Pep Boys 2008 Annual Report Download - page 99

At February 2, 2008, the Company had outstanding $205,035,000 of fixed rate notes with an
aggregate fair market value of $199,137,000. The Company determines fair value on its fixed rate debt
by using quoted market prices and current interest rates.
Interest Rate Swaps
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
master operating lease payments. The interest rate swap converted the variable LIBOR portion of the
lease payment to a fixed rate of 2.90%. Both the master operating lease and interest rate swap were
terminated as of July 1, 2008. As of February 2, 2008 and February 3, 2007, the fair value was an asset
of $22,000 and $4,150,000, respectively, recorded within other long-term assets on the balance sheet. In
the fourth quarter of fiscal year 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
$4,150,000. 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 and concluded there was no material impact on the fourth quarter of fiscal 2006 or any
historical periods. The Company thereafter removed its designation as a cash flow hedge on this
transaction and recorded the change in fair value in operations until the July 1, 2008 termination date.
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
$1,490,000 as a reduction to Interest Expense. 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 of the swap through Accumulated Other Comprehensive
Loss. On November 27, 2007, the Company prepaid $162,558,000 of the Senior Secured Term Loan
facility which eliminated a portion of the future interest payments hedged by the 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 swap and reclassified a $2,259,000 pre-tax loss applicable to the unmatched portion of the
$200,000,000 interest rate swap from other comprehensive income to interest expense. On
November 27, 2007, the Company re-designated $145,000,000 notional amount of the 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, interest expense includes $4,166,000 related to the $55,000,000 unmatched
portion of this swap. On February 1, 2008, the Company recorded $4,539,000 within accrued expenses
to reduce the notional amount of the interest rate swap to $145,000,000 from the original $200,000,000
amount. The $4,539,000 was paid on February 4, 2008.
As of January 31, 2009 and February 2, 2008, respectively, the fair value of the swap was a net
$15,805,000 and $10,985,000 payable recorded within other long-term liabilities.
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