- --------------------------------------------------------------------------------
FINANCIAL TABLE
OF CONTENTS
selected financial information................................. 12
management's discussion and analysis........................... 13
consolidated balance sheets.................................... 16
consolidated statements of earnings............................ 17
consolidated statements of shareholders' equity................ 17
consolidated statements of cash flows.......................... 18
notes to consolidated financial statements..................... 19
report of independent auditors................................. 22
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(Dollar Amounts in Thousands Except Per Share)
Years Ended March 31, 1995 1994 % CHANGE
- -----------------------------------------------------------------------------------------------
Operating Results Systemwide Revenues $ 241,286 $ 189,781 27.1%
Revenues 228,892 185,184 23.6
Earnings Before Taxes 18,427 15,005 22.8
Net Earnings 11,325 8,796 28.8
Earnings Per Share 1.15 1.01 13.9
- -----------------------------------------------------------------------------------------------
Financial Position Total Assets $ 157,527 $ 144,917 8.7%
Rental Merchandise, Net 121,356 113,599 6.8
Interest-Bearing Debt 43,159 53,123 (18.8)
Shareholders' Equity 84,951 59,830 42.0
Book Value Per Share 8.65 7.09 22.0
Debt to Capitalization 33.7% 47.0%
Pre-Tax Profit Margin 8.1% 8.1%
Net Profit Margin 4.9% 4.7%
Return on Average Equity 15.6% 15.7%
- -----------------------------------------------------------------------------------------------
Stores Open Rent-to-Rent 107 123
Rental Purchase 96 77
Rental Purchase Franchised 26 15
[BAR GRAPH OF SYSTEMWIDE REVENUES APPEARS]
[BAR GRAPH OF REVENUES APPEARS]
[BAR GRAPH OF NET EARNINGS APPEARS]
2
SELECTED FINANCIAL INFORMATION
(Dollar Amounts in Thousands Except Per Share)
Years Ended March 31, 1995 1994 1993 1992 1991
Operating Results Systemwide Revenues/(1)/ $ 241,286 $ 189,781 $ 158,361 $ 144,549 $ 143,167
Revenues:
Rentals & Fees 173,208 130,962 100,617 89,593 82,580
Sales 53,655 53,139 55,275 53,161 58,983
Other 2,029 1,083 1,740 1,795 1,604
---------------------------------------------------------------------------------------------------
228,892 185,184 157,632 144,549 143,167
---------------------------------------------------------------------------------------------------
Costs & Expenses:
Cost of Sales 38,696 38,879 41,594 40,684 48,485
Operating Expenses 115,028 91,927 77,816 75,620 74,591
Depreciation of
Rental Merchandise 53,708 37,310 25,407 20,728 15,081
Interest 3,033 2,063 1,650 2,481 3,318
---------------------------------------------------------------------------------------------------
210,465 170,179 146,467 139,513 141,475
---------------------------------------------------------------------------------------------------
Earnings Before
Income Taxes 18,427 15,005 11,165 5,036 1,692
Income Taxes 7,102 6,209 5,100 1,984 662
---------------------------------------------------------------------------------------------------
Net Earnings 11,325 8,796 6,065 3,052 1,030
---------------------------------------------------------------------------------------------------
Earnings Per Share 1.15 1.01 0.70 0.36 0.12
---------------------------------------------------------------------------------------------------
Dividends Per Share:
Class A 0.05 0.06 0.055 0.05 0.05
Class B 0.09 0.08 0.065 0.05 0.05
Financial Position Rental Merchandise, Net $ 121,356 $ 113,599 $ 86,462 $ 80,141 $ 80,095
Property, Plant &
Equipment, Net 24,181 18,819 13,326 10,861 10,839
Total Assets 157,527 144,917 108,217 101,051 100,698
Interest-Bearing Debt 43,159 53,123 33,130 34,126 35,499
Shareholders' Equity 84,951 59,830 52,152 46,676 44,022
At Year End Stores Open:
Company-Operated 203 200 156 153 159
Franchised 26 15 6 0 0
Rental Contracts in Effect 156,600 126,700 100,600 80,900 79,700
Number of Employees 2,200 2,100 1,450 1,400 1,450
===================================================================================================
/(1)/ Systemwide revenues include revenues from franchised Aaron's Rental
Purchase stores.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
(Fiscal Years 1995 & 1994)
- --------------------------------------------------------------------------------
Total revenues for fiscal year 1995 increased $43.7 million (23.6%) to
$228.9 million compared to $185.2 million in 1994 due to a $42.2 million (32.3%)
increase in rentals and fees revenue. Of this increase in rental revenues, $26.7
million was attributable to Aaron's Rental Purchase stores, which increased
57.4% to $73.2 million compared to $46.5 million last year. Higher revenues from
existing rental purchase stores, as well as the opening of 19 additional rental
purchase stores during fiscal year 1995, contributed to the increase. Rental
revenues from rental purchase stores opened during the year were $3.8 million.
