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| PCTY > SEC Filings for PCTY > Form 10-Q on 10-Feb-2004 | All Recent SEC Filings |
10-Feb-2004
Quarterly Report
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements.
We believe our application of accounting policies, and the estimates inherently required by the policies, are reasonable. These accounting policies and estimates are constantly reevaluated and adjustments are made when facts and circumstances dictate a change. Historically, we have found the application of accounting policies to be appropriate and actual results generally do not differ materially from those determined using necessary estimates.
Our accounting policies are more fully described in Note 1 to the consolidated financial statements contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on September 26, 2003. We have identified certain critical accounting policies that are described below.
Merchandise inventory. Inventory is valued using the cost method which values inventory at the lower of the actual cost or market, at the individual item level. Cost is determined using the weighted average method. Inventory levels are reviewed to identify slow-moving and closeout merchandise that will no longer be carried. Market is determined by the estimated net realizable value, based upon the merchandise selling price.
Finite long-lived assets. In the evaluation of the fair value and future benefits of finite long-lived assets, we perform an analysis of the anticipated undiscounted future net cash flows of the related finite long-lived assets. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates.
Insurance accruals. Our consolidated balance sheets include liabilities with respect to self-insured workers' compensation and general liability claims. We estimate the required liability of such claims utilizing an actuarial method, based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity).
Goodwill. We evaluate goodwill annually or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flows. In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data. A change in these underlying assumptions may cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying value. In such event, we would then be required to record a charge, which would impact earnings.
Sales Returns. We estimate future sales returns and, when material, record a provision in the period that the related sales are recorded based on historical information. Should actual returns differ from our estimates, we would be required to revise estimated sales returns.
Store Closure Costs. We record estimated store closure costs, such as estimated lease commitment costs net of estimated sublease income and other miscellaneous store closing costs, when the liability is incurred. Such estimates may be subject to change should actual costs differ.
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Results of Operations
Quarter Ended Six Months Ended
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
----------------- ----------------- ----------------- -----------------
Statement of Operations Data:
Total revenues $ 182,560 $ 168,191 $ 289,535 $ 263,197
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Company-owned stores:
Net sales $ 175,304 $ 161,648 $ 277,924 $ 252,772
Cost of goods sold and occupancy costs 104,705 95,974 179,033 160,399
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Gross profit 70,599 65,674 98,891 92,373
Store operating and selling expense 36,290 34,288 62,169 57,986
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Company-owned stores profit contribution 34,309 31,386 36,722 34,387
General and administrative expense 7,498 8,403 15,657 15,705
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Company-owned profit contribution 26,811 22,983 21,065 18,682
Franchise stores:
Royalty fees 7,216 6,503 11,123 10,150
Franchise fees 40 40 488 275
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Total franchise revenues 7,256 6,543 11,611 10,425
Total franchise expense 1,562 1,646 3,221 3,208
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Franchise profit contribution 5,694 4,897 8,390 7,217
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Operating income 32,505 27,880 29,455 25,899
Interest expense, net 112 2,824 312 3,709
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Income before income taxes 32,393 25,056 29,143 22,190
Provision for income taxes 13,103 10,006 11,803 8,876
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Net income $ 19,290 $ 15,050 $ 17,340 $ 13,314
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Basic earnings per share $ 1.14 $ 0.90 $ 1.03 $ 0.80
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Diluted earnings per share $ 0.98 $ 0.76 $ 0.88 $ 0.67
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Weighted average shares outstanding - basic 16,867 16,803 16,856 16,600
Weighted average shares outstanding - diluted 19,624 19,896 19,620 19,904
Operating Data:
Number of Company-owned stores (end of
period) 247 239 247 239
Increase in Company-owned same store sales 3.7 % 1.9 % 3.8 % 2.5 %
Number of franchise stores (end of period) 254 240 254 240
Increase in franchise same store sales 7.0 % 2.9 % 5.7 % 4.0 %
Other Information:
Depreciation and amortization $ 3,890 $ 3,761 $ 7,692 $ 7,133
Cash flow used in:
Investing activities (2,081 ) (4,817 ) (3,529 ) (15,202 )
Financing activities (14,402 ) (21,880 ) (9,940 ) (4,907 )
Balance Sheet Data:
Working capital $ 35,574 $ 14,487 $ 35,574 $ 14,487
Total assets 178,624 177,938 178,624 177,938
Borrowings — 4,114 — 4,114
Stockholders' equity 98,199 82,941 98,199 82,941
EBITDA(a) 36,395 31,641 37,147 33,032
Most directly comparable GAAP measures:
Net income 19,290 15,050 17,340 13,314
Cash flows provided by Operating
activities 32,430 24,729 30,647 19,915
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(a) Our definition of EBITDA is earnings before interest, taxes, depreciation
and amortization. We believe EBITDA provides additional information for
determining our ability to meet future debt service requirements. EBITDA
should not be construed as a substitute for net income or net cash provided
by operating activities (all as determined in accordance with generally
accepted accounting principles) for the purpose of analyzing our operating
performance, financial position and cash flows as EBITDA is not defined by
generally accepted accounting principles. We have presented EBITDA, however,
because it is commonly used by certain investors and analysts to analyze and
compare companies on the basis of operating performance and to determine a
company's ability to service and/or incur debt. Our computation of EBITDA
may not be comparable to similar titled measures of other companies.
