Aarons 2007 Annual Report Download - page 35

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franchisee’s ten year area development agreement.
Amortization expense on intangibles, included in operating
expenses in the accompanying consolidated statements of
earnings, was $2.5 million, $2.4 million, and $2.0 million
during the years ended December 31, 2007, 2006, and
2005, 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. There
were no impairments of long-lived assets for the year ended
December 31, 2007.
DEFERRED INCOME TAXES — These represent primarily
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 — At December
31, 2007 and 2006, the fair market value of fixed rate long-
term debt was $80.4 million and $88.9 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 merchandise. 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. Refer to Note I for discus-
sion of recognition of other franchise-related revenues. The
Company presents sales net of sales taxes.
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 $53.1 million in 2007, $45.0 million in 2006,
and $40.5 million in 2005.
ADVERTISING — The Company expenses advertising costs
as incurred. Advertising costs are recorded as expenses the
first time an advertisement appears. Such costs aggregated
to $32.2 million in 2007, $28.3 million in 2006, and $27.1
million in 2005. These advertising expenses are shown net
of cooperative advertising considerations received from
vendors, substantially all of which represents reimbursement
of specific, identifiable, and incremental costs incurred in
selling those vendors’ products. The amounts of cooperative
advertising consideration netted against advertising expense
were $20.1 million in 2007, $18.3 million in 2006 and $16.9
million in 2005. The prepaid advertising asset was $2.4
million and $2.0 million at December 31, 2007 and 2006,
respectively.
STOCK-BASED COMPENSATION — The Company has stock-
based employee compensation plans, which are more fully
described in Note H below. Prior to January 1, 2006, the
Company accounted for awards granted under those plans
following the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of FASB SFAS No. 123(R),
Share-Based Payments (“SFAS 123R”), using the modified
prospective application method. Under this transition
method, compensation expense recognized in the year
ended December 31, 2006 includes the applicable amounts
of compensation expense of all stock-based payments granted
prior to, but not yet vested, as of January 1, 2006, based on
the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, Accounting for Stock-
Based Compensation (“SFAS 123”), and previously presented
in the pro forma footnote disclosures.
The Company has in the past granted stock options for
a fixed number of shares to employees primarily with an
exercise price equal to the fair value of the shares at the
date of grant and, accordingly, recognized no compensation
expense for these stock option grants. The Company also
has granted stock options for a fixed number of shares
to certain key executives with an exercise price below the
fair value of the shares at the date of grant (“Key Executive
grants”). Compensation expense for Key Executive grants is
recognized over the three-year vesting period of the options
for the difference between the exercise price and the fair
value of a share of Common Stock on the date of grant times
the number of options granted. Income tax benefits resulting
from stock option exercises credited to additional paid-in
capital totaled $1.5 million, $5.2 million, and $1.9 million
in 2007, 2006, and 2005, respectively.
The Company amended the Key Executive grants in
2006 and raised the exercise price of each of the stock
options to the fair market value of the common stock on
the original grant date, adjusted for a 3-for-2 stock dividend
that occurred on August 2, 2004 in the case of those stock
options with an original grant date that preceded the stock
dividend date. The amendment also provides that, in order
to compensate the grantees for the increase in the exercise
price of the stock options, the full original discounted
amount will be paid in cash on the applicable 2007
vesting date.
Under the modified prospective application method,
results for prior periods have not been restated to reflect
the effects of implementing SFAS 123R. For purposes of pro
forma disclosures under SFAS 123 as amended by SFAS No.
148, Accounting for Stock-Based Compensation—Transition
and Disclosure—an amendment of FASB Statement 123, the