1
EXHIBIT 13
SELECTED FINANCIAL INFORMATION
TWELVE
MONTHS NINE MONTHS NINE MONTHS YEAR YEAR
YEAR ENDED YEAR ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1996 1995 1995 1994 1995 1994
------------ ------------ ------------ ------------ ------------ --------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE)
OPERATING RESULTS
Systemwide Revenues(1)... $364,306 $306,200 $256,500 $192,953 $177,773 $241,286 $189,781
Revenues:
Rentals & Fees......... 231,207 208,463 182,311 137,098 127,995 173,208 130,962
Sales.................. 73,223 61,527 52,999 39,218 39,875 53,655 53,139
Other.................. 6,321 4,255 2,465 1,908 1,471 2,029 1,083
-------- -------- -------- -------- -------- -------- --------
310,751 274,245 237,775 178,224 169,341 228,892 185,184
-------- -------- -------- -------- -------- -------- --------
Costs & Expenses:
Cost of Sales.......... 55,914 46,168 38,274 28,350 28,772 38,696 38,879
Operating Expenses..... 149,728 135,012 119,590 90,027 85,464 115,028 91,927
Depreciation of Rental
Merchandise.......... 71,151 64,437 55,408 41,612 39,912 53,708 37,310
Interest............... 3,721 3,449 3,172 2,323 2,185 3,033 2,063
-------- -------- -------- -------- -------- -------- --------
280,514 249,066 216,444 162,312 156,333 210,465 170,179
-------- -------- -------- -------- -------- -------- --------
Earnings Before Income
Taxes.................. 30,237 25,179 21,331 15,912 13,008 18,427 15,005
Income Taxes............. 11,841 9,786 8,113 6,032 5,021 7,102 6,209
-------- -------- -------- -------- -------- -------- --------
Net Earnings......... $ 18,396 $ 15,393 $ 13,218 $ 9,880 $ 7,987 $ 11,325 $ 8,796
-------- -------- -------- -------- -------- -------- --------
Earnings Per Share....... $ .96 $ .81 $ .68 $ .51 $ .42 $ .59 $ .52
Earnings Per Share
Assuming Dilution...... .94 .77 .66 .49 .40 .58 .51
-------- -------- -------- -------- -------- -------- --------
Dividends Per Share:
Common................. $ .04 $ .04 $ .05 $ .05 $ .05 $ .045 $ .04
Class A................ .04 .04 .02 .02 .02 .025 .03
======== ======== ======== ======== ======== ======== ========
FINANCIAL POSITION
Rental Merchandise,
Net.................... $176,968 $149,984 $122,311 $122,311 $119,781 $121,356 $113,599
Property, Plant &
Equipment, Net......... 39,757 33,267 23,492 23,492 23,532 24,181 18,819
Total Assets............. 239,382 198,103 158,645 158,645 155,914 157,527 144,917
Interest-Bearing Debt.... 76,486 55,365 37,479 37,479 46,894 43,159 53,123
Shareholders' Equity..... 116,455 107,335 91,094 91,094 81,418 84,951 59,830
======== ======== ======== ======== ======== ======== ========
AT YEAR END
Stores Open:
Company-Operated....... 292 240 212 212 203 203 200
Franchised............. 101 61 36 36 24 26 15
Rental Agreements in
Effect................. 219,800 179,600 158,900 158,900 152,100 156,600 126,700
Number of Employees...... 3,100 2,550 2,160 2,160 2,150 2,200 2,100
======== ======== ======== ======== ======== ======== ========
- ---------------
(1) Systemwide revenues include rental revenues of franchised Aaron's Rental
Purchase stores.
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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 year 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 twelve months ended
December 31, 1995 (unaudited), along with the years ended December 31, 1996 and
December 31, 1997.
Year Ended December 31, 1997 versus Year Ended December 31, 1996
Total revenues for 1997 increased $36.5 million (13.3%) to $310.8 million
compared to $274.2 million in 1996 due primarily to a $22.7 million (10.9%)
increase in rentals and fees revenues, plus an $11.7 million (19.0%) increase in
sales. Of this increase in rentals and fees revenues, $19.2 million (84.4%) was
attributable to the Aaron's Rental Purchase Division. Rentals and fees revenues
from the Company's rent-to-rent operations increased $3.5 million (3.3%) during
the same period.