Because we also consider EBITDA useful as an operating measure, a reconciliation of EBITDA to net income follows for the periods indicated:
Quarter Ended Six Months Ended
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
-------------------- -------------------- -------------------- ----------------
EBITDA(a) $ 36,395 $ 31,641 $ 37,147 $ 33,032
Depreciation and amortization (3,890 ) (3,761 ) (7,692 ) (7,133 )
Interest expense, net (112 ) (2,824 ) (312 ) (3,709 )
Provision for income taxes (13,103 ) (10,006 ) (11,803 ) (8,876 )
---------- ---------- ---------- ---------
Net income $ 19,290 $ 15,050 $ 17,340 $ 13,314
---------- ---------- ---------- ---------
Because we also consider EBITDA useful as a liquidity measure, we present the following reconciliation of EBITDA to our net cash provided by operating activities:
Quarter Ended Six Months Ended
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
------------------- ------------------- ------------------- -------------------
EBITDA(a) $ 36,395 $ 31,641 $ 37,147 $ 33,032
Interest expense, net (112 ) (2,824 ) (312 ) (3,709 )
Provision for income taxes (13,103 ) (10,006 ) (11,803 ) (8,876 )
Non-cash interest 40 1,304 80 1,554
Deferred rent (117 ) 128 (240 ) 387
Equity based compensation 24 614 148 752
Provision for doubtful accounts (77 ) (301 ) (140 ) (602 )
Other 6 356 10 44
Changes in assets and liabilities:
Accounts payable, accrued expenses
and other current liabilities (20,691 ) (16,949 ) 3,437 17,956
Merchandise inventory 32,946 25,572 5,627 (12,915 )
Other long-term liabilities (12 ) (37 ) (119 ) —
Other current assets and other
assets (2,869 ) (4,769 ) (3,188 ) (7,708 )
---------- ---------- ---------- ----------
Net cash provided by operating
activities $ 32,430 $ 24,729 $ 30,647 $ 19,915
---------- ---------- ---------- ----------
We use EBITDA to determine our executive compensation which bases incentive compensation payments on our EBITDA performance measured against budget. EBITDA is also widely used by us and others in our industry to evaluate and price potential acquisitions.
EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• EBITDA does not reflect our current or future requirements for capital
expenditures or contractual commitments;• EBITDA does not reflect changes in, or cash requirements for, our working
capital needs;
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• EBITDA does not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments, on our debts;• Although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the
future, and EBITDA does not reflect any cash requirements for such
replacements; and
• Other companies in our industry may calculate EBITDA differently than we
do, limiting its usefulness as a comparative measure.
Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. See the Statements of Cash Flows included in our financial statements.
Quarter ended Six months ended
---------------------------------- ----------------------------------
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Store Data:
Company-owned:
Stores open at beginning of period 247 234 242 209
Stores opened — 5 6 28
Stores closed — — (1 ) —
Stores acquired from franchisees — — — 2
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Stores open at end of period 247 239 247 239
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Average Company-owned stores open in period 247 236 245 230
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Franchise:
Stores open at beginning of period 253 247 241 242
Stores opened 1 1 13 8
Stores closed — (8 ) — (8 )
Stores sold to Company — — — (2 )
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Stores open at end of period 254 240 254 240
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Average franchise stores open in period 253 247 251 245
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Total stores chainwide 501 479 501 479
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General
Net Sales. Net sales include same store sales and new store sales. Same store sales include sales for those stores that were in operation for a full period in both the current month and the corresponding month for the prior year. New store sales include sales in the current fiscal year from stores opened during the previous fiscal year before they are considered same stores, and new stores opened in the current fiscal year.
