitions. (a) "Aggregation Group" means either a Required Aggregation Group or a Permissive Aggregation Group. (b) "Determination Date" means with respect to any Plan Year, the last day of the preceding Plan Year or in the case of the first Plan Year of any plan, the last day of such Plan Year or such other date as permitted by the Secretary of the Treasury or his delegate. (c) "Group Employer" means the Employer that adopts this Plan and all members of a controlled group of corporations (as defined in Section 414(b) of the Code), all commonly controlled trades or businesses (as defined in Section 414(c) of the Code), all affiliated service groups (as defined in Section 414(m) of the Code) and any other affiliated entities (as provided in Section 414(o) of the Code) of which the Employer is a part. (d) "Key Eligible Employee" means those individuals described in Section 416(i)(1) of the Code and the regulations thereunder. (e) "Non-Key Eligible Employee" means those Eligible Employees who are not Key Eligible Employees and includes a former Key Eligible Employee. (f) "Permissive Aggregation Group" means a Required Aggregation Group plus any other plans selected by the Company provided that all such plans when considered together satisfy the requirements of Section 401(a)(4) and 410 of the Code. (g) "Required Aggregation Group" means each plan of the Employer in which a Key Eligible Employee participates (in the Plan Year containing the Determination Date or any of the four preceding Plan Years) and each other plan which enables any plan in which a Key Eligible Employee participates during the period tested to meet the requirements of Section 401(a)(4) or 410 of the Code. All employers aggregated under Section 414(b), (c) or (m) of the Code are considered a single employer. The Required Aggregation Group shall include any terminated plan that covered a Key Eligible Employee and was maintained within the five year period ending on the Determination Date. (h) "Valuation Date" means the annual date on which Plan assets must be valued for purposes of determining the Plan's assets and liabilities and the value of account balances maintained under any defined contribution plan of the Employer. The valuation date for purposes of the preceding sentence shall be the same valuation date for computing Plan costs for minimum funding. 12.6 Minimum Annual Retirement Benefit. (a) Each Participant who is a Non-Key Eligible Employee will receive the greater of his Accrued Annual Pension as defined in Section 2.1 or a Minimum Annual Retirement Benefit (expressed as a life annuity commencing at Normal Retirement Date) equal to two percent of the Participant's average compensation (as determined under any permissible definitions under Section 415 of the Code and the regulations thereunder) but limited in amount under Section 401(a)(17) of the Code for the five consecutive years for which the Participant had the highest aggregate compensation multiplied by the Participant's Years of Credited Service with the Employer, up to a maximum of 20%. (b) For purposes of this Section 12.6, Years of Credited Service shall not include service if the Plan were not Top-Heavy for any Plan Year ending in such period of Years of Credited Service or Years of Credited Service completed in a Plan Year commencing before January 1, 1984. For purposes of this Section 12.6, compensation in years prior to January 1, 1984 and compensation in years after the close of the last Plan Year in which the Plan is Top-Heavy shall be disregarded. (c) A Minimum Annual Retirement Benefit shall not be provided under this Section 12.6 to the extent that the Participant is covered under any other plan or plans of the Group Employer and the Group Employer has provided that the minimum benefit requirements applicable to this Plan will be met by the other plan or plans. (d) A Participant who is a Non-Key Eligible Employee shall not fail to accrue a Minimum Annual Retirement Benefit because of (i) his level of Compensation or (ii) a failure to make mandatory Eligible Employee contributions. 12.7 Vesting. A Participant who is credited with one Hour of Service in any Plan Year during which the Plan is Top-Heavy or Super Top-Heavy shall have a nonforfeitable interest in that portion of his Normal Annual Pension, Accrued Annual Pension or Minimum Annual Retirement Benefit attributable to participation during the Plan Year in which the Plan is Top-Heavy or Super Top-Heavy and all prior Plan Years in accordance with the following schedule: Years of Service Nonforfeitable Percentage less than 2 years 0 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 or more 100% If the Plan ceases to be Top-Heavy in any Plan Year, the vesting provisions of Section 5.1 determined without regard to this Section 12.7, shall apply with respect to subsequent Plan Years, subject to Section 7.2(b). 12.8 Defined Benefit and Defined Contribution Plans. For any Plan Year beginning prior to January 1, 2000 in which the Plan is Super Top-Heavy or for each Plan Year in which the Plan is Top-Heavy and the additional minimum benefits or contributions required by Section 416(h) of the Code are not provided, the dollar limitations in the denominator of the defined benefit plan fraction and defined contribution plan fraction as defined in Section 415(e) of the Code shall be multiplied by 100 percent rather than 125 percent. If the application of the provisions of this Section 12.8 would cause any Participant to exceed 1.0 for any Limitation Year as set forth in Section 9.4, then the application of this Section 12.8 shall be suspended as to such Participant until such time as he no longer exceeds 1.0. During the period of such suspension, there shall be no accruals for such Participant under this Plan and no Group Employer contributions, forfeitures or voluntary nondeductible contributions allocated to such Participant under any defined contribution plan of the Group Employer. Article XIII. ERISA Transition Provisions 13.1 Scope and Purpose. The provisions of this Article XIII shall apply only to those Participants or Former Participants who were Participants on December 14, 1976 and Employees on December 15, 1976. The purpose of this Article XIII is to preserve for those Participants or Former Participants certain of the provisions of the Plan as in effect before December 15, 1976. 13.2 Calculation of Benefit. With respect to a Participant or Former Participant covered by this Section 13.2, the Participant's or Former Participant's monthly benefit at his Normal Retirement Date under the Plan shall be the greater of (i) the Participant's or Former Participant's benefit calculated under Section 4.1 or (ii) one-twelfth of the product of (A) and (B), but not in excess of $625, where (A) equals 45% of the Participant's or Former Participant's "Basic Salary" on December 15, 1975 and (B) equals a fraction, the numerator of which is the Participant's or Former Participant's total number of "Years of Participation" at December 14, 1976 and the denominator of which is the total number of "Years of Participation" with which he would have been credited if he separated from service on the "Anniversary Date" nearest his 65th birthday, all as defined under the terms of the Plan as in effect on December 14, 1976. Such amount is set forth in Schedule A, Column 1. 