1 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 1934 JUNE 30, 2000 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 1934 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 August 7, 2000 ------------------------------------ ------------------------ Common Stock, $.50 Par Value 15,964,041 Class A Common Stock, $.50 Par Value 3,829,506 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS AARON RENTS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, 2000 1999 ---------- ------------ (In thousands, except share data) ASSETS Cash $ 91 $ 99 Accounts Receivable 23,435 21,030 Rental Merchandise 342,927 316,294 Less: Accumulated Depreciation (104,335) (96,463) ---------- ---------- 238,592 219,831 Property, Plant and Equipment, Net 55,096 55,918 Prepaid Expenses and Other Assets 18,316 21,530 ---------- ---------- Total Assets $ 335,530 $ 318,408 ========== ========== LIABILITIES & SHAREHOLDERS' EQUITY Accounts Payable and Accrued Expenses $ 27,782 $ 36,941 Dividends Payable 396 399 Deferred Income Taxes Payable 18,888 14,410 Customer Deposits and Advance Payments 10,864 10,180 Bank Debt 80,829 72,225 Other Debt 2,229 535 ---------- ---------- Total Liabilities 140,988 134,690 Commitments & Contingencies Shareholders' Equity Common Stock, Par Value $.50 Per Share; Authorized: 25,000,000 Shares; Shares Issued: 18,270,987 9,135 9,135 Class A Common Stock, Par Value $.50 Per Share; Authorized: 25,000,000 Shares; Shares Issued: 5,361,761 2,681 2,681 Additional Paid-in Capital 53,740 54,181 Retained Earnings 173,124 159,313 ---------- ---------- 238,680 225,310 Less: Treasury Shares at Cost, Common Stock, 2,342,246 Shares at June 30, 2000 and 2,177,956 Shares at December 31, 1999 (29,902) (27,356) Class A Common Stock, 1,532,255 Shares at June 30, 2000 and December 31, 1999 (14,236) (14,236) ---------- ---------- Total Shareholders' Equity 194,542 183,718 ---------- ---------- Total Liabilities & Shareholders' Equity $ 335,530 $ 318,408 ========== ========== See Notes to Consolidated Financial Statements 3 AARON RENTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended Six Months Ended -------------------------- -------------------------- June 30, June 30, -------------------------- -------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (in thousands, except per share amounts) REVENUES: Rentals and Fees $ 89,257 $ 79,980 $176,771 $157,241 Retail Sales 14,530 14,617 31,835 31,080 Non-Retail Sales 14,392 10,334 31,222 18,305 Other 3,731 2,433 7,454 5,041 -------- -------- -------- -------- 121,910 107,364 247,282 211,667 -------- -------- -------- -------- COSTS AND EXPENSES: Retail Cost of Sales 10,191 10,360 22,424 22,218 Non-Retail Cost of Sales 13,412 9,617 28,905 16,979 Operating Expenses 55,594 50,202 112,009 98,923 Depreciation of Rental Merchandise 30,219 25,708 58,482 50,477 Interest 1,317 862 2,544 1,676 -------- -------- -------- -------- 110,733 96,749 224,364 190,273 -------- -------- -------- -------- EARNINGS BEFORE TAXES 11,177 10,615 22,918 21,394 INCOME TAXES 4,248 4,040 8,711 8,140 -------- -------- -------- -------- NET EARNINGS $ 6,929 $ 6,575 $ 14,207 $ 13,254 ======== ======== ======== ======== EARNINGS PER SHARE $ .35 $ .33 $ .72 $ .66 -------- -------- -------- -------- EARNINGS PER SHARE ASSUMING DILUTION $ .35 $ .32 $ .71 $ .65 -------- -------- -------- -------- CASH DIVIDENDS DECLARED PER SHARE Common Stock $ .02 $ .02 $ .02 $ .02 -------- -------- -------- -------- Class A Common Stock $ .02 $ .02 $ .02 $ .02 -------- -------- -------- -------- WEIGHTED AVERAGE SHARES OUTSTANDING 19,790 20,040 19,845 20,127 ======== ======== ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 19,905 20,445 19,998 20,439 ======== ======== ======== ======== See Notes to Consolidated Financial Statements 4 AARON RENTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended ----------------------------------- June 30, ----------------------------------- 2000 1999 ---------- ---------- (in thousands) OPERATING ACTIVITIES Net Earnings 14,207 $ 13,254 Depreciation and Amortization 64,258 56,220 Deferred Income Taxes 4,478 (3,233) Change in Accounts Payable and Accrued Expenses (9,159) 5,077 Change in Accounts Receivable (2,405) (1,314) Other Changes, Net 3,950 (2,394) ---------- ---------- Cash Provided by Operating Activities 75,329 67,610 ---------- ---------- INVESTING ACTIVITIES Additions to Property, Plant and Equipment (9,512) (11,392) Book Value of Property Retired or Sold 4,709 5,812 Additions to Rental Equipment (132,316) (99,445) Book Value of Rental Equipment Sold 55,292 42,495 Contracts and Other Assets Acquired (422) (9,610) ---------- ---------- Cash Used by Investing Activities (82,249) (72,140) ---------- ---------- FINANCING