Aarons 2001 Annual Report Download - page 23

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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
As of December 31, 2001 and 2000, and for the Years
Ended December 31, 2001, 2000 and 1999.
Basis of Presentation—The consolidated financial state-
ments include the accounts of Aaron Rents, Inc. and its wholly-
owned subsidiaries (the Company). All significant intercompany
accounts and transactions have been eliminated. The prepara-
tion of the Company’s consolidated financial statements in con-
formity with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the amounts reported in these financial statements and accom-
panying notes. Actual results could differ from those estimates.
Line of Business — The Company is engaged in the business
of renting and selling residential and office furniture, consumer
electronics, appliances and other merchandise throughout the
U.S. and Puerto Rico. The Company manufactures furniture
principally for its rent-to-rent and sales and lease ownership
operations.
Rental Merchandise consists primarily of residential and
office furniture, consumer electronics, appliances and other
merchandise and is recorded at cost. The sales and lease own-
ership division depreciates merchandise over the agreement
period, generally 12 to 24 months, when on rent, and 36
months, when not on rent, to a 0% salvage value. The rent-
to-rent division depreciates merchandise over its estimated
useful life which ranges from 6 months to 60 months, net
of its salvage value which ranges from 0% to 60%. All rental
merchandise is available for rental and sale.
Property, Plant and Equipment are recorded at cost. Depre-
ciation and amortization are computed on a straight-line basis
over the estimated useful lives of the respective assets, which
are from 8 to 40 years for buildings and improvements and
from 1 to 5 years for other depreciable property and equip-
ment. Gains and losses related to dispositions and retirements
are expensed as incurred. Maintenance and repairs are also
expensed as incurred; renewals and betterments are capitalized.
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.
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 — Shipping and handling
costs are classified as operating expenses in the accompanying
consolidated statements of operations and totaled approxi-
mately $18,965,000 in 2001, $17,397,000 in 2000, and
$15,129,000 in 1999.
Advertising — The Company expenses advertising costs
as incurred. Such costs aggregated $14,204,000 in 2001,
$11,937,000 in 2000, and $12,496,000 in 1999.
Stock Based Compensation — The Company has elected
to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related
NOTE A:
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
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 (FAS 123). The Company grants stock
options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date
of grant and, accordingly, recognizes no compensation expense
for the stock option grants. Income tax benefits resulting from
stock option exercises credited to additional paid-in capital
totaled approximately $288,000, $540,000, and $867,000, in
2001, 2000, and 1999, respectively.
Excess Costs over Net Assets Acquired—Goodwill is
amortized on a straight-line basis over a period of twenty
years. Long-lived assets, including goodwill, are periodically
reviewed for impairment based on an assessment of future
operations. The Company records impairment losses on long-
lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets’ carrying
amount. Measurement of an impairment loss is based on the
estimated fair value of the asset. Accumulated amortization
at December 31, 2001 and 2000 was $2,607,000 and
$1,498,000, respectively. (See Recently Issued Accounting
Pronouncements.)
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 interest rate swap
agreements, included in accounts payable and accrued expenses
in the consolidated balance sheet, was approximately $3,145,000
at December 31, 2001, based upon quotes from financial insti-
tutions. At December 31, 2001 and 2000, the carrying amount
for variable rate debt approximates fair market value since the
interest rates on these instruments are reset periodically to
current market rates.
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 revenue. The Company maintains ownership of the
rental merchandise until all payments are received under
sales and lease ownership agreements. Revenues from the sale
of residential and office furniture and other merchandise are
recognized at the time of shipment.
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 por-
tion 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.
The ineffectiveness related to the Company’s derivative transac-
tions is not material. The Company records amounts to be
received or paid as a result of interest swap agreements as an
adjustment to interest expense. All of the Company’s interest
rate swaps are designated as cash flow hedges. In the event of
early termination or redesignation of interest rate swap agree-
ments, any resulting gain or loss would be deferred and amor-
tized 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