13.3 Form of Payment of Normal, Late, Early and Disability Benefit. In addition to the forms of settlement provided under Section 4.6(e), a Participant or Former Participant covered under this Article XIII, shall be entitled to elect in writing on forms provided by the Administrative Committee payment of the "value of the accrued benefit" (as determined under Section 13.7) to which he is entitled under Schedule A, Column 2, increased by interest at the rate of 5% per annum from December 14, 1976 to the date of determination, counting only completed months, in a lump sum upon Normal, Late, Early or Disability Retirement in accordance with the provisions of Sections 4.1, 4.2, 4.3 or 4.4. In the event a Participant or Former Participant elects payment of some or all of the amount of the "value of the accrued benefit" to which he is entitled under Schedule A, Column 2, increased by interest as described in the preceding sentence, in a lump sum, the "actuarial value" (as determined under Section 13.7) of the benefit to which he is otherwise entitled under Article IV shall be reduced by the amount of such payment and the "remaining value", if any, will be paid in a form provided by Section 4.6(e) of the Plan. However, any Participant or Former Participant covered under this Article XIII, the value of whose benefit under Schedule A, Column 2, without increase, is $20,000 or more, alternatively may elect in writing, on forms provided by the Administrative Committee, payment of the value of the entire benefit to which he is entitled under the Plan in an "actuarially equivalent" (as determined under Section 13.7) lump sum upon Normal, Late, Early or Disability Retirement in accordance with the provisions of Section 4.6. Notwithstanding the foregoing, effective January 1, 1989, anyParticipant covered under this Section 13, who is a Highly Compensated Employee, determined as of any date, and the value of whose benefit under Schedule A, Column 2, without increase, is $20,000 or more may not elect to have the value of the entire benefit to which he is entitled under the Plan, paid in a lump sum, but alternatively may elect in writing, on forms provided by the Administrative Committee payment of (i) the value of the benefit which he had accrued as of December 31, 1988 under the Plan in an actuarially equivalent lump sum (as determined under Section 13.7) upon Normal, Late, Early or Disability Retirement in accordance with the provisions of Section 4.1, 4.2, 4.3 or 4.4; and (ii) the remainder of his Accrued Annual Pension, which he had accrued after December 31, 1988, paid to him in one of the forms provided for under Section 4.6 of the Plan. Effective December 31, 1996, in no event shall the "actuarial value" (as determined under Section 13.7) of the "value of the accrued benefit" (as determined under Section 13.7) listed under Schedule A, Column 2, increased by interest at the rate of 5% per annum from December 14, 1976 to the date of determination, counting only completed months, for any Participant or Former Participant, who is covered by the provisions of this Article XIII, be greater than the Participant's Accrued Annual Pension payable under Section 4.1 of the Plan. 13.4 Payment of Vested Benefits. Any Participant or Former Participant covered under this Article XIII who terminates employment with the Employer and all Affiliates with a nonforfeitable benefit under Section 5.1 may elect in writing on forms provided by the Administrative Committee to receive the value of his benefit under Schedule A, Column 2, increased by interest at the rate of 5% per annum from December 14, 1976 to the date of determination, counting only completed months, in a lump sum. The "remaining value" of his benefit, if any, shall be paid in accordance with Section 4.6(e). Any such Participant or Former Participant, the value of whose accrued benefit under Schedule A, Column 2, without increase, is $20,000 or more, alternatively may elect in writing, on forms provided by the Administrative Committee, payment of the value of the entire benefit to which he is entitled under the Plan in an "actuarially equivalent" lump sum. Notwithstanding the foregoing, effective January 1, 1989, any Participant covered under this Section 13, who is a Highly Compensated Employee, determined as of any date, and the value of whose benefit under Schedule A, Column 2, without increase, is $20,000 or more may not elect to have the value of the entire benefit to which he is entitled under the Plan, paid in a lump sum, but alternatively may elect in writing, on forms provided by the Administrative Committee, payment of (i) only the value of the benefit which he had accrued as of December 31, 1988 under the Plan in an actuarial equivalent lump sum (as determined under Section 13.7) upon his Termination of employment in accordance with the provisions of Section 4.5; and (ii) the remainder of his Accrued Annual Pension, which he had accrued after December 31, 1988, paid to him in one of the forms provided for under Section 4.6 of the Plan. If a Participant or Former Participant who receives a distribution hereunder returns to service covered by the Plan, his prior service shall be restored for purposes of benefit accrual if he contributes to the Trust Fund in cash the amount of the distribution he received, together with interest thereon at the rate set forth in Section 411(c)(2)(C) of the Code per annum, compounded annually, before suffering five consecutive Breaks in Service or five years following the date he is reemployed by the Employer, if earlier. If the Participant or Former Participant does not make such a contribution as provided above, his Accrued Annual Pension upon subsequent termination of service shall be based on accruals arising from and after his return to service under the terms of the Plan plus any "remaining value" of his benefit at the date of his previous termination of service not paid hereunder upon his previous termination of service. Effective December 31, 1996, in no event shall the "actuarial value" (as determined under Section 13.7) of the "value of the accrued benefit" (as determined under Section 13.7) listed under Schedule A, Column 2, increased by interest at the rate of 5% per annum from December 14, 1976 to the date of determination, counting only completed months, for any Participant or Former Participant, who is covered by the provisions of this Article XIII, be greater than the Participant's Accrued Annual Pension payable under Section 4.1 of the Plan. 13.5 Death Benefits. The Beneficiary of any Participant or Former Participant covered under this Article XIII who attained his Normal Retirement Date, as defined under the terms of the Plan as in effect on December 14, 1976, on or before December 14, 1976, and dies on or after December 15, 1976, but prior to the earlier of the date (i) benefit payments to him commence or (ii) an annuity contract is purchased to provide his retirement benefit, shall be entitled to receive a death benefit equal to the "actuarial value" at the time of death of such Participant's or Former Participant's accrued benefit under Schedule A, Column 2. The benefit will be paid in the mode of distribution designated by the Participant or Former Participant in writing; provided, however, if the Participant's or Former Participant's designated Beneficiary should die on or before the commencement of distribution of benefits or the Participant or Former Participant fails to designate the mode of distribution, the mode of distribution shall be determined by the Administrative Committee after consultation with the Participant's or Former Participant's Beneficiary. Notwithstanding the foregoing, if the Participant or Former Participant is married, the Participant's or Former Participant's Spouse shall be the Beneficiary unless the Spouse waives the right to be the Beneficiary in writing witnessed by a notary public or a member of the Administrative Committee in accordance with the rules established by the Administrative Committee. Notwithstanding the foregoing, effective January 1, 1989, any Participant covered under this Section 13, who is a Highly Compensated Employee, determined as of any date, and the value of whose benefit under Schedule A, Column 2, without increase, is $20,000 or more may not elect to have the value of the entire benefit to which he is entitled under the Plan paid as a lump sum death benefit, but alternatively may elect in writing, on forms provided by the Administrative Committee, payment of (i) the value of the benefit which he had accrued as of December 31, 1988 under the Plan in an actuarial equivalent lump sum (as determined under Section 13.7) upon his death paid to his Beneficiary; and (ii) the remainder of his Accrued Annual Pension, which he had accrued after December 31, 1988, paid to his Beneficiary in the form provided for under Section 4.7 of the Plan. Effective December 31, 1996, in no event shall the "actuarial value" (as determined under Section 13.7) of the "value of the accrued benefit" (as