Selected Financial
Information
Twelve Nine Nine
(Dollar Amounts in Year Ended Months Ended Months Ended Months Ended Year Ended Year Ended Year Ended
Thousands December 31, December 31, December 31, December 31, March 31, March 31, March 31,
Except Per Share) 1996 1995 (unaudited) 1995 1994 (unaudited) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Results
Systemwide Revenues (1) $306,200 $256,500 $192,953 $177,773 $241,286 $189,781 $158,361
Revenues:
Rentals & Fees 208,463 182,311 137,098 127,995 173,208 130,962 100,617
Sales 61,527 52,999 39,218 39,875 53,655 53,139 55,275
Other 4,255 2,465 1,908 1,471 2,029 1,083 1,740
-------------------------------------------------------------------------------------------------------
274,245 237,775 178,224 169,341 228,892 185,184 157,632
-------------------------------------------------------------------------------------------------------
Costs & Expenses:
Cost of Sales 46,168 38,274 28,350 28,772 38,696 38,879 41,594
Operating Expenses 135,012 119,590 90,027 85,464 115,028 91,927 77,816
Depreciation of
Rental Merchandise 64,437 55,408 41,612 39,912 53,708 37,310 25,407
Interest 3,449 3,172 2,323 2,185 3,033 2,063 1,650
-------------------------------------------------------------------------------------------------------
249,066 216,444 162,312 156,333 210,465 170,179 146,467
-------------------------------------------------------------------------------------------------------
Earnings Before
Income Taxes 25,179 21,331 15,912 13,008 18,427 15,005 11,165
Income Taxes 9,786 8,113 6,032 5,021 7,102 6,209 5,100
-------------------------------------------------------------------------------------------------------
Net Earnings $ 15,393 $ 13,218 $ 9,880 $ 7,987 $ 11,325 $ 8,796 $ 6,065
-------------------------------------------------------------------------------------------------------
Earnings Per Share $0.77 $0.66 $0.49 $0.40 $0.58 $0.51 $0.35
-------------------------------------------------------------------------------------------------------
Dividends Per Share:
Common $0.04 $0.05 $0.05 $.05 $0.045 $0.04 $0.0325
Class A 0.04 0.02 0.02 .02 0.025 0.03 0.0275
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Position
Rental Merchandise, Net $149,984 $122,311 $122,311 $119,781 $121,356 $113,599 $ 86,462
Property, Plant &
Equipment, Net 33,267 23,492 23,492 23,532 24,181 18,819 13,326
Total Assets 198,103 158,645 158,645 155,914 157,527 144,917 108,217
Interest-Bearing Debt 55,365 37,479 37,479 46,894 43,159 53,123 33,130
Shareholders' Equity 107,335 91,094 91,094 81,418 84,951 59,830 52,152
- -----------------------------------------------------------------------------------------------------------------------------------
At Year End
Stores Open:
Company-Operated 240 212 212 203 203 200 156
Franchised 61 36 36 24 26 15 6
Rental Contracts in Effect 179,600 158,900 158,900 152,100 156,600 126,700 100,600
Number of Employees 2,550 2,160 2,160 2,150 2,200 2,100 1,450
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Systemwide revenues include rental revenues of franchised Aaron's Rental
Purchase stores.
13
Management's Discussion and
Analysis of Financial Condition
and Results of Operations
Change in Fiscal Year End
During 1995, the Company changed its fiscal year end from March 31 to December
31, which resulted in a nine month fiscal period ended December 31, 1995. The
decision to change the fiscal year end was made for more convenience in both
internal and external communications. To aid comparative analysis, the Company
has elected to present the results of operations for the year ended December 31,
1996, along with the twelve months ended December 31, 1995 (unaudited) and the
nine months ended December 31, 1995, along with the nine months ended December
31, 1994 (unaudited).