Revenues from retail sales increased $5.8 million (11.1%) to $58.6 million
in 1997, from $52.8 million for the same period last year. This increase was
primarily due to increased sales of both new and rental return furniture in the
rent-to-rent division. Non-retail sales, which primarily represent merchandise
sold to Aaron's Rental Purchase franchisees, increased $5.9 million (66.7%) to
$14.6 million compared to $8.8 million for the same period last year. The
increased sales are due to the growth of the franchise operations.
Other revenues for 1997 increased $2.1 million (48.6%) to $6.3 million
compared to $4.3 million in 1996. This increase was attributable to franchise
fee and royalty income increasing $2.1 million (70.8%) to $5.0 million compared
to $2.9 million last year, reflecting the addition of 40 new franchise stores in
1997 and improved operating revenues at mature franchise stores.
Cost of sales from retail sales increased $4.4 million (11.7%) to $42.3
million compared to $37.8 million, and as a percentage of sales, increased
slightly to 72.1% from 71.7% primarily due to product mix. Cost of sales from
non-retail sales increased $5.3 million (64.1%) to $13.7 million from $8.3
million, and as a percentage of sales, decreased to 93.4% from 94.9%. The
decrease in 1997 in cost of sales as a percentage of sales is due to slightly
higher margins on sales through the Company's distribution centers.
Operating expenses increased $14.7 million (10.9%) to $149.7 million from
$135.0 million. As a percentage of total revenues, operating expenses were 48.2%
in 1997 and 49.2% in 1996. 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 $6.7 million (10.4%) to $71.2
million from $64.4 million, and as a percentage of total rentals and fees,
decreased to 30.8% from 30.9%.
Interest expense increased $272,000 (7.9%) to $3.7 million compared to $3.4
million. As a percentage of total revenues, interest expense was 1.2% in 1997
compared to 1.3% in 1996. The slight decrease in interest expense as a
percentage of revenues was due to the effect of lower debt levels as a
percentage of revenues throughout the year being offset by slightly higher
interest rates.
Income tax expense increased $2.1 million (21.0%) to $11.8 million compared
to $9.8 million. The Company's effective tax rate was 39.2% in 1997 compared to
38.9% in 1996, primarily due to higher state income taxes.
As a result, net earnings increased $3.0 million (19.5%) to $18.4 million
for 1997 compared to $15.4 million for the same period in 1996. As a percentage
of total revenues, net earnings were 5.9% in 1997 and 5.6% in 1996.
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3
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 rentals and fees revenues, $16.6 million (19.6%) was
attributable to the Aaron's Rental Purchase Division. Rentals and fees 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. Non-retail 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.
Other revenues 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
non-retail 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 are 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. 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations for the years ended December 31, 1997 and 1996
was $105.3 million and $89.5 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 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 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 $90.0 million which
includes a $6.0 million credit line to fund daily working capital requirements.
At December 31, 1997, an aggregate of $75.9 million was outstanding under this
facility, bearing interest at an average rate of 6.57%. The Company uses
interest rate swap agreements as part of its overall long-term
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4
financing program. At December 31, 1997, the Company had swap agreements with
notional principal amounts of $40 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,
together with the proceeds of the proposed offering described in Note 13 to the
Consolidated Financial Statements, will be sufficient to fund the Company's
capital and liquidity needs for at least the next 24 months.
In February 1997, the Company's Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's Common Stock and Class A
Common Stock. During 1997, 795,000 shares were purchased at an aggregate cost of
$8.9 million.
The Company has paid dividends for eleven consecutive years. A $.02 per
share dividend on Common Stock and on Class A Common Stock was paid in January
1997 and July 1997, for a total fiscal year cash outlay of $761,000. The Company
currently expects to continue its policy of paying dividends.
YEAR 2000
The Year 2000 issue arises from the widespread use of computer programs
that rely on two-digit date codes to perform computations or decision-making
functions. The Company's significant computer programs, including financial,
accounting, store operating and point of sale software, have recently been or
are in the process of being updated. The upgrading and rewriting of the
Company's software is being done to gain further strategic advantages over its
competitors and is not the result of any anticipated Year 2000 issues. However,
as part of the Company's continuing process to update systems, management has
required that vendor purchased and internally developed software be Year 2000
compliant. Therefore, based on recent and continuing strategic enhancement of
the Company's software, management does not expect any material impact to the
Company's business, operations or financial condition as a result of Year 2000
issues.
