Aarons 2006 Annual Report Download - page 31

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for goodwill and other intangible assets in accordance with
Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible 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
estimates and assumptions about projected future operating
results and other variables. The Company has elected to perform
this annual evaluation on September 30. More frequent evalua-
tions 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, 2006 and 2005,
the net intangibles other than goodwill were $3.4 million and
$3.6 million, respectively. The customer relationship 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 accompanying consolidated statements
of earnings, was $2.4 million, $2.0 million, and $1.6 million
during the years ended December 31, 2006, 2005, and
2004, 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.
To analyze recoverability, the Company projects undiscounted net
future cash flows over the remaining life of such assets. If these
projected cash flows were less 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— At times, 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 as of December 31, 2005. This
amount is included in prepaid expenses and other assets in the
accompanying consolidated balance sheet. 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 a cost 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 Statements 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 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 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, 2006 and 2005 the
Company did not have any swap agreements.
At December 31, 2006 and 2005, the fair market value of
fixed rate long-term debt was $88.9 million and $113.9 million,
respectively, based on quoted prices for similar instruments.
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.
Until all payments are received under sales and lease ownership
agreements, the Company maintains ownership of the rental mer-
chandise. Revenues from the sale of merchandise to franchisees
are recognized at the time of receipt of the merchandise 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 $45.0 million in 2006, $40.5 million in 2005, and
$31.1 million in 2004.
ADVERTISING — The Company expenses advertising costs as
incurred. Advertising costs are recorded as expense the first
time an advertisement appears. Such costs aggregated to $28.3
million in 2006, $27.1 million in 2005, and $22.4 million in
2004. In addition, certain advertising expenses were offset by
cooperative advertising consideration received from vendors,
substantially all of which represents reimbursement of specific,