Petsmart 2007 Annual Report Download - page 77

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At February 3, 2008, the total unrecognized stock options expense and restricted stock expense, net of
estimated forfeitures, was $37.4 million and is expected to be recognized over a weighted average period of
2.2 years.
We estimated the fair value of stock options issued after January 30, 2005 using a lattice option pricing model.
Expected volatilities are based on implied volatilities from traded call options on our stock, historical volatility of
our stock and other factors. We use historical data to estimate option exercises and employee terminations within the
valuation model. The expected term of options granted is derived from the output of the option valuation model and
represents the period of time we expect options granted to be outstanding. The risk-free rates for the periods within
the contractual life of the option are based on the monthly U.S. Treasury yield curve in effect at the time of the
option grant using the expected life of the option. Stock options are amortized straight-line over the vesting period
net of estimated forfeitures by a charge to income. Actual values of grants could vary significantly from the results
of the calculations. The following assumptions were used to value grants:
2007 2006 2005
(53 weeks) (52 weeks) (52 weeks)
Dividend yield................................... 0.42% 0.48% 0.45%
Expected volatility ................................ 32.0% 34.6% 35.1%
Risk-free interest rate ............................. 4.83% 4.64% 4.59%
Forfeiture rate ................................... 16.0% 14.7% 13.0%
Expected lives ................................... 5.2years 4.6 years 6.9 years
Vesting periods .................................. 4years 4 years 4 years
Term.......................................... 7years 7 years 10 years
Weighted average fair value ......................... $ 10.86 $ 8.63 $ 11.97
Restricted stock expense, which reflects the fair market value on the date of the grant net of estimated
forfeitures and cliff vests after four years, is being amortized ratably by a charge to income over the four-year term
of the restricted stock awards.
We estimated the fair value of employee stock plan purchases using the Black-Scholes option pricing model.
The valuation model requires the input of subjective assumptions including the expected volatility and lives. Actual
values of purchases could vary significantly from the results of the calculations. Employee stock plan purchases
generally vest over a six-month period and have no expiration. The following assumptions were used to value
purchases:
2007 2006 2005
(53 weeks) (52 weeks) (52 weeks)
Dividend yield ..................................... 0.37% 0.48% 0.47%
Expected volatility .................................. 22.2% 29.3% 29.7%
Risk-free interest rate ................................ 5.06% 5.15% 3.94%
Expected lives ..................................... 0.5years 0.5 years 0.5 years
F-27
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)