Cost of goods sold and occupancy costs. Cost of goods sold and occupancy costs includes the cost of merchandise, freight to the stores and store occupancy costs. Store occupancy costs include rent, common area maintenance, real estate taxes, repairs and maintenance, depreciation, insurance and utilities.
Store operating and selling expenses. Store operating and selling expenses consist of selling and store management payroll, employee benefits, medical insurance, employment taxes, advertising, pre-opening expenses which are expensed when incurred and other store level expenses.
General and administrative expenses. General and administrative expenses include payroll and employee benefits, employment
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taxes, management information systems, marketing, insurance, legal and other corporate level expenses. Corporate level expenses are primarily attributable to our corporate office in Rockaway, New Jersey, and district and regional offices throughout the country.
Franchising. Franchising revenue is composed of the initial franchise fees, which are recorded as revenue when a franchise store opens, plus ongoing royalty fees, which are generally 4.0% of the store's net sales. Franchise expenses include direct and indirect expenses. The direct expenses include salaries, travel and other direct expenses of the franchise operations department in addition to legal fees, bad debt expense, insurance expense and other miscellaneous charges. The indirect expenses include pro-rata allocations of corporate expenses for salaries, including bonuses, occupancy and depreciation, based on time spent on franchise support.
Interest expense. Interest and debt expense includes interest relating to our senior notes and credit facility. Interest also includes amortization of financing intangibles, bank service charges and interest on capital lease obligations.
Quarter Ended December 27, 2003 Compared to Quarter Ended December 28, 2002
Retail. Net sales from Company-owned stores increased 8.4% to $175.3 million for the second quarter of Fiscal 2004 from $161.6 million for the second quarter of the prior fiscal year. Of the 8.4% increase in net sales, 3.7% resulted from a same store sales increase and the remaining 4.7% related to the stores that have not been open for one year. The customer count in company-owned stores, on a same store basis, increased 1.5%, and the average sale increased 2.2%. With nine stores joining the same store sales group during this quarter of Fiscal 2004, same store sales increased 4.9% in the western region, 4.0% in the eastern region and 2.6% in the central region. Same store sales for Company-owned stores increased 1.9% for the second quarter of Fiscal 2003. The Company opened no new stores during the second quarter of Fiscal 2004 and five in the same period last year.
Gross profit, which is net sales minus cost of goods sold and occupancy costs, increased 7.5% to $70.6 million in the second quarter of Fiscal 2004 from $65.7 million in the same period last year. The increase was primarily due to increased sales volume. Gross margin as a percent of sales was 40.3% for the second quarter of Fiscal 2004 compared with 40.6% for the same period last year.
Store operating and selling expenses increased 5.8% to $36.3 million for the second quarter of Fiscal 2004 from $34.3 million in the same period last year. The increase in store operating expenses is attributable to same store sales increases and the increase in the number of stores. Store operating and selling expenses were 20.7% and 21.2% of sales for the second quarter of Fiscal 2004 and Fiscal 2003, respectively. The decrease as a percent of sales is due mainly to a decrease in store opening expenses.
The pre-opening expenses incurred in the second quarter of Fiscal 2004 for the new stores and stores to be opened later in the fiscal year amounted to $20,000 compared with $314,000 incurred during the same period last year.
Company-owned store profit contribution, which is gross profit minus store operating and selling expenses, was $34.3 million for the second quarter of Fiscal 2004 compared with $31.4 million for the same period last year. The improvement over the prior year is primarily the result of same store sales increases and the increase in the number of stores. Store profit contribution as a percent of sales was 19.6% for the second quarter of Fiscal 2004 compared with 19.4% in the same period last year. New stores in their first or second Halloween season reported store contribution of $3.3 million, an increase of $2.9 million over the comparable period last year. Of this $2.9 million increase, $400,000 was attributable to the 12 stores in the Seattle market acquired in 2002.
