Pep Boys 2006 Annual Report Download - page 58

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19
In October 2001, the Company entered into a contractual commitment to purchase media advertising
services with equal annual purchase requirements totaling $39,773,000 over four years. During the second
quarter of fiscal 2004, it was determined that the Company would be unable to meet this obligation for the
2004 contract year which ended on November 30, 2004. As a result, the Company recorded a $1,579,000
charge to selling, general and administrative expenses in the quarter ended July 31, 2004 related to the
anticipated shortfall in this purchase commitment. This agreement expired in October 2005.
The Company has letter of credit arrangements in connection with its risk management, import
merchandising and vendor financing programs. The Company was contingently liable for $487,000 and
$1,015,000 in outstanding import letters of credit and $55,708,000 and $41,218,000 in outstanding standby
letters of credit as of February 3, 2007 and January 28, 2006, respectively.
The Company was also contingently liable for surety bonds in the amount of approximately
$11,224,000 and $13,021,000 as of February 3, 2007 and January 28, 2006, respectively. The surety bonds
guarantee certain of the Company’s payments (for example utilities, easement repairs, licensing
requirements and customs fees).
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 February 3, 2007, there was an outstanding commitment of $14,938,000 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
February 3, 2007 and January 28, 2006, the current value of this liability was $71,000 and $105,000,
respectively, which is recorded in other long-term liabilities on the consolidated balance sheets.
On August 1, 2003, the Company renegotiated $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 February 3, 2007, the current value of this liability was
$1,496,000, which is recorded in other long-term liabilities on the consolidated balance sheets. As of
February 3, 2007, there was an outstanding commitment of $117,627,000 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
February 3, 2007 were $482,849,000.