Petsmart 2008 Annual Report Download - page 40

(4) Approximately $63.2 million of insurance obligations, as shown in “Other” have been classified as noncurrent
liabilities. We are unable to estimate the specific year to which the obligations will relate beyond 2009.
Letters of Credit
We issue letters of credit for guarantees provided for insurance programs, capital lease agreements and
utilities. As of February 1, 2009, $91.3 million was outstanding under our letters of credit.
Related Party Transactions
We have an investment in MMIH which, through a wholly-owned subsidiary, Medical Management Inter-
national, Inc., operates full-service veterinary hospitals inside 722 of our stores. Our investment consists of common
and convertible preferred stock.
During the thirteen weeks ended April 29, 2007, we sold a portion of our non-voting shares in MMIH resulting
in a pre-tax gain of $95.4 million. In connection with this transaction, we also converted our remaining MMIH non-
voting shares to voting shares. The increase in voting shares caused us to exceed the significant influence threshold
as defined by GAAP, which required us to account for our investment in MMIH using the equity method of
accounting instead of the previously applied cost method in accordance with APB No. 18. As of February 1, 2009,
we owned approximately 21.5% of the voting stock and approximately 21.0% of the combined voting and non-
voting stock of MMIH.
Conversion to the equity method of accounting would typically require a restatement of prior years’
consolidated financial statements for MMIH earnings. However, because the amounts are not material, we have
not restated prior year financial statements. Our equity income from our investment in MMIH, which is recorded
one month in arrears, was $2.6 million for 2008.
We charge MMIH license fees for the space used by the veterinary hospitals and for their portion of utilities
costs. We treat these amounts as a reduction of the retail stores’ occupancy costs, which are included as a component
of cost of sales in the Consolidated Statements of Operations and Comprehensive Income. We also charge MMIH
for its portion of specific operating expenses, and treat the reimbursement as a reduction of the stores’ operating
expense.
In June 2007, we entered into a new master operating agreement with MMIH that has an initial 15-year term
and was retroactive to February 2007. The new agreement includes a change to the calculation of license fees
charged to MMIH and a provision for MMIH to pay their portion of utilities costs.
We recognized license fees, utilities and other cost reimbursements of $30.1 million and $32.9 million during
2008 and 2007, respectively. Receivables from MMIH totaled $3.3 million and $4.5 million at February 1, 2009,
and February 3, 2008, respectively, and were included in the receivables in the accompanying Consolidated Balance
Sheets.
The master operating agreement also includes a provision for the sharing of profits on the sales of therapeutic
pet foods sold in all stores with a hospital operated by MMIH.
Credit Facility
In August 2007, we replaced our existing $125.0 million credit facility with a $350.0 million five-year
revolving credit facility which expires on August 15, 2012. Borrowings under the credit facility are subject to a
borrowing base and bear interest, at our option, at a bank’s prime rate plus 0% to 0.25% or LIBOR plus 0.875% to
1.25%. We are subject to fees payable to lenders each quarter at an annual rate of 0.20% of the unused amount of the
credit facility. The credit facility also gives us the ability to issue letters of credit, which reduce the amount available
under the credit facility. Letter of credit issuances under the credit facility are subject to interest payable to the
lenders and bear interest of 0.875% to 1.25% for standby letters of credit or 0.438% to 0.625% for commercial
letters of credit. As of February 1, 2009, we had no borrowings and $91.3 million in stand-by letter of credit
issuances under our $350.0 million five-year revolving credit facility.
34