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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File No.
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December 31, 1996 0-12385
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)
Registrant's telephone number, including area code:
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(404) 231-0011
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class
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Class A Common Stock, $.50 Par Value
Common Stock, $.50 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 17, 1997: $16,194,000. See Item 12.
Indicate the number of share outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Shares Outstanding as of
Title of Each Class March 17, 1997
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Class A Common Stock, $.50 Par Value 3,941,906
Common Stock, $.50 Par Value 15,696,246
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report to Shareholders for the fiscal year ended
December 31, 1996 are incorporated by reference into Part II of this Form 10-K.
Portions of the registrant's definitive proxy statement for the 1997 annual
meeting of shareholders are incorporated by reference into Part III of this Form
10-K.
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PART I.
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Item 1. Business
GENERAL
Aaron Rents is one of the leading furniture rental companies in the United
States and has a growing and distinct presence in the rental purchase industry.
The Company rents and sells residential and office furniture and accessories,
consumer electronics, household appliances and business equipment. By
manufacturing its own specially designed residential and office furniture, the
Company enjoys an advantage over many of its competitors. Through its rent-to-
rent and rental purchase operations, the Company serves a broad range of
customers, including customers with temporary needs, customers who want the
option but not the obligation to purchase merchandise, and consumers financially
unable to purchase merchandise for cash or on credit. Cost-conscious consumers
can buy rental return merchandise at any of the Company's rental purchase or
rent-to-rent stores or at one of the Company's clearance centers. These sales
allow the Company to maximize the residual value of its rental return
merchandise.
Aaron Rents at December 31, 1996 had 240 Company operated stores and 61
franchised stores in 26 states, including 105 rent-to-rent stores in its Aaron
Rents' Rent-to-Rent division, 135 Company-operated rental purchase stores in its
Aaron's Rental Purchase division, and 61 Aaron's Rental Purchase franchised
stores. Aaron Rents stores are located primarily in the Southeast and
Southwest. While each store has a principal focus (rent-to-rent, rental
purchase or clearance sales), all stores give customers the option to rent only,
to rent to purchase, or to purchase any of the store's merchandise. The Company
expects to develop or acquire additional stores in clusters to achieve
marketing, distribution and other operating efficiencies. The Company
franchises Aaron's Rental Purchase stores in selected markets. The Company also
own five furniture manufacturing plants and four bedding manufacturing
facilities, which supply approximately 63% of the furniture rented or sold by
the Company.
In 1992, the Company accelerated development of its distinctive Aaron's
Rental Purchase concept to increase its share of the growing rent-to-own
industry. The Company took this opportunity to introduce innovative programs
and approaches that would differentiate the Company's rental purchase program
from the typical rent-to-own programs of its competitors. The Company's
innovations included offering 12-month rental purchase contract terms (compared
to the industry standard 18 to 24 months), larger and more attractive store
showrooms in more appealing locations, and a wider selection of merchandise. To
address opportunities primarily in non-metropolitan areas where the Company-
operated stores would be difficult to manage efficiently, the Company began its
Aaron's Rental Purchase franchise program in 1992.
For the fiscal year ended December 31, 1996, in the Company's rent-to-rent
and rental purchase stores, approximately 35% of its volume of business was the
rental of furniture and accessories, approximately 21% was the sale of rental
and other merchandise, and 44% was rental purchase. The rent-to-rent portion of
the business (including the sale of rental return merchandise) is mature and
stable, and accounts for approximately 58% of the Company's total revenues. At
December 31, 1996, the Company's 240 stores had an aggregate showroom and
warehouse space of approximately 3.3 million square feet, and approximately 70%
of the Company's rental merchandise inventory was on rent.
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THE RENT-TO-OWN INDUSTRY
The Company believes its rental purchase concept differs significantly from
the typical rent-to-own program. The rent-to-own industry is a growing segment
of the retail industry that offers an alternative to traditional methods of
acquiring furniture, electronics and appliances. The rent-to-own concept is
particularly popular with consumers who are unable to pay for merchandise in
cash or who lack the credit to qualify under conventional financing programs.
It is also popular with consumers who, despite good credit, do not wish to incur
additional debt, have only a temporary need for the merchandise, or desire to
try out a particular brand or model before purchasing it. Historically,
electronic goods have been the dominant product category rented and sold in the
industry although furniture items are growing rapidly in popularity.
In the typical rent-to-own transaction, the customer seeks to acquire
merchandise over a fixed term, usually 18 to 24 months, by making weekly rental
payments. The customer may cancel the contract at any time by returning the
merchandise to the store, with no further rental obligation. The average rental
period in the industry is about four months, as the majority of customers do not
rent the item to the full term of the contract. If the customer rents the item
to the full term, he obtains ownership of the item, though he has the option to
purchase it any time.
The estimated potential size of the United States rent-to-own market is
19.6 million households of which only 2.7 million are being served currently by
the industry. According to the Association of Progressive Rental Organizations
("APRO"), the national trade association representing the rent-to-own industry,
there are approximately 7,500 rent-to-own stores in the United States, 35% of
which are owned or franchised by the ten largest companies in the industry.
Industry-wide revenues are believed to have been approximately $4.0 billion in
1995.
Rent-to-own transactions currently are regulated at the state level by 45
states. See "Government Regulation."
THE RENT-TO-RENT INDUSTRY
The rent-to-rent industry serves both residential and business customers
who generally have immediate, temporary needs for office or residential
merchandise but who generally do not seek to own the merchandise. Residential
rental customers include both individual residents seeking to rent merchandise
for their own homes and apartments, and apartment complex managers seeking to
provide furnished apartments. Business customers range from small businesses
and professionals who are in need of office furnishings but need to conserve
capital, to large corporations with temporary or seasonal needs.
In the typical rent-to-rent transaction, the customer agrees to rent one or
more items for a minimum of four months, which may be extended by the customer
on a month-to-month basis. Although most rental contracts give the customer the
option of purchasing the rented item, most customers do not enter into the
transaction with the desire to own the rented merchandise.
The furniture component of the rent-to-rent industry is estimated to be
greater than $650 million in annual rental revenues. Although, in general, the
rent-to-rent industry is mature, the Company believes that there is growth
potential in office furniture. The demand for rental products is believed to be
related to the mobility of the population, which relies upon rented merchandise
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to fulfill temporary needs. The industry is highly competitive and
consolidating, with only a handful of companies accounting for a substantial
share of the market.
OPERATING DIVISIONS
Rental Purchase-Aaron's Rental Purchase
The Company established its Aaron's Rental Purchase division with stand-
alone stores in 1987, accelerated its expansion of the stores in 1990, and at
December 31, 1996 had 135 Company-operated and 61 franchised Aaron's Rental
Purchase stores. The Company has clearly defined its Aaron's Rental Purchase
stores with specific merchandising selection and store layout, pricing and
contract terms, and the customers it seeks to attract. The Company believes
that these features create a store and rental purchase concept that is
significantly different from the operations of most other rent-to-own stores,
the Company's traditional rent-to-rent business, and the operations of home
furnishings retailers who finance merchandise.
Compared to the typical rent-to-own stores, Aaron's Rental Purchase stores
offer shorter contract terms which are payable on a monthly basis and have
generally lower total payments to acquire merchandise. Aaron's Rental Purchase
stores offer a larger selection of merchandise in general and a greater
percentage of furniture merchandise in particular, and have a larger and more
visually appealing store layout. The Company believes that its rental purchase
customers demand and can afford both higher quality merchandise and more
competitive pricing on total contract terms compared to the typical rent-to-own
customer.
The Company's rental purchase operations differ from its traditional rent-
to-rent business. A typical rental purchase customer, while usually lacking the
cash or credit resources to acquire merchandise, desires the option of ownership
and may have the intention to utilize rental purchase to achieve ownership.
Accordingly, in rental purchase transactions, the customer is willing to pay a
higher monthly payment for the ownership option, as compared to the rent-to-rent
customer. Typically, the Company's rental purchase customers are more style and
brand name conscious than rent-to-rent customers who regard the merchandise as
temporary. Aaron's Rental Purchase stores are attractively appointed and are
typically in or near a shopping center strategically located near the residences
of its target customers, as opposed to the rent-to-rent store typical location
in an office park that services destination customers from a broad geographical
area.
The Company's rental purchase transactions differ from sales by home
furnishings retailers in that rental purchase allows the option, but not the
obligation, to purchase merchandise while paying a similar "all-in" contract
price. Rental purchase allows the customer to have the item serviced free of
charge or replaced at any time during the rental contract, and allows the
Company to re-rent an item to another customer if the contract does not go to
term. The Company also believes that rental purchase contracts have fewer
merchandise losses, as the customer is more likely to return merchandise that he
knows he does not own.
The Company's rental purchase store layout consists of a combination
showroom and warehouse, ranging from 3,000 to 20,000 square feet, with an
average of 8,700 total square feet. The stores are strategically located in or
near shopping centers within ten miles of the residential communities of a large
number of its target customers. The Company emphasizes a broad selection of
brand name products for its electronics and appliance items, and offers
customers a wide selection of furniture, including furniture manufactured by the
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Company's MacTavish Furniture Industries division. Aaron's Rental Purchase
stores also offer jewelry and computers.
Aaron's Rental Purchase stores structure the pricing of merchandise to be
less expensive than similar items offered by other rent-to-own operators, and
substantially equivalent to the "all-in" contract price of similar items offered
by home furnishings retailers who finance merchandise. Over 84% of the
Company's rental purchase contracts have monthly payments as compared to the
industry standard weekly payments, and most monthly contracts are for 12 months
compared to the industry standard of 18 to 24 months. Approximately 39% of
Aaron's Rental Purchase contracts go to term, in contrast to an industry average
of less than 25%. The merchandise from the contracts that do not go to term is
either re-rented or sold.
In selecting new locations for Aaron's Rental Purchase stores, the Company
generally looks for locations near established working class neighborhoods and
communities with good access, typically in well-maintained strip shopping
centers. Many of the Company's stores are placed near existing rent-to-own
stores of competitors.
Each rental purchase store maintains at least two trucks and crews for
pickups and deliveries, and generally offers same or next day delivery for
addresses located within 15 miles of the store.