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5
AARON RENTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
Cash........................................................ $ 96 $ 84
Accounts Receivable......................................... 11,794 10,491
Rental Merchandise.......................................... 246,498 210,516
Less: Accumulated Depreciation.............................. (69,530) (60,532)
-------- --------
176,968 149,984
Property, Plant & Equipment, Net............................ 39,757 33,267
Prepaid Expenses & Other Assets............................. 10,767 4,277
-------- --------
Total Assets...................................... $239,382 $198,103
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts Payable & Accrued Expenses......................... $ 31,071 $ 24,999
Dividends Payable........................................... 379 382
Deferred Income Taxes Payable............................... 6,687 2,882
Customer Deposits & Advance Payments........................ 8,304 7,140
Bank Debt................................................... 75,904 55,125
Other Debt.................................................. 582 240
-------- --------
Total Liabilities................................. 122,927 90,768
Commitments & Contingencies
Shareholders' Equity
Common Stock, Par Value $.50 Per Share; Authorized:
25,000,000 Shares; Shares Issued: 16,170,987........... 8,085 8,085
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................................ 15,484 15,445
Retained Earnings......................................... 113,864 96,226
-------- --------
140,114 122,437
Less: Treasury Shares at Cost, Common Stock, 1,058,041
Shares at December 31, 1997 and 415,941 Shares at December
31, 1996.................................................. (9,523) (2,315)
Class A Common Stock, 1,525,255 Shares at December 31,
1997 and 1,418,855 Shares at December 31, 1996......... (14,136) (12,787)
-------- --------
Total Shareholders' Equity........................ 116,455 107,335
-------- --------
Total Liabilities & Shareholders' Equity.......... $239,382 $198,103
======== ========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
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AARON RENTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE)
REVENUES
Rentals and Fees.......................................... $231,207 $208,463 $137,098
Retail Sales.............................................. 58,602 52,757 35,537
Non-Retail Sales.......................................... 14,621 8,770 3,681
Other..................................................... 6,321 4,255 1,908
-------- -------- --------
310,751 274,245 178,224
COSTS & EXPENSES
Retail Cost of Sales...................................... 42,264 37,848 24,983
Non-Retail Cost of Sales.................................. 13,650 8,320 3,367
Operating Expenses........................................ 149,728 135,012 90,027
Depreciation of Rental Merchandise........................ 71,151 64,437 41,612
Interest.................................................. 3,721 3,449 2,323
-------- -------- --------
280,514 249,066 162,312
-------- -------- --------
Earnings Before Income Taxes.............................. 30,237 25,179 15,912
Income Taxes.............................................. 11,841 9,786 6,032
-------- -------- --------
Net Earnings.............................................. $ 18,396 $ 15,393 $ 9,880
======== ======== ========
Earnings Per Share........................................ $ .96 $ .81 $ .51
Earnings Per Share Assuming Dilution...................... .94 .77 .49
The accompanying notes are an integral part of the Consolidated Financial
Statements.
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AARON RENTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TREASURY STOCK COMMON STOCK ADDITIONAL
----------------- ---------------- PAID-IN RETAINED
SHARES AMOUNT COMMON CLASS A CAPITAL EARNINGS
------ -------- ------ ------- ---------- --------
(IN THOUSANDS)
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
Reacquired Shares..................... (795) (8,918)
Dividends............................. (758)
Reissued Shares....................... 47 361 39
Net Earnings.......................... 18,396
------ -------- ------ ------ ------- --------
BALANCE, DECEMBER 31, 1997.............. (2,583) $(23,659) $8,085 $2,681 $15,484 $113,864
====== ======== ====== ====== ======= ========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
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AARON RENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE
YEAR ENDED YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net Earnings............................................. $ 18,396 $ 15,393 $ 9,880
Depreciation & Amortization.............................. 77,487 70,693 45,798
Deferred Income Taxes.................................... 3,805 (899) (345)
Change in Accounts Payable & Accrued Expenses............ 5,103 5,695 242
Change in Accounts Receivable............................ (1,083) (2,339) 255
Other Changes, Net....................................... 1,587 982 (711)
--------- --------- --------
Cash Provided by Operating Activities.................... 105,295 89,525 55,119
INVESTING ACTIVITIES
Additions to Property, Plant & Equipment................. (15,165) (17,534) (5,476)
Book Value of Property Retired or Sold................... 6,531 1,823 1,979
Additions to Rental Merchandise.......................... (145,262) (137,023) (72,926)
Book Value of Rental Merchandise Sold.................... 58,436 48,352 30,892
Contracts & Other Assets Acquired........................ (21,665) (3,891) (533)
--------- --------- --------
Cash Used by Investing Activities........................ (117,125) (108,273) (46,064)
FINANCING ACTIVITIES
Proceeds from Revolving Credit Agreement................. 118,545 85,299 51,933
Repayments on Revolving Credit Agreement................. (97,766) (67,434) (56,845)
Increase (Decrease) in Other Debt........................ 342 21 (768)
Dividends Paid........................................... (761) (765) (367)
Acquisition of Treasury Stock............................ (8,918) (2,889) (3,134)
Issuance of Stock Under Stock Option Plan................ 400 4,502 129
--------- --------- --------
Cash Provided (Used) by Financing Activities............. 11,842 18,734 (9,052)
Increase (Decrease) in Cash.............................. 12 (14) 3
Cash at Beginning of Year................................ 84 98 95
--------- --------- --------
Cash at End of Year...................................... $ 96 $ 84 $ 98
========= ========= ========
Cash Paid During the Year:
Interest............................................... $ 3,713 $ 3,384 $ 2,642
Income Taxes........................................... 6,989 7,531 7,677
The accompanying notes are an integral part of the Consolidated Financial
Statements.
