Petsmart 2005 Annual Report Download - page 49

stores’ occupancy costs. We record occupancy costs as a component of cost of sales in our Consolidated Statements
of Operations. Licensing fees are determined by fixed costs per square foot, adjusted for the number of days the
hospitals are open and sales volumes achieved. We recognized licensing fees of $16.3 million in fiscal 2005,
$13.1 million in fiscal 2004 and $10.5 million in fiscal 2003. We also charge MMI for its portion of specific
operating expenses and treat the reimbursement as a reduction of the stores’ operating expenses. Receivables from
MMI totaled $5.4 million and $5.5 million at January 29, 2006 and January 30, 2005, respectively, and were
included in receivables in the Consolidated Balance Sheets.
Credit Facility
We have an available credit facility of $125.0 million, which expires April 30, 2008. Borrowings under the
credit facility are subject to a borrowing base and bear interest, at our option, at either a bank’s prime rate plus 0% to
0.50% or LIBOR plus 1.25% to 1.75%. We are subject to fees payable to the lenders each quarter at an annual rate of
0.25% of the unused amount of the credit facility. Letter of credit issuances under the credit facility are subject to a
borrowing base and bear interest of LIBOR plus 1.25% to 1.75% or LIBOR less 0.50%, depending on the type of
letter of credit issued. The credit facility permits the payment of dividends, so long as we are not in default and the
payment of dividends would not result in default of the facility. The credit facility is secured by substantially all our
personal property assets, our subsidiaries and certain real property. As of January 29, 2006, we had no borrowings
outstanding under the credit facility; however, we issue letters of credit for guarantees provided for insurance
programs, capital lease agreements and utilities. Subsequent to January 29, 2006, we determined that we were in
technical non-compliance under our credit facility during a portion of fiscal 2005. In March 2006, the lender group
waived such past non-compliance, and we are currently in compliance with our credit facility.
Seasonality and Inflation
Our business is subject to seasonal fluctuations. We typically realize a higher portion of our net sales and
operating profit during the fourth fiscal quarter. As a result of this seasonality, we believe that quarter-to-quarter
comparisons of our operating results are not necessarily meaningful, and that these comparisons cannot be relied
upon as indicators of future performance. Controllable expenses, such as advertising, could fluctuate from
quarter-to-quarter in a fiscal year. Sales of certain products and services designed to address pet health needs
are seasonal. Because our stores typically draw customers from a large trade area, sales also may be impacted by
adverse weather or travel conditions, which are more prevalent during certain seasons of the year. Finally, as a result
of our expansion plans, the timing of new store openings and related preopening expenses, the amount of revenue
contributed by new and existing stores, and the timing and estimated obligations of store closures, our quarterly
results of operations may fluctuate.
Recent Accounting Pronouncements
On December 16, 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which is a revision of
SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board
Opinion, or APB, No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance.
SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to
be recognized in the financial statements based on their grant-date fair values. SFAS No. 123(R) is effective for
public companies at the beginning of the first interim or annual period beginning after December 31, 2005. We
adopted SFAS No. 123(R) in the first quarter of fiscal 2005 and utilized the modified retrospective transition
method, which allows the adjustment of prior periods by recognizing compensation cost in the amounts previously
reported in the pro forma footnote disclosures under the provisions of SFAS No. 123.
In November 2004, the FASB issued Emerging Issues Task Force, or EITF, No. 03-13, “Applying the
Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued
Operations,” to assist entities in analyzing SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” EITF No. 03-13 specifically addresses paragraph 42 of SFAS No. 144, which states that
the results of operations of a component of an entity that either has been disposed of or is classified as held for sale
shall be reported in discontinued operations in accordance with certain provisions. EITF No. 03-13 is applicable to
an enterprise’s component that is either disposed of or classified as held for sale in fiscal periods beginning after
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