The Aaron's Rental Purchase division's 6 clearance centers serve primarily
as retail outlets for final sales of rental return merchandise that will not be
rented again, although they also sell some new merchandise. Sales by the
clearance centers, together with sales at the Company's rental purchase stores
are instrumental in enabling the Company to maximize residual values of
depreciated rental merchandise.
Franchise Program
The Company began franchising Aaron's Rental Purchase stores in selected
markets in 1992. It is not anticipated that franchised stores will compete with
Company-operated stores, as franchises are primarily awarded in markets into
which the Company has no current plans to expand. Franchised stores operate
under the same financial controls and audits as Company-operated stores and
process their financial and inventory information on the information system that
was developed and can be accessed by the Company. On a weekly basis,
franchisees pay a continuing licensing fee of 5% of gross receipts, and purchase
much of their rental purchase inventory through or from the Company. The
Company provides its franchisees with considerable support, including site
selection, advertising, collection procedures and store operating procedures.
The Company has an arrangement with a major financial institution to provide
financing to qualifying franchisees to assist with the establishment and
operation of their stores. As of December 31, 1996, 155 Aaron's Rental Purchase
franchises had been awarded.
Rent-to-Rent -- Aaron Rents and Sells Furniture
The Company has been in the rent-to-rent business for over 40 years and is
one of the largest furniture rent-to-rent companies in the United States. The
rent-to-rent business remains the Company's core business, and accounted for 58%
of the Company's total revenues for the fiscal year ended December 31, 1996,
even though the Company's rental purchase business is expanding rapidly. The
Company rents new and rental return merchandise to both the residential and the
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office segments of the rent-to-rent industry, with approximately two-thirds of
its rental revenues generated from residential rentals.
Rental contracts typically give the customer the option to purchase the
merchandise rented, though few customers exercise the purchase option. Items
held for rent, whether new or rental return, are also available for purchase and
rental purchase at all rent-to-rent stores.
The Company's typical rent-to-rent store layout consists of a combination
showroom and warehouse comprising about 20,000 square feet. Each residential
showroom features attractive displays of dining-room, living-room and bedroom
furniture in a number of styles, fabrics, materials and colors. Office rental
showrooms feature lines of desks, chairs, conference tables, credenzas, sofas,
business equipment and accessories. The Company believes that having a
warehouse next to each showroom permits the store manager to exercise greater
control over inventory, merchandise condition and pickup and deliveries,
resulting in more efficient and consistent service for the customer, and gives
the Company an advantage over many of its competitors in the rent-to-rent market
who do not have attached warehouses.
Each rent-to-rent store generally offers next day delivery for addresses
located within 50 miles of the store, and maintains at least one truck and a
crew for pickups and deliveries. The Company believes that its ability to
deliver office furniture and equipment to its office customers quickly and
efficiently gives the Company and advantage over general office furniture
retailers who often require several weeks to effect delivery.
The Aaron Rents' Rent-to-Rent division's 5 clearance stores serve primarily
as retail outlets for final sales of rental return merchandise that will not be
rented again, though they also sell new merchandise. Sales by the clearance
stores, together with sales at the clearance centers located in most of the
Company's rent-to-rent stores, are instrumental in enabling the Company to
maximize residual values of depreciated rental merchandise.
The Company generally sells rental return merchandise at or above its book
value (cost less depreciation) plus selling expenses, a price which is usually
considerably lower than the price for comparable new merchandise. Most
merchandise held for sale in clearance stores may also be acquired through a
rental purchase option. Because new merchandise is sold at the same location as
rental return merchandise, the Company has the opportunity to sell both new and
rental return merchandise to customers who may have been attracted to the store
by the advertising and price appeal of rental return merchandise. The ability
to sell new and rental return merchandise at the same location allows for more
efficient use of facilities and personnel and minimizes overhead.
As of December 31, 1996, the Company had 105 rent-to-rent store locations,
primarily in the Southeastern and Southwestern United States.
Furniture Manufacturing
The Company believes that its manufacturing capability gives it a strategic
advantage over its competitors by enabling the Company to control the quality,
cost, timing, styles and quantity of its furniture rental products. As the only
major furniture rental company that manufacturers its own furniture, the Company
believes its 375,000 square feet of manufacturing facilities provide it more
flexibility in scheduling production runs and in meeting inventory needs than
rental companies that do not manufacture their own furniture and are dependent
upon third party suppliers. The Company's MacTavish Furniture Industries
division has manufactured furniture for the Company's rental stores since 1971.
The division has five manufacturing plants and four bedding manufacturing
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facilities which supply 76% of the Company's rent-to-rent furniture and bedding
needs and 34% of company-operated rental purchase stores' furniture and bedding
needs. Overall, approximately 63% of the furniture rented or sold by the
Company is manufactured by MacTavish Furniture Industries. The Company's
manufacturing plants have the capacity to meet the Company's needs for such
furniture for the foreseeable future. The Company also does limited
manufacturing of residential furniture for several unaffiliated furniture
retailers.
MacTavish Furniture Industries manufacturers upholstered living-room
furniture (including contemporary sofas, sofabeds, chairs and modular sofa and
ottoman collections in a variety of natural and synthetic fabrics and leathers),
bedding (including standard sizes of mattresses and box springs), upholstered
office furniture, bedroom furniture (including bedroom sets, headboards,
dressers, mirrors, chests and night tables), and cocktail, sofa and end tables.
The Company has designed special features for the furniture it manufactures,
which makes its furniture more durable than furniture purchased from third
parties. These features include wrench-disassembly (or knock-down) construction
of upholstered furniture products for easy replacement of worn or damaged parts
at lower cost; standardization of components; reduction of parts and features
susceptible to wear or damage; and durable, soil-resistant fabrics and solid-
hardwood frames for longer life and higher residual value. The Company also
manufactures replacement covers of all styles and fabrics of its upholstered
furniture for use in reconditioning rental return furniture.
The principal raw materials used in manufacturing are fabric, foam, wire-
innerspring assemblies, cotton liners and hardwoods. All of these materials are
purchased in the open market from sources not affiliated with the Company. The
Company is not dependent on any single supplier, and none of the raw materials
are in short supply. The Company generally maintains a three or four week
inventory of such materials.
Other Rental and Sales Operations
To supplement its rental purchase, rent-to-rent and sales operations, the
Company also operates three smaller divisions: Aaron Rents Business Equipment,
Aaron Rents Convention Furnishings and Aaron Rents Housewares and Linens. The
Aaron Rents Business Equipment division's three stores offer business equipment
(such as computers, copy machines, fax machines, word processors and paper
shredders) for rental, rental purchase and purchase. The Aaron Rents Convention
Furnishings division specializes in supplying conventions and events of various
sizes with furniture (such as tables, chairs, desks and sofas) on a temporary
basis. The Aaron Rents Housewares and Linens division supplies many of the
Company's rent-to-rent stores with a selection of common household and linen
items to complement the store's other items of merchandise.
STORE OPERATIONS
Management
The Company's rent-to-rent stores are managed by the President of the
division and are organized geographically into five regions, each supervised by
a vice-president who is primarily responsible for monitoring individual store
performance and inventory levels within the respective regions. The Aaron's
Rental Purchase division is managed separately by the President of the division,
who has four regional managers performing similar responsibilities.
Stores are directly supervised by 38 district managers. At the individual
store level, the store manager is responsible for customer and credit relations,
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deliveries and pickups, warehouse and inventory management, and certain
marketing efforts. Store managers are also responsible for inspecting rental
return furniture to determine whether it should be sold as is, rented again as
is, repaired and sold, or reconditioned for additional rental. A significant
portion of the store manager's compensation is dependent upon store revenues and
profits.
Executive management at the Company's headquarters directs and coordinates
purchasing, financial planning and control, manufacturing, employee training,
and new store site selection for the Company-operated stores. The Company's
internal audit department conducts periodic audits of every store, including
audits of Company-operated rental purchase stores every 60 days, and semiannual
audits of rent-to-rent stores and franchised rental purchase stores. The
Company's business philosophy has always emphasized strict cost containment and
fiscal controls. Executive and store level management monitor expenses
vigilantly to contain costs. All invoices are paid out of the Company's
headquarters in order to enhance fiscal accountability. The Company believes
that its careful attention to the expense side of its operations has enabled it
to maintain financial stability and profitability even during periods of
declining revenues.
Management Information Systems
The Company utilizes computer-based management information systems to
facilitate cash collections, merchandise returns and inventory monitoring.
Through the use of proprietary software developed by the Company, each of the
Company's stores is linked by computer directly to corporate headquarters, which
enables headquarters to monitor the performance of each store on a daily basis.
At the store level, the store manager is better able to track inventory on the
showroom floor and in the warehouse to minimize delivery times, assist with
product purchasing and match customer needs with available inventory.
Contract Approval, Renewal and Collection
One of the keys to the Company's success is its ability to achieve timely
cash collections. Individual store managers utilize the Company's computerized
information system on a daily basis to track cash collections. They contact
customers within a few days of when their rental payments are due in order to
encourage customers to keep their contracts current and in force (rather than
having to return the merchandise for non-payment of rent) and to renew their
contracts for an additional rental period. Careful attention to cash
collections is particularly important in the rental purchase operations, where
the customer typically has the option to cancel the contract at any time and
each payment is considered a renewal of the contract rather than a collection of
a receivable.
Each rent-to-rent store performs a credit check on most of its residential
and business customers. The Company generally performs no formal credit check
with respect to rental purchase customers other than to verify employment or
other reliable sources of income and personal references supplied by the
customer because the Company does not extend credit to rental purchase
customers. All of the Company's rental agreements for residential and office
merchandise require rental payments in advance, and the merchandise normally is
picked up if a payment is significantly in arrears. Net bad debt losses from
rent-to-rent rentals as a percentage of rent-to-rent rental revenues were
approximately 2.5%, 3.0% and 4.0% for the fiscal year ended December 31, 1996,
for the nine months ended December 31, 1995, and for the fiscal year ended March
31, 1995. Bad debt losses in the rental purchase division are not significant.
For the same periods, net merchandise shrinkage as a percentage of all rental
revenues was 2.5%, 2.8% and 2.7%, respectively. The Company's collection and
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repossession policies comply with governing legal requirements, and the Company
disciplines any employee that it discovers deviating from such policies.
