Aarons 2004 Annual Report Download - page 27

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Effective January 1, 2002, the Company adopted Statement
of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS No. 142). SFAS No. 142
requires that entities assess the fair value of the net assets
underlying all acquisition-related goodwill on a reporting-
unit basis effective beginning in 2002. When the fair value is
less than the related carrying value, entities are required to
reduce the carrying value of goodwill. The approach to eval-
uating the recoverability of goodwill as outlined in SFAS No.
142 requires the use of valuation techniques using estimates
and assumptions about projected future operating results and
other variables. The Company has elected to perform this
annual evaluation on September 30. More frequent evalua-
tions will be completed if indicators of impairment become
evident. The impairment only approach required by SFAS
No. 142 may have the effect of increasing the volatility of
the Company’s earnings if goodwill impairment occurs at
a future date.
Other Intangibles represent the value of customer
relationships acquired in connection with business acquisi-
tions, recorded at fair value as determined by the Company.
As of December 31, 2004 and 2003, the net intangibles
other than goodwill was $1.9 and $2.2 million, respectively.
These intangibles are amortized on a straight-line basis over
a two-year useful life. Amortization expense on intangibles,
included in operating expenses in the accompanying consoli-
dated statements of earnings, was $1.6 million and $0.5
million during the years ended December 31, 2004 and
2003, respectively. No amortization expense on intangibles
was recognized in the year ended December 31, 2002.
Substantially all of the Company’s goodwill and other
intangibles relate to the Sales and Lease Ownership segment
and are expected to be fully deductible for U.S. federal
income tax purposes.
Impairment — The Company assesses its long-lived
assets other than goodwill for impairment whenever facts
and circumstances indicate that the carrying amount may not
be fully recoverable. To analyze recoverability, the Company
projects undiscounted net future cash flows over the remain-
ing life of such assets. If these projected cash flows were
less than the carrying amount, an impairment would be
recognized, resulting in a write-down of assets with a corre-
sponding charge to earnings. Impairment losses, if any, are
measured based upon the difference between the carrying
amount and the fair value of the assets.
Investments in Marketable Securities — The Company
holds certain marketable equity securities and has designated
these securities as available-for-sale. The fair value of these
securities was approximately $6.0 million and $3.6 million as
of December 31, 2004 and 2003, respectively. These amounts
are included in prepaid expenses and other assets in the
accompanying consolidated balance sheets. The Company
did not sell any of its investments in marketable securities
during the two-year period ended December 31, 2003. In
May of 2004 the Company sold its holdings in Rainbow
Rentals, Inc. with a cost basis of approximately $2.1
million for cash proceeds of approximately $7.6 million in
connection with Rent-A-Center’s acquisition of Rainbow
Rentals. The Company recognized an after-tax gain of
$3.4 million on this transaction. In connection with this gain
recognition, $3.4 million was transferred from unrealized
gains within accumulated other comprehensive income to
net income on the accompanying Consolidated Statement
of Earnings for the year ended December 31, 2004.
Deferred Income Taxes are provided for temporary
differences between the amounts of assets and liabilities
for financial and tax reporting purposes. Such temporary
differences arise principally from the use of accelerated
depreciation methods on rental merchandise for tax purposes.
Fair Value of Financial Instruments — The carrying
amounts reflected in the consolidated balance sheets for cash,
accounts receivable, bank and other debt approximate their
respective fair values. The fair value of the liability for inter-
est rate swap agreements, included in accounts payable and
accrued expenses in the accompanying consolidated balance
sheets, was approximately $346,000 and $1,369,000 at
December 31, 2004 and 2003, respectively, based upon
quotes from financial institutions. At December 31, 2004
and 2003, the carrying amount for variable rate debt approx-
imates fair market value since the interest rates on these
instruments are reset periodically to current market rates.
At December 31, 2004 and 2003 the fair market value of
fixed rate long-term debt was approximately $51.4 million
and $52.9 million, respectively, based on quoted prices for
similar instruments.
Revenue Recognition — Rental revenues are recognized as
revenue in the month they are due. Rental payments received
prior to the month due are recorded as deferred rental rev-
enue. Until all payments are received under sales and lease
ownership agreements, the Company maintains ownership of
the rental merchandise. Revenues from the sale of merchan-
dise to franchisees are recognized at the time of receipt by the
franchisee; revenues from such sales to other customers are
recognized at the time of shipment, at which time title and
risk of ownership are transferred to the customer. Please refer
to Note I for discussion of recognition of other franchise-
related revenues.
Cost of Sales includes the net book value of merchandise
sold, primarily using specific identification in the sales and
lease ownership division and first-in, first-out in the rent-to-
rent division. It is not practicable to allocate operating
expenses between selling and rental operations.
Shipping and Handling Costs are classified as operating
expenses in the accompanying consolidated statements of
earnings and totaled approximately $31.1 million in 2004,
$24.9 million in 2003, and $20.6 million in 2002.
Advertising — The Company expenses advertising costs as
incurred. Such costs aggregated approximately $22.4 million
in 2004, $18.7 million in 2003, and $15.4 million in 2002.
Stock Based Compensation — The Company has elected to
follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related
Interpretations in accounting for its employee stock options
and adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation (SFAS 123). The Company grants
stock options for a fixed number of shares to employees
primarily 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 grants 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 approximately $3,248,000, $703,000,
and $341,000 in 2004, 2003, and 2002, respectively.