Cabela's 2006 Annual Report Download - page 58

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sensitive categories of merchandise are apparel and footwear. However, a significant percentage of our inventory has
a low fashion component, such as hunting, camping, and fishing gear. Slow moving inventory is marked down and
sold in the Bargain Cave section of our merchandising business.
Catalog Amortization
Prepaid catalog expenses consist of internal and third party incremental direct costs incurred in the
development, production and circulation of our direct mail catalogs. These costs are primarily composed of creative
design, prepress/production, paper, printing, postage and mailing costs relating to the catalogs. All such costs are
capitalized as prepaid catalog expenses and are amortized over their expected period of future benefit or twelve
months, whichever is shorter. Such amortization is based upon sales lag pattern forecasts, which are developed
using similar prior catalog offerings as a guide. Prepaid catalog expenses are evaluated for realizability at each
reporting period by comparing the carrying amount associated with each catalog to actual sales data and to the
estimated probable remaining future revenue (net revenue less merchandise cost of goods sold, selling expenses and
catalog completions costs) associated with that catalog. If the carrying amount is in excess of the estimated probable
remaining future revenue, the excess is expensed in the reporting period. At the end of fiscal years 2006 and 2005,
we had $34.9 million and $37.0 million, respectively, capitalized for catalog costs.
Economic Development Bonds
Debt and equity securities with readily determinable fair values are classified as “available-for-sale” and
recorded at fair value, with unrealized gains and losses, net of related income taxes, excluded from earnings and
reported in accumulated other comprehensive income (loss). Declines in the fair value of available-for-sale securities
below cost that are deemed to be other than temporary are reflected in earnings as realized losses. At the time we
purchase these bonds we make estimates of the discounted future cash flow streams they are expected to generate in
the form of interest and principal payments. Because these cash flows are based primarily on future property or sales
tax collections at our facilities and other facilities (which in many cases may not yet be operating), these estimates are
inherently subjective and the probability of ultimate realization is highly uncertain. Any excess of par value over fair
value of bonds acquired as part of the destination retail store construction are allocated to the basis of the store. Each
reporting period we review the assumptions underlying the recorded valuation of these bonds to determine whether
changes in actual or anticipated tax collections or other factors suggest that the bonds have become permanently
impaired. Future property tax revenue is estimated using management’s current knowledge and assessment of known
construction projects and the likelihood of additional development or land sales at the relevant sites. Future sales tax
revenue is estimated generally using historical same store sales and projected increases for similar retail stores. Any
declines in the fair value of held-to-maturity and available-for-sale bonds and securities below cost that are deemed
to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sales of securities are
recorded on the trade date and determined using the specific identification method.
Asset Securitization
We use securitization of our credit card loans as one source to meet our funding needs for our Financial
Services business. We account for our securitization transactions in accordance with FAS 140. When we securitize
credit card loans, we retain certain interests in the loans, including an interest-only strip receivable; transferor’s
interest; servicing rights; and in some cases cash reserve accounts and Class B securities. The interest-only strip
receivable represents the contractual right to receive from the trust interest and other revenue less certain costs over
the estimated life of the securitized loans. The most significant estimates of the bank related to the interest-only
strips on the securitized loans.
We estimate the fair value of the interest-only strip receivable based on the present value of expected future
revenue flows (“excess spread”) based upon certain assumptions and estimates of our management. Quoted market
prices for the interest-only strip receivable are not available and we have limited experience in performing this type of
valuation. Our assumptions and estimates include projections concerning interest income and late fees on securitized
loans, recoveries on charged-off securitized loans, gross credit losses on securitized loans, contractual servicing
fees and the interest rate paid to investors in a securitization transaction. These projections are used to determine
the excess spread we expect to earn over the estimated life of the securitized loan principal. The other assumptions
and estimates we use in estimating the fair value of the interest-only strip receivable include projected loan payment
rates, which are used to determine the estimated life of the securitized loan principal, and an appropriate discount
rate.