Petsmart 2002 Annual Report Download - page 63

PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
In November 2002, the FASB issued Interpretation No. (FIN) 45, ""Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.'' Among
other things, the Interpretation requires guarantors to recognize, at fair value, their obligations to stand ready
to perform under certain guarantees. FIN 45 is eÅective for guarantees issued or modiÑed on or after
January 1, 2003. The Company has adopted the disclosure requirements of FIN 45, which is eÅective for Ñscal
years ending after December 15, 2002. The Company believes the adoption will not have a signiÑcant impact
on its Ñnancial position and future results of operations. FIN 45 also requires guarantors to disclose certain
information for guarantees outstanding at February 2, 2003 (see Note 13).
The FASB issued FIN No. 46, ""Consolidation of Variable Interest Entities,'' an interpretation of
Accounting Research Bulletin No. 51, ""Consolidated Financial Statements,'' on January 17, 2003. FIN 46
requires that an entity holding a majority of the ""variable interest'' of a ""variable interest entity'' must
consolidate the operations of the variable interest entity of which it is the primary beneÑciary. As currently
constituted, the Company's structured lease Ñnancing facilities may involve a variable interest entity of which
we are the primary beneÑciary. If so determined, the Company would be required to consolidate the seven
stores and two properties at the beginning of the second quarter for Ñscal 2003, which would increase Ñxed
assets and debt by $27,713,000, and also have an impact on depreciation expense. However, the Company may
be able to restructure these leases so as not to require consolidation. The Company is also considering other
options related to the disposition of these properties, and the Company can provide no assurance that a loss or
impairment charge will not be incurred due to current real estate market conditions.
The Emerging Issues Task Force, or EITF, released Issue No. 02-16, ""Accounting by a Customer
(including a Reseller) for Cash Consideration Received from a Vendor,'' in November 2002, which, among
other things, addresses the accounting by a vendor for consideration given to a customer, including a reseller of
the vendor's products, and accounting guidance on how to characterize consideration, when to recognize the
consideration, and how to measure that consideration in the Ñnancial statements. The Company records
vendor allowances and discounts in the income statement when the purpose for which those monies were
designated is fulÑlled. As such, the Company does not expect the adoption of EITF No. 02-16 to have a
material impact on the results of operation or Ñnancial position.
ReclassiÑcations
For comparative purposes, certain prior year amounts have been reclassiÑed to conform to the current
year presentation.
Note 2 Ì Acquisition of Controlling Interest in PETsMART.com
In Ñscal 2000, the Company accounted for its investment using the equity method in accordance with
APB No. 18 and recognized its share of the losses in PETsMART.com until it acquired a controlling interest
in PETsMART.com on December 20, 2000 (the ""Transaction''). As a result of the Transaction, the Company
increased its voting ownership percentage to approximately 81.7% and accounted for the results of operations
of PETsMART.com under the consolidation method of accounting for all subsequent periods. The Company
accounted for the Transaction as a step acquisition and allocated approximately $7,904,000 for the excess of
the consideration paid over the underlying net assets acquired to goodwill.
In June 2001, the Company purchased 1,020,789 shares of convertible voting preferred stock from
minority shareholders for approximately $741,000, which increased its voting ownership to a requisite
percentage for income tax reporting purposes that will allow the Company to utilize a portion of
PETsMART.com's net operating loss carryforwards. As a result, in the second quarter of Ñscal 2001, the
Company reversed valuation allowances of deferred tax assets of $18,885,000, eliminated the net goodwill of
$8,575,000 and recorded a tax beneÑt of $10,310,000. In January 2002, the Company acquired all of the
remaining shares held by PETsMART.com minority stockholders for approximately $9,500,000 . The balance
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