This excerpt taken from the PETM DEF 14A filed May 8, 2006.
Option Grants in Fiscal Year 2005
The exercise price of each option was equal to the fair market value of our Common Stock on the date of grant as reported on the Nasdaq National Market. The exercise price may be paid in cash, in shares of our Common Stock valued at fair market value on the exercise date, or through a cashless exercise procedure involving a same-day sale of the purchased shares. Historically, options vested as to 25% of the shares on the one-year anniversary of the date of grant, and the remaining 75% of the option shares vested and became exercisable each month thereafter on a ratable basis over a period of 36 months in accordance with their terms. In January 2005, we changed the standard vesting schedule for future stock option grants to vest 25% annually.
The potential realizable value is based on the ten-year term of the option at the time of grant. Commencing in fiscal year 2006 the term for stock options will generally be seven years from the date of grant. Stock price appreciation of 5% and 10% is assumed pursuant to the rules promulgated by the SEC and does not represent our prediction of our stock price. Actual gains, if any, are dependent on the actual future performance of our Common Stock, and no gain to the optionee is possible unless the stock price increases over the option term, which will benefit all stockholders. The potential realizable values at 5% and 10% appreciation are calculated by:
Percentages shown under Percentage of Total Options Granted to Employees in Fiscal Year 2005 are based on an aggregate of 929,152 options granted to PetSmart employees under our stock option plans in fiscal year 2005.