1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of l934
March 31, 1998 0-12385
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For Quarter Ended Commission File No.
AARON RENTS, INC.
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(Exact name of registrant as
specified in its charter)
GEORGIA 58-0687630
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
309 E. PACES FERRY ROAD, N.E.
ATLANTA, GEORGIA 30305-2377
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(Address of principal executive offices) (Zip Code)
(404) 231-0011
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(Registrant's telephone number, including area code)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER
FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether registrant (l) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
l934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X
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No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding as of
Title of Each Class May 12, 1998
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Common Stock, $.50 Par Value 17,254,391
Class A Common Stock, $.50 Par Value 3,836,506
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
1998 1997
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(in thousands)
ASSETS:
Cash $ 95 $ 96
Accounts Receivable 14,171 11,794
Rental Merchandise 251,429 246,498
Less: Accumulated Depreciation (72,847) (69,530)
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178,582 176,968
Property, Plant and Equipment, Net 44,223 39,757
Prepaid Expenses and Other Assets 10,991 10,767
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Total Assets $ 248,062 $ 239,382
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts Payable and Accrued Expenses $ 32,892 $ 31,071
Dividends Payable 379
Deferred Income Taxes Payable 9,674 6,687
Customer Deposits and Advance Payments 8,577 8,304
Bank Debt 74,390 75,904
Other Debt 373 582
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Total Liabilities 125,906 122,927
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 15,508 15,484
Retained Earnings 119,150 113,864
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145,424 140,114
Less: Treasury Shares at Cost,
Common Stock, 1,020,596 Shares
at March 31, 1998 and 1,058,041
Shares at December 31, 1997 (9,132) (9,523)
Class A Common Stock, 1,525,255 Shares
at March 31, 1998 and December 31, 1997 (14,136) (14,136)
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Total Shareholders' Equity 122,156 116,455
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Total Liabilities and
Shareholders' Equity $ 248,062 $ 239,382
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See Notes to Consolidated Financial Statements
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AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
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March 31,
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1998 1997
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(in thousands, except per share amounts)
REVENUES:
Rentals and Fees $70,118 $57,016
Retail Sales 16,304 15,067
Non-Retail Sales 4,603 2,971
Other 1,784 1,426
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92,809 76,480
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COSTS AND EXPENSES:
Retail Cost of Sales 11,487 11,083
Non-Retail Cost of Sales 4,276 2,783
Operating Expenses 46,207 37,051
Depreciation
of Rental Merchandise 21,018 17,614
Interest 1,141 869
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84,129 69,400
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EARNINGS BEFORE
TAXES 8,680 7,080
INCOME TAXES 3,394 2,768
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NET EARNINGS $ 5,286 $ 4,312
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EARNINGS PER SHARE $ .28 $ .22
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EARNINGS PER SHARE
ASSUMING DILUTION $ .27 $ .22
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CASH DIVIDENDS DECLARED
PER SHARE
Common Stock $ -- $ --
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Class A Common Stock $ -- $ --
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WEIGHTED AVERAGE
SHARES OUTSTANDING 18,965 19,654
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WEIGHTED AVERAGE
SHARES OUTSTANDING
ASSUMING DILUTION 19,468 19,985
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See Notes to Consolidated Financial Statements
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AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
Three Months Ended
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March 31,
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1998 1997
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(in thousands)
OPERATING ACTIVITIES
Net Earnings $ 5,286 $ 4,312
Depreciation and Amortization 23,027 16,566
Deferred Income Taxes 2,987 2,646
Change in Accounts Payable and
Accrued Expenses 1,821 (76)
Change in Accounts Receivable (2,377) (513)
Other Changes, Net (48) 253
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Cash Provided by Operating Activities 30,696 23,188
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INVESTING ACTIVITIES
Additions to Property, Plant and Equipment (7,953) (2,412)
Book Value of Property Retired or Sold 1,575 2,672
Additions to Rental Equipment (46,528) (32,095)
Book Value of Rental Equipment Sold 23,896 17,456
Contracts and Other Assets Acquired (85)
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Cash Used by Investing Activities (29,010) (14,464)
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FINANCING ACTIVITIES
Proceeds from Revolving Credit Agreement 35,827 17,970
Repayments on Revolving Credit Agreement (37,341) (24,758)
Decrease in Other Debt (209) (240)
Dividends Paid (379) (382)
Acquisition of Treasury Stock (1,405)
Issuance of Stock Under Stock Option Plan 415 98
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Cash Used by Financing Activities (1,687) (8,717)
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(Decrease) Increase in Cash (1) 7
Cash at Beginning of Year 96 84
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Cash at End of Period $ 95 $ 91
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See Notes to Consolidated Financial Statements
Page 1
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AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Aaron Rents, Inc.
