Petsmart 2006 Annual Report Download - page 82

Download and view the complete annual report

Please find page 82 of the 2006 Petsmart annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 89

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89

Note 14 — Stock-Based Compensation
Stock-based compensation charged against operating, general and administrative expense and the total income
tax benefit recognized in the Consolidated Statement of Operations and Comprehensive Income were as follows (in
thousands):
2006 2005 2004
Fiscal Year
Stock options expense .................................. $ 8,625 $11,424 $22,053
Employee stock purchase plan expense...................... 1,311 1,140 1,587
Restricted stock expense ................................ 9,384 9,834 4,812
Total stock-based compensation cost ...................... $19,320 $22,398 $28,452
Tax benefit .......................................... $ 6,330 $ 6,546 $11,189
The cumulative effect of adopting SFAS No. 123(R), which includes the impact of changing from the prior
method of recognizing forfeitures as they occurred to estimating forfeitures at the grant date, was not material and is
included in operating, general and administrative expenses in the Consolidated Statements of Operations and
Comprehensive Income for fiscal 2005.
At January 28, 2007, the total unrecognized stock-based compensation cost net of forfeitures was $36,778,000.
The Company expects to recognize that cost over a weighted average period of 2.4 years.
The Company 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 the Company’s
stock, historical volatility of the Company’s stock and other factors. The Company uses 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 the Company expects
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. The fair value of stock options issued on and before January 30, 2005 was estimated using the Black-Scholes
option pricing model. Stock options are amortized straight-line over the vesting period 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:
2006 2005 2004
Fiscal Year
Dividend yield................................... 0.48% 0.45% 0.10%
Expected volatility ................................ 34.6% 35.1% 60.1%
Risk-free interest rate ............................. 4.64% 4.59% 3.22%
Forfeiture rate ................................... 14.7% 13.0% N/A(1)
Expected lives ................................... 4.6years 6.9 years 2.9 years
Vesting periods .................................. 4years 4 years 4 years
Term.......................................... 7years 10 years 10 years
Weighted average fair value ......................... $ 8.63 $ 11.97 $ 12.14
(1) Prior to the adoption of SFAS No. 123(R), forfeitures were recognized as they occurred.
The Company 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
F-26
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)