EXHIBIT 13
FINANCIAL HIGHLIGHTS
YEAR ENDED YEAR ENDED
(DOLLAR AMOUNTS IN THOUSANDS, DECEMBER 31, DECEMBER 31, PERCENTAGE
EXCEPT PER SHARE) 2001 2000 CHANGE
=====================================================================================
OPERATING RESULTS
Revenues $546,681 $502,920 8.7%
Earnings Before Taxes 19,855 43,906 (54.8)
Net Earnings 12,336 27,261 (54.7)
Earnings Per Share 0.62 1.38 (55.1)
Earnings Per Share
Assuming Dilution 0.61 1.37 (55.5)
=====================================================================================
FINANCIAL POSITION
Total Assets $397,196 $380,379 4.4%
Rental Merchandise, Net 258,932 267,713 (3.3)
Interest-Bearing Debt 77,713 104,769 (25.8)
Shareholders' Equity 219,967 208,538 5.5
Book Value Per Share 11.01 10.50 4.9
Debt to Capitalization 26.1% 33.4%
Pre-Tax Profit Margin 3.6 8.7
Net Profit Margin 2.3 5.4
Return on Average Equity 5.8 13.9
=====================================================================================
STORES OPEN
Sales & Lease Ownership 364 263 38.4%
Sales & Lease Ownership Franchised 209 193 8.3
Rent-to-Rent 75 98 (23.5)
=====================================================================================
Total Stores 648 554 17.0%
========================================
REVENUES BY CALENDAR YEAR
CHART
========================================
NET EARNINGS BY CALENDAR YEAR
CHART
SELECTED FINANCIAL INFORMATION
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
(DOLLAR AMOUNTS IN THOUSANDS, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
EXCEPT PER SHARE) 2001 2000 1999 1998 1997
========================================================================================================
OPERATING RESULTS
Systemwide Revenues(1) $ 735,389 $ 656,096 $ 547,255 $ 464,175 $ 364,306
------------------------------------------------------------------------
Revenues:
Rentals & Fees 403,385 $ 359,880 $ 318,154 $ 289,272 $ 231,207
Retail Sales 60,481 62,417 62,296 62,576 58,602
Non-Retail Sales 66,212 65,498 45,394 18,985 14,621
Other 16,603 15,125 11,515 8,826 6,321
------------------------------------------------------------------------
546,681 502,920 437,359 379,659 310,751
------------------------------------------------------------------------
Costs & Expenses:
Retail Cost of Sales 43,987 44,156 45,254 44,386 42,264
Non-Retail Cost of Sales 61,999 60,996 42,451 17,631 13,650
Operating Expenses 276,682 227,587 201,923 189,719 149,728
Depreciation of
Rental Merchandise 137,900 120,650 102,324 89,171 71,151
Interest 6,258 5,625 4,105 3,561 3,721
------------------------------------------------------------------------
526,826 459,014 396,057 344,468 280,514
------------------------------------------------------------------------
Earnings Before
Income Taxes 19,855 43,906 41,302 35,191 30,237
Income Taxes 7,519 16,645 15,700 13,707 11,841
------------------------------------------------------------------------
Net Earnings $ 12,336 $ 27,261 $ 25,602 $ 21,484 $ 18,396
------------------------------------------------------------------------
Earnings Per Share $ .62 $ 1.38 $ 1.28 $ 1.06 $ .96
Earnings Per Share
Assuming Dilution .61 1.37 1.26 1.04 .94
------------------------------------------------------------------------
Dividends Per Share:
Common $ .04 $ .04 $ .04 $ .04 $ .04
Class A .04 .04 .04 .04 .04
========================================================================================================
FINANCIAL POSITION
Rental Merchandise, Net $ 258,932 $ 267,713 $ 219,831 $ 194,163 $ 176,968
Property, Plant &
Equipment, Net 77,282 63,174 55,918 50,113 39,757
Total Assets 397,196 380,379 318,408 272,174 239,382
Interest-Bearing Debt 77,713 104,769 72,760 51,727 76,486
Shareholders' Equity 219,967 208,538 183,718 168,871 116,455
========================================================================================================
AT YEAR END
Stores Open:
Company-Operated 439 361 320 291 292
Franchised 209 193 155 136 101
Rental Agreements in Effect 314,600 281,000 254,000 227,400 219,800
Number of Employees 4,200 3,900 3,600 3,400 3,100
========================================================================================================
(1) Systemwide revenues include revenues of franchised Aaron's Sales & Lease
Ownership stores.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Year Ended December 31, 2001 versus Year Ended December 31, 2000
Total revenues for 2001 increased $43.8 million (8.7%) to $546.7 million
compared to $502.9 million in 2000 due primarily to a $43.5 million (12.1%)
increase in rentals and fees revenues, plus a $714,000 (1.1%) increase in
non-retail sales. Of this increase in the rentals and fees revenues, $62.7
million was attributed to the Aaron's Sales & Lease Ownership division which
added 101 Company-operated stores in 2001, offset by a $19.2 million decrease in
the Company's rent-to-rent division.
Revenues from retail sales decreased $1.9 million (3.1%) to $60.5 million
in 2001, from $62.4 million for the same period last year. Non-retail sales,
which primarily represent merchandise sold to Aaron's Sales & Lease Ownership
franchisees, increased $714,000 (1.1%) to $66.2 million compared to $65.5
million for the same period last year. The increased sales are due to the growth
of the franchise operations.
Other revenues for 2001 increased $1.5 million (9.8%) to $16.6 million
compared to $15.1 million in 2000. This increase was attributable to franchise
fee and royalty income increasing $1.2 million (10.0%) to $13.6 million compared
to $12.4 million last year, reflecting the net addition of 16 new (including 3
acquired) franchised stores in 2001 and improved operating revenues at mature
franchised stores.
Cost of sales from retail sales decreased $169,000 (.4%) to $44.0 million
compared to $44.2 million, and as a percentage of sales, increased to 72.7% from
70.7% primarily due to product mix. Cost of sales from non-retail sales
increased $1.0 million (1.6%) to $62.0 million from $61.0 million, and as a
percentage of sales, increased to 93.6% from 93.1%. The decreased margins on
non-retail sales was primarily the result of slightly lower margins on certain
products sold to franchisees.