Results of Operations
Year Ended December 31, 1996 versus Twelve Months Ended December 31, 1995
(unaudited)
Total revenues for 1996 increased $36.5 million (15.3%) to $274.2 million
compared to $237.8 million in 1995 due primarily to a $26.2 million (14.3%)
increase in rentals and fees revenues, plus an $8.5 million (16.1%) increase in
sales. Of this increase in rental revenues, $16.6 million (19.6%) was
attributable to the Aaron's Rental Purchase Division. Rental revenues from the
Company's rent-to-rent operations increased $9.5 million (9.8%) during the same
period.
Revenues from retail sales increased $5.6 million (11.8%) to $52.8 million in
1996, from $47.2 million for the same period last year. This increase was due to
increased sales of both new and rental return furniture in the rent-to-rent
division.
Other sales, which represent wholesale sales to primarily Aaron's Rental
Purchase franchisees, increased $3.0 million (51.0%) to $8.8 million compared to
$5.8 million for the same period last year. The increased sales are due to the
growth of the franchise operations.
Franchise fee and royalty income increased $1.5 million (105.4%) to $2.9 million
compared to $1.4 million last year. This increase was due to adding 25 new
franchise stores in 1996 as well as older franchise stores gaining in revenues.
Cost of sales from retail sales increased $4.8 million (14.5%) to $37.8 million
compared to $33.1 million, and as a percentage of sales, increased slightly to
71.7% from 70.1% primarily due to product mix.
Cost of sales from other sales increased $3.1 million (59.5%) to $8.3 million
from $5.2 million, and as a percentage of sales, increased to 94.9% from 89.8%.
The increase in cost of sales as a percentage of sales is due to a larger
percentage of franchise sales in 1996 which is at lower margins than other
miscellaneous wholesale sales.
Operating expenses increased $15.4 million (12.9%) to $135.0 million from $119.6
million. As a percentage of total revenues, operating expenses were 49.2% in
1996 and 50.3% in 1995. Operating expenses declined as a percentage of total
revenues between years due to the spreading of expenses over higher revenues.
Depreciation of rental merchandise increased $9.0 million (16.3%) to $64.4
million and, as a percentage of total rentals and fees, increased to 30.9% from
30.4%. This increase is primarily due to a change in the rental merchandise mix
during the year.
Interest expense increased $277,000 (8.7%) to $3.4 million compared to $3.2
million. As a percentage of total revenues, interest is unchanged at 1.3% due to
stability in interest rates during 1996.
Income tax expense increased $1.7 million (20.6%) to $9.8 million compared to
$8.1 million, and the Company's effective tax rate was 38.9% in 1996 versus
38.0% for the same period in 1995.
As a result, net earnings increased $2.2 million (16.5%) to $15.4 million for
1996 compared to $13.2 million for the same period in 1995. As a percentage of
total revenues, net earnings were 5.6% in both 1996 and 1995.
Nine Months Ended December 31, 1995 versus Nine Months Ended December 31, 1994
(unaudited)
Total revenues for the nine months of 1995 increased $8.9 million (5.2%) to
$178.2 million compared to $169.3 million in 1994 due to a $9.1 million (7.1%)
increase in rentals and fees revenue, offset by a decline in sales. Of this
increase in rental revenues, $11.7 million was attributable to the Aaron's
Rental Purchase Division. Rental revenues from the Company's rent-to-rent
operations declined $2.6 million (-3.5%) during the same period, reflecting a
slightly slower than normal winter season, an overall maturity in this segment
of the rental industry and the Company's increased emphasis on the Aaron's
Rental Purchase Division.
14
Revenues from sales decreased $657,000 (-1.6%) to $39.2 million in the nine
months of 1995, from $39.9 million for the same period last year. This decrease
was due to the closure of two rent-to-rent clearance centers and a realignment
of MacTavish Furniture Industries away from sales to furniture distributors to
the supply of furniture internally for both the rent-to-rent and rental purchase
divisions. This new emphasis resulted in reduced sales of new merchandise for
the rent-to-rent division by $3.4 million; however, for the same period, new
sales for the rental purchase division increased $1.5 million (268.9%), and
rental return sales at all store outlets increased $1.3 million (5.8%) to $24.2
million.