Rental revenues from the Company's rent-to-rent operation increased $15.5
million (18.4%) during the same time period. Included in fiscal year 1994 total
revenues was $4.9 million attributed to the former Looks Furniture Leasing
locations acquired in December 1993.
Revenues from sales increased $516,000 (1.0%) to $53.7 million from $53.1
million. Excluding sales of Ball Stalker, which was sold in fiscal year 1994,
revenues from sales increased $2.6 million in fiscal year 1995. Of this
increase, $1.3 million was due to sales to furniture distributors and the
remaining increase was due primarily to the sale of rental-return furniture.
Other revenue increased $946,000 (87.3%) to $2.0 million compared to $1.1
million last year. This increase was primarily due to a $495,000 increase in
franchise and royalty fee income. This fee income in fiscal year 1995 was
$912,000 compared to $417,000 for the same period last year.
Cost of sales decreased $183,000 (.5%) to $38.7 million compared to $38.9
million and, as a percentage of sales, decreased to 72.1% from 73.2%. The
improvement in gross margins was primarily due to improved margins on the sale
of rental return furniture.
Operating expenses increased $23.1 million (25.1%) to $115.0 million from
$91.9 million. As a percentage of total revenues, operating expenses increased
slightly to 50.3% in fiscal year 1995 compared to 49.6% in fiscal year 1994.
Aaron's Rental Purchase operating costs increased $14.8 million (60.4%) to $39.3
million from $24.5 million. This increase was primarily due to increased costs,
including personnel and occupancy costs, associated with the opening of 19
rental purchase stores during fiscal year 1995.
Depreciation of rental merchandise increased $16.4 million (44.0%) to $53.7
million and, as a percentage of total rentals and fees, increased to 31.0% in
1995 from 28.5% in 1994. This increase was primarily due to the growth of the
Company's rental purchase operations, in which merchandise is depreciated at
faster rates to coincide with shorter contract terms.
Interest expense increased $970,000 (47.0%) to $3.0 million compared to
$2.1 million. This increase was primarily the result of higher interest rates
during fiscal year 1995.
Income tax expense increased $893,000 (14.4%) to $7.1 million compared to
$6.2 million, and the Company's effective tax rate was 38.5% in 1995 and 41.4%
in 1994. The decrease in the effective tax rate was due to decreases in
permanent differences between book and taxable income.
As a result, net earnings increased $2.5 million (28.8%) to $11.3 million
in 1995 compared to $8.8 million in 1994. As a percentage of total revenues, net
earnings were 4.9% in fiscal year 1995 and 4.7% in fiscal year 1994.
13
Results of Operations
(Fiscal Years 1994 & 1993)
Total revenues for fiscal year 1994 increased $27.6 million (17.5%) to
$185.2 million compared to $157.6 million in 1993 due to a $30.3 million (30.2%)
increase in rentals and fees revenue. Of this increase in rental revenues, $21.3
million was attributable to Aaron's Rental Purchase stores, which increased
84.3% to $46.5 million compared to $25.2 million last year. Higher revenues from
existing rental purchase stores, as well as the opening of 34 additional rental
purchase stores during fiscal year 1994, contributed to the increase. Rental
revenues from rental purchase stores opened during the year were $7.2 million.
Rental revenues from the Company's rent-to-rent operations increased $9.0
million (12.1%) during the same time period. Included in fiscal year 1994 total
revenues was $4.9 million attributed to the former Looks Furniture Leasing
locations acquired in December 1993.
Revenues from sales decreased $2.1 million (3.9%) to $53.1 million from
$55.3 million. This decrease was primarily due to the June 1993 sale of the
Company's Ball Stalker subsidiary. If sales recorded by Ball Stalker had been
excluded from both periods, sales revenue would have increased $10.9 million
(27.2%). This increase was due to increased sales of rental return merchandise
and $4.3 million of sales of new furniture to furniture distributors by the
Company's MacTavish Furniture Industries division. Sales to furniture
distributors were insignificant in the same period a year ago. Prior to fiscal
year 1993, the MacTavish Furniture Industries division manufactured furniture
exclusively for the Company's own retail outlets.
