FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report under Section 13 or 15 (d) of the Securities Exchange Act of l934 September 30, 1996 0-12385 ------------------ ------- For Quarter Ended Commission File No. AARON RENTS, INC. ----------------- (Exact name of registrant as specified in its charter) Georgia 58-0687630 ------- ---------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 309 E. Paces Ferry Road, N.E. Atlanta, Georgia 30305-2377 ---------------- ---------- (Address of principal executive offices) (Zip Code) (404) 231-0011 -------------- (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether registrant (l) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X ----- No ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding as of Title of Each Class November 11, 1996 ------------------- ----------------- Class A Common Stock, $.50 Par Value 3,790,906 Common Stock, $.50 Par Value 15,264,046 Part 1 - FINANCIAL INFORMATION Item 1 - Financial Statements AARON RENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) September 30, December 31, 1996 1995 ---------------- -------------- (in thousands) ASSETS: Cash $ 99 $ 98 Accounts Receivable 9,901 8,136 Rental Merchandise 201,255 176,751 Less: Accumulated Depreciation (59,335) (54,440) ---------------- -------------- 141,920 122,311 Property, Plant and Equipment, Net 31,670 23,492 Prepaid Expenses and Other Assets 3,633 4,608 ---------------- -------------- Total Assets $ 187,223 $ 158,645 ================ ============== LIABILITIES AND SHAREHOLDERS' EQUITY: Accounts Payable and Accrued Expenses $ 22,243 $ 19,304 Dividends Payable 0 365 Deferred Income Taxes Payable 2,400 3,781 Customer Deposits and Advance Payments 6,979 6,622 Bank Debt 55,039 37,260 Other Debt 602 219 ---------------- -------------- Total Liabilities 87,263 67,551 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, Par Value $.50 Per Share-Authorized 25,000,000 shares: 16,170,987 Shares Issued at September 30, 1996 and 6,636,761 Shares Issued at December 31, 1995 8,085 3,318 Additional Paid in Capital 15,413 15,370 Retained Earnings 93,076 86,365 ---------------- -------------- 119,255 107,734 Less: Treasury Shares at Cost, Class A Common Stock, 1,571,855 Shares at September 30, 1996 and 1,427,588 Shares at December 31, 1995 (14,125) (11,451) Common Stock, 928,941 Shares at September 30, 1996 and 932,441 Shares at December 31, 1995 (5,170) (5,189) ---------------- -------------- Total Shareholders' Equity 99,960 91,094 ---------------- -------------- Total Liabilities and Shareholders' Equity $ 187,223 $ 158,645 ================ ============== See Notes to Consolidated Financial Statements AARON RENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended Nine Months Ended ------------------ ------------------ September 30, September 30, ------------------ ------------------ 1996 1995 1996 1995 ------------------ ------------------ (in thousands, except per share amounts) REVENUES: Rentals and Fees $ 54,230 $ 45,361 $155,687 $136,264 Sales 15,787 13,132 44,942 39,770 Other 1,207 519 2,898 1,664 -------- -------- -------- -------- 71,224 59,012 203,527 177,698 -------- -------- -------- -------- COSTS AND EXPENSES: Cost of Sales 12,016 9,440 33,247 28,478 Operating Expenses 35,377 29,664 101,259 89,252 Depreciation of Rental Merchandise 16,728 13,926 47,256 41,622 Interest 905 830 2,401 2,428 -------- -------- -------- -------- 65,026 53,860 184,163 161,780 -------- -------- -------- -------- EARNINGS BEFORE TAXES 6,198 5,152 19,364 15,918 INCOME TAXES 2,411 1,947 7,504 6,060 -------- -------- -------- -------- NET EARNINGS $ 3,787 $ 3,205 $ 11,860 $ 9,858 ======== ======== ======== ======== EARNINGS PER SHARE $ .19 $ .16 $ .59 $ .49 -------- -------- -------- -------- CASH DIVIDENDS DECLARED PER SHARE Class A Common Stock $ $ $ .02 $ .01 -------- -------- -------- -------- Common Stock $ $ $ .02 $ .025 -------- -------- -------- -------- WEIGHTED AVERAGE SHARES OUTSTANDING 20,027 20,044 19,962 19,994 ======== ======== ======== ======== See Notes to Consolidated Financial Statements AARON RENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended ----------------- September 30, ------------- 1996 1995 ---- ---- (in thousands) OPERATING ACTIVITIES Net Earnings $ 11,860 $ 9,858 Depreciation and Amortization 48,088 44,313 Deferred Taxes (1,381) (1,101) Change in Accounts Payable and Accrued