Other revenues increased $437,000 (29.7%) to $1.9 million compared to $1.5
million last year. This increase was entirely due to an increase of $552,000 in
franchise fee and royalty income due to the opening of 10 new franchise stores
as well as older franchise stores gaining in revenues. This income in the nine
months of 1995 was $1.17 million compared with $618,000 for the same period last
year.
Cost of sales decreased $422,000 (-1.5%) to $28.4 million compared to $28.8
million, and as a percentage of sales, increased slightly to 72.3% from 72.2%
primarily due to increases in vendor prices.
Operating expenses increased $4.6 million (5.3%) to $90 million from $85.5
million. As a percentage of total revenues, operating expenses were essentially
unchanged at 50.5% for both periods.
Depreciation of rental merchandise increased $1.7 million (4.3%) to $41.6
million and, as a percentage of total rentals and fees, decreased slightly to
30.4% from 31.2%. This decrease is primarily due to a change in the rental
merchandise mix during the year.
Interest expense increased $138,000 (6.3%) to $2.3 million compared to $2.2
million. As a percentage of total revenues, interest is unchanged at 1.3% due to
stability in interest rates during the nine months of 1995.
Income tax expense increased $1 million (20.1%) to $6 million compared to $5
million, and the Company's effective tax rate was 37.9% in 1995 versus 38.6% for
the same period in 1994.
As a result, net earnings increased $1.9 million (23.7%) to $9.9 million for the
nine months of 1995 compared to $8 million for the same period in 1994. As a
percentage of total revenues, net earnings increased to 5.5% in the nine months
of 1995, as compared to 4.7% for the same period in 1994.
Liquidity and Capital Resources
Cash flow from operations for the year ended December 31, 1996 and for the nine
months ended December 31, 1995 was $89.5 million and $55.1 million,
respectively. Such cash flows include profits on the sale of rental return
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 revolving credit
agreement provides for unsecured borrowings up to $75.0 million which includes a
$6.0 million credit line to fund daily working capital requirements. At December
31, 1996, an aggregate of $55.1 million was outstanding under this facility,
bearing interest at an average fixed rate of 6.13%. The Company uses interest
rate swap agreements as part of its overall long-term financing program. At
December 31, 1996, the Company had swap agreements with notional principal
amounts of $40 million which effectively fixed the interest rates on an equal
amount of the Company's revolving credit agreement at 6.53%.
The Company believes that the expected cash flows from operations, proceeds from
the sale of rental return merchandise, bank borrowings and vendor credit 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 ten consecutive years. A $.02 per share
dividend on Common Stock and on Class A Common Stock were paid in January, 1996
and July 1996, for a total fiscal year cash outlay of $765,000. The Company
currently expects to continue its policy of paying dividends.
