VVTV » Topics » Critical Accounting Policies and Estimates

These excerpts taken from the VVTV 10-K filed Apr 16, 2009.
Critical Accounting Policies and Estimates
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, management evaluates its estimates and assumptions, including those related to the realizability of long-term investments and intangible assets, accounts receivable, inventory and product returns. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from these estimates under different assumptions or conditions.
 
Management believes the following critical accounting policies affect the more significant assumptions and estimates used in the preparation of the consolidated financial statements:
 
  •  Accounts receivable.  We utilize an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two to six equal monthly credit card installments in which we bear the risk for uncollectibility. As of January 31, 2009 and February 2, 2008, we had approximately $46.3 million and $99.9 million respectively, due from customers under the ValuePay installment program. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Estimates are used in determining the provision for doubtful accounts and are based on historical rates in connection with actual write offs and delinquency rates, historical collection experience, current consumer credit trends, credit policy, current trends in the credit quality of our customer base, average length of ValuePay offers, average selling prices, our sales mix and accounts receivable aging. While credit losses have historically been within our expectations and the provisions established, during fiscal 2008 and 2007 we saw a significant increase in bad debt write offs due to the recent deterioration of consumer credit coupled with our mix shift to higher delinquency product categories, increases in our average ValuePay installment length and increased sales to lower credit-score customers. Provision for doubtful accounts receivable (primarily related to our ValuePay program) for fiscal 2008, fiscal 2007 and fiscal 2006 were $9.8 million, $12.6 million and $6.1 million, respectively. Based on our fiscal 2008 bad debt experience, a one-half point increase or decrease in our bad debt experience as a percentage of total television home shopping and internet sales would have an impact of approximately $2.8 million on consolidated distribution and selling expense.
 
  •  Inventory.  We value our inventory, which consists primarily of consumer merchandise held for resale, principally at the lower of average cost or realizable value. As of January 31, 2009 and February 2, 2008, we had inventory balances of $51.1 million and $79.4 million, respectively. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on a percentage of the inventory balance as determined by its age and specific product category. In determining these percentages, we look at our historical write-off experience, the specific merchandise categories on hand, our historic recovery percentages on liquidations, forecasts of future product television shows, historic show pricing and the current market value of gold. Provision for excess and obsolete inventory for fiscal 2008, fiscal 2007 and fiscal 2006 were $5.0 million, $1.8 million and $3.0 million, respectively. Based on our fiscal 2008 inventory write down experience, a 10% increase or decrease in inventory write downs would have had an impact of approximately $502,000 on consolidated net sales less cost of sales (exclusive of depreciation and amortization).


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  •  Product returns.  We record a reserve as a reduction of gross sales for anticipated product returns at each month-end and must make estimates of potential future product returns related to current period product revenue. Our return rates on our television and internet sales have been approximately 31% to 33% over the past three fiscal years. We estimate and evaluate the adequacy of our returns reserve by analyzing historical returns by merchandise category, looking at current economic trends and changes in customer demand and by analyzing the acceptance of new product lines. Assumptions and estimates are made and used in connection with establishing the sales returns reserve in any accounting period. Reserves for product returns for fiscal 2008, fiscal 2007 and fiscal 2006 were $2.8 million, $8.4 million and $8.5 million, respectively. Based on our fiscal 2008 sales returns, a one-point increase or decrease in our television and internet sales returns rate would have had an impact of approximately $2.9 million on consolidated net sales less cost of sales (exclusive of depreciation and amortization).
 
  •  Long-term investments.  As of January 31, 2009 our investment portfolio included auction rate securities with an estimated fair value of $15.7 million ($26.8 million cost basis). Our auction rate securities are primarily variable rate debt instruments that have underlying securities with contractual maturities greater than ten years and interest rates that are reset at auction primarily every 28 days. These investment-grade auction rate securities have failed to settle in auctions during fiscal 2007 and fiscal 2008. At this time, these investments are not available to settle current obligations, are not liquid, and in the event we need to access these funds, we will not be able to do so without a loss of principle. The loss of principal could be significant if we needed to access the funds within a short time horizon and the market for auction rate securities had not returned at the time we sought to sell such securities. As a result, in the fourth quarter of fiscal 2008, we recorded an other-than-temporary impairment charge of $11.1 million and reduced the carrying value of our auction rate security investment portfolio to reflect a permanent impairment on these securities due to the continued illiquidity of these investments and uncertainty regarding what period of time they might be settled and their ultimate value. While we believe that our estimates and assumptions regarding the valuation of our investments are reasonable, different assumptions could have a material affect on our valuations.
 
