Napa Auto Parts 2003 Annual Report Download - page 28

26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
significant impact on the Company’s consolidated financial
statements for the year ended December 31, 2003.
Until January 1, 2003, the Company had elected to follow
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (“APB 25”), and related
Interpretations in accounting for stock compensation.
Under APB 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 7 con-
tains a tabular presentation as if the Company had applied
the alternative fair value accounting provided for under
SFAS 123, to all stock options.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by
dividing net income (loss) by the weighted average number
of common shares outstanding during the year. The com-
putation of diluted net income (loss) per common share
includes the dilutive effect of stock options and non-vested
restricted stock awards. Options to purchase 5,219,100,
679,000 and 3,485,000, shares of common stock at prices
ranging from $32 to $38 per share were outstanding at
December 31, 2003, 2002 and 2001, respectively, but were
not included in the computation of diluted net income
(loss) per common share because the options’ exercise price
was greater than the average market price of the common
shares. At December 31, 2003, 2002 and 2001, the dilutive
effect of options to purchase approximately 39,000, 56,000,
and 199,000 shares of common stock at an average exercise
price of approximately $18 per share issued in connection
with a 1998 acquisition have been included in the compu-
tation of diluted net income (loss) per common share since
the date of the acquisition.
Reclassifications
Certain reclassifications have been made to prior year
amounts to conform to current year presentation.
Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46
(“FIN 46”), Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51. FIN 46, as revised in
December 2003, requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the charac-
teristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from
other parties. FIN 46 is effective for all new variable inter-
est entities created or acquired after January 31, 2003.
For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied
no later than December 31, 2003 for entities meeting the
definition of special-purpose entities, and no later than
fiscal periods ending after March 15, 2004 for all other
entities under consideration.
In connection with the adoption of FIN 46, in June 2003, the
Company’s construction and lease facility was amended.
Subject to the amendment, FIN 46 did not change the
Company’s accounting for the construction and lease facility.
In addition to the construction and lease facility, the
Company has relationships with entities which are required
to be considered for consolidation under FIN 46. Specifically,
the Company guarantees the borrowings of certain inde-
pendently controlled automotive parts stores (“independ-
ents”) and certain other affiliates in which the Company
has a minority equity ownership interest (“affiliates”).
Presently, the independents are generally consolidated
by an enterprise that has a controlling financial interest
through ownership of a majority voting interest in the
entity. The Company has no voting interest or other equity
conversion rights in any of the independents. At December
31, 2003, the total borrowings subject to guarantee by the
Company were approximately $163,006,000. The Company
does not control the independents or the affiliates, but
receives a fee for the guarantee. The Company has prelimi-
narily concluded that it is not the primary beneficiary with
respect to any of the independents and, in substantially
all cases, has concluded that the affiliates are not variable
interest entities or, if so, the Company is not the primary
beneficiary.
In January 2003, the Emerging Issues Task Force (“EITF”)
of the 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 recog-
nized in the customer’s income statement. However, under
certain circumstances, this presumption may be overcome
and recognition 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 a non-cash
charge of $19.5 million, net of a $13.6 million tax benefit,
($.11 and $.12 per basic and diluted share, respectively)
related to the capitalization of certain vendor considera-
tion as part of inventory cost. Had the Company accounted
for vendor considerations in accordance with EITF 02-16 in
prior years, the capitalization of these vendor considera-
tions would not have a significant impact on the consoli-
dated statements of income for the years ended December
31, 2002 and 2001. In addition, as a result of the January 1,
2003 adoption of EITF 02-16, approximately $102 million was
reclassified from selling, administrative and other expenses
to cost of goods sold in the consolidated statement of income
for the year ended Dechember 31, 2003. In accordance with
EITF 02-16, the income statement presentations for periods
prior to January 1, 2003 have not been reclassified. Had
the Company accounted for consideration received from