CUSTOMER SERVICE
The Company believes that customer service is one of the most important
elements in the success of its rent-to-rent and rental purchase businesses.
Customer satisfaction is critical because the customer usually has the option of
returning the rented merchandise at any time. The Company's goal is to make its
customers feel positive about the Company and its products from the moment they
enter the Company's showrooms. Rented items are serviced at no charge to the
customer, and quick, free delivery is available in many cases. In order to
increase rentals at existing stores, the Company fosters relationships with
existing customers to attract recurring business, and many new rental and rental
purchase contracts are attributable to repeat customers.
Because of the importance of customer service, the Company believes that a
prerequisite for successful operations and growth is skilled, effective
employees who value the Company's customers and project a genuine desire to
serve the customers' needs. The Company has a comprehensive employee training
program at its Atlanta headquarters for all rent-to-rent store managers and
employees covering all areas of the Company's operations, with a heavy emphasis
on customer service. Additionally, four field trainers are based out of the
regional offices. Store managers and employees in the Aaron's Rental Purchase
stores have similar training primarily on site by the division's training staff
and regional managers. The Company's policy of promoting from within aids in
employee retention and commitment to the Company's customer service and other
business philosophies, which also allows the Company to realize greater benefits
from its employee training programs.
PURCHASING AND DISTRIBUTION
The Company's product mix is determined by store managers in consultation
with the regional managers and regional vice presidents, based on an analysis of
customer demands. With approval from the applicable operating management, store
managers send their orders to the purchasing department at headquarters. The
purchasing department reviews all purchase orders to determine whether
merchandise needs may be satisfied out of existing inventory at other stores
before contacting vendors. If inventory is available at other stores, the
purchasing department arranges for inventory shipments between stores.
Virtually all merchandise for the Company's stores is purchased by the Company's
six buyers, three of whom are solely responsible for rental purchase
merchandise.
The Company purchases the majority of its merchandise directly from
manufacturers, with the balance from local distributors. The Company's largest
supplier is its MacTavish Furniture Industries manufacturing division, which
supplies approximately 66% of the furniture rented or sold by the Company. The
Company has no long-term contracts for the purchase of merchandise and believes
that its relationships with suppliers are excellent.
Both rent-to-rent and rental purchase operations utilize distribution
centers to control inventory. During fiscal year 1996, the Company opened two
such rent-to-rent facilities in Richmond, Virginia and Dallas, Texas. Rent-to-
rent stores in geographic proximity to these facilities order merchandise
directly from the distribution centers. The remaining rent-to-rent stores
receive merchandise directly from vendors who ship to the stores' attached
warehouses. All rental purchase stores order directly from the Company's three
rental purchase distribution centers located in Auburndale, Florida; Houston,
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Texas; and Duluth, Georgia. Rental purchase stores typically have smaller
warehouses with less inventory storage space than the Company's rent-to-rent
stores. Vendors ship directly to the distribution centers.
Distribution centers result in freight savings from truckload discounts and
a more efficient distribution of merchandise. The Company utilizes its four
tractor trailers, its local delivery trucks, and various contract carriers to
make weekly deliveries to individual stores.
MARKETING AND ADVERTISING
In its rental purchase operations, the Company relies heavily on store
traffic and direct mail advertising to reach its target markets. Rental
purchase stores are located within neighborhood communities, and will typically
distribute mass mailings of promotional material every two weeks, with the goal
of reaching every known household within a specified radius of each store at
least 12 times per year. In addition, delivery personnel are trained to leave
promotional material at the door of each residence within five doors of the
delivery destination. In concentrated geographic markets, and for special
promotions, the Company also utilizes television advertising and radio
advertising for special promotions.
The Company markets its rent-to-rent operations through its outside sales
staff for personal contact with apartment complex managers for the residential
market as well as the decision maker for the office market. It also relies on
the use of brochures, newspapers, radio, television, direct mail, trade
publications, yellow pages and electronic mail over the Internet
(http://www.aaronrents.com) to reach its residential and office rental and sales
customers. The Company believes that such advertising benefits its residential
and office rental and sales operations because of increased awareness of rental
and purchase options along with name recognition.
EMPLOYEES
At December 31, 1996, the Company had 2,550 employees. None of the
Company's employees are covered by a collective bargaining agreement, and the
Company believes that its relations with its employees are good.
CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS
Many of the matters discussed in this Annual Report on Form 10-K are
forward looking statements. These statements involve a number of risks and
uncertainties that could cause actual results to differ materially from any such
statement. The following is a nonexclusive list of factors that could cause
actual results to differ materially:
Risks Associated with the Opening of New Stores
An important part of the Company's growth strategy is to open new rental
purchase stores, many of which may be in new markets.
Competition
The Company's businesses are highly competitive. The Company competes in
the rent-to-rent market with national and local companies and, to a lesser
extent, with apartment owners who purchase furniture for rental to tenants. In
the rent-to-own market, the Company competes with several larger companies.
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Although definitive industry statistics are not available, management
believes that the Company is one of the largest furniture rental companies in
the United States. Management also believes that it generally has a favorable
competitive position in that industry because of its manufacturing and
reconditioning capabilities, its prompt delivery and its commitment to customer
service.
Government Regulation
The Company believes that 43 states specifically regulate rent-to-own
transactions, including states in which the Company currently operates Aaron's
Rental Purchase stores. Most of these states have enacted disclosure laws which
require rent-to-own companies to disclose to its customers the total number of
payments, total amount and timing of all payments to acquire ownership of any
item, any other charges that may be imposed by the Company and miscellaneous
other items. The most restrictive states limit the total amount that a customer
may be charged for an item to twice the "retail" price for the item, or regulate
the amount of "interest" that rent-to-own companies may charge on rent-to-own
transactions, generally defining "interest" as rental fees paid in excess of the
"retail" price of the goods. The Company's long-established policy in all
states is to disclose the term of its rental purchase transactions as a matter
of good business ethics and customer service.
At the present time, no federal law specifically regulates the rent-to-own
industry. Federal legislation has been proposed in the past which could affect
the rental purchase industry. Management cannot predict whether any such
legislation will be enacted and what the impact of such legislation would be.
Although the Company is unable to predict the results of these or any additional
regulatory initiatives, the Company does not believe that the existing and
proposed regulations will have a material adverse impact on the Company's rental
purchase or other operations.
Limited Voting Rights
The Company's capital stock consists of Class A Common Stock and Common
Stock (formerly known as the Class B Common Stock). Only the holders of shares
of Class A Common Stock vote for the election of directors of the Company and on
most other matters. The Common Stock has only limited voting rights.
Control by and Dependence Upon Principal Shareholder
R. Charles Loudermilk, Sr., the Company's President, Chief Executive
Officer and Chairman of the Board, own or controls approximately 60% of the
Company's voting stock and 22% of the non-voting stock outstanding. As a
result, Mr. Loudermilk will continue to be able to elect all the directors of,
and otherwise effectively control, the Company. The Company believes that it
has benefited substantially from Mr. Loudermilk's leadership and that if it were
to lose his services at any time in the near future such loss could have an
adverse effect on the Company's business and operations.
Item 2. Properties
The Company leases space for substantially all of its store and warehouse
operations under operating leases expiring at various times through August,
2005. Most of the leases contain renewal options for additional periods ranging
from two to ten years at rental rates generally adjusted on the basis of the
<PAGE>
consumer price index or other factors. For further information regarding the
Company's store and warehouse leases, see Note G of the Notes to the Company's
Consolidated Financial Statements.
The Company owns five furniture manufacturing plants and operates four
bedding facilities and five distribution centers. It manufactures wood bedroom
furniture at an 80,000 square foot plant, and office furniture at a 91,000
square foot plant, both located on a four-acre site in Quincy, Florida, near
Tallahassee. Three plants are located in a five acre site in Coolidge, Georgia
(approximately 200 miles south of Atlanta). Upholstered residential furniture
is produced at a 77,000 square foot plant. A second plant of 46,000 square feet
assembles chairs, manufactures leather upholstery, sleepers, and box springs and
mattresses. A third plant of 20,000 square feet cuts and sews fabric for
upholstered furniture. The Company's bedding operations are located in Atlanta
and Coolidge, Georgia; Houston, Texas, and Orlando, Florida. Distribution
centers in Auburndale, Florida; Houston, Texas; and Duluth, Georgia (average
57,000 square feet each) service the Aaron's Rental Purchase division.
Distribution centers in Richmond, Virginia and Dallas, Texas (approximately
100,000 square feet each) service the Aaron's Rent-to-Rent Division.
The Company's executive and administrative offices occupy approximately
37,000 square feet in an 11 story, 81,000 square-foot building that the Company
owns in Atlanta. The Company leases most of the remaining space to third
parties under leases with remaining terms averaging four years.
All of the Company's facilities are well maintained and adequate for their
current and reasonably foreseeable uses.
Item 3. Legal Proceedings
The Company is not currently a party to any legal proceedings the result of
which it believes could have a material adverse impact upon its business,
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
- -------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
(a) The information presented under the caption "Common Stock Market Prices
and Dividends" on page 23 of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1996 is
incorporated herein by reference. The over-the-counter market
quotations stated herein reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
(b) There were approximately 2,000 stockholders of record as of March 17,
1997.
(c) The information presented under "Note E - Debt" on page 20 of the
Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1996 is incorporated herein by reference. During the
<PAGE>
fiscal year ended December 31,1996, the Company paid two semi-annual
cash dividends. No assurance can be provided that such dividends will
continue.
Item 6. Selected Financial Data
The information presented under the caption "Selected Financial
Information" on page 13 of the Company's Annual Report to Shareholders
for the fiscal year ended December 31, 1996 is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information presented under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operation" on pages 14 through 15
of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1996 is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The information presented under the captions "Consolidated Balance Sheets,"
"Consolidated Statements of Earnings," "Consolidated Statements of Shareholders'
Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated
Financial Statements," and "Report of Independent Auditors" on pages 16 through
23 of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1996 is incorporated herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1996, with respect to the identity, background
and Section 16 filings of directors and executive officers of the Company, is
incorporated herein by reference to this item.