determined under Section 13.7) listed under Schedule A, Column 2, increased by interest at the rate of 5% per annum from December 14, 1976 to the date of determination, counting only completed months, for any Participant or Former Participant, who is covered by the provisions of this Article XIII, be greater than the Participant's Accrued Annual Pension payable under Section 4.1 of the Plan. 13.6 Transfer of Benefit. (i) Any Participant or Former Participant (A) who has reached his Normal Retirement Date on or before December 15, 1976, (B) whose benefit is calculated under the Plan as effective prior to December 15, 1976 and (C) whose benefit payments have not started prior to October 9, 1979, shall be entitled to elect irrevocably in writing as hereinafter provided that the Administrative Committee transfer the amount of his accrued benefit to be held as a separate bookkeeping account under the terms of the Trust Agreement. The election may be made effective as of the January 1st or July 1st next following the delivery of a written request to the Administrative Committee at least 30 days before such date. (ii) In addition to the forms of settlement provided under Section 4.6, a Participant or Former Participant covered under this Section 13.5, shall be entitled to elect in writing on forms provided by the Administrative Committee one of the following settlement options: (A) approximately equal monthly, quarterly or annual installments as elected by the Participant or Former Participant over a period not exceeding the life expectancy of the Participant or Former Participant or the joint life expectancy of the Participant or Former Participant and his designated Beneficiary with the remainder of such installments, if any, after the Participant's or Former Participant's death payable to his designated beneficiary or Beneficiaries; or (B) a lump sum; or (C) any combination of the above. Notwithstanding the foregoing, the Participant or Former Participant must elect under this Section 13.5(ii) or 4.6(e) a method of settlement under which the present value of the installments to be paid to the Participant or Former Participant over his projected life span is more than 50% of the present value of the installments payable to both the Participant or Former Participant and his Beneficiary or Beneficiaries. (iii) The Beneficiary of any Participant or Former Participant eligible to make the election under Section 13.6(i) who is to receive death benefits under Section 13.5, may subject to the approval of the Administrative Committee, request that the value of the death benefit be held as a separate bookkeeping account under the terms of the Trust Agreement, with distribution to be made in the mode provided for under Section 13.5. 13.7 Actuarial Equivalency. With respect to Article XIII, when referring to amounts developed under Article IV, "actuarial value", "remaining value", "actuarial equivalent" and "value of the accrued benefit" shall be determined using GAM71 Male mortality table and interest at the rate of 5.5% per annum. However, the value so determined for any Participant or Former Participant to whom this Article XIII applies shall not be less than the actuarial value of the accrued benefit for that Participant or Former Participant as of July 31, 1983, determined using the GAM71 Male and Female (as appropriate) mortality table and interest at the rate of 5.5% per annum. When referring to amounts developed from Schedule A, Column 2, the amount of accrued benefits and actuarial equivalents shall be determined as described, using interest at the rate of 5% per annum. Effective with respect to any lump sum payable pursuant to this Article XIII on or after January 1, 1998, to any Participant or Former Participant, the value of such benefit shall be equal to the greater of (i) and (ii) below: (i) The Actuarial Equivalent of the amount set forth in Column 1 of Schedule A (using the assumptions set forth in paragraph (b) of the definition of Actuarial Equivalence in Section 2.1 of the Plan); or (ii) The "value of the accrued benefit" (as determined under Section 13.7) to which he is entitled under Schedule A, Column 2, increased with interest at 5% per annum from December 14, 1976 to the date of determination, counting only completed months. Appendix A Participating Employers The Pep Boys - Manny, Moe & Jack The Pep Boys - Manny, Moe & Jack of California Pep Boys - Manny, Moe & Jack of Delaware, Inc. (effective 1/29/95) EX-10 7 exhi1024.txt AGREEMENT THIS AGREEMENT is made as of the 3rd day of October, 2001 by and among The Pep Boys - Manny, Moe & Jack located at 3111 West Allegheny Avenue, Philadelphia, Pennsylvania 19132 ("Purchaser"), ICON INTERNATIONAL, INC., a Connecticut corporation ("Icon"), and ICON VENDOR CORPORATION, a Connecticut corporation ("IVC"). WITNESSETH: WHEREAS, Icon and IVC are engaged in the business of, among other things, procuring media advertising for customers; and WHEREAS, IVC is a wholly owned subsidiary of Icon; WHEREAS, Pep Boys - Manny, Moe & Jack of Delaware, Inc., a wholly-owned subsidiary of Purchaser ("Pep Boys-Delaware"), and affiliates of IVC and Icon have entered into a separate arrangement whereby such affiliates agreed to purchase from Pep Boys-Delaware, and Pep Boys-Delaware agreed to sell to such affiliates, certain real property and improvements (collectively, the "Property"); WHEREAS, Purchaser desires to engage IVC for the purpose of causing Icon to sell certain media advertising to Purchaser; and WHEREAS, Purchaser desires to enter into this Agreement in order to induce IVC and Icon to maintain the resources and capabilities necessary to ensure that they will have adequate funding commitments to enable them to acquire media advertising services sufficient to satisfy certain of Purchaser's advertising needs; NOW THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending legally and equitably to be bound, hereby agree as follows: 1. Engagement. Purchaser hereby engages IVC to cause Icon to sell to Purchaser, and Purchaser hereby shall purchase from Icon, media advertising services (collectively, "Media Advertising") pursuant to the Pro Forma Media Purchase Plan attached as Exhibit A hereto and made a part hereof (the "Media Plan"). 2. Term. The Term of this Agreement shall be deemed effective as of June 8, 2001 and shall include any Media Advertising purchased under that certain Letter Agreement, dated June 8, 2001, between the parties (the "Letter Agreement") and shall expire on November 30, 2005. 3. Agreement of Icon. Icon agrees to sell the Media Advertising to Purchaser, upon IVC's request, pursuant to the Media Plan. 4. Consideration. (a) In exchange for Media Advertising actually delivered pursuant to the Media Plan (assuming a 60/40 Network Cable to Local Market Spot split), Purchaser shall pay to IVC an aggregate net purchase price of up to $39,773,275 million (the "Target Purchase Price," and any portion thereof, the "Purchase Price"). All Media Advertising purchases hereunder shall be non-commissionable. (b) Purchaser shall receive a credit against the Purchase Price in an amount equal to one-half (1/2) of the amount by which the aggregate net sales proceeds IVC and its affiliates receive from the sale of the Property (the "Property Market Value") exceeds $2,000,000. For purposes hereof, "net sales proceeds" shall mean the gross sales proceeds received by IVC (or its affiliate) from the sale of the Property less (i) all documented out-of-pocket costs incurred by IVC (or its affiliates) in connection with acquiring the Property from Purchaser and selling the property to a third party buyer, including without limitation due diligence expenses, legal fees, commissions, title insurance, survey and recording costs, and conveyance or similar taxes, and (ii) all documented out-of-pocket costs incurred in connection with the Property between the date of acquisition from Purchaser and the date of sale to a third party, including, without limitation, with respect to property taxes, insurance, security, improvements, repairs, and maintenance and utilities. (c) Payment for the Media Advertising shall be as follows: (i) Payment for each invoice shall