Petsmart 2006 Annual Report Download - page 79

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The Company recognized gains of $8,500,000, net of legal costs, and $3,600,000 from legal settlements in
fiscal 2005 and 2004, respectively. In addition, the Company recognized a gain of $2,750,000 in fiscal 2005 related
to a Visa/Mastercard antitrust litigation settlement. These gains were recorded in operating, general and admin-
istrative expenses in the Consolidated Statements of Operations and Comprehensive Income.
Note 12 — Commitments and Contingencies
Guarantees
The following is a summary of agreements that the Company has determined are within the scope of
FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB
interpretation No. 34,” which are specifically grandfathered because the guarantees were in effect prior to
December 31, 2002. Accordingly, the Company has no liabilities recorded for these agreements as of January 28,
2007, except as noted below.
As permitted under Delaware law and the Company’s bylaws and certificate of incorporation, the Company
has agreements to indemnify its officers and directors for certain events or occurrences while the officer or director
is, or was, serving at the request of the Company. The term of the indemnification period is for the officer’s or
director’s lifetime. The maximum potential amount of future payments the Company could be required to make
under these indemnification agreements is unlimited; however, the Company has a directors’ and officers’
insurance policy that may enable it to recover a portion of any future amounts paid. Assuming the applicability
of coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and
other policy provisions, the Company believes the estimated fair value of this indemnification obligation is not
material. However, no assurances can be given that the insurers will not attempt to dispute the validity, applicability
or amount of coverage without expensive and time-consuming litigation against the insurers.
Lease Contingencies
In December 1997, the Company entered into operating lease agreements for a pool of 11 properties. Under the
agreements, in year ten of the lease, the Company must elect to either cancel the leases and pay a cancellation fee,
make an offer to purchase the leased property for a predetermined value or amend the leases with a provision for a
change in rent payments and a cancellation price at the end of the amended term. In January 2007, the Company
elected the cancellation option on two leases, the purchase option on three leases, and an extension on the remaining
six leases with a change in rent payments to occur in January 2008. The landlords for the leases where the Company
elected the cancellation option must respond to the Company’s election by June 2007. The landlords for the leases
where the Company made an offer to purchase must respond to the Company’s offer by September 2007. The
landlords for the leases where the Company elected to change rent payments must respond to the Company’s
election by November 2007. The Company does not believe that the impact of these leases and election will be
material to its consolidated financial statements.
In May 1998, the Company entered into additional operating lease agreements for a pool of eight properties.
Under the agreements, in year ten of the lease, the Company must elect to either cancel the leases and pay a
cancellation fee, make an offer to purchase the leased property for a predetermined value or amend the leases with a
provision for a change in rent payments and a cancellation price at the end of the amended term. The decision date
for each property is May 2007, with any payment under these options to occur in May 2008. The Company is
currently evaluating its options under the lease agreements to determine the impact on its consolidated financial
statements.
Purchase Commitment
The Company has purchase obligations for certain advertising of approximately $10,525,000 in fiscal 2007.
F-23
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)