Petsmart 2005 Annual Report Download - page 75

by the Company, 4,822,000 shares of convertible preferred stock are not convertible into voting common stock until
the earliest of: (i) June 1, 2011; (ii) an acquisition of MMIH; or (iii) an initial public offering of shares of common
stock of MMIH, and 163,000 shares of non-voting convertible preferred stock are convertible into voting common
stock at any time at the option of the Company. In addition, the Company holds 250,000 shares of MMIH non-
voting common stock that is only convertible into voting common stock in the event of an initial public offering of
shares of common stock of MMIH. As of January 29, 2006 and January 30, 2005, all shares of voting and non-voting
convertible preferred stock are convertible into voting common stock on a one-for-one basis, subject to the
restrictions previously discussed.
The Company charges MMI licensing fees for the space used by the veterinary hospitals, and the Company
treats this income as a reduction of the retail stores’ occupancy costs. The Company recognizes occupancy costs as a
component of cost of sales in the 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. The
Company recognized licensing fees of $16,251,000, $13,144,000 and $10,466,000 in fiscal 2005, 2004 and 2003,
respectively. The Company also charges MMI for its portion of specific operating expenses and treats the
reimbursement as a reduction of the stores’ operating expenses. Receivables from MMI totaled $5,379,000 and
$5,476,000 at January 29, 2006 and January 30, 2005, respectively, and were included in receivables in the
Consolidated Balance Sheets.
In March 2005, the Company entered into a merchandising agreement with MMI and Hills Pet Nutrition, Inc.
to provide certain prescription diet and other therapeutic pet foods in all stores with an operating Banfield hospital.
The activity resulting from this agreement is not material to the Company’s financial statements.
Note 4 — Property and Equipment
Property and equipment consists of the following (in thousands):
January 29,
2006
January 30,
2005
Land ................................................... $ 2,991 $ 2,991
Buildings................................................ 8,776 8,776
Furniture, fixtures and equipment .............................. 453,079 372,333
Leasehold improvements .................................... 410,289 333,160
Computer software......................................... 77,907 66,429
Buildings, equipment and computer software under capital leases ...... 422,345 307,145
1,375,387 1,090,834
Less: accumulated depreciation and amortization .................. 563,779 433,683
811,608 657,151
Construction in progress..................................... 46,050 42,111
Total property and equipment, net ............................. $ 857,658 $ 699,262
Accumulated amortization of buildings, equipment and computer software under capital leases approximated
$106,914,000 and $83,036,000 as of January 29, 2006 and January 30, 2005, respectively.
The Company recognizes capitalized interest in accordance with SFAS No. 34, “Capitalization of Interest
Cost.” Capitalized interest primarily consists of interest expense incurred during the construction period for new
stores. Capitalized interest approximated $1,251,000 and $1,021,000 in fiscal 2005 and fiscal 2004, respectively.
There was no capitalized interest recorded in fiscal 2003. Capitalized interest is included in property and equipment
in the Consolidated Balance Sheets.
F-16
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)