("the Company") and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated.
INTERIM FINANCIAL STATEMENTS:
The Consolidated Balance Sheet as of March 31, 1998, and the Consolidated
Statements of Earnings and Cash Flows for the three months ended March 31, 1998
and 1997, have been prepared without audit. In the opinion of management, all
adjustments necessary to present fairly the financial position, results of
operations and cash flows at March 31, 1998 and for all periods presented have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1997. The results of
operations for the period ended March 31, 1998 are not necessarily indicative of
the operating results for the full year.
PUBLIC OFFERING OF STOCK
On April 28, 1998, the Company issued through a public offering 2,100,000 shares
of Common Stock. The net proceeds to the Company after deducting underwriting
discounts and offering expenses were $40.0 million. The net proceeds were used
to reduce bank debt. As part of this public offering, the underwriters have an
over-allotment option that expires May 28, 1998. If the over-allotment option is
fully exercised, the Company would issue an additional 375,000 shares and
receive net proceeds of approximately $7.1 million which would also be used to
reduce bank debt.
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PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS:
THE QUARTER ENDED MARCH 31, 1998 VERSUS THE QUARTER ENDED MARCH 31, 1997:
Total revenues for the first quarter of 1998 increased $16.3 million (21.4%) to
$92.8 million compared to $76.5 million in 1997 due primarily to a $13.1 million
(23.0%) increase in rentals and fees revenues, plus a $2.7 million (15.9%)
increase in sales. Of this increase in rentals and fees revenues, $10.5 million
(80.2%) was attributable to the Aaron's Rental Purchase division. Rentals and
fees from the Company's rent-to-rent operations increased $2.6 million (9.1%)
during the same period.
Revenues from retail sales increased $1.2 million (8.2%) to $16.3 million in
1998, from $15.1 million for the same period last year. This increase was
primarily due to increased sales of both new and rental return merchandise in
the Aaron's Rental Purchase division. Non-retail sales, which primarily
represent merchandise sold to Aaron's Rental Purchase franchisees, increased
$1.6 million (54.9%) to $4.6 million compared to $3.0 million for the same
period last year. The increased sales are due to the growth of the franchise
operations.
Other revenues for the first quarter 1998 increased $358,000 (25.1%) to $1.8
million compared to $1.4 million in 1997. This increase was attributable to
franchise fee and royalty income increasing $351,000 (33.1%) to $1.4 million
compared to $1.1 million last year, reflecting the addition of 34 franchised
stores since the end of the first quarter of 1997 and improved operating
revenues at mature franchise stores.
Cost of sales from retail sales increased $404,000 (3.6%) to $11.5 million
compared to $11.1 million last year, and as a percentage of retail sales,
decreased to 70.5% from 73.6%. The decrease in cost of sales as a
percentage of sales is due to improved margins in the Company's rent-to-rent
operations and a greater percentage of the Company's sales coming from the
Aaron's Rental Purchase division which are at higher margins. Cost of sales from
non-retail sales increased $1.5 million (53.6%) to $4.3 million from $2.8
million, and as a percentage of sales, decreased to 92.9% from 93.7%. The
decrease 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 $9.2 million (24.7%) to $46.2 million from $37.1
million. As a percentage of total revenues, operating expenses were 49.8% in
1998 and 48.4% in 1997. Operating expenses increased as a percentage of total
revenues between quarters primarily due to the Company's acquisition of RentMart
Rent-To-Own, Inc. in December 1997. The RentMart stores are relatively immature
and have lower revenues over which to spread expenses.
