WFB retains certain interests in securitized loans, including a transferor’s interest, servicing rights, interest-only strips, cash reserve accounts, and in some cases cash accounts. WFB classifies the interest-only strips and cash reserve accounts as retained interests in asset securitizations. A servicing asset or liability is not recognized as WFB receives adequate compensation relative to current market servicing rates.
WFB retains rights to future cash flows derived from finance charge collections, certain fee collections, allocated interchange, and recoveries on charged-off accounts net of collection costs, arising after investors have received the return for which they are entitled; reimbursement for charged-off accounts; and after certain administrative costs, such as servicing fees of operating the trust. This portion of the retained interests is known as interest-only strips and is subordinate to investor’s interests. For interest-only strips and cash reserve accounts, WFB estimates related fair values based on the present value of future expected cash flows using assumptions for credit losses, payment rates, and discount rates commensurate with the risks involved, but does not include interchange income since interchange income is earned only when a charge is made to a customer’s account. The value of the interest-only strips and cash reserve accounts are subject to credit, payment rate, and interest rate risks on the loans sold. For cash accounts, WFB estimates related fair values based on the present value of future expected cash flows using discount rates commensurate with the risks involved. Fair value changes in the interest-only strips and cash reserve accounts are recorded in securitization income included in Financial Services revenue. Actual results could differ materially from the estimates, and changes in circumstances could result in significant future changes to the assumptions currently being used.
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
Inventories– Inventories are stated at the lower of cost or market.All inventories are finished goods. The reserve for inventory shrinkage, estimated based on cycle counts and physical inventories, was $9,825 and $6,875 at the end of 2008 and 2007, respectively. The reserves for returns of damaged goods, obsolescence, and slow-moving items, estimated based upon historical experience, inventory aging, and specific identification, were $6,626 and $6,805 at the end of 2008 and 2007, respectively.
Vendor Allowances– Vendor allowances include price allowances, volume rebates, store opening costs reimbursements, marketing participation, and advertising reimbursements received from vendors under vendor contracts. Vendor merchandise allowances are recognized as a reduction of the costs of merchandise as sold. Vendor reimbursements of costs are recorded as a reduction to expense in the period the related cost is incurred based on actual costs incurred. Any cost reimbursements exceeding expenses incurred are recognized as a reduction of the cost of merchandise sold. Volume allowances may be estimated based on historical purchases and estimates of projected purchases.
Deferred Catalog Costs and Advertising– Advertising production costs are expensed as the advertising occurs except for catalog costs which are amortized over the expected period of benefit estimated at 3 to 12 months after mailing. Unamortized catalog costs totaled $31,015 and $32,569 at the end of 2008 and 2007, respectively. Advertising expense, including catalog costs amortization, and website marketing paid search fees, was $212,379, $207,373, and $191,533 for 2008, 2007, and 2006, respectively. Advertising vendor reimbursements netted in advertising expense above totaled $1,834, $7,058, and $4,546 for 2008, 2007, and 2006, respectively.
Store Pre-opening Expenses– Non-capital costs associated with the opening of new stores are expensed as incurred.
Leases– We lease certain retail locations, distribution centers, office space, equipment and land. Assets held under capital lease are included in property and equipment. Operating lease rentals are expensed on a straight-line basis over the life of the lease. At the inception of a lease, we determine the lease term by assuming the exercise of those renewal options that are reasonably assured because of the significant economic penalty that exists for not exercising those options. The exercise of lease renewal options is at our sole discretion. The expected lease term is used to determine whether a lease is capital or operating and is used to calculate straight-line rent expense. Additionally, the depreciable life of buildings and leasehold improvements is limited by the expected lease term.
Property and Equipment– Property and equipment are stated at cost. Depreciation and amortization are provided over the estimated useful lives of the assets, including assets held under capital leases, on a straight-line basis. Leasehold improvements are amortized over the lease term or, if shorter, the useful lives of the improvements. Assets held under capital lease agreements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. The costs of major improvements that extend the useful life of an asset are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Capitalized interest on projects during the construction period totaled $2,472, $4,069, and $355, for 2008, 2007, and 2006, respectively. Costs related to internally developed software are capitalized and amortized on a straight-line basis over their estimated useful lives.
Intangible Assets– Intangible assets are recorded in other assets and include non-compete agreements and goodwill. At the end of 2008 and 2007, intangible assets totaled $5,902 and $8,123, net of accumulated amortization of $2,132 and $4,509, respectively. During the fourth quarter of 2008, we completed our annual impairment analyses of goodwill and other intangible assets and recognized an impairment of $1,070, which is recorded in selling, distribution, and administrative expenses in our Direct segment where projected discounted cash flows were less than the fair value of the reporting unit.
Intangible assets, excluding goodwill, are amortized over three to five years. Amortization expense for these intangible assets for the next five years is estimated to approximate $725 (2009), $715 (2010), $644 (2011), $459 (2012), and $139 (2013).
72
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
On September 27, 2007, we purchased the net assets, and assumed certain liabilities, of an outdoors specialty retailer located in Winnipeg, Manitoba, totaling $11,162. The purchase price has been allocated to tangible and identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill of $3,505. We recorded goodwill related to this acquisition based on expected future economic benefits as this acquisition will serve as our platform for expansion into Canada. Results of operations for this acquisition for the last three months of 2007 and for fiscal year 2008 are included in our consolidated income statement.
Restructuring and Impairment Charges– After completing a review of our organizational structure, in October 2008 we announced a reduction in workforce of approximately 10% at our company headquarters. Severance and related benefits under this workforce reduction totaled $1,670, which was recorded in selling, distribution, and administrative expenses.
During the fourth quarter of 2008, we evaluated the recoverability of our available for sale economic development bonds being actively marketed and recorded an other-than-temporary impairment. We also evaluated the recoverability of our property and equipment. The impairment charges associated with these assets totaled $2,269 and were recorded in selling, distribution, and administrative expenses in the fourth quarter of 2008. We also incurred prepayment penalties totaling $775 in the fourth quarter of 2008. In addition, included in restructuring and impairment charges was the impairment of goodwill and other intangibles described earlier totaling $1,070, for total restructuring and impairment charges of $5,784.
Land Held for Sale or Development– Proceeds from the sale of land from development activities are recognized in other revenue and the corresponding costs of land sold are recognized in other costs of revenue.
Government Economic Assistance– When we construct a new retail store or retail development, we may receive economic assistance from local governments to fund a portion or all of our associated capital costs. This assistance typically comes in the form of cash and/or land grants and has been typically funded by the local government through proceeds from the sale of economic development bonds. We have historically purchased the majority of the bonds associated with our developments. Cash grants are made available to fund land, retail store construction, and/or development infrastructure costs. Economic development bonds are typically repaid through sales and/or property taxes generated by the retail store and/or within a designated development area. Cash and land grants are recognized as deferred grant income as a reduction to the costs, or recognized fair value in the case of land grants, of the associated property and equipment. Deferred grant income is amortized to earnings, as a reduction of depreciation expense, over the average estimated useful life of the associated assets.
Deferred grant income estimates, and their associated present value, are updated quarterly. These estimates are determined when estimation of the fair value of associated economic development bonds are performed if there are related bond investments. When it is determined that recorded amounts will not be recovered through projected discounted cash flows, an adjustment is made to reduce deferred grant income, and accumulated amortization on the deferred grant at that point in time is reversed as an increase to depreciation expense. We may agree to guarantee deficiencies in tax collections which fund the repayment of economic development bonds. We guaranteed an economic development bond totaling $3,695 at the end of 2007 and did not guarantee any economic development bonds at the end of 2008.
Land grants typically include land associated with the retail store and may include other land for sale and further development. Land grants are recognized at the fair value of the land on date of grant. Deferred grant income on land grants is recognized as a reduction to depreciation expense over the estimated life of the related assets of the developments. In 2008 and 2007, we received land under land grants with a fair value of $5,015 and $19,000, respectively.
Certain grants contain covenants we are required to comply with regarding minimum employment levels, maintaining retail stores in certain locations, and maintaining office facilities in certain locations. For these grants we recognize grant revenue as the milestones associated with the grant are met. For 2008 and 2007, we were in compliance with all material requirements under these grants.
73
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
Economic Development Bonds– Economic development bonds (“bonds”) issued by state and local municipalities that management has the intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Other bonds are classified as available-for-sale and valued at their fair value. Fair values of bonds are estimated using discounted cash flow projections based on available market interest rates and management estimates including the estimated amounts and timing of expected future tax payments to be received by the municipalities under development zones. These fair values do not reflect any premium or discount that could result from offering these bonds for sale or through early redemption, or any related income tax impact. Declines in the fair value of held-to-maturity and available-for-sale economic development bonds below cost that are deemed to be other than temporary are reflected in earnings.
Credit Card and Loyalty Rewards Programs– Cabela’s CLUB Visa cardholders receive Cabela’s points based on the dollar amounts of transactions through WFB issued credit cards which may be redeemed for Cabela’s products and services. Points may also be awarded for special promotions for the acquisition and retention of accounts. The dollar amount of related points are accrued as earned by the cardholder and recorded as a reduction in Financial Services revenue. In addition to the WFB issued credit cards, customers receive points for purchases at Cabela’s from various loyalty programs. The dollar amount of unredeemed credit card points and loyalty points was $106,159 and $70,955 at the end of 2008 and 2007, respectively. The total cost incurred for all credit card rewards and loyalty programs was $118,269, $109,619, and $90,096 for 2008, 2007 and 2006, respectively.
Income Taxes– The Company files consolidated federal and state income tax returns with its wholly-owned subsidiaries. The consolidated group follows a policy of requiring each entity to provide for income taxes in an amount equal to the income taxes that would have been incurred if each were filing separately. We recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of our assets and liabilities. We establish valuation allowances if we believe it is more likely than not that some or all of our deferred tax assets will not be realized.
Stock-Based Compensation– We adopted the provisions of FAS No. 123 (revised 2004),Share-Based Payment (“FAS 123R”),on January 1, 2006, using the modified prospective transition method. Prior to January 1, 2006, we accounted for stock-based payments under the provisions of Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees,and related interpretations. Effective January 1, 2006, we also adopted FASB Staff Interpretation FAS 123(R)-3,Transition Election Related to Accounting for the Tax Effect of Share-Based PaymentAwards, relating to transitional guidance on determining and reporting excess tax benefits from stock options exercised.
Under FAS 123R, we recognize compensation expense as follows. For equity awards issued after January 1, 2006, compensation expense is estimated based on grant date fair value on a straight-line basis over the requisite service period. For awards granted prior to, but not yet vested as of January 1, 2006, we estimated compensation expense based on the grant date fair value estimated under the provisions of APB Opinion No. 25. Costs associated with all awards are included in compensation expense as a component of selling, distribution, and administrative expenses.
Financial Instruments and Credit Risk Concentrations– Financial instruments which may subject us to concentrations of credit risk are primarily cash, cash investments, and accounts receivable. We invest primarily in money market accounts or tax-free municipal bonds, with short-term maturities, limiting the amount of credit exposure to any one entity. Concentrations of credit risk on accounts receivable are limited due to the nature of our receivables.
Fair Value of Financial Instruments – The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, gift certificates (including credit card loyalty rewards programs), accrued expenses, short-term borrowings, and income taxes payable included in the consolidated balance sheets approximate fair value given the short-term nature of these financial instruments. The estimated fair values of our long-term debt instruments are based on the amount of future cash flows associated with each instrument discounted using current borrowing rates for similar debt instruments of comparable maturity. Time deposits are pooled in homogeneous groups, and the future cash flows of those groups are discounted using current market rates offered for similar products for purposes of estimating fair value. The estimated fair value of credit card loans is based on the present value of future expected cash flows using assumptions for credit losses, payment rates, and discount rates commensurate with the risks involved. The estimated fair value of credit card loans was $168,429 and $191,893 at the end of 2008 and 2007, respectively.
74
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
Derivatives– We use derivatives for the purpose of hedging our exposure to changes in interest rates and foreign currency exchange rates. The fair value of each derivative is recognized in the consolidated balance sheets within current assets or current liabilities. For derivatives designated as a hedge and used to hedge an anticipated transaction, changes in the fair value of the derivatives are deferred in the consolidated balance sheets within accumulated other comprehensive income (loss) to the extent the hedge is effective in mitigating the exposure to the related anticipated transaction. Any ineffectiveness associated with the hedge is recognized immediately in earnings. Amounts deferred within accumulated other comprehensive income (loss) are recognized in the consolidated income statements in the same period during which the hedged transaction affects earnings. For derivatives that do not qualify for hedge accounting, changes in fair values are recognized immediately in earnings.
Comprehensive Income (Loss)– Comprehensive income (loss) consists of net income, derivative adjustments, unrealized gains and losses on available-for-sale economic development bonds, and foreign currency translation adjustments, net of related income taxes.
