Pep Boys 2005 Annual Report Download - page 22

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17
Off-balance Sheet Arrangements
In the third quarter of fiscal 2004, the Company entered into a $35,000,000 operating lease for certain operating equipment
at an interest rate of LIBOR plus 2.25%. The Company has evaluated this transaction in accordance with the original guidance
of Financial Accounting Standards Board Interpretation Number (FIN) 46 and has determined that it is not required to
consolidate the leasing entity. As of January 28, 2006, there was an outstanding balance of $20,507,000 under the lease. The
lease includes a residual value guarantee with a maximum value of approximately $172,000. The Company expects the fair
market value of the leased equipment to substantially reduce or eliminate the Company’s payment under the residual guarantee
at the end of the lease term. In accordance with FIN 45, the Company has recorded a liability for the fair value of the guarantee
related to this operating lease. As of January 28, 2006 and January 29, 2005, the current value of this liability was $105,000
and $90,000, respectively, which is recorded in other long-term liabilities on the consolidated balance sheets.
On August 1, 2003, the Company refinanced $132,000,000 in operating leases. These leases, which expire on August 1,
2008, have lease payments with an effective rate of LIBOR plus 2.06%. The Company has evaluated this transaction in
accordance with the original guidance of FIN 46 and has determined that it is not required to consolidate the leasing entity.
The leases include a residual value guarantee with a maximum value of approximately $105,000,000. The Company expects
the fair market value of the leased real estate to substantially reduce or eliminate the Company’s payment under the residual
guarantee at the end of the lease term. In accordance with FIN 45, the Company has recorded a liability for the fair value of
the guarantee related to this operating lease. As of January 28, 2006, the current value of this liability was $2,493,000, which
is recorded in other long-term liabilities on the consolidated balance sheets. As of January 28, 2006, there was an outstanding
balance of $123,970,000 under the lease.
The Company leases certain property and equipment under operating leases and capital leases which contain renewal and
escalation clauses, step rent provisions, capital improvements funding and other lease concessions. These provisions are
considered in the Company’s calculation of its minimum lease payments which are recognized as expense on a straight-line
basis over the applicable lease term. In accordance with the Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 13, as amended by SFAS No. 29, any lease payments that are based upon an
existing index or rate are included in the Company’s minimum lease payment calculations. Total operating lease commitments
as of January 28, 2006 were $503,016,000.
Pension Plans
The Company has a defined benefit pension plan covering its full-time employees hired on or before February 1, 1992
and a unfunded Supplemental Executive Retirement Plan (SERP) that includes a defined benefit portion. The pension expense
under these plans for fiscal 2005, 2004 and 2003 was $4,331,000, $4,076,000 and $11,937,000, respectively. This expense is
calculated based upon a number of actuarial assumptions, including an expected return on plan assets of 6.75% and a discount
rate of 5.75%. In developing the expected return on asset assumptions, the Company evaluated input from its actuaries,
including their review of asset class return expectations. The discount rate utilized for the pension plans is based on a model
bond portfolio with durations that match the expected payment patterns of the plans. The Company will continue to evaluate
its actuarial assumptions and adjust as necessary. In fiscal 2005, the Company contributed an aggregate of $1,867,000 to the
defined benefit pension plan and the defined benefit portion of the SERP. Based upon the current funded status of the defined
benefit pension plan and the unfunded defined benefit portion of the SERP, aggregate cash contributions are expected to be
$1,417,000 in fiscal 2006.
On January 31, 2004, the Company amended and restated its SERP. This amendment converted the defined benefit plan
to a defined contribution plan for certain unvested participants and all future participants. All vested participants under the
defined benefit portion will continue to accrue benefits according to the previous defined benefit formula. In fiscal 2005, the
Company settled several obligations related to the benefits under the defined benefit SERP. These obligations totaled $568,000,
and resulted in an expense under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits,” of approximately $774,000 in fiscal 2004.