Pep Boys 2007 Annual Report Download - page 68

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We are also contingently liable for surety bonds in the amount of approximately $6,598,000 and
$11,224,000 as of February 2, 2008 and February 3, 2007, respectively. The surety bonds guarantee
certain of our payments (for example utilities, easement repairs, licensing requirements and customs
fees).
Off-balance Sheet Arrangements
In the third quarter of fiscal 2004, we entered into a $35,000,000 operating lease for certain
operating equipment at an interest rate of LIBOR plus 2.25%. We have evaluated this transaction in
accordance with the guidance of Financial Accounting Standards Board Interpretation Number (FIN)
46 and re-evaluated the transaction under FIN 46R and have determined that the Company is not
required to consolidate the leasing entity. As of February 2, 2008, there was an outstanding
commitment of $9,836,000 under the lease. The lease includes a residual value guarantee with a
maximum value of approximately $172,000. We expect the fair market value of the leased equipment to
substantially reduce or eliminate our payment under the residual guarantee at the end of the lease
term. In accordance with FIN 45, we have recorded a liability for the fair value of the guarantee
related to this operating lease. As of February 2, 2008 and February 3, 2007, the current value of this
liability was $38,000 and $71,000, respectively, which is recorded in other long-term liabilities on the
consolidated balance sheets.
On August 1, 2003, we 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%. We have
evaluated this transaction in accordance with the guidance of FIN 46 and re-evaluated the transaction
under FIN 46R and have determined that the Company is not required to consolidate the leasing
entity. We have exercised our option to purchase, on or before August 1, 2008, these properties and
expect the fair market value of the leased real estate to exceed the $116,318,000 purchase price. We
expect to fund this obligation through sale-leaseback or other financing transactions. As of February 2,
2008, there was an outstanding commitment of $116,318,000 under the lease.
We lease certain property and equipment under operating leases and lease financings which
contain renewal and escalation clauses, step rent provisions, capital improvements funding and other
lease concessions. These provisions are considered in the calculation of our 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 our minimum lease payment calculations. Total operating lease commitments as
of February 2, 2008 were $584,965,000.
Pension and Retirement Plans
We have a defined benefit pension plan covering our full-time employees hired on or before
February 1, 1992.
We also have an unfunded Supplemental Executive Retirement Plan (SERP) that includes a
defined benefit portion. On January 31, 2004, we amended and restated our SERP. This amendment
converted the defined benefit portion of the SERP to a defined contribution portion for certain
unvested participants and all future participants. All vested participants under the defined benefits
portion of the SERP continue to accrue benefits according to the previous defined benefit formula.
The expense under these plans for fiscal 2007, 2006, and 2005 was $3,612,000; $3,999,000 and
$4,331,000, respectively. The fiscal 2007 expense is calculated based upon a number of actuarial
assumptions, including an expected return on plan assets of 6.30% and a discount rate of 5.90%. In
developing the expected return on asset assumptions, we evaluated input from our 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. We
continue to evaluate our actuarial assumptions and make adjustments as necessary. In fiscal 2007, we
contributed an aggregate of $661,000 to our pension plans. Based upon the current funded status of the
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