Currency Translation –Assets and liabilities of our Canadian operations are translated into U. S. dollars at currency exchange rates in effect at the end of a reporting period. Gains and losses from translation into U. S. dollars are included in accumulated other comprehensive income (loss) in our consolidated balance sheets. Revenues and expenses are translated at average monthly currency exchange rates.
Earnings Per Share– Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed by dividing net income by the sum of the weighted average number of shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common share equivalents had been issued.
2.CHANGE IN ACCOUNTING PRINCIPLES
At the beginning of fiscal 2007, December 31, 2006, we adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The recognition threshold requires that we determine whether it is more likely than not that a tax position will be sustained upon examination, and then the position is measured at the largest amount of the benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed on our tax returns that do not meet these recognition and measurement standards.
As a result of adopting FIN 48, we recognized additional liabilities for unrecognized tax benefits of $8,569. Of this amount, $966 after-tax was recorded as a one-time decrease to our beginning retained earnings. The remaining amount was previously accrued under FAS 5,Accounting for Contingencies, or FAS 109,Accounting for Income Taxes. In addition, we recorded $1,196 before-tax, or $789 after-tax, of accrued interest on the estimated unrecognized tax benefits as a one-time decrease to our beginning retained earnings. The cumulative effect of adopting FIN 48 totaled $1,755 as a decrease to our beginning retained earnings.
3. ACCOUNTING PRONOUNCEMENTS
As of December 30, 2007, FAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment to FASB Statement No. 115 became effective for the Company. This statement permits entities to choose to measure many financial instruments and certain other items at fair value on an instrument by instrument basis with changes in fair value reported in earnings. The Company has elected not to adopt the fair value option under FAS No. 159 on any financial instruments or other items held.
75
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
Effective December 30, 2007, we adopted the provisions of FAS No. 157,Fair Value Measurements. This statement defines fair value, establishes a hierarchal disclosure framework for measuring fair value, and requires expanded disclosures about fair value measurements. The provisions of FAS 157 apply to all financial instruments that are being measured and reported on a fair value basis. In addition, in February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The partial adoption of FAS 157 did not have any impact on our financial position or results of operations. We do not believe that the adoption of FAS 157, as it relates to nonfinancial assets and liabilities, will have a material impact on our financial position or results of operations.
In December 2007, the FASB issued FAS No. 141R,Business Combinations, which replaces FAS No. 141. FAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. This statement applies prospectively to all business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. FAS 141R will be applicable to us beginning in fiscal year 2009.
In December 2007, the FASB issued FAS No. 160,Noncontrolling Interests in Consolidated Financial Statements– an amendment of ARB No. 51. This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 is effective for fiscal years beginning on or after December 15, 2008, including interim periods. We do not believe that the adoption of this statement will have a material effect on our financial position or results of operations.
In February 2008, the FASB issued FSP FAS 140-3,Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.The objective of this FSP is to provide implementation guidance on accounting for a transfer of a financial asset and repurchase financing. The FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under FAS 140. However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall not be evaluated under FAS 140. FSP FAS 140-3 is effective for fiscal years beginning after November 15, 2008. We do not believe that the adoption of this statement will have a material effect on our financial position or results of operations.
In March 2008, the FASB issued FAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. This statement changes the existing disclosure requirements in FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities. FAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Since the provisions of this statement are disclosure related, we do not believe that the adoption of this statement will have a material effect on our financial position or results of operations.
76
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
On September 15, 2008, the FASB issued two exposure drafts proposing amendments to FAS 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and FASB Interpretation No. 46R,Consolidation of Variable Interest Entities. Currently, the transfers of our bank subsidiary’s credit card receivables in securitization transactions qualify for sale accounting treatment. The trusts used in our bank subsidiary’s securitizations are not consolidated with us for financial reporting purposes because the trusts are qualifying special purpose entities. Because the transfers qualify as sales and the trusts are not subject to consolidation, the assets and liabilities of the trusts are not reported on our consolidated balance sheet under generally accepted accounting principles. Under the proposed amendments, the concept of a QSPE would be eliminated and would modify the consolidation model for variable interest entities and require continual reassessment of consolidation conclusions. As proposed, these amendments would be effective for us at the beginning of our 2010 fiscal year. The proposed amendments, if adopted, could require us to consolidate the assets and liabilities of our bank subsidiary’s securitization trusts. This could cause us to breach certain financial covenants in our credit agreements and unsecured notes. This could have a significant effect on our financial condition and ability to meet the regulatory capital maintenance requirements of our bank subsidiary, as affected off-balance sheet loans would be recorded on our consolidated balance sheet and may be subject to regulatory capital requirements. Additionally, if WFB does not meet the requirements for the well-capitalized category under the regulatory framework for prompt corrective action, the ability to obtain certificates of deposit could be affected.
On December 11, 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8,Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.As a result of the new FSP issuers must provide additional disclosures about transfers of financial assets and involvement with variable interest entities. The requirements apply to transferors, sponsors, servicers, primary beneficiaries, and holders of significant variable interests in a variable interest entity or qualifying special purpose entity. The Staff Position is effective for the first interim period or fiscal year ending after December 15, 2008, and each interim and annual period thereafter until the effective date of the amendments to FAS 140 and Interpretation 46R, which are still being deliberated. The new requirements include disclosure objectives as well as required specified disclosures. The specified disclosures focus both on continuing involvement with transferred financial assets, including involvement related to securitizations or asset-backed financing arrangements, and on a company’s involvement with VIEs. The Company has included the required disclosures below in Note 4. The adoption of FSP FAS 140-4 did not have any impact on our financial position or results of operations.
On January 12, 2009, the FASB issued FASB Staff Position No. EITF 99-20-1,Amendments to the Impairment Guidance of EITF Issue No. 99-20. The FSP eliminates the requirement that a holder’s best estimate of cash flows be based upon those “that a market participant” would use. Instead, the FSP requires that an other-than-temporary impairment be recognized through earnings when it is probable that there has been an adverse change in the holder’s estimated cash flows from the cash flows previously projected. The Staff Position is effective for the first interim period or fiscal year ending after December 15, 2008, and each interim and annual period thereafter. Retroactive application to a prior interim period is not permitted. The adoption of FSP EITF 99-20-1 did not have any impact on our financial position or results of operations.
4. CREDIT CARD LOANS AND SECURITIZATION
WFB has established the Cabela’s Master Credit Card Trust for the purpose of routinely selling and securitizing credit card loans and issuing beneficial interest to investors. The trust issues variable funding facilities and long-term notes each of which has an undivided interest in the assets of the trust. Variable rate notes are priced at a benchmark rate plus a spread. Fixed rate notes are priced on a swap rate plus a spread. At the end of 2008, the trust had six term series outstanding totaling $1,700,000 and three variable funding facilities with $911,115 in available capacity and $474,272 outstanding. WFB maintains responsibility for servicing the securitized loans and receives a servicing fee based on the average outstanding loans in the trust. Servicing fees are paid monthly and reflected in other non-interest income in Financial Services revenue. The trust is not a subsidiary of WFB or Cabela’s and is therefore excluded from the consolidated financial statements in accordance with GAAP. These securitizations qualify as sales under GAAP and accordingly are not treated as debt on the consolidated financial statements. The credit card loans receivable equal to the investor interest is removed from the consolidated financial statements.
77
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
As contractually required, WFB establishes certain cash accounts, to be used as collateral for the benefit of investors. As of 2008 and2007, the balances in the cash accounts with the trustee were $8,000 and $12,750, respectively. In addition, WFB owns asset-backed securities from some of its securitizations, which are subordinated to other notes issued.
WFB’s retained interests in credit card asset securitizations include a transferor’s interest, asset-backed securities, accrued interest receivable on securitized credit card receivables, cash accounts, servicing rights, the interest-only strip, cash reserve accounts, and other retained interests. The transferor’s interest is represented by security certificates and is reported in credit card loans held for sale. WFB’s transferor’s interest rankspari passu with investors’ interests in the securitization trusts. The remaining retained interests are subordinate to certain investors’ interests, and as such, may not be realized by WFB if needed to absorb deficiencies in cash flows that are allocated to the investors of the trusts.
WFB’s retained interest and related receivables are comprised of the following:
| 2008 | | 2007 |
| Investments in asset-backed securities - trading securities | $ | 31,584 | | $ | 12,650 |
| Interest-only strip, cash reserve accounts, and cash accounts | | 30,021 | | | 39,127 |
| Transferor's Interest | | 143,411 | | | 166,700 |
| Other assets - accrued interest receivable, and amounts due from trust | | 32,379 | | | 25,222 |
| Total | $ | 237,395 | | $ | 243,699 |
WFB’s retained interests are subject to credit, payment and interest rate risks on the transferred credit card receivables. To protect investors, the securitization structures include certain features that could result in earlier-than-expected repayment of the securities, which could cause WFB to sustain a loss of one or more of its retained interests and could prompt the need for WFB to seek alternative sources of funding. The primary investor protection feature relates to the availability and adequacy of cash flows in the securitized pool of receivables to meet contractual requirements, the insufficiency of which triggers early repayment of the securities. WFB refers to this as the “early amortization” feature. Investors are allocated cash flows derived from activities related to the accounts comprising the securitized pool of receivables, the amounts of which reflect finance charges collected, certain fee assessments collected, allocations of interchange, and recoveries on charged off accounts. From these cash flows, investors are reimbursed for charge-offs occurring within the securitized pool of receivables and receive a contractual rate of return and WFB is paid a servicing fee as servicer. Any cash flows remaining in excess of these requirements are paid to WFB and recorded as excess spread, included in securitization income. An excess spread of less than 0% for a contractually specified period, generally a three-month average, would trigger an early amortization event. Once the excess spread falls below 0%, the receivables that would have been subsequently purchased by the trust from WFB will instead continue to be recognized on the consolidated balance sheet since the cash flows generated in the trust would be used to repay principal to investors. Such an event could result in WFB incurring losses related to its retained interests, including amounts due from trust, investments in asset backed securities, interest-only strip receivables, cash reserve account, and accrued interest receivable. The investors have no recourse to WFB’s other assets for failure of debtors to pay other than for breaches of certain customary representations, warranties and covenants. These representations, warranties, covenants, and the related indemnities, do not protect the trust or the outside investors against credit-related losses on the loans.
Another feature, which is applicable to the notes issued from Cabela’s Master Credit Card Trust (“CMCCT”), is one in which excess cash flows generated by the transferred loan receivables are held at the trust for the benefit of the investors, rather than paid to WFB. This reserve account funding is triggered when CMCCT’s three month average excess spread rate decreases to below between 4.50% and 5.50% with increasing funding requirements as excess spread levels decline below preset levels to 0%. Similar to economic early amortization, this feature also is designed to protect the investors’ interests from loss.
Credit card loans performed within establish guidelines and no other events occurred during 2008, 2007, and 2006.
In 2003, in connection with the Series 2003-1 securitization, the securitization trust entered into a $300,000 notional swap agreement in order to manage interest rate exposure. The Series 2003-1 swap effectively converted the interest rate on the investor notes from a floating rate based on a spread over a benchmark to a fixed rate of 3.699%. The Series 2003-1 securitization matured in 2008. In 2008, the securitization trust entered into a $229,900 notional swap agreement in connection with the Series 2008-I securitization in order to manage interest rate exposure. The exposure is related to changes in cash flows from funding credit card loans, which include a high percentage of accounts that do not incur monthly finance charges based on floating rate obligations. The Series 2008-I swap effectively converts the interest rate on the investor notes from a floating rate based on a spread over a benchmark to a fixed rate of 4.32%. Since the trust is not consolidated with WFB, the fair value of the swap is not reflected on the WFB’s financial statements. Cabela’s entered into a swap with similar terms with the counterparty whereby the notional amount is zero unless the notional amount of WFB’s swap falls below a required amount, which effectively makes Cabela’s a guarantor of the swap. The bank pays Cabela’s a fee for the credit enhancement provided by this swap.
