Napa Auto Parts 2004 Annual Report Download - page 35

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7. Stock Options and Restricted Stock Awards
In 1999, the Company authorized the grant of options of up to
9,000,000 shares of common stock. In accordance with stock
option plans approved by shareholders, options are granted to
key personnel for the purchase of the Company’s stock at prices
not less than the fair market value of the shares on the dates of
grant. Most options may be exercised not earlier than twelve
months nor later than ten years from the date of grant.
Pro forma information regarding net income and earnings per
share is required by SFAS 123, as amended, determined as if
the Company had accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value
method of SFAS 123. The fair value for these options was esti-
mated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for
2004, 2003 and 2002, respectively: risk-free interest rates of
4.0%, 4.0%, and 4.1%; dividend yield of 3.7%; 3.6%, and 4.0%;
annual volatility factor of the expected market price of the
Company’s common stock of 0.23, 0.25, and 0.22; an expected
life of the options of 8 years; and turnover of 4.44% based on the
historical pattern of existing grants.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assump-
tions including the expected stock price volatility. Because the
Company’s employee stock options have characteristics signifi-
cantly different from those of traded options, and because
changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures under SFAS 123, as
amended by SFAS No. 148, the estimated fair value of the
options is amortized to expense over the options’ vesting period.
The following table illustrates the effect on net income (loss) and
income (loss) per share if the fair value based method had been
applied to all outstanding and unvested awards in each period
(in thousands, except per share amounts):
A summary of the Company’s stock option activity and related information are as follows:
Year ended December 31, 2004 2003 2002
Net income (loss), as reported $ 395,552 $ 334,101 $ (27,590)
Add: Stock-based employee
compensation expense related to
option grants after January 1, 2003
included in reported net income,
net of related tax effects 1,566 13 —
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (3,758) (5,688) (3,376)
Pro forma net income (loss) $ 393,360 $ 328,426 $ (30,966)
Income (loss) per share:
Basic—as reported $ 2.26 $ 1.92 $ (0.16)
Basic—pro forma $ 2.25 $ 1.89 $ (0.18)
Diluted—as reported $ 2.25 $ 1.91 $ (0.16)
Diluted—pro forma $ 2.24 $ 1.88 $ (0.18)
2004 2003 2002
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000’s) Price (000’s) Price (000’s) Price
Outstanding at beginning of year 6,913 $ 30 7,590 $ 29 6,045 $ 28
Granted 1,270 33 20 32 3,155 32
Exercised (2,096) 29 (500) 23 (1,412) 29
Forfeited (328) 32 (197) 31 (198) 34
Outstanding at end of year 5,759 $ 31 6,913 $ 30 7,590 $ 29
Exercisable at end of year 3,092 $ 30 4,171 $ 29 3,361 $ 28
Weighted-average fair value of options
granted during the year $ 6.94 $ 6.92 $ 5.72
Shares available for future grants 2,689 3,631 3,454