Aarons 2003 Annual Report Download - page 29

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other comprehensive income approximated $837,000 and
$104,000 for the years ended December 31, 2003 and 2002,
respectively. The Company did not sell any of its investments
in marketable securities during the three-year period ended
December 31, 2003.
Deferred Income Taxes — 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
interest rate swap agreements, included in accounts payable
and accrued expenses in the consolidated balance sheet, was
approximately $1,369,000 and $3,321,000 at December 31,
2003 and 2002, respectively, based upon quotes from finan-
cial institutions. At December 31, 2003 and 2002, the carry-
ing amount for variable rate debt approximates fair market
value since the interest rates on these instruments are reset
periodically to current market rates.
At December 31, 2003 and 2002, the fair market value
of fixed rate long-term debt was approximately $52,903,000
and $50,000,000, respectively, based primarily on quoted
prices for these or similar instruments. The fair value of fixed
rate long-term debt was estimated by calculating the present
value of anticipated cash flows. The discount rate used was
an estimated borrowing rate for similar debt instruments
with like maturities.
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. The Company maintains ownership of the rental mer-
chandise 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, at which time title and risk of owner-
ship are transferred to the customer. Please refer to Note J
for discussion of recognition of franchise-related revenues.
Cost of Sales — 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 accompany-
ing consolidated statements of earnings and totaled approxi-
mately $24,907,000 in 2003, $20,554,000 in 2002, and
$18,965,000 in 2001.
Advertising — The Company expenses advertising costs as
incurred. Such costs aggregated approximately $18,716,000
in 2003, $15,406,000 in 2002, and $14,204,000 in 2001.
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 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 $703,000, $341,000,
and $288,000 in 2003, 2002, and 2001, respectively.
Closed Store Reserves — From time to time the Company
closes underperforming stores. The charges related to the
closing of these stores primarily consist of reserving the net
present value of future minimum payments under the stores’
real estate leases.
Insurance Reserves — Estimated insurance reserves are
accrued primarily for group health and workers’ compen-
sation 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.
Derivative Instruments and Hedging Activities —
From time to time, the Company uses interest rate swap
agreements to synthetically manage the interest rate charac-
teristics 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 rate 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 redesignation 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 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 income or expense at the time of extinguish-
ment. For the years ended December 31, 2003 and 2002,
the Company’s net income included an after-tax benefit of
approximately $170,000 and an after-tax expense of
approximately $156,000, respectively, related to swap
ineffectiveness. The Company does not enter into
derivatives for speculative or trading purposes.
Comprehensive Income — Comprehensive income totaled
approximately $38,294,000, $27,526,000, and $10,382,000
for the years ended December 31, 2003, 2002 and 2001,
respectively.
New 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 acquisition-related
goodwill on a reporting unit basis (see Note B).
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