Aarons 2000 Annual Report Download - page 26

Note I: Franchising of Aaron’s Sales
& Lease Ownership Stores
The Company franchises Aaron’s Sales & Lease Ownership stores. As of December 31, 2000 and
December 31, 1999, 339 and 277 franchises had been awarded, respectively. Franchisees pay a non-
refundable initial franchise fee of $35,000 and an ongoing royalty of 5% of cash receipts. Franchise
fees and area development franchise fees are generated from the sale of rights to develop, own and
operate Aaron’s Sales & Lease Ownership stores. These fees are recognized when substantially all of the
Company’s obligations per location are satisfied (generally at the date of the store opening). Franchise
fees and area development fees received prior to the substantial completion of the Company’s obligations
are deferred. The Company includes this income in Other Revenues in the Consolidated Statement
of Earnings.
The Company has guaranteed certain debt obligations of some of the franchisees amounting to
$39,127,000 at December 31, 2000. The Company receives a guarantee and servicing fee based on
such franchisees’ outstanding debt obligations which it recognizes as income as earned. The Company
has recourse rights to the assets securing the debt obligations. As a result, the Company does not
expect to incur any significant losses under these guarantees.
Note J: Acquisitions and Dispositions
During 1998, the Company acquired five rental purchase stores from a franchisee and acquired a lamp
designer and manufacturer, Lamps Forever, Inc. The aggregate purchase price of these 1998 acquisitions
was not significant. In 1999, the Company acquired 18 rental purchase stores with an aggregate purchase
price of $10,252,000. The excess cost over the fair market value of tangible assets acquired was approxi-
mately $5,985,000. Also in 1999, the Company acquired two rent-to-rent stores. The aggregate purchase
price of these 1999 acquisitions was not significant. During 2000, the Company acquired 20 rental
purchase stores including nine stores purchased from franchisees and 10 stores located in Puerto Rico.
The aggregate purchase price of these 2000 acquisitions was $14,273,000 and the excess cost over the
fair market value of tangible assets acquired was approximately $7,150,000.
These acquisitions were accounted for under the purchase method and, accordingly, 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 2000, 1999 and 1998 consolidated financial
statements was not significant.
In October 1998, the Company sold substantially all of the assets of its convention furnishings division.
In 2000, the Company sold four of its rent-to-rent stores and an additional four in 1999. 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 & lease ownership, rent-to-rent, franchise
and manufacturing. The sales & lease ownership division offers electronics, residential furniture and
appliances to consumers primarily on a monthly payment basis with no credit requirements. 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 & lease ownership concept. The manufacturing division manufactures upholstery, office furniture,
lamps and accessories, and bedding predominantly for use by the other divisions.
The principal source of revenue in the “Other” category was the Company’s convention furnishings
division which was sold during 1998.
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 & 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 interseg-
ment profit is eliminated in consolidation.
Factors Used by Management to Identify the Reportable Segments
Aaron Rents, Inc.’s reportable segments are business units that service different customer profiles using
distinct payment arrangements. The reportable segments are each managed separately because of differ-
ences in both customer base and infrastructure.
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