General and administrative expenses decreased 10.8% to $7.5 million in the second quarter of Fiscal 2004 from $8.4 million in the same period last year. General and administrative expenses were 4.3% and 5.2% of sales for the second quarter of Fiscal 2004 and Fiscal 2003, respectively. This decrease is primarily due to unusual expenses associated with the Company's new logistics initiative and professional fees related to the implementation of a new information system incurred in the second quarter of Fiscal 2003 which were not incurred in Fiscal 2004.
Franchising. Franchise fees recognized on one store opening was $40,000 in the second quarter of Fiscal 2004 and $40,000 for one store opening in the same period last year. Royalty fees increased 10.9% to $7.2 million in the second quarter of Fiscal 2004 from $6.5 million in the same period last year. This was primarily due to an increased franchise store base and a same store sales increase of 7.0% for the franchise stores in the second quarter of Fiscal 2004, as compared with 2.9% for the same period last year.
Expenses attributable to franchise revenue decreased 5.1% to $1.6 million for the second quarter of Fiscal 2004 from $1.6 million for the second quarter of the prior fiscal year. As a percentage of franchise revenue, franchise expenses were 21.5% and 25.2% for the second quarter of Fiscal 2004 and Fiscal 2003, respectively.
Franchise profit contribution, which is franchise revenue minus expenses related to franchise revenue, increased 16.3% to $5.7
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million in second quarter of Fiscal 2004 from $4.9 million in the same period last year. The increase in franchise profit contribution is due to the increase in royalty fees combined with a decrease in franchise expenses.
Interest Expense. Interest expense decreased to $112,000 for the second quarter of Fiscal 2004 from $2.8 million in the same period last year. This decrease in interest expense is due to the repurchase of outstanding senior notes in the second quarter of Fiscal 2003. The repurchase of these notes was completed using working capital and borrowings under the Company's asset-based revolving credit agreement.
Income Taxes. An income tax expense of $13.1 million or 40.5% of pre-tax income, and $10.0 million or 39.9% of pre-tax income was recorded in the second quarter of Fiscal 2004 and Fiscal 2003, respectively. The change in tax rate from 39.9% to 40.5% is due to an increase in the overall state tax rate.
Net Income. As a result of the above factors, net income increased to $19.3 million, or $0.98 per diluted share, in the second quarter of Fiscal 2004, as compared to net income of $15.1 million, or $0.76 per diluted share in Fiscal 2003. Weighted average diluted shares outstanding decreased to 19.6 million in the second quarter of Fiscal 2004 from 19.9 million in the same period last year. This decrease is mainly due to the 463,000 shares of company stock that were purchased by the Company during the third quarter of Fiscal 2003, the warrant and stock option exercises during the twelve months ending December 27, 2003.
Six Months Ended December 27, 2003 Compared with Six Months Ended December 28,
Retail. Net sales from Company-owned stores increased 10.0% to $277.9 million for the six-months ended December 27, 2003 from $252.8 million for the same period last year. Of the 10.0% increase in net sales, 3.8% resulted from a same store sales increase and the remaining 6.2% related to the stores that have not been open for one year. The customer count in company-owned stores, on a same store basis, increased 1.4%, and the average sale increased 2.2%. With 31 stores joining the same store sales group during the six months ended December 27, 2003, same store sales increased 4.6% in the western region, 4.3% in the eastern region and 2.8% in the central region. Same store sales for Company-owned stores increased 2.5% for the same period last year. The Company opened six new stores and closed one store during the six-months ended December 27, 2003 and opened 28 stores, acquired two stores from franchises and closed no stores during the same period last year.
Gross profit, which is net sales minus cost of goods sold and occupancy costs, increased 7.1% to $98.9 million in the six-months ended December 27, 2003 from $92.4 million in the same period last year. The increase was primarily due to increased sales volume. Gross margin as a percent of sales was 35.6% for the six-months ended December 27, 2003 compared with 36.5% for the same period last year. The decrease in gross margin percent was related primarily to a high level of promotional activity in July and August, the continued emphasis on the clearance of discontinued merchandise as part of the Company's strategic focus.
Store operating and selling expenses increased 7.2% to $62.2 million for the six-months ended December 27, 2003 from $58.0 million in the same period last year. The increase in store operating expenses is attributable to increased expenses related to the additional stores opened since the same period last year. Store operating and selling expenses were 22.4% and 22.9% of sales for the six-months ended December 27, 2003 and December 28, 2002, respectively. The decrease as a percent of sales is due mainly to a decrease in store opening expenses.
