Aarons 2008 Annual Report Download - page 25

Purchase obligations are primarily related to certain advertising
and marketing programs. Purchase orders or contracts for the pur-
chase of rental merchandise and other goods and services are not
included in the tables above. We are not able to determine the
aggregate amount of such purchase orders that represent contrac-
tual obligations, as purchase orders may represent authorizations
to purchase rather than binding agreements. Our purchase orders
are based on our current distribution needs and are fulfilled by
our vendors within short time horizons. We do not have signifi-
cant agreements for the purchase of rental merchandise or other
goods specifying minimum quantities or set prices that exceed
our expected requirements for three months.
Market Risk
From time-to-time, we manage our exposure to changes in
short-term interest rates, particularly to reduce the impact on
floating-rate borrowings, by entering into interest rate swap
agreements. These swap agreements involve the receipt of
amounts by us when floating rates exceed the fixed rates and
the payment of amounts by us to the counterparties when
fixed rates exceed the floating rates in the agreements over
their term. We accrue the differential we may pay or receive as
interest rates change and recognize it as an adjustment to the
floating rate interest expense related to our debt. The counter-
parties to these contracts are high credit quality commercial
banks, which we believe largely minimize the risk of counterparty
default. At December 31, 2008 and 2007 we did not have any
swap agreements.
We do not use any market risk sensitive instruments to
hedge commodity, foreign currency, or risks other than interest
rate risk, and hold no market risk sensitive instruments for
trading or speculative purposes.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). Under SFAS 141R, an acquir-
ing entity will be required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition date
fair value with limited exceptions. SFAS 141R will change the
accounting treatment for certain specific acquisition-related items
including: expensing acquisition-related costs as incurred, valuing
non-controlling interests at fair value at the acquisition date
and expensing restructuring costs associated with an acquired
business. SFAS 141R also establishes disclosure requirements for
how identifiable assets, liabilities assumed, any non-controlling
interest in an acquiree and goodwill is recognized and recorded
in an acquiree’s financial statements. SFAS 141R is to be applied
prospectively to business combinations for which the acquisition
date is on or after January 1, 2009. The impact of this Statement
on our financial statements will depend on the number of acquisi-
tions we make and the related terms.
In May 2008, FASB issued SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles” (“SFAS 162”). SFAS
162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the prepa-
ration of financial statements that are presented in conformity
with generally accepted accounting principles in the United
States. This Statement is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly
in Conformity with Generally Accepted Accounting Principles.”
The Company is currently evaluating the impact of this
Statement on its financial statements.
Quantitative and Qualitative
Disclosures About Market Risk
As of December 31, 2008, we had $10.0 million of senior
unsecured notes outstanding at a fixed rate of 6.88% and $48.0
million of senior unsecured notes outstanding at a fixed rate
of 5.03%. We had $35.0 million outstanding under our revolv-
ing credit agreement indexed to the LIBOR (“London Interbank
Offer Rate”) or the prime rate, which exposes us to the risk of
increased interest costs if interest rates rise. Based on our overall
interest rate exposure at December 31, 2008, a hypothetical 1.0%
increase or decrease in interest rates would have the effect of
causing a $127,000 in additional pre-tax charge or credit to our
statement of earnings than would otherwise occur if interest rates
remained unchanged.
From time-to-time, we manage our exposure to changes in
short-term interest rates, particularly to reduce the impact on
floating-rate borrowings, by entering into interest rate swap
agreements. These swap agreements involve the receipt of
amounts by us when floating rates exceed the fixed rates and
the payment of amounts by us to the counterparties when fixed
rates exceed the floating rates in the agreements over their
term. We accrue the differential we may pay or receive as
interest rates change and recognize it as an adjustment to
the floating rate interest expense related to our debt. The
counterparties to these contracts are high credit quality
commercial banks, which we believe largely minimize the
risk of counterparty default. At December 31, 2008 and 2007
we did not have any swap agreements.
We do not use any market risk sensitive instruments to
hedge commodity, foreign currency, or risks other than interest
rate risk, and hold no market risk sensitive instruments for
trading or speculative purposes.
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