  •  FCC broadcasting license.  As of January 31, 2009 and February 2, 2008, we have recorded an intangible FCC broadcasting license asset totaling $23.1 million and $31.9 million, respectively, as a result of our acquisition of Boston television station WWDP TV-46 in fiscal 2003. In assessing the recoverability of our FCC broadcasting license asset, which we determined to have an indefinite life, we must make assumptions regarding estimated projected cash flows, recent comparable asset market data and other factors to determine the fair value of the related reporting unit. We had an independent fair market appraisal valuation performed on our television station WWDP TV-46 in the fourth quarter of fiscal 2008. As a result of this fair value appraisal, we recorded an intangible asset impairment of $8.8 million in the fourth quarter of fiscal 2008 and reduced the carrying value of our intangible FCC broadcast license asset as of January 31, 2009. While we believe that our estimates and assumptions regarding the valuation of our reporting unit are reasonable, different assumptions or future events could materially affect our valuations.
 
  •  Intangible assets.  As of January 31, 2009 and February 2, 2008, we had amortizable intangible assets totaling $7.5 million and $11.5 million, respectively, for the trademark license agreement with NBCU and the distribution and marketing agreement entered into with NBCU. We performed an impairment test with respect to these amortizable intangible assets in the fourth quarter of fiscal 2008 using an undiscounted cash flow analysis as stipulated by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and determined that an impairment had not occurred. In assessing the recoverability of our intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets and reporting units. While we believe that our estimates and assumptions regarding the valuation are reasonable, different assumptions or future events could materially affect our valuations.
 
  •  Stock-based compensation.  We account for stock-based compensation issued to employees in accordance with Statement of Financial Accounting Standards No. 123(R) (revised 2004), Share-Based Payment, which revised SFAS No. 123, Accounting for Stock-Based Compensation, and superseded APB Opinion No. 25, Accounting for Stock Issued to Employees. This standard requires compensation costs related to all share-based payment transactions to be recognized in the financial statements at fair value. The fair value of each


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  option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions for stock volatility, option terms, risk-free interest rates and dividend yields. Expected volatilities are based on the historical volatility of our stock. Expected term is calculated using the simplified method taking into consideration the option’s contractual life and vesting terms. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yields are not used in the fair value computations as we have never declared or paid dividends on our common stock. While we believe that our estimates and assumptions regarding the valuation of our share-based awards are reasonable, different assumptions could have a material affect on our valuations.
 
  •  Deferred taxes.  We account for income taxes under the liability method of accounting whereby income taxes are recognized during the fiscal year in which transactions enter into the determination of financial statement income (loss). Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment of such laws. We assess the recoverability of our deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In accordance with that standard, as of January 31, 2009 and February 2, 2008, we recorded a valuation allowance of approximately $91.6 million and $56.5 million, respectively, for our net deferred tax assets and net operating and capital loss carryforwards. Based on our recent history of losses, a full valuation allowance was recorded in fiscal 2008, fiscal 2007 and fiscal 2006 and was calculated in accordance with the provisions of SFAS No. 109, which places primary importance on our most recent operating results when assessing the need for a valuation allowance. We intend to maintain a full valuation allowance for our net deferred tax assets and loss carryforwards until sufficient positive evidence exists to support reversal of allowances.
 
Critical
Accounting Policies and Estimates



 



Management’s Discussion and Analysis of Financial Condition
and Results of Operations discusses our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting periods. On an on-going basis, management
evaluates its estimates and assumptions, including those related
to the realizability of long-term investments and intangible
assets, accounts receivable, inventory and product returns.
Management bases its estimates and assumptions on historical
experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. There can be no assurance that actual results will not
differ from these estimates under different assumptions or
conditions.