The pre-opening expenses incurred in the six-months ended December 27, 2003 for the new stores and stores to be opened later in the fiscal year amounted to $323,000 compared with $796,000 incurred during the same time period last year.
Company-owned store profit contribution, which is gross profit minus store operating and selling expenses, was $36.7 million for the six-months ended December 27, 2003 compared with $34.4 million for the same period last year. The improvement over the prior year is primarily the result of same store sales increases and the increase in the number of stores. Store profit contribution as a percent of sales was 13.2% for the six-months ended December 27, 2003 compared with 13.6% of sales in the same period last year due to the decrease in gross margin as described above. New stores in their first or second Halloween season reported store contribution of $1.3 million, an increase of $3.7 million over the comparable period last year. Of this $3.7 million increase, approximately $900,000 was attributable to our Seattle stores.
General and administrative expenses decreased 0.3% to $15.7 million in the six-months ended December 27, 2003 from $15.7 million in the same period last year. General and administrative expenses were 5.6% and 6.2% of sales for the six-months ended December 27, 2003 and December 28, 2002, respectively. This decrease is primarily due to unusual expenses associated with the Company's new logistics initiative and professional fees related to the implementation of a new information system incurred during the six months ended December 27, 2002 which were not incurred during the same time period this year.
Franchising. Franchising fees recognized on 13 store openings was $488,000 in the six-months ended December 27, 2003 as compared with $275,000 recognized for eight store openings in the same period last year. Royalty fees increased 9.6% to $11.1 million in the six-months ended December 27, 2003 from $10.2 million in the same period last year. This was primarily due to an increased franchise store base and a same store
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sales increase of 5.7% for the franchise stores in the six-months ended December 27, 2003, as compared with 4.0% for the same period last year.
Expenses attributable to franchise revenue for the six-months ended December 27, 2003 remained relatively flat with last year at $3.2 million. As a percentage of franchise revenue, franchise expenses were 27.7% and 30.8% for the six-months ended December 27, 2003 and December 28, 2002, respectively.
Franchise profit contribution, which is franchise revenue minus expenses related to franchise revenue, increased 16.3% to $8.4 million for the six months ended December 27, 2003 from $7.2 million in the same period last year. The increase in franchise profit contribution is due to the increase in royalty fees as well as a decrease in franchise expenses.
Interest Expense. Interest expense decreased to $312,000 for the six-months ended December 27, 2003 from $3.7 million in the same period last year. This decrease in interest expense is due to the repurchase of outstanding senior notes. The repurchase of these notes was completed using working capital and borrowings under the Company's asset-based revolving credit agreement.
Income Taxes. An income tax expense of $11.8 million or 40.5% of pre-tax income, and $8.9 million or 40.0% of pre-tax income, was recorded in the six-months ended December 27, 2003 and December 28, 2002, respectively. The change in tax rate from 40.0% to 40.5% is due to an increase in the overall state tax rate.
Net Income. As a result of the above factors, net income increased to $17.3 million or $0.88 per diluted share in the six-months ended December 27, 2003, as compared to net income of $13.3 million, or $0.67 per diluted share in the same period last year. Weighted average diluted shares outstanding decreased to 19.6 million in the six-months ended December 27, 2003 from 19.9 million in the same period last year. This decrease is mainly due to the 463,000 shares of company stock that were purchased by the Company during the third quarter of Fiscal 2003, the warrant and stock option exercises during the twelve months ending December 27, 2003 and a slight decrease in average stock price for the six months ending December 27, 2003.
Liquidity and Capital Resources
The Company's cash requirements are primarily for working capital, the opening of new stores, the improvement and expansion of existing facilities and the improvement of information systems. Historically, these cash requirements have been met through cash flow from operations and borrowings under our credit facilities. At December 27, 2003, working capital was $35.6 million compared to $14.5 million in the same period last year.
For the six months ended December 27, 2003, cash provided by operating activities was $30.6 million, compared to $19.9 million for the same period last year. The increase in cash provided by operating activities was primarily attributable to a decrease in inventory. The decrease in average inventory level per store of 15.7% from the same period last year was attributed to management's efforts to control inventory and enable the Company to focus on product assortment, merchandise presentation and identify and discontinue slower moving SKU's. There was also an increase in net income and a decrease in accounts payable and other current liabilities.
