Petsmart 2004 Annual Report Download - page 72

PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Impairment of Long-Lived Assets
Long-lived assets, including goodwill and intangible assets, are reviewed for impairment, based on
undiscounted cash Öows, annually and whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. If this review indicates that the carrying amount of the long-
lived assets is not recoverable, the Company will recognize an impairment loss, measured by the future
discounted cash Öow method or market appraisals. During Ñscal 2004 and Ñscal 2003, the Company recorded
a loss of approximately $1,500,000 and $1,300,000, respectively, in operating, general and administrative
expenses in the accompanying statements of operations, which represented the net book value of leasehold
improvements at closed stores. During Ñscal 2002, no impairment losses were recorded.
Long-lived assets for Canadian operations, denominated in US dollars, approximate $17,337,000 and
$15,119,000 as of January 30, 2005 and February 2, 2004, respectively.
Insurance Liabilities and Reserves
The Company maintains standard property and casualty insurance on all its properties and leasehold
interests, product liability insurance that covers products and the sale of live pets, self-insured health plans,
employer's professional liability and workers' compensation insurance. Property insurance covers approxi-
mately $1.0 billion in buildings and contents, including furniture and Ñxtures, leasehold improvements and
inventory. Under the Company's casualty and workers' compensation insurance policies through January 31,
2004, it retained the initial risk of loss of $250,000 for each policy per occurrence. EÅective February 1, 2004,
the Company engaged a new insurance provider. Under the Company's casualty and workers' compensation
insurance policies with the new provider, it retains an initial risk of loss of $500,000 for each policy per
occurrence on or subsequent to February 1, 2004. The Company establishes reserves for losses based on semi-
annual independent actuarial estimates of the amount of loss inherent in that period's claims, including losses
for which claims have been incurred but not reported. Loss estimates rely on actuarial observations of ultimate
loss experience for similar historical events, and changes in such assumptions could result in an adjustment to
the reserves. During the second quarter of 2004, the Company recognized additional expense as a result of an
actuarial report that indicated a higher reserve requirement. As of January 30, 2005 and February 1, 2004, the
Company had approximately $40,527,000 and $27,862,000, respectively, in reserves related to casualty, self-
insured health plans, employer's professional liability and workers' compensation insurance policies.
Reserve for Closed Stores
The Company continuously evaluates the performance of its retail stores and periodically closes those
that are under-performing. Closed stores are generally replaced by a new store in a nearby location. The
Company establishes reserves for future rental payments on closed stores and terminated subleases and
classiÑes these costs in operating, general and administrative expenses (see Note 7). The costs for future
rental payments associated with closed stores are calculated using the net present value method, at a credit-
adjusted risk-free interest rate, over the remaining life of the lease, net of expected sublease income. The
Company records such reserves as of the date it ceases use of the property. Judgment is used to estimate the
underlying real estate market related to the expected sublease income, and additional charges may be required
based on the changing real estate environment. As of January 30, 2005 and February 1, 2004, approximately
$9,141,000 and $14,762,000, respectively, were recorded for closed store reserves.
Income Taxes
The Company establishes deferred income tax assets and liabilities for temporary diÅerences between the
Ñnancial reporting bases and the income tax bases of assets and liabilities at enacted tax rates expected to be in
eÅect when such assets or liabilities are realized or settled. The Company records a valuation allowance on the
deferred income tax assets to reduce the total to an amount it believes is more likely than not to be realized.
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