 



Management believes the following critical accounting policies
affect the more significant assumptions and estimates used in
the preparation of the consolidated financial statements:


 


























  • 

Accounts receivable.  We utilize an installment
payment program called ValuePay that entitles customers to
purchase merchandise and generally pay for the merchandise in
two to six equal monthly credit card installments in which we
bear the risk for uncollectibility. As of January 31, 2009
and February 2, 2008, we had approximately
$46.3 million and $99.9 million respectively, due from
customers under the ValuePay installment program. We maintain
allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments.
Estimates are used in determining the provision for doubtful
accounts and are based on historical rates in connection with
actual write offs and delinquency rates, historical collection
experience, current consumer credit trends, credit policy,
current trends in the credit quality of our customer base,
average length of ValuePay offers, average selling prices, our
sales mix and accounts receivable aging. While credit losses
have historically been within our expectations and the
provisions established, during fiscal 2008 and 2007 we saw a
significant increase in bad debt write offs due to the recent
deterioration of consumer credit coupled with our mix shift to
higher delinquency product categories, increases in our average
ValuePay installment length and increased sales to lower
credit-score customers. Provision for doubtful accounts
receivable (primarily related to our ValuePay program) for
fiscal 2008, fiscal 2007 and fiscal 2006 were $9.8 million,
$12.6 million and $6.1 million, respectively. Based on
our fiscal 2008 bad debt experience, a one-half point increase
or decrease in our bad debt experience as a percentage of total
television home shopping and internet sales would have an impact
of approximately $2.8 million on consolidated distribution
and selling expense.
 
  • 

Inventory.  We value our inventory, which
consists primarily of consumer merchandise held for resale,
principally at the lower of average cost or realizable value. As
of January 31, 2009 and February 2, 2008, we had
inventory balances of $51.1 million and $79.4 million,
respectively. We regularly review inventory quantities on hand
and record a provision for excess and obsolete inventory based
primarily on a percentage of the inventory balance as determined
by its age and specific product category. In determining these
percentages, we look at our historical write-off experience, the
specific merchandise categories on hand, our historic recovery
percentages on liquidations, forecasts of future product
television shows, historic show pricing and the current market
value of gold. Provision for excess and obsolete inventory for
fiscal 2008, fiscal 2007 and fiscal 2006 were $5.0 million,
$1.8 million and $3.0 million, respectively. Based on
our fiscal 2008 inventory write down experience, a 10% increase
or decrease in inventory write downs would have had an impact of
approximately $502,000 on consolidated net sales less cost of
sales (exclusive of depreciation and amortization).





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  • 

Product returns.  We record a reserve as a
reduction of gross sales for anticipated product returns at each
month-end and must make estimates of potential future product
returns related to current period product revenue. Our return
rates on our television and internet sales have been
approximately 31% to 33% over the past three fiscal years. We
estimate and evaluate the adequacy of our returns reserve by
analyzing historical returns by merchandise category, looking at
current economic trends and changes in customer demand and by
analyzing the acceptance of new product lines. Assumptions and
estimates are made and used in connection with establishing the
sales returns reserve in any accounting period. Reserves for
product returns for fiscal 2008, fiscal 2007 and fiscal 2006
were $2.8 million, $8.4 million and $8.5 million,
respectively. Based on our fiscal 2008 sales returns, a
one-point increase or decrease in our television and internet
sales returns rate would have had an impact of approximately
$2.9 million on consolidated net sales less cost of sales
(exclusive of depreciation and amortization).
 
  • 

Long-term investments.  As of January 31,
2009 our investment portfolio included auction rate securities
with an estimated fair value of $15.7 million
($26.8 million cost basis). Our auction rate securities are
primarily variable rate debt instruments that have underlying
securities with contractual maturities greater than ten years
and interest rates that are reset at auction primarily every
28 days. These investment-grade auction rate securities
have failed to settle in auctions during fiscal 2007 and fiscal
2008. At this time, these investments are not available to
settle current obligations, are not liquid, and in the event we
need to access these funds, we will not be able to do so without
a loss of principle. The loss of principal could be significant
if we needed to access the funds within a short time horizon and
the market for auction rate securities had not returned at the
time we sought to sell such securities. As a result, in the
fourth quarter of fiscal 2008, we recorded an
other-than-temporary impairment charge of $11.1 million and
reduced the carrying value of our auction rate security
investment portfolio to reflect a permanent impairment on these
securities due to the continued illiquidity of these investments
and uncertainty regarding what period of time they might be
settled and their ultimate value. While we believe that our
estimates and assumptions regarding the valuation of our
investments are reasonable, different assumptions could have a
material affect on our valuations.
 