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AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997 and 1996, and for the Years Ended December 31, 1997
and 1996, and the Nine Months Ended December 31, 1995.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Aaron Rents, Inc. and its wholly-owned subsidiary, 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,
consumer electronics 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.
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AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING -- The Company expenses advertising costs as incurred. Such
costs aggregated $9,530,000 in 1997, $10,422,000 in 1996, and $6,258,000 for the
nine months ended December 31, 1995.
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.
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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD -- In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (FAS 131), which is effective for 1998. FAS 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires that those companies report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt the new
requirements in its annual financial statements in 1998. Management has not
completed its analysis of the effect of FAS 131 on its reported segments.
2. 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, DECEMBER 31,
1995 1994
------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
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.......................................... $ .51 $ .42
Earnings Per Share Assuming Dilution........................ .49 .40
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AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EARNINGS PER SHARE
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share", (FAS 128). FAS 128 replaced the
calculation of primary and fully diluted earnings per share with earnings per
share and earnings per share assuming dilution. Earnings per share is computed
by dividing net income by the weighted average number of common shares
outstanding during the year which were 19,165,000 shares in 1997, 19,099,000
shares in 1996, and 19,461,000 shares in the nine months ended December 31,
1995. The computation of earnings per share assuming dilution includes the
dilutive effect of stock options. Such stock options had the effect of
increasing the weighted average shares outstanding assuming dilution by 497,000
and 885,000 in 1997 and 1996, respectively, and 576,000 shares in the nine
months ended December 31, 1995.
4. PROPERTY, PLANT & EQUIPMENT
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
Land........................................................ $ 4,643 $ 3,662
Buildings & Improvements.................................... 17,698 15,787
Leasehold Improvements & Signs.............................. 19,243 16,068
Fixtures & Equipment........................................ 19,402 15,738
Construction in Progress.................................... 3,380 2,726
-------- --------
64,366 53,981
Less: Accumulated Depreciation & Amortization............... (24,609) (20,714)
-------- --------
$ 39,757 $ 33,267
======== ========
5. DEBT
BANK DEBT -- The Company has a revolving credit agreement with four banks
providing for unsecured borrowings up to $90,000,000, 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, LIBOR plus .50%,
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, 1997 and 1996, an aggregate of $75,904,000
(bearing interest at 6.57%) and $55,125,000, 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 6.29% in 1997, 6.17%
in 1996 and 6.99% for the nine months ended December 31, 1995. The effect 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 7.0% until November 2003 and an additional
$20,000,000 at an average rate of 6.85% 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. Unrealized losses under the swap agreements aggregated $926,000
at December 31, 1997. The fair value of the Company's bank debt approximates its
carrying value.
11
12
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 requires 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)
$105,000,000 plus (b) 50% of the Company's consolidated net income (but not
loss) for the period beginning July 1, 1997 and ending on the last day of such
fiscal quarter. It also places other restrictions on additional borrowings and
requires the maintenance of certain financial ratios. At December 31, 1997, $6.7
million of retained earnings was available for dividend payments and stock
repurchases under the debt restrictions.