Operating expenses increased $49.1 million (21.6%) to $276.7 million from
$227.6 million. As a percentage of total revenues, operating expenses were 50.6%
in 2001 and 45.3% in 2000. Operating expenses increased as a percentage of total
revenues between years primarily due to the costs associated with the
acquisition and accelerated start-up costs of sales and lease ownership
locations formerly operated by one of the nation's largest furniture retailers
along with other new store openings. In addition, the Company recorded non-cash
charges of $5.6 million related to the future real estate lease obligations of
closed rent-to-rent stores and the write down of inventory and other assets
within the rent-to-rent division.
Depreciation of rental merchandise increased $17.2 million (14.3%) to
$137.9 million, from $120.7 million, and as a percentage of total rentals and
fees increased to 34.2% from 33.5% in 2000. The increase as a percentage of
rentals and fees is primarily due to a greater percentage of the Company's
rentals and fees coming from the Aaron's Sales & Lease Ownership division which
depreciates its rental merchandise at a faster rate than the rent-to-rent
division.
Interest expense increased $633,000 (11.3%) to $6.3 million compared to
$5.6 million. As a percentage of total revenues, interest expense was 1.1% in
2001 and 2000.
The Company manages its exposure to changes in short-term interest rates,
particularly to reduce the impact on its floating-rate term notes, by entering
into interest rate swap agreements. The counterparties to these contracts are
high credit quality commercial banks. Consequently, credit risk, which is
inherent in all swaps, has been minimized to a large extent. Interest expense is
adjusted for the differential to be paid or received as interest rates change.
The level of floating-rate debt fixed by swap agreements was $60 million at
December 31, 2001 and the Company does not expect a significant change in this
amount in 2002. Accordingly, the Company does not believe it has material
exposure of potential, near-term losses in future earnings, and/or cash flows
from reasonably possible near-term changes in market rates.
Income tax expense decreased $9.1 million (54.8%) to $7.5 million compared
to $16.6 million. The Company's effective tax rate was 37.9% in both 2001 and
2000.
As a result, net earnings decreased $14.9 million (54.8%) to $12.3 million
for 2001 compared to $27.3 million for the same period in 2000. As a percentage
of total revenues, net earnings were 2.3% in 2001 and 5.4% in 2000. The decrease
in net earnings is primarily the result of start-up expenses associated with the
101 new store openings, as compared to just 32 stores opened in the prior year,
and non-cash charges associated with the rent-to-rent division.
Year Ended December 31, 2000 versus Year Ended December 31, 1999
Total revenues for 2000 increased $65.6 million (15.0%) to $502.9 million
compared to $437.4 million in 1999 due primarily to a $41.7 million (13.1%)
increase in rentals and fees revenues, plus a $20.1 million (44.3%) increase in
non-retail sales. Of this increase in rentals and fees revenues, $37.7 million
was attributable to the Aaron's Sales & Lease Ownership division. Rentals and
fees revenues from the Company's rent-to-rent operations increased $4.0 million
during the same period.
Revenues from retail sales increased $121,000 (.2%) to $62.4 million in
2000, from $62.3 million for the same period last year. Non-retail sales, which
primarily represent merchandise sold to Aaron's Sales & Lease Ownership
franchisees, increased $20.1 million (44.3%) to $65.5 million compared to $45.4
million for the same period last year. The increased sales are due to the growth
of the franchise operations.
Other revenues for 2000 increased $3.6 million (31.4%) to $15.1 million
compared to $11.5 million in 1999. This increase was attributable to franchise
fee and royalty income increasing $3.3 million (36.3%) to $12.4 million compared
to $9.1 million last year, reflecting the net addition of 38 new franchised
stores in 2000 and improved operating revenues at mature franchised stores.
Cost of sales from retail sales decreased $1.1 million (2.4%) to $44.2
million compared to $45.3 million, and as a percentage of sales, decreased to
70.7% from 72.6% primarily due to product mix. Cost of sales from non-retail
sales increased $18.5 million (43.7%) to $61.0 million from $42.5 million, and
as a percentage of sales, decreased to 93.1% from 93.5%. The increased margins
on non-retail sales was primarily the result of slightly higher margins on
certain products sold to franchisees.
Operating expenses increased $25.7 million (12.7%) to $227.6 million from
$201.9 million. As a percentage of total
revenues, operating expenses were 45.3% in 2000 and 46.2% in 1999. Operating
expenses decreased as a percentage of total revenues between years primarily due
to increased revenues in the Aaron's Sales & Lease Ownership division.
Depreciation of rental merchandise increased $18.3 million (17.9%) to
$120.7 million, from $102.3 million, and as a percentage of total rentals and
fees increased to 33.5% from 32.2% in 1999. The increase as a percentage of
rentals and fees is primarily due to a greater percentage of the Company's
rentals and fees coming from the Aaron's Sales & Lease Ownership division which
depreciates its rental merchandise at a faster rate than the rent-to-rent
division.
Interest expense increased $1.5 million (37.0%) to $5.6 million compared to
$4.1 million. As a percentage of total revenues, interest expense was 1.1% in
2000 compared to .9% in 1999. The increase in interest expense as a percentage
of revenues was due to increased interest rates along with higher daily average
debt levels.
Income tax expense increased $945,000 (6.0%) to $16.6 million compared to
$15.7 million. The Company's effective tax rate was 37.9% in 2000 compared to
38.0% in 1999.
As a result, net earnings increased $1.7 million (6.5%) to $27.3 million
for 2000 compared to $25.6 million for the same period in 1999. As a percentage
of total revenues, net earnings were 5.4% in 2000 and 5.9% in 1999. The decrease
in net earnings as a percentage of total revenues is the result of startup
expenses associated with the increased rate at which the Company opened new
Aaron's Sales & Lease Ownership stores with 32 stores opened in 2000 compared to
17 in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations for the years ended December 31, 2001 and 2000
were $189.4 million and $166.2 million, respectively. Such cash flows include
profits on the sale of rental return merchandise. In 2001, the Company extended
its payment terms with vendors as a source of additional cash flows. The
Company's primary capital requirements consist of acquiring rental merchandise
for both rent-to-rent and Company-operated Aaron's Sales & Lease Ownership
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 bank credit, cash
flow from operations, trade credit, proceeds from the sale of rental return
merchandise and stock offerings.