be due and payable in full within thirty (30) days after receipt by Purchaser of undisputed written proof of performance. Amounts invoiced must reflect the approved Media Advertising schedule. Any amount shown on the invoice, that is not approved as part of the advertising procedure, will not be paid by Purchaser. Media Advertising shall only be invoiced after the applicable schedule has run. All invoices shall be sent to Purchaser via overnight or regular mail, as facsimile invoice copies, except those which evidence overdue amounts, will not be paid. (ii) If any undisputed amount owed to IVC hereunder is overdue, IVC shall send a reminder notice to Purchaser. If any such amount remains unpaid within five (5) days of Purchaser's receipt of such reminder notice, Purchaser shall pay to IVC interest at the rate of twelve percent (12%) per annum (or, if less, the maximum rate allowed by law) on such amount. (iii) The obligation of Purchaser to pay each invoice after delivery of the applicable Media Advertising, on an individual transaction by transaction basis, shall be absolute and unconditional, provided that such Media Advertising invoiced has been provided by Icon in accordance with the terms of this Agreement, and not subject to any offset or recoupment right or any other defense or counterclaim which Purchaser may have against IVC, Icon or the applicable media advertising provider now or in the future either hereunder or otherwise. (d) Notwithstanding the foregoing Section 4(c), IVC shall have the right, in its sole discretion, to require that Purchaser pay in advance for Media Advertising, if at any time Purchaser fails to pay two (2) two consecutive undisputed invoices by their due date. If IVC so elects by delivering written notice to Purchaser, then prior to the ordering by Icon or IVC of any Media Advertising (or any portion thereof), Purchaser shall forward the Purchase Price for such Media Advertising (or portion thereof) to IVC. (e) All payments by Purchaser shall be by check or wire transfer made payable to the order of Icon Vendor Corporation. Checks shall be addressed as follows: Icon Vendor Corporation, P.O. Box 32389, Hartford, Connecticut 06150-2389. Wire transfers shall be sent as follows: Fleet Boston Financial, 1185 6th Avenue, New York, NY 10036, ABA # 021200339, for the account of Icon Vendor Corporation, Account # 9429124218. 5. Obligations and Acknowledgments of IVC and Icon (a) IVC shall cause Icon to deliver the Media Advertising in accordance with the Media Plan. Icon shall deliver all Media Advertising it is directed by IVC to deliver in accordance with the Media Plan. (b) IVC and Icon hereby acknowledge and agree that all advertisements and other material to be used in connection with the Media Advertising (collectively, the "Advertisements") furnished by Purchaser constitute the property of Purchaser and that neither IVC nor Icon shall have claim or proprietary interest in or to designs, patents, or trademarks pertaining to the goods and/or services of Purchaser, including any and all packaging, labels, and logos, as well as any copyrighted material contained in the Advertisements or arising out of the services rendered to Purchaser hereunder. (c) IVC and Icon acknowledge and agree that all media broadcasts or publications secured under the terms of this Agreement shall be free and clear of all liens, conflicting claims, or encumbrances. 6. Obligations and Acknowledgments of Purchaser (a) All Advertisements will be furnished by Purchaser to IVC sufficiently in advance of their scheduled use to permit IVC to cause Icon to fulfill its commitments hereunder in the ordinary course of business. (b) Purchaser acknowledges and agrees that Purchaser shall be solely responsible for the content of each and every Advertisement and shall defend, indemnify, and hold harmless IVC and Icon from and against any and all claims, demands, damages, losses liabilities, expenses, actions or causes of action (including reasonable attorneys' fees) arising out of the Advertisements or any claims of infringement or violation of any third party's copyright, patent, trademark or other property right in connection with the Advertisements. (c) If any Media Advertising is canceled as a result of Purchaser's action or inaction, Purchaser shall reimburse IVC or Icon (as applicable) for any out of pocket costs or expenses incurred directly as a result of such cancellation. 7. Guaranteed Minimum Payments. (a) For purposes of this Agreement, the following definitions shall apply: (i) "Agreement Year" means the period between the date of this Agreement and the first Anniversary Date or between two immediately succeeding Anniversary Dates. (i) "Anniversary Dates" means November 30, 2002, 2003, 2004 and 2005. (ii) "Carryover Minimum Credits" for a particular Anniversary Date shall mean the amount by which Guaranteed Minimum Credits and Carryover Minimum Credits applicable to the immediately preceding Anniversary Date exceeded the Guaranteed Minimum Payment for such immediately preceding Anniversary Date. (iii) "Guaranteed Minimum Credit" for any Media Advertising purchased shall be equal to the Purchase Price of such Media Advertising multiplied by the Minimum Credit Ratio for such Media Advertising. Guaranteed Minimum Credits are applicable as and when the related Purchase Price is actually paid by Purchaser. (iv) "Guaranteed Minimum Payment" for each Anniversary Date shall be $1,805,306. (v) "Minimum Credit Ratio" shall be as set forth in the Media Plan. (vi) "Minimum Payment" for a particular Anniversary Date shall mean the Guaranteed Minimum Payment for such Anniversary Date, less (i) the Guaranteed Minimum Credits applicable with respect to such Anniversary Date, and (ii) any Carryover Minimum Credits applicable with respect to such Anniversary Date. (b) As an inducement to IVC and Icon to enter into this Agreement, and to any third party to take an assignment of the right to receive the Minimum Payments, Purchaser agrees that five (5) business days after IVC has supplied Purchaser with a written calculation specifying the Minimum Payment Due, Purchaser will pay the Minimum Payment due with respect to such Anniversary Date regardless of the reason that sufficient Guaranteed Minimum Credits have not been accumulated in an amount sufficient to eliminate such Minimum Payment. (c) In the event that Purchaser is required to make a Minimum Payment pursuant to subparagraph (b) hereof, Purchaser shall be entitled to a credit in the amount of such Minimum Payments against future Media Advertising payable hereunder at such time thereafter, if ever, that the total of all Guaranteed Minimum Credits from Media Advertising purchases equals or exceeds the total of all Guaranteed Minimum Payments required to be made hereunder. Under no other circumstances whatsoever, shall Purchaser be entitled to a credit for Minimum Payments made. (d) Notwithstanding anything herein to the contrary other than subsection (c) of this Section 7, Purchaser's obligation to pay for Media Advertising that has been delivered to Purchaser pursuant to the Media Plan shall be and remain an obligation of Purchaser independent of and in addition to any Minimum Payments due. (e) It will be a requirement of any third party assignees that Purchaser's obligation to pay the Minimum Payments be and remain absolute, unconditional and irrevocable, regardless of the reason or reasons that Purchaser does not acquire or take delivery of any or all of the Media Advertising. Without limiting the generality of the foregoing, and to induce any such third party to pay a purchase price, or to provide loans or other financial accommodations to IVC, and thereby assist IVC in providing the Media Advertising to Purchaser, Purchaser agrees that IVC's or Icon's default under this or any other agreement, including IVC's or Icon's failure to provide the Media Advertising, shall not relieve Purchaser of its obligation to pay the Minimum Payments; and in furtherance hereof, Purchaser agrees to limit its rights and remedies as more fully described in Section 10 below. 