78
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
The table below presents quantitative information about delinquencies, net charge-offs and components of managed credit card loans, including securitized loans:
| | 2008 | | 2007 |
|
| Credit card loans held for sale (including transferor’s interest of $143,411 and $166,700) | | $ | 157,301 | | | $ | 178,258 | |
| Credit card loans receivable, net of allowances of $1,507 and $1,197 | | | 9,925 | | | | 13,635 | |
| Total | | $ | 167,226 | | | $ | 191,893 | |
| |
| Composition of credit card loans at year end: | | | | | | | | |
| Loans serviced | | $ | 2,347,223 | | | $ | 2,058,235 | |
| Loans securitized and sold to outside investors | | | (2,142,688 | ) | | | (1,850,000 | ) |
| Securitized loans with securities owned by WFB which are classified as | | | | | | | | |
| asset-backed securities in retained interests on securitized loans | | | (31,584 | ) | | | (12,650 | ) |
| | | | 172,951 | | | | 195,585 | |
| Less adjustments to market value and allowance for loan losses | | | (5,725 | ) | | | (3,692 | ) |
| |
| Total (including transferor’s interest of $143,411 and $166,700) | | $ | 167,226 | | | $ | 191,893 | |
| |
| Transferor’s interest restricted for repayment of secured borrowing at year end | | $ | — | | | $ | 133,333 | |
| |
| Delinquent loans including finance charges and fees at year end: | | | | | | | | |
| Managed credit card loans: | | | | | | | | |
| 30-89 days | | | 28,712 | | | | 14,319 | |
| 90 days or more and still accruing | | | 11,145 | | | | 5,835 | |
| Securitized credit card loans including transferor’s interest: | | | | | | | | |
| 30-89 days | | | 28,148 | | | | 13,850 | |
| 90 days or more and still accruing | | | 10,761 | | | | 5,628 | |
| |
| Total net charge-offs including finance charges and fees for the year ended: | | | | | | | | |
| Managed credit card loans | | | 61,448 | | | | 33,898 | |
| Securitized credit card loans including transferor’s interest | | | 60,033 | | | | 32,557 | |
| |
| Annual average credit card loans including finance charges and fees: | | | | | | | | |
| Managed credit card loans | | | 2,085,481 | | | | 1,690,543 | |
| Securitized credit card loans including transferor’s interest | | | 2,051,295 | | | | 1,656,078 | |
| |
| Total net charge-offs as a percentage of annual average loans: | | | | | | | | |
| Managed credit card loans | | | 2.95 | % | | | 2.01 | % |
| Securitized credit card loans including transferor’s interest | | | 2.93 | % | | | 1.97 | % |
79
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
Cash Flows from Securitizations:
The following table summarizes the cash flows received from the securitization trust during the years ended:
| 2008 | | 2007 | | 2006 |
| Proceeds from new securitizations, net | $ | 292,687 | | $ | 336,000 | | $ | 267,000 |
| Collections used by the trust to purchase new balances in | | | | | | | | |
| revolving credit card securitizations | | 8,929,868 | | | 8,040,206 | | | 6,727,177 |
| Servicing fees received | | 36,315 | | | 30,077 | | | 24,352 |
| Other cash flows received by the transferor other than servicing fees | | 187,590 | | | 188,633 | | | 157,259 |
Key Assumptions: The following are the key economic assumptions used to estimate the fair value of the retained interests resulting from the securitization of credit card loans for the years ended:
| | 2008 | | 2007 |
| | Weighted average payment rates | 26.93 to 29.78 | % | | 29.88 to 33.16 | % |
| | Weighted average life in years | 0.708 to 0.750 | | | 0.542 to 0.708 | |
| | |
| Weighted average expected credit losses | 3.28 to 6.06 | % | | 2.57 to 3.06 | % |
| | |
| Servicing fee | 2.00 | % | | 1.25 to 2.00 | % |
| | Discount rate | 10.00 to 16.60 | % | | 10.12 to 16.60 | % |
| Weighted average interest rate paid to investors | 4.11 to 5.35 | % | | 5.47 to 5.64 | % |
Sensitivity Analysis:
The key economic assumptions used and the sensitivity of the current fair value of retained interests of $61,605 at December 27, 2008, to immediate 10% and 20% adverse changes in those assumptions are as follows:
| | | | Impact on Fair Value of |
| | | | | an Adverse Change of |
| | Assumption | | 10% | | 20% |
| Weighted average payment rates | 26.93 | % | | $ | (1,117 | ) | | $ | (2,114 | ) |
| Weighted average expected credit losses | 6.06 | | | | (3,183 | ) | | | (6,518 | ) |
| Discount rate | 14.25 to 15.25 | | | | (268 | ) | | | (538 | ) |
| Weighted average interest paid to investors | 4.11 | | | | (203 | ) | | | (406 | ) |
The sensitivity analysis is hypothetical and is as of a specific point in time. As a result, these scenarios should be used with caution. As the table indicates, changes in fair value based on 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair values of the retained interests are calculated without changing any other assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. In addition, the sensitivity analysis does not consider any corrective action that WFB may take to mitigate the impact of any adverse changes in the key assumptions.
80
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
Credit card loans are originated with variable rates of interest that adjust with changing market interest rates. Thus, the carrying value of the credit card loans, less the allowance for loan losses, approximates fair value. WFB estimates related fair value of the transferor’s interest, less valuation allowance based on the present value of future expected cash flows, using assumptions for credit losses, payment rates, and discount rates commensurate with the risks involved. This valuation does not include the value that relates to estimated cash flows generated from new loans over the life of the cardholder relationship. Accordingly, the aggregate fair value of the credit card loans does not represent the underlying value of the established cardholder relationship. At the end of 2008 and 2007, the carrying amounts of credit card loans were $167,226 and $191,893, respectively, with estimated fair values of $168,429 and $191,893, respectively.
On February 19, 2009, Moody's Investors Service announced that it had downgraded the ratings on 21 classes of asset-backed notes issued by the trust of our Financial Services business. Downgrades could negatively impact the ability of our Financial Services business to complete other securitization transactions on acceptable terms or at all and force our Financial Services business to rely on other potentially more expensive funding sources, to the extent available, which would decrease our profitability.
5. PROPERTY AND EQUIPMENT
Property and equipment included the following at the years ended:
| | Depreciable Life | | | | | | | | |
| | in Years | | 2008 | | 2007 |
| | Land and improvements | Up to 20 | | $ | 158,742 | | | $ | 172,582 | |
| Buildings and improvements | 7 to 40 | | | 492,135 | | | | 470,067 | |
| Furniture, fixtures and equipment | 3 to 15 | | | 424,640 | | | | 378,050 | |
| Assets held under capital lease | Up to 30 | | | 14,562 | | | | 14,562 | |
| | Property and equipment | | | | 1,090,079 | | | | 1,035,261 | |
| Less accumulated depreciation and amortization | | | | (302,575 | ) | | | (246,178 | ) |
| | | | | 787,504 | | | | 789,083 | |
| Construction in progress | | | | 93,576 | | | | 114,969 | |
| | | | $ | 881,080 | | | $ | 904,052 | |
6. ECONOMIC DEVELOPMENT BONDS
Economic development bonds consisted of the following at the years ended:
| | 2008 |
| | | | Gross | | Gross | | |
| | | | Unrealized | | Unrealized | | Fair |
| | | Cost | | Gains | | Losses | | Value |
| | Classified as: | | | | | | | | | |
| Available-for-sale | $ | 122,501 | | $ | 35 | | $ | (9,951 | ) | | $ | 112,585 |
| |
| | 2007 |
| | | | Gross | | Gross | | |
| | | | Unrealized | | Unrealized | | Fair |
| | Cost | | Gains | | Losses | | Value |
| Classified as: | | | | | | | | | | | |
| Available-for-sale | $ | 91,427 | | $ | 9 | | $ | (1,299 | ) | | $ | 90,137 |
| Held to maturity | | 7,898 | | — | | — | | | | 7,898 |
| | $ | 99,325 | | $ | 9 | | $ | (1,299 | ) | | $ | 98,035 |
81
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
The carrying value and fair value of economic development bonds by contractual maturity at the end of 2008 was as follows:
| | | | | Fair |
| | | Cost | | Value |
| | 2009 | $ | 2,680 | | $ | 2,520 |
| 2010 | | 1,757 | | | 1,702 |
| 2011 | | 1,897 | | | 1,837 |
| 2012 | | 2,428 | | | 2,325 |
| 2013 | | 3,079 | | | 2,924 |
| Thereafter | | 110,660 | | | 101,277 |
| | $ | 122,501 | | $ | 112,585 |
At the end of 2008 the Company transferred the remaining economic development bond classified as held to maturity because of management’s intent to sell the bond. At the end of 2008 and 2007, the fair value of certain economic development bonds, including those reclassified from held to maturity to held for sale, were determined to be below carrying value, with the decline in fair value deemed to be other than temporary. These fair value adjustments totaling $1,280 and $6,733, respectively, reduced the carrying value of the economic development bond portfolio at the end of 2008 and 2007, respectively.
Interest earned on the economic development bonds totaled $6,305, $5,680, and $9,574 for 2008, 2007, and 2006, respectively. There were no realized gains or losses in 2008, 2007, or 2006.
7. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets (current and long-term) consisted of the following at the years ended:
| | 2008 | | 2007 |
| Prepaid expenses and other current assets: | | | | | |
| | Deferred catalog costs | $ | 31,015 | | $ | 32,569 |
| Interest and notes receivable | | 10,314 | | | 5,520 |
| Financial Services - Visa interchange funding | | 32,217 | | | 31,067 |
| Financial Services accrued interest and other receivables | | 43,812 | | | 34,575 |
| Other | | 16,081 | | | 12,566 |
| | $ | 133,439 | | $ | 116,297 |
| | |
| Other assets: | | | | | |
| Goodwill | $ | 2,874 | | $ | 4,474 |
| Intangible assets, net | | 3,028 | | | 3,649 |
| Financial Services deferred financing and new account costs | | 9,616 | | | 6,942 |
| Long-term notes and other receivables | | 9,246 | | | 12,382 |
| Held to maturity investments | | 1,780 | | | 1,630 |
| Other | | 720 | | | 699 |
| | $ | 27,264 | | $ | 29,776 |
82
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
8. ACCRUED EXPENSES
Accrued expenses consisted of the following at the years ended:
| | 2008 | | 2007 |
| | Accrued employee compensation and benefits | $ | 45,662 | | $ | 61,519 |
| Accrued property, sales, and other taxes | | 24,622 | | | 17,926 |
| | Deferred revenue and accrued sales returns | | 24,632 | | | 27,710 |
| | Accrued interest | | 7,548 | | | 6,305 |
| Accrued credit card fees | | 5,507 | | | 6,306 |
| Other | | 15,325 | | | 19,744 |
| | $ | 123,296 | | $ | 139,510 |
9. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following at the years ended:
| | | 2008 | | 2007 |
| | Deferred lease tenant allowances | | $ | 37,823 | | $ | 17,018 |
| Deferred grant income | | | 10,041 | | | 9,685 |
| Deferred compensation | | | 5,192 | | | 5,379 |
| FIN 48 unrecognized tax benefits | | | 3,076 | | | 2,000 |
| | | $ | 56,132 | | $ | 34,082 |
10. TIME DEPOSITS
WFB accepts time deposits only in amounts of at least one hundred thousand dollars. All time deposits are interest bearing. The aggregate amount of time deposits by maturity at the end of 2008 was as follows:
| 2009 | $ | 178,817 | |
| | 2010 | | 82,357 | |
| 2011 | | 115,230 | |
| 2012 | | 34,912 | |
| 2013 | | 74,683 | |
| Thereafter | | 200 | |
| | $ | 486,199 | |
| Less current maturities | | (178,817 | ) |
| Deposits classified as non-current liabilities | $ | 307,382 | |
Time deposits include brokered institutional certificates of deposit totaling $447,782 and $137,191 at the end of 2008 and 2007, respectively.For purposes of estimating fair value, time deposits are pooled in homogeneous groups and the future cash flows of those groups are discounted using current market rates offered for similar products. At the end of 2008 and 2007, the carrying amounts of the bank’s time deposits were $486,199 and $160,591, respectively, with estimated fair values of $508,190 and $162,939, respectively.
83
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
11. REVOLVING CREDIT FACILITIES
We have a credit agreement providing for a $430,000 unsecured revolving credit facility that was increased from $325,000 effective April 2, 2008. Other than the increase in borrowing capacity, the terms of the credit agreement remained unchanged. The credit facility may be increased to $450,000 and permits the issuance of up to $200,000 in letters of credit and standby letters of credit, which reduce the overall credit limit available under the credit facility.
At December 27, 2008, and December 29, 2007, the principal amount outstanding under this credit agreement totaled $20,000 and $50,576, respectively. During 2008 and 2007, the average principal balance outstanding on the line of credit was $178,617 and $66,840, respectively, and the weighted average interest rate was 3.82% and 5.67%, respectively. Letters of credit and standby letters of credit totaling $16,117 and $59,596, respectively, were outstanding at the end of 2008 and 2007. The average outstanding amount of total letters of credit during 2008 and 2007 was $32,799 and $64,309, respectively.
During the term of the facility, we are required to pay a quarterly facility fee, which ranges from 0.10% to 0.25% of the average daily unused principal balance on the line of credit. Interest on advances on this credit facility is determined at the greater of 1) the lead lender’s prime rate, 2) the average rate on the federal funds rate in effect for the day plus one-half of one percent, or 3) the Eurodollar rate of interest plus a margin, as defined.
The credit agreement requires that Cabela’s comply with certain financial and other customary covenants, including 1) a fixed charge coverage ratio (as defined) of no less than 1.50 to 1.00 as of the last day of any quarter; 2) a cash flow leverage ratio (as defined) of no more than 3.00 to 1.00 as of the last day of any quarter; and 3) a minimum tangible net worth standard (as defined).
