Aarons 2004 Annual Report Download - page 28

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For purposes of pro forma disclosures under SFAS No.
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 earn-
ings and earnings per share if the fair-value-based method
had been applied to all outstanding and unvested awards in
each period:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
(In Thousands) 2004 2003 2002
Net Earnings before effect
of Key Executive grants $52,854 $36,426 $27,440
Expense effect of Key
Executive grants recognized (238)
Net earnings as reported 52,616 36,426 27,440
Deduct: total stock-based
employee compensation
expense determined under
fair-value-based method for
all awards, net of related
tax effects (1,687) (1,345) (1,165)
Pro forma net earnings $50,929 $35,081 $26,275
Earnings per share:
Basic — as reported $ 1.06 $ .74 $ .58
Basic — pro forma $ 1.03 $ .71 $ .56
Diluted — as reported $ 1.04 $ .73 $ .57
Diluted — pro forma $ 1.01 $ .70 $ .55
Closed Store Reserves — From time to time, the Company
closes under-performing stores. The charges related to the
closing of these stores primarily consist of reserving the net
present value of future minimum payments under the stores’
real estate leases. As of both December 31, 2004 and 2003,
accounts payable and accrued expenses in the accompanying
Consolidated Balance Sheets included approximately $2.2
million for closed store expenses.
Insurance Reserves — Estimated insurance reserves are
accrued primarily for group health and workers compen-
sation benefits provided to the Company’s employees.
Estimates for these insurance reserves are made based on
actual reported but unpaid claims and actuarial analyses of
the projected claims run off for both reported and incurred
but not reported claims. Effective on September 30, 2004,
we revised certain estimates related to our accrual for group
health self-insurance based on our experience that the time
periods between our liability for a claim being incurred and
the claim being reported had declined and favorable claims
experience which resulted in a reduction in expenses of
$1.4 million in 2004. The group health self-insurance
liability and expense are included in accounts payable
and accrued expenses and in operating expenses in the
accompanying consolidated balance sheets and statements
of earnings, respectively.
Derivative Instruments and Hedging Activities — From
time to time, the Company uses interest rate swap agree-
ments to synthetically manage the interest rate characteristics
of a portion of its outstanding debt and to limit the
Company’s exposure to rising interest rates. The Company
designates at inception that interest rate swap agreements
hedge risks associated with future variable interest payments
and monitors each swap agreement to determine if it remains
an effective hedge. The effectiveness of the derivative as a
hedge is based on a high correlation between changes in the
value of the underlying hedged item and the derivative instru-
ment. The Company records amounts to be received or paid
as a result of interest swap agreements as an adjustment to
interest expense. Generally, the Company’s interest rate
swaps are designated as cash flow hedges. In the event of
early termination or redesignation of interest rate swap
agreements, any resulting gain or loss would be deferred
and amortized as an adjustment to interest expense of the
related debt instrument over the remaining term of the
original contract life of the agreement. In the event of early
extinguishment of a designated debt obligation, any realized
or unrealized gain or loss from the associated swap would be
recognized in income or expense at the time of extinguish-
ment. There was no net income effect related to swap ineffec-
tiveness in 2004. For the year ended December 31, 2003,
the Company’s net income included an after-tax benefit of
approximately $170,000 related to swap ineffectiveness. The
Company does not enter into derivatives for speculative or
trading purposes. The fair value of the swaps as of December
31, 2004 and 2003 of $0.3 million and $1.4 million, respec-
tively, is included in accounts payable and accrued expenses
in the accompanying consolidated balance sheets.
Comprehensive Income totaled approximately $52.1
million, $38.3 million, and $27.5 million, for the years ended
December 31, 2004, 2003 and 2002, respectively.
New Accounting Pronouncements — In November 2002
the FASB issued Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
(FIN 45). FIN 45 requires an entity to disclose in its interim
and annual financial statements information with respect to
its obligations under certain guarantees that it has issued. It
also requires an entity to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure require-
ments of FIN 45 are effective for interim and annual periods
ending after December 15, 2002. These disclosures are pre-
sented in Note F. The initial recognition and measurement
requirements of FIN 45 are effective prospectively for guar-
antees issued or modified after December 31, 2002. The
adoption of the recognition provisions of FIN 45 had no
significant effect on the consolidated financial statements.
In January 2003 the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51 (FIN 46). FIN 46 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 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 parties. FIN 46 is effective immediately for all
new variable interest entities created or acquired after
January 31, 2003. The Company has not entered into trans-
actions with, created, or acquired significant potential vari-
able interest entities subsequent to that date. For interests in
variable interest entities arising prior to February 1, 2003,
the Company must apply the provisions of FIN 46 as of
December 31, 2003. The Company has concluded that cer-
tain independent franchisees, as discussed in Note I, are not
subject to the interpretation, and are therefore not included
in the Company’s consolidated financial statements. In addi-
tion, as discussed in Note D, the Company has certain capital
leases with partnerships controlled by related parties of the
Company. The Company has concluded that these partner-