Home Depot 2002 Annual Report Download - page 40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THE HOME DEPOT, INC. AND SUBSIDIARIES
5LEASES
The Company leases certain retail locations, office space, ware-
house and distribution space, equipment and vehicles. While the
majority of the leases are operating leases, certain retail locations
are leased under capital leases. As leases expire, it can be
expected that, in the normal course of business, certain leases
will be renewed or replaced.
The Company has two off-balance sheet lease agreements
under which the Company leases assets totaling $882 million
comprised of an initial lease agreement of $600 million and a
subsequent agreement of $282 million. These two leases were
created under structured financing arrangements and involve
a special purpose entity which meets the criteria for non-consoli-
dation established by generally accepted accounting principles
and is not owned by or affiliated with the Company, its manage-
ment or officers. The Company financed a portion of its new stores
opened in fiscal years 1997 through 2002, as well as a distribu-
tion center and office buildings, under these lease agreements.
Under both agreements, the lessor purchases the properties, pays
for the construction costs and subsequently leases the facilities
to the Company. The lease term for the $600 million agreement
expires in fiscal 2006 and has three two-year renewal options.
The lease term for the $282 million agreement expires in 2008
with no renewal option. Both lease agreements provide for sub-
stantial residual value guarantees and include purchase options
at original cost of each property. Events or circumstances that
would require the Company to perform under the guarantees
include 1) initial default on the leases with the assets sold for less
than book value, or 2) the Company’s decision not to purchase
the assets at the end of the leases and the sale of the assets results
in proceeds less than the initial book value of the assets. The
Company’s guarantees are limited to 82% of the initial book
value of the assets.
The Company also leases an import distribution facility,
including its related equipment, under an off-balance sheet lease
created as part of a structured financing arrangement totaling
$85 million. The lease for the import distribution facility expires
in fiscal 2005 and has four 5-year renewal options. The lease
agreement provides for substantial residual value guarantees
and includes purchase options at the higher of the cost or fair
market value of the assets.
The maximum amount of the residual value guarantees relative
to the assets under the three off-balance sheet lease agreements
described above is estimated to be $799 million. As the leased
assets are placed into service, the Company estimates its liability
under the residual value guarantees and records additional rent
expense on a straight-line basis over the remaining lease terms.
Total rent expense, net of minor sublease income for the fiscal
years ended February 2, 2003, February 3, 2002 and January 28,
2001, was $533 million, $522 million and $479 million,
respectively. Real estate taxes, insurance, maintenance and
operating expenses applicable to the leased property are obliga-
tions of the Company under the lease agreements. Certain store
leases provide for contingent rent payments based on percent-
ages of sales in excess of specified minimums. Contingent rent
expense for the fiscal years ended February 2, 2003, February 3,
2002 and January 28, 2001, was approximately $8 million,
$10 million and $9 million, respectively.
The approximate future minimum lease payments under
capital and all other leases, including off-balance sheet leases,
at February 2, 2003, were as follows (in millions):
Capital Operating
Fiscal Year Leases Leases
2003 $ 44 $ 541
2004 45 512
2005 44 476
2006 46 440
2007 47 424
Thereafter through 2033 608 4,915
834 $7,308
Less imputed interest 557
Net present value of
capital lease obligations 277
Less current installments 5
Long-term capital lease obligations,
excluding current installments $272
Short-term and long-term obligations for capital leases are
included in the accompanying Consolidated Balance Sheets in
Other Accrued Expenses and Long-Term Debt, respectively. The
assets under capital leases recorded in Property and Equipment,
net of amortization, totaled $235 million and $199 million at
February 2, 2003 and February 3, 2002, respectively.
38 THE HOME DEPOT, INC. 2002 ANNUAL REPORT