ACTIVITIES Proceeds from Revolving Credit Agreement 97,765 91,571 Repayments on Revolving Credit Agreement (89,161) (81,202) Increase in Other Debt 1,694 809 Dividends Paid (399) (415) Acquisition of Treasury Stock (4,625) (9,437) Issuance of Stock Under Stock Option Plans 1,638 3,199 ---------- ---------- Cash Provided by Financing Activities 6,912 4,525 ---------- ---------- Decrease in Cash (8) (5) Cash at Beginning of Year 99 95 ---------- ---------- Cash at End of Period $ 91 $ 90 ========== ========== See Notes to Consolidated Financial Statements 5 AARON RENTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Aaron Rents, Inc. ("the Company") and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated. The Consolidated Balance Sheet as of June 30, 2000, and the Consolidated Statements of Earnings and Cash Flows for the six months ended June 30, 2000 and 1999, 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 June 30, 2000 and for all periods presented have been made. 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 year ended December 31, 1999. The results of operations for the period ended June 30, 2000 are not necessarily indicative of the operating results for the full year. Certain amounts in the 1999 segment information have been reclassified to conform to the 2000 presentation. NOTE B: COMPREHENSIVE INCOME There were no differences between net income and comprehensive income for the six months ended June 30, 2000 and 1999. NOTE C: SEGMENT INFORMATION Three Months Ended Six Months Ended June 30 June 30 ------------------------ ------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (in thousands) REVENUES FROM EXTERNAL CUSTOMERS: Rental Purchase $ 72,203 $ 61,322 $ 149,429 $ 119,428 Rent-to-Rent 44,163 43,483 89,735 88,252 Franchise 3,048 1,946 5,978 4,034 Other 1,782 (201) 2,606 (250) Manufacturing 13,022 14,901 30,470 29,244 Elimination of intersegment revenues (13,042) (14,726) (30,535) (29,022) Cash to accrual adjustments 734 639 (401) (19) --------- --------- --------- --------- Total revenues from external customers $ 121,910 $ 107,364 $ 247,282 $ 211,667 ========= ========= ========= ========= EARNINGS BEFORE INCOME TAXES: Rental Purchase $ 3,872 $ 5,353 $ 10,438 $ 9,388 Rent-to-Rent 4,228 3,919 9,001 10,611 Franchise 1,749 995 3,443 2,220 Other (245) 66 (542) (565) Manufacturing 711 420 1,423 472 --------- --------- --------- --------- Earnings before income taxes for reportable segments 10,315 10,753 23,763 22,126 Elimination of intersegment profit (624) (337) (1,239) (288) Cash to accrual adjustments 901 569 (166) (133) Other allocations and adjustments 585 (370) 560 (311) --------- --------- --------- --------- Total earnings before income taxes $ 11,177 $ 10,615 $ 22,918 $ 21,394 ========= ========= ========= ========= 6 PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations. Special Note Regarding Forward-Looking Information: Except for historical information contained herein, the matters set forth in this Form 10-Q are forward-looking statements. The Company notes that the forward-looking statements set forth involve a number of risks and uncertainties that could cause actual results to differ materially from any such statements, including the risks and uncertainties discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, filed with the Securities and Exchange Commission, under the caption "Certain Factors Affecting Forward Looking Statements," which discussion is incorporated herein by this reference. RESULTS OF OPERATIONS: QUARTER ENDED JUNE 30, 2000 VERSUS QUARTER ENDED JUNE 30, 1999: Total revenues for the second quarter of 2000 increased $14.5 million (13.5%) to $121.9 million compared to $107.4 million in 1999 due primarily to a $9.3 million (11.6%) increase in rentals and fees revenues, plus a $4.0 million (15.9%) increase in sales. Of this increase in rentals and fees revenues, $7.9 million was attributable to the Aaron's Rental Purchase division which opened five new Company-operated stores in the second quarter of 2000. Rentals and fees revenues from the Company's rent-to-rent operations increased $1.4 million. Revenues from retail sales decreased $87,000 (0.6%) to $14.5 million in 2000, from $14.6 million for the same period last year. This decrease was primarily due to a $614,000 decrease in sales of rental return merchandise in the Company's rent-to-rent operations partially offset by a $428,000 increase in rental return sales in the rental purchase division and a $63,000 increase in new sales. Non-retail sales, which primarily represent merchandise sold to Aaron's Rental Purchase franchisees, increased $4.1 million (39.3%) to $14.4 million compared to $10.3 million for the