Napa Auto Parts 2005 Annual Report Download - page 31

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Fair Value of Financial Instruments
The carrying amounts reflected in the consolidated balance
sheets for cash and cash equivalents, trade accounts receivable
and trade accounts payable approximate their respective fair
values based on the short-term nature of these instruments.
At December 31, 2005 and 2004, the fair market value of fixed
rate long-term debt was approximately $526,000,000 and
$534,000,000, respectively, based primarily on quoted prices
for these or similar instruments. The fair value of fixed rate
long-term debt was estimated by calculating the present value
of anticipated cash flows. The discount rate used was an
estimated borrowing rate for similar debt instruments with
like maturities.
Shipping and Handling Costs
Shipping and handling costs are classified as selling, administra-
tive and other expenses in the accompanying consolidated
statements of income and totaled approximately $238,000,000,
$216,000,000 and $202,000,000 in the years ended December 31,
2005, 2004, and 2003, respectively.
Advertising Costs
Advertising costs are expensed as incurred and totaled
$44,100,000, $41,500,000 and $38,100,000 in the years ended
December 31, 2005, 2004, and 2003, respectively.
Stock Compensation
Effective January 1, 2003, the Company prospectively adopted
the fair value method of accounting for stock compensation.
The Company recognizes compensation expense based on the
straight-line method. The adoption of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), had no significant impact on
the Company’s consolidated financial statements for the years
ended December 31, 2005, 2004, and 2003.
Until January 1, 2003, the Company had elected to follow
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB No. 25), and related
Interpretations in accounting for stock compensation. Under
APB No. 25, no compensation expense is recognized if the
exercise price of stock options equals the market price of the
underlying stock on the date of grant. Note 5 contains a
tabular presentation as if the Company had applied the
alternative fair value accounting provided for under SFAS
No. 123, to all stock options.
Net Income per Common Share
Basic net income per common share is computed by dividing
net income by the weighted average number of common
shares outstanding during the year. The computation of diluted
net income per common share includes the dilutive effect of
stock options and non-vested restricted stock awards. Options
to purchase 5,219,000 shares of common stock at prices ranging
from $32 to $38 per share were outstanding at December 31,
2003, but were not included in the computation of diluted
net income per common share because the options’ exercise
price was greater than the average market price of the
common shares at the time. At December 31, 2005, 2004 and
2003, the dilutive effect of options to purchase approximately
12,000, 12,000, and 39,000 shares of common stock, respectively,
at an average exercise price of approximately $18 per share
issued in connection with a 1998 acquisition have been included
in the computation of diluted net income per common share
since the date of the acquisition.
Recently Issued Accounting Pronouncements
In January 2003, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) issued EITF Issue
No. 02-16, Accounting by a Customer (Including Reseller) for
Certain Consideration Received from a Vendor (EITF 02-16).
EITF 02-16 addresses accounting and reporting issues related
to how a reseller should account for certain consideration
received from vendors. Generally, certain consideration
received from vendors is presumed to be a reduction of prices
of the vendor’s products or services and should, therefore, be
characterized as a reduction of cost of sales when recognized
in the customer’sincome statement. However, under certain
circumstances, this presumption may be overcome and recogni-
tion as revenue or as a reduction of other costs in the income
statement may be appropriate. The Company, in certain
circumstances, previously included funds of this type in selling,
administrative and other expenses. Under the new method,
vendor allowances for advertising and catalog related programs
are generally considered a reduction of cost of goods sold. On
January 1, 2003, the Company adopted EITF 02-16 and recorded
anon-cash charge of $19.5 million ($.11 and $.12 per basic and
diluted share, respectively), net of a tax benefit of $13.6 million,
related to the capitalization of certain vendor consideration as
part of inventory cost.