Napa Auto Parts 2006 Annual Report Download - page 36

Notes to Consolidated Financial Statements
(continued)
34
4. Leased Properties
In June 2003, the Company completed an amended and restated
master agreement to our $85,000,000 construction and lease
agreement (the “Agreement”). The lessor in the Agreement is an
independent third-party limited liability company, which has as its
sole member a publicly traded corporation. Properties acquired by
the lessor are constructed and/or then leased to the Company un-
der operating lease agreements. No additional properties are being
added to this Agreement, as the construction term has ended. The
Company does not believe the lessor is a variable interest entity, as
dened in FASB Interpretation No. 46(R), Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51
(“FIN No. 46”).
In addition, the Company has veried that even if the lessor was
determined to be a variable interest entity, the Company would
not have to consolidate the lessor nor the assets and liabilities
associated with properties leased to the Company. This is because
the assets leased under the Agreement do not exceed 50% of the
total fair value of the lessor’s assets, excluding any assets that
should be excluded from such calculation under FIN No. 46, nor
did the lessor nance 95% or more of the leased balance with
non-recourse debt, target equity or similar funding. The Agreement
has been accounted for as an operating lease under SFAS No. 13,
Accounting for Leases (“SFAS No. 13”) and related interpretations.
Future minimum rental commitments under the Agreement have
been included in the table of future minimum payments below.
Rent expense related to the Agreement is recorded under selling,
administrative and other expenses in our consolidated statements
of income and was $4,797,000, $3,338,000, and $1,745,000 for
the years ended December 31, 2006, 2005, and 2004, respectively.
Buildings includes $15,400,000 with accumulated depreciation of
$6,917,000, for leases of distribution centers and stores capitalized
at December 31, 2006. Depreciation expense for capital leases was
approximately $4,585,000, $3,466,000, and $2,776,000 in 2006,
2005, and 2004, respectively.
Future minimum payments, by year and in the aggregate, under the
capital and noncancelable operating leases with initial or remaining
terms of one year or more consisted of the following at December
31, 2006 (in thousands):
Capital Operating
Leases Leases
2007 $ 2,509 $ 129,156
2008 2,344 95,152
2009 2,158 63,990
2010 1,760 44,239
2011 1,092 30,535
ereafter 3,752 81,534
Total minimum lease payments 13,615 $ 444,606
Amounts representing interest 5,132
Present value of future minimum
lease payments $ 8,483
Rental expense for operating leases was approximately $147,727,000
in 2006, $147,187,000 in 2005, and $132,493,000 in 2004.
5. Stock Options and Restricted Stock Awards
The Company maintains various Long-Term Incentive Plans, which
provide for the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units, performance awards,
dividend equivalents and other share-based awards. The Company
issues new shares upon option exercise under these plans.
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 for all award types, including SARs, which
are subject to graded vesting based on a service condition. Until
January 1, 2003, the Company had elected to follow APB No. 25,
Accounting for Stock Issued to Employees and related interpreta-
tions in accounting for stock compensation. Under APB No. 25,
no compensation expense was recognized if the exercise price of
stock options equaled or exceeded the market price of the under-
lying stock on the date of grant. Pro forma information regarding
net income and earnings per share is required by SFAS No. 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 No. 123.
Effective January 1, 2006 the Company adopted SFAS No. 123(R)
choosing the “modied prospective” method. Compensation cost
recognized for the year ended December 31, 2006 includes: (a)
compensation cost for all share-based payments granted prior to,
but not yet vested as of January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of
SFAS No. 123, and (b) compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the
grant date fair value estimated with the provisions of SFAS No.
123(R). Results for prior periods have not been restated. Most
options may be exercised not earlier than twelve months nor later
than ten years from the date of grant. As of January 1, 2006,
there was approximately $1.2 million of unrecognized compen-
sation cost for all awards granted prior to January 1, 2003 to
employees that remained unvested prior to the effective date of
SFAS No. 123(R). This compensation cost is expected to be recog-
nized over a weighted-average period of approximately four years.