Item 11. Executive Compensation
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1996, with respect to executive compensation,
is incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1996, with respect to the ownership of common
stock by certain beneficial owners and management, is incorporated herein by
reference to this item.
<PAGE>
For purposes of determining the aggregate market value of the Company's
voting stock held by non-affiliates, shares held by all directors and officers
of the Company have been excluded. The exclusion of such shares is not intended
to, and shall not, constitute a determination as to which person or entities may
be "affiliates" of the Company as defined by the Securities and Exchange
Commission.
Item 13. Certain Relationships and Related Transactions
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1996, with respect to certain relationships and
related transactions, is incorporated herein by reference in response to this
item.
PART IV
- -------
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K
Reference
Form 10-K Report to Shareholders Page
- --------------------------------
(a) 1. Consolidated Financial Statements
The following financial statements and notes thereto of
Aaron Rents, Inc. and Subsidiaries, and the related
Report of Independent Auditors are incorporated in
Item 8 by reference from the Company's Annual Report to
Shareholders for the Year ended December 31,
1996.
Consolidated Balance Sheets - December 31, 1996 and 1995 16
Consolidated Statements of Earnings - Year ended
December 31, 1996, Nine months ended December 31, 1995, and
Year ended March 31, 1995 17
Consolidated Statements of Shareholders' Equity - Year ended
December 31, 1996, Nine Months ended December 31, 1995
and Year ended March 31, 1995 17
Consolidated Statements of Cash Flows - Year ended
December 31, 1996, Nine Months ended December 31, 1995,
and Year ended March 31, 1995 18
Notes to Consolidated Financial Statements 19-23
Report of Independent Auditors 23
2. Consolidated Financial Statement Schedules
All schedules have been omitted because they are inapplicable
or the required information is included in the financial
statements or notes thereto.
3. Exhibits
<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
3 (a) Amended and Restated Articles of Incorporation of the Company, filed
as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 (the "March 31, 1996 10-Q") which exhibit is
by this reference incorporated herein.
3 (b) By-laws of the Company, filed as Exhibit 2.2 to the Company's
Registration Statement on form 8-A filed with the Commission on
October 22, 1992, which exhibit is by this reference incorporated herein.
4 See Exhibits 3 (a) through 3 (b).
10 (a) Aaron Rents, Inc. Employees Retirement Plan and Trust, filed as
Exhibit 4 (a) to the Company's Registration Statement on Form S-8, file
number 33-62538, filed with the Commission on May 12, 1993, which exhibit
is by this reference incorporated herein.*
10 (b) Aaron Rents, Inc. 1990 Stock Option Plan, filed as Exhibit 4 (a) to
the Company's Registration Statement on Form S-8, file number 33-62536,
filed with the Commission on May 12, 1993, which exhibit is by this
reference incorporated herein.*
10 (c) Amended and Restated Revolving Credit and Term Loan Agreement,
dated January 6, 1995, filed as Exhibit 10 (a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1994 (the
"December 31, 1994 10-Q"), which exhibit is by this reference
incorporated herein.
10 (d) Letter Agreements dated November 14, 1994, between Trust Company
Bank and the Company, and November 21, 1994 between Bank of America and
the Company regarding an Interest Rate Swap Transaction, filed as Exhibit
10 (b) to the December 31, 1994 10-Q, which exhibit is by this reference
incorporated herein.
10 (e) Letter Agreements dated June 19, 1995, between First Union National
Bank of North Carolina and the Company and June 20, 1995, between Trust
Company Bank and the Company regarding an Interest Rate Swap Transaction,
filed as Exhibit 10 (b) to the June 30, 1995 10-Q, which exhibit is by
this reference incorporated herein.
10 (f) Third Amendment to Second Amended and Restated Revolving Credit
and Term Loan Agreement, dated September 30, 1996, filed as Exhibit 10 to
the September 30, 1996 10-Q, which exhibit is by reference incorporated
herein.
10 (g) Letter agreements dated December 26, 1996 between SunTrust Bank,
Atlanta and the Company, and letter agreements dated December 27, 1996
between First Chicago NBD, Bank of America NT & SA and the Company
regarding Interest Rate Swap Transactions.
11 Computation of Earnings Per Share.
13 Aaron Rents, Inc. Annual Report to Shareholders for the fiscal year
ended December 31,1996. With the exception of information expressly
<PAGE>
incorporated herein by direct reference thereto, the Annual Report to
Shareholders for the fiscal year ended December 31, 1996 is not deemed to
be filed as a part of this Annual Report on Form 10-K.
18 Letter Re Change in Accounting Principles dated May 13, 1996, filed as
Exhibit 18 to the March 31, 1996 10-Q, which exhibit is by this reference
incorporated herein.
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
99 Press release dated May 7, 1996, filed as Exhibit 99 to the March 31,
1996 10-Q, which exhibit is by this reference incorporated herein.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to item 14 (c) of this report.
(b) Reports on Form 8-K-none
(c) Exhibits listed in item 14 (a) (3) are included elsewhere in this
Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
March, 1997.
AARON RENTS, INC.
By: /s/ Gilbert L. Danielson
------------------------
Gilbert L. Danielson
Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 28th day of March, 1997.
SIGNATURE TITLE
- --------- -----
/s/ R. Charles Loudermilk, Sr. Chief Executive Officer
- ------------------------------ (Principal Executive Officer)
R. Charles Loudermilk, Sr. and Chairman of the Board of Directors
/s/ Gilbert L. Danielson Vice President, Finance, Chief
- ------------------------ Financial Officer and Director,
Gilbert L. Danielson (Principal Financial Officer)
/s/ Robert P. Sinclair, Jr. Controller
- --------------------------- (Principal Accounting Officer)
Robert P. Sinclair, Jr.
/s/ Leo Benatar Director
- ---------------
Leo Benatar
/s/ Earl Dolive Director
- ---------------
Earl Dolive
/s/ Rex Fuqua Director
- -------------
J. Rex Fuqua
/s/ Keith C. Groen Vice President, Legal
- ------------------ Secretary and Director
Keith C. Groen
/s/ Ingrid Saunders Jones Director
- -------------------------
Ingrid Saunders Jones
/s/ Robert C. Loudermilk, Jr. Vice President, Real Estate
- ----------------------------- and Director
Robert C. Loudermilk, Jr.
/s/ LTG. M. Collier Ross USA (Ret.) Director
- -----------------------------------
LTG M. Collier Ross USA (Ret.)
/s/ R. K. Sehgal Director
- ----------------
R. K. Sehgal
<PAGE>
Exhibit 10 (g)
TERMINATION AGREEMENT
---------------------
Mr. Mitch Paull December 26, 1996
Treasurer
Aaron Rents, Inc.
309 East Paces Ferry Road, N.E.
Atlanta, GA 30305
Ph#: 404-231-0011
Fax#: 404-240-6584
Dear Mr. Paull:
The purpose of this communication is to set forth the terms and conditions
pursuant to which we have agreed to cancel the Interest Rate Swap Transaction,
the terms of which are briefly summarized below.
Fixed Rate Payer: Aaron Rents, Inc.
Fixed Rate: 7.530% per annum
Floating Rate Payer: SunTrust Bank, Atlanta
Beginning Notional Amount: USD $10,000,000.00
Trade Date: 11-14-1994
Effective Date: 11-16-1994
Termination Date: 11-16-1997
It is hereby agreed that the rights and obligations of the parties arising out
of this Interest Rate Swap Transaction are terminated and waived effective from
12-26-96 and the parties agree that they shall be under no further liability to
each other with respect to the Interest Rate Swap Transaction. This agreement
shall be part of and an agreement to the Confirmation in respect of the Interest
Rate Swap Transaction.
Please confirm that the foregoing correctly sets forth the terms of our
agreement by signing this copy and facing it back to us at the following fax
number: 404-658-4835, Attn: Andrean Stone. An original execution copy will be
forwarded to you upon us receiving your faxed copy.
<PAGE>
Best Regards,
SunTrust Bank, Atlanta
By: ___________________
Name:
Title:
By: ____________________
Name:
Title:
Accepted and Confirmed as
of the date first written above:
Aaron Rents, Inc.
By: /s/ Gilbert L. Danielson
------------------------------
Name: Gilbert L. Danielson
Title: Vice President, Finance
<PAGE>
December 26, 1996
CONFIRMATION OF INTEREST RATE SWAP TRANSACTION
Mr. Mitch Paull
Treasurer
Aaron Rents, Inc.
309 East Paces Ferry Road, N.E.
Atlanta, GA 30305
Ph#: 404-231-0011
Fax#: 404-240-6584
Dear Mr. Paull:
The purpose of this letter agreement is to set forth the terms and
conditions of the Rate Swap Transaction entered into between you and SunTrust
Bank, Atlanta on the Trade Date specified below (the "Transaction"). This
letter agreement constitutes a "Confirmation" as referred to in the ISDA Master
Agreement to be entered into by the parties hereto.
The definitions and provisions contained in the 1991 ISDA Definitions (the
"Definitions") published by the International Swap Dealers Association, Inc.
("ISDA") are incorporated by reference into this Confirmation. In the event of
any inconsistency between the Definitions and this Confirmation, this
Confirmation will govern.
1. This Confirmation supplements, forms a part of, and is subject to the ISDA
Master Agreement (a "Swap Agreement"), as amended and supplemented from time to
time, between you and SunTrust Bank, Atlanta. All provisions contained or
incorporated by reference in the Swap Agreement shall govern this Confirmation
except as expressly modified below. Prior to the execution and delivery of such
Swap Agreement, this Confirmation alone shall constitute a complete and binding
agreement with respect to the Transaction.
Each party is hereby advised, and each such party acknowledges, that the
other party has engaged in (or refrained from engaging in) substantial financial
transactions and has taken other material actions in reliance upon the parties'
entry in the Transaction to which this Confirmation relates on the terms and
conditions set forth below.
This Confirmation will be governed by and construed in accordance with the
laws of the State of New York without reference to choice of law doctrine.
2. The terms of the particular Transaction to which this Confirmation relates
are as follows:
<PAGE>
Type of Transaction Rate Swap
Notional Amount: US $10,000,000.00
Trade Date: December 26, 1996
Effective Date: December 30, 1996
Termination Date: November 16, 2000, with adjustment
in accordance with the Modified
Following Business Day Convention
FIXED AMOUNTS:
- --------------
Fixed Rate Payer: Aaron Rents, Inc.
