Aarons 2006 Annual Report Download - page 38

36
Notes to Consolidated Financial Statements
NOTE I: FRANCHISING OF AARON’S SALES AND
LEASE OWNERSHIP STORES
The Company franchises Aaron’s Sales and Lease Ownership
stores. As of December 31, 2006 and 2005, 674 and 664 fran-
chises had been granted, respectively. Franchisees typically pay
a non-refundable initial franchise fee from $15,000 to $50,000
depending upon market size and an ongoing royalty of either
5% or 6% of gross revenues. Franchise fees and area develop-
ment fees are generated from the sale of rights to develop, own
and operate Aaron’s Sales and Lease Ownership stores. These fees
are recognized as income 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
before the substantial completion of the Company’s obligations
are deferred. Substantially all of the amounts reported as non-
retail sales and non-retail cost of sales in the accompanying
consolidated statements of earnings relate to the sale of rental
merchandise to franchisees.
Franchise agreement fee revenue was $3.1 million, $3.0 million,
and $3.3 million and royalty revenue was $25.4 million, $21.6
million, and $17.8 million for the years ended December 31,
2006, 2005 and 2004, respectively. Deferred franchise and area
development agreement fees, included in customer deposits and
advance payments in the accompanying consolidated balance
sheets, was $4.3 million and $5.2 million as of December 31,
2006 and 2005, respectively.
Franchised Aaron’s Sales and Lease Ownership store activity is
summarized as follows:
2006 2005 2004
Franchised stores open at
January 1, 392 357 287
Opened 75 71 79
Added through acquisition 0012
Purchased from the Company 3 0 0
Purchased by the Company (28) (35) (19)
Closed (1) (1) (2)
Franchised stores open at
December 31, 441 392 357
Company-operated Aaron’s Sales and Lease Ownership store
activity is summarized as follows:
2006 2005 2004
Company-operated stores open
at January 1, 748 616 500
Opened 78 82 68
Added through acquisition 40 56 61
Closed, sold or merged (21) (6) (13)
Company-operated stores open
at December 31, 845 748 616
In 2006, the Company acquired the rental contracts, mer-
chandise, and other related assets of 40 stores, including 28
franchised stores, and merged certain acquired stores into
existing stores, resulting in a net gain of 37 stores. In 2005, the
Company acquired the rental contracts, merchandise, and other
related assets of 96 stores, including 35 franchised stores, and
merged certain acquired stores into existing stores, resulting in a
net gain of 56 stores. In 2004, the Company acquired the rental
contracts, merchandise, and other related assets of 85 stores,
including 19 franchised stores, and merged certain acquired
stores into existing stores, resulting in a net gain of 61 stores.
NOTE J: ACQUISITIONS AND DISPOSITIONS
During 2006, the Company acquired the rental contracts,
merchandise, and other related assets of 40 sales and lease
ownership stores for an aggregate purchase price of $32.4
million. Fair value of acquired tangible assets included $13.3
million for rental merchandise, $1.5 million for fixed assets,
and $154,000 for other assets. Fair value of liabilities assumed
approximated $65,000. The excess cost over the fair value of the
assets and liabilities acquired in 2006, representing goodwill was
$15.5 million. The fair value of acquired separately identifiable
intangible assets included $1.4 million for customer lists and
$885,000 for acquired franchise development rights. The estimated
amortization of these customer lists and acquired franchise
development rights in future years approximates $857,000,
$582,000, $115,000, $112,000, and $106,000 for 2007, 2008,
2009, 2010, and 2011, respectively. The purchase price allocations
for certain acquisitions during December 2006 are preliminary
pending finalization of the Company’s assessment of the fair
values of tangible assets acquired.
During 2005, the Company acquired the rental contracts,
merchandise, and other related assets of 96 sales and lease
ownership stores for an aggregate purchase price of $46.6 mil-
lion. Fair value of acquired tangible assets included $16.8 million
for rental merchandise, $1.5 million for fixed assets, and $1.4
million for other assets. Fair value of liabilities assumed