Pep Boys 2008 Annual Report Download - page 37

31
that will be granted to key employees or who will receive any grants under the 2009 Plan after the 2009 Annual
Meeting, except for the automatic grants to non-employee directors described above.
On April 17, 2009, the closing price of a share of Pep Boys Stock on the New York Stock Exchange was $7.62.
Federal Income Tax Consequences. The federal income tax consequences arising with respect to grants awarded
under the 2009 Plan will depend on the type of grant. The following provides only a general description of the
application of federal income tax laws to certain grants under the 2009 Plan. This discussion is intended for the
information of stockholders considering how to vote at the 2009 Annual Meeting and not as tax guidance to
participants in the 2009 Plan, as the consequences may vary with the types of grants made, the identity of the
recipients, and the method of payment or settlement. The summary does not address the effects of other federal
taxes (including possible “golden parachute” excise taxes) or taxes imposed under state, local, or foreign tax laws.
From the recipients’ standpoint, as a general rule, ordinary income will be recognized at the time of payment of
cash or delivery of actual shares of Pep Boys Stock. Future appreciation on shares of Pep Boys Stock held beyond
the ordinary income recognition event will be taxable at capital gains rates when the shares of Pep Boys Stock are
sold. We, as a general rule, will be entitled to a tax deduction that corresponds in time and amount to the ordinary
income recognized by the recipient, and we will not be entitled to any tax deduction in respect of capital gain
income recognized by the recipient.
Exceptions to these general rules may arise under the following circumstances: (i) if shares of Pep Boys Stock,
when delivered, are subject to a substantial risk of forfeiture by reason of failure to satisfy any employment-,
service-, or performance-related condition, ordinary income taxation and our tax deduction will be delayed until the
risk of forfeiture lapses (unless the recipient makes a special election to ignore the risk of forfeiture); (ii) if an
employee is granted a stock option that qualifies as an “incentive stock option,” no ordinary income will be
recognized, and we will not be entitled to any tax deduction, if shares of Pep Boys Stock acquired upon exercise of
such stock option are held more than the longer of one year from the date of exercise and two years from the date of
grant; (iii) we will not be entitled to a tax deduction for compensation attributable to grants to our chief executive
officer or certain other of our executive officers, if and to the extent such compensation does not qualify as
“performance-based compensation” under Section 162(m) of the Code, and such compensation, along with any
other non-performance-based compensation paid in the same calendar year, exceeds $1 million; and (iv) a grant may
be taxable to the recipient at 20 percentage points above ordinary income tax rates at the time it becomes vested,
plus interest, even if that is prior to the delivery of the cash or shares of Pep Boys Stock in settlement of the grant, if
the grant constitutes “deferred compensation” under Section 409A of the Code, and the requirements of Section
409A of the Code are not satisfied.
Section 162(m) of the Code generally disallows a publicly held corporation’s tax deduction for compensation
paid to its chief executive officer and certain other of its executive officers in excess of $1,000,000 in any year.
Compensation that qualifies as performance-based compensation is excluded from the $1,000,000 deductibility cap
and therefore remains fully deductible by the corporation that pays it. We intend that stock options granted under
the 2009 Plan will qualify as performance-based compensation. Restricted Stock grants, phantom units and
dividend equivalents granted under the 2009 Plan will not qualify as performance-based compensation under the
2009 Plan.
The 2009 Plan provides that we have the right to require the recipient of any grant under the 2009 Plan to (i) pay
to us an or otherwise make available to us an amount sufficient to satisfy any federal, state and/or local withholding
tax requirements prior to the delivery or transfer of any certificates for shares of Pep Boys Stock or (ii) take
whatever action we deem appropriate to protect our interests with respect to tax liabilities, including, without
limitation, allowing the grantee to surrender, or we retain from shares of Pep Boys Stock that would otherwise be
deliverable in connection with an award, a number of shares of Pep Boys Stock equal to such tax liability.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
“FOR”
THE AMENDMENT AND RESTATEMENT OF THE PEP BOYS STOCK INCENTIVE PLAN