Aarons 2008 Annual Report Download - page 38

opment rights in future years approximates $2.5 million, $1.8
million, $334,000, $318,000, and $270,000 for 2009, 2010, 2011,
2012, and 2013, respectively. The purchase price allocations for
certain acquisitions during December 2008 are preliminary
pending finalization of the Company’s assessment of the fair
values of tangible assets acquired.
During 2007, the Company acquired the rental contracts,
merchandise, and other related assets of a net of 39 sales and
lease ownership stores for an aggregate purchase price of $57.3
million. Fair value of acquired tangible assets included $20.4
million for rental merchandise, $2.2 million for fixed assets,
and $241,000 for other assets. Fair value of liabilities assumed
approximated $499,000. The excess cost over the fair value of
the assets and liabilities acquired in 2007, representing good-
will, was $31.3 million. The fair value of acquired separately
identifiable intangible assets included $2.7 million for customer
lists and $1.1 million for acquired franchise development rights.
Acquisitions have been accounted for as purchases, and the
results of operations of the acquired businesses are included in
the Company’s results of operations from their dates of acquisi-
tion. The effect of these acquisitions on the 2008, 2007 and
2006 consolidated financial statements was not significant.
The Company sold 27, eleven, and three of its sales and
lease ownership locations to franchisees in 2008, 2007, and
2006, respectively. The effect of these sales on the consolidated
financial statements was not significant. The Company also sold
the assets of 12 of its sales and lease ownership locations in
Puerto Rico to an unrelated third party in the second quarter
of 2006. The Company received $16.0 million in cash proceeds,
recognized a $7.2 million gain, and disposed of goodwill of
$1.0 million in conjunction with the 2006 sales.
Note K: Segments
Description of Products and Services of
Reportable Segments
Aaron Rents, Inc. has three reportable segments: sales and
lease ownership, franchise, and manufacturing. During 2008, the
Company sold its corporate furnishings division. The sales and
lease ownership division offers electronics, residential furniture,
appliances, and computers to consumers primarily on a monthly
payment basis with no credit requirements. The Company’s
franchise operation sells and supports franchisees of its sales
and lease ownership concept. The manufacturing division manu-
factures upholstered furniture, office furniture, and bedding
predominantly for use by Company-operated and franchised
stores.
Earnings before income taxes for each reportable segment are
generally determined in accordance with accounting principles
generally accepted in the United States with the following
adjustments:
•฀฀Sales฀and฀lease฀ownership฀revenues฀are฀reported฀on฀the฀cash฀
basis for management reporting purposes.
•฀฀A฀predetermined฀amount฀of฀each฀reportable฀segment’s฀rev-
enues is charged to the reportable segment as an allocation
of corporate overhead. This allocation was approximately 2.3%
in 2008, 2007, and 2006.
•฀฀Accruals฀related฀to฀store฀closures฀are฀not฀recorded฀on฀the฀
reportable segments’ financial statements, but are rather
maintained and controlled by corporate headquarters.
•฀฀The฀capitalization฀and฀amortization฀of฀manufacturing฀
variances are recorded on the consolidated financial state-
ments as part of Cash to Accrual and Other Adjustments
and are not allocated to the segment that holds the related
rental merchandise.
•฀฀Advertising฀expense฀in฀the฀sales฀and฀lease฀ownership฀division฀
is estimated at the beginning of each year and then allocated
to the division ratably over time for management reporting
purposes. For financial reporting purposes, advertising
expense is recognized when the related advertising activities
occur. The difference between these two methods is reflected
as part of the Cash to Accrual and Other Adjustments
line below.
•฀฀Sales฀and฀lease฀ownership฀rental฀merchandise฀write-offs฀are฀
recorded using the direct write-off method for management
reporting purposes and using the allowance method for
financial reporting purposes. The difference between these
two methods is reflected as part of the Cash to Accrual and
Other Adjustments line below.
•฀฀Interest฀on฀borrowings฀is฀estimated฀at฀the฀beginning฀of฀each฀
year. Interest is then allocated to operating segments based
on relative total assets.
Revenues in the “Other” category are primarily from leasing
space to unrelated third parties in the corporate headquarters
building and revenues from several minor unrelated activities.
The pre-tax losses in the “Other” category are the net result of
the activity mentioned above, net of the portion of corporate
overhead not allocated to the reportable segments for manage-
ment purposes, and a $4.9 million gain from the sale of a
parking deck at the Company’s corporate headquarters in the
first quarter of 2007.
Measurement of Segment Profit or Loss and
Segment Assets
The Company evaluates performance and allocates resources based
on revenue growth and pre-tax profit or loss from operations. The
accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies
except that the sales and lease ownership division revenues and
certain other items are presented on a cash basis. Intersegment
sales are completed at internally negotiated amounts ensuring
competitiveness with outside vendors. Since the intersegment
profit and loss affect inventory valuation, depreciation and
cost of goods sold are adjusted when intersegment profit is
eliminated in consolidation.
Notes to Consolidated Financial Statements
36