Pep Boys 2008 Annual Report Download - page 119

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2009, February 2, 2008 and February 3, 2007
(dollar amounts in thousands, except share data)
Flows. Accordingly, the Company continues to reflect the property on its balance sheet in accordance
with SFAS No.13.
On March 25, 2008, the Company sold 18 owned properties to an independent third party. Net
proceeds from this sale were $62,542. Concurrent with the sale, the Company entered into agreements
to lease the properties back from the purchaser over a minimum lease term of 15 years. Each property
was separately evaluated under SFAS No.13. The two master leases have an initial term of 15 years
with four five-year renewal options of which none were considered bargain renewal options. The second
through the fourth renewal options are at fair market rents. The leases have yearly incremental rental
increases that are 1.5% of the prior year’s rentals. The Company discounted the minimum lease
payments, reflecting escalation amounts, during the initial term of 15 years using its then incremental
borrowing rate. For properties where the value of the land was greater than 25% of the property value,
the building component was evaluated separately. The Company classified these 18 leases as operating
leases in accordance with SFAS No.13. The Company actively uses these properties and considers the
leases as normal leasebacks. In accordance with SFAS No.98, a $9 gain on the sale of these properties
was recognized immediately upon execution of the sale and a $26,809 gain was deferred. The
immediate gain represents those properties sold where the realized gain exceeds the present value of
the minimum lease payments. The deferred gain is being recognized over the minimum term of these
leases.
On April 10, 2008, the Company sold 23 owned properties to an independent third party. Net
proceeds from this sale were $72,977. Concurrent with the sale, the Company entered into agreements
to lease the properties back from the purchaser over a minimum lease term of 15 years. Each property
has a separate lease and was separately evaluated under SFAS No.13. The leases have an initial term of
15 years with four five-year renewal options of which none were considered bargain renewal options.
The leases have yearly incremental rental increases that are 1.5% of the prior year’s rentals. The
second through the fourth renewal options are at fair market rents. The Company discounted the
minimum lease payments, reflecting escalation amounts, during the initial term of 15 years using its
then incremental borrowing rate. For properties where the value of the land was greater than 25% of
the property value, the building component was evaluated separately. The Company classified 22 of
these leases as operating leases in accordance with SFAS No.13. The Company actively uses these
properties and considers the leases as normal leasebacks. In accordance with SFAS No.98, a $5,522 gain
on the sale of these properties was recognized immediately upon execution of the sale and a $34,483
gain was deferred. The immediate gain represents those properties sold where the realized gain exceeds
the present value of the minimum lease payments. The deferred gain is being recognized over the
minimum term of these leases. The Company initially had continuing involvement in one property
relating to an environmental indemnity and, accordingly, recorded $4,583 of the transaction’s total net
proceeds as a borrowing and as a financing activity in the Statement of Cash Flows. During the second
quarter of fiscal year 2008, the Company provided the necessary documentation to satisfy its indemnity
and remove its continuing involvement with this property. The Company then recorded the sale of this
property as a sale-leaseback transaction, removing the asset and related lease financing and recorded a
$1,515 deferred gain which is being recognized over the remaining minimum term of this lease.
On July 30, 2008, the Company sold 22 properties to an independent third party. Net proceeds
from this sale were $75,951. Concurrent with the sale, the Company entered into agreements to lease
the properties back from the purchaser over a minimum lease term of 15 years. Each property has a
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