8. Representations and Warranties. (a) IVC and Icon hereby represents and warrants to Purchaser that: (i) IVC and Icon are duly organized and validly existing under the laws of the State of Connecticut and have the capacity to enter into this Agreement, and execution and delivery of this Agreement has been duly authorized by IVC and Icon; and (ii) Neither IVC nor Icon are subject to any restriction, contractual or otherwise, which prevents them from entering into and carrying out its obligations under this Agreement, and neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default of any term or provision of any contract, commitment, indenture, or other agreement or restriction (including statutory, regulatory, administrative, or judicial restrictions) to which IVC or Icon is a party or is otherwise subject. (b) Purchaser hereby represents and warrants to IVC and Icon that: (i) Purchaser is duly organized and validly existing under the laws of the state of its organization and has the capacity to enter into this Agreement, and execution and delivery of this Agreement has been duly authorized by Purchaser; and (ii) Purchaser is not subject to any restriction, contractual or otherwise, which prevents Purchaser from entering into and carrying out its obligations under this Agreement, and neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default of any term or provision of any contract, commitment, indenture, or other agreement or restriction (including statutory, regulatory, administrative, or judicial restrictions) to which Purchaser is a party or is otherwise subject. 9. Purchaser's Default. (a) The following events shall constitute "Purchaser Defaults:" (i) Purchaser shall fail to pay all or any portion of the Minimum Payments when due. (ii) Purchaser shall fail to perform any terms, covenants or agreements contained in this Agreement or in any other document or instrument executed or delivered in connection herewith, including Purchaser's obligation to pay the Purchase Price (on the payment terms set forth in Section 4 above) for Media Advertising provided pursuant to the Media Plan, and any such failure to perform shall remain uncured for a period of thirty (30) days from Purchaser's receipt of written notice of such failure to perform. (iii) Any representation or warranty of Purchaser in this Agreement or in any other document or instrument executed or delivered in connection herewith shall have been false in any material respect upon the date when made or deemed to have been made or repeated. (iv) The occurrence of any default in the payment or performance, and the subsequent acceleration, of any debt or other obligations owed by Purchaser to any other person or entity unaffiliated with IVC or Icon with an outstanding principal balance in excess of $5,000,000. (v) Purchaser shall make an assignment for the benefit of creditors, or admit in writing its general inability to pay or generally fail to pay its debts as they mature or become due, or shall petition or apply for the appointment of a trustee or other custodian, liquidator or receiver of Purchaser or of any substantial part of Purchaser's assets or shall commence any case or other proceeding relating to Purchaser under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or shall take any action to authorize or in furtherance of any the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against Purchaser and such filing, case or proceeding shall not have been bonded against, vacated or dismissed within forty-five (45) days of its effective date. (b) Upon the occurrence of a Purchaser Default, IVC may, at its option, upon written notice and demand to Purchaser, declare all Minimum Payments to be immediately due and payable in full, whereupon IVC's and Icon's obligations to supply the Media Advertising set forth in the Pro Forma Media Purchase Plan shall thereupon terminate, and neither IVC nor Icon shall have any further obligations to Purchaser under this Agreement. 10. IVC Default. (a) The following events shall constitute "IVC Defaults". (i) IVC or Icon shall fail to perform any terms, covenants or agreements contained in this Agreement or in any other document or instrument executed or delivered in connection herewith, other than Icon's obligation to deliver Media Advertising pursuant to the Media Plan, and any such failure to perform shall remain uncured for a period of thirty (30) days from IVC or Icon's, as the case may be, receipt of written notice of such failure to perform. (ii) Icon shall fail to deliver Media Advertising, on an annual basis, substantially in accordance with the material aspects of the Media Plan. (iii) Any representation or warranty of IVC or Icon in this Agreement or in any other document or instrument executed or delivered in connection herewith shall have been false in any material respect upon the date when made or deemed to have been made or repeated. (iv) IVC or Icon shall make an assignment for the benefit of creditors, or admit in writing its general inability to pay or generally fail to pay its debts as they mature or become due, or shall petition or apply for the appointment of a trustee or other custodian, liquidator or receiver of IVC or Icon or of any substantial part of IVC's or Icon's assets or shall commence any case or other proceeding relating to IVC or Icon under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or shall take any action to authorize or in furtherance of any the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against IVC or Icon and such filing, case or proceeding shall not have been bonded against, vacated or dismissed within forty-five (45) days of its effective date. (b) Upon the occurrence of an IVC Default, Purchaser may, at its option, upon written notice to IVC, terminate this Agreement and all of its obligations hereunder, except for its obligation to make the Minimum Payments on their scheduled due dates. Upon the termination of this Agreement following the occurrence of an IVC Default, IVC and Icon, jointly and severally, shall be obligated to pay to Purchaser, within thirty (30) days of such termination an amount equal to: P x (1 - (DPP / TPP)) where, P = the Property Market Value up to $2,000,000 + one half of the amount, if any, by which the Property Market Value exceeds $2,000,000 DPP = the Purchase Price for the Media Advertising actually delivered pursuant to the Media Plan TPP = the Targeted Purchase Price (i.e., $39,773,275) (c) No breach of this Agreement, including the failure to provide the Media Advertising pursuant to the Media Plan, by IVC or Icon shall relieve or excuse Purchaser from its obligation to make the Minimum Payments. Purchaser expressly acknowledges and agrees that IVC's rights to the Minimum Payments are freely assignable and that Purchaser's obligations to make the Minimum Payments shall not be subject to any rights of set off or recoupment, or subject to any counterclaim or defense which Purchaser may claim to have for the breach by IVC or Icon of this Agreement; and Purchaser agrees that in any legal or equitable proceeding to enforce Purchaser's obligation to make the Minimum Payments, Purchaser shall not interpose any claim for setoff or recoupment or attempt to avoid its obligation to make the Minimum Payments based, in whole or in part, upon IVC's or Icon's breach of this Agreement. (d) Except with respect to an IVC Default under Section 10(a)(ii) for which Purchaser's remedy set forth in Section 10(b) shall be exclusive, the remedies of Purchaser set forth in this Section 10 shall be in addition to, and shall not in any way prejudice, any other remedies available to Purchaser at law or equity on account of damages caused by IVC's or Icon's failure to perform under this Agreement; provided, however, that Purchaser may not assert any such claim or cause of action as a set off or recoupment, defense or counterclaim to the Purchaser's obligation to make the Minimum Payments; but rather Purchaser may only assert such claim or cause of action against IVC or Icon in an action that is separate and independent from any action to recover the Minimum Payments. 