The credit agreement includes a dividend provision limiting the amount that Cabela’s could pay to stockholders, which at December 27, 2008, was not in excess of $106,238. The agreement also has a provision permitting acceleration by the lenders in the event there is a change in control, as defined. In addition, the credit agreement contains cross default provisions to other outstanding debt. In the event that we fail to comply with these covenants, a default is triggered. In the event of default, all outstanding letters of credit and all principal and outstanding interest would immediately become due and payable. We were in compliance with all financial debt covenants at December 27, 2008.
We also have an unsecured revolving credit agreement for $15,000 Canadian dollars (“CAD”) in conjunction with the acquisition of the net assets of an outdoors specialty retailer located in Winnipeg, Manitoba. Interest is variable, computed at rates as defined in the agreement, plus a margin, and payable monthly. At the end of 2008 and 2007, the principal amount outstanding under this credit agreement totaled $6,465 and $7,447, respectively, with interest rates of 3.50% and 5.60%, respectively.
Advances made pursuant to the $430,000 credit agreement and for our Canada operations are classified as long-term debt. These agreements do not contain limitations regarding the pay downs of revolving loans advanced; therefore, advances made pursuant to these agreements are considered long-term in nature.
84
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
We also have financing agreements that allow certain boat and all-terrain vehicle merchandise vendors to give us extended payment terms. The vendors are responsible for all interest payments, with certain exceptions, for the financing period and the financing company holds a security interest in the specific inventory held Cabela’s. We record this merchandise in inventory. Our revolving credit facility limits this security interest to $50,000. The extended payment terms to the vendor do not exceed one year. The outstanding liability, included in accounts payable, was $5,162 and $7,988 at the end of 2008 and 2007, respectively.
12. SHORT-TERM BORROWINGS OF FINANCIAL SERVICES SUBSIDIARY
WFB has a variable funding facility credit agreement that is secured by a participation interest in the transferor’s interest of the Cabela’s Master Credit Card Trust. The facility was entered into on June 21, 2007, and had a commitment of $50,000, which was increased to $100,000 on November 29, 2007. On May 29, 2008, this credit agreement was modified to a total commitment of $25,000 and was extended until May 28, 2009. At December 27, 2008, there were no amounts outstanding under the credit agreement and $100,000 was outstanding at December 29, 2007. The weighted average interest rate on the facility was 3.88% and 5.31%, respectively, for 2008 and 2007.
WFB has unsecured federal funds purchase agreements with two financial institutions. The maximum amount that can be borrowed is $85,000. There were no amounts outstanding at December 27, 2008, or December 29, 2007. During 2008 and 2007, the average balance outstanding was $25,790 and $10,386 with a weighted average rate of 2.90% and 5.12%, respectively.
13. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt, including revolving credit facilities and capital leases, consisted of the following at the years ended:
| 2008 | | 2007 |
| Unsecured revolving credit facility for $430,000 expiring June 30, 2012 | | | | | | | |
| with interest at 3.25% at December 27, 2008 | $ | 20,000 | | | $ | 50,576 | |
| Unsecured notes payable due 2016 with interest at 5.99% | | 215,000 | | | | 215,000 | |
| Unsecured senior notes payable due 2017 with interest at 6.08% | | 60,000 | | | | 60,000 | |
| Unsecured senior notes due 2012-2018 with interest at 7.20% | | 57,000 | | | | — | |
| Unsecured revolving credit facility for $15,000 CAD expiring June 30, 2010, | | | | | | | |
| with interest at 3.50% at December 27, 2008 | | 6,465 | | | | 7,447 | |
| Unsecured senior notes due 2009 with interest at 4.95% | | — | | | | 50,000 | |
| Capital lease obligations payable through 2036 | | 13,665 | | | | 13,939 | |
| Other long-term debt | | 7,901 | | | | 6,423 | |
| Total debt | | 380,031 | | | | 403,385 | |
| Less current portion of debt | | (695 | ) | | | (26,785 | ) |
| |
| Long-term debt, less current maturities | $ | 379,336 | | | $ | 376,600 | |
85
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
On January 16, 2008, we issued $57,000 of 7.20% unsecured senior notes to institutional buyers. Scheduled principal repayments of $8,143 are payable beginning January 16, 2012, and annually thereafter until their maturity at January 16, 2018. Interest is payable semi-annually. We used the proceeds to pay down existing debt and for general corporate purposes.
On June 15, 2007, we issued $60,000 of 6.08% unsecured senior notes pursuant to a supplement to our February 2006 debt issuance of $215,000. The notes mature on June 15, 2017, with interest on the notes payable semi-annually. These notes contain the same default provisions and covenants as those pertaining to the February 2006 debt issuance, including limitations on indebtedness and financial covenants relating to net worth and fixed charges.
Certain of the long-term debt agreements contain various covenants and restrictions such as the maintenance of minimum debt coverage, net worth, and financial ratios. The significant financial ratios and net worth requirements in the long-term debt agreements are 1) a limitation of funded debt to be less than 60% of consolidated total capitalization; 2) cash flow fixed charge coverage ratio, as defined, of no less than 2.00 to 1.00 as of the last day of any quarter; and 3) a minimum consolidated adjusted net worth (as defined). See Note 11 for information on the covenants and restrictions contained in our $430 million revolving credit facility.
In addition, the debt contains cross default provisions to other outstanding credit facilities. In the event that we failed to comply with these covenants and the failure to comply would go beyond 30 days, a default would trigger and all principal and outstanding interest would immediately be due and payable. At December 27, 2008, we were in compliance with all financial covenants under our credit agreements and unsecured notes.
At the end of 2008 and 2007, the total carrying amount of long-term debt was $380,031 and $403,385, respectively, with an estimated fair value of $373,304 and $387,743, respectively.
We have a lease agreement for our distribution facility in Wheeling, West Virginia. The lease term is through June 2036. The monthly installments are $83 and the lease contains a bargain purchase option at the end of the lease term. We are accounting for this lease as a capital lease and have recorded the additional leased asset at the present value of the future minimum lease payments using a 5.9% implicit rate. The additional leased asset was recorded at $5,649 and is being amortized on a straight-line basis over 30 years.
Aggregate expected maturities of long-term debt and scheduled capital lease payments for the years shown are as follows:
| | Scheduled Capital | | Long-Term Debt |
| | Lease Payments | | Maturities |
| 2009 | | $ | 1,075 | | | $ | 588 |
| 2010 | | | 1,000 | | | | 7,087 |
| 2011 | | | 1,000 | | | | 663 |
| 2012 | | | 1,000 | | | | 28,842 |
| 2013 | | | 1,000 | | | | 8,889 |
| Thereafter | | | 22,500 | | | | 320,297 |
| | | | 27,575 | | | | 366,366 |
| Capital lease amount representing interest | | | (13,910 | ) | | | |
| Present value of net scheduled lease payments | | $ | 13,665 | | | | 13,665 |
| Total long-term debt and capital leases | | | | | | $ | 380,031 |
86
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
14. INTEREST (EXPENSE) INCOME, NET
Interest expense, net of interest income, consisted of the following for years ended:
| | 2008 | | 2007 | | 2006 |
| Interest expense | | $ | (32,180 | ) | | $ | (24,312 | ) | | $ | (18,302 | ) |
| Capitalized interest | | | 2,472 | | | | 4,069 | | | | 355 | |
| Interest income | | | 50 | | | | 1,465 | | | | 1,821 | |
| | $ | (29,658 | ) | | $ | (18,778 | ) | | $ | (16,126 | ) |
15. INCOME TAXES
The provision for income taxes consisted of the following for the years ended:
| | 2008 | | 2007 | | 2006 |
| Current: | | | | | | | | | | | |
| Federal | | $ | 32,503 | | | $ | 47,431 | | | $ | 24,601 |
| State | | | 2,400 | | | | 4,993 | | | | 2,840 |
| | | 34,903 | | | | 52,424 | | | | 27,441 |
| |
| Deferred: | | | | | | | | | | | |
| Federal | | | 7,233 | | | | (599 | ) | | | 22,225 |
| State | | | (305 | ) | | | (477 | ) | | | 1,805 |
| | | 6,928 | | | | (1,076 | ) | | | 24,030 |
| | $ | 41,831 | | | $ | 51,348 | | | $ | 51,471 |
87
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows for the years ended:
| | 2008 | | 2007 | | 2006 |
| Statutory federal rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State income taxes, net of federal tax benefit | | 1.7 | | | 1.8 | | | 1.8 | |
| Other nondeductible items | | 0.1 | | | 0.1 | | | 0.1 | |
| Change in valuation allowance | | (0.8 | ) | | — | | | — | |
| Other, net | | (0.6 | ) | | — | | | 0.6 | |
| | 35.4 | % | | 36.9 | % | | 37.5 | % |
Deferred tax assets and liabilities consisted of the following for the years ended:
| | 2008 | | 2007 |
| Deferred tax assets: | | | | | | | | |
| Deferred compensation | | $ | 5,820 | | | $ | 5,547 | |
| Deferred revenue | | | 4,589 | | | | 3,744 | |
| Reserve for returns | | | 5,607 | | | | 7,550 | |
| Accrued expenses | | | 5,506 | | | | 5,121 | |
| Gift certificates liability | | | 5,514 | | | | 3,401 | |
| Allowance for doubtful accounts | | | 3,337 | | | | 2,505 | |
| Economic development bonds | | | 3,684 | | | | 484 | |
| Other | | | 3,560 | | | | 3,139 | |
| | | | 37,617 | | | | 31,491 | |
| Deferred tax liabilities: | | | | | | | | |
| Prepaid expenses | | | 17,321 | | | | 17,773 | |
| Property and equipment | | | 52,094 | | | | 34,519 | |
| Inventories | | | 10,181 | | | | 14,902 | |
| Retained interests in securitized loans | | | 8,414 | | | | 10,050 | |
| Other | | | 21 | | | | 45 | |
| | | | 88,031 | | | | 77,289 | |
| Valuation allowance | | | — | | | | (916 | ) |
| Net deferred tax liability | | | (50,414 | ) | | | (46,714 | ) |
| Less current deferred income taxes | | | 11,707 | | | | 15,601 | |
| Long-term deferred income taxes | | $ | (38,707 | ) | | $ | (31,113 | ) |
88
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
Effective April 1, 2008, we completed a legal entity restructuring by merging certain subsidiaries resulting in the major selling channels (catalog, Internet, and retail) residing in a single legal entity. Prior to the restructuring, state net operating losses were being carried forward. Under the previous operating structure, the losses were likely to have expired unused, therefore a full valuation allowance was established. The surviving entity in the restructuring is anticipated to generate sufficient taxable income to fully recognize the tax benefit of these net operating losses. Accordingly, in the second quarter of 2008, we reversed the state net operating losses valuation allowance of $916.
We adopted the provisions of FIN 48 in 2007 as discussed in Note 2. The reconciliation of unrecognized tax benefits, the balance of which is classified as other long-term liabilities in the consolidated balance sheet, is as follows for the years ended:
| | 2008 | | 2007 |
| Unrecognized tax benefits, beginning of year | | $ | 2,000 | | | $ | 8,569 | |
| Decreases on items related to prior periods | | | (134 | ) | | | (6,866 | ) |
| Increases from current period items | | | 1,210 | | | | 297 | |
| Unrecognized tax benefits, end of year | | $ | 3,076 | | | $ | 2,000 | |
Our policy is to accrue interest expense, and penalties as appropriate, on estimated unrecognized tax benefits as a charge to interest expense in the consolidated statements of income. We recorded a net credit of $134 against interest expense during 2008 due to the gross decrease of certain unrecognized tax benefits. No penalties were accrued. The liability for estimated interest on unrecognized tax benefits totaling $847 at the end of 2008 is included in other long-term liabilities in the consolidated balance sheet. We do not anticipate a substantial change in the balance of unrecognized tax benefits in the next twelve months.
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $2,230. We file income tax returns in the United States, Canada, and various states. The tax years 2004 through 2007 remain open to examination by major taxing jurisdictions to which Cabela’s is subject.
At the beginning of fiscal 2007, the current portion of deferred income taxes payable in our consolidated balance sheet related to the book-tax difference resulting from the LIFO method used for income tax purposes totaled $18,697. We elected in our 2007 federal income tax return to change our method of accounting for inventory from LIFO to FIFO for income tax purposes and, accordingly, we will incur a cash outlay totaling $18,697 over the four years subsequent to the change.
16. COMMITMENTS AND CONTINGENCIES
We lease various buildings, computer equipment, and storage space under operating leases, which expire on various dates through April 2033. Rent expense on these leases as well as other month to month rentals was $8,494, $9,792 and $6,733 for 2008, 2007 and 2006, respectively. The following is a schedule of future minimum rental payments under operating leases as of December 27, 2008:
| 2009 | | $ | 5,616 |
| 2010 | | | 5,090 |
| 2011 | | | 4,604 |
| 2012 | | | 4,167 |
| 2013 | | | 4,167 |
| Thereafter | | | 83,902 |
| | $ | 107,546 |
89
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
We have entered into certain lease agreements for retail store locations. Certain leases include tenant allowances that will be amortized over the life of the lease. In 2008 and 2007, we received $21,977 and $17,018, respectively, in tenant allowances. Certain leases require us to pay contingent rental amounts based on a percentage of sales, in addition to real estates taxes, insurance, maintenance, and other operating expenses associated with the leased premises. These leases include options to renew with lease periods, including extensions, varying from 10 to 70 years.