Fixed Rate Payer Payment Dates: The 16th day of each February, May,
August, and November, beginning
February 16, 1997 and terminating
on the Termination Date, subject to
adjustment in accordance with the
Modified Following Business Day
Convention
Fixed Rate: 6.7100% per annum
Fixed Rate Day Count Fraction: Actual/360
FLOATING AMOUNTS:
- -----------------
Floating Rate Payer: SunTrust Bank, Atlanta
Floating Rate Payer Payment Dates: The 16th day of each February,
May, August, and November,
beginning February 16, 1997 and
terminating on the Termination Date,
subject to adjustment in accordance
with the Modified Following
Business Day Convention.
Floating Rate for initial
Calculation Period: 5.50% per annum.
Designated Maturity for all
subsequent Calculation Periods: Three month
<PAGE>
Floating Rate Option: USD-LIBOR-BBA
Spread: Inapplicable
Floating Rate Day Count Fraction: Actual/360
Reset Dates: The Effective Date and each Floating
Rate Payer Payment Date except the
Termination Date.
Calculation Agent: SunTrust Bank, Atlanta
Business Days: New York
3. Other Provisions
a) Aaron Rents, Inc. agrees to provide a certificate of signing authority
and incumbency with respect to the individual executing this
Confirmation as well as a Corporate Resolution authorizing Aaron Rents,
Inc. to enter into this Transaction. This provision will constitute an
additional Agreement for the purpose of Section 3 of the Interest Rate
Swap Agreement.
b) By signing this confirmation, Counterparty acknowledges they have
received and understand the SunTrust Bank, Atlanta "Terms of Dealing
for OTC Risk Management Transactions" and the "Risk Disclosure
Statement for OTC Risk Management Transactions".
4. Account Details:
Payment to Fixed Rate Payer:
SunTrust Bank, Atlanta
ABA# 061000104
FBO: Aaron Rents, Inc.
A/C#: 8800-527-494
Payment to Floating Rate Payer:
SunTrust Bank, Atlanta
ABA# 061000104
Bond Wire Clearing, Center 095
Attn: Financial Risk Management, Operations
<PAGE>
5. Offices
(a) The Office of Fixed Rate Payer for the Transaction is its Atlanta
office; and
(b) The Office of Floating Rate Payer for the Transaction is its Atlanta
office.
Please confirm that the foregoing correctly sets forth the terms of our
agreement by signing this copy of this Confirmation and faxing it back to us at
the following fax number: 404-658-4835, Attn: Andrean Stone. An original
execution copy will be forwarded to you upon receiving your faxed copy.
By signing below, you also acknowledge and agree that we have explained to you
the risks involved in this Transaction, which risks include but are not limited
to the following:
o Market Risk: the risk that the Transaction may increase or decrease
in value with a change in, among other things, interest rates or the
yield curve; and
o Liquidity Risk: the risk that the Transaction cannot be closed out or
disposed of quickly at or near its value.
You further acknowledge and agree that you understand these risks and the
Transaction as a whole, that you are capable of managing the risks associated
with this Transaction, that the risks involved in this Transaction are
consistent with your financial goals, policies and procedures, and risk
tolerance, and that you have determined that this Transaction is appropriate for
you.
Very truly yours,
SunTrust Bank, Atlanta
By: ____________________
Name:
Title:
By: _____________________
Name:
Title:
Accepted and Confirmed as
of the Date First Written
Aaron Rents, Inc.
By: _________________
Name:
Title:
By: _________________
Name:
Title:
<PAGE>
FIRST CHICAGO
The First National Bank of Chicago
NOVATION AGREEMENT
dated as of December 27, 1996 among
Aaron Rents, Inc. ("Transferor"),
The First National Bank of Chicago ("Transferee") and
Bank of America NT & SA ("Continuing Party")
The parties agree that the rights and obligations ("Rights" and
"Obligations") of Transferor in respect of that certain interest Rate Swap
Transaction evidenced by a Confirmation between Transferor and Continuing Party
are hereby assigned and transferred to Transferee as follows:
1. Transferee assumes the Rights and Obligations but only to the extent
that such Rights and Obligations are set forth in the Interest Rate and
Currency Exchange Agreement dated as of August 22, 1990 between
Transferee and Continuing Party as supplemented by a certain
Confirmation dated as of December 27, 1996.
2. Transferor is hereby released and discharged from the Obligations.
This agreement shall be construed in accordance with the internal laws of
the State of New York applicable to contracts made and performed wholly in such
jurisdiction. This agreement may be executed in one or more counterparts, which
shall constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this agreement by their duly
authorized officers, effective as of the date hereof.
AARON RENTS, INC.
By: _______________________
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By: _________________________
Name:
Title:
BANK OF AMERICA NT & SA
By: ________________________
Name:
Title:
<PAGE>
TO: AARON RENTS, INC.
ATTN: MR. MITCH PAULL
PHONE: (404) 231-0011 EXT. 309
FAX NO: (404) 240-6584
FROM: NBD BANK
DATE: 27DEC96
RE: OUR REF: 8544.AB TRN ID: 1046030
We are pleased to confirm the terms of the transaction described below between
NBD Bank ("NBD") (The Floating Rate Payer), and Aaron Rents, Inc. ("AARON") (The
Fixed Rate Payer).
Type of Transaction: Interest Rate Swap
Notional Amount: USD 10,000,000.00
Term:
----------
Trade Date: 26Dec96
Effective Date: 30Dec96
Termination Date: 16Nov00, Subject to adjustment in accordance
with the modified following business day convention
Fixed Amounts:
----------
Fixed Rate Payer: Aaron
Payment Dates: Each February 16, May 16, August 16, and
November 16, commencing February 16, 1997
and ending November 16, 2000.
Business Day
Convention Modified Following
Fixed Rate: 6.7125 PCT
Fixed Rate Day Count
Fraction: Actual/360
Floating Amounts:
----------
Floating Rate Payer: NBD
Payment Dates: Each February 16, May 16, August 16, and
November 16, commencing February 16, 1997
and ending November 16, 2000.
<PAGE>
Business Day
Convention: Modified Following
Floating Rate Option: USD-LIBOR-BBA
Designated Maturity: 3 Months
Floating Rate Day
Count Fraction: Actual/360
Reset Dates: The first day of each calculation period
Spread PCT: None
Initial Floating Rate:
(Including Spread) 5.62153 PCT
Compounding: Inapplicable
Averaging: Inapplicable
Method of Averaging:
Rounding Convention: 5 decimal places as per ISDA
Business Days: New York and London
Documentation:
International Swaps and Derivatives Association, Inc. ("ISDA") master agreement
("Master Agreement") with a first draft of a schedule thereto to be provided by
NBD. This letter shall evidence a binding agreement between the parties until
such time as the master agreement is executed, and upon its execution shall
become a "confirmation" thereunder. Terms used and not otherwise defined herein
shall have their meanings as defined in the 1991 ISDA definitions.
Dealing with confirmations on our behalf:
Dianne Schuyler 312-732-2148
Dealing with settlements on our behalf:
Edward Lazowski 312-732-2623
NBD Bank Payment Instructions:
NBD BANK, N.A.
ABA Number: 072000326
Account Name: NBD Bank, N.A.
Account Number: 132664
Aaron Rents, Inc. Payment Instructions:
Please advise
Please confirm the foregoing correctly sets forth the terms of our agreement by
executing this letter and returning it via facsimile to:
<PAGE>
Derivatives Product Support - Confirmations
NBD Bank
(312) 336-4403 (Fax)
It has been a pleasure working with you on this interest rate swap transaction
and we look forward to completing similar transactions with you in the near
future.
Regards,
NBD Bank
By: ___________________
Name:
Title:
Accepted and confirmed as of the date hereto:
Aaron Rents, Inc.
By: ______________________
Name:
Title:
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended Year Ended
December December 31, March 31,
1996 1995 1995
<S> <C> <C> <C>
Primary:
Net Income $15,393 $ 9,880 $ 11,325
======= ======== =========
Weighted average number of
common shares outstanding 19,099 19,461 19,226
Add:
Dilutive effect of outstanding options
as determined by the application
of the treasury stock method using
the average market price of the
Company's common stock 885 576 403
------- -------- ---------
Weighted average number of common
and common equivalent shares 19,984 20,037 19,629
======= ========= =========
Primary earnings per share $ 0.77 $ 0.49 $ 0.58
======= ========= =========
Fully diluted:
Weighted average number of common
and common equivalent shares 19,984 20,037 19,629
Add:
Additional dilutive effect of outstanding
options, as determined by the
application of the treasury stock
method using the year end market
price of the Company's common
stock 0 42 48
------- --------- ---------
Weighted average number of common
shares fully diluted 19,984 20,079 19,677
======= ========= =========
Fully diluted earnings per share $ 0.77* $ 0.49* $ 0.58*
======= ========= =========
</TABLE>
*Not presented in Financial Statements since dilutive effect is less than 3%.
