AutoNation 2003 Annual Report Download - page 58

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Table of Contents
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company’s pro forma net income, pro forma earnings per share and pro forma weighted average fair value of options granted, with related
assumptions, are as follows for the years ended December 31:
2003 2002 2001
Net income, as reported $479.2 $381.6 $232.3
Pro forma stock-based employee compensation
cost, net of taxes (17.4) (19.3) (28.1)
Pro forma net income $461.8 $362.3 $204.2
Basic earnings per share, as reported $1.71 $1.20 $.70
Pro forma stock-based employee compensation
cost $(.06) $(.06) $(.09)
Pro forma basic earnings per share $1.65 $1.14 $.61
Diluted earnings per share, as reported $1.67 $1.19 $.69
Pro forma stock-based employee compensation
cost $(.06) $(.06) $(.08)
Pro forma diluted earnings per share $1.61 $1.13 $.61
Pro forma weighted average fair value of options
granted $6.51 $4.78 $4.54
Risk free interest rates 3.30- 3.83% 2.79- 3.55% 4.44- 4.92%
Expected dividend yield — — —
Expected lives 5-7 years 5-7 years 5-7 years
Expected volatility 40% 40% 40%
Derivative Financial Instruments
The Company complies with Statement of Financial Accounting Standards Nos. 133, 137, 138 and 149 (collectively “SFAS 133”)
pertaining to the accounting for derivatives and hedging activities. SFAS 133 requires the Company to recognize all derivative instruments on
the balance sheet at fair value. The related gains or losses on these transactions are deferred in stockholders’ equity as a component of other
comprehensive income. These deferred gains and losses are recognized in income in the period in which the related items being hedged are
recognized in expense. However, to the extent that the change in value of a derivative contract does not perfectly offset the change in the value
of the items being hedged, that ineffective portion is immediately recognized in income. All of the Company’s interest rate hedges are
designated as cash flow hedges. During the year ended December 31, 2003, the Company entered into a series of interest rate hedge
transactions, consisting of a combination of forward starting swaps, and cap and floor options (collars) with a notional value of $800.0 million,
designed to convert certain floating rate floorplan notes payable and mortgage facilities to fixed rate debt. The Company has $200 million in
notional swaps, which start in 2004 and effectively lock in a rate of 3.0%, and $600 million in notional collars that cap floating rates to a
maximum rate no greater than 2.4%. All of its hedges mature over the next three years. For the year ended December 31, 2003, net
unrealized losses related to hedges included in Other Comprehensive Loss were $3.1 million in the accompanying Consolidated Financial
Statements. As of December 31, 2003, all of the Company’s derivative contracts were determined to be highly effective, and no ineffective
portion was recognized in income. The Company had no outstanding derivative instruments at December 31, 2002.
Revenue Recognition
Revenue consists of sales of new and used vehicles and related finance and insurance (“F&I”) products, sales of parts and service and
sales of other products. As further described below, the Company recognizes revenue in the period in which products are sold or services are
provided. The Company recognizes vehicle and finance and insurance revenue when a sales contract has been executed, the vehicle has
been delivered and payment has been received or financing has been arranged. Revenue on finance and insurance products represents
commissions earned by the Company for: (i) loans and leases placed with financial institutions in
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