15
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
(In Thousands, Except Share Data) 1996 1995
- ------------------------------------------------------------------------------------
Assets
Cash $ 84 $ 98
Accounts Receivable 10,491 8,136
Rental Merchandise 210,516 176,751
Less: Accumulated Depreciation (60,532) (54,440)
-----------------------------------
149,984 122,311
Property, Plant & Equipment, Net 33,267 23,492
Prepaid Expenses & Other Assets 4,277 4,608
-----------------------------------
Total Assets $198,103 $158,645
- ------------------------------------------------------------------------------------
Liabilities & Shareholders' Equity
Accounts Payable & Accrued Expenses $ 24,999 $ 19,304
Dividends Payable 382 365
Deferred Income Taxes Payable 2,882 3,781
Customer Deposits & Advance Payments 7,140 6,622
Bank Debt 55,125 37,260
Other Debt 240 219
-----------------------------------
Total Liabilities 90,768 67,551
Commitments & Contingencies
Shareholders' Equity
Common Stock, Par Value $.50
Per Share;
Authorized: 25,000,000 Shares;
Shares Issued: 16,170,987 at
December 31, 1996
and 6,636,761 at December 31, 1995 8,085 3,318
Common Stock, Class A, Par Value $.50
Per Share;
Authorized: 25,000,000 Shares;
Shares Issued: 5,361,761 2,681 2,681
Additional Paid-In Capital 15,445 15,370
Retained Earnings 96,226 86,365
-----------------------------------
122,437 107,734
Less: Treasury Shares at Cost,
Common Stock, 415,941 Shares
at December 31, 1996 and 932,441 Shares
at December 31, 1995 (2,315) (5,189)
Class A Common Stock, 1,418,855 Shares
at December 31, 1996 and 1,427,588 Shares
at December 31, 1995 (12,787) (11,451)
-----------------------------------
Total Shareholders' Equity 107,335 91,094
-----------------------------------
Total Liabilities & Shareholders' Equity $198,103 $158,645
- ------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
16
Consolidated Statements of earnings
Nine
Year Ended Months Ended Year Ended
(In Thousands, December 31, December 31, March 31,
Except Per Share) 1996 1995 1995
- -----------------------------------------------------------------------------------------------------
Revenues
Rentals and Fees $ 208,463 $ 137,098 $173,208
Retail Sales 52,757 35,537 47,781
Non-Retail Sales 8,770 3,681 5,874
Other 4,255 1,908 2,029
-------------------------------------------------
274,245 178,224 228,892
- -----------------------------------------------------------------------------------------------------
Costs & Expenses
Retail Cost of Sales 37,848 24,983 33,680
Non-Retail Cost of Sales 8,320 3,367 5,016
Operating Expenses 135,012 90,027 115,028
Depreciation of Rental Merchandise 64,437 41,612 53,708
Interest 3,449 2,323 3,033
-------------------------------------------------
249,066 162,312 210,465
-------------------------------------------------
Earnings Before Income Taxes 25,179 15,912 18,427
Income Taxes 9,786 6,032 7,102
-------------------------------------------------
Net Earnings $ 15,393 $ 9,880 $ 11,325
-------------------------------------------------
Earnings Per Share $ .77 $ .49 $ .58
- -----------------------------------------------------------------------------------------------------
Consolidated Statements of
Shareholders' Equity
Additional
Treasury Stock Common Stock Paid-In Retained
(In Thousands) Shares Amount Common Class A Capital Earnings
- --------------------------------------------------------------------------------------------------------------------
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 245 1,486 710 5
Net Earnings 11,325
- ----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 (2,179) (13,578) 3,318 2,681 15,314 77,216
Reacquired Shares (194) (3,134)
Dividends (732)
Reissued Shares 13 72 56 1
Net Earnings 9,880
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 (2,360) (16,640) 3,318 2,681 15,370 86,365
Stock Dividend 4,767 (4,767)
Reacquired Shares (164) (2,889)
Dividends (765)
Reissued Shares 689 4,427 75
Net Earnings 15,393
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 (1,835) $ (15,102) $ 8,085 $ 2,681 $15,445 $96,226
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
17
Consolidated Statements
of Cash Flows
Nine
Year Ended Months Ended Year Ended
December 31, December 31, March 31,
(In Thousands) 1996 1995 1995
- ----------------------------------------------------------------------------------------------------
Operating Activities
Net Earnings $ 15,393 $ 9,880 $ 11,325
Depreciation 70,693 45,798 58,765
Deferred Income Taxes (899) (345) (1,090)
Change in Accounts Payable & Accrued Expenses 5,695 242 (1,834)
Change in Accounts Receivable (2,339) 255 (386)
Other Changes, Net 982 (711) 1,966
-----------------------------------------------
Cash Provided by Operating Activities 89,525 55,119 68,746
- ----------------------------------------------------------------------------------------------------
Investing Activities
Additions to Property, Plant & Equipment (17,534) (5,476) (11,820)
Book Value of Property Retired or Sold 1,823 1,979 1,401
Additions to Rental Merchandise (137,023) (72,926) (101,755)
Book Value of Rental Merchandise Sold 48,352 30,892 40,667