<PAGE>
Selected Financial
Information
<TABLE>
<CAPTION>
Twelve Nine Nine
(Dollar Amounts in Year Ended Months Ended Months Ended Months Ended Year Ended Year Ended Year Ended
Thousands December 31, December 31, December 31, December 31, March 31, March 31, March 31,
Except Per Share) 1996 1995 (unaudited) 1995 1994 (unaudited) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results
Systemwide Revenues (1) $306,200 $256,500 $192,953 $177,773 $241,286 $189,781 $158,361
Revenues:
Rentals & Fees 208,463 182,311 137,098 127,995 173,208 130,962 100,617
Sales 61,527 52,999 39,218 39,875 53,655 53,139 55,275
Other 4,255 2,465 1,908 1,471 2,029 1,083 1,740
-------------------------------------------------------------------------------------------------------
274,245 237,775 178,224 169,341 228,892 185,184 157,632
-------------------------------------------------------------------------------------------------------
Costs & Expenses:
Cost of Sales 46,168 38,274 28,350 28,772 38,696 38,879 41,594
Operating Expenses 135,012 119,590 90,027 85,464 115,028 91,927 77,816
Depreciation of
Rental Merchandise 64,437 55,408 41,612 39,912 53,708 37,310 25,407
Interest 3,449 3,172 2,323 2,185 3,033 2,063 1,650
-------------------------------------------------------------------------------------------------------
249,066 216,444 162,312 156,333 210,465 170,179 146,467
-------------------------------------------------------------------------------------------------------
Earnings Before
Income Taxes 25,179 21,331 15,912 13,008 18,427 15,005 11,165
Income Taxes 9,786 8,113 6,032 5,021 7,102 6,209 5,100
-------------------------------------------------------------------------------------------------------
Net Earnings $ 15,393 $ 13,218 $ 9,880 $ 7,987 $ 11,325 $ 8,796 $ 6,065
-------------------------------------------------------------------------------------------------------
Earnings Per Share $0.77 $0.66 $0.49 $0.40 $0.58 $0.51 $0.35
-------------------------------------------------------------------------------------------------------
Dividends Per Share:
Common $0.04 $0.05 $0.05 $.05 $0.045 $0.04 $0.0325
Class A 0.04 0.02 0.02 .02 0.025 0.03 0.0275
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Position
Rental Merchandise, Net $149,984 $122,311 $122,311 $119,781 $121,356 $113,599 $ 86,462
Property, Plant &
Equipment, Net 33,267 23,492 23,492 23,532 24,181 18,819 13,326
Total Assets 198,103 158,645 158,645 155,914 157,527 144,917 108,217
Interest-Bearing Debt 55,365 37,479 37,479 46,894 43,159 53,123 33,130
Shareholders' Equity 107,335 91,094 91,094 81,418 84,951 59,830 52,152
- -----------------------------------------------------------------------------------------------------------------------------------
At Year End
Stores Open:
Company-Operated 240 212 212 203 203 200 156
Franchised 61 36 36 24 26 15 6
Rental Contracts in Effect 179,600 158,900 158,900 152,100 156,600 126,700 100,600
Number of Employees 2,550 2,160 2,160 2,150 2,200 2,100 1,450
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Systemwide revenues include rental revenues of franchised Aaron's Rental
Purchase stores.
13
<PAGE>
Management's Discussion and
Analysis of Financial Condition
and Results of Operations
Change in Fiscal Year End
During 1995, the Company changed its fiscal year end from March 31 to December
31, which resulted in a nine month fiscal period ended December 31, 1995. The
decision to change the fiscal year end was made for more convenience in both
internal and external communications. To aid comparative analysis, the Company
has elected to present the results of operations for the year ended December 31,
1996, along with the twelve months ended December 31, 1995 (unaudited) and the
nine months ended December 31, 1995, along with the nine months ended December
31, 1994 (unaudited).
Results of Operations
Year Ended December 31, 1996 versus Twelve Months Ended December 31, 1995
(unaudited)
Total revenues for 1996 increased $36.5 million (15.3%) to $274.2 million
compared to $237.8 million in 1995 due primarily to a $26.2 million (14.3%)
increase in rentals and fees revenues, plus an $8.5 million (16.1%) increase in
sales. Of this increase in rental revenues, $16.6 million (19.6%) was
attributable to the Aaron's Rental Purchase Division. Rental revenues from the
Company's rent-to-rent operations increased $9.5 million (9.8%) during the same
period.
Revenues from retail sales increased $5.6 million (11.8%) to $52.8 million in
1996, from $47.2 million for the same period last year. This increase was due to
increased sales of both new and rental return furniture in the rent-to-rent
division.
Other sales, which represent wholesale sales to primarily Aaron's Rental
Purchase franchisees, increased $3.0 million (51.0%) to $8.8 million compared to
$5.8 million for the same period last year. The increased sales are due to the
growth of the franchise operations.
Franchise fee and royalty income increased $1.5 million (105.4%) to $2.9 million
compared to $1.4 million last year. This increase was due to adding 25 new
franchise stores in 1996 as well as older franchise stores gaining in revenues.
Cost of sales from retail sales increased $4.8 million (14.5%) to $37.8 million
compared to $33.1 million, and as a percentage of sales, increased slightly to
71.7% from 70.1% primarily due to product mix.
Cost of sales from other sales increased $3.1 million (59.5%) to $8.3 million
from $5.2 million, and as a percentage of sales, increased to 94.9% from 89.8%.
The increase in cost of sales as a percentage of sales is due to a larger
percentage of franchise sales in 1996 which is at lower margins than other
miscellaneous wholesale sales.
Operating expenses increased $15.4 million (12.9%) to $135.0 million from $119.6
million. As a percentage of total revenues, operating expenses were 49.2% in
1996 and 50.3% in 1995. Operating expenses declined as a percentage of total
revenues between years due to the spreading of expenses over higher revenues.
Depreciation of rental merchandise increased $9.0 million (16.3%) to $64.4
million and, as a percentage of total rentals and fees, increased to 30.9% from
30.4%. This increase is primarily due to a change in the rental merchandise mix
during the year.
Interest expense increased $277,000 (8.7%) to $3.4 million compared to $3.2
million. As a percentage of total revenues, interest is unchanged at 1.3% due to
stability in interest rates during 1996.
Income tax expense increased $1.7 million (20.6%) to $9.8 million compared to
$8.1 million, and the Company's effective tax rate was 38.9% in 1996 versus
38.0% for the same period in 1995.
As a result, net earnings increased $2.2 million (16.5%) to $15.4 million for
1996 compared to $13.2 million for the same period in 1995. As a percentage of
total revenues, net earnings were 5.6% in both 1996 and 1995.
Nine Months Ended December 31, 1995 versus Nine Months Ended December 31, 1994
(unaudited)
Total revenues for the nine months of 1995 increased $8.9 million (5.2%) to
$178.2 million compared to $169.3 million in 1994 due to a $9.1 million (7.1%)
increase in rentals and fees revenue, offset by a decline in sales. Of this
increase in rental revenues, $11.7 million was attributable to the Aaron's
Rental Purchase Division. Rental revenues from the Company's rent-to-rent
operations declined $2.6 million (-3.5%) during the same period, reflecting a
slightly slower than normal winter season, an overall maturity in this segment
of the rental industry and the Company's increased emphasis on the Aaron's
Rental Purchase Division.
14
<PAGE>
Revenues from sales decreased $657,000 (-1.6%) to $39.2 million in the nine
months of 1995, from $39.9 million for the same period last year. This decrease
was due to the closure of two rent-to-rent clearance centers and a realignment
of MacTavish Furniture Industries away from sales to furniture distributors to
the supply of furniture internally for both the rent-to-rent and rental purchase
divisions. This new emphasis resulted in reduced sales of new merchandise for
the rent-to-rent division by $3.4 million; however, for the same period, new
sales for the rental purchase division increased $1.5 million (268.9%), and
rental return sales at all store outlets increased $1.3 million (5.8%) to $24.2
million.
Other revenues increased $437,000 (29.7%) to $1.9 million compared to $1.5
million last year. This increase was entirely due to an increase of $552,000 in
franchise fee and royalty income due to the opening of 10 new franchise stores
as well as older franchise stores gaining in revenues. This income in the nine
months of 1995 was $1.17 million compared with $618,000 for the same period last
year.
Cost of sales decreased $422,000 (-1.5%) to $28.4 million compared to $28.8
million, and as a percentage of sales, increased slightly to 72.3% from 72.2%
primarily due to increases in vendor prices.
Operating expenses increased $4.6 million (5.3%) to $90 million from $85.5
million. As a percentage of total revenues, operating expenses were essentially
unchanged at 50.5% for both periods.
Depreciation of rental merchandise increased $1.7 million (4.3%) to $41.6
million and, as a percentage of total rentals and fees, decreased slightly to
30.4% from 31.2%. This decrease is primarily due to a change in the rental
merchandise mix during the year.
Interest expense increased $138,000 (6.3%) to $2.3 million compared to $2.2
million. As a percentage of total revenues, interest is unchanged at 1.3% due to
stability in interest rates during the nine months of 1995.
Income tax expense increased $1 million (20.1%) to $6 million compared to $5
million, and the Company's effective tax rate was 37.9% in 1995 versus 38.6% for
the same period in 1994.
As a result, net earnings increased $1.9 million (23.7%) to $9.9 million for the
nine months of 1995 compared to $8 million for the same period in 1994. As a
percentage of total revenues, net earnings increased to 5.5% in the nine months
of 1995, as compared to 4.7% for the same period in 1994.
Liquidity and Capital Resources
Cash flow from operations for the year ended December 31, 1996 and for the nine
months ended December 31, 1995 was $89.5 million and $55.1 million,
respectively. Such cash flows include profits on the sale of rental return
merchandise. The Company's primary capital requirements consist of acquiring
rental merchandise for Aaron's Rental Purchase stores and replacing merchandise
no longer suitable for rent at all Aaron Rents locations. As the Company
continues to grow, the need for additional rental merchandise will continue to
be the Company's major capital requirement. These capital requirements
historically have been financed through bank credit, cash flow from operations,
trade credit and proceeds from the sale of rental return merchandise.
The Company has financed its growth through a revolving credit agreement with
several banks, trade credit and internally generated funds. The revolving credit
agreement provides for unsecured borrowings up to $75.0 million which includes a
$6.0 million credit line to fund daily working capital requirements. At December
31, 1996, an aggregate of $55.1 million was outstanding under this facility,
bearing interest at an average fixed rate of 6.13%. The Company uses interest
rate swap agreements as part of its overall long-term financing program. At
December 31, 1996, the Company had swap agreements with notional principal
amounts of $40 million which effectively fixed the interest rates on an equal
amount of the Company's revolving credit agreement at 6.53%.
The Company believes that the expected cash flows from operations, proceeds from
the sale of rental return merchandise, bank borrowings and vendor credit will be
sufficient to fund the Company's capital and liquidity needs for at least the
next 24 months.
The Company has paid dividends for ten consecutive years. A $.02 per share
dividend on Common Stock and on Class A Common Stock were paid in January, 1996
and July 1996, for a total fiscal year cash outlay of $765,000. The Company
currently expects to continue its policy of paying dividends.