The Company has financed its growth through a revolving credit agreement
with several banks, trade credit and internally generated funds. The revolving
credit agreement dated March 30, 2001 provides for unsecured borrowings up to
$110.0 million which includes an $8.0 million credit line to fund daily working
capital requirements. The facility expires on March 30, 2004. At December 31,
2001, an aggregate of $72.4 million was outstanding under this facility, bearing
interest at a weighted average variable rate of 3.2%. The Company uses interest
rate swap agreements as part of its overall long-term financing program. At
December 31, 2001, the Company had swap agreements with notional principal
amounts of $60 million which effectively fixed the interest rates on an equal
amount of the Company's debt under the revolving credit agreement at 7.2%. The
fair value of interest rate swap agreements was a liability of approximately
$3.1 million at December 31, 2001.
On October 31, 2001, the Company renewed its $25 million construction and
lease facility. From 1996 to 1999, properties acquired by the lessor were
purchased or constructed and then leased to the Company under operating lease
agreements. The total amount advanced and outstanding under this facility at
December 31, 2001 was approximately $24.7 million. Since the resulting leases
are operating leases, no debt obligation is recorded on the Company's balance
sheet. This construction and lease facility expires in 2006. Lease payments
fluctuate based upon current interest rates and are generally based upon LIBOR
plus 1.35%. The lease facility contains residual value guarantee and default
guarantee provisions. Although management believes the likelihood of funding to
be remote, the maximum guarantee obligation under the residual value and default
guarantee provisions upon termination is approximately $20.9 million and $24.7
million, respectively, at December 31, 2001.
The Company's revolving credit agreement, the construction and lease
facility, and the franchise loan program discussed below (collectively "the
facilities") contain financial covenants which, among other things, require the
Company to not exceed certain debt to equity levels and to maintain a minimum
fixed charge coverage ratio as defined under the facilities. Failure to maintain
these required covenants would constitute an event of default under the credit
facilities, and all amounts would become due immediately. The Company was in
compliance with all such covenants at December 31, 2001. The Company anticipates
it will be in compliance with such covenants in the future, or will be able to
obtain waivers in the event of non-compliance.
The Company leases warehouse and retail store space for substantially all
of its operations under operating leases expiring at various times through 2015.
Most of the leases contain renewal options for additional periods periods
ranging from 1 to 15 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 required under operating leases that
have initial or remaining non-cancelable terms in excess of one year as of
December 31, 2001, are as follows: $30.0 million in 2002; $24.5 million in 2003,
$18.8 million in 2004; $12.4 million in 2005; $7.6 million in 2006; and $8.8
million thereafter.
The Company has guaranteed the borrowings of certain independent
franchisees under a franchise loan program with a bank. In the event these
franchisees are unable to meet their debt service payments or otherwise
experience an event of default, the Company would be unconditionally liable for
the outstanding balance of the franchisee's debt obligations ($30.6 million as
of December 31, 2001), which would be due in full within 90 days of the event of
default. However, due to franchisee borrowing limits, the Company believes any
losses associated with such a default would be substantially mitigated through
the recovery of rental merchandise and other assets. The Company has had no
significant losses associated with the franchisee loan and guaranty program.
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.
As of December 31, 2001 the Board of Directors had authorized the Company
to purchase an additional 1,284,190 shares of Company stock.
The Company has paid dividends for fifteen consecutive years. A $.02 per
share dividend on Common Stock and on Class A Common Stock was paid in January
2001 and July 2001, for a total fiscal year cash outlay of $797,000. The Company
currently expects to continue its policy of paying dividends.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition: Rental revenues are recognized in the month they are
due on the accrual basis of accounting. For internal management reporting
purposes, rental revenues in the sales and lease ownership division are
recognized as revenue in the month the cash is collected. On a monthly basis,
the Company records an accrual for rental revenues due, but not yet received,
and a deferral of revenue for rental payments received prior to the month due.
The Company's revenue recognition accounting policy matches the rental revenue
with the corresponding costs (primarily depreciation) associated with the rental
merchandise. At December 31, 2001 and 2000, the Company had a net revenue
deferral representing cash collected in advance of being due or otherwise earned
totaling approximately $5.7 million and $4.3 million, respectively. Revenues
from the sale of residential and office furniture and other merchandise are
recognized at the time of shipment.
Rental Merchandise Depreciation: The sales and lease ownership division
depreciates merchandise over the agreement period, generally 12 to 24 months,
when on rent, and 36 months, when not on rent, to a 0% salvage value, with the
exception of merchandise in distribution centers which is not depreciated during
the initial months in the distribution center. As sales and lease ownership
revenues continue to constitute an increasing percentage of total revenues, the
Company would expect rental merchandise depreciation to increase at a
correspondingly faster rate. The rent-to-rent division depreciates merchandise
over its estimated useful life which ranges from 6 months to 60 months, net of
its salvage value which ranges from 0% to 60%. All rental merchandise is
available for rental and sale. On a monthly basis, the Company writes off
damaged, lost or unsalable merchandise as identified. Such write-offs totaled
approximately $10.0 million, $8.9 million and $6.7 million during the years
ended December 31, 2001, 2000 and 1999, respectively.
Closed Store Reserves: From time to time, the Company closes or
consolidates retail stores. The Company records an estimate of the future
obligation related to closed stores based upon the present value of the future
lease payments and related commitments, net of estimated sublease income.
Sublease income is based upon historical experience. At December 31, 2001 and
2000, the Company's reserve for closed stores was $3.4 million and $350,000,
respectively, with the increase primarily related to rent-to-rent stores closed
during 2001. If the Company's estimates related to sublease income are not
correct, the Company's actual liability may be more or less than the liability
recorded at December 31, 2001.
Company Insurance Programs: The Company maintains insurance contracts for
the payment of workers compensation and group health insurance claims. Using
actuarial analysis and projections, the Company estimates annually the
liabilities associated with open and incurred but not reported workers
compensation claims. This analysis is based upon an assessment of the likely
outcome or historical experience, net of any stop loss or other supplementary
coverages. The Company also calculates on an annual basis, the projected
outstanding plan liability for the group health insurance program.
The Company's liability for workers compensation insurance claims and group
health insurance was approximately $3.3 million and $3.5 million, respectively
at December 31, 2001 and 2000.
If the Company resolves existing workers compensation claims for amounts
which are in excess of the Company's current estimates and within policy stop
loss limits, the Company will be required to pay additional amounts beyond those
accrued at December 31, 2001. Additionally, if the actual group health insurance
liability develops in excess of the annual projection, the Company will be
required to pay additional amounts beyond those accrued at December 31, 2001.
The assumptions and conditions described above reflect management's best
assumptions and estimates, but these items involve inherent uncertainties as
described above, which may or may not be controllable by management. As a
result, the accounting for such items could result in different amounts if
management used different assumptions or if different conditions occur in future
periods.