Other revenue decreased $657,000 (37.8%) to $1.1 million compared to $1.7
million in 1993, primarily due to the sale of the Ball Stalker subsidiary during
fiscal year 1994. This decrease was offset by an increase of $302,000 from
franchise and royalty fee income from franchised operations of Aaron's Rental
Purchase stores. This fee income in fiscal year 1994 was $417,000 compared to
$115,000 for the same period in 1993.
Cost of sales decreased $2.7 million (6.5%) to 38.9 million compared to
$41.6 million and, as a percentage of sales, decreased to 73.2% from 75.2%. The
improvement in gross margins was primarily due to improved margins on the sale
of rental return furniture.
Operating expenses increased $14.1 million (18.1%) to $91.9 million from
$77.8 million. As a percentage of total revenues, operating expenses increased
slightly to 49.6% in fiscal year 1994 compared to 49.4% in fiscal year 1993.
While overall operating expenses increased slightly, Aaron's Rental Purchase
operating costs increased $10.9 million (80.3%) to $24.5 million from $13.6
million. This increase was primarily due to increased costs, including personnel
and occupancy costs, associated with the opening of 34 rental purchase stores
during fiscal year 1994.
Depreciation of rental merchandise increased $11.9 million (46.9%) to $37.3
million compared to $25.4 million and, as a percentage of total rentals and
fees, increased to 28.5% in 1994 from 25.3% in 1993. This increase was primarily
due to the growth of the Company's rental purchase operations, in which
merchandise is depreciated at faster rates to coincide with shorter contract
terms.
Interest expense increased $413,000 (25.0%) to $2.1 million compared to
$1.7 million in 1993. This increase was primarily the result of higher debt
levels during fiscal year 1994 due to growth of the Company's business.
Income tax expense increased $1.1 million (21.7%) to $6.2 million compared
to $5.1 million, and the Company's effective tax rate was 41.4% in 1994 and
45.7% in 1993. The decrease in the effective tax rate was due to the result of
permanent differences between book and taxable income resulting from the fiscal
year 1993 $1.4 million write-off of goodwill associated with the 1987 purchase
of Ball Stalker.
As a result, net earnings increased $2.7 million (45%) to $8.8 million in
1994 compared to $6.1 million in 1993. As a percentage of total revenues, net
earnings increased to 4.7% in 1994 compared to 3.8% in 1993.
Liquidity &
Capital Resources
- --------------------------------------------------------------------------------
Cash flow from operations for fiscal years 1995 and 1994 was $68.7 million
and $55.8 million, respectively. Such cash flows include profits on the sale of
rental merchandise. The Company's primary capital requirements consist of
acquiring rental merchandise for Aaron's Rental Purchase stores and replacing
merchandise no longer suitable for rent at all Aaron Rents locations. As the
Company continues to grow, the need for additional rental merchandise will
continue to be the Company's major capital requirement. These capital
requirements historically have been financed through bank credit, cash flow from
operations, trade credit and proceeds from the sale of rental return
merchandise.
The Company has financed its growth through a revolving credit agreement
with several banks, trade credit and internally generated funds. The rent-to-
rent business has contributed cash that has partially funded the growth of the
rental purchase business. On January 6, 1995, the Company revised its revolving
credit agreement by adding a third bank and increased allowable borrowings to
$75.0 million from $60.0 million and changed certain covenants in the credit
agreement. In addition, under the credit agreement an additional $3.0 million
credit line was established to fund daily working capital requirements. The
revised credit agreement is unsecured, and the terms and pricing either remained
unchanged or were substantially at terms and pricing more favorable to the
Company. The pricing under the working capital line is based upon overnight bank
borrowing rates. At March 31, 1995, an aggregate of $42.2 million was
outstanding under this facility. Of these borrowings, $20.0 million was bearing
interest at an average fixed rate of 5.51%, $20 million was bearing interest at
an average fixed rate of 8.27%, and the remaining balance was bearing interest
at a floating rate of 6.9375%. At March 31, 1994, the amount outstanding under
the facility was $51.5 million.
