Aarons 2004 Annual Report Download - page 29

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ships are not variable interest entities. The Company has
concluded that the accounting and reporting of its con-
struction and lease facility (see Note F) are not subject to
the provisions of FIN 46 since the lessor is not a variable
interest entity, as defined by FIN 46.
In January 2003 the Emerging Issues Task Force (EITF) of
the FASB issued EITF Issue No. 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration
Received from a Vendor (EITF 02-16). EITF 02-16 addresses
accounting and reporting issues related to how a reseller
should account for cash consideration received from vendors.
Generally, cash consideration received from vendors is pre-
sumed to be a reduction of the prices of the vendor’s prod-
ucts or services and should, therefore, be characterized as a
reduction of cost of sales when recognized in the customer’s
income statement. However, under certain circumstances this
presumption may be overcome, and recognition as revenue or
as a reduction of other costs in the income statement may be
appropriate. The Company does receive cash consideration
from vendors subject to the provisions of EITF 02-16. EITF
02-16 is effective for fiscal periods beginning after December
15, 2002. The Company adopted EITF 02-16 as of January
1, 2003. Such adoption did not have a material effect on the
Company’s financial statements since substantially all cooper-
ative advertising consideration received from vendors repre-
sents a reimbursement of specific, identifiable, and incremen-
tal costs incurred in selling those vendors’ products.
In November 2004 the FASB issued Statement of Financial
Accounting Standards No. 151, Inventory Costs — An
Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS
151 amends ARB 43, Chapter 4, to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-
period charges. In addition, this Statement requires that
allocation of fixed production overheads to the costs of con-
version be based on the normal capacity of the production
facilities. SFAS 151 is effective for the Company beginning
January 1, 2006, though early application is permitted.
Management is currently assessing the impact of SFAS 151,
but does not expect the impact to be material.
In December 2004 the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-based
Payment (SFAS 123R). SFAS 123R amends SFAS 123 to
require adoption of the fair-value method of accounting for
employee stock options effective June 30, 2005. The transi-
tion guidance in SFAS 123R specifies that compensation
expense for options granted prior to the effective date be
recognized over the remaining vesting period of those
options, and that compensation expense for options granted
subsequent to the effective date be recognized over the
vesting period of those options. We anticipate recognizing
compensation expense of approximately $1.7 million, $2.6
million, and $1.0 million for the years ended December 31,
2005, 2006, and 2007, respectively, in connection with
stock option grants made prior to December 31, 2004.
Note B: Earnings Per Share
Earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding
during the year, which were approximately 49,602,000
shares in 2004, 48,964,000 shares in 2003, and 47,046,000
shares in 2002. The computation of earnings per share
assuming dilution includes the dilutive effect of stock options
and awards. Such stock options and awards had the effect of
increasing the weighted average shares outstanding assuming
dilution by approximately 973,000 in 2004, 819,000 in
2003, and 729,000 in 2002.
Note C: Property, Plant & Equipment
Following is a summary of the Company’s property, plant,
and equipment at December 31:
(In Thousands) 2004 2003
Land $ 11,687 $ 10,370
Buildings & Improvements 39,305 39,772
Leasehold Improvements & Signs 63,291 54,348
Fixtures & Equipment 36,518 32,135
Assets Under Capital Lease:
With Related Parties 15,734 10,308
With Unrelated Parties 1,475 1,432
Construction in Progress 4,339 3,647
$172,349 $152,012
Less: Accumulated Depreciation
& Amortization (61,231) (52,428)
$111,118 $ 99,584
Note D: Credit Facilities
Following is a summary of the Company’s credit facilities
at December 31:
(In Thousands) 2004 2003
Bank Debt $ 45,528 $13,870
Senior Unsecured Notes 50,000 50,000
Capital Lease Obligations:
With Related Parties 16,596 10,144
With Unrelated Parties 1,197 1,319
Other Debt 3,334 4,237
$116,655 $79,570
Bank Debt — The Company has a revolving credit agree-
ment dated May 28, 2004 with several banks providing for
unsecured borrowings up to $87.0 million, which includes a
$12.0 million credit line to fund daily working capital
requirements. Amounts borrowed bear interest at the lower
of the lender’s prime rate or LIBOR plus 1.00%. The pricing
under the working capital line is based upon overnight bank
borrowing rates. At December 31, 2004 and 2003, respec-
tively, an aggregate of approximately $45.5 million (bearing
interest at 3.41%) and $13.9 million (bearing interest at
2.24%) was outstanding under the revolving credit agree-
ment. The Company pays a .20% commitment fee on unused
balances. The weighted average interest rate on borrowings
under the revolving credit agreement (before giving effect to
interest rate swaps in 2003 and 2002) was 2.72% in 2004,
2.53% in 2003, and 3.86% in 2002. The revolving credit
agreement expires May 28, 2007.
The revolving credit agreement contains certain covenants
which require that the Company not permit its consolidated
net worth as of the last day of any fiscal quarter to be less
than the sum of (a) $338,340,000 plus (b) 50% of the
Company’s consolidated net income (but not loss) for the
period beginning April 1, 2004 and ending on the last day