For further information concerning accounting policies, refer to Note A of
our Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
Certain written and oral statements made by our Company may constitute
"forward-looking statements" as defined under the Private Securities Litigation
Reform Act of 1995, including statements made in this report and other filings
with the Securities and Exchange Commission. All statements which address
operating performance, events or developments that we expect or anticipate will
occur in the future -- including growth in store openings and franchises
awarded, market share, and statements expressing general optimism about future
operating results -- are forward-looking statements. Forward-looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially. The Company undertakes no obligation to publicly update or
revise any forward-looking statements. For a discussion of such risks and
uncertainties see "Certain Factors Affecting Forward-Looking Statements" in the
Company's Annual Report on Form 10-K for fiscal 2001, filed with the Securities
and Exchange Commission, which discussion is incorporated herein by this
reference.
CONSOLIDATED BALANCE SHEETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 2001 2000
=========================================================================================
ASSETS
Cash $ 93 $ 95
Accounts Receivable 25,411 23,637
Rental Merchandise 392,532 381,930
Less: Accumulated Depreciation (133,600) (114,217)
----------------------------
258,932 267,713
Property, Plant & Equipment, Net 77,282 63,174
Goodwill, Net 22,096 17,672
Prepaid Expenses & Other Assets 13,382 8,088
----------------------------
Total Assets $ 397,196 $ 380,379
=========================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts Payable & Accrued Expenses $ 65,344 $ 34,693
Dividends Payable 399 399
Deferred Income Taxes Payable 20,963 20,986
Customer Deposits & Advance Payments 12,810 10,994
Bank Debt 72,397 100,000
Other Debt 5,316 4,769
----------------------------
Total Liabilities 177,229 171,841
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 53,846 53,662
Retained Earnings 197,321 185,782
Accumulated Other Comprehensive Loss (1,954)
----------------------------
261,029 251,260
Less: Treasury Shares at Cost,
Common Stock, 2,130,421 Shares at December 31, 2001
& 2,230,446 Shares at December 31, 2000 (26,826) (28,486)
Class A Common Stock, 1,532,255 Shares
at December 31, 2001 & December 31, 2000 (14,236) (14,236)
----------------------------
Total Shareholders' Equity 219,967 208,538
----------------------------
Total Liabilities & Shareholders' Equity $ 397,196 $ 380,379
=========================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE) 2001 2000 1999
==================================================================================
REVENUES
Rentals & Fees $ 403,385 $ 359,880 $ 318,154
Retail Sales 60,481 62,417 62,296
Non-Retail Sales 66,212 65,498 45,394
Other 16,603 15,125 11,515
-----------------------------------------
546,681 502,920 437,359
==================================================================================
COSTS & EXPENSES
Retail Cost of Sales 43,987 44,156 45,254
Non-Retail Cost of Sales 61,999 60,996 42,451
Operating Expenses 276,682 227,587 201,923
Depreciation of Rental Merchandise 137,900 120,650 102,324
Interest 6,258 5,625 4,105
----------------------------------------
526,826 459,014 396,057
-----------------------------------------
Earnings Before Income Taxes 19,855 43,906 41,302
Income Taxes 7,519 16,645 15,700
-----------------------------------------
Net Earnings $ 12,336 $ 27,261 $ 25,602
-----------------------------------------
Earnings Per Share $ .62 $ 1.38 $ 1.28
-----------------------------------------
Earnings Per Share Assuming Dilution .61 1.37 1.26
==================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
TREASURY STOCK COMMON STOCK PAID-IN RETAINED COMPREHENSIVE
(IN THOUSANDS, EXCEPT PER SHARE) SHARES AMOUNT COMMON CLASS A CAPITAL EARNINGS LOSS
==================================================================================================================================
BALANCE, DECEMBER 31, 1998 (3,084) $(31,740) $ 9,135 $ 2,681 $ 54,284 $134,511
Reacquired Shares (860) (12,673)
Dividends, $.04 per share (800)
Reissued Shares 234 2,821 (103)
Net Earnings 25,602
==================================================================================================================================
BALANCE, DECEMBER 31, 1999 (3,710) (41,592) 9,135 2,681 54,181 159,313
Reacquired Shares (328) (4,625)
Dividends, $.04 per share (792)
Reissued Shares 275 3,495 (519)
Net Earnings 27,261
==================================================================================================================================
BALANCE, DECEMBER 31, 2000 (3,763) (42,722) 9,135 2,681 53,662 185,782
Dividends, $.04 per share (797)
Reissued Shares 100 1,660 184
Net Earnings 12,336
Unrealized Loss on Financial Instruments,
Net of Income Taxes of $1,191 $ (1,954)
==================================================================================================================================
BALANCE, DECEMBER 31, 2001 (3,663) $(41,062) $ 9,135 $ 2,681 $ 53,846 $197,321 $ (1,954)
==================================================================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 2001 2000 1999
============================================================================================
OPERATING ACTIVITIES
Net Earnings $ 12,336 $ 27,261 $ 25,602
Depreciation & Amortization 153,548 133,109 112,746
Deferred Income Taxes 1,168 6,576 6,599
Change in Accounts Payable &
Accrued Expenses 27,320 (2,248) 3,480
Change in Accounts Receivable (1,657) (2,607) (4,804)
Other Changes, Net (3,357) 4,074 (3,330)
-------------------------------------------
Cash Provided by Operating Activities 189,358 166,165 140,293
============================================================================================
INVESTING ACTIVITIES
Additions to Property, Plant & Equipment (34,785) (23,761) (21,030)
Book Value of Property Retired or Sold 6,605 7,326 5,833
Additions to Rental Merchandise (237,912) (279,580) (218,933)
Book Value of Rental Merchandise Sold 115,527 115,601 95,840
Contracts & Other Assets Acquired (12,125) (14,273) (11,393)
-------------------------------------------
Cash Used by Investing Activities (162,690) (194,687) (149,683)
============================================================================================
FINANCING ACTIVITIES
Proceeds from Revolving Credit Agreement 161,672 198,403 180,213
Repayments on Revolving Credit Agreement (189,275) (170,628) (158,399)
Increase (Decrease) in Other Debt 547 4,234 (781)
Dividends Paid (797) (792) (816)
Acquisition of Treasury Stock (4,625) (12,673)
Issuance of Stock under Stock Option Plans 1,183 1,926 1,850
-------------------------------------------
Cash (Used) Provided by Financing Activities (26,670) 28,518 9,394
-------------------------------------------
(Decrease) Increase in Cash (2) (4) 4
Cash at Beginning of Year 95 99 95
-------------------------------------------
Cash at End of Year $ 93 $ 95 $ 99
-------------------------------------------
Cash Paid During the Year:
Interest $ 6,183 $ 5,674 $ 4,025
Income Taxes 3,544 5,762 15,289
============================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As of December 31, 2001 and 2000, and for the Years Ended December 31, 2001,
2000 and 1999.
BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of Aaron Rents, Inc. and its wholly-owned subsidiaries (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, consumer electronics, appliances and
other merchandise throughout the U.S. and Puerto Rico. The Company manufactures
furniture principally for its rent-to-rent and sales and lease ownership
operations.
RENTAL MERCHANDISE consists primarily of residential and office furniture,
consumer electronics, appliances and other merchandise and is recorded at cost.
The sales and lease ownership division depreciates merchandise over the
agreement period, generally 12 to 24 months, when on rent, and 36 months, when
not on rent, to a 0% salvage value. The rent-to-rent division depreciates
merchandise over its estimated useful life which ranges from 6 months to 60
months, net of its salvage value which ranges from 0% to 60%. All rental
merchandise is available for rental and sale.
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 40 years for buildings and
improvements and from 1 to 5 years for other depreciable property and equipment.
Gains and losses related to dispositions and retirements are expensed as
incurred. Maintenance and repairs are also expensed as incurred; renewals and
betterments are capitalized.
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 net book value of merchandise sold, primarily
using specific identification in the sales and lease ownership division and
first-in, first-out, in the rent-to-rent division. It is not practicable to
allocate operating expenses between selling and rental operations.
SHIPPING AND HANDLING COSTS -- Shipping and handling costs are classified
as operating expenses in the accompanying consolidated statements of operations
and totaled approximately $18,965,000 in 2001, $17,397,000 in 2000, and
$15,129,000 in 1999.
ADVERTISING -- The Company expenses advertising costs as incurred. Such
costs aggregated $14,204,000 in 2001, $11,937,000 in 2000, and $12,496,000 in
1999.
STOCK BASED COMPENSATION -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees 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. Income tax
benefits resulting from stock option exercises credited to additional paid-in
capital totaled approximately $288,000, $540,000, and $867,000, in 2001, 2000,
and 1999, respectively.
EXCESS COSTS OVER NET ASSETS ACQUIRED -- Goodwill is amortized on a
straight-line basis over a period of twenty years. Long-lived assets, including
goodwill, are periodically reviewed for impairment based on an assessment of
future operations. The Company records impairment losses on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Measurement of an impairment loss is based on the
estimated fair value of the asset. Accumulated amortization at December 31, 2001
and 2000 was $2,607,000 and $1,498,000, respectively. (See Recently Issued
Accounting Pronouncements.)
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts reflected in
the consolidated balance sheets for cash, accounts receivable, bank and other
debt approximate their respective fair values. The fair value of the liability
for interest rate swap agreements, included in accounts payable and accrued
expenses in the consolidated balance sheet, was approximately $3,145,000 at
December 31, 2001, based upon quotes from financial institutions. At December
31, 2001 and 2000, the carrying amount for variable rate debt approximates fair
market value since the interest rates on these instruments are reset
periodically to current market rates.
REVENUE RECOGNITION -- Rental revenues are recognized as revenue in the
month they are due. Rental payments received prior to the month due are recorded
as deferred rental revenue. The Company maintains ownership of the rental
merchandise until all payments are received under sales and lease ownership
agreements. Revenues from the sale of residential and office furniture and other
merchandise are recognized at the time of shipment.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- From time to time, the
Company uses interest rate swap agreements to synthetically manage the interest
rate characteristics of a portion of its outstanding debt and to limit the
Company's exposure to rising interest rates. The Company designates at inception
that interest rate swap agreements hedge risks associated with future variable
interest payments and monitors each swap agreement to determine if it remains an
effective hedge. The effectiveness of the derivative as a hedge is based on a
high correlation between changes in the value of the underlying hedged item. The
ineffectiveness related to the Company's derivative transactions is not
material. The Company records amounts to be received or paid as a result of
interest swap agreements as an adjustment to interest expense. All of the
Company's interest rate swaps are designated as cash flow hedges. In the event
of early termination or redesignation of interest rate swap agreements, any
resulting gain or loss would be deferred and amortized as an adjustment to
interest expense of the related debt instrument over the remaining term of the
original contract life of the agreement. In the event of early extinguishment of
a designated debt obligation, any realized or unrealized gain or loss from the
associated swap would be recognized in
income at the time of extinguishment. The Company does not enter into
derivatives for speculative or trading purposes.
COMPREHENSIVE INCOME -- Comprehensive income totaled $10,382,000,
$27,261,000, and $25,602,000 for the years ended December 31, 2001, 2000 and
1999, respectively.
NEW ACCOUNTING PRONOUNCEMENTS -- On January 1, 2001, the Company adopted
Statements of Financial Accounting Standards Nos. 133, 137, and 138
(collectively SFAS 133), pertaining to the accounting for derivative instruments
and hedging activities. SFAS 133 requires the Company to recognize all
derivative instruments in the balance sheet at fair value. Upon adoption of SFAS
133, the Company recorded a charge to other comprehensive income of $497,000,
net of income taxes, resulting from a cumulative effect of a change in
accounting principle. Any subsequent gains or losses arising from these swaps
have also been deferred in shareholders' equity as a component of accumulated
other comprehensive loss. These deferred gains and losses are recognized in the
Company's Consolidated Statements of Earnings in the period in which the related
interest payments being hedged are recognized in expense. No significant amounts
were reclassified from accumulated other comprehensive loss to earnings during
2001.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141,Business Combinations. This
statement eliminates the pooling of interests method of accounting for all
business combinations initiated after June 30, 2001, and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. The Company had no significant business combinations
after June 30, 2001.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. This statement changes the
accounting for goodwill from an amortization method to an impairment only
approach. Application of the non-amortization provisions of this statement is
expected to result in an increase in net income of approximately $752,000 ($.04
per diluted share) in 2002. During fiscal 2002, the Company will perform
impairment tests for goodwill as required by this statement. If the results of
these tests indicate any impairment of goodwill, the Company will record such
amount as a cumulative effect of a change in accounting principle as of January
1, 2002. The Company does not anticipate any impairment will be recorded upon
adoption.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived
Assets. This statement supercedes Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. The Company will adopt SFAS 144 as of January 1, 2002,
but does not believe the statement will have a material effect on its
consolidated financial statements.
