Petsmart 2003 Annual Report Download - page 60

PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Reserve for Closed Stores
The Company continuously evaluates the performance of its retail stores and periodically closes those
that are underperforming. The Company establishes reserves for future rental payments on closed stores and
terminated subleases, and classiÑes these costs in general and administrative expenses (see Note 6). The costs
for future rental payments associated with closed stores are calculated using the net present value method, at a
credit-adjusted risk-free interest rate, over the remaining life of the lease, net of expected sublease income.
The Company records such reserves as of the date it ceases use of the property. Judgment is used to estimate
the underlying real estate market related to the expected sublease income, and the Company can make no
assurances that additional charges will not be required based on the changing real estate environment. As of
February 1, 2004, and February 2, 2003, approximately $14,762,000 and $9,261,000, respectively, were
recorded for closed store reserves.
Foreign Currency Translation and Transactions
The local currency has been used as the functional currency in Canada. The assets and liabilities
denominated in foreign currency are translated into United States dollars at the current rate of exchange at
year-end and revenues and expenses are translated at the average exchange rate for the year. The translation
gains and losses are included as a separate component of other comprehensive income (loss), and transaction
gains and losses are included in net income.
Comprehensive Income
The income tax expense (beneÑt) related to the foreign currency translation adjustment, which was the
only component of other comprehensive income, was approximately $2,063,000, $592,000, and $(210,000) for
Ñscal 2003, 2002, and 2001, respectively.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted average of common shares
outstanding during each period. Diluted earnings per share is computed by dividing net income 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 No. 123''), the
Company applies the provisions of Accounting Principles Board Opinion No. 25, ""Accounting for Stock Issued
to Employees'' (APB No. 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 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
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