Cash used in investment activities for the six months ended December 27, 2003 was $3.5 million compared to $15.2 million in the same period in the last fiscal year. The decrease in cash used in investing activities was primarily attributable to the opening of six Company-owned stores this year as compared with 28 new store openings and the acquisition of two stores from a franchisee during the same period last year.
Cash used in financing activities was $9.9 million for the six months ended December 27, 2003 compared with $4.9 million for the same period last year. Cash generated from operations was used to pay down our revolving credit facility.
At December 27, 2003, the Company had no balance outstanding under the Loan Agreement. Under the terms of the Loan Agreement, the Company may from time to time borrow amounts based on a percentage of its eligible inventory, up to a maximum of $65 million at any time outstanding. Advances bear interest, at the Company's option, (i) at the adjusted Eurodollar rate plus the applicable margin, which was set initially at 1.50% and is currently at 1.25%, per annum or (ii) at the prime rate less the applicable margin, which was initially set at and is currently 0.25% per annum, totaling 3.75% at December 27, 2003. The term of the Loan Agreement is three years, and is secured by a lien on substantially all of the assets of the Company. At December 27, 2003 and February 2, 2004, the
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Company had no borrowings outstanding under the Loan Agreement. Based on a percentage of current eligible inventory and credit card receivables, the Company had $19.2 million available to be borrowed under the Loan Agreement at February 2, 2004.
Company management currently believes that the cash generated by operations, together with the borrowing availability under the Loan Agreement, will be sufficient to meet the Company's working capital needs for the next twelve months, including planned new store openings. The Company is currently free of debt. This permits the Company to consider a wide variety of corporate initiatives intended to improve shareholder value, although there is no assurance that any specific initiative will be pursued or consummated.
Contractual Obligations and Commercial Commitments
To facilitate an understanding of our contractual obligations and commercial commitments, the following data is provided as of December 27, 2003:
Payments Due By Period (in thousands)
----------------------------------------------------------------------------------------
Total 1 Year 2-3 Years 4-5 Years After 5 years
---------------- ------------- ------------- ------------- -----------------
Contractual Obligations Operating
leases $ 244,830 $ 46,229 $ 86,258 $ 81,701 $ 30,642
Severance Arrangements 13 13 — — —
Capital lease Obligations 10 10 — — —
------- ------ ------ ------ ----------
Total Contractual Obligations $ 244,853 $ 46,252 $ 86,258 $ 81,701 $ 30,642
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As of December 27, 2003 and February 2, 2004, we had a contingent liability related to severance payments for 14 employees. The total contingent liability ranges from zero to approximately $2.0 million. As of December 27, 2003 and February 2, 2004, we had a standby letter of credit of $3.7 million pursuant to the Loan Agreement.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business.
Accounting and Reporting Changes
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities." FIN 46 addresses how to identify variable interest entities and provides guidance as to how a company may assess its interests in a variable interest entity for purposes of deciding whether consolidation of that entity is required. FIN 46 is effective for all variable interest entities created after January 31, 2003. The Company is required to adopt the provisions of FIN 46 for any variable interest entity created prior to February 1, 2003 by the end of the current fiscal year. The Company is reviewing the provisions of this interpretation and currently does not expect its implementation to have a material effect on its financial position, results of operations or cash flows.
Forward-Looking Statements
This Form 10-Q (including the information incorporated herein by reference) contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. The statements are made a number of times throughout the document and may be identified by forward-looking terminology as "estimate," "project," "expect," "believe," "may," "will," "intend" or similar statements or variations of such terms. Such forward-looking statements are based on many assumptions that are subject to certain risks and uncertainties, and include among others, the following: levels of sales, store traffic, acceptance of product offerings, competitive pressures from other party supplies retailers and other retailers, availability of qualified personnel, availability of suitable future store locations, schedules of store expansion plans and other factors beyond our control. As a result of the foregoing risks and uncertainties, actual results and performance may differ materially from those projected or suggested herein. Additional information concerning certain risks and uncertainties that could cause our actual results to differ materially from those projected or suggested may be identified from time to time in our Securities and Exchange Commission filings and our public announcements.
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