NOTE B: EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year which were
19,928,000 shares in 2001, 19,825,000 shares in 2000, and 20,062,000 in 1999.
The computation of earnings per share assuming dilution includes the dilutive
effect of stock options and awards. Such stock options and awards had the effect
of increasing the weighted average shares outstanding assuming dilution by
214,000 in 2001, 142,000 in 2000, and 273,000 in 1999, respectively.
NOTE C: PROPERTY, PLANT & EQUIPMENT
DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 2001 2000
================================================================================
Land $ 10,504 $ 8,977
Buildings & Improvements 37,570 28,681
Leasehold Improvements & Signs 38,214 34,128
Fixtures & Equipment 28,357 25,786
Construction in Progress 1,788 2,051
---------------------------
116,433 99,623
Less: Accumulated Depreciation & Amortization (39,151) (36,449)
---------------------------
$ 77,282 $ 63,174
================================================================================
NOTE D: DEBT
BANK DEBT -- The Company has a revolving credit agreement dated March 30,
2001 with several banks providing for unsecured borrowings up to $110,000,000,
which includes an $8,000,000 credit line to fund daily working capital
requirements. Amounts borrowed bear interest at the lower of the lender's prime
rate or LIBOR plus 1.25%. The pricing under the working capital line is based
upon overnight bank borrowing rates. At December 31, 2001 and
2000, an aggregate of $72,397,000 (bearing interest at 3.21%) and $90,000,000
(bearing interest at 7.04%) was outstanding under the current and prior
revolving credit agreements, respectively. The Company pays a .25% 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
5.77% in 2001, 7.07% in 2000 and 5.94% in 1999. The revolving credit agreement
expires March 30, 2004. In September 2000, the Company entered into a credit
agreement with two banks providing for unsecured borrowings up to $10,000,000.
At December 31, 2000 an aggregate of $10,000,000 bearing interest at LIBOR plus
1.00% was outstanding under the agreement. The debt matured in 2001.
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 6.15% until May 2003, $10,000,000 at an average
rate of 7.96% until November 2003, $10,000,000 at an average rate of 7.75% until
November 2003, and an additional $20,000,000 at an average rate of 7.6% 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 fair value of the liability of interest rate swap
agreements included in accounts payable & accrued expenses in the consolidated
balance sheet was approximately $3,145,000 at December 31, 2001.
The revolving credit agreement contains certain covenants which require
that the Company not permit its consolidated net worth as of the last day of any
fiscal quarter to be less than the sum of (a) $187,625,000 plus (b) 50% of the
Company's consolidated net income (but not loss) for the period beginning
January 1, 2001 and ending on the last day of such fiscal quarter. It also
places other restrictions on additional borrowings and requires the mainte-
nance of certain financial ratios. At December 31, 2001, $26,124,000 of retained
earnings were available for dividend payments and stock repurchases under the
debt restrictions, and the Company was in compliance with all covenants.
OTHER DEBT -- Other debt at December 31, 2001 of $5,316,000 is primarily
comprised of $4,200,000 of industrial development corporation revenue bonds. The
average weighted borrowing rate on these bonds in 2001 was 2.87%. No principal
payments are due on the bonds until maturity in 2015.
NOTE E: INCOME TAXES
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 2001 2000 1999
================================================================================
Current Income Tax Expense:
Federal $ 6,239 $ 9,461 $ 8,020
State 112 608 1,081
-----------------------------------------
6,351 10,069 9,101
Deferred Income Tax Expense:
Federal 953 5,520 5,989
State 215 1,056 610
-----------------------------------------
1,168 6,576 6,599
-----------------------------------------
$ 7,519 $ 16,645 $ 15,700
================================================================================
Significant components of the Company's deferred income tax liabilities and
assets are as follows:
DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 2001 2000
================================================================================
Deferred Tax Liabilities:
Rental Merchandise and
Property, Plant & Equipment $ 28,852 $ 25,770
Other, Net 1,376 1,531
--------------------------
Total Deferred Tax Liabilities 30,228 27,301
Deferred Tax Assets:
Accrued Liabilities 2,702 1,324
Advance Payments 3,512 3,179
Other, Net 3,051 1,812
--------------------------
Total Deferred Tax Assets 9,265 6,315
--------------------------
Net Deferred Tax Liabilities $ 20,963 $ 20,986
================================================================================
The Company's effective tax rate differs from the federal income tax
statutory rate as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
================================================================================
Statutory Rate 35.0% 35.0% 35.0%
Increases in Taxes
Resulting From:
State Income Taxes,
Net of Federal Income
Tax Benefit 1.1 2.5 2.7
Other, Net 1.8 0.4 0.3
----------------------------------------------
Effective Tax Rate 37.9% 37.9% 38.0%
================================================================================
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 2015.
Most of the leases contain renewal options for additional periods ranging from 1
to 15 years or provide for options to purchase the related property at
predetermined purchase prices which do not represent bargain purchase options.
In addition, certain properties occupied under operating leases contain normal
purchase options. The Company also has a $25,000,000 construction and lease
facility. Properties acquired by the lessor are purchased or constructed and
then leased to the Company under operating lease agreements. The total amount
advanced and outstanding under this facility at December 31, 2001 was
approximately $24,700,000. Since the resulting leases are operating leases, no
debt obligation is recorded on the Company's balance sheet. 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 required under operating leases that have
initial or remaining non-cancelable terms in excess of one year as of December
31, 2001, are as follows: $29,998,000 in 2002; $24,451,000 in 2003; $18,849,000
in 2004; $12,442,000 in 2005; $7,643,000 in 2006; and $8,845,000 thereafter.
Certain operating leases expiring in 2006 contain residual value guarantee
provisions and other guarantees in the event of a default. Although the
likelihood of funding under these guarantees is considered by the Company to be
remote, the maximum amount the Company may be liable for under such guarantees
is approximately $24,700,000.
Rental expense was $36,506,000 in 2001, $30,659,000 in 2000; and
$28,851,000 in 1999.
The Company leases one building from a partnership of which an officer of
the Company is a partner under a lease expiring in 2008 for annual rentals
aggregating $212,700.
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 10% 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 $436,000 in 2001;
$427,000 in 2000; and $447,000 in 1999.
