Aarons 2005 Annual Report Download - page 31

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Notes to Consolidated Financial Statements
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. When the fair value
is less than the related carrying value, entities are required
to reduce the carrying value of goodwill. The approach to
evaluating the recoverability of goodwill as outlined in SFAS
No. 142 requires the use of valuation techniques using esti-
mates and assumptions about projected future operating results
and other variables. The Company has elected to perform this
annual evaluation on September 30. More frequent evaluations
will be completed if indicators of impairment become evident.
The impairment 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 acquisitions as well as
acquired franchise development rights, recorded at fair value
as determined by the Company. As of December 31, 2005
and 2004, the net intangibles other than goodwill was $3.6
million and $1.9 million, respectively.The customer relation-
ship intangible is amortized on a straight-line basis over a
two-year useful life while acquired franchise development
rights are amortized over the unexpired life of the franchisee’s
ten year area development agreement. Amortization expense on
intangibles, included in operating expenses in the accompany-
ing consolidated statements of earnings, was $2.0 million, $1.6
million, and $.5 million during the years ended December 31,
2005, 2004, and 2003, respectively.
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. Toanalyze recoverability,the Company
projects undiscounted net future cash flows over the remaining
life of such assets. If these projected cash flows wereless than
the carrying amount, an impairment would be recognized,
resulting in a write-down of assets with a corresponding
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 $59,000 and $6.0 million as of
December 31, 2005 and 2004, respectively. These amounts
are included in prepaid expenses and other assets in the
accompanying consolidated balance sheets. In May of 2004,
the Company sold its holdings in Rainbow Rentals, Inc.
with a cost basis of $2.1 million for cash proceeds of $7.6
million in connection with Rent-A-Center, Inc.’s acquisition of
Rainbow Rentals, Inc. The Company recognized an after-tax
gain of $3.4 million on this transaction. In May and June of
2005, the Company sold its holdings in Rent-Way, Inc. with
acost basis of $6.4 million for cash proceeds of $7.0 million.
The Company recognized an after-tax gain of $355,000 on this
transaction. In connection with this gain recognition, $355,000
and $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 years
ended December 31, 2005 and 2004, respectively.
DEFERRED INCOME TAXES — are provided for temporary
differences between the amounts of assets and liabilities for
financial and tax reporting purposes. Such temporary differ-
ences 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 accompanying consolidated
balance sheets, was $346,000 at December 31, 2004, based
upon quotes from financial institutions. At December 31, 2004
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. At December 31,
2005 the Company did not have any swap agreements.
At December 31, 2005 and 2004 the fair market value of
fixed rate long-term debt was $113.9 million and $51.4 million,
respectively,based on quoted prices for similar instruments.
REVENUE RECOGNITION — Rental revenues are recog-
nized as revenue in the month they aredue. Rental payments
received prior to the month due are recorded as deferred rental
revenue. Until all payments are received under sales and lease
ownership agreements, the Company maintains ownership of
the rental merchandise. Revenues from the sale of merchandise
to franchisees are recognized at the time of receipt by the
franchisee, and 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 — Included in cost of sales is 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 corporate furnishings division. It is not practicable to
allocate operating expenses between selling and rental operations.
SHIPPING AND HANDLING COSTS — The Company
classifies shipping and handling costs as operating expenses
in the accompanying consolidated statements of earnings and
these costs totaled $40.5 million in 2005, $31.1 million in
2004, and $24.9 million in 2003.
ADVERTISING — The Company expenses advertising
costs as incurred. Advertising costs are recorded as expense
the first time an advertisement appears. Such costs aggregated
$27.1 million in 2005, $22.4 million in 2004, and $18.7
million in 2003. In addition certain advertising expenses were
offset by cooperative advertising consideration received from
vendors, substantially all of which represents reimbursement of
specific, identifiable, and incremental costs incurred in selling
those vendors’ products.
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