Expenses 2,188 1,705 Change in Accounts Receivable (1,765) 1,482 Other Changes, Net 1,349 (384) ------------- ------------ Cash Provided by Operating Activities 60,339 55,873 ------------- ------------ INVESTING ACTIVITIES Additions to Property, Plant and Equipment (13,319) (6,660) Book Value of Property Retired or Sold 874 2,815 Additions to Rental Equipment (98,597) (73,347) Book Value of Rental Equipment Sold 37,645 32,577 Contracts and Other Assets Acquired (1,744) (328) ------------- ------------ Cash Used by Investing Activities (75,141) (44,943) ------------- ------------ FINANCING ACTIVITIES Proceeds from Revolving Credit Agreement 63,669 55,067 Repayments on Revolving Credit Agreement (45,890) (63,370) Increase of Other Debt 383 223 Dividends Paid (747) (729) Acquisition of Treasury Stock (2,785) (3,487) Issuance of Stock Under Stock Option Plan 173 1,370 ------------- ------------ Cash provided (used) by financing activities 14,803 (10,926) ------------- ------------ INCREASE IN CASH 1 4 Cash at Beginning of Year 98 92 ------------- ------------ Cash at Beginning of Period $ 99 $ 96 ============= ============ See Notes to Consolidated Financial Statements AARON RENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Principles of Consolidation: ---------------------------- The consolidated financial statements include the accounts of Aaron Rents, Inc. ("the Company") and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Interim Financial Statements: ----------------------------- The Consolidated Balance Sheet as of September 30, 1996, and the Consolidated Statements of Earnings and Cash Flows for the nine months ended September 30, 1996 and 1995, have been prepared without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at September 30, 1996 and for all periods presented have been made. During 1995, the Company changed its fiscal year end from March 31 to December 31. Interim financial statements for the comparable periods during 1995 of the fiscal year ending December 31, 1996 have been presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the nine months ended December 31, 1995. The results of operations for the period ended September 30, 1996, are not necessarily indicative of the operating results for the full year. Accounting Changes in Depreciation: ----------------------------------- At December 31, 1995, approximately 20% of the Aaron's Rental Purchase Division's merchandise on rent was fully depreciated. On January 1, 1996, the Company prospectively changed its depreciation method on rental purchase merchandise acquired after December 31, 1995 from generally 14 months straight-line with a 5% salvage value to a method that depreciates the merchandise over the contract period, generally 12 months when on rent and 36 months when not on rent to a 0% salvage value. This new method is similar to a method referred to as the income forecasting method in the rental purchase industry. The Company adopted the new method because management believes that it provides a more systematic and rational allocation of the cost of rental purchase merchandise over its useful life. The effect of the change in the depreciation method on merchandise purchased after December 31, 1995 was to decrease net income by approximately $235,000 ($.01 per share) and $1,005,000 ($.05 per share) respectively for the quarter and nine months ended September 30, 1996. In addition, based on an analysis of the average composite life of the division's rental purchase merchandise on rent or on hand at December 31, 1995, the Company extended the depreciable lives of that merchandise from generally 14 months to 18 months, and made other refinements to depreciation rates on rental and rental purchase merchandise. The effect of such change in depreciable lives and other refinements was to decrease net income by approximately $26,000 ($.00 per share) for the quarter and increase net income $514,000 ($.03 per share) for the nine months ended September 30, 1996. It is not expected that such change in estimates will have a significant effect on net income for the year ending December 31, 1996. Stock Dividend -------------- In June 1996 the Company distributed a 100% stock dividend in Common Stock on the Company's Class A Stock and Common Stock. Such stock dividend resulted in the issuance of 9,534,226 shares of Common Stock. The stock dividend was accounted for as an increase in Common Stock at par value and a reduction of retained earnings. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations. RESULTS OF OPERATIONS: - --------------------- Third quarter ended September 30, 1996, compared to September 30, 1995: Total revenues for the third quarter of fiscal year 1996 increased $12.2 million (20.7%) to $71.2 million compared to $59 million for the same period a year ago. This increase in revenues was primarily due to a $8.9 million (19.6%) increase in rentals and fees revenues and $2.7 million (20.2%) increase in sales. Of this increase in rental revenues, $4.1 million was attributable to Aaron's Rental Purchase stores, which increased 19.3% to $25.5 million compared to $21.4 million last year. Rental revenues from the Company's rent-to-rent operations increased $4.8 million (19.9%) to $28.7 million compared to $24 million during the same period last year. This significant increase in the rent-to-rent division was due to Rentals for the 1996 Summer Olympic Games. The $2.7 million increase in Sales was due to an increase in sales for the rental purchase division of $1.3 million and an increase in sales of $1.3 million for the rent- to-rent division. Other revenue increased $688,000 (132.3%) to $1.2 million compared to $519,000 last year. Included in other revenues is an increase of $575,000 in franchise and royalty fee income due to a net increase of 9 franchise stores as well as older franchise stores gaining in revenue. This income for the current quarter was $890,000 compared with $315,000 for the same period last year. Cost of sales increased $2.6 million (27.3%) to $12 million compared to $9.4 million and as a percentage of sales, increased to 76.1% from 71.9% due to increased lower margin sales of inventory to rental purchase franchisees, and lower margins on the sale of new furniture. Operating expenses increased $5.7 million (19.3%) to $35.4 million from $29.7 million. As a percentage of total revenues, operating expenses decreased to 49.7% from 50.3% for the same period a year ago. Depreciation of rental merchandise increased $2.8 million (20.1%) to $16.7 million compared to $13.9 million and, as a percentage of total rentals and fees, increased slightly to 30.8% versus 30.7% for the same period in 1995. Interest expense increased $75,000 (9%) to $904,000 compared to $830,000. As a percentage of total revenue, interest decreased to 1.3% from 1.4% due to the stability of interest rates during the quarter. Income tax expense increased $463,000 (23.8%) to $2.4 million compared to $1.9 million, and the Company's effective tax rate was 38.9% for the quarter versus 37.8% for the same period in 1995 due to higher state income taxes. As a result, net earnings increased $583,000 (18.2%) to $3.8 million in the third quarter of fiscal year 1996 compared to $3.2 million for the same period in 1995. As a percentage of total revenues, net earnings decreased slightly to 5.3% in the current quarter as compared to 5.4% for the same period last year. The weighted average number of shares outstanding during the third quarter of 1996 was 20,027,000 compared to 20,044,000 for the same period last year. Prior year weighted average shares outstanding have been restated to reflect the June, 1996 100% stock dividend. Nine months ended September 30, 1996, compared to nine months ended September 30, 1995: Total revenues for the first nine months of 1996 increased $25.8 million (14.5%) to $203.5 million compared to $177.7 million for the same period a year ago. This increase in revenues was primarily due to a $19.4 million (14.3%) increase in rentals and fees revenues and $5.2 million (13%) increase in sales. Of this increase in rental revenues, $11.9 million was attributable to Aaron's Rental Purchase stores, which increased 18.9% to $75 million compared to $63.1 million last year. Rental revenues from the Company's rent-to-rent operations increased $7.4 million (10.1%) to $80.7 million compared to $73.3 million for the same period last year. This significant increase in the rent-to-rent division was due to Rentals for the 1996 Summer Olympic Games. The $5.2 million increase in sales was due to an increase in sales for the rental purchase division of $4.4 million and an increase in sales of $738,000 for the rent-to-rent division. Other revenue increased $1.2 million (74.1%) to $2.9 million compared to $1.7 million last year. Included in other revenues is an increase of $1.1 million in franchise and royalty fee income due to a net increase of 18 franchise stores as well as older franchise stores gaining in revenue. This income for the nine month period was $2.0 million compared with $953,000 for the same period last year. Cost of sales increased $4.8 million (16.7%) to $33.2 million compared to $28.5 million and as a percentage of sales, increased to 74% from 71.6% primarily due to increased sales of lower margin inventory to rental purchase franchisees. Operating expenses increased $12 million (13.5%) to $101.3 million from $89.3 million. As a percentage of total revenues, operating expenses decreased to 49.8% from 50.2% for the same period a year ago. Depreciation of rental merchandise increased $5.6 million (13.5%) to $47.3 million compared to $41.6 million and, as a percentage of total rentals and fees, decreased slightly to 30.4% from 30.5% for the same period last year. Interest expense decreased $27,000 (-1.1%) to $2.4 million. As a percentage of total revenue, interest decreased to 1.2% from 1.4% due to the stability of interest rates during the nine months Income tax expense increased $1.4 million (23.8%) to $7.5 million compared to $6.1 million, and the Company's effective tax rate was 38.8% for the current nine month period versus 38.1% for the same period in 1995. As a result, net earnings increased $2 million (20.3%) to $11.9 million in first nine months of 1996 compared to $9.9 million for the same period in 1995. As a percentage of total revenues, net earnings increased to 5.8% in the first nine months as compared to 5.5% for the same period last year. The weighted average number of shares outstanding during the first nine months of 1996 was 19,962,000 compared to 19,994,000 for the same period last year. Prior year weighted average shares outstanding have been restated to reflect the June, 1996 100% stock dividend. Liquidity and Capital Resources: - -------------------------------- On May 7, 1996, Aaron Rents Class B Common stock was renamed Common Stock with the NASDAQ trading symbol changing from ARONB to ARON. On the same date, a 100% stock dividend was declared on both the Class A Common Stock (ARONA) as well as the newly renamed Common Stock. The stockholders of record at the close of business day May 20, 1996, received one share of Common Stock for each share of Common Stock and Class A Common Stock held. The aforementioned stock dividend was distributed on June 3, 1996. During the third quarter of 1996, the Company paid a semi-annual dividend that was declared in May 1996 of $.02 per share on both Common Stock and Class A Common Stock respectively. During the first quarter of 1996, the Company paid a semi-annual dividend that was declared in December 1995 of $.02 per share on Class A Common Stock and $.05 per share on Class B Common Stock (now renamed Common Stock). Management believes its expected cash flow from operations, proceeds from the sale of rental return merchandise, bank borrowings, and vendor credit are adequate to supply short-term capital needs, and that it has the ability to obtain additional long-term capital if needed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AARON RENTS, INC. (Registrant) Date - November 12, 1996 ------------------- /S/ Gilbert L. Danielson -------------------------- Gilbert L. Danielson Vice President, Finance Chief Financial Officer Date - November 12, 1996 ------------------- /S/ Robert P. Sinclair Jr. -------------------------- Robert P. Sinclair, Jr. Controller PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K: (a) The following exhibits are furnished herewith: Exhibit Number Description of Exhibit Page No. ------ ---------------------- -------- 10 Third Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement 11 Computation of Earnings Per Share 27 Financial Data Schedule (b) No reports on Form 8-K were filed by the Registrant during the three months ended September 30, 1996 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AARON RENTS, INC. (Registrant) Date - November 14, 1996 ----------------- /s/ Gilbert L. Danielson ---------------------------- Gilbert L. Danielson Vice President, Finance Chief Financial Officer Date - November 14, 1996 ----------------- /s/ Robert P. Sinclair, Jr. ----------------------------- Robert P. Sinclair, Jr. Controller