Aarons 2004 Annual Report Download - page 33

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Note J: Acquisitions and Dispositions
During 2004 the Company acquired the rental contracts,
merchandise, and other related assets of 85 sales and lease
ownership stores with an aggregate purchase price of $36.0
million. Fair value of acquired tangible assets included
approximately $12.9 million for rental merchandise, $0.8
million for fixed assets, and $2.4 million for other assets.
Fair value of liabilities assumed approximated $47,000. The
excess cost over the net fair market value of tangible assets
acquired, representing goodwill and customer lists was $19.4
million and $1.2 million respectively. The estimated amorti-
zation of these customer lists in future years approximates
$1,447,000 for 2005, $456,000 for 2006 and $19,000 for
2007. In addition, in 2004 the Company acquired three rent-
to-rent stores. The purchase price of the 2004 rent-to-rent
acquisitions was $2,226,000. Fair value of acquired tangible
assets included approximately $1,476,000 for rental mer-
chandise and $309,000 for other assets. The excess cost
over the net fair market value of tangible assets acquired,
representing goodwill and customer lists, was $399,000 and
$42,000, respectively. The purchase price allocations for
certain acquisitions during December 2004 are preliminary
pending finalization of the Company’s assessment of the fair
values of tangible assets acquired.
During 2003 the Company acquired 98 sales and lease
ownership stores with an aggregate purchase price of $45.0
million. Fair value of acquired tangible assets included
approximately $16.1 million for rental merchandise, $1.0
million for fixed assets, and $53,000 for other assets. Fair
value of liabilities assumed approximated $1.3 million. The
excess cost over the net fair market value of tangible assets
acquired, representing goodwill and customer lists, was
$26.4 million and $2.7 million, respectively. The estimated
amortization of these customer lists in future years approxi-
mates $849,000 for 2005. In addition, in 2003 the Company
acquired one rent-to-rent store. The purchase price of the
2003 rent-to-rent acquisition was not significant.
The results of operations of the acquired businesses are
included in the Company’s results of operations from their
dates of acquisition. The effect of these acquisitions on the
2004, 2003 and 2002 consolidated financial statements was
not significant.
In 2004 the Company sold two of its sales and lease
ownership locations to an existing franchisee. In 2003 the
Company sold three of its sales and lease ownership loca-
tions to an existing franchisee and sold one of its rent-to-rent
stores. In 2002 the Company sold four of its sales and lease
ownership stores to an existing franchisee. The effect of
these sales on the consolidated financial statements was
not significant.
Note K: Segments
Description of Products and Services of
Reportable Segments
Aaron Rents, Inc. has four reportable segments: sales and
lease ownership, rent-to-rent, franchise, and manufacturing.
The sales and lease ownership division offers electronics,
residential furniture, appliances, and computers to consumers,
primarily on a monthly payment basis with no credit require-
ments. The rent-to-rent division rents and sells residential
and office furniture to businesses and consumers who meet
certain minimum credit requirements. The Company’s
franchise operation sells and supports franchises of its sales
and lease ownership concept. The manufacturing division
manufactures upholstered furniture, office furniture, lamps
and accessories, and bedding, predominantly for use by the
other divisions.
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:
• A predetermined amount of each reportable segment’s
revenues is charged to the reportable segment as an
allocation of corporate overhead. This allocation was
approximately 2.3% in 2004 and 2003 and 2.2%
in 2002.
• 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
statements 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 our 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, effective in 2004,
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 for 2004.
• Interest on borrowings is estimated at the beginning of
each year. Interest is then allocated to operating seg-
ments on the basis of relative total assets.
• Sales and lease ownership revenues are reported on the
cash basis for management reporting purposes.