We have entered into real estate purchase, construction, and/or economic development agreements for various new retail store site locations. At December 27, 2008, we had total estimated cash commitments of approximately $92,500 for 2009 and 2010 for projected retail store-related expenditures and the purchase of future economic development bonds connected with the development, construction, and completion of new retail stores. This does not include any amounts for contractual obligations associated with retail store locations where we are in the process of certain negotiations.
Under various grant programs, state or local governments provide funding for certain costs associated with developing and opening a new retail store. We generally receive grant funding in exchange for commitments, such as assurance of agreed employment and wage levels at the retail store or that the retail store will remain open, made by us to the state or local government providing the funding. The commitments typically phase out over approximately five to 10 years. If we fail to maintain the commitments during the applicable period, the funds received may have to be repaid or other adverse consequences may arise, which could affect our cash flows and profitability. As of December 27, 2008, the total amount of grant funding subject to a specific contractual remedy was $11,322.
In April 2007, we began an open account document instructions program, which provides for our company-issued letters of credit. At the end of 2008 and 2007, we had obligations to pay participating vendors $35,622 and $6,399, respectively.
WFB enters into financial instruments with off balance sheet risk in the normal course of business through the origination of unsecured credit card loans. Unsecured credit card accounts are commitments to extend credit and totaled $12,886,000 and $11,635,000 at December 27, 2008, and December 29, 2007, respectively. These commitments are in addition to any current outstanding balances of a cardholder. Unsecured credit card loans involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The principal amounts of these instruments reflect WFB’s maximum related exposure. WFB has not experienced and does not anticipate that all customers will exercise the entire available line of credit at any given point in time. WFB has the right to reduce or cancel the available lines of credit at any time.
Litigation and Claims– We are party to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of our business. These actions include commercial, intellectual property, employment, and product liability claims. Some of these actions involve complex factual and legal issues and are subject to uncertainties. We cannot predict with assurance the outcome of the actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and negatively impact earnings in the quarter of such development, settlement, or resolution. However, we do not believe that the outcome of any current action would have a material adverse effect on our results of operations, cash flows, or financial position taken as a whole.
Self-Insurance– We are self-insured for health claims up to $300 per individual. We have established a liability for health claims submitted and for those claims incurred prior to year end but not yet reported totaling $3,445 and $3,929 at the end of 2008 and 2007, respectively.
90
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
We are also self-insured for workers’ compensation claims up to $500 per individual. We have established a liability for workers’ compensation claims submitted and for those claims incurred prior to year end but not yet reported totaling $4,198 and $4,326 at the end of 2008 and 2007, respectively.
Our liabilities for health and workers’ compensation claims incurred but not reported are based upon internally developed calculations. These estimates are regularly evaluated for adequacy based on the most current information available, including historical claim payments, expected trends, and industry factors.
17. REGULATORY CAPITAL REQUIREMENTS
WFB is subject to various regulatory capital requirements administered by the FDIC and the Nebraska State Department of Banking and Finance. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, WFB must meet specific capital guidelines that involve quantitative measures of WFB’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. WFB’s capital amounts and classification are also subject to qualitative judgment by the regulators with respect to components, risk weightings, and other factors.
The quantitative measures established by regulation to ensure capital adequacy require that WFB maintain minimum amounts and ratios (defined in the regulations) as set forth in the following table. WFB exceeded the minimum requirements for the well-capitalized category under the regulatory framework for prompt corrective action provisions for both periods presented.
As of December 31, 2008 and 2007, the most recent notification from the FDIC categorized WFB as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized WFB must maintain certain amounts and ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution’s category.
| | 2008 |
| | | | | | | | Ratio Required to be Considered |
| | Actual | | Adequately-Capitalized | | Well-Capitalized |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| Total Capital to Risk-Weighted Assets | | $ | 166,611 | | 28.1 | % | | $ | 47,460 | | 8.0 | % | | $ | 59,325 | | 10.0 | % |
| Tier I Capital to Risk-Weighted Assets | | | 140,886 | | 23.8 | | | | 23,730 | | 4.0 | | | | 35,595 | | 6.0 | |
| Tier I Capital to Average Assets | | | 140,886 | | 23.6 | | | | 23,842 | | 4.0 | | | | 29,803 | | 5.0 | |
| |
| | 2007 |
| | | | | | | | Ratio Required to be Considered |
| | Actual | | Adequately-Capitalized | | Well-Capitalized |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| Total Capital to Risk-Weighted Assets | | $ | 118,030 | | 16.8 | % | | $ | 56,102 | | 8.00 | % | | $ | 70,127 | | 10.0 | % |
| Tier I Capital to Risk-Weighted Assets | | | 114,336 | | 16.3 | | | | 28,051 | | 4.0 | | | | 42,076 | | 6.0 | |
| Tier I Capital to Average Assets | | | 114,336 | | 27.6 | | | | 16,568 | | 4.0 | | | | 20,710 | | 5.0 | |
91
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
In December 2008, WFB received $25,000 from Cabela's in exchange for 250,000 shares of WFB convertible participating preferred stock. If management elected to covert the participating preferred stock to WFB common stock, the $25,000 would qualify as Tier 1 capital.
18. STOCK BASED COMPENSATION AND STOCK OPTION PLANS
Under the provisions of FAS 123R, we recorded share-based compensation expense of $6,535 ($4,222 after-tax, or $.06 per diluted share), $4,944 ($3,115 after-tax, or $0.05 per diluted share), and $3,615 ($2,259 after-tax, or $.03 per diluted share) for 2008, 2007, and 2006, respectively. Compensation expense related to our share-based payment awards is recorded in selling, distribution, and administrative expenses in the consolidated statements of income.
During 2006, share-based compensation expense was recorded for awards granted since 2004 but not yet vested as of January 1, 2006. For these awards, we recognized compensation expense using the accelerated or graded method of amortization. Compensation cost for awards granted after the adoption date is recognized using a straight-line amortization method over the vesting period. As of December 27, 2008, the total unrecognized deferred share-based compensation balance for unvested shares issued, net of expected forfeitures, was approximately $7,345, net of tax, which is expected to be amortized over a weighted average period of 2.2 years.
The fair value of options granted on and subsequent to May 1, 2004, is estimated on the date of the grant using the Black-Scholes option pricing model. The expected volatility for 2008 and 2007 was based on the historical volatility of our common stock. For 2006, the expected volatility was derived using a historical volatility model as well as comparisons to peers in our market sector.
The fair value of options in the years presented was estimated using the Black-Scholes model with the following weighted average assumptions:
| | 2008 | | 2007 | | 2006 |
| Risk-free interest rate based on U.S. Treasury yield | | | | | | | | | | | | |
| curve in effect at the grant date | | | 1.34 to 3.22 | % | | | 3.31 to 4.63 | % | | | 5.01 | % |
| Dividend yield | | | — | | | | — | | | | — | |
| Expected volatility | | | 35 to 43 | % | | | 30 to 33 | % | | | 50 | % |
| Weighted average expected life based on historical information | | | 5.0 years | | | | 5.0 years | | | | 6.0 years | |
| Weighted average grant date fair value of options granted | | $ | 5.49 | | | $ | 7.82 | | | $ | 10.45 | |
92
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
The following table summarizes our option activity during 2008:
| | | | | All Options | | Non-Vested Options |
| | | | | | | | Weighted | | | | | Weighted |
| | Options | | | | | Average | | | | | Average |
| | Available | | Number | | Exercise | | Number | | Grant Date |
| | for Grant | | of Options | | Price | | of Options | | Fair Value |
| Outstanding, beginning of year | | 2,529,196 | | | 5,312,444 | | | $ | 16.28 | | 2,915,315 | | | $ | 7.36 |
| Granted | | (1,085,077 | ) | | 1,085,077 | | | | 15.19 | | 1,085,077 | | | | 5.49 |
| Restricted stock issued | | (111,324 | ) | | | | | | | | | | | | |
| Vested | | — | | | — | | | | — | | (1,156,454 | ) | | | 11.12 |
| Exercised | | — | | | (769,608 | ) | | | 9.36 | | — | | | | — |
| Forfeited (1)(2) | | 208,873 | | | (344,663 | ) | | | 16.11 | | (184,611 | ) | | | 4.63 |
| Outstanding, end of year (3) | | 1,541,668 | | | 5,283,250 | | | | 17.08 | | 2,659,327 | | | | 5.15 |
____________________
| (1) | | Options forfeited under the 1997 Plan do not become available for grant under the 2004 Plan. |
| |
| (2) | | Options forfeited under the 2004 Plan are immediately available for grant. |
| |
| (3) | | Options outstanding at the end of 2008 were comprised of 785,535 of incentive stock options and 4,497,715 of nonqualified stock options. |
The following table provides information relating to our equity share-based payment awards at December 27, 2008:
| | | | | | | | | | | | | Weighted |
| | | | Weighted | | | | | | | | Average |
| | | | Average | | Weighted | | Aggregate | | Remaining |
| | | | Exercise | | Average | | Intrinsic | | Contractual |
| | Shares | | Price | | Fair Value | | Value | | Life (in Years) |
| Vested and exercisable | | 2,623,923 | | $ | 17.12 | | $ | 6.88 | | $ | 83 | | 5.16 |
| Non-vested | | 2,659,327 | | | 17.03 | | | 5.15 | | | 29 | | 6.42 |
| Total outstanding | | 5,283,250 | | | 17.08 | | | 6.01 | | $ | 112 | | 5.79 |
| |
| Expected to vest after December 27, 2008 | | 2,596,703 | | | 17.03 | | | 5.15 | | $ | 29 | | 6.42 |
The aggregate intrinsic value of awards exercised was $2,602, $8,188, and $3,473 during 2008, 2007, and 2006, respectively. The total fair value of shares vested was $12,864, $5,025, and $3,843, in 2008, 2007, and 2006, respectively. Based on our closing stock price of $6.50 as of December 27, 2008, the total number of in-the-money awards exercisable as of December 27, 2008, was 112,280.
93
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
The stock options outstanding and exercisable for equity share-based payment awards as of December 27, 2008, were in the following exercise price ranges:
| Options Outstanding | | Options Exercisable |
| | | | Weighted | | Average | | | | Weighted |
| Exercise | | | | Average | | Remaining Contractual | | | | Average |
| Price | | Shares | | Exercise Price | | Life (in Years) | | Shares | | Exercise Price |
| $0.00 to $10.00 | | 534,037 | | $ | 8.15 | | 2.34 | | 333,685 | | $ | 8.00 |
| $10.01 to $15.00 | | 762,392 | | | 12.17 | | 4.34 | | 552,831 | | | 12.43 |
| $15.01 to $17.50 | | 1,049,700 | | | 15.25 | | 7.32 | | — | | | — |
| $17.51 to $20.00 | | 1,950,121 | | | 19.73 | | 6.27 | | 1,380,053 | | | 19.83 |
| $20.01 to $25.00 | | 983,000 | | | 22.38 | | 6.21 | | 353,354 | | | 22.37 |
| $25.01 to $30.00 | | 4,000 | | | 27.26 | | 5.59 | | 4,000 | | | 27.26 |
| | 5,283,250 | | | 17.08 | | 5.79 | | 2,623,923 | | | 17.12 |
19. STOCK OPTION AND OTHER EMPLOYEE BENEFIT PLANS
Employee Stock Option Plans– The Cabela’s Incorporated 2004 Stock Plan (the “2004 Plan”) provides for the granting of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards to employees, directors, and consultants. Options granted under the 2004 Plan have a term of no greater than ten years from the grant date and are exercisable in accordance with the vesting schedule determined at the time the awards are granted. During 2008, there were 1,073,077 options granted to employees and 12,000 options granted to non-employee directors, all at an exercise price of $15.25 per share except 7,677 options which were granted at $7.16 per share. The options have an eight-year term and vest over three years for employees and one year for non-employee directors.
In addition, on July 7, 2008, 111,324 shares of restricted stock were issued to two executives under the 2004 Plan. The stock price on the date of grant was $10.48 per share resulting in a fair value of $1,167 of deferred compensation which will be amortized to expense over a five-year period. The restricted stock vests one-third on the third, fourth, and fifth anniversaries of the grant date. As of December 27, 2008, there were 4,474,211 shares subject to options and 1,541,668 shares authorized and available for grant under the 2004 Plan. Our policy has been to issue new shares for the exercise of stock options.
As of December 27, 2008, under our 1997 Stock Option Plan (the “1997 Plan”), there were 809,039 shares subject to options with no shares available for grant. Options issued expire on the fifth or the tenth anniversary of the date of the grant under the 1997 Plan.