same period last year. The increased sales are due to the growth of the franchise operations. Other revenues for the second quarter of 2000 increased $1.3 million (53.3%) to $3.7 million compared to $2.4 million in 1999. This increase was attributable to fees and royalties from franchise operations increasing $964,000 (58.3%) to $2.6 million compared to $1.7 million last year, reflecting a net increase of 43 franchised stores since the end of the second quarter of 1999 and increasing operating revenues of maturing franchise stores. Cost of sales from retail sales decreased $169,000 (1.6%) to $10.2 million compared to $10.4 million last year, and as a percentage of retail sales, decreased slightly to 70.1% from 70.9%. Cost of sales from non-retail sales increased $3.8 million (39.5%) to $13.4 million from $9.6 million, and as a percentage of sales, increased slightly to 93.2% from 93.1%. Operating expenses increased $5.4 million (10.7%) to $55.6 million from $50.2 million. As a percentage of total revenues, operating expenses were 45.6% in 2000 and 46.8% in 1999. Operating expenses decreased as a percentage of total revenues between quarters primarily due to increased revenues in the Aaron's Rental Purchase division. Depreciation of rental merchandise increased $4.5 million (17.5%) to $30.2 million, from $25.7 million, and as a percentage of total rentals and fees, increased slightly to 33.9% from 32.1%. The increase as a percentage of revenues is primarily due to a greater percentage of the Company's 7 rentals and fees coming from the Aaron's Rental Purchase division, which depreciates its rental merchandise at a faster rate than the Rent-to-Rent division. Interest expense increased $455,000 (52.8%) to $1.3 million compared to $862,000. As a percentage of total revenues, interest expense was 1.1% in 2000 compared to .80% in 1999. The increase in interest expense as a percentage of total revenues was due to slightly higher interest rates and higher debt levels in the second quarter of 2000. Income tax expense increased $208,000 (5.1%) to $4.2 million for 2000 compared to $4.0 million for the same period in 1999. The Company's effective tax rate was 38.0% for the second quarter of 2000 compared to 38.1% in the second quarter of 1999. As a result, net earnings increased $354,000 (5.4%) to $6.9 million in the second quarter of 2000 compared to $6.6 million for the same period in 1999. As a percentage of total revenues, net earnings were 5.7% in the current quarter as compared to 6.1% for the same period last year. The weighted average number of shares outstanding during the second quarter of 2000 was 19,790,000 compared to 20,040,000 (19,905,000 versus 20,445,000 assuming dilution) for the same period last year. Six Months Ended June 30, 2000 versus Six Months Ended June 30, 1999: Total revenues for the first six months of 2000 increased $35.6 million (16.8%) to $247.3 million compared to $211.7 million in 1999 due primarily to a $19.5 million (12.4%) increase in rentals and fees revenues, plus a $13.7 million (27.7%) increase in sales. Of this increase in rentals and fees revenues, $16.8 million was attributable to the Aaron's Rental Purchase division which opened 18 new Company-operated stores in the first six months of 2000. Rentals and fees revenues from the Company's rent-to-rent operations increased $2.7 million. Revenues from retail sales increased $755,000 (2.4%) to $31.8 million in 2000, from $31.1 million for the same period last year. This increase was primarily due to increased sales of new and rental return merchandise in the Company's rental purchase operations primarily offset by a decrease of rental return sales in the rent-to-rent operations. Non-retail sales, which primarily represent merchandise sold to Aaron's Rental Purchase franchisees, increased $12.9 million (70.6%) to $31.2 million compared to $18.3 million for the same period last year. The increased sales are due to the growth of the franchise operations. Other revenues for the second quarter of 2000 increased $2.4 million (47.8%) to $7.5 million compared to $5.0 million in 1999. This increase was attributable to fees and royalties from franchise operations increasing $1.6 million (46.6%) to $5.0 million compared to $3.4 million last year, reflecting a net increase of 43 franchised stores since the end of the second quarter of 1999 and increasing operating revenues of maturing franchise stores. Cost of sales from retail sales increased $206,000 (0.9%) to $22.4 million compared to $22.2 million last year, and as a percentage of retail sales, decreased slightly to 70.4% from 71.5%. Cost of sales from non-retail sales increased $11.9 million (70.2%) to $28.9 million from $17.0 million, and as a percentage of sales, decreased slightly to 92.6 % from 92.8%. Operating expenses increased $13.1 million (13.2%) to $112.0 million from $98.9 million. As a percentage of total revenues, operating expenses were 45.3% in 2000 and 46.7% in 1999. Operating expenses decreased as a percentage of total revenues between periods primarily due to increased revenues in the Aaron's Rental Purchase division. 