  • 

FCC broadcasting license.  As of
January 31, 2009 and February 2, 2008, we have
recorded an intangible FCC broadcasting license asset totaling
$23.1 million and $31.9 million, respectively, as a
result of our acquisition of Boston television station WWDP
TV-46 in fiscal 2003. In assessing the recoverability of our FCC
broadcasting license asset, which we determined to have an
indefinite life, we must make assumptions regarding estimated
projected cash flows, recent comparable asset market data and
other factors to determine the fair value of the related
reporting unit. We had an independent fair market appraisal
valuation performed on our television station WWDP TV-46 in the
fourth quarter of fiscal 2008. As a result of this fair value
appraisal, we recorded an intangible asset impairment of
$8.8 million in the fourth quarter of fiscal 2008 and
reduced the carrying value of our intangible FCC broadcast
license asset as of January 31, 2009. While we believe that
our estimates and assumptions regarding the valuation of our
reporting unit are reasonable, different assumptions or future
events could materially affect our valuations.
 
  • 

Intangible assets.  As of January 31, 2009
and February 2, 2008, we had amortizable intangible assets
totaling $7.5 million and $11.5 million, respectively,
for the trademark license agreement with NBCU and the
distribution and marketing agreement entered into with NBCU. We
performed an impairment test with respect to these amortizable
intangible assets in the fourth quarter of fiscal 2008 using an
undiscounted cash flow analysis as stipulated by
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets
, and determined that an
impairment had not occurred. In assessing the recoverability of
our intangible assets, we must make assumptions regarding
estimated future cash flows and other factors to determine the
fair value of the respective assets and reporting units. While
we believe that our estimates and assumptions regarding the
valuation are reasonable, different assumptions or future events
could materially affect our valuations.
 
  • 

Stock-based compensation.  We account for
stock-based compensation issued to employees in accordance with
Statement of Financial Accounting Standards No. 123(R)
(revised 2004), Share-Based Payment, which revised
SFAS No. 123, Accounting for Stock-Based
Compensation
, and superseded APB Opinion No. 25,
Accounting for Stock Issued to Employees. This standard
requires compensation costs related to all share-based payment
transactions to be recognized in the financial statements at
fair value. The fair value of each





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option award is estimated on the date of grant using the
Black-Scholes option pricing model that uses assumptions for
stock volatility, option terms, risk-free interest rates and
dividend yields. Expected volatilities are based on the
historical volatility of our stock. Expected term is calculated
using the simplified method taking into consideration the
option’s contractual life and vesting terms. The risk-free
interest rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect
at the time of grant. Expected dividend yields are not used in
the fair value computations as we have never declared or paid
dividends on our common stock. While we believe that our
estimates and assumptions regarding the valuation of our
share-based awards are reasonable, different assumptions could
have a material affect on our valuations.


 
















  • 

Deferred taxes.  We account for income taxes
under the liability method of accounting whereby income taxes
are recognized during the fiscal year in which transactions
enter into the determination of financial statement income
(loss). Deferred tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences
between the financial statement and tax basis of assets and
liabilities. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of
the enactment of such laws. We assess the recoverability of our
deferred tax assets in accordance with the provisions of
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this
assessment. In accordance with that standard, as of
January 31, 2009 and February 2, 2008, we recorded a
valuation allowance of approximately $91.6 million and
$56.5 million, respectively, for our net deferred tax
assets and net operating and capital loss carryforwards. Based
on our recent history of losses, a full valuation allowance was
recorded in fiscal 2008, fiscal 2007 and fiscal 2006 and was
calculated in accordance with the provisions of SFAS
No. 109, which places primary importance on our most recent
operating results when assessing the need for a valuation
allowance. We intend to maintain a full valuation allowance for
our net deferred tax assets and loss carryforwards until
sufficient positive evidence exists to support reversal of
allowances.