94
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
Employee Stock Purchase Plan– The maximum number of shares of common stock available for issuance under our Employee Stock Purchase Plan (the “ESPP”) is 1,835,000. During 2008, there were 246,620 shares issued under the ESPP. As of December 27, 2008, there were 1,198,656 shares authorized and available for issuance. We issued new shares, rather than market purchases, beginning in October 2008 and plan to continue to issue new shares in the future.
401(k) Savings Plan– All employees are eligible to defer up to 80% of their wages to Cabela’s 401(k) savings plan, subject to certain limitations. Through 2008, the Company matched 100% of eligible employee deferrals up to 6% of eligible wages. Total expense for employer contributions was $7,894, $7,007, and $6,502 in 2008, 2007, and 2006, respectively.
Deferred Compensation Plan– We have a self-funded, nonqualified deferred compensation plan for certain key employees that was amended on December 31, 2004, to restrict any further contributions. Participants’ balances earn interest with the rate adjusting on a semi-annual basis. Upon certain conditions participants can receive their balance in either a lump sum or in equal annual payments over various time periods. Participants’ balances under this plan will be paid in full no later than January 2010. The charge to interest expense under this plan was $368, $525, and $503 for 2008, 2007, and 2006, respectively.
20. STOCKHOLDERS’ EQUITY AND DIVIDEND RESTRICTIONS
Preferred Stock– We are authorized to issue 10,000,000 shares of preferred stock having a par value of $0.01 per share. None of the shares of the authorized preferred stock have been issued. The board of directors is authorized to issue these shares of preferred stock without stockholder approval in different classes and series and, with respect to each class or series, to determine the dividend rate, the redemption provisions, conversion provisions, liquidation preference, and other rights, privileges, and restrictions. The issuance of any preferred stock could have the effect of diluting the voting power of the holders of common stock, restricting dividends on the common stock, impairing the liquidation rights of the common stock, or delaying or preventing a change in control without further action by the stockholders.
Class A Voting Common Stock– The holders of our Class A common stock are entitled to receive ratably dividends, if any, the board of directors may declare from time to time from funds legally available therefore, subject to the preferential rights of the holders of any shares of preferred stock that we may issue in the future. The holders of our Class A common stock are entitled to one vote per share on any matter to be voted upon by stockholders.
Upon any voluntary or involuntary liquidation, dissolution, or winding up of company affairs, the holders of our Class A common stock are entitled to share ratably with the holders of Class B non-voting common stock in all assets remaining after payment to creditors and subject to prior distribution rights of any shares of preferred stock that the Company may issue in the future. All of the outstanding shares of Class A common stock are fully paid and non-assessable.
Class B Non-voting Common Stock– The holders of our Class B non-voting common stock are not entitled to any voting rights, except that the holders may vote as a class, with each holder receiving one vote per share of Class B non-voting common stock, on any amendment, repeal, or modification of any provision of our Amended and Restated Certificate of Incorporation that adversely affects the powers, preferences, or special rights of holders of Class B non-voting common stock. Shares of the Class B non-voting common stock are convertible into the same number of shares of Class A voting common stock at any time. However, no holder of shares of Class B non-voting common stock is entitled to convert any of its shares into shares of Class A common stock, to the extent that, as a result of such conversion, the holder directly, or indirectly, would own, control, or have the power to vote a greater number of shares of Class A common stock or other securities of any kind issued by us than the holder is legally permitted to own, control, or have the power to vote. Subject to the prior rights of holders of preferred stock, if any, holders of Class B non-voting common stock, which rates equally with the Class A common stock in respect of dividends, are entitled to receive ratably dividends, if any, as may be lawfully declared from time to time by our board of directors.
95
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
Upon any voluntary or involuntary liquidation, dissolution, or winding up of company affairs, the holders of Class B non-voting common stock are entitled to share ratably with the holders of Class A common stock in all assets remaining after payment to creditors and subject to prior distribution rights of any shares of preferred stock that we may issue in the future.
Retained Earnings– The most significant restrictions on the payment of dividends are the covenants contained in our revolving credit agreement and unsecured senior notes purchase agreements. Nebraska banking laws also govern the amount of dividends that WFB can pay to Cabela’s. At December 27, 2008, we had unrestricted retained earnings of $106,238 available for dividends. However, we have never declared or paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future.
Other Comprehensive Income (Loss)– The components of accumulated other comprehensive income (loss), net of related taxes, are as follows for the years ended:
| | 2008 | | 2007 |
| Accumulated net unrealized holding losses on economic development bonds | | $ | (6,231 | ) | | $ | (806 | ) |
| Accumulated net unrealized holding gains on derivatives | | | 33 | | | | 76 | |
| Cumulative foreign currency translation adjustments | | | (399 | ) | | | 7 | |
| |
| Total accumulated other comprehensive income (loss) | | $ | (6,597 | ) | | $ | (723 | ) |
21. EARNINGS PER SHARE
The following table reconciles the number of shares utilized in the earnings per share calculations for the years ended:
| | 2008 | | 2007 | | 2006 |
| Weighted average number of shares: | | | | | | |
| Common shares – basic | | 66,384,004 | | 65,744,077 | | 65,221,339 |
| Effect of incremental dilutive securities: | | | | | | |
| Stock options and employee stock purchase plan shares | | 774,579 | | 1,531,454 | | 1,422,517 |
| Common shares – diluted | | 67,158,583 | | 67,275,531 | | 66,643,856 |
| |
| Options outstanding considered anti-dilutive | | 4,466,534 | | 1,048,000 | | 6,000 |
96
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
22. SUPPLEMENTAL CASH FLOW INFORMATION
The following table sets forth non-cash financing and investing activities and other cash flow information for the years ended:
| | 2008 | | 2007 | | 2006 |
| Non-cash financing and investing activities: | | | | | | | | | | | | |
| Accrued property and equipment additions (1) | | $ | 12,304 | | | $ | 48,534 | | | $ | 19,852 | |
| Capital lease obligations | | | — | | | | 201 | | | | 5,649 | |
| Contribution of land received | | | 5,015 | | | | 19,000 | | | | — | |
| Issuance of restricted common stock | | | 1,167 | | | | — | | | | — | |
| |
| Other cash flow information: | | | | | | | | | | | | |
| Interest paid | | $ | 42,575 | | | $ | 30,273 | | | $ | 19,017 | |
| Capitalized interest | | | (2,472 | ) | | | (4,069 | ) | | | (355 | ) |
| Interest paid, net of capitalized interest | | $ | 40,103 | | | $ | 26,204 | | | $ | 18,662 | |
| |
| Income taxes, net | | $ | 55,594 | | | $ | 33,575 | | | $ | 41,012 | |
| (1) | | Accrued property and equipment additions are recognized in the consolidated statements of cash flows in the period they are paid. |
23. SEGMENT REPORTING
We have three reportable segments: Retail, Direct, and Financial Services. The Retail segment sells products and services through our retail stores; the Direct segment sells products through direct mail catalogs and e-commerce websites (Cabelas.com and complementary websites); and the Financial Services segment issues co-branded credit cards. For the Retail segment, operating costs primarily consist of labor, advertising, depreciation, and occupancy costs of retail stores. For the Direct segment, operating costs primarily consist of catalog costs, e-commerce advertising costs, and order processing costs. For the Financial Services segment, operating costs primarily consist of advertising and promotion, marketing fees, third party services for processing credit card transactions, salaries, and other general and administrative costs.
Revenues included in Corporate Overhead and Other are primarily made up of land sales, amounts received from our outfitter sevices, real state rental income, and fees earned through our travel business an other complementary business services. Corporate Overhead and Other expenses include unallocated shared-service costs, operations of various ancillary subsidiaries such as real estate development and travel, and eliminations. Unallocated shared-service costs include receiving, distribution, and storage costs of inventory, merchandising, and quality assurance costs, as well as corporate headquarters occupancy costs.
97
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
Segment assets are those directly used in or clearly allocable to an operating segment’s operations. For the Retail segment, assets primarily include inventory in the retail stores, land, buildings, fixtures, and leasehold improvements. For the Direct segment, assets primarily include deferred catalog costs and fixed assets. At the end of 2008, goodwill totaling $2,874 was included in the assets of the Retail segment. At the end of 2007, goodwill totaling $4,474 was allocated between the Direct and Retail segments, with $969 being allocated to the Direct segment and $3,505 being allocated to the Retail Segment.For the Financial Services segment, assets primarily include cash, credit card loans, retained interest, receivables, fixtures, and other assets. Assets for the Corporate Overhead and Other segment include corporate headquarters and facilities, merchandise distribution inventory, shared technology infrastructure and related information systems, corporate cash and cash equivalents, economic development bonds, prepaid expenses, deferred income taxes, and other corporate long-lived assets. Depreciation, amortization, and property and equipment expenditures of each segment are allocated to each respective segment. The accounting policies of the segments, where applicable, are the same as those described in the summary of significant accounting policies in our notes to consolidated financial statements. Intercompany revenue between segments has been eliminated in consolidation.
Results by business segment are presented in the following tables for 2008, 2007 and 2006:
| | | | | | | | | | | | | | Corporate | | | | |
| | | | | | | | | | Financial | | Overhead | | | | |
| Fiscal Year 2008 | | Retail | | Direct | | Services | | and Other | | Total |
| Revenue from external customers | | $ | 1,283,148 | | | $ | 1,093,307 | | | $ | 159,423 | | | $ | 16,843 | | | $ | 2,552,721 | |
| Revenue (loss) from internal customers | | | 2,348 | | | | 1,852 | | | | (452 | ) | | | (3,748 | ) | | | — | |
| Total revenue | | $ | 1,285,496 | | | $ | 1,095,159 | | | $ | 158,971 | | | $ | 13,095 | | | $ | 2,552,721 | |
| |
| Operating income (loss) | | $ | 141,578 | | | $ | 161,249 | | | $ | 46,184 | | | $ | (207,972 | ) | | $ | 141,039 | |
| As a percentage of revenue | | | 11.0 | % | | | 14.7 | % | | | 29.1 | % | | | N/A | | | | 5.5 | % |
| |
| Depreciation and amortization | | $ | 37,930 | | | $ | 4,198 | | | $ | 1,075 | | | $ | 21,470 | | | $ | 64,673 | |
| Assets | | | 988,474 | | | | 663,994 | | | | 728,271 | | | | 15,327 | | | | 2,396,066 | |
| Property and equipment additions including accrued amounts | | | 21,033 | | | | 6,501 | | | | 1,592 | | | | 25,808 | | | | 54,934 | |
98
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
| | | | | | | | | | | | | | Corporate | | | | |
| | | | | | | | | | Financial | | Overhead | | | | |
| Fiscal Year 2007 | | Retail | | Direct | | Services | | and Other | | Total |
| Revenue from external customers | | $ | 1,040,664 | | | $ | 1,127,942 | | | $ | 159,943 | | | $ | 21,050 | | | $ | 2,349,599 | |
| Revenue (loss) from internal customers | | | 2,778 | | | | 2,611 | | | | (608 | ) | | | (4,781 | ) | | | — | |
| Total revenue | | $ | 1,043,442 | | | $ | 1,130,553 | | | $ | 159,335 | | | $ | 16,269 | | | $ | 2,349,599 | |
| |
| Operating income (loss) | | $ | 127,744 | | | $ | 190,046 | | | $ | 37,448 | | | $ | (204,146 | ) | | $ | 151,092 | |
| As a percentage of revenue | | | 12.2 | % | | | 16.8 | % | | | 23.5 | % | | | N/A | | | | 6.4 | % |
| Depreciation and amortization | | $ | 29,830 | | | $ | 4,462 | | | $ | 1,129 | | | $ | 24,442 | | | $ | 59,863 | |
| Assets | | | 1,065,234 | | | | 480,341 | | | | 450,616 | | | | 216,639 | | | | 2,212,830 | |
| Property and equipment additions including accrued amounts | | | 324,272 | | | | 8,466 | | | | 1,037 | | | | 30,551 | | | | 364,326 | |
| |
| | | | | | | | | | | | | | Corporate | | | | |
| | | | | | | | | | Financial | | Overhead | | | | |
| Fiscal Year 2006 | | Retail | | Direct | | Services | | and Other | | Total |
| Revenue from external customers | | $ | 817,836 | | | $ | 1,086,162 | | | $ | 138,164 | | | $ | 21,362 | | | $ | 2,063,524 | |
| Revenue (loss) from internal customers | | | 2,485 | | | | 2,318 | | | | (741 | ) | | | (4,062 | ) | | | — | |
| Total revenue | | $ | 820,321 | | | $ | 1,088,480 | | | $ | 137,423 | | | $ | 17,300 | | | $ | 2,063,524 | |
| |
| Operating income (loss) | | $ | 124,122 | | | $ | 179,182 | | | $ | 30,061 | | | $ | (189,620 | ) | | $ | 143,745 | |
| As a percentage of revenue | | | 15.1 | % | | | 16.5 | % | | | 21.9 | % | | | N/A | | | | 7.0 | % |
| Depreciation and amortization | | $ | 19,050 | | | $ | 4,371 | | | $ | 941 | | | $ | 21,197 | | | $ | 45,559 | |
| Assets | | | 602,513 | | | | 496,963 | | | | 316,417 | | | | 335,337 | | | | 1,751,230 | |
| Property and equipment additions including accrued amounts | | | 161,585 | | | | 5,680 | | | | 1,735 | | | | 21,592 | | | | 190,592 | |
The components and amounts of total revenue for the Financial Services business segment were as follows for the years ended:
| | 2008 | | 2007 | | 2006 |
| Interest and fee income, net of provision for loan losses | | $ | 37,462 | | | $ | 28,974 | | | $ | 23,973 | |
| Interest expense | | | (13,417 | ) | | | (7,288 | ) | | | (5,008 | ) |
| Net interest income, net of provision for loan losses | | | 24,045 | | | | 21,686 | | | | 18,965 | |
| Non-interest income: | | | | | | | | | | | | |
| Securitization income | | | 185,820 | | | | 194,516 | | | | 169,173 | |
| Other non-interest income | | | 67,375 | | | | 51,670 | | | | 39,381 | |
| Total non-interest income | | | 253,195 | | | | 246,186 | | | | 208,554 | |
| Less: Customer rewards costs | | | (118,269 | ) | | | (108,537 | ) | | | (90,096 | ) |
| Financial Services total revenue | | $ | 158,971 | | | $ | 159,335 | | | $ | 137,423 | |
Our products are principally marketed to individuals within the United States. Net sales realized from other geographic markets, primarily Canada, have collectively been less than 3% of consolidated net merchandise sales in each reported period. No single customer accounted for 10% or more of consolidated net sales. No single product or service accounts for a significant percentage of our consolidated revenue.