On May 2, 1994, the Company issued through a public offering 1,275,000
shares of Class B Common Stock. The net proceeds to the Company after deducting
underwriting discounts and offering expenses were $14.1 million. The net
proceeds were used to reduce bank debt. The reduced debt level, coupled with the
increased availability under its revolving credit agreement, will provide the
Company additional capacity to fund the growth of its operations.
The Company believes that the expected cash flows from operations, proceeds
from the sale of rental return merchandise, bank borrowings and vendor credit,
together with the proceeds of the stock offering, will be sufficient to fund the
Company's capital and liquidity needs for at least the next 24 months.
The Company has paid dividends for nine consecutive years. A $.03 per share
dividend on Class A Common Stock and $.04 per share dividend on Class B Common
Stock were paid in July 1994, and a $.02 per share dividend on Class A Common
Stock and $.05 per share dividend on Class B Common Stock were paid in January
1995, for a total fiscal year 1995 cash outlay of $709,000. The Company
currently expects to continue its policy of paying dividends.
15
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, 1995 1994
Assets Cash $ 95 $ 86
Accounts Receivable 8,391 8,023
Rental Merchandise 172,741 152,289
Less: Accumulated Depreciation (51,385) (38,690)
------------------------------------------------------------------------------
121,356 113,599
Property, Plant & Equipment, Net 24,181 18,819
Prepaid Expenses & Other Assets 3,504 4,390
------------------------------------------------------------------------------
Total Assets $ 157,527 $ 144,917
Liabilities & Accounts Payable & Accrued Expenses $ 19,062 $ 20,891
Shareholders' Equity Current Income Taxes Payable 504
Deferred Income Taxes Payable 4,126 5,216
Customer Deposits & Advance Payments 6,229 5,353
Bank Debt 42,172 51,451
Other Debt 987 1,672
------------------------------------------------------------------------------
72,576 85,087
Commitments & Contingencies
Shareholders' Equity
Common Stock, Class A, Par Value $.50 Per Share
Authorized 25,000,000 Shares;
5,361,761 Shares Issued 2,681 2,681
Common Stock, Class B, Par Value $.50 Per Share
Authorized 25,000,000 Shares;
6,636,761 Shares Issued at March 31, 1995 &
5,361,761 Shares Issued at March 31, 1994 3,318 2,681
Additional Paid-In Capital 15,314 1,101
Retained Earnings 77,216 66,595
------------------------------------------------------------------------------
98,529 73,058
Less: Treasury Shares at Cost,
Class A Common Stock, 1,234,748 Shares
at March 31, 1995 & 1,226,653 Shares
at March 31, 1994 (8,324) (7,329)
Class B Common Stock, 944,031 Shares
at March 31, 1995 & 1,059,831 Shares
at March 31, 1994 (5,254) (5,899)
------------------------------------------------------------------------------
84,951 59,830
------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $ 157,527 $ 144,917
==============================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
16
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Per Share Data)
Years Ended March 31, 1995 1994 1993
=================================================================================================
Revenues Rentals & Fees $ 173,208 $ 130,962 $ 100,617
Sales 53,655 53,139 55,275
Other 2,029 1,083 1,740
----------------------------------------------------------------------------
228,892 185,184 157,632
=================================================================================================
Costs & Expenses Cost of Sales 38,696 38,879 41,594
Operating Expenses 115,028 91,927 77,816
Depreciation of Rental Merchandise 53,708 37,310 25,407
Interest 3,033 2,063 1,650
----------------------------------------------------------------------------
210,465 170,179 146,467
----------------------------------------------------------------------------
Earnings Before Income Taxes 18,427 15,005 11,165
Income Taxes 7,102 6,209 5,100
----------------------------------------------------------------------------
Net Earnings $ 11,325 $ 8,796 $ 6,065
----------------------------------------------------------------------------
Earnings Per Share $ 1.15 $ 1.01 $ 0.70
============================================================================
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Treasury Stock Common Stock Paid-In Retained
(In Thousands) Shares Amount Class A Class B Capital Earnings
=============================================================================================================================
Balance, March 31, 1992 (2,264) $(12,567) $ 2,681 $ 2,681 $ 1,059 $ 52,822
Reacquired Shares (40) (250)
Dividends (506)
Reissued Shares at Cost 27 153 10 4
Net Earnings 6,065
=============================================================================================================================