Depreciation of rental merchandise increased $3.4 million (19.3%) to $21.0
million, from $17.6 million, and as a percentage of total rentals and fees,
decreased to 30.0% from 30.9%. The decrease as a percentage of revenues is
primarily due to decreased depreciation in relation to revenues in the Company's
Aaron's Rental Purchase division.
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Interest expense increased $272,000 (31.3%) to $1.1 million compared to
$869,000. As a percentage of total revenues, interest expense was 1.2% in 1998
compared to 1.1% in 1997. The slight increase in interest expense as a
percentage of revenues was due to higher debt levels associated with the
Company's December 1997 acquisition of RentMart Rent-To-Own, Inc. and Blackhawk
Convention Services, Inc.
Income tax expense increased $626,000 (22.6%) to $3.4 million for 1998 compared
to $2.8 million for the same period in 1997. The Company's effective tax rate
was 39.1% for both quarters.
As a result, net earnings increased $974,000 (22.6%) to $5.3 million in the
first quarter of 1998 compared to $4.3 million for the same period in 1997. As a
percentage of total revenues, net earnings were 5.7% in the current quarter as
compared to 5.6% for the same period last year.
The weighted average number of shares outstanding during the first quarter of
1998 was 18,965,000 compared to 19,654,000 (19,468,000 versus 19,985,000
assuming dilution) for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES:
During the first quarter of 1998, the Company paid a semi-annual dividend that
was declared in December 1997 of $.02 per share on both Common Stock and Class A
Common Stock. On May 5, 1998, the Company declared a semi-annual dividend
payable on July 7, 1998 of $.02 per share on both Common Stock and Class A
Common Stock.
On April 28, 1998, the Company issued through a public offering 2,100,000 shares
of Common Stock. The net proceeds to the Company after deducting underwriting
discounts and offering expenses were $40.0 million. The net proceeds were used
to reduce bank debt. As part of this public offering, the underwriters have an
over-allotment option that expires May 28, 1998. If the over-allotment option is
fully exercised, the Company would issue an additional 375,000 shares and
receive net proceeds of approximately $7.1 million which would also be used to
reduce bank debt.
Cash flow from operations for the quarters ended March 31, 1998 and 1997 was
$30.7 million and $23.2 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 requirements. 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 credit
line to fund daily working capital requirements. At March 31, 1998, an
aggregate of $74.4 million was outstanding under this facility, bearing
interest at an average rate of 6.82%. The Company uses interest rate swap
agreements as part of its overall long-term financing program. At March 31,
1998, the Company has swap agreements with notional principal amounts of $40.0
million which effectively fixed the interest rates on an equal amount under the
Company's revolving credit agreement at 7.18%.
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 from the Stock offering on April 28, 1998, will be
sufficient to fund the Company's capital and liquidity needs for at least the
next 24 months.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) The following exhibits are furnished herewith:
Exhibit
Number Description of Exhibit
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10(a) Loan Facility Agreement and Guaranty by and
among Aaron Rents, Inc., SunTrust Bank,
Atlanta, as Servicer and each of the
Participants Party Hereto, Dated January 20,
1998.
10(b) Amendment No. 1 to Loan Facility Agreement
and Guaranty (this "Amendment") dated as of
March 13, 1998.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Registrant during the
three months ended March 31, 1998
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AARON RENTS, INC.
(Registrant)
Date - May 14, 1998
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/s/ Gilbert L. Danielson
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Gilbert L. Danielson
Executive Vice President
Chief Financial Officer
Date - May 14, 1998
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/s/ Robert P. Sinclair, Jr.
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Robert P. Sinclair, Jr.
Corporate Controller