Aarons 2009 Annual Report Download - page 38

During 2008, the Company acquired the lease contracts,
merchandise and related assets of a net of 68 sales and lease
ownership stores for an aggregate purchase price of $79.8
million. Consideration transferred consisted primarily of cash.
Fair value of acquired tangible assets included $28.5 million for
lease merchandise, $2.1 million for fixed assets, and $66,000 for
other assets. The excess cost over the fair value of the assets and
liabilities acquired in 2008, representing goodwill, was $44.1 mil-
lion. The fair value of acquired separately identifiable intangible
assets included $4.3 million for customer lists and $1.9 million
for acquired franchise development rights.
During 2007, the Company acquired the lease contracts, mer-
chandise, and other related assets of a net of 39 sales and lease
ownership stores for an aggregate purchase price of $57.3 mil-
lion. Fair value of acquired tangible assets included $20.4 million
for lease 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 goodwill, was $31.3 mil-
lion. 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 2009, 2008 and
2007 consolidated financial statements was not significant.
The Company sold 37, 27 and 11 of its sales and lease owner-
ship locations to franchisees in 2009, 2008 and 2007, respec-
tively. The effect of these sales on the consolidated financial
statements was not significant.
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Description of Products and Services of
Reportable Segments
Aaron’s, Inc. has three reportable segments: sales and lease owner-
ship, 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 con-
cept. The manufacturing division manufactures upholstered fur-
niture and bedding predominantly for use by Company-operated
and franchised stores. The Company has elected to aggregate
certain operating segments.
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
2009, 2008 and 2007.
•฀฀Accruals฀related฀to฀store฀closures฀are฀not฀recorded฀on฀the฀
reportable segments’ financial statements, but are rather main-
tained and controlled by corporate headquarters.
•฀฀The฀capitalization฀and฀amortization฀of฀manufacturing฀vari-
ances are recorded on the consolidated financial statements
as part of Cash to Accrual and Other Adjustments and are not
allocated to the segment that holds the related lease merchan-
dise.
•฀฀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฀lease฀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 revenues
of the Aaron’s Office Furniture division, 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 management 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. Since the
intersegment profit and loss affect inventory valuation, deprecia-
tion and cost of goods sold are adjusted when intersegment profit
is eliminated in consolidation.
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