NOTE G: SHAREHOLDERS' EQUITY
In February 1999, the Company's Board of Directors authorized the
repurchase of up to 2,000,000 shares of the Company's Common Stock and/or Class
A Common Stock. During 2001, 10,000 shares of the Company's common shares were
transferred back into treasury at an aggregate cost of $128,000 and the Company
was authorized to purchase an additional 1,284,690 at December 31, 2001. At
December 31, 2001, the Company held a total of 3,662,676 common shares in its
treasury.
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.
NOTE H: 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
plans, options granted become exercisable after a period of two or three years
and unexercised options lapse five or ten years after the date of the grant.
Options are subject to forfeiture upon termination of service. Under the plans,
1,915,000 of the Company shares are reserved for issuance at December 31, 2001.
The weighted average fair value of options granted was $9.68 in 2001, $8.11 in
2000, and $9.55 in 1999.
Pro forma information regarding net earnings and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options granted in 2001, 2000, and 1999 under the fair value
method. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for 2001, 2000, and 1999, respectively: risk-free interest rates of
6.05%, 6.47%, and 6.36%, a dividend yield of .24%, .28%, and .23%; a volatility
factor of the expected market price of the Company's Common Stock of .45, .45,
and .42; 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:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE) 2001 2000 1999
================================================================================
Pro Forma Net Earnings $ 11,074 $ 25,910 $ 24,424
Pro Forma Earnings Per Share .56 1.31 1.22
Pro Forma Earnings Per Share
Assuming Dilution .55 1.30 1.20
================================================================================
The table below summarizes option activity for the periods indicated in the
Company's stock option plans.
WEIGHTED
AVERAGE
EXERCISE
(IN THOUSANDS EXCEPT PER SHARE) OPTIONS PRICE
================================================================================
Outstanding at December 31, 1998 1,382 $ 10.92
Granted 230 16.74
Exercised (233) 7.91
Forfeited (77) 16.33
- --------------------------------------------------------------------------------
Outstanding at December 31, 1999 1,302 12.17
Granted 405 13.73
Exercised (235) 8.22
Forfeited (95) 16.18
- --------------------------------------------------------------------------------
Outstanding at December 31, 2000 1,377 13.02
Granted 133 16.30
Exercised (110) 10.77
Forfeited (99) 16.44
- --------------------------------------------------------------------------------
Outstanding at December 31, 2001 1,301 13.29
- --------------------------------------------------------------------------------
Exercisable at December 31, 2001 639 $ 11.68
================================================================================
The following table summarizes information about stock options outstanding
at December 31, 2001.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
========================================================================================================
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES DECEMBER 31, 2001 LIFE PRICE DECEMBER 31, 2001 PRICE
========================================================================================================
$ 9.87 - $10.00 450,800 4.27 years $ 9.88 450,800 $ 9.88
10.01 - 15.00 429,000 8.42 years 13.41 500 14.75
15.01 - 20.25 421,050 7.57 years 16.81 187,300 16.03
- --------------------------------------------------------------------------------------------------------
$ 9.87 - $20.25 1,300,850 6.66 years $13.29 638,600 $11.68
========================================================================================================
NOTE I: FRANCHISING OF AARON'S SALES & LEASE OWNERSHIP STORES
The Company franchises Aaron's Sales & Lease Ownership stores. As of
December 31, 2001 and 2000, 299 and 339 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. Franchise fees and area
development franchise fees are generated from the sale of rights to develop, own
and operate Aaron's Sales & Lease Ownership stores. These fees are recognized
when substantially all of the Company's obligations per location are satisfied
(generally at the date of the store opening). Franchise fees and area
development fees received prior to the substantial completion of the Company's
obligations are deferred. The Company includes this income in Other Revenues in
the Consolidated Statement of Earnings.
The Company has guaranteed certain debt obligations of some of the
franchisees amounting to $30,609,000 at December 31, 2001. The Company receives
a guarantee and servicing fee based on such franchisees' outstanding debt
obligations which it recognizes as income as earned. The Company has recourse
rights to the assets securing the debt obligations. As a result, the Company
does not expect to incur any significant losses under these guarantees.
NOTE J: ACQUISITIONS AND DISPOSITIONS
In 1999, the Company acquired 18 sales and lease ownership stores with an
aggregate purchase price of $10,252,000. The excess cost over the fair market
value of tangible assets acquired was approximately $5,985,000. Also in 1999,
the Company acquired two rent-to-rent stores. The aggregate purchase price of
these 1999 acquisitions was not significant. During 2000, the Company acquired
20 sales and lease ownership stores including nine stores purchased from
franchisees and 10 stores located in Puerto Rico. The aggregate purchase price
of these 2000 acquisitions was $14,273,000 and the excess cost over the fair
market value of tangible assets acquired was approximately $7,150,000. During
2001, the Company acquired 23 sales & lease ownership stores including 13 stores
purchased from franchisees. The aggregate purchase price of these 2001
acquisitions was $10,423,000 and the excess cost over the fair market value of
tangible assets acquired was approximately $4,553,000. Also, in 2001 the Company
acquired two rent-to-rent stores. The aggregate purchase price of these 2001
rent-to-rent acquisitions was not significant.
These acquisitions were accounted for under the purchase method and,
accordingly, the results of operations of the acquired businesses are included
in the Company's results of operations from their dates of acquisition. The
effect of these acquisitions on the 2001, 2000 and 1999 consolidated financial
statements was not significant.
In 2001, the Company sold three of its sales and lease ownership stores to
existing franchisees and sold five of its rent-to-rent stores. In 2000, the
Company sold four of its rent-to-rent stores and an additional four in 1999. The
effect of these sales on the consolidated financial statements was not
significant.
NOTE K: SEGMENTS
Description of Products and Services of Reportable Segments
Aaron Rents, Inc. has four reportable segments: sales and lease ownership,
rent-to-rent, franchise and manufacturing. The sales and lease ownership
division offers electronics, residential furniture and appliances to consumers
primarily on a monthly payment basis with no credit requirements. The
rent-to-rent division rents and sells residential and office furniture to
businesses and consumers who meet certain minimum credit requirements. The
Company's franchise operation sells and supports franchises of its sales and
lease ownership concept. The
manufacturing division manufactures upholstery, office furniture, lamps and
accessories, and bedding predominantly for use by the other divisions.
Measurement of Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources based on revenue
growth and pre-tax profit or loss from operations. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies except that the sales and lease ownership
division revenues and certain other items are presented on a cash basis.