OTHER DEBT -- Other debt of $582,000 at December 31, 1997 and $240,000 at
December 31, 1996 primarily represents an insurance premium financing agreement
bearing interest at 6.22%. Other debt matures in 1998.
6. INCOME TAXES
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Current Income Tax Expense:
Federal..................................... $ 7,375 $ 9,503 $5,577
State....................................... 661 1,182 800
------- ------- ------
8,036 10,685 6,377
Deferred Income
Tax Expense (Benefit):
Federal..................................... 3,287 (889) (302)
State....................................... 518 (10) (43)
------- ------- ------
3,805 (899) (345)
------- ------- ------
$11,841 $ 9,786 $6,032
======= ======= ======
Significant components of the Company's deferred income tax liabilities and
assets are as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
Deferred Tax Liabilities:
Rental Merchandise and Property, Plant & Equipment...... $ 9,265 $5,486
Other, Net.............................................. 1,244 1,141
------- ------
Total Deferred Tax Liabilities.................. 10,509 6,627
Deferred Tax Assets:
Accrued Liabilities..................................... 1,015 892
Advance Payments........................................ 2,276 2,150
Other, Net.............................................. 531 703
------- ------
Total Deferred Tax Assets....................... 3,822 3,745
------- ------
Net Deferred Tax Liabilities.................... $ 6,687 $2,882
======= ======
12
13
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective tax rate differs from the federal income tax
statutory rate as follows:
NINE
MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
Statutory Rate.............................. 35.0% 35.0% 35.0%
Increases in Taxes Resulting From State
Income Taxes, Net of Federal Income Tax
Benefit................................... 2.5 3.0 3.2
Other, Net.................................. 1.7 .9 (.3)
---- ---- ----
Effective Tax Rate.......................... 39.2% 38.9% 37.9%
==== ==== ====
7. COMMITMENTS
The Company leases warehouse and retail store space for substantially all
of its operations under operating leases expiring at various times through 2007.
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.
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, 1997, are as follows: $20,838,000
in 1998; $16,819,000 in 1999; $12,444,000 in 2000; $19,319,000 in 2001;
$4,164,000 in 2002; and $4,457,000 thereafter.
Rental expense was $22,146,000 in 1997, $17,886,000 in 1996 and $11,513,000
for the nine months ended December 31, 1995.
The Company leases five buildings from certain officers of the Company
under leases expiring through 1998 for annual rentals aggregating $383,000.
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 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 $357,000 in 1997,
$308,000 in 1996 and $162,000 for the nine months ended December 31, 1995.
8. 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.
At December 31, 1997, the Company held a total of 2,583,296 common shares
in its treasury, and is authorized by the Board of Directors to acquire up to an
additional 208,090 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.
13
14
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. 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,
2,000,500 of the Company shares are reserved for issuance at December 31, 1997.
The weighted-average fair value of options granted was $8.58 in 1997 and $4.99
in 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 1997 and 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
weighted-average assumptions for 1997 and 1996, respectively: risk-free interest
rates of 5.88% and 6.72%; a dividend yield of .25% and .4%; volatility factor of
the expected market price of the Company's common stock of .39 and .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 YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Pro forma net earnings............................... $17,508 $14,825
Pro forma earnings per share......................... .91 .78
Pro forma earnings per share assuming dilution....... .89 .74
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until future
years.
14
15
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below summarizes option activity for the periods indicated in the
Company's stock option plans.
