Napa Auto Parts 2007 Annual Report Download - page 37

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5. Stock Options and Restricted Stock Awards
e Company maintains various Long-Term Incentive Plans,
which provide for the granting of stock options, stock apprecia-
tion rights (SARs), restricted stock, restricted stock units (RSUs),
performance awards, dividend equivalents and other share-based
awards. e 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.
e 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 “modified prospective” method. Compensa-
tion cost recognized for the years ended December 31, 2007 and
2006, includes: (a) compensation cost for all share-based pay-
ments 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 compensation 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). is compensation cost
is expected to be recognized over a weighted-average period of
approximately four years.
For the year ended December 31, 2007, total compensation cost
related to nonvested awards not yet recognized was approximately
$21.7 million. e weighted-average period over which this com-
pensation cost is expected to be recognized is approximately
three years. e aggregate intrinsic value for options and RSUs
outstanding at December 31, 2007 and 2006 was approximately
$58.5 million and $74.6 million, respectively. e aggregate intrin-
sic value for options and RSUs vested totaled approximately
$37.9 million and $46.4 million at December 31, 2007 and
2006, respectively. At December 31, 2007, the weighted-average
contractual life for outstanding and exercisable options and RSUs
was six years. For the years ended December 31, 2007, 2006, and
2005, $14.3 million, $11.9 million, and $6.9 million of share-based
compensation cost was recorded, respectively. e total income
tax benefit recognized in the income statement for share-based
compensation arrangements was approximately $5.7 million, $4.8
million, and $2.8 million for 2007, 2006, and 2005, respectively.
ere have been no modifications to valuation methodologies or
methods subsequent to the adoption of SFAS No. 123(R).
For the years ended December 31, 2007, 2006, and 2005 the fair
value for options and SARs granted was estimated using a
Black-Scholes option pricing model with the following weighted-
average assumptions, respectively: risk-free interest rate of 4.6%,
4.8%, and 4.1%; dividend yield of 3.1%, 2.9%, and 3.2%; annual
historical volatility factor of the expected market price of the
Company’s common stock of 21%, 21%, and 23%; an average
expected life and estimated turnover based on the historical pat-
tern of existing grants of six years and 4.0% to 5.6%, respectively.
e fair value of RSUs is based on the price of the Company’s
stock on the date of grant. e total fair value of shares vested
during the years ended December 31, 2007, 2006, and 2005,
was $10.5 million, $6.9 million, and $8.0 million, respectively.
For purposes of pro forma disclosures under SFAS No. 123, as
amended by SFAS No. 148, Accounting for Stock-Based Compensa-
tion Transition and Disclosure, an amendment of FASB Statement
No. 123, the estimated fair value of the options is amortized
to expense over the options’ vesting period. e following table
illustrates the effect on net income and income per share if the
fair value based method had been applied to all outstanding and
unvested awards during the year ended December 31, 2005 (in
thousands, except per share amounts):
Year Ended December 31, 2005
Net income, as reported $ 437,434
Add: Stock-based employee compensation expense re-
lated to option grants after January 1, 2003, included
in reported net income, net of related tax effects 4,247
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (6,225)
Pro forma net income $ 435,456
Income per share:
Basic—as reported $ 2.51
Basic—pro forma $ 2.50
Diluted—as reported $ 2.50
Diluted—pro forma $ 2.49