8 Depreciation of rental merchandise increased $8.0 million (15.9%) to $58.5 million, from $50.5 million, and as a percentage of total rentals and fees, increased slightly to 33.1% from 32.1%. The increase as a percentage of revenues is primarily due to a greater percentage of the Company's rentals and fees coming from the Aaron's Rental Purchase division, which depreciates its rental merchandise at a faster rate than the Rent-to-Rent division. Interest expense increased $868,000 (51.8%) to $2.5 million compared to $1.7 million. As a percentage of total revenues, interest expense was 1.0% in 2000 compared to 0.8% in 1999. The increase in interest expense as a percentage of total revenues was due to slightly higher interest rates and higher debt levels in the first six months of 2000. Income tax expense increased $571,000 (7.0%) to $8.7 million for 2000 compared to $8.1 million for the same period in 1999. The Company's effective tax rate was 38.0% for both the first six months of 2000 and 1999. As a result, net earnings increased $953,000 (7.2%) to $14.2 million in the first six months of 2000 compared to $13.3 million for the same period in 1999. As a percentage of total revenues, net earnings were 5.7% in the current period as compared to 6.3% for the same period last year. The weighted average number of shares outstanding during the first six months of 2000 was 19,845,000 compared to 20,127,000 (19,998,000 versus 20,439,000 assuming dilution) for the same period last year. LIQUIDITY AND CAPITAL RESOURCES: During the first six months of 2000, the Company paid a semi-annual dividend that was declared on November 3, 1999 of $.02 per share on both Common Stock and Class A Common Stock. On May 2, 2000, the Company declared a semi-annual dividend payable on July 6, 2000 of $.02 per share on both Common Stock and Class A Common Stock. Cash flow from operations for the six months ended June 30, 2000 and 1999 was $75.3 million and $67.6 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 both rent-to-rent stores and Company-operated Aaron's Rental Purchase stores. 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 a revolving credit agreement, cash flow from operations, trade credit, proceeds from the sale of rental return merchandise, and stock offerings. The revolving credit agreement provides for unsecured borrowings up to $90.0 million which includes a $6.0 million credit line to fund daily working capital requirements. At June 30, 2000, an aggregate of $80.8 million was outstanding under this facility, bearing interest at an average rate of 7.17%. The Company uses interest rate swap agreements as part of its overall long-term financing program. At June 30, 2000, the Company had swap agreements with notional principal amounts of $40.0 million which effectively fixed the interest rates on an equal amount under the Company's revolving credit agreement at 6.93%. 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. 9 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders was held on May 2, 2000 in Atlanta, Georgia, at which the following matter was submitted to a vote of the shareholders: Votes cast for or withheld regarding the election of nine (9) Directors for a term of one (1) year were as follows: Name of Nominee For Withheld - --------------- --------- -------- R.C. Loudermilk, Sr. 3,718,599 125 Gilbert L. Danielson 3,718,599 125 Earl Dolive 3,718,619 105 Robert C. Loudermilk, Jr. 3,718,599 125 Ronald W. Allen 3,718,619 105 Leo Benatar 3,718,619 105 Ingrid Sanders Jones 3,718,619 105 J. Rex Fuqua 3,718,619 105 M. Collier Ross 3,718,619 105 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) The following exhibits are furnished herewith: Exhibit Number Description of Exhibit ------ ---------------------- 27 Financial Data Schedule (for SEC use only) 10(J) Amended and Restated Loan Facility Agreement (b) No reports on Form 8-K were filed by the Registrant during the six months ended June 30, 2000. 10 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 - August 14, 2000 /s/ Gilbert L. Danielson ------------------------------ Gilbert L. Danielson Executive Vice President Chief Financial Officer Date - August 14, 2000 /s/ Robert P. Sinclair, Jr. ------------------------------ Robert P. Sinclair, Jr. Vice President Corporate Controller