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
-------- ---------
(IN THOUSANDS, EXCEPT
PRICE PER SHARE)
Outstanding at April 1, 1995................................ 1,294 $ 4.54
Exercised................................................. (24) 3.00
Forfeited................................................. (22) 6.68
----- ------
Outstanding at December 31, 1995............................ 1,248 4.54
Granted................................................... 780 9.88
Exercised................................................. (701) 3.00
Forfeited................................................. (8) 9.68
----- ------
Outstanding at December 31, 1996............................ 1,319 8.48
Granted................................................... 322 15.95
Exercised................................................. (47) 5.28
Forfeited................................................. (9) 10.83
----- ------
Outstanding at December 31, 1997............................ 1,585 $10.07
===== ======
Exercisable at December 31, 1997............................ 501 $ 6.62
===== ======
Exercise prices for options outstanding as of December 31, 1997 ranged from
$4.88 to $16.50. The weighted-average remaining contractual life of those
options is 6.58 years.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE)
YEAR ENDED DECEMBER 31, 1997
Revenues.................................................. $76,480 $77,465 $76,238 $80,568
Gross Profit.............................................. 43,574 44,236 43,996 45,559
Earnings Before Taxes..................................... 7,080 7,608 7,883 7,666
Net Earnings.............................................. 4,312 4,633 4,805 4,646
Earnings Per Share........................................ $ .22 $ .24 $ .25 $ .25
Earnings Per Share Assuming Dilution...................... .22 .24 .25 .24
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........................................ $ .22 $ .21 $ .20 $ .18
Earnings Per Share Assuming Dilution...................... .21 .20 .19 .18
11. FRANCHISING OF AARON'S RENTAL PURCHASE STORES
The Company franchises Aaron's Rental Purchase stores. As of December 31,
1997 and December 31, 1996, 186 and 155 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
15
16
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as earned and includes it in Other Revenues in the Consolidated Statements of
Earnings. The Company has guaranteed certain lease and debt obligations
(primarily extending through 1999) of some of the franchisees amounting to
$127,000 and $8,131,000, respectively, at December 31, 1997. The Company
receives a guarantee and servicing fee based on such franchisees outstanding
debt obligations which it recognizes as income over the guaranty and servicing
period. 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.
12. ACQUISITIONS
In December 1997, the Company acquired substantially all of the assets of
RentMart Rent-To-Own, Inc., a wholly-owned subsidiary of the Associates Capital
Corporation, for $18,012,000 in cash. The excess cost over the fair market value
of tangible assets acquired was approximately $4,300,000.
In December 1997, the Company acquired substantially all of the assets of
Blackhawk Convention Services, Inc. for $3,500,000 in cash. The excess cost over
the fair market value of tangible assets acquired was approximately $2,700,000.
Both 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 1997 consolidated financial statements was
not significant.
13. PROPOSED STOCK OFFERING
On or about March 31, 1998, the Company intends to file a registration
statement for the sale by the Company of 2,100,000 shares of Common Stock. The
proceeds of the offering, if consummated, would be used to reduce indebtedness
and for general business purposes, including opening additional rent-to-rent and
rental purchase stores and expansion of manufacturing and distribution capacity.
16
17
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, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
years ended December 31, 1997 and 1996, and the nine months ended December 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1997 and 1996, and the nine months ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, in 1996,
the Company changed its method of accounting for depreciation of rental purchase
merchandise.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 23, 1998
17
18
COMMON STOCK MARKET PRICES & DIVIDENDS
On March 20, 1998, the Company's Common Stock and Class A Common Stock were
listed on the New York Stock Exchange under the symbols "RNT" and "RNT.A,"
respectively. Previously, the Company's Common Stock and Class A Common Stock
were traded on The NASDAQ Stock Market under the symbols "ARON" and "ARONA,"
respectively.
The approximate number of shareholders of the Company's Common Stock and
Class A Common Stock at March 23, 1998, was 2,000. The following table shows,
for the periods indicated, the range of high and low closing prices per share
for the Common Stock and Class A Common Stock as reported by NASDAQ, and the
cash dividends declared per share.
The closing prices for the Common Stock and Class A Common Stock on March
23, 1998, was $23.438 and $22.625, respectively. The Company currently expects
to continue its policy of paying dividends.
CASH
DIVIDENDS
PER
COMMON STOCK HIGH LOW SHARE
- ------------ ------- ------- ---------
December 31, 1997
First Quarter............................................. $12.875 $10.063 $
Second Quarter............................................ 13.375 10.375 .02
Third Quarter............................................. 18.250 12.750
Fourth Quarter............................................ 20.250 15.500 .02
December 31, 1996
First Quarter............................................. $10.375 $ 9.000 $
Second Quarter............................................ 15.000 9.688 .02
Third Quarter............................................. 14.250 11.000
Fourth Quarter............................................ 14.625 10.750 .02
CASH
DIVIDENDS
CLASS A PER
COMMON STOCK HIGH LOW SHARE
- ------------ ------- ------- ---------
December 31, 1997
First Quarter............................................. $14.000 $ 9.750 $
Second Quarter............................................ 13.750 10.000 .02
Third Quarter............................................. 18.000 11.938
Fourth Quarter............................................ 18.500 14.500 .02
December 31, 1996
First Quarter............................................. $11.250 $ 8.875 $
Second Quarter............................................ 16.000 10.750 .02
Third Quarter............................................. 16.250 12.750
Fourth Quarter............................................ 15.750 12.625 .02
18