99
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
24. FAIR VALUE MEASUREMENTS
As defined by FAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, we use various methods including discounted cash flow projections based on available market interest rates and management estimates of future cash payments. Financial instrument assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
- Level 1 – Quoted market prices in active markets for identical assets or liabilities.
- Level 2 – Observable inputs other than quoted market prices.
- Level 3 – Unobservable inputs corroborated by little, if any, market data.
Level 3 is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are primarily unobservable from objective sources. In determining the appropriate hierarchy levels, we performed an analysis of the assets and liabilities that are subject to FAS 157 and determined that at December 27, 2008, all applicable financial instruments carried on our consolidated balance sheets are classified as Level 3. The following table summarizes the valuation of our recurring financial instruments at December 27, 2008.
| | Fair Value at |
| Assets | December 27, 2008 (1) |
| Retained interests in securitized loans | $ | 61,605 |
| Economic development bonds | | 112,585 |
| | $ | 174,190 |
____________________
|
| (1) | | All fair value measurements using Level 3 category. |
The table below presents changes in fair value of our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), as defined in FAS 157, for the year ended December 27, 2008.
| | Retained | | | | |
| | Interests in | | Economic |
| | Securitized | | Development |
| | Loans | | Bonds |
| Balance, December 30, 2007 | $ | 51,777 | | | $ | 98,035 | |
| Total gains or losses (realized/unrealized): | | | | | | | |
| Included in earnings | | (4,356 | ) | | | (42 | ) |
| Included in other comprehensive income | | — | | | | (8,584 | ) |
| Purchases, issuances, and settlements, net | | 14,184 | | | | 23,176 | |
| Balance, December 27, 2008 | $ | 61,605 | | | $ | 112,585 | |
100
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
Included in retained interests in asset securitizations are interest-only strips, cash reserve accounts, and cash accounts. For interest-only strips and cash reserve accounts WFB estimates related fair values based on the present value of future expected cash flows using assumptions for credit losses, payment rates, and discount rates commensurate with the risks involved. For cash accounts, WFB estimates related fair values based on the present value of future expected cash flows using discount rates commensurate with risks involved. WFB retains the rights to remaining cash flows (including interchange fees) after the other costs of the trust are paid. However, future expected cash flows for valuation of the interest-only strips and cash reserve accounts do not include interchange income since interchange income is earned only when a charge is made to a customer’s account.
WFB also owns asset-backed securities from three of its securitizations. Asset-backed trading securities fluctuate daily based on the short-term operational needs of WFB. Advances and pay downs on the trading securities are at par value. Therefore, the par value of the asset-backed trading securities approximates fair value.
Fair values of economic development bonds (“bonds”) are estimated using discounted cash flow projections based on available market interest rates and management estimates including the estimated amounts and timing of expected future tax payments to be received by the municipalities under development zones. These fair values do not reflect any premium or discount that could result from offering these bonds for sale or through early redemption, or any related income tax impact. Declines in the fair value of held-to-maturity and available-for-sale economic development bonds below cost that are deemed to be other than temporary are reflected in earnings.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, gift certificates (including credit card and loyalty rewards programs), accrued expenses, short-term borrowings, and income taxes payable included in the consolidated balance sheets approximate fair value given the short-term nature of these financial instruments. The estimated fair value and disclosures for credit card loans receivable, time deposits, and long-term debt included in the consolidated balance sheets are reported under the provisions of FAS 107Disclosures About Fair Value of Financial Instruments.
101
CABELA’S INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Share and Per Share Amounts)
25. QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth unaudited financial and operating data in each quarter for the years ended 2008 and 2007:
| | 2008 | | 2007 |
| | First | | Second | | Third | | Fourth | | First | | Second | | Third | | Fourth |
| | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter |
| Total revenue (1) | $ | 535,539 | | $ | 525,952 | | $ | 611,800 | | $ | 879,430 | | $ | 462,091 | | $ | 451,199 | | $ | 546,809 | | $ | 889,500 |
| Operating income (2) | | 21,086 | | | 14,852 | | | 20,845 | | | 84,256 | | | 12,391 | | | 20,252 | | | 24,346 | | | 94,103 |
| Net income | | 9,956 | | | 7,279 | | | 9,722 | | | 49,447 | | | 7,142 | | | 11,264 | | | 13,232 | | | 56,241 |
| Earnings per share—Basic (3) | | 0.15 | | | 0.11 | | | 0.15 | | | 0.74 | | | 0.11 | | | 0.17 | | | 0.20 | | | 0.85 |
| Earnings per share—Diluted (3) | | 0.15 | | | 0.11 | | | 0.15 | | | 0.74 | | | 0.11 | | | 0.17 | | | 0.20 | | | 0.84 |
____________________
| (1) | | In the fourth quarter of 2008, we recorded gift instrument breakage of $8.7 million in Retail revenue and operating income due to a change in the estimated breakage period from seven years to four years. |
| |
| (2) | | In the fourth quarter of 2008, we recorded $6 million of expenses relating to the impairment of goodwill, economic development bond impairment, and employee severance costs. |
| |
| (3) | | Basic and diluted earnings per share are computed independently for each of the quarters presented and, therefore may not sum to the totals for the year. |
Revenue is typically higher in our third and fourth quarters than in the first and second quarters due to holiday buying patterns and hunting and fishing season openings across the United States. Our quarterly operating results may fluctuate significantly as a result of these events and a variety of other factors, and operating results for any quarter are not necessarily indicative of results for a full year.
26. SUBSEQUENT EVENT
On February 19, 2009, Moody's Investors Service announced that it had downgraded the ratings on 21 classes of asset-backed notes issued by the trust of our Financial Services business. Moody’s Investors Service is one of three rating agencies that rate our Financial Services business' term securitizations. We do not believe that this downgrade will have a significant impact on the ability of our Financial Services business to complete other securitization transactions on acceptable terms or to access financing.
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| CABELA’S INCORPORATED AND SUBSIDIARIES |
| |
| SCHEDULE II |
| VALUATION AND QUALIFYING ACCOUNTS |
| (In Thousands) |
| | Beginning | | Charged to | | Charged | | Net | | End |
| | of Year | | Costs and | | to Other | | Charge- | | of Year |
| | Balance | | Expenses | | Accounts | | Offs | | Balance |
| YEAR ENDED DECEMBER 27, 2008: | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 1,851 | | $ | (1,295 | ) | | $ | — | | | $ | (1,295 | ) | | $ | 556 |
| Allowance for credit card receivable loan losses | | 1,197 | | | 1,260 | | | | (950 | ) | | | 310 | | | | 1,507 |
| |
| YEAR ENDED DECEMBER 29, 2007: | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 1,932 | | $ | (81 | ) | | $ | — | | | $ | (81 | ) | | $ | 1,851 |
| Allowance for credit card receivable loan losses | | 699 | | | 1,748 | | | | (1,250 | ) | | | 498 | | | | 1,197 |
| |
| YEAR ENDED DECEMBER 30, 2006: | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 1,404 | | $ | 527 | | | $ | 1 | | | $ | 528 | | | $ | 1,932 |
| Allowance for credit card receivable loan losses | | 536 | | | 664 | | | | (501 | ) | | | 163 | | | | 699 |
| | | |
| ITEM 9. | | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized, and reported within specified time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In connection with this annual report on Form 10-K, our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that our disclosure controls and procedures were effective as of December 27, 2008.
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America.
With the participation of our Chief Executive Officer and our Chief Financial Officer, management evaluated the effectiveness of our internal control over financial reporting as of December 27, 2008, based on the criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 27, 2008.
The independent registered public accounting firm of Deloitte & Touche LLP, as auditors of our consolidated financial statements included in this annual report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Their report is included in this Item 9A.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 27, 2008, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
104
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cabela’s Incorporated and Subsidiaries
Sidney, Nebraska
We have audited the internal control over financial reporting of Cabela’s Incorporated and Subsidiaries (the "Company") as of December 27, 2008, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 27, 2008, based on the criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 27, 2008 of the Company and our report dated February 24, 2009 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 24, 2009
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ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information under the headings “Proposal One – Election of Directors,” “Executive Officers of the Company,” “Corporate Governance – Committees of the Board of Directors – Audit Committee,” and “Section 16(a) Beneficial Ownership Reporting Compliance,” in our Proxy Statement relating to our 2009 Annual Meeting of Shareholders (our “Proxy Statement”) is incorporated herein by reference. With the exception of the foregoing information and other information specifically incorporated by reference into this Report on Form 10-K, our Proxy Statement is not being filed as a part hereof.
The policies comprising our code of ethics are set forth in our Business Code of Conduct and Ethics. These policies satisfy the SEC’s requirements for a “code of ethics,” and apply to all of our directors, officers, and employees. Our Business Code of Conduct and Ethics is posted on our website atwww.cabelas.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding certain amendments to, or waivers from, the provisions of our Business Code of Conduct and Ethics by posting such information on our website at the address specified above. Information contained on our website, whether currently posted or posted in the future, is not part of this document or the documents incorporated by reference in this document.
On June 12, 2008, we filed with the NYSE the Annual CEO Certification regarding the company’s compliance with the NYSE’s Corporate Governance listing standards as required by Section 303A.12(a) of the NYSE Listed Company Manual.
ITEM 11. EXECUTIVE COMPENSATION
The information under the headings “Executive Compensation” and “Director Compensation” in our Proxy Statement is incorporated herein by reference.
| ITEM 12. | | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information under the headings “Executive Compensation – Equity Compensation Plan Information as of Fiscal Year-End” and “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information under the headings “Transactions with Related Persons” and “Corporate Governance – Board of Directors” in our Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information under the heading “Proposal Three – Ratification of Independent Registered Public Accounting Firm” in our Proxy Statement is incorporated herein by reference.
106
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)The following documents are filed as part of this report:
1. Financial Statements:
- Report of Independent Registered Public Accounting Firm
- Consolidated Statements of Income –Years ended December 27, 2008, December 29, 2007, and December 30, 2006
- Consolidated Balance Sheets – December 27, 2008, and December 29, 2007
- Consolidated Statements of Cash Flows – Years ended December 27, 2008, December 29, 2007, and December 30, 2006
- Consolidated Statements of Stockholders’ Equity – Years ended December 27, 2008, December 29, 2007, and December 30, 2006
- Notes to Consolidated Financial Statements
2.Financial Statement Schedules:
- Schedule II – Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.
3.Exhibits: See Item 15(b) below.