Balance, March 31, 1993 (2,277) (12,664) 2,681 2,681 1,069 58,385
Reacquired Shares (115) (1,151)
Dividends (591)
Reissued Shares at Cost 106 587 32 5
Net Earnings 8,796
=============================================================================================================================
Balance, March 31, 1994 (2,286) (13,228) 2,681 2,681 1,101 66,595
Issued Shares 637 13,503
Reacquired Shares (138) (1,836)
Dividends (709)
Reissued Shares at Cost 245 1,486 710 5
Net Earnings 11,325
=============================================================================================================================
Balance, March 31, 1995 (2,179) $(13,578) $ 2,681 $ 3,318 $ 15,314 $ 77,216
=============================================================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended March 31, 1995 1994 1993
Operating Activities Net Earnings $ 11,325 $ 8,796 $ 6,065
Depreciation & Amortization 58,765 41,040 29,392
Deferred Taxes (1,090) 101 779
Change in Accounts Payable & Accrued Expenses (1,834) 6,428 2,550
Change in Accounts Receivable (386) (1,159) 563
Other Changes, Net 1,966 585 (967)
--------------------------------------------------------------------------------------
Cash Provided by Operating Activities 68,746 55,791 38,382
Investing Activities Additions to Property, Plant & Equipment (11,820) (9,539) (5,782)
Book Value of Property Retired or Sold 1,401 590 760
Additions to Rental Merchandise (101,755) (103,164) (77,961)
Book Value of Rental Merchandise Sold 40,667 48,267 47,150
Contracts & Other Assets Acquired (328) (10,815) (955)
--------------------------------------------------------------------------------------
Cash Used by Investing Activities (71,835) (74,661) (36,788)
Financing Activities Proceeds from Revolving Credit Agreement 229,448 219,262 152,712
Repayments on Revolving Credit Agreement (238,727) (199,756) (152,664)
(Decrease) Increase in Other Debt (685) 487 (1,044)
Proceeds from Common Stock Offering 14,140
Dividends Paid (709) (591) (506)
Acquisition of Treasury Stock (1,836) (1,151) (250)
Issuance of Stock Under Stock Option Plan 1,467 624 150
--------------------------------------------------------------------------------------
Cash Provided (Used) by Financing Activities 3,098 18,875 (1,602)
--------------------------------------------------------------------------------------
Increase (Decrease) in Cash 9 5 (8)
Cash at Beginning of Year 86 81 89
--------------------------------------------------------------------------------------
Cash at End of Year $ 95 $ 86 $ 81
--------------------------------------------------------------------------------------
Cash Paid During the Year:
Interest $ 3,005 $ 2,277 $ 1,139
Income Taxes 8,705 5,123 5,120
======================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 1995 and 1994, and for Each of the Three
Years in the Period Ended March 31, 1995
- --------------------------------------------------------------------------------
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the parent, Aaron Rents, Inc., and its wholly owned
subsidiaries, Aaron Enterprises, Inc., formerly Ball Stalker Co., and Aaron
Investment Company. All significant intercompany accounts and transactions have
been eliminated.
LINE OF BUSINESS--The Company is engaged in the business of renting and
selling residential and office furniture and other merchandise. The Company
manufactures furniture principally for its rental and sales operations.
RENTAL MERCHANDISE consists primarily of residential and office furniture
and other merchandise and is recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful life of the merchandise,
principally from 1 to 5 years, after allowing for a salvage value of 5% to 60%.
The Company recognizes rental revenues over the rental period and recognizes all
cost of servicing and maintaining merchandise on rent as incurred.
PROPERTY, PLANT AND EQUIPMENT are recorded at cost. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives of the respective assets, which are from 8 to 27 years for buildings and
improvements and from 2 to 5 years for other depreciable property and equipment.
Gains and losses related to dispositions and retirements are included in income.
Maintenance and repairs are charged to income as incurred; renewals and
betterments are capitalized.
DEFERRED INCOME TAXES arise principally from the use of accelerated methods
of computing depreciation on rental merchandise for tax purposes.
COST OF SALES includes the depreciated cost of rental-return residential
and office merchandise sold and the cost of new residential and office
merchandise sold. It is not practicable to allocate operating expenses between
selling and rental operations.
ADVERTISING--The Company expenses advertising costs as incurred. Such costs
aggregated $7,257,000, $6,025,000, and $4,291,000 in 1995, 1994 and 1993,
respectively.