Contracts & Other Assets Acquired (3,891) (533) (328)
-----------------------------------------------
Cash Used by Investing Activities (108,273) (46,064) (71,835)
- ----------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from Revolving Credit Agreement 85,299 51,933 229,448
Repayments on Revolving Credit Agreement (67,434) (56,845) (238,727)
Increase (Decrease) in Other Debt 21 (768) (685)
Proceeds from Common Stock Offering 14,140
Dividends Paid (765) (367) (709)
Acquisition of Treasury Stock (2,889) (3,134) (1,836)
Issuance of Stock Under Stock Option Plan 4,502 129 1,467
-----------------------------------------------
Cash Provided (Used) by Financing Activities 18,734 (9,052) 3,098
(Decrease) Increase in Cash (14) 3 9
Cash at Beginning of Year 98 95 86
-----------------------------------------------
Cash at End of Year $ 84 $ 98 $ 95
-----------------------------------------------
Cash Paid During the Year:
Interest $ 3,384 $ 2,642 $ 3,005
Income Taxes 7,531 7,677 8,705
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
18
Notes to Consolidated
Financial Statements
At December 31, 1996 and 1995, and for the Year Ended December 31, 1996, the
Nine Month Period Ended December 31, 1995, and the Year Ended March 31, 1995.
Note A: Summary of Significant Accounting Policies
Principles of Consolidation -- The consolidated financial statements include the
accounts of Aaron Rents, Inc., and its wholly-owned subsidiaries, Aaron
Enterprises, Inc. and Aaron Investment Company (the Company). All significant
intercompany accounts and transactions have been eliminated. The preparation of
the Company's consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those estimates.
Line of Business -- The Company is engaged in the business of renting and
selling residential and office furniture and other merchandise throughout the
U.S. 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. Prior to January 1, 1996,
depreciation was 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%. Effective January 1, 1996, the Company
prospectively changed its depreciation method on merchandise in the rental
purchase division 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 agreement 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 for the year ended
December 31, 1996 of the change in the depreciation method on merchandise
purchased after December 31, 1995 was to decrease net income by approximately
$850,000 ($.04 per share). 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 increase net income for
the year ended December 31, 1996 by approximately $709,000 ($.04 per share). The
Company recognizes rental revenues over the rental period and recognizes all
costs 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. The Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), in the first
quarter of 1996. The effect of the adoption was not material.
Deferred Income Taxes are provided for temporary differences between the amounts
of assets and liabilities for financial and tax reporting purposes. Such
temporary differences arise principally from the use of accelerated depreciation
methods 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 $10,422,000 for the fiscal year ended December 31, 1996, $6,258,000
for the nine months ended December 31, 1995, and $7,257,000 in fiscal year 1995,
respectively.
Stock Based Compensation -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations in accounting for its employee stock options and
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation" (FAS 123). The
Company grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant and,
accordingly, recognizes no compensation expense for the stock option grants.
19
Reclassifications -- Certain classifications have been made to the 1995
financial statements to conform to the 1996 presentation.
Note B: Change in Fiscal Year End
During 1995, the Company changed its fiscal year end from March 31 to December
31, which resulted in a nine month fiscal period ended December 31, 1995. The
decision to change the fiscal year end was made for more convenience in both
internal and external reporting.
Results of operations (condensed) for the nine-month periods ended December 31,
1995 and December 31, 1994 are shown below:
Nine Months Ended
December 31,
(In Thousands, Except 1995 1994
Per Share Amounts) (unaudited)
- -----------------------------------------------------------
Revenues $178,224 $169,341
Cost of Sales 28,350 28,772
Operating And Other Expenses 92,350 87,649
Depreciation of Rental Merchandise 41,612 39,912
--------------------
Earnings Before Income Taxes 15,912 13,008
Income Taxes 6,032 5,021
--------------------
Net Earnings $ 9,880 $ 7,987
--------------------
Earnings Per Share $.49 $.40
--------------------
Weighted Average
Shares Outstanding 20,037 19,768
- -----------------------------------------------------------
Note C: 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 19,983,692
shares for the year ended December 31, 1996; 20,037,456 shares for the nine
months ended December 31, 1995; and 19,628,548 shares for the year ended March
31, 1995.
