Pep Boys 2007 Annual Report Download - page 124

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)
2006 or any historical periods, on an individual or aggregate basis. The three other errors consisted of:
(i) $3,700 of amortization expense on leasehold improvements classified in land and therefore not
depreciated, (ii) $500 of understated closed store reserves and (iii) $400 of an overstated accrual for
non-qualified defined contributions. 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 records 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. The Company has designated the swap a cash flow hedge on the first $200,000 of the
Company’s $320,000 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 during fiscal 2006. The Company documented that the swap met the requirements of
SFAS No. 133 for hedge accounting on April 9, 2007 and prospectively records the effective portion of
the change in fair value through Accumulated Other Comprehensive Loss. During the period from
February 4, 2007 through April 8, 2007, a $974 expense was recorded in interest expense for the change
in fair value of this swap.
On November 27, 2007, the Company sold the land and buildings for 34 owned properties to an
independent third party. The Company used $162,558 of the net proceeds from such transaction to
prepay a portion of the Senior Secured Term Loan facility which eliminated a portion of the future
interest payments hedged by the November 2, 2006 interest rate swap. The Company concluded that it
was not probable that those future interest payments would occur. In accordance with SFAS No. 133,
the Company discontinued hedge accounting for the unmatched portion of the November 2, 2006 swap
and reclassified a $2,259 pre-tax loss applicable to the unmatched portion of the $200,000 interest rate
swap from other comprehensive income to interest expense. On November 27, 2007, the Company
re-designated $145,000 notional amount of the $200,000 interest rate swap as a cash flow hedge to fully
match the future interest payments under the Senior Secured Notes. As a result, all future changes in
this interest rate swap’s fair value that has been re-designated as a hedge will be recorded to
Accumulated Other Comprehensive Loss. From the period of November 27, 2007 through February 1,
2008, the Company incurred interest expense of $1,907 for changes in fair value related to the $55,000
unmatched portion of this swap. On February 1, 2008, the Company recorded $4,539 within accrued
expenses to reduce the notional amount of the interest rate swap to $145,000 from the original
$200,000 amount. The $4,539 was paid on February 4, 2008. The fair value of the swap was a net
$10,985 payable recorded within other long-term liabilities on the balance sheet at February 2, 2008
and a net $1,372 receivable recorded within other long-term assets on the balance sheet at February 3,
2007.
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10-K