Ross 2006 Annual Report Download - page 56

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Term debt. In March 2006, the Company repaid its $50.0 million term debt in full. The borrowing was made in 2002 to finance
equipment and information systems for the Company’s Perris, California distribution center.
Senior Notes. In October 2006, the Company entered into a Note Purchase Agreement with various institutional investors for
$150.0 million of unsecured senior notes. The notes were issued in two series and funding occurred in December 2006. Series
A notes were issued, for an aggregate of $85.0 million, are due in December 2018 and bear interest at a rate of 6.38%. Series B
notes were issued, for an aggregate of $65.0 million, are due in December 2021 and bear interest at a rate of 6.53%. Borrowings
under these notes are subject to certain operating and financial covenants including maintaining certain interest coverage and
leverage ratios. As of February 3, 2007, the Company was in compliance with these covenants.
Letters of credit. The Company uses standby letters of credit to collateralize certain obligations related to its self-insured work-
ers’ compensation and general liability programs. The Company had $66.4 million and $61.7 million in standby letters of credit
and $26.0 million and $16.5 million in trade letters of credit outstanding at February 3, 2007 and January 28, 2006, respectively.
Note E: Leases
The Company leases substantially all of its store sites, selected computer and other related equipment under operating leases
with original, non-cancelable terms that in general range from three to ten years, expiring through 2018. Store leases typically
contain provisions for three to four renewal options of five years each. Most store leases also provide for minimum annual rentals
and for payment of certain expenses. In addition, some store leases also have provisions for additional rent based on a percent-
age of sales.
The Company has lease arrangements for certain equipment in its stores for its point-of-sale (“POS”) hardware and software
systems. These leases are accounted for as operating leases for financial reporting purposes. The initial terms of these leases
are three years and the Company typically has options to renew the leases for two to three one-year periods. Alternatively, the
Company may purchase or return the equipment at the end of the initial or each renewal term. The Company’s obligation under
the residual value guarantee at the end of the respective initial lease terms is $9.6 million.
The Company also leases a 1.3 million square foot distribution center in Perris, California. This distribution center is being
financed under a $70 million ten-year synthetic lease facility that expires in July 2013. Rent expense on this distribution center
is payable monthly at a fixed annual rate of 5.8% on the lease balance of $70 million. At the end of the lease term, the Company
must either refinance the $70 million synthetic lease facility, purchase the distribution center at the amount of the then-outstand-
ing lease balance, or arrange a sale of the distribution center to a third party. If the distribution center is sold to a third party for
less than $70 million, the Company has agreed under a residual value guarantee to pay the lessor any shortfall amount up to $56
million. The Company’s obligation under this residual value guarantee is $56 million.
In accordance with FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,” the Company has recognized a liability and corresponding asset for the fair value of the
residual value guarantee in the amount of $8.3 million for the Perris, California distribution center and $2.1 million for the POS
leases. These residual value guarantees are being amortized on a straight-line basis over the original terms of the leases. The
current portion of the related asset and liability is recorded in “Prepaid expenses and other” and “Accrued expenses and other,”
respectively, and the long-term portion of the related assets and liabilities is recorded in “Other long-term assets” and “Other
long-term liabilities,” respectively, in the accompanying consolidated balance sheets.
In addition, the Company leases two separate warehouse facilities for packaway storage in Carlisle, Pennsylvania with operat-
ing leases expiring through 2011. In January 2004, the Company entered into a two-year lease with two one-year options for a
warehouse facility in Fort Mill, South Carolina, the second option of which has been exercised, and also modified, extending the
term to February 1, 2009. These three leased facilities are being used primarily to store packaway merchandise.
The synthetic lease facilities described above, as well as the Company’s revolving credit facility and senior notes, have covenant
restrictions requiring the Company to maintain certain interest coverage and leverage ratios. In addition, the interest rates under
these agreements may vary depending on the Company’s actual interest coverage ratios. As of February 3, 2007, the Company
was in compliance with these covenants.