 




This excerpt taken from the VVTV 10-K filed Apr 29, 2008.
Critical Accounting Policies and Estimates
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, management evaluates its estimates and assumptions, including those related to the realizability of long-term investments and intangible assets, accounts receivable, inventory and product returns. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from these estimates under different assumptions or conditions.
 
Management believes the following critical accounting policies affect the more significant assumptions and estimates used in the preparation of the consolidated financial statements:
 
  •  Accounts receivable.  We utilize an installment payment program called ValuePay that entitles customers to purchase merchandise and generally pay for the merchandise in two to five equal monthly credit card installments in which we bear the risk for uncollectibility. As of February 2, 2008 and February 3, 2007, we had approximately $99,875,000 and $105,197,000 respectively, due from customers under the ValuePay installment program. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Estimates are used in determining the allowance for doubtful accounts and are based on historical write off and delinquency rates, historical collection experience, current trends, credit policy and a percentage of accounts receivable by aging category. In determining these percentages, we review our historical write-off experience, current trends in the credit quality of the customer base as well as changes in credit policies and our sales mix. While credit losses have historically been within our expectations and the provisions established, during fiscal 2007 we saw a significant increase in bad debt write offs due to the recent deterioration of consumer credit coupled with our mix shift to higher delinquency product categories, increases in our average ValuePay installment length and increased sales to lower credit-score customers. Provision for doubtful accounts receivable (primarily related to our ValuePay program) for fiscal 2007, 2006 and 2005 were $12,613,000, $6,065,000 and $4,542,000, respectively. Based on our fiscal 2007 bad debt experience, a one-half point increase or decrease in our bad debt experience as a percentage of total television home shopping and internet sales would have an impact of approximately $3.8 million on consolidated distribution and selling expense.
 
  •  Inventory.  We value our inventory, which consists primarily of consumer merchandise held for resale, principally at the lower of average cost or realizable value, and reduce our balance by an allowance for excess and obsolete merchandise. As of February 2, 2008 and February 3, 2007, we had inventory balances of $79,444,000 and $66,622,000, respectively. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on a percentage of the inventory balance as determined by its age and specific product category. In determining these percentages, we look at our historical write-off experience, the specific merchandise categories on hand, our historic recovery percentages on liquidations, forecasts of future product television shows and the current market value of gold. Provision for excess and obsolete inventory for fiscal 2007, 2006 and 2005 were $1,811,000, $2,977,000 and $3,508,000, respectively. Based on our fiscal 2007 inventory write down experience, a 10% increase or decrease in inventory write downs would have had an impact of approximately $181,000 on consolidated net sales less cost of sales (exclusive of depreciation and amortization).
 
  •  Product returns.  We record a reserve as a reduction of gross sales for anticipated product returns at each month-end and must make estimates of potential future product returns related to current period product revenue. Our return rates on our television and internet sales have been approximately 32% to 33% over the past three fiscal years. We estimate and evaluate the adequacy of our returns reserve by analyzing historical returns by merchandise category, looking at current economic trends and changes in customer demand and


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  by analyzing the acceptance of new product lines. Assumptions and estimates are made and used in connection with establishing the sales returns reserve in any accounting period. Reserves for product returns for fiscal years 2007, 2006 and 2005 were $8,376,000, $8,498,000 and $7,658,000, respectively. Based on our fiscal 2007 sales returns, a one-point increase or decrease in our television and internet sales returns rate would have had an impact of approximately $4.7 million on consolidated net sales less cost of sales (exclusive of depreciation and amortization).
 
