Pep Boys 2009 Annual Report Download - page 113

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 30, 2010, January 31, 2009 and February 2, 2008
(dollar amounts in thousands, except share and per share data)
NOTE 6—LEASE AND OTHER COMMITMENTS (Continued)
removed 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 recording
an $829 deferred gain which is being recognized in costs of merchandise sales and costs of service
revenues over the remaining minimum term of the lease.
During 2008, the Company sold 63 owned properties to an independent third party. Net proceeds
from this sale were $211,470. 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 with initial terms of 15 years and 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 61 leases as operating leases, actively uses these properties and considers the
leases as normal leasebacks. Accordingly, a $7,655 gain on the sale of these properties was recognized
immediately upon execution of the sale and an $89,930 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 determined that it had continuing involvement in two properties relating to an environmental
indemnity and recorded $8,479 of the transaction’s total net proceeds as a borrowing and as a financing
activity in the Statement of Cash Flows. Subsequently, during fiscal 2008, the Company provided the
necessary documentation to satisfy its indemnity and removed its continuing involvement with these
properties. The Company then recorded the sale of these properties as sale-leaseback transactions,
removing the assets and related lease financing and recorded a $3,963 deferred gain which is being
recognized in costs of merchandise sales and costs of service revenues over the remaining minimum
term of the leases. Of the total net proceeds for these properties, $75,951 together with $41,170 of cash
on hand were used to finance, the purchase of 29 properties for $117,121 that were previously leased
under a master operating lease.
In fiscal 2009, the Company sold four properties to unrelated third parties. Net proceeds from
these sales were $12,863. Concurrent with these sales, the Company entered into agreements to lease
the properties back from the purchasers over minimum lease terms of 15 years. Each property has a
separate lease with an initial term of 15 years and four five-year renewal options. Every five years, the
leases have rent increases of an amount equal to the lesser of 8% of the monthly rent due in the
immediately preceding lease year or the percentage of the CPI increase between five year anniversaries.
The Company classified these leases as operating leases, actively uses these properties and considers
the leases as normal leasebacks. A $1,202 gain on the sale of these properties was recognized
immediately upon execution of the sale and a $6,396 gain was deferred. The deferred gain is being
recognized in costs of merchandise sales and costs of service revenues over the minimum term of these
leases.
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