11. Assignment. This Agreement shall become effective when it shall have been executed by IVC, Icon and Purchaser and thereafter shall be binding upon, inure to the benefit of and be enforceable by IVC, Icon and Purchaser, and their respective permitted successors and assigns. IVC may assign any or all of its rights and interest (but not its obligations) under this Agreement, without the prior written consent of Purchaser. Purchaser may assign any or all of its rights or interest, but not its obligations, under this Agreement. Not by way of limitation of the foregoing, Purchaser acknowledges that IVC may freely assign to any third party IVC's rights to receive the Minimum Payments. Any assignment in violation of this Agreement shall be void. 12. Miscellaneous. (a) Notices. All notices required to be given pursuant to this Agreement shall be deemed given when actually delivered, if delivered in person, or three (3) days after being deposited in the United States certified mail service, postage prepaid, and addressed to the receiving party as follows: For IVC: Icon Vendor Corporation 107 Elm Street/4 Stamford Plaza Stamford, Connecticut 06902 Attention: Mr. Clarence V. Lee III, EVP/CFO For Icon: Icon International, Inc. 107 Elm Street/4 Stamford Plaza Stamford, Connecticut 06902 Attention: Mr. John Kramer, President For Purchaser: The Pep Boys - Manny, Moe & Jack 3111 West Allegheny Avenue Philadelphia, Pennsylvania 19132 Attention: SVP - Chief Administrative Officer cc: Chief Legal Officer (b) Severability. The invalidity, illegality, or unenforceability of any provisions of this Agreement shall not affect the validity, legality, and enforceability of the remaining provisions of this Agreement. (c) Waiver. Any waiver (whether express or implied) by any party hereto of the breach of any term or condition of this Agreement shall not constitute a waiver of any subsequent breach of the same or any other term or condition of this Agreement. (d) Governing Law; Jurisdiction. This Agreement shall be interpreted in its entirety in accordance with the laws of the State of Connecticut. Each of IVC, Icon and Purchaser hereby submit to the exclusive jurisdiction of the state or federal courts resident in the State of Connecticut, if IVC or Icon is the defendant, or in the County of Philadelphia, Commonwealth of Pennsylvania, if Purchaser is the defendant, for purposes of resolving any disputes arising under this Agreement. EACH PARTY EXPRESSLY WAIVES ITS RIGHT TO A JURY TRIAL IN CONNECTION WITH ANY LITIGATION OVER A DISPUTE UNDER THIS AGREEMENT. (e) No Joint Venture. Nothing contained herein shall be construed to constitute or deem either party as a partner, joint venturer, employee, associate, or agent of the other. (f) Entire Agreement. This Agreement is the entire agreement between the parties relating to the subject matter hereof and supersedes all prior agreements (including the Letter Agreement), proposals, letters of intent, representations and commitments. This Agreement may be amended only by an instrument executed by the authorized representatives of all parties. [signature page follows] IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. Signed, Sealed, and Delivered in the Presence of: ICON INTERNATIONAL, INC. /s/ Valerie Kappel By: /s/ Clarence V. Lee, III Its: /s/ EVP/CFO ICON VENDOR CORPORATION /s/ Valerie Kappel By: /s/ Clarence V. Lee, III Its: EVP/CFO THE PEP BOYS - MANNY, MOE & JACK /s/ Brian Zuckerman By: /s/ Frederick A. Stampone Its: SVP - Chief Administrative Officer EX-10 8 exh1025.txt AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT December 13, 2001 Congress Financial Corporation 1133 Avenue of the Americas New York, New York 10036 Ladies and Gentlemen: Congress Financial Corporation ("Lender") and The Pep Boys - Manny, Moe & Jack, a Pennsylvania corporation ("Pep Boys"), The Pep Boys Manny, Moe & Jack of California, a California corporation ("PBY-California"), Pep Boys Manny Moe & Jack of Delaware, Inc., a Delaware corporation ("PBY-Delaware"), and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc., a Delaware corporation ("PBY-Puerto Rico"; and together with PBY, PBY-California and PBY-Delaware, each individually, a "Borrower" and collectively, "Borrowers" as hereinafter further defined), PBY Corporation, a Delaware corporation ("PBY") and Carrus Supply Corporation, a Delaware corporation ("Carrus" and, together with PBY, each individually, a "Guarantor" and collectively, "Guarantors" as hereinafter further defined) have entered into certain financing arrangements pursuant to which Lender may make loans and advances and provide other financial accommodations to Borrower as set forth in the Loan and Security Agreement, dated September 22, 2000, as amended by Amendment No. 1 to Loan and Security Agreement, dated as of June 29, 2001 (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement") and the agreements, documents and instruments at any time executed and/or delivered in connection therewith or related thereto, including, but not limited to, this Amendment, but excluding the Synthetic Lease Facility Agreements, (all of the foregoing together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the "Financing Agreements"). Borrowers and Guarantors have requested that Lender consent to the Borrowers entering into the PNC Credit Card Documents (as defined below) and enter into certain amendments to the Financing Agreements in connection therewith. Lender is willing to agree to the foregoing, subject to the terms and conditions contained herein. In consideration of the foregoing, the mutual agreements and covenants contained herein, and other good and valuable consideration, the adequacy and sufficiency of which are hereby acknowledged, Lender, each Borrower and each Guarantor agree as follows: 1. Definitions. (a) Additional Definitions. As used herein, the following terms shall have the respective meanings given to them below and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation of, each of the following definitions: (i) "Credit Card Issuer" shall mean PNC Bank, National Association. (ii) "PNC Credit Card Documents" shall mean each of the documents listed on the attached Schedule A, dated as of December 13, 2001 between Credit Card Issuer and the Borrowers, as in effect on December 13, 2001, and as such documents may be hereafter amended to the extent permitted under the Intercreditor Agreement dated as of December 13, 2001 by and between Credit Card Issuer and Lender, as amended. (b) Interpretation. For purposes of this Amendment, unless otherwise defined herein, all terms used herein shall have the respective meanings assigned to them in the Loan Agreement. 2. Consents. Notwithstanding anything to the contrary contained in the Loan Agreement or the other Financing Agreements, and subject to the terms and conditions contained herein and the other Financing Agreements, Lender hereby consents to the Borrowers and Guarantors entering into the PNC Credit Card Documents. 3. Amendments to Loan Agreement. (a) Encumbrances. Section 9.8(a) of the Loan Agreement is hereby amended by adding thereto, immediately following Section 9.8(a)(xvi), the following new subsection: "(xvii") liens and security interests on accounts, inventory and certain other personal property of the Borrowers and Guarantors pursuant to, and as more particularly described in, the PNC Credit Card Documents." (b) Section 9.8(b) of the Loan Agreement is hereby amended to replace the reference in the first sentence to "Sections 9.8 (a)(i) through (xiv) and Section 9.8(a)(xvi)" with "Sections 9.8 (a)(i) through (xiv), Section 9.8(a) (xvi) and Section 9.8(a)(xvii)." (c) Indebtedness. Section 9.9(j) of the Loan Agreement is hereby deleted in its entirety and the following substituted therefor: "(j) the Indebtedness of Borrowers, Guarantors and their Subsidiaries set forth on Schedule 9.9 hereto; provided, that, (i) except as otherwise provided in clauses (ii) and (iv) below, the Borrower, Guarantor or Subsidiary obligated on such Indebtedness may only make regularly scheduled or other mandatory payments of principal and interest in respect of such Indebtedness in accordance with the terms of the agreement or instrument evidencing or giving rise to such Indebtedness as in effect on the date hereof, (ii) such Borrower, Guarantor or Subsidiary