Napa Auto Parts 2004 Annual Report Download - page 31

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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 $216,000,000,
$202,000,000 and $200,000,000 in the years ended December
31, 2004, 2003, and 2002, respectively.
Stock Compensation
Effective January 1, 2003, the Company prospectively adopted
the fair value method of accounting for stock compensation.
The adoption of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123), had no significant impact on the
Company’s consolidated financial statements for the years
ended December 31, 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 25), and related Interpretations
in accounting for stock compensation. Under APB 25, no com-
pensation 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 contains 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 computation of diluted
net income (loss) per common share includes the dilutive effect
of stock options and non-vested restricted stock awards. Options
to purchase 5,219,000 and 679,000, shares of common stock at
prices ranging from $32 to $38 per share were outstanding at
December 31, 2003 and 2002, respectively, but were not included
in the computation of diluted net income (loss) per common share
in those years because the options’ exercise price was greater
than the average market price of the common shares at the time.
At December 31, 2004, 2003 and 2002, the dilutive effect of options
to purchase approximately 12,000, 39,000 and 56,000 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 (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 bene-
ficiary of the entity if the equity investors in the entity do not have
the characteristics 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 par-
ties. FIN 46 is effective for all new variable interest 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. This construction
and lease facility, expiring in 2008, contains residual value
guarantee provisions and other guarantees which would become
due in the event of a default under the operating lease agreement
or at the expiration of the operating lease agreement if the fair
value of the leased properties is less that the guaranteed residual
value. The maximum amount of the Company’s potential guarantee
obligation at December 31, 2004 is approximately $83,880,000.
The Company believes the likelihood of funding the guarantee
obligation under any provision of the operating lease agreement
is remote.
In addition to the construction and lease facility, the Company
has relationships with entities that are required to be considered
for consolidation under FIN 46. Specifically, the Company guar-
antees the borrowings of certain independently controlled auto-
motive parts stores (independents) and certain other affiliates in
which the Company has a minority equity ownership interest
(affiliates). Presently, the independents are generally consolidated
by an unaffiliated 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. The Company does not control the
independents or the affiliates, but receives a fee for the guarantee.
The Company has concluded that it is not the primary beneficiary
with respect to any of the independents and that the affiliates are
not variable interest entities. The Company’s maximum exposure
to loss as a result of its involvement with these independents
and affiliates is equal to the total borrowings subject to the
Company’s guarantee. At December 31, 2004, the total borrow-
ings of the independents and affiliates subject to guarantee by
the Company were approximately $169,000,000. These loans
generally mature over periods from one to ten years. In the event
that the Company is required to make payments in connection
with guaranteed obligations of the independents or the affiliates,
the Company would obtain and liquidate certain collateral (e.g.
accounts receivable and inventory) to recover all or a portion of
the amounts paid under the guarantee. To date, the Company
has had no significant losses in connection with guarantees of
independents' and affiliates’ borrowings.