  •  Long-term investments.  As of February 2, 2008 our investment portfolio included auction rate securities with an estimated fair value of $24,346,000 ($26,800,000 cost basis). Our auction rate securities are primarily variable rate debt instruments that have underlying securities with contractual maturities ranging from 17 to 42 years and interest rates that are reset at auction primarily every 28 days. These mostly AAA-rated auction rate securities, which met our investment guidelines at the time the investments were made, have failed to settle in auctions during fiscal 2007. At this time, these investments are not currently liquid, and in the event we need to access these funds, we will not be able to do so without a loss of principle unless a future auction on these investments is successful. As a result, in fiscal 2007, we reduced the carrying value of these investments by $2,454,000 through other comprehensive income (loss) to reflect a temporary impairment on these securities. While we believe that our estimates and assumptions regarding the valuation of our investments are reasonable, different assumptions could have a material affect on our valuations. As of February 3, 2007, we had $4,139,000 of long-term equity investment in RLM recorded in connection with our equity share of RLM income under the equity method of accounting. On March 28, 2007, we sold our 12.5% ownership interest in RLM for approximately $43.8 million. See Note 2 to the consolidated financial statements.
 
  •  FCC broadcasting license.  As of February 2, 2008 and February 3, 2007, we have recorded an intangible FCC broadcasting license asset totaling $31,943,000 as a result of our acquisition of Boston television station WWDP TV-46 in fiscal 2003. In assessing the recoverability of our FCC broadcasting license asset, which we determined to have an indefinite life, we must make assumptions regarding estimated projected cash flows, recent comparable asset market data and other factors to determine the fair value of the related reporting unit. We performed an impairment test with respect to our FCC broadcasting license in the fourth quarter of fiscal 2007 using resent comparable market data for this asset and a discounted cash flow analysis as stipulated by SFAS No. 142, Goodwill and other Intangible Assets, and determined that an impairment had not occurred. With respect to the FCC broadcasting license asset, the fair value of the reporting unit exceeded its carrying value. While we believe that our estimates and assumptions regarding the valuation of our reporting unit are reasonable, different assumptions or future events could materially affect our valuations.
 
  •  Intangible assets.  As of February 2, 2008 and February 3, 2007, we had amortizable intangible assets totaling $11,480,000 and $13,993,000, respectively, for the trademark license agreement with NBCU and the distribution and marketing agreement entered into with NBCU. We performed an impairment test with respect to these amortizable intangible assets in the fourth quarter of fiscal 2007 using an undiscounted cash flow analysis as stipulated by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and determined that an impairment had not occurred. In assessing the recoverability of our intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets and reporting units.
 
  •  Stock-based compensation.  We account for stock-based compensation issued to employees in accordance with Statement of Financial Accounting Standards No. 123(R) (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which revised SFAS No. 123, “Accounting for Stock-Based Compensation,” and superseded APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). This standard requires compensation costs related to all share-based payment transactions to be recognized in the financial statements at fair value. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions for stock volatility, option terms, risk-free interest rates and dividend yields. Expected volatilities are based on the historical volatility of our stock. Expected term is calculated using the simplified method taking into consideration the option’s contractual life and vesting


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Table of Contents

  terms. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
 
Expected dividend yields are not used in the fair value computations as we have never declared or paid dividends on our common stock. While we believe that our estimates and assumptions regarding the valuation of our share-based awards are reasonable, different assumptions could have a material affect on our valuations. See Note 6, Shareholders’ Equity — Stock-Based Compensation, for our disclosure regarding our share-based equity awards.
 
  •  Deferred taxes.  We account for income taxes under the liability method of accounting whereby income taxes are recognized during the fiscal year in which transactions enter into the determination of financial statement income (loss). Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment of such laws. We assess the recoverability of our deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In accordance with that standard, as of February 2, 2008 and February 3, 2007, we recorded a valuation allowance of approximately $56,530,000 and $63,194,000, respectively, for our net deferred tax assets and net operating and capital loss carryforwards. Based on our recent history of losses, a full valuation allowance was recorded in fiscal 2007, 2006 and 2005 and was calculated in accordance with the provisions of SFAS No. 109, which places primary importance on our most recent operating results when assessing the need for a valuation allowance. Although management believes that our recent operating losses were heavily affected by a challenging retail economic environment and slowdown in consumer spending experienced by us and other merchandise retailers, we intend to maintain a full valuation allowance for our net deferred tax assets and loss carryforwards until sufficient positive evidence exists to support reversal of allowances.
 
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