Note D: Property, Plant & Equipment
December 31, December 31,
(In Thousands) 1996 1995
- -------------------------------------------------------------------
Land $ 3,662 $ 1,872
Buildings & Improvements 15,787 9,692
Leasehold Improvements & Signs 16,068 13,834
Fixtures & Equipment 15,738 16,065
Construction in Progress 2,726 528
---------------------------------
53,981 41,991
Less: Accumulated Depreciation
& Amortization (20,714) (18,499)
---------------------------------
$ 33,267 $ 23,492
- -------------------------------------------------------------------
Note E: Debt
Bank Debt -- The Company has a revolving credit agreement with four banks
providing for unsecured borrowings up to $75,000,000, which includes a
$6,000,000 credit line to fund daily working capital requirements. Amounts
borrowed bear interest at the lower of the lender's prime rate, or LIBOR plus
.5%, or the rate at which certificates of deposit are offered in the secondary
market plus .625%. The pricing under the working capital line is based upon
overnight bank borrowing rates. At December 31, 1996 and 1995, an aggregate of
$55,125,000 and $37,260,000, respectively, was outstanding under this agreement.
The Company pays a .22% commitment fee on unused balances. The weighted average
interest rate on borrowings under the revolving credit agreement (before giving
effect to interest rate swaps) was 6.17% in 1996, 6.99% for the nine months
ended December 31, 1995 and 6.13% in fiscal 1995. The effects of interest rate
swaps on the weighted average interest rate was not material.
The Company has entered into interest rate swap agreements that effectively fix
the interest rate on $20,000,000 of borrowings under the revolving credit
agreement at an average rate of 6.71% until November 2000 and an additional
$20,000,000 at an average rate of 6.35% until June 2005. These swap agreements
involve the receipt of amounts when the floating rates exceed the fixed rates
and the payment of amounts when the fixed rates exceed the floating rates in
such agreements over the life of the agreements. The differential to be paid or
received is accrued as interest rates change and is recognized as an adjustment
to the floating rate interest expense related to the debt. The related amount
payable to or receivable from counterparties 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 not to be significant at
December 31, 1996. 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 $240,000 at December 31, 1996 and $219,000 at
December 31, 1995 represents an insurance premium financing agreement bearing
interest at 6.95%. Other debt matures in 1997.
20
Note F: Income Taxes
Nine
Year Ended Months Ended Year Ended
December 31, December 31, March 31,
(In Thousands) 1996 1995 1995
- ------------------------------------------------------------------------------
Current Income Tax Expense:
Federal $ 9,503 $5,577 $ 7,258
State 1,182 800 934
-----------------------------------------
10,685 6,377 8,192
Deferred Income Tax (Benefit):
Federal (889) (302) (930)
State (10) (43) (160)
-----------------------------------------
(899) (345) (1,090)
-----------------------------------------
$ 9,786 $6,032 $ 7,102
- ------------------------------------------------------------------------------
Significant components of the Company's deferred income tax liabilities and
assets are as follows:
December 31, December 31,
(In Thousands) 1996 1995
- -----------------------------------------------------------------
Deferred Tax Liabilities:
Rental Merchandise and
Property, Plant & Equipment $5,486 $6,858
Other, Net 1,141 134
---------------------------
Total Deferred Tax Liabilities 6,627 6,992
Deferred Tax Assets:
Accrued Liabilities 892 847
Advance Payments 2,150 1,702
Other, Net 703 662
---------------------------
Total Deferred Tax Assets 3,745 3,211
---------------------------
Net Deferred Tax Liabilities $2,882 $3,781
- -----------------------------------------------------------------
The Company's effective tax rate differs from the federal income tax statutory
rate as follows:
Nine
Year Ended Months Ended Year Ended
December 31, December 31, March 31,
1996 1995 1995
- --------------------------------------------------------------------
Statutory Rate 35.0% 35.0% 35.0%
Increases in Taxes
Resulting From
State Income Taxes,
net of Federal Income
Tax Benefit 3.0 3.2 2.7
Other, Net .9 (.3) .8
-----------------------------------------
Effective Tax Rate 38.9% 37.9% 38.5%
- --------------------------------------------------------------------
Note G: Commitments
The Company leases warehouse and retail store space for substantially all of its
operations under operating leases expiring at various times through 2005. Most
of the leases contain renewal options for additional periods ranging from 2 to
10 years or provide for options to purchase the related property at
predetermined purchase prices which do not represent bargain purchase options.