Intersegment sales are completed at internally negotiated amounts ensuring
competitiveness with outside vendors. Since the intersegment profit and loss
affect inventory valuation, depreciation and cost of goods sold are adjusted
when intersegment profit is eliminated in consolidation.
Factors Used by Management to Identify the Reportable Segments
The Company's reportable segments are business units that service different
customer profiles using distinct payment arrangements. The reportable segments
are each managed separately because of differences in both customer base and
infrastructure.
Information on segments and a reconciliation to earnings before income
taxes are as follows:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2001 2000 1999
====================================================================================================
Revenues From External Customers:
Sales & Lease Ownership $ 380,404 $ 312,921 $ 252,284
Rent-to-Rent 150,002 174,918 173,579
Franchise 13,913 12,621 9,079
Other 4,243 4,057 1,551
Manufacturing 47,035 54,340 54,550
Elimination of Intersegment Revenues (47,801) (54,807) (53,941)
Cash to Accrual Adjustments (1,115) (1,130) 257
-------------------------------------------
Total Revenues From External Customers $ 546,681 $ 502,920 $ 437,359
-------------------------------------------
Earnings Before Income Taxes:
Sales & Lease Ownership $ 11,314 $ 19,527 $ 20,630
Rent-to-Rent 9,152 16,346 14,369
Franchise 9,212 7,484 5,042
Other (3,244) (943) (1,072)
Manufacturing (587) 728 717
-------------------------------------------
Earnings Before Income Taxes For Reportable Segments 25,847 43,142 39,686
Elimination of Intersegment Profit (1,449) (441) (357)
Cash to Accrual Adjustments (1,151) (804) 855
Other Allocations & Adjustments (3,392) 2,009 1,118
-------------------------------------------
Total Earnings Before Income Taxes $ 19,855 $ 43,906 $ 41,302
-------------------------------------------
Assets:
Sales & Lease Ownership $ 241,245 $ 205,043 $ 139,177
Rent-to-Rent 107,882 128,163 138,349
Franchise 13,991 12,961 10,755
Other 17,533 17,485 16,097
Manufacturing 16,545 16,727 14,030
-------------------------------------------
Total Assets $ 397,196 $ 380,379 $ 318,408
-------------------------------------------
Depreciation & Amortization:
Sales & Lease Ownership $ 121,953 $ 97,139 $ 78,385
Rent-to-Rent 29,736 34,557 32,946
Franchise 444 412 347
Other 690 354 492
Manufacturing 725 647 576
-------------------------------------------
Total Depreciation & Amortization $ 153,548 $ 133,109 $ 112,746
-------------------------------------------
Interest Expense:
Sales & Lease Ownership $ 4,620 $ 2,750 $ 1,702
Rent-to-Rent 3,010 2,496 2,317
Franchise 119 144 117
Other (1,491) 235 (31)
-------------------------------------------
Total Interest Expense $ 6,258 $ 5,625 $ 4,105
====================================================================================================
NOTE L: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
(IN THOUSANDS EXCEPT PER SHARE) QUARTER QUARTER QUARTER QUARTER
========================================================================================
YEAR ENDED DECEMBER 31, 2001
Revenues $ 141,417 $ 132,763 $ 132,516 $ 139,985
Gross Profit 75,857 71,442 70,034 68,859
Earnings Before Taxes 11,802 7,998 (3,158) 3,213
Net Earnings 7,329 4,967 (1,961) 2,001
Earnings Per Share $ .37 $ .25 $ (.10) $ .10
Earnings Per Share Assuming Dilution .37 .25 (.10) .10
========================================================================================
YEAR ENDED DECEMBER 31, 2000
Revenues $ 125,372 $ 121,910 $ 124,850 $ 130,788
Gross Profit 65,660 64,357 64,818 67,158
Earnings Before Taxes 11,741 11,177 10,799 10,189
Net Earnings 7,278 6,929 6,706 6,348
Earnings Per Share $ .37 $ .35 $ .34 $ .32
Earnings Per Share Assuming Dilution .36 .35 .34 .32
========================================================================================
In the third quarter of 2001, the Company recorded non-cash charges
totaling approximately $5.6 million, before income taxes, related to certain
store closings and related exit costs.
================================================================================
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, 2001 and 2000, and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
years ended December 31, 2001, 2000 and 1999. 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 auditing standards generally
accepted in the United States. 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, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 21, 2002
COMMON STOCK MARKET PRICES & DIVIDENDS
The following table shows, for the periods indicated, the range of high and
low prices per share for the Common Stock and Class A Common Stock and the cash
dividends declared per share.
The Company's Common Stock and Class A Common Stock are listed on the New
York Stock Exchange under the symbols "RNT" and "RNT.A," respectively.
The approximate number of shareholders of the Company's Common Stock and
Class A Common Stock at March 15, 2002, was 2,800. The closing price for the
Common Stock and Class A Common Stock on March 15, 2002, was $20.48 and $18.50,
respectively.
CASH
DIVIDENDS
COMMON STOCK HIGH LOW PER SHARE
=======================================================
DECEMBER 31, 2001
First Quarter $17.50 $13.55
Second Quarter 19.50 15.10 .02
Third Quarter 18.97 14.90
Fourth Quarter 18.20 15.00 .02
=======================================================
DECEMBER 31, 2000
First Quarter $17.89 $13.46
Second Quarter 14.96 11.45 .02
Third Quarter 15.48 12.61
Fourth Quarter 18.00 11.74 .02
=======================================================
CASH
DIVIDENDS
CLASS A COMMON STOCK HIGH LOW PER SHARE
=======================================================
DECEMBER 31, 2001
First Quarter $15.90 $12.13
Second Quarter 16.50 15.72 .02
Third Quarter 16.35 13.75
Fourth Quarter 15.25 12.50 .02
=======================================================
DECEMBER 31, 2000
First Quarter $18.58 $16.46
Second Quarter 17.08 14.59 .02
Third Quarter 16.10 15.35
Fourth Quarter 15.92 13.44 .02
=======================================================
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UNITED STATES AND PUERTO RICO STORE LOCATIONS
[MAP OF THE UNITED STATES AND PUERTO RICO]
================================================
AT DECEMBER 31, 2001
* Company-Operated Sales & Lease Ownership 364
# Franchised Sales & Lease Ownership 209
+ Rent-to-Rent 75
----
Total Stores 648
------------------------------------------------
Manufacturing & Distribution Centers 18