Aarons 2006 Annual Report Download - page 30

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Notes to Consolidated Financial Statements
NOTE A: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
AS OF DECEMBER 31, 2006 AND 2005, AND FOR THE YEARS
ENDED DECEMBER 31, 2006, 2005 AND 2004.
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 preparation
of the Company’s consolidated financial statements in conformity
with United States generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those
estimates. Generally, actual experience has been consistent with
management’s prior estimates and assumptions. Management
does not believe these estimates or assumptions will change sig-
nificantly in the future absent unsurfaced or unforeseen events.
In May 2006, the Company completed an underwritten public
offering of 3.45 million newly-issued shares of common stock for
net proceeds, after the underwriting discount and expenses, of
approximately $84.0 million. The Company used the proceeds
to repay borrowings under the revolving credit facility. The
Company’s Chairman, Chief Executive Officer and controlling
shareholder sold an additional 1,150,000 shares in the offering.
On July 12, 2004, the Company announced a 3-for-2 stock
split effected in the form of a 50% stock dividend on both
Common Stock and Class A Common Stock. New shares were
distributed on August 16, 2004 to shareholders of record as
of the close of business on August 2, 2004. All share and per
share information has been restated for all periods presented
to reflect this stock dividend.
Certain reclassifications have been made to the prior periods
to conform to the current period presentation. In previous years
certain franchise other income was included in other income and
has been reclassified to franchise royalties and fees.
LINE OF BUSINESS — The Company is engaged in the business
of renting and selling residential and office furniture, consumer
electronics, appliances, computers, and other merchandise
throughout the U.S. and Canada. The Company manufactures
furniture principally for its sales and lease ownership and
corporate furnishings operations.
RENTAL MERCHANDISE— The Company’s rental merchandise
consists primarily of residential and office furniture, consumer
electronics, appliances, computers, and other merchandise and
is recorded at cost. The sales and lease ownership division
depreciates merchandise over the rental agreement period,
generally 12 to 24 months when on rent and 36 months when
not on rent, to a 0% salvage value. The corporate furnishings
division depreciates merchandise over its estimated useful life,
which ranges from six months to 60 months, net of its salvage
value, which ranges from 0% to 60% of historical cost. The
Company’s policies require weekly rental merchandise counts by
store managers, which include write-offs for unsalable, damaged,
or missing merchandise inventories. Full physical inventories are
generally taken at the fulfillment and manufacturing facilities
on a quarterly basis, and appropriate provisions are made for
missing, damaged and unsalable merchandise. In addition, the
Company monitors rental merchandise levels and mix by division,
store, and fulfillment center, as well as the average age of
merchandise on hand. If unsalable rental merchandise cannot
be returned to vendors, it is adjusted to its net realizable
value or written off.
All rental merchandise is available for rental or sale. On a
monthly basis, all damaged, lost or unsalable merchandise
identified is written off. Effective September 30, 2004, the
Company began recording rental merchandise adjustments on
the allowance method. In connection with the adoption of this
method, a one-time adjustment of $2.5 million was recorded
to establish a rental merchandise allowance reserve. Rental
merchandise adjustments in the future under this new method
are expected to be materially consistent with the prior year’s
adjustments under the direct-write off method. The 2005 rental
merchandise adjustments include write-offs of merchandise in the
third quarter that resulted from losses associated with Hurricanes
Katrina and Rita. These hurricane related write-offs were $2.8
million, net of insurance proceeds. Rental merchandise write-offs,
including the effect of the establishment of the reserve men-
tioned above, totaled $20.8 million, $21.8 million, and $18.0
million during the years ended December 31, 2006, 2005, and
2004, respectively, and are included in operating expenses in
the accompanying consolidated statements of earnings.
PROPERTY, PLANT AND EQUIPMENT— The Company records
property, plant, and equipment at cost. Depreciation and
amortization are computed on a straight-line basis over the
estimated useful lives of the respective assets, which are from
eight to 40 years for buildings and improvements and from
one to five years for other depreciable property and equipment.
Gains and losses related to dispositions and retirements are
recognized as incurred. Maintenance and repairs are also
expensed as incurred; renewals and betterments are capitalized.
Depreciation expense, included in operating expenses in the
accompanying consolidated statements of earnings, for property,
plant, and equipment was $29.1 million, $25.6 million, and
$22.2 million during the years ended December 31, 2006,
2005, and 2004, respectively.
GOODWILL AND OTHER INTANGIBLES — Goodwill represents
the excess of the purchase price paid over the fair value of
the net tangible and identifiable intangible assets acquired in
connection with business acquisitions. The Company accounts