Petsmart 2002 Annual Report Download - page 61

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PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Earnings Per Share
Basic earnings per share are computed by dividing net income or loss by the weighted average of common
shares outstanding during each period. Diluted earnings per share is computed by dividing net income or loss
by the weighted average number of common shares outstanding during the period after adjusting for dilutive
stock options and dilutive common shares assumed to be issued on conversion of the Company's 6
3
/
4
%
Subordinated Convertible Notes (the ""Notes'').
Stock-Based Compensation
As permitted by SFAS No. 123, ""Accounting for Stock-based Compensation'' (""SFAS 123''), the
Company applies the provisions of Accounting Principles Board Opinion No. 25, ""Accounting for Stock Issued
to Employees'' (""APB 25''), and related interpretations, in recording compensation expense for grants of
equity instruments to employees.
The Company has stock option plans as well an Employee Stock Purchase Plan (see Note 14). The
Company accounts for those plans under APB Opinion No. 25, and related Interpretations. Accordingly, no
compensation cost is reÖected in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant. The following table illustrates
the eÅect on net income and net income per common share if the Company had applied the fair-value-based
method of SFAS No. 123 to record compensation expense for stock options and employee stock purchases (in
thousands, except per share data).
Fiscal Year
2002 2001 2000
Net income (loss), as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $88,855 $39,567 $(30,904)
Less: Compensation expense for option awards determined by
the fair value based method, net of related tax eÅectsÏÏÏÏÏÏÏ (8,031) (6,822) (4,384)
Pro forma net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $80,824 $32,745 $(35,288)
Net income (loss) per share
Basic:
Net income (loss), as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.66 $ 0.35 $ (0.28)
Pro forma net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.60 $ 0.29 $ (0.32)
Diluted:
Net income (loss), as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.63 $ 0.35 $ (0.28)
Pro forma net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.58 $ 0.29 $ (0.32)
The fair value was estimated using the Black-Scholes option pricing model with the following
assumptions used for grants in Ñscal 2002, 2001, and 2000, respectively: dividend yield of 0.00% in all years;
expected volatility of 63.0 percent, 64.0 percent and 65.0 percent, respectively; risk-free interest rates of 1.32
to 5.11 percent, 2.25 to 5.25 percent and 4.79 to 6.53 percent, respectively; and expected lives of 1.58 years,
1.47 years, and 1.46 years, respectively. The weighted average fair value of options granted during Ñscal 2002,
2001, and 2000 was $5.76, $2.06, and $1.97, respectively.
F-13