Pep Boys 2007 Annual Report Download - page 123

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended February 2, 2008, February 3, 2007 and January 28, 2006
(dollar amounts in thousands, except share data)
$2,374 for which it is reasonably possible that the amount will increase or decrease within the next
twelve months. However, based on the uncertainties associated with litigation and the status of
examination, it is not possible to estimate the impact of the change.
NOTE 15—CONTINGENCIES
During the fourth quarter of 2006 and the first quarter of 2007, the Company was served with four
separate lawsuits brought by former associates employed in California, each of which lawsuits purports
to be a class action on behalf of all current and former California store associates. One or more of the
lawsuits claim that the plaintiff was not paid for (i) overtime, (ii) accrued vacation time, (iii) all time
worked (i.e. ‘‘off the clock’’ work) and/or (iv) late or missed meal periods or rest breaks. The plaintiffs
also allege that the Company violated certain record keeping requirements arising out of the foregoing
alleged violations. The lawsuits (i) claim these alleged practices are unfair business practices,
(ii) request back pay, restitution, penalties, interest and attorney fees and (iii) request that the
Company be enjoined from committing further unfair business practices. During the third quarter of
2007, the Company reached a settlement in principle regarding the accrued vacation time claims (which
is scheduled to be considered by the court for final approval on May 5, 2008). The Company continues
to vigorously defend the remaining claims.
The Company is also party to various other actions and claims arising in the normal course of
business.
The Company believes that amounts accrued for awards or assessments in connection with all such
matters, which amounts were increased by $6,250 in fiscal 2007, are adequate and that the ultimate
resolution of these matters will not have a material adverse effect on the Company’s financial position.
However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of
which cannot currently be estimated. While the Company does not believe that the amount of such
excess loss could be material to the Company’s financial position, any such loss could have a material
adverse effect on the Company’s results of operations in the period(s) during which the underlying
matters are resolved.
NOTE 16—INTEREST RATE SWAP AGREEMENT
On June 3, 2003, the Company entered into an interest rate swap for a notional amount of
$130,000. 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 2, 2008 and
February 3, 2007, the fair value was an asset of $22 and $4,150, respectively, recorded within other
long-term assets on the balance sheet. In the fourth quarter of fiscal 2006, the Company determined it
was not in compliance with SFAS No. 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. 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 discussed in the next sentence, on an
annual and quarterly basis and concluded there was no material impact on the fourth quarter of fiscal
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10-K