Pep Boys 2008 Annual Report Download - page 145

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2009, February 2, 2008 and February 3, 2007
(dollar amounts in thousands, except share data)
effective tax rate. The Company is undergoing examinations of its tax returns in certain jurisdictions.
The Company has unrecognized tax benefits of approximately $1,011 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
In September 2006, the United States Environmental Protection Agency (‘‘EPA’’) requested certain
information from the Company as part of an investigation to determine whether the Company had
violated, and is in violation of, the Clean Air Act and its non-road engine regulations. The information
requested concerned certain generator and personal transportation merchandise offered for sale by the
Company. In the fourth quarter of fiscal year 2008, the EPA informed the Company that it believed
that the Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise
did not conform to their corresponding EPA Certificates of Conformity and that unless the EPA and
the Company were able to reach a settlement, the EPA was prepared to commence a civil action. The
Company is currently engaged in settlement discussions with the EPA that would call for the payment
of a civil penalty and certain injunctive relief. As a result of these discussions, the Company has
accrued an amount equal to its estimate of the civil penalty that the Company is prepared to pay to
settle the matter and has temporarily restricted from sale, and taken a partial asset impairment against
certain inventory. If the Company is not able to reach a settlement with the EPA on mutually
acceptable terms, the Company is prepared to vigorously defend any civil action filed.
The Company is also party to various other actions and claims arising in the normal course of
business.
The Company accrued $5,700 in the fourth quarter of fiscal year 2008 for awards or assessments in
connection with all such matters. The Company believes that these amounts 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 converted the variable LIBOR portion of the lease
payment to a fixed rate of 2.90% and terminated 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 the fair value
was an asset of $22 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
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