GOODWILL, which was entirely related to the acquisition of Ball Stalker
Co., was amortized on a straight-line basis over a period of 40 years. As a
result of preliminary discussions regarding the sale of Ball Stalker Co. during
fiscal year 1993, the Company estimated that the Goodwill was not recoverable
and, accordingly, all of the Company's then remaining Goodwill of $1,429,000
($.16 per share) was written off and charged to income. The assets of Ball
Stalker Co. were sold in June 1993.
- --------------------------------------------------------------------------------
NOTE B: EARNINGS PER SHARE
Earnings per share are computed by dividing net earnings by the weighted
average number of common shares and common equivalent shares (for stock options
using the treasury stock method) outstanding during the period, which was
9,814,274 shares for the year ended March 31, 1995; 8,720,209 shares for the
year ended March 31, 1994; and 8,644,964 shares for the year ended March 31,
1993.
- --------------------------------------------------------------------------------
NOTE C: PROPERTY, PLANT & EQUIPMENT
(In Thousands)
Years Ended March 31, 1995 1994
- ----------------------------------------------------------
Land $ 1,968 $ 1,781
Buildings & Improvements 8,824 6,913
Leasehold Improvements & Signs 13,845 9,886
Fixtures & Equipment 17,112 15,068
Construction in Progress 1,203 511
- ----------------------------------------------------------
42,952 34,159
Less: Accumulated Depreciation
& Amortization (18,771) (15,340)
- ----------------------------------------------------------
$ 24,181 $ 18,819
- --------------------------------------------------------------------------------
NOTE D: DEBT
BANK DEBT-- On January 6, 1995, the Company revised its revolving credit
agreement by adding a third bank and increased allowable borrowings to
$75,000,000 from $60,000,000. In addition, under the credit agreement an
additional $3,000,000 credit line was established to fund daily working capital
19
requirements. The revised credit agreement is unsecured, and the terms and
pricing either remained unchanged or were substantially at terms and pricing
more favorable to the Company. The pricing under the working capital line is
based upon overnight bank borrowing rates. At March 31, 1995, an aggregate of
$42,172,000, was outstanding under this agreement. Amounts borrowed are charged
interest at the lower of the lender's prime rate, or LIBOR plus .75%, or the
rate at which certificates of deposit are offered in the secondary market plus
.875%. Under the agreement, the Company pays a .22% commitment fee on unused
balances. The weighted average interest rate on borrowings under the revolving
credit agreement (after giving effect to the interest rate swaps) were 6.13% in
1995, 5% in 1994 and 4.9% in 1993.
The Company has entered into interest rate swap agreements that effectively
fix the interest rate on $20,000,000 of the amount outstanding under the
revolving credit agreement at an average of 5.51% until June 1996 and an
additional $20,000,000 at an average of 8.27% until November 1997. These swap
agreements involve the receipt of amounts when the floating rate exceeds the
fixed rates in such agreements over the life of the agreements. The differential
to be paid or received is accrued as interest rates change and recognized as an
adjustment to the floating rate interest expense related to the debt. The
related amount payable to or receivable from counter parties is included in
accrued liabilities or other assets. The fair values of the swap agreements,
which are not recognized in the financial statements, are estimated to be
$190,000 at March 31,1995. The fair value of the Company's bank debt
approximates its carrying value.
The revolving credit agreement may be terminated on ninety days' notice by
the Company or six months' notice by the lenders. The debt is payable in 60
monthly installments following the termination date if terminated by the
lenders.
The agreement restricts cash dividend payments and stock repurchases to
$3,000,000 plus 25% of net earnings since April 1, 1991, and places other
restrictions on additional borrowings and requires the maintenance of certain
financial ratios.
OTHER DEBT--Other debt of $987,000 at March 31,1995, and $1,672,000 at
March 31, 1994, represents an insurance premium financing agreement bearing
interest at 7.25% and 5.2%, respectively. Other debt matures in fiscal year
1996.