obligated on such Indebtedness may make optional prepayments in respect of such Indebtedness, provided, that, each of the following conditions is satisfied as determined by Lender: (A) as of the date of such payment and after giving effect thereto, Excess Availability for each of the immediately preceding thirty (30) consecutive days shall have been not less than $25,000,000, and as of the date of such payment and after giving effect thereto, Excess Availability shall be not less than $25,000,000, and (B) as of the date of such payment and after giving effect thereto, no Event of Default or act, condition or event which with notice or passage of time or both would constitute an Event of Default shall exist or have occurred and be continuing, (iii) such Borrower, Guarantor or Subsidiary shall not amend, modify, alter or change the terms of such Indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof except, that, such Borrower, Guarantor or Subsidiary, as the case may be, may, after prior written notice to Lender, amend, modify, alter or change the terms thereof so as to extend the maturity thereof, or defer the timing of any payments in respect thereof, or to forgive or cancel any portion of such Indebtedness (other than pursuant to payments thereof), or to reduce the interest rate or any fees in connection therewith, or to make the provisions thereof less restrictive or burdensome than the terms or conditions of such Indebtedness as in effect on the date hereof, (iv) such Borrower, Guarantor or Subsidiary shall not, directly or indirectly, redeem, retire, defease, purchase or otherwise acquire such Indebtedness, or set aside or otherwise deposit or invest any sums for such purpose (except as expressly required pursuant to the terms thereof, or with proceeds of any Refinancing Indebtedness permitted hereunder), and (v) Borrowers and Guarantors shall furnish to Lender all notices or demands in connection with such Indebtedness either received by a Borrower, Guarantor, or Subsidiary or on its behalf, promptly after the receipt thereof, or sent by a Borrower, Guarantor, Subsidiary or on its behalf, concurrently with the sending thereof, as the case may be; and" (d) Indebtedness. Section 9.9 of the Loan Agreement is hereby amended by adding thereto, immediately following Section 9.9(r), the following new subsection: "(s) Indebtedness of the Borrowers pursuant to the PNC Credit Card Documents." 4. Collateral. To secure payment and performance of all obligations, each Borrower and Guarantor hereby grants to Lender and hereby confirms, reaffirms and restates its prior grant to Lender under the Loan Agreement and the other Financing Agreements, a continuing security interest and lien upon, and a right of set-off against, and hereby assigns to Lender, as security, all of the Collateral. 5. Additional Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by each Borrower and Guarantor to Lender pursuant to the other Financing Agreements, each Borrower and Guarantor hereby jointly and severally represents, warrants and covenants with and to Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Financing Agreements: (a) No Event of Default or condition or event which with notice or passage of time or both would constitute an Event of Default exists or has occurred as of the date of this Amendment (after giving effect to the amendments made and consents and waivers granted by Lender pursuant to this Amendment). As of the date of any Borrower or Guarantor entering into the PNC Credit Card Documents and after giving effect to such transaction, the aggregate amount of outstanding Exempted Debt represented by such transaction, when aggregated with all other outstanding Exempted Debt, shall not exceed the Exempted Debt Limit, and such transaction is and shall be in compliance with the terms and conditions set forth in the Pep Boys Indentures. (b) This Amendment and each other agreement or instrument to be executed and delivered by Borrowers and Guarantors hereunder has been duly executed and delivered by each Borrower and Guarantor and is in full force and effect as of the date hereof, and the agreements and obligations of each Borrower contained herein and therein constitute legal, valid and binding obligations of each Borrower and Guarantor enforceable against each Borrower and Guarantor in accordance with their terms. (c) Neither the execution and delivery of the PNC Credit Card Documents, nor the consummation of the transactions contemplated by the PNC Credit Card Documents, nor compliance with the provisions of the PNC Credit Card Documents or instruments thereunder shall result in (i) the creation or imposition of any lien, claim, charge or encumbrance upon any of the Collateral, except in favor of Lender or as expressly permitted by Section 9.8 of the Loan Agreement (after giving effect to this Amendment) and by the other Financing Agreements or (ii) the incurrence, creation, assumption of any Indebtedness of any Borrower or Guarantor, except as expressly permitted under Section 9.9 and 9.10 of the Loan Agreement (after giving effect to this Amendment) and by the other Financing Agreements. (d) No court of competent jurisdiction has issued any injunction, restraining order or other order which prohibits consummation of the transactions contemplated in respect of the PNC Credit Card Documents, and no governmental or other action or proceeding has been threatened or commenced in the United States of America, seeking any injunction, restraining order or other order which seeks to void or otherwise modify the transactions described in the PNC Credit Card Documents. Neither the execution and delivery of the PNC Credit Card Documents, nor the consummation of the transactions contemplated by the PNC Credit Card Documents, nor compliance with the provisions thereof, shall violate any Federal or state securities laws or any other law or regulation or any order or decree of any court or governmental instrumentality in respect or shall conflict with or result in the breach of, or constitute a default in any respect under, any indenture, or other material mortgage, agreement, instrument or undertaking to which any Borrower or Guarantor is a party or may be bound, or violate any provision of the organizational documents of any Borrower or Guarantor. (e) Each Borrower and Guarantor shall take such steps and execute and deliver, and cause to be executed and delivered, to Lender, such additional UCC financing statements and termination statements, and other and further agreements, documents and instruments as Lender may require in order to more fully evidence, perfect and protect Lender's security interest in Collateral. (f) The PNC Credit Card Documents have been duly authorized, executed and delivered by each Borrower and Guarantor and are in full force and effect as of the date hereof. 6. Conditions to Effectiveness of Consent and Amendment. The effectiveness of the amendments and consents pursuant to this Amendment shall be subject to the satisfaction of each of the following conditions precedent: (a) Lender shall have received an executed original or executed original counterparts of this Amendment (as the case may be), duly authorized, executed and delivered by the respective parties hereto; (b) Lender shall have received an executed original or executed original counterparts of the Intercreditor Agreement between Credit Card Issuer and Lender, duly authorized, executed and delivered by the respective parties thereto; (c) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgments, releases, terminations and such other documents and agreements from third persons which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral; (d) Lender shall have received, in form and substance satisfactory to Lender, a true and complete copy of the PNC Credit Card Documents, duly authorized, executed and delivered by and to the appropriate parties thereto and all notices, instruments, documents and agreements relating thereto, including all exhibits and schedules thereto, together with evidence that the transactions contemplated under the terms and conditions of the PNC Credit Card Documents have been consummated prior to or contemporaneously with the execution of this Amendment; and (e) no Event of Default shall exist or have occurred and no event or condition shall have occurred or exist which notice or passage of time or both would constitute an Event of Default (after giving effect to the amendments made and consents granted by Lender pursuant to this Amendment). 