Pep Boys 2006 Annual Report Download - page 69

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30
Fixed Rate Debt
The table below summarizes the fair value and contract terms of fixed rate debt instruments held by
the Company at February 3, 2007:
(dollar amounts in thousands) Amount
Average
Interest Rate
FairvalueatFebruary3,2007............................ $189,268
Expected maturities:
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 268 8.00%
2008.................................................. — —
2009.................................................. — —
2010.................................................. — —
2011.................................................. — —
Thereafter............................................. 200,000 7.50%
$200,268
At January 28, 2006, the Company had outstanding $319,215,000 of fixed rate notes with an aggregate
fair market value of $315,039,000.
Interest Rate Swap
On June 3, 2003, the Company entered into an interest rate swap for a notional amount of
$130,000,000. The Company had designated the swap as a cash flow hedge of the Company’s real estate
operating lease payments. The interest rate swap converts the variable LIBOR portion of the lease
payment to a fixed rate of 2.90% and terminates on July 1, 2008. If the critical terms of the interest rate
swap or hedge item do not change, the interest rate swap is considered to be highly effective with all
changes in fair value included in other comprehensive income. As of February 3, 2007 and January 28,
2006, the fair value was $4,150,000 and $5,790,000, respectively. In the fourth quarter of fiscal 2006, the
Company determined it was not in compliance with FAS 133 for hedge accounting and, accordingly,
recorded a reduction of rent expense, which is included in Costs of Merchandise and Costs of Service
Revenues, for the cumulative fair value change of $4,150,000. This change in fair value had previously been
recorded in Accumulated Other Comprehensive Income (Loss) on the consolidated balance sheets. The
Company evaluated the impact of this error, along with three other errors, on an annual and quarterly
basis and concluded there was no material impact on any historical periods, on an individual or aggregate
basis. The Company corrected these errors in the fourth quarter of fiscal 2006, resulting in no material
impact to the consolidated financial statements. The Company has removed its designation as a cash flow
hedge on this transaction and will record the change in fair value through its operating statement until the
date of termination.
On November 2, 2006, the Company entered into an interest rate swap for a notional amount of
$200,000,000. The Company has designated the swap a cash flow hedge on the first $200,000,000 of the
Company’s $320,000,000 senior secured notes. The interest rate swap converts the variable LIBOR portion
of the interest payments to a fixed rate of 5.036% and terminates in October 2013. The Company did not
meet the documentation requirements of SFAS No. 133, at inception or as of February 3, 2007 and,
accordingly, recorded the increase in the fair value of the interest rate swap of $1,490 as a reduction to
Interest Expense. The Company intends to meet the documentation requirements of SFAS No. 133 for
hedge accounting in the first quarter of fiscal 2007 and prospectively then record the effective portion of
the change in fair value through Accumulated Other Comprehensive Income (Loss).