15
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
(In Thousands, Except Share Data) 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 84 $ 98
Accounts Receivable 10,491 8,136
Rental Merchandise 210,516 176,751
Less: Accumulated Depreciation (60,532) (54,440)
-----------------------------------
149,984 122,311
Property, Plant & Equipment, Net 33,267 23,492
Prepaid Expenses & Other Assets 4,277 4,608
-----------------------------------
Total Assets $198,103 $158,645
- ------------------------------------------------------------------------------------
Liabilities & Shareholders' Equity
Accounts Payable & Accrued Expenses $ 24,999 $ 19,304
Dividends Payable 382 365
Deferred Income Taxes Payable 2,882 3,781
Customer Deposits & Advance Payments 7,140 6,622
Bank Debt 55,125 37,260
Other Debt 240 219
-----------------------------------
Total Liabilities 90,768 67,551
Commitments & Contingencies
Shareholders' Equity
Common Stock, Par Value $.50
Per Share;
Authorized: 25,000,000 Shares;
Shares Issued: 16,170,987 at
December 31, 1996
and 6,636,761 at December 31, 1995 8,085 3,318
Common Stock, Class A, Par Value $.50
Per Share;
Authorized: 25,000,000 Shares;
Shares Issued: 5,361,761 2,681 2,681
Additional Paid-In Capital 15,445 15,370
Retained Earnings 96,226 86,365
-----------------------------------
122,437 107,734
Less: Treasury Shares at Cost,
Common Stock, 415,941 Shares
at December 31, 1996 and 932,441 Shares
at December 31, 1995 (2,315) (5,189)
Class A Common Stock, 1,418,855 Shares
at December 31, 1996 and 1,427,588 Shares
at December 31, 1995 (12,787) (11,451)
-----------------------------------
Total Shareholders' Equity 107,335 91,094
-----------------------------------
Total Liabilities & Shareholders' Equity $198,103 $158,645
- ------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
16
<PAGE>
Consolidated Statements of earnings
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended Year Ended
(In Thousands, December 31, December 31, March 31,
Except Per Share) 1996 1995 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Rentals and Fees $ 208,463 $ 137,098 $173,208
Retail Sales 52,757 35,537 47,781
Non-Retail Sales 8,770 3,681 5,874
Other 4,255 1,908 2,029
-------------------------------------------------
274,245 178,224 228,892
- -----------------------------------------------------------------------------------------------------
Costs & Expenses
Retail Cost of Sales 37,848 24,983 33,680
Non-Retail Cost of Sales 8,320 3,367 5,016
Operating Expenses 135,012 90,027 115,028
Depreciation of Rental Merchandise 64,437 41,612 53,708
Interest 3,449 2,323 3,033
-------------------------------------------------
249,066 162,312 210,465
-------------------------------------------------
Earnings Before Income Taxes 25,179 15,912 18,427
Income Taxes 9,786 6,032 7,102
-------------------------------------------------
Net Earnings $ 15,393 $ 9,880 $ 11,325
-------------------------------------------------
Earnings Per Share $ .77 $ .49 $ .58
- -----------------------------------------------------------------------------------------------------
</TABLE>
Consolidated Statements of
Shareholders' Equity
<TABLE>
<CAPTION>
Additional
Treasury Stock Common Stock Paid-In Retained
(In Thousands) Shares Amount Common Class A Capital Earnings
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 (2,286) $ (13,228) $ 2,681 $ 2,681 $ 1,101 $66,595
Issued Shares 637 13,503
Reacquired Shares (138) (1,836)
Dividends (709)
Reissued Shares 245 1,486 710 5
Net Earnings 11,325
- ----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 (2,179) (13,578) 3,318 2,681 15,314 77,216
Reacquired Shares (194) (3,134)
Dividends (732)
Reissued Shares 13 72 56 1
Net Earnings 9,880
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 (2,360) (16,640) 3,318 2,681 15,370 86,365
Stock Dividend 4,767 (4,767)
Reacquired Shares (164) (2,889)
Dividends (765)
Reissued Shares 689 4,427 75
Net Earnings 15,393
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 (1,835) $ (15,102) $ 8,085 $ 2,681 $15,445 $96,226
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
17
<PAGE>
Consolidated Statements
of Cash Flows
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended Year Ended
December 31, December 31, March 31,
(In Thousands) 1996 1995 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Earnings $ 15,393 $ 9,880 $ 11,325
Depreciation 70,693 45,798 58,765
Deferred Income Taxes (899) (345) (1,090)
Change in Accounts Payable & Accrued Expenses 5,695 242 (1,834)
Change in Accounts Receivable (2,339) 255 (386)
Other Changes, Net 982 (711) 1,966
-----------------------------------------------
Cash Provided by Operating Activities 89,525 55,119 68,746
- ----------------------------------------------------------------------------------------------------
Investing Activities
Additions to Property, Plant & Equipment (17,534) (5,476) (11,820)
Book Value of Property Retired or Sold 1,823 1,979 1,401
Additions to Rental Merchandise (137,023) (72,926) (101,755)
Book Value of Rental Merchandise Sold 48,352 30,892 40,667
Contracts & Other Assets Acquired (3,891) (533) (328)
-----------------------------------------------
Cash Used by Investing Activities (108,273) (46,064) (71,835)
- ----------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from Revolving Credit Agreement 85,299 51,933 229,448
Repayments on Revolving Credit Agreement (67,434) (56,845) (238,727)
Increase (Decrease) in Other Debt 21 (768) (685)
Proceeds from Common Stock Offering 14,140
Dividends Paid (765) (367) (709)
Acquisition of Treasury Stock (2,889) (3,134) (1,836)
Issuance of Stock Under Stock Option Plan 4,502 129 1,467
-----------------------------------------------
Cash Provided (Used) by Financing Activities 18,734 (9,052) 3,098
(Decrease) Increase in Cash (14) 3 9
Cash at Beginning of Year 98 95 86
-----------------------------------------------
Cash at End of Year $ 84 $ 98 $ 95
-----------------------------------------------
Cash Paid During the Year:
Interest $ 3,384 $ 2,642 $ 3,005
Income Taxes 7,531 7,677 8,705
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
18
<PAGE>
Notes to Consolidated
Financial Statements
At December 31, 1996 and 1995, and for the Year Ended December 31, 1996, the
Nine Month Period Ended December 31, 1995, and the Year Ended March 31, 1995.
Note A: Summary of Significant Accounting Policies
Principles of Consolidation -- The consolidated financial statements include the
accounts of Aaron Rents, Inc., and its wholly-owned subsidiaries, Aaron
Enterprises, Inc. and Aaron Investment Company (the Company). All significant
intercompany accounts and transactions have been eliminated. The preparation of
the Company's consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those estimates.
Line of Business -- The Company is engaged in the business of renting and
selling residential and office furniture and other merchandise throughout the
U.S. The Company manufactures furniture principally for its rental and sales
operations.
Rental Merchandise consists primarily of residential and office furniture and
other merchandise and is recorded at cost. Prior to January 1, 1996,
depreciation was provided using the straight-line method over the estimated
useful life of the merchandise, principally from 1 to 5 years, after allowing
for a salvage value of 5% to 60%. Effective January 1, 1996, the Company
prospectively changed its depreciation method on merchandise in the rental
purchase division acquired after December 31, 1995 from generally 14 months
straight-line with a 5% salvage value to a method that depreciates the
merchandise over the agreement period, generally 12 months, when on rent and 36
months when not on rent to a 0% salvage value. This new method is similar to a
method referred to as the income forecasting method in the rental purchase
industry. The Company adopted the new method because management believes that it
provides a more systematic and rational allocation of the cost of rental
purchase merchandise over its useful life. The effect for the year ended
December 31, 1996 of the change in the depreciation method on merchandise
purchased after December 31, 1995 was to decrease net income by approximately
$850,000 ($.04 per share). In addition, based on an analysis of the average
composite life of the division's rental purchase merchandise on rent or on hand
at December 31, 1995, the Company extended the depreciable lives of that
merchandise from generally 14 months to 18 months, and made other refinements to
depreciation rates on rental and rental purchase merchandise. The effect of such
change in depreciable lives and other refinements was to increase net income for
the year ended December 31, 1996 by approximately $709,000 ($.04 per share). The
Company recognizes rental revenues over the rental period and recognizes all
costs of servicing and maintaining merchandise on rent as incurred.
Property, Plant and Equipment are recorded at cost. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives of the respective assets, which are from 8 to 27 years for buildings and
improvements and from 2 to 5 years for other depreciable property and equipment.
Gains and losses related to dispositions and retirements are included in income.
Maintenance and repairs are charged to income as incurred; renewals and
betterments are capitalized. The Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), in the first
quarter of 1996. The effect of the adoption was not material.
Deferred Income Taxes are provided for temporary differences between the amounts
of assets and liabilities for financial and tax reporting purposes. Such
temporary differences arise principally from the use of accelerated depreciation
methods on rental merchandise for tax purposes.
Cost of Sales includes the depreciated cost of rental-return residential and
office merchandise sold and the cost of new residential and office merchandise
sold. It is not practicable to allocate operating expenses between selling and
rental operations.
Advertising -- The Company expenses advertising costs as incurred. Such costs
aggregated $10,422,000 for the fiscal year ended December 31, 1996, $6,258,000
for the nine months ended December 31, 1995, and $7,257,000 in fiscal year 1995,
respectively.
Stock Based Compensation -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations in accounting for its employee stock options and
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation" (FAS 123). The
Company grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant and,
accordingly, recognizes no compensation expense for the stock option grants.
19
<PAGE>
Reclassifications -- Certain classifications have been made to the 1995
financial statements to conform to the 1996 presentation.
Note B: Change in Fiscal Year End
During 1995, the Company changed its fiscal year end from March 31 to December
31, which resulted in a nine month fiscal period ended December 31, 1995. The
decision to change the fiscal year end was made for more convenience in both
internal and external reporting.
