Aarons 2005 Annual Report Download - page 32

30
Notes to Consolidated Financial Statements
with an exercise price equal to the fair value of the shares at
the date of grant and, accordingly, recognizes no compensation
expense for these stock option grants. The Company also has
granted stock options for a fixed number of shares to certain
key executives with an exercise price below the fair value of
the shares at the date of grant (“Key Executive grants”).
Compensation expense for Key Executive grants is recognized
over the three-year vesting period of the options for the
difference between the exercise price and the fair value of a
share of Common Stock on the date of grant times the number
of options granted. Income tax benefits resulting from stock
option exercises credited to additional paid-in capital totaled
$1.9 million, $3.2 million, and $703,000 in 2005, 2004, and
2003, respectively.
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 earnings 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) 2005 2004 2003
Net Earnings beforeeffect
of Key Executive grants $58,522 $52,854 $36,426
Expense effect of Key
Executive grants recognized (529) (238) —
Net earnings as reported 57,993 52,616 36,426
Deduct: total stock-based
employee compensation
expense determined under
fair-value-based method for
all awards, net of related
tax effects (1,996) (1,687) (1,345)
Pro forma net earnings $55,997 $50,929 $35,081
Earnings per share:
Basic — as reported $ 1.16 $ 1.06 $ .74
Basic — pro forma $ 1.12 $ 1.03 $ .71
Diluted — as reported $ 1.14 $ 1.04 $ .73
Diluted — proforma $ 1.11 $ 1.01 $ .70
CLOSED STORE RESERVES — From time to time the
Company closes or consolidates stores. The charges related to
the closing or consolidating of these stores primarily consist of
reserving the net present value of futureminimum payments
under the stores’ real estate leases. As of both December 31,
2005 and 2004, accounts payable and accrued expenses in
the accompanying consolidated balance sheets included $1.3
million and $2.2 million, respectively, for closed store expenses.
INSURANCE RESERVES — Estimated insurance reserves are
accrued primarily for group health and workers compensation
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, the Company revised certain
estimates related to the accrual for group health self-insurance
based on favorable claims experience as well as on the experi-
ence that the time periods between the liability for a claim
being incurred and the claim being reported had declined. The
change in estimates 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 agreements 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 instrument. 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 redesig-
nation 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 remain-
ing termof 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
extinguishment. There was no net income effect related to swap
ineffectiveness in 2004. For the year ended December 31, 2003,
the Company’s net income included an after-tax benefit of
$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 $.3 million and $1.4 million, respectively,areincluded in
accounts payable and accrued expenses in the accompanying
consolidated balance sheets. At December 31, 2005 the
Company did not have any swap agreements.
COMPREHENSIVE INCOME — For the years ended
December 31, 2005, 2004 and 2003, comprehensive income
totaled approximately $58.0 million, $52.1 million, and
$38.3 million, respectively.
NEW ACCOUNTING PRONOUNCEMENTS — In
September 2004, the Emerging Issues Task Force (EITF) of the
FASB issued EITF Issue No. 04-1, Accounting for Preexisiting
Relationships Between the Parties to a Business Combination
(EITF 04-1). EITF 04-1 requires an acquirer in a business
combination to evaluate any preexisting relationships with the
acquired party to determine if the business combination in
effect contains a settlement of the preexisting relationship. A
business combination between parties with a preexisting rela-
tionship should be viewed as a multiple element transaction.
EITF 04-1 is effective for business combinations after October
13, 2004, but requires goodwill resulting from prior business
combinations involving parties with a preexisting relationship