7. Additional Events of Default. The parties hereto acknowledge, confirm and agree that the failure of any Borrower or Guarantor to comply with the covenants and agreements contained herein shall constitute an Event of Default under the Financing Agreements (subject to the applicable cure period, if any, with respect thereto provided for in the Loan Agreement as in effect on the date hereof). 8. Effect of this Amendment. Except as modified pursuant hereto, no other waivers, changes or modifications to the Financing Agreements are intended or implied, and in all other respects, the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of conflict between the terms of this Amendment and the other Financing Agreements, the terms of this Amendment shall control. 9. Further Assurances. The parties hereto shall execute and deliver such additional documents and take such additional actions as may be necessary to effectuate the provisions and purposes of this Amendment. 10. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the laws of the State of New York (without giving effect to principles of conflicts of laws). 11. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. Any acknowledgment or consent contained herein shall not be construed to constitute a consent to any other or further action by any Borrower or Guarantor or to entitle any Borrower or Guarantor to any other consent. The Loan Agreement and this Amendment shall be read and construed as one agreement. 12. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties thereto. Very truly yours, /s/ THE PEP BOYS - MANNY, MOE & JACK /s/ THE PEP BOYS MANNY MOE & JACK OF CALIFORNIA /s/ PEP BOYS - MANNY, MOE & JACK OF DELAWARE, INC. /s/ PEP BOYS - MANNY, MOE & JACK OF PUERTO RICO, INC. GUARANTORS /s/ PBY CORPORATION /s/ CARRUS SUPPLY CORPORATION AGREED AND ACCEPTED: /s/ CONGRESS FINANCIAL CORPORATION EX-11 9 exh11.txt
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES Exhibit 11 - Computation of Earnings per Share (in thousands, except per share data) - --------------------------------------------------------------------------------------------------------------------- Fiscal 2001 Fiscal 2000 Fiscal 1999 ------------------------------- ----------------------------- ------------------------------- Earnings Shares Per Earnings Shares Per Earnings Shares Per (Num- (Denom- Share (Num- (Denom- Share (Num- (Denom- Share erator) inator) Amount erator) inator) Amount erator) inator) Amount ------- ------- ------ ------- ------- ------ ------- ------- ------ Basic EPS Before Extraordinary Items Earnings available to common stockholders $36,100 51,348 $.70 $(53,148) 51,088 $(1.04) $29,303 50,665 $.58 ==== ======= ==== Effect of Dilutive Securities Adjustment for interest on 4% convertible subordinated notes, net of tax - - - - - - Adjustment for interest on 4% zero coupon subordinated notes, net of tax - - - - - - Common Shares assumed issued upon exercise of dilutive stock options - 687 - - - 175 ------- ------ -------- ------ ------- ------ Diluted EPS Before Extraordinary Items Earnings available to common stockholders assuming conversion $36,100 52,035 $.69 $(53,148) 51,088 $(1.04) $29,303 50,840 $.58 ======= ====== ==== ======== ====== ======= ======= ====== ==== [RESTUBBED TABLE] (Table Restubbed Below) (in thousands, except per share data) - ------------------------------------------------------------------------------------------------------ Fiscal 1998 Fiscal 1997 ----------------------------------------------------------------- Earnings Shares Per Earnings Shares Per (Num- (Denom- Share (Num- (Denom- Share erator) inator) Amount erator) inator) Amount ------- ------- ------ ------- ------- ------ Basic EPS Before Extraordinary Items Earnings available to common stockholders $ 4,974 61,543 $ .08 $ 49,611 61,133 $ .81 ===== ===== Effect of Dilutive Securities Adjustment for interest on 4% convertible subordinated notes, net of tax - - - - Adjustment for interest on 4% zero coupon subordinated notes, net of tax - - - - Common Shares assumed issued upon exercise of dilutive stock options - 197 - 524 ------- ----- ------- ------ Diluted EPS Before Extraordinary Items Earnings available to common stockholders assuming conversion $ 4,974 61,740 $ .08 $ 49,611 61,657 $ .80 ======== ====== ===== ======== ====== =====
EX-12 10 exh12.txt
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES Exhibit 12 - Statement Regarding Computation of Ratios of Earnings to Fixed Charges (in thousands, except ratios) - ---------------------------------------------------------------------------------------------------------------------- February 2, February 3, January 29, Fiscal year 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- Interest $ 51,335 $ 57,882 $ 51,557 Interest factor in rental expense 21,478 21,069 19,963 Capitalized interest 1 489 1,098 - ---------------------------------------------------------------------------------------------------------------------- (a) Fixed charges, as defined $ 72,814 $ 79,440 $ 72,618 Earnings before income taxes $ 56,404 $ (83,669) $ 44,967 Fixed charges 72,814 79,440 72,618 Capitalized interest (1) (489) (1,098) - ---------------------------------------------------------------------------------------------------------------------- (b) Earnings, as defined $ 129,217 $ (4,718) $ 116,487 - ---------------------------------------------------------------------------------------------------------------------- (c) Ratio of earnings to fixed charges (b/a) 1.8x (0.1x) 1.6x - ---------------------------------------------------------------------------------------------------------------------- (Table Restubbed Below) (in thousands, except ratios) - ---------------------------------------------------------------------------------------- January 30, January 31, Fiscal year 1999 1998 - ---------------------------------------------------------------------------------------- Interest $ 48,930 $ 39,656 Interest factor in rental expense 19,052 16,368 Capitalized interest 1,020 1,861 - ---------------------------------------------------------------------------------------- (a) Fixed charges, as defined $ 69,002 $ 57,885 Earnings before income taxes $ 7,284 $ 75,456 Fixed charges 69,002 57,885 Capitalized interest (1,020) (1,861) - ---------------------------------------------------------------------------------------- (b) Earnings, as defined $ 75,266 $ 131,480 - ---------------------------------------------------------------------------------------- (c) Ratio of earnings to fixed charges (b/a) 1.1x 2.3x - ----------------------------------------------------------------------------------------
EX-21 11 exh21.txt Exhibit 21
SUBSIDIARIES OF THE COMPANY WHERE % OF SHARES NAME INCORPORATED OWNED - ----- ------------ ----- The Pep Boys-Manny, Moe & Jack of California 3111 W. Allegheny Avenue Philadelphia, PA 19132 California 100% Pep Boys- Manny, Moe & Jack of Delaware, Inc. 3111 W. Allegheny Avenue Philadelphia, PA 19132 Delaware 100% Pep Boys- Manny, Moe & Jack of Puerto Rico, Inc. 3111 W. Allegheny Avenue Philadelphia, PA 19132 Delaware 100% Colchester Insurance Company 7 Burlington Square Burlington, VT 05401 Vermont 100% PBY Corporation Suite 946 1105 North Market Street Wilmington, DE 19899 Delaware 100% Carrus Supply Corporation 1013 Centre Road Wilmington, DE 19805 Delaware 100%
EX-23 12 exh23.txt Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Numbers 33-31765, 33-64248, 33-35592, 33-61429, 33-32857, 333-40363, 333-51585 and 333-81351 of The Pep Boys - Manny, Moe & Jack and subsidiaries on Form S-8 of our report dated March 21, 2002, appearing in this Annual Report on Form 10-K of The Pep Boys - Manny, Moe & Jack and subsidiaries for the year ended February 2, 2002. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania May 3, 2002 -----END PRIVACY-ENHANCED MESSAGE-----