Advance Auto Parts 2003 Annual Report Download - page 32

price. Accordingly, the Company has not recognized
compensation expense on the issuance of its Fixed Options
because the exercise price equaled the fair market value of the
underlying stock on the grant date. The Company recorded
compensation expense related to its Performance Options
and Variable Options of $11,735 in non-cash stock option
compensation expense in the accompanying consolidated
statements of operations for the fiscal year ended December 29,
2001. No compensation expense was required for the fiscal
years ended January 3, 2004 and December 28, 2002.
As required by SFAS No. 148, “Accounting for Stock-
Based Compensation—Transition and Disclosure an Amend-
ment of FASB Statement No. 123,” the following table
reflects the impact on net income and earnings per share as if
the Company had adopted the fair value based method of rec-
ognizing compensation costs as prescribed by SFAS No. 123.
2003 2002 2001
Net income, as reported ......................... $124,935 $65,019 $11,442
Add: Total stock-based employee
compensation expense included in
reported net income, net of related
tax effects .......................................... — — 7,076
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects ........ (4,636) (1,894) (9,771)
Pro forma net income ............................ $120,299 $63,125 $ 8,747
Net income per share:
Basic, as reported ............................... $ 1.71 $ 0.93 $ 0.20
Basic, pro forma ................................ 1.65 0.90 0.15
Diluted, as reported ............................ 1.67 0.90 0.20
Diluted, pro forma ............................. 1.61 0.87 0.15
For the above information, the fair value of each option
granted in the fiscal 2003 was estimated on the grant date
using the Black-Scholes option-pricing model with the
following assumptions: (i) weighted-average risk-free interest
rate of 3.12%; (ii) weighted-average expected life of
options of four years; (iii) expected dividend yield of zero
and (iv) weighted-average volatility of 41%.
For the above information, the fair value of each option
granted in the fiscal 2002 was estimated on the grant date
using the Black-Scholes option-pricing model with the fol-
lowing assumptions: (i) weighted-average risk-free interest
rate ranging from 4.45% to 3.12%; (ii) weighted-average
expected life of options of four years; (iii) expected dividend
yield of zero and (iv) weighted-average volatility of 17%.
For the above information, the fair value of each option
granted in fiscal 2001 was estimated on the grant date using
the Black-Scholes option-pricing model with the following
assumptions: (i) weighted-average risk-free interest rate
of 2.89%; (ii) weighted-average expected life of options
of three years; (iii) expected dividend yield of zero and
(iv) volatility of 60%.
Hedge Activities
In March 2003, the Company entered into two interest
rate swap agreements to limit its cash flow risk on an aggre-
gate of $125,000 of its variable rate debt. The first swap
allows the Company to fix its LIBOR rate at 2.269% on
$75,000 of debt for a term of 36 months. The second swap
allows the Company to fix its LIBOR rate at 1.79% on an
additional $50,000 of debt for a term of 24 months.
In September 2002, the Company entered into a hedge
agreement in the form of a zero-cost collar, which protects
the Company from interest rate fluctuations in the LIBOR
rate on $150,000 of its variable rate debt under its senior credit
facility. The collar consists of an interest rate ceiling at 4.5%
and an interest rate floor of 1.56% for a term of 24 months.
Under this hedge, the Company will continue to pay interest at
prevailing rates plus any spread, as defined by the Company’s
credit facility, but will be reimbursed for any amounts paid
on the LIBOR rate in excess of the ceiling. Conversely, the
Company will be required to pay the financial institution that
originated the collar if the LIBOR rate is less than the floor.
In accordance with SFAS No. 133, “Accounting for Deriv-
ative Instruments and Hedging Activities,” the fair value of the
hedge arrangement is recorded as an asset or liability in the
accompanying consolidated balance sheet at January 3, 2004.
The Company has adopted the “matched terms” accounting
method as provided by Derivative Implementation Group, or
DIG, Issue No. G20, “Assessing and Measuring the
Effectiveness of a Purchased Option Used in a Cash Flow
Hedge” for the zero-cost collar, and DIG Issue No. 9,
“Assuming No Ineffectiveness When Critical Terms of the
Hedging Instrument and the Hedge Transaction Match in a
Cash Flow Hedge” for the interest rate swaps. Accordingly,
the Company has matched the critical terms of each hedge
instrument to the hedged debt and used the anticipated termi-
nal value of zero to assume the hedges have no ineffective-
ness. In addition, the Company will record all adjustments to
the fair value of the hedge instruments in accumulated other
comprehensive income (loss) through the maturity date of
the applicable hedge arrangement. The fair value at January 3,
2004 was an unrecognized loss of $433 and $96 on the interest
rate collar and swaps, respectively. At December 28, 2002,
the fair value of the interest rate collar was an unrecognized
loss of $592. Any amounts received or paid under these
hedges will be recorded in the statement of operations as
earned or incurred. Comprehensive income for the fiscal years
ended January 3, 2004 and December 28, 2002 is as follows:
January 3, December 28,
2004 2002
Net income ...................................................... $124,935 $65,019
Unrealized gain (loss) on hedge arrangements ... 63 (592)
Comprehensive income .................................... $124,998 $64,427
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 3, 2004, December 28, 2002 and December 29, 2001
(in thousands, except per share data)
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