- --------------------------------------------------------------------------------
NOTE E: INCOME TAXES
(In Thousands)
Years Ended March 31, 1995 1994 1993
- ----------------------------------------------------------------------
Current Tax Expense:
Federal $ 7,258 $ 5,667 $ 3,727
State 934 441 594
- ----------------------------------------------------------------------
8,192 6,108 4,321
- ----------------------------------------------------------------------
Deferred Tax Expense (Benefit):
Federal (930) 101 781
State (160) (2)
- ----------------------------------------------------------------------
(1,090) 101 779
$ 7,102 $ 6,209 $ 5,100
- ----------------------------------------------------------------------
Significant components of the Company's deferred tax liabilities and assets
are as follows:
(In Thousands)
March 31, 1995 1994
- ------------------------------------------------------------
Deferred Tax Liabilities:
Tax Over Book Depreciation $ 6,967 $ 7,041
Other, Net 606 736
- ------------------------------------------------------------
Total Deferred Tax Liabilities 7,573 7,777
- ------------------------------------------------------------
Deferred Tax Assets
Insurance Reserves 934 725
Reserve for Closed Store Locations 353 601
Rent Collected in Advance 1,325 1,235
Other, Net 835
- ------------------------------------------------------------
Total Deferred Tax Assets 3,447 2,561
- ------------------------------------------------------------
Net Deferred Tax Liabilities $ 4,126 $ 5,216
- ------------------------------------------------------------
The Company's actual tax rate differs from the statutory rate as follows:
Years Ended March 31, 1995 1994 1993
- ------------------------------------------------------------------------------
Statutory Rate 35.0% 34.3% 34.0%
Increases in Taxes
Resulting From:
Write-off of Goodwill 4.4
State Income Taxes, net of
Federal Income Tax Benefit 2.7 2.5 3.5
Effect of Change in Federal
Income Tax Rate on
Deferred Taxes .9
Other, Net .8 3.7 3.8
- ------------------------------------------------------------------------------
Effective Tax Rate 38.5% 41.4% 45.7%
- --------------------------------------------------------------------------------
NOTE F: COMMITMENTS
The Company leases warehouse and retail store space for substantially all
of its operations under operating leases expiring at various times through 2004.
Most of the leases contain renewal options
for additional periods ranging from 2 to 10 years at rental rates generally
adjusted on the basis of the consumer price index or other factors. The Company
also leases transportation equipment and data processing equipment under
operating leases expiring during the next 3 years. Management expects that most
leases will be renewed or replaced by other leases in the normal course of
business.
Future minimum rental payments required under operating leases that have
initial or remaining non-cancelable terms in excess of one year as of March 31,
1995, are as follows: $13,183,000 in 1996; $11,333,000 in 1997; $9,346,000 in
1998; $6,799,000 in 1999; $3,587,000 in 2000; and $2,448,000 thereafter.
Rental expense was $15,467,000 in 1995, $12,462,000 in 1994 and $10,523,000
in 1993.
The Company leases three buildings from certain officers of the Company
under leases expiring in the years 1995 and 1999 for current annual rentals
aggregating $600,000.
The Company maintains a 401(k) savings plan for all full-time employees
with at least one year of service with the Company and who meet certain
eligibility requirements. The plan allows employees to contribute up to 6% of
their annual compensation with 50% matching by the Company on the first 4% of
compensation. The Company's expense related to the plan was $259,000, $219,000
and $197,000 in 1995, 1994 and 1993, respectively.
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NOTE G: SHAREHOLDERS' EQUITY
On May 2, 1994, the Company issued, through a public offering, 1,275,000
shares of Class B Common Stock. The net proceeds to the Company after deducting
underwriting discounts and offering expenses were $14,100,000. The net proceeds
were used to reduce bank debt.
At March 31, 1995, the Company held a total of 2,178,779 common shares in
its treasury, and is authorized by the Board of Directors to acquire up to an
additional 335,400 shares.
The Company has 1,000,000 shares of preferred stock authorized. The shares
are issuable in series with terms for each series fixed by the Board and such
issuance is subject to approval by the Board of Directors. No preferred shares
have been issued.
In April 1990, the Company established a stock option plan for the benefit
of certain key employees. Under the plan, 647,000 shares of the Company's
treasury shares are reserved for issuance when these options are exercised.
During fiscal year 1995, 10,000 options were granted at $12.00 per share, 66,000
options were granted at $12.75 per share, and 176,000 were granted at $13.875
per share. During fiscal year 1994, 5,000 options were granted at $9.75 per
share and 10,000 options were granted at $10.50 per share. At March 31, 1995,
there was a total of 647,000 options granted and outstanding. These options are
exercisable 2 years from date of issuance and expire 5 years from date of
issuance.