The Company also leases transportation 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, including guaranteed residual values, required
under operating leases that have initial or remaining non-cancelable terms in
excess of one year as of December 31, 1996, are as follows: $17,207,000 in 1997;
$14,688,000 in 1998; $10,728,000 in 1999; $6,689,000 in 2000; $7,479,000 in
2001; and $3,284,000 thereafter.
Rental expense was $17,886,000 for the year ended December 31, 1996, $11,513,000
for the nine months ended December 31, 1995 and $15,467,000 for the year ended
March 31, 1995, respectively.
The Company leases five buildings from certain officers of the Company under
leases expiring through 2005 for annual rentals aggregating $680,000.
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 $308,000 in 1996, $162,000 for the
nine months ended December 31, 1995 and $259,000 in fiscal year 1995,
respectively.
Note H: Shareholders' Equity
During 1996, the Company declared a 100% stock dividend on its Common Stock and
Class A Common Stock. Each stockholder received one share of Common Stock for
each share of Common Stock and Class A Common Stock held. All share and per
share amounts have been restated to reflect the 100% stock dividend. Common
stock is non-voting.
On May 2, 1994, the Company issued, through a public offering, 1,275,000 shares
of 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 December 31, 1996, the Company held a total of 1,834,796 common shares in its
treasury, and is authorized by the Board of Directors to acquire up to an
additional 3,090 shares. On February 11, 1997, the Board of Directors approved
the purchase of an additional 1,000,000 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.
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Note I: Stock Options
The Company has stock option plans under which options to purchase shares of the
Company's Common Stock are granted to certain key employees.
Under the Company's 1990 Stock Option Plan, options granted become exercisable
after a period of two years and unexercised options lapse five years after the
date of grant. Under the Company's 1996 Stock Option Plan, options currently
granted become exercisable after a period of three years and unexercised options
lapse ten years after the date of the grant. Options under both plans are
subject to forfeiture upon termination of service. Under the plans, 2,047,000
shares of the Company shares are reserved for issuance at December 31, 1996.
Pro forma information regarding net earnings and earnings per share is required
by FAS 123, and has been determined as if the Company has accounted for its
employee stock options granted in 1996 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions for
1996: risk-free interest rate of 6.72%; a dividend yield of .4%; volatility
factor of the expected market price of the Company's common stock of .335; and a
weighted-average expected life of the option of 8 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
Year Ended
December 31, 1996
- ----------------------------------------------------------------
Pro forma net earnings $14,825
Pro forma earnings per share
Primary .74
Fully diluted .74
- ----------------------------------------------------------------
Because these pro forma disclosures only reflect grants of stock options in
1996, such pro forma amounts are not indicative of the pro forma effects on net
earnings in future years from grants of stock options.
