Aarons 2003 Annual Report Download - page 24

7.6% until June 2005. In 2002, we reassigned approximately
$28 million of notional amount of swaps to the variable pay-
ment obligations under our construction and lease facility
and other debt as described above. Certain of these swaps
have since expired. Since August 2002, fixed rate swap agree-
ments in the notional amount of $32 million were not being
utilized as a hedge of variable obligations, and accordingly,
changes in the valuation of such swap agreements are record-
ed directly to earnings. These swaps have since expired as
well. The fair value of interest rate swap agreements was
a liability of approximately $1.4 million at December 31,
2003. A 1% adverse change in interest rates on variable
rate obligations would not have a material adverse impact
on the future earnings and cash flows of the Company.
We do not use any market-risk-sensitive instruments
to hedge commodity, foreign currency, or risks other
than interest rate risk and hold no market-risk-sensitive
instruments for trading or speculative purposes.
Recent Accounting
Pronouncements
Effective January 1, 2002, the Company adopted SFAS
No. 141, Business Combinations (SFAS No. 141), and SFAS
No. 142. SFAS No. 141 requires that the purchase method
of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 142 requires that entities
assess the fair value of the net assets underlying all acquisi-
tion-related goodwill on a reporting unit basis (see Note B
to the Consolidated Financial Statements).
In June 2002, the Financial Accounting Standards
Board (FASB) issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS No. 146)
which addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity
be recognized when the liability is incurred as opposed to
the date of an entity’s commitment to an exit plan. SFAS
No. 146 also establishes fair value as the objective for initial
measurement of the liability. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December
31, 2002. Adoption of SFAS No. 146 did not have a material
effect on the Company’s financial statements.
In November 2002, the FASB issued Interpretation No.
45, Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others (FIN 45). FIN 45 requires an entity to disclose in
its interim and annual financial statements information with
respect to its obligations under certain guarantees that it has
issued. It also requires an entity to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure require-
ments of FIN 45 are effective for interim and annual periods
ending after December 15, 2002. These disclosures are pre-
sented in Note G to the Consolidated Financial Statements.
The initial recognition and measurement requirements of
FIN 45 are effective prospectively for guarantees issued or
modified after December 31, 2002. The adoption of the
recognition provisions of FIN 45 had no significant effect
on the consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51 (FIN 46). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
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of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective immediately for
all new variable interest entities created or acquired after
January 31, 2003. The Company has not entered into
transactions with, created, or acquired significant potential
variable interest entities subsequent to that date. For interests
in variable interest entities arising prior to February 1, 2003,
the Company must apply the provisions of FIN 46 as of
December 31, 2003. The Company has concluded that
certain independent franchisees, as discussed in Note J to
the Consolidated Financial Statements, are not subject to
the interpretation and are therefore not included in the
Company’s consolidated financial statements. In addition,
as discussed in Note E to the Consolidated Financial
Statements, the Company has certain capital leases with
partnerships controlled by related parties of the Company.
The Company has concluded that these partnerships are not
variable interest entities. The Company has concluded that
the accounting and reporting of its construction and lease
facility (see Note G to the Consolidated Financial Statements)
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
presumed to be a reduction of the prices of the vendor’s
products or services and should, therefore, be characterized
as a reduction of cost of sales when recognized in the cus-
tomer’s income statement. However, under certain circum-
stances 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 cooperative advertising consideration
received from vendors represents a reimbursement of specific
identifiable and incremental costs incurred in selling those
vendors’ products.
Forward-Looking Statements
Certain written and oral statements made by our
Company may constitute “forward-looking statements” as
defined under the Private Securities Litigation Reform Act
of 1995, including statements made in this report and other
filings with the Securities and Exchange Commission. All
statements which address operating performance, events, or
developments that we expect or anticipate will occur in the
future — including growth in store openings and franchises
awarded, market share, and statements expressing general
optimism about future operating results — are forward-
looking statements. Forward-looking statements are subject
to certain risks and uncertainties that could cause actual
results to differ materially. The Company undertakes no
obligation to publicly update or revise any forward-looking
statements. For a discussion of such risks and uncertainties
see “Certain Factors Affecting Forward-Looking Statements”
in Item I of the Company’s Annual Report for the year
ended December 31, 2003 on Form 10-K.