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NOTE H: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In Thousands First Second Third Fourth
Except Per Share) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------
Fiscal 1995
Revenues $ 55,595 $ 57,235 $ 56,511 $ 59,551
Gross Profit 33,183 33,274 34,200 35,831
Earnings Before
Taxes 4,273 4,097 4,638 5,419
Net Earnings 2,607 2,507 2,873 3,338
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Earnings Per Share $ .27 $ .25 $ .29 $ .34
======================================================================
Fiscal 1994
Revenues $ 42,627 $ 43,441 $ 45,701 $ 53,415
Gross Profit 24,253 25,478 26,906 32,358
Earnings Before
Taxes 3,443 3,259 3,667 4,636
Net Earnings 2,002 1,885 2,190 2,719
- ----------------------------------------------------------------------
Earnings Per Share $ .23 $ .22 $ .25 $ .31
- --------------------------------------------------------------------------------
NOTE I: SALES & ACQUISITIONS
On June 16, 1993, the Company sold substantially all of the assets of its
Ball Stalker subsidiary. Ball Stalker had revenues of $16,242,000 in fiscal year
1993 and $14,168,000 in fiscal year 1992 and did not contribute to earnings in
either year. The sale did not have any significant effect on the Company's
results of operations for fiscal year 1994.
On December 1, 1993, the Company acquired substantially all of the assets
of FLB, Inc. (d/b/a Looks Furniture Leasing), a furniture rental operation with
15 locations in Texas and Oklahoma. The cash purchase price was $8,000,000. The
acquisition had no significant effect on the Company's results of operations for
fiscal year 1994. In addition to the above acquisition, the Company acquired
during fiscal year 1994 the assets of several other furniture rental companies
for cash aggregating approximately $3,000,000.
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NOTE J: FRANCHISING OF
AARON'S RENTAL PURCHASE STORES
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The Company franchises Aaron's Rental Purchase stores. As of March 31, 1995
and 1994, 35 and 18 franchises had been sold, respectively. Franchisees pay a
non-refundable initial franchise fee of $35,000 and an ongoing royalty fee of 5%
of cash receipts. The Company recognizes these fees as earned and includes them
in Other Revenues in the Consolidated Statements of Earnings. The Company has
guaranteed certain lease and debt obligations of some of the franchisees
amounting to $764,000 and $1,799,000, respectively, at March 31, 1995. The
Company has recourse rights to the leased property and to the assets securing
the debt obligations. As a result, the Company does not expect to incur any
significant losses under these guarantees.
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Common Stock Market Prices & Dividends
The Company's Class A and Class B Common Stock are traded on The NASDAQ
Market under the symbols "ARONA" and "ARONB," respectively. The approximate
number of shareholders of record of the Company's Common Stock at June 9, 1995,
was 2,000. The following table shows, for the periods indicated, the range of
high and low bid prices per share for the Class A and Class B Common Stock as
reported by NASDAQ, and the cash dividends paid per share.
The average closing bid quotation for Class A and Class B Common Stock on
June 9, 1995, was $14.50 and $14.75 respectively. The Company currently expects
to continue its policy of paying dividends.
Class A
Common Stock
Cash
Dividends
Fiscal Year Ended High Low Per Share
- --------------------------------------------------------
MARCH 31,1995
FIRST QUARTER $ 13.25 $ 11.50 $ .03
SECOND QUARTER 13.00 10.50
THIRD QUARTER 12.75 11.50 .02
FOURTH QUARTER 14.25 12.00
- --------------------------------------------------------
March 31,1994
First Quarter $ 10.75 $ 10.25 $ .03
Second Quarter 13.25 10.50
Third Quarter 12.25 10.50 .03
Fourth Quarter 15.00 11.75
Class B
Common Stock
Cash
Dividends
Fiscal Year Ended High Low Per Share
- --------------------------------------------------------
MARCH 31,1995
FIRST QUARTER $ 12.75 $ 11.25 $ .04
SECOND QUARTER 13.25 11.50
THIRD QUARTER 12.875 11.50 .05
FOURTH QUARTER 14.00 12.00
- --------------------------------------------------------
March 31,1994
First Quarter $ 10.00 $ 9.75 $ .04
Second Quarter 13.00 9.50
Third Quarter 12.50 10.00 .04
Fourth Quarter 15.00 11.00
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Report of
Independent Auditors
To the Board of Directors and Shareholders of Aaron Rents, Inc.:
We have audited the accompanying consolidated balance sheets of Aaron
Rents, Inc., and Subsidiaries as of March 31, 1995 and 1994, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended March 31. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Aaron Rents,
Inc., and Subsidiaries as of March 31, 1995 and 1994, the consolidated results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young
Atlanta, Georgia
May 31,1995
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