(b)Exhibits
| Exhibit | | |
| Number | | Exhibit Description |
| 3.1 | | Amended and Restated Certificate of Incorporation of Cabela’s Incorporated (incorporated by reference from Exhibit 3.1 of our Quarterly Report on Form 10-Q, filed on August 13, 2004, File No. 001-32227) |
| |
| 3.2 | | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Cabela’s Incorporated (incorporated by reference from Exhibit 3.1 of our Current Report on Form 8-K, filed on May 15, 2006, File No. 001-32227) |
| |
| 3.3 | | Amended and Restated Bylaws of Cabela’s Incorporated (incorporated by reference from Exhibit 3 of our Current Report on Form 8-K, filed on August 29, 2008, File No. 001-32227) |
| |
| 4.1 | | Specimen Stock Certificate (incorporated by reference from Exhibit 4.1 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835) |
| |
| 4.2 | | Registration Rights Agreement dated as of September 23, 2003, among Cabela’s Incorporated and the security holders named therein (incorporated by reference from Exhibit 4.2 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835) |
| |
| 4.3 | | Form of 7.2% Senior Note, Series 2008-A, due January 16, 2018 (incorporated by reference from Exhibit 4.1 of our Current Report on Form 8-K, filed on January 22, 2008, File No. 001-32227) |
| |
| 4.4 | | Form of 6.08% Senior Note, Series 2007-A, due June 15, 2007 (incorporated by reference from Exhibit 4.2 of our Current Report on Form 8-K, filed on June 20, 2007, File No. 001-32227) |
107
| 4.5 | | Form of 5.99% Senior Note, Series 2006-A, due February 27, 2016 (incorporated by reference from Exhibit 4.7 of our Current Report on Form 8-K, filed on June 20, 2007, File No. 001-32227) |
| |
| 4.6 | | Note Purchase Agreements dated as of February 27, 2006, among Cabela’s Incorporated and various purchasers party thereto (incorporated by reference from Exhibit 4.2 of our Current Report on Form 8-K, filed on March 3, 2006, File No. 001-32227) |
| |
| 4.7 | | First Supplement to Note Purchase Agreements dated as of February 27, 2006, among Cabela’s Incorporated and various purchasers party thereto (incorporated by reference from Exhibit 4.1 of our Current Report on Form 8-K, filed on June 20, 2007, File No. 001-32227) |
| |
| 4.8 | | Second Supplement to Note Purchase Agreements dated as February 27, 2006, among Cabela’s Incorporated and various purchasers party thereto (incorporated by reference from Exhibit 4.2 of our Current Report on Form 8-K, filed on January 22, 2008, File No. 001-32227) |
| |
| 4.9 | | Amendment No. 1 to Note Purchase Agreements dated as of February 27, 2006, among Cabela’s Incorporated and various purchasers party thereto (incorporated by reference from Exhibit 4.4 of our Current Report on Form 8-K, filed on June 20, 2007, File No. 001-32227) |
| |
| 10.1 | | Executive Employment Agreement dated as of January 4, 2004, between Cabela’s Incorporated and Richard N. Cabela (incorporated by reference from Exhibit 10.1 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
| 10.2 | | Addendum to Executive Employment Agreement dated as of January 4, 2004, between Cabela’s Incorporated and Richard N. Cabela (incorporated by reference from Exhibit 10.1 of our Quarterly Report of Form 10-Q, filed on May 12, 2005, File No. 001-32227)* |
| |
| 10.3 | | Executive Employment Agreement dated as of January 4, 2004, between Cabela’s Incorporated and James W. Cabela (incorporated by reference from Exhibit 10.2 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
| 10.4 | | Addendum to Executive Employment Agreement dated as of January 4, 2004, between Cabela’s Incorporated and James W. Cabela (incorporated by reference from Exhibit 10.2 of our Quarterly Report of Form 10-Q, filed on May 12, 2005, File No. 001-32227)* |
108
| 10.5 | | 1997 Stock Option Plan (incorporated by reference from Exhibit 10.6 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
| 10.6 | | First Amendment to 1997 Stock Option Plan (incorporated by reference from Exhibit 10.7 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
10.7 | | Second Amendment to 1997 Stock Option Plan (incorporated by reference from Exhibit 10.8 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
| 10.8 | | Third Amendment to 1997 Stock Option Plan (incorporated by reference from Exhibit 10.9 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
| 10.9 | | Fourth Amendment to 1997 Stock Option Plan (incorporated by reference from Exhibit 10.9.1 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
| 10.10 | | Fifth Amendment to 1997 Stock Option Plan (incorporated by reference from Exhibit 10 of our Quarterly Report of Form 10-Q, filed on August 6, 2007, File No. 001-32227)* |
| |
| 10.11 | | Form of 1997 Employee Stock Option Agreement (incorporated by reference from Exhibit 10.10 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
| 10.12 | | Cabela’s Incorporated 2004 Stock Plan (as amended and restated effective May 14, 2008) (incorporated by reference from Exhibit 10.2 of our Current Report on Form 8-K, filed on May 19, 2008, File No. 001-32227)* |
| |
| 10.13 | | Form of 2004 Stock Plan Employee Stock Option Agreement (incorporated by reference from Exhibit 10.13 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
| 10.14 | | Form of 2004 Stock Plan Employee Stock Option Agreement (2006) (incorporated by reference from Exhibit 10.1 of our Current Report on Form 8-K, filed on May 15, 2006, File No. 001-32227)* |
| |
| 10.15 | | Form of 2004 Stock Plan Employee Stock Option Agreement (2008) (incorporated by reference from Exhibit 10.3 of our Current Report on Form 8-K, filed on June 4, 2008, File No. 001-32227)* |
| |
| 10.16 | | Form of 2004 Stock Plan Non-Employee Director Stock Option Agreement (2006) (incorporated by reference from Exhibit 10.2 of our Current Report on Form 8-K, filed on May 15, 2006, File No. 001-32227)* |
| |
| 10.17 | | Form of 2004 Stock Plan Non-Employee Director Stock Option Agreement (2008) (incorporated by reference from Exhibit 10.4 of our Current Report on Form 8-K, filed on June 4, 2008, File No. 001-32227)* |
| |
| 10.18 | | 2004 Employee Stock Purchase Plan (incorporated by reference from Exhibit 10.14 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
| 10.19 | | Second Amended and Restated Credit Agreement dated as of July 15, 2005, among Cabela’s Incorporated, various lenders party thereto, and U.S. Bank National Association, as Administrative Agent (incorporated by reference from Exhibit 10 of our Current Report on Form 8-K, filed on July 15, 2005, File No. 001-32227) |
| |
| 10.20 | | Joinder Agreement made by Cabela’s Retail IL, Inc. to Second Amended and Restated Credit Agreement dated as of July 15, 2005, among Cabela’s Incorporated, various lenders party thereto, and U.S. Bank National Association, as Administrative Agent (incorporated by reference from Exhibit 10.2 of our Current Report on Form 8-K, filed on June 20, 2007, File No. 001-32227) |
| |
| 10.21 | | First Amendment to Second Amended and Restated Credit Agreement dated as of July 15, 2005, among Cabela’s Incorporated, various lenders party thereto, and U.S. Bank National Association, as Administrative Agent (incorporated by reference from Exhibit 10 of our Quarterly Report of Form 10-Q, filed on November 5, 2007, File No. 001-32227) |
109
| 10.22 | | Fourth Amended and Restated Intercreditor Agreement dated as of June 15, 2007, among Cabela’s Incorporated, various note holders party thereto, various lenders party thereto, and U.S. Bank National Association, as Collateral Agent (incorporated by reference from Exhibit 10.1 of our Current Report on Form 8-K, filed on June 20, 2007, File No. 001-32227) |
| |
| 10.23 | | Form of Indemnification Agreement (incorporated by reference from Exhibit 10.18 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
| 10.24 | | Form of Management Change of Control Severance Agreement (incorporated by reference from Exhibit 10.19 of our Registration Statement on Form S-1, filed on March 23, 2004, Registration No. 333-113835)* |
| |
| 10.25 | | Amended and Restated Management Change of Control Severance Agreement dated May 9, 2006, between Cabela’s Incorporated and Joseph M. Friebe (incorporated by reference from Exhibit 10.3 of our Current Report on Form 8-K, filed on May 15, 2006, File No. 001-32227)* |
| |
| 10.26 | | Cabela’s Incorporated Third Amended and Restated Deferred Compensation Plan (incorporated by reference from Exhibit 10.1 of our Current Report on Form 8-K, filed on March 1, 2005, File No. 001-32227)* |
| |
| 10.27 | | First Amendment of the Cabela’s Incorporated Third Amended and Restated Deferred Compensation Plan (incorporated by reference from Exhibit 10.1 of our Current Report on Form 8-K, filed on March 1, 2005, File No. 001-32227)* |
| |
| 10.28 | | Second Amendment of the Cabela’s Incorporated Third Amended and Restated Deferred Compensation Plan (incorporated by reference from Exhibit 10.28 of our Annual Report on Form 10-K, filed on February 28, 2007, File No. 001-32227)* |
| |
| 10.29 | | Third Amendment of the Cabela’s Incorporated Third Amended and Restated Deferred Compensation Plan (incorporated by reference from Exhibit 10 of our Quarterly Report on Form 10-Q, filed on November 4, 2008, File No. 001-32227)* |
| |
| 10.30 | | Summary of Non-Employee Director Compensation (incorporated by reference from the Section titled “Director Compensation” in our Proxy Statement for the 2009 Annual Meeting of Shareholders)* |
| |
| 10.31 | | Summary of Named Executive Officer Compensation (incorporated by reference from the Section titled “Executive Compensation” in our Proxy Statement for the 2009 Annual Meeting of Shareholders)* |
| |
| 10.32 | | Retirement Transition and Consulting Agreement dated March 18, 2008, between Cabela’s Incorporated and Michael Callahan (incorporated by reference from Exhibit 10 of our Current Report of Form 8-K, filed on March 20, 2008, File No. 001-32227)* |
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| 10.33 | | Amended and Restated Lease Agreement with Option to Purchase dated April 26, 2005, between Ohio County Development Authority and Cabela’s Wholesale, Inc. (incorporated by reference from Exhibit 10.29 of our Annual Report of Form 10-K, filed on March 1, 2006, File No. 001-32227) |
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| 10.34 | | Cabela’s Incorporated Performance Bonus Plan (incorporated by reference from Exhibit 10 of our Current Report on Form 8-K, filed on February 19, 2008, File No. 001-32227)* |
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| 10.35 | | Form of Proprietary Matters Agreement (executed by Dennis Highby, Patrick A. Snyder, Brian J. Linneman, and Charles Baldwin) (incorporated by reference from Exhibit 10.1 of our Current Report on Form 8-K, filed on June 4, 2008, File No. 001-32227)* |
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| 10.36 | | Form of Proprietary Matters Agreement – World’s Foremost Bank (executed by Ralph W. Castner and Joseph M. Friebe) (incorporated by reference from Exhibit 10.2 of our Current Report on Form 8-K, filed on June 4, 2008, File No. 001-32227)* |
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| 10.37 | | Form of Retention Award Agreement (executed by Patrick A. Snyder and Brian J. Linneman) (incorporated by reference from Exhibit 10.1 of our Current Report on Form 8-K, filed on July 10, 2008, File No. 001-32227)* |
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| 10.38 | | Form of Restricted Stock Agreement (executed by Patrick A. Snyder and Brian J. Linneman) (incorporated by reference from Exhibit 10.2 of our Current Report on Form 8-K, filed on July 10, 2008, File No. 001-32227)* |
| | | |
| 21.1 | | Subsidiaries of Cabela’s Incorporated |
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| 23.1 | | Consent of Deloitte & Touche LLP |
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| 24.1 | | Powers of Attorney |
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| 31.1 | | Certification of CEO Pursuant to Rule 13a-14(a) under the Exchange Act |
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| 31.2 | | Certification of CFO Pursuant to Rule 13a-14(a) under the Exchange Act |
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| 32.1 | | Certifications Pursuant to U.S.C. Section 1350 |
____________________
| * | | Indicates management contract or compensatory plan or arrangement required to be filed as exhibits pursuant to Item 15(b) of this report. |
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| (c) | | Financial Statement Schedules. See Item 15(a) above. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | CABELA’S INCORPORATED |
| |
| |
| Dated:February 25, 2009 | By: | /s/ Dennis Highby | |
| | | | Dennis Highby |
| | | | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | | |
| /s/ Dennis Highby | | President, Chief Executive Officer, and | | February 25, 2009 |
| Dennis Highby | | Director (Principal Executive Officer) | | |
| |
| /s/ Ralph W. Castner | | Vice President and Chief Financial Officer | | February 25, 2009 |
| Ralph W. Castner | | (Principal Financial Officer and Principal | | |
| | | Accounting Officer) | | |
| |
| * | | Chairman of the Board and Director | | February 25, 2009 |
| Richard N. Cabela | | | | |
| |
| * | | Vice-Chairman of the Board and Director | | February 25, 2009 |
| James W. Cabela | | | | |
| |
| * | | Director | | February 25, 2009 |
| Theodore M. Armstrong | | | | |
| |
| * | | Director | | February 25, 2009 |
| John H. Edmondson | | | | |
| |
| * | | Director | | February 25, 2009 |
| John Gottschalk | | | | |
| |
| * | | Director | | February 25, 2009 |
| Reuben Mark | | | | |
| |
| * | | Director | | February 25, 2009 |
| Michael R. McCarthy | | | | |
| | * By:/s/ Ralph W. Castner |
| Ralph W. Castner |
| Attorney-in-fact |
| February 25, 2009 |
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