20
L I L L I A N V E R N O N
Provision for Inventory Allowance
The Company records a charge to cost of goods sold in the current year related to products in
inventory that it expects to sell below its cost. These estimates are based on assumptions of
future sales, prices, and disposition plans. If actual sales are less favorable than those projected,
additional write-downs may be required.
Catalog Costs
Catalog costs are deferred and amortized over the estimated useful life of the catalog, generally
three months. The estimated life is based on the projected total revenues of the catalog. The
related costs of the catalog are expensed according to the percentage that actual revenue as of
an income statement date comprises of total revenue projected at that time. Should this future
sales projection prove to be incorrect, catalog costs may not be properly matched to the proper
periods that include the revenues.
Income Taxes
As discussed earlier, the Company's realization of future benefits from its net deferred tax asset
of $1.4 million recorded on the books as of February 23, 2002 is dependent upon the generation
of sufficient amounts of future taxable income during the years in which the net expenses
become deductible. The Company's ability to generate sufficient taxable income in future
periods is contingent upon a number of factors, including general economic conditions and the
Company's sales levels in future periods. Although management has developed plans which
should enable the Company to achieve sufficient income levels in the future, there can be no
assurance that the plans will be successful in enabling the Company to generate sufficient
taxable income in the periods in which the net expenses become deductible. However, the
Company has developed certain tax planning strategies relating to the sale and leaseback of
certain of its facilities, which could be employed, if necessary, to generate taxable income in
amounts sufficient enough to offset the impact of the net deductible expenses. Accordingly, the
Company has not recorded a valuation allowance with respect to the net deferred tax asset as of
February 23, 2002. If the Company was not able to structure such a sale and leaseback
arrangement with a suitable buyer, an adjustment to the deferred tax asset would be charged to
earnings in the period such a determination was made.
Capitalized Software Costs
Capitalized software costs are amortized over estimated useful lives of two to five years. Should
it be decided that the actual useful lives of these assets are less than those estimated due to
technology changes or operability of the software or other reason, there would be a significant
negative impact on the future earnings of the Company.
Paper Hedge Contract
The Company has a collar hedge contract with a third party. (See Item 7a -- "Quantitative and
Qualitative Disclosure about Market Risk"). Since the end of the third quarter, when the
