Petsmart 2003 Annual Report Download - page 62

PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board, or FASB, issued FASB Interpretation, or FIN, 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 that variable interest
entity of which it is the primary beneÑciary. In 2003, the Company purchased two properties from the
structured lease Ñnancing facility, and based on current appraisals, it recorded a $1,700,000 loss in the
consolidated Ñnancial statements. Subsequent to this purchase and also in 2003, the structured lease Ñnancing
facility was liquidated and the remaining seven stores were leased by the Company. FIN 46 was eÅective for
the Company on August 4, 2003. With the liquidation of the Company's special purpose entity during 2003,
FIN 46 did not have a material impact on the Company's consolidated Ñnancial statements.
In March 2003, the FASB's Emerging Issues Task Force, or EITF, reached a consensus on Issue 02-16,
""Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor.'' The
transition provisions apply prospectively to arrangements with vendors entered into or modiÑed after
December 31, 2002, do not allow for prior period reclassiÑcation, and require companies to account for all
amounts received from vendors as a reduction of the cost of the products purchased unless certain criteria are
met that allow companies to account for vendor funding as a reduction of related selling, general and
administrative expenses. During 2003 and 2002, the Company recorded approximately $10,931,000 and
$11,007,000, respectively, for cooperative promotional income. The Company adopted the provisions of
EITF 02-16 for vendor contracts entered into or modiÑed subsequent to December 31, 2002, and the adoption
did not have a material impact on the consolidated Ñnancial statements.
In November 2003, the FASB's Emerging Issues Task Force reached a consensus on Issue 03-10,
""Application of Issue No. 02-16 by Resellers to Sales Incentives OÅered to Consumers by Manufacturers.''
Under EITF 03-10, any cash consideration a company receives from a vendor as part of a sales incentive
arrangement must be recorded in the income statement as an oÅset to cost of sales, and cannot be recorded as
revenue, unless the company meets certain criteria. EITF 03-10 is eÅective for new arrangements, including
modiÑcations to existing arrangements, entered into Ñscal periods beginning after November 25, 2003. The
Company is currently assessing the impact, if any, regarding the adoption of EITF 03-10.
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 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 allowed the Company to utilize a portion of PET-
sMART.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 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 of the minority interest
as of February 3, 2002 was $604,000. The additional investment and the minority interest represented a net
amount of $8,896,000, which was recorded as goodwill in Ñscal 2001. The Pasadena, California-based
operations moved its administrative functions to the Company's oÇce in Phoenix, Arizona during Ñscal 2002.
The minority interest in PETsMART.com held by the Company during Ñscal 2001, consisted primarily of
convertible voting preferred stock, which was convertible at Ñxed conversion rates into common stock of
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