The table below summarizes option activity for the periods indicated in the
Company's stock option plans:
Year Ended Nine Months Ended Year Ended
December 31, 1996 December 31, 1995 March 31, 1995
------------------------- --------------------------- ------------------------
Common Weighted Common Weighted Common Weighted
(In Thousands, Except Price Per Share) Shares Average Price Shares Average Price Shares Average Price
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding - beginning of year 1,248 $4.54 1,294 $4.54 1,279 $3.08
Options granted 780 9.88 504 6.75
Options exercised (701) 3.00 (24) 3.00 (489) 3.00
Options cancelled (8) 9.88 (22) 6.68
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding - end of year 1,319 $8.48 1,248 $4.54 1,294 $4.54
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercisable - end of year 207 $5.79 766 $3.14 760 $3.06
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 1996 ranged from
$3.00 to $9.88. The weighted average remaining contractual life of those
options is 6.6 years.
Note J: Quarterly Financial Information (Unaudited)
(In Thousands First Second Third Fourth
Except Per Share) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Year ended December 31, 1996
Revenues $64,693 $67,610 $71,224 $70,718
Gross Profit 38,873 39,980 41,273 39,259
Earnings Before Taxes 6,791 6,375 6,198 5,815
Net Earnings 4,159 3,914 3,787 3,533
Earnings Per Share $ .21 $ .20 $ .19 $ .18
- --------------------------------------------------------------------------------
Twelve Months ended December 31, 1995
Revenues $59,551 $59,135 $59,012 $60,077
Gross Profit 35,273 35,534 35,127 35,694
Earnings Before Taxes 5,419 5,347 5,152 5,413
Net Earnings 3,338 3,315 3,205 3,360
Earnings Per Share $ .17 $ .17 $ .16 $ .17
- --------------------------------------------------------------------------------
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Note K: Franchising of Aaron's Rental Purchase Stores
The Company franchises Aaron's Rental Purchase stores. As of December 31, 1996
and December 31, 1995, 151 and 106 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. The Company recognizes this income as earned and
includes it 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 $304,000 and $4,513,000, respectively, at December 31,
1996. 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.
Common Stock Market Prices
& Dividends
The Company's Common Stock and Class A Common Stock are traded on The NASDAQ
Stock Market under the symbols "ARON" and "ARONA," respectively. The approximate
number of shareholders of record of the Company's Common Stock and Class A
Common Stock at March 17, 1997, was 2,000. The following table shows, for the
periods indicated, the range of high and low closing bid prices per share for
the Common Stock and Class A Common Stock as reported by NASDAQ, and the cash
dividends declared per share.
The average closing bid quotation for Common Stock and Class A Common Stock on
March 17, 1997, was $11.625 and $11.00 respectively. The Company currently
expects to continue its policy of paying dividends.
Cash
Dividends
Common Stock High Low Per Share
- ---------------------------------------------------
December 31, 1996
First Quarter $10.125 $ 9.00 $
Second Quarter 15.00 9.875 .02
Third Quarter 13.625 11.00
Fourth Quarter 14.625 11.125 .02
- ---------------------------------------------------
December 31, 1995
First Quarter $ 7.875 $ 6.875 $.025
Second Quarter 9.50 7.688
Third Quarter 9.25 8.625 .025
Cash
Class A Dividends
Common Stock High Low Per Share
- ---------------------------------------------------
December 31, 1996
First Quarter $10.875 $ 8.875 $
Second Quarter 15.125 10.875 .02
Third Quarter 15.75 11.50
Fourth Quarter 15.00 12.75 .02
- ---------------------------------------------------
December 31, 1995
First Quarter $ 7.75 $ 7.00 $ .01
Second Quarter 9.50 7.75
Third Quarter 9.25 8.688 .01
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 December 31, 1996 and 1995, and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
year ended December 31, 1996, the nine months ended December 31, 1995 and the
year ended March 31, 1995. 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 December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for the year ended December 31, 1996,
the nine months ended December 31, 1995 and the year ended March 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note A to the Consolidated Financial Statements, in 1996 the
Company changed its method of accounting for depreciation of rental purchase
merchandise.
Atlanta, Georgia
March 14, 1997
23