Results of operations (condensed) for the nine-month periods ended December 31,
1995 and December 31, 1994 are shown below:
Nine Months Ended
December 31,
(In Thousands, Except 1995 1994
Per Share Amounts) (unaudited)
- -----------------------------------------------------------
Revenues $178,224 $169,341
Cost of Sales 28,350 28,772
Operating And Other Expenses 92,350 87,649
Depreciation of Rental Merchandise 41,612 39,912
--------------------
Earnings Before Income Taxes 15,912 13,008
Income Taxes 6,032 5,021
--------------------
Net Earnings $ 9,880 $ 7,987
--------------------
Earnings Per Share $.49 $.40
--------------------
Weighted Average
Shares Outstanding 20,037 19,768
- -----------------------------------------------------------
Note C: Earnings Per Share
Earnings per share are computed by dividing net earnings by the weighted average
number of common shares and common equivalent shares (for stock options using
the treasury stock method) outstanding during the period, which was 19,983,692
shares for the year ended December 31, 1996; 20,037,456 shares for the nine
months ended December 31, 1995; and 19,628,548 shares for the year ended March
31, 1995.
Note D: Property, Plant & Equipment
December 31, December 31,
(In Thousands) 1996 1995
- -------------------------------------------------------------------
Land $ 3,662 $ 1,872
Buildings & Improvements 15,787 9,692
Leasehold Improvements & Signs 16,068 13,834
Fixtures & Equipment 15,738 16,065
Construction in Progress 2,726 528
---------------------------------
53,981 41,991
Less: Accumulated Depreciation
& Amortization (20,714) (18,499)
---------------------------------
$ 33,267 $ 23,492
- -------------------------------------------------------------------
Note E: Debt
Bank Debt -- The Company has a revolving credit agreement with four banks
providing for unsecured borrowings up to $75,000,000, which includes a
$6,000,000 credit line to fund daily working capital requirements. Amounts
borrowed bear interest at the lower of the lender's prime rate, or LIBOR plus
.5%, or the rate at which certificates of deposit are offered in the secondary
market plus .625%. The pricing under the working capital line is based upon
overnight bank borrowing rates. At December 31, 1996 and 1995, an aggregate of
$55,125,000 and $37,260,000, respectively, was outstanding under this agreement.
The Company pays a .22% commitment fee on unused balances. The weighted average
interest rate on borrowings under the revolving credit agreement (before giving
effect to interest rate swaps) was 6.17% in 1996, 6.99% for the nine months
ended December 31, 1995 and 6.13% in fiscal 1995. The effects of interest rate
swaps on the weighted average interest rate was not material.
The Company has entered into interest rate swap agreements that effectively fix
the interest rate on $20,000,000 of borrowings under the revolving credit
agreement at an average rate of 6.71% until November 2000 and an additional
$20,000,000 at an average rate of 6.35% until June 2005. These swap agreements
involve the receipt of amounts when the floating rates exceed the fixed rates
and the payment of amounts when the fixed rates exceed the floating rates in
such agreements over the life of the agreements. The differential to be paid or
received is accrued as interest rates change and is recognized as an adjustment
to the floating rate interest expense related to the debt. The related amount
payable to or receivable from counterparties is included in accrued liabilities
or other assets. The fair values of the swap agreements, which are not
recognized in the financial statements, are estimated not to be significant at
December 31, 1996. The fair value of the Company's bank debt approximates its
carrying value.
The revolving credit agreement may be terminated on ninety days' notice by the
Company or six months' notice by the lenders. The debt is payable in 60 monthly
installments following the termination date if terminated by the lenders.
The agreement restricts cash dividend payments and stock repurchases to
$3,000,000 plus 25% of net earnings since April 1, 1991, and places other
restrictions on additional borrowings and requires the maintenance of certain
financial ratios.
Other Debt -- Other debt of $240,000 at December 31, 1996 and $219,000 at
December 31, 1995 represents an insurance premium financing agreement bearing
interest at 6.95%. Other debt matures in 1997.
20
<PAGE>
Note F: Income Taxes
Nine
Year Ended Months Ended Year Ended
December 31, December 31, March 31,
(In Thousands) 1996 1995 1995
- ------------------------------------------------------------------------------
Current Income Tax Expense:
Federal $ 9,503 $5,577 $ 7,258
State 1,182 800 934
-----------------------------------------
10,685 6,377 8,192
Deferred Income Tax (Benefit):
Federal (889) (302) (930)
State (10) (43) (160)
-----------------------------------------
(899) (345) (1,090)
-----------------------------------------
$ 9,786 $6,032 $ 7,102
- ------------------------------------------------------------------------------
Significant components of the Company's deferred income tax liabilities and
assets are as follows:
December 31, December 31,
(In Thousands) 1996 1995
- -----------------------------------------------------------------
Deferred Tax Liabilities:
Rental Merchandise and
Property, Plant & Equipment $5,486 $6,858
Other, Net 1,141 134
---------------------------
Total Deferred Tax Liabilities 6,627 6,992
Deferred Tax Assets:
Accrued Liabilities 892 847
Advance Payments 2,150 1,702
Other, Net 703 662
---------------------------
Total Deferred Tax Assets 3,745 3,211
---------------------------
Net Deferred Tax Liabilities $2,882 $3,781
- -----------------------------------------------------------------
The Company's effective tax rate differs from the federal income tax statutory
rate as follows:
Nine
Year Ended Months Ended Year Ended
December 31, December 31, March 31,
1996 1995 1995
- --------------------------------------------------------------------
Statutory Rate 35.0% 35.0% 35.0%
Increases in Taxes
Resulting From
State Income Taxes,
net of Federal Income
Tax Benefit 3.0 3.2 2.7
Other, Net .9 (.3) .8
-----------------------------------------
Effective Tax Rate 38.9% 37.9% 38.5%
- --------------------------------------------------------------------
Note G: Commitments
The Company leases warehouse and retail store space for substantially all of its
operations under operating leases expiring at various times through 2005. Most
of the leases contain renewal options for additional periods ranging from 2 to
10 years or provide for options to purchase the related property at
predetermined purchase prices which do not represent bargain purchase options.
The Company also leases transportation equipment under operating leases expiring
during the next 3 years. Management expects that most leases will be renewed or
replaced by other leases in the normal course of business.
Future minimum rental payments, including guaranteed residual values, required
under operating leases that have initial or remaining non-cancelable terms in
excess of one year as of December 31, 1996, are as follows: $17,207,000 in 1997;
$14,688,000 in 1998; $10,728,000 in 1999; $6,689,000 in 2000; $7,479,000 in
2001; and $3,284,000 thereafter.
Rental expense was $17,886,000 for the year ended December 31, 1996, $11,513,000
for the nine months ended December 31, 1995 and $15,467,000 for the year ended
March 31, 1995, respectively.
The Company leases five buildings from certain officers of the Company under
leases expiring through 2005 for annual rentals aggregating $680,000.
The Company maintains a 401(k) savings plan for all full-time employees with at
least one year of service with the Company and who meet certain eligibility
requirements. The plan allows employees to contribute up to 6% of their annual
compensation with 50% matching by the Company on the first 4% of compensation.
The Company's expense related to the plan was $308,000 in 1996, $162,000 for the
nine months ended December 31, 1995 and $259,000 in fiscal year 1995,
respectively.
Note H: Shareholders' Equity
During 1996, the Company declared a 100% stock dividend on its Common Stock and
Class A Common Stock. Each stockholder received one share of Common Stock for
each share of Common Stock and Class A Common Stock held. All share and per
share amounts have been restated to reflect the 100% stock dividend. Common
stock is non-voting.
On May 2, 1994, the Company issued, through a public offering, 1,275,000 shares
of Common Stock. The net proceeds to the Company after deducting underwriting
discounts and offering expenses were $14,100,000. The net proceeds were used to
reduce bank debt.
At December 31, 1996, the Company held a total of 1,834,796 common shares in its
treasury, and is authorized by the Board of Directors to acquire up to an
additional 3,090 shares. On February 11, 1997, the Board of Directors approved
the purchase of an additional 1,000,000 shares.
The Company has 1,000,000 shares of preferred stock authorized. The shares are
issuable in series with terms for each series fixed by the Board and such
issuance is subject to approval by the Board of Directors. No preferred shares
have been issued.
21
<PAGE>
Note I: Stock Options
The Company has stock option plans under which options to purchase shares of the
Company's Common Stock are granted to certain key employees.
Under the Company's 1990 Stock Option Plan, options granted become exercisable
after a period of two years and unexercised options lapse five years after the
date of grant. Under the Company's 1996 Stock Option Plan, options currently
granted become exercisable after a period of three years and unexercised options
lapse ten years after the date of the grant. Options under both plans are
subject to forfeiture upon termination of service. Under the plans, 2,047,000
shares of the Company shares are reserved for issuance at December 31, 1996.
Pro forma information regarding net earnings and earnings per share is required
by FAS 123, and has been determined as if the Company has accounted for its
employee stock options granted in 1996 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions for
1996: risk-free interest rate of 6.72%; a dividend yield of .4%; volatility
factor of the expected market price of the Company's common stock of .335; and a
weighted-average expected life of the option of 8 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
Year Ended
December 31, 1996
- ----------------------------------------------------------------
Pro forma net earnings $14,825
Pro forma earnings per share
Primary .74
Fully diluted .74
- ----------------------------------------------------------------
Because these pro forma disclosures only reflect grants of stock options in
1996, such pro forma amounts are not indicative of the pro forma effects on net
earnings in future years from grants of stock options.
The table below summarizes option activity for the periods indicated in the
Company's stock option plans:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
December 31, 1996 December 31, 1995 March 31, 1995
------------------------- --------------------------- ------------------------
Common Weighted Common Weighted Common Weighted
(In Thousands, Except Price Per Share) Shares Average Price Shares Average Price Shares Average Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding - beginning of year 1,248 $4.54 1,294 $4.54 1,279 $3.08
Options granted 780 9.88 504 6.75
Options exercised (701) 3.00 (24) 3.00 (489) 3.00
Options cancelled (8) 9.88 (22) 6.68
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding - end of year 1,319 $8.48 1,248 $4.54 1,294 $4.54
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercisable - end of year 207 $5.79 766 $3.14 760 $3.06
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$3.00 to $9.88. The weighted average remaining contractual life of those
options is 6.6 years.
Note J: Quarterly Financial Information (Unaudited)
(In Thousands First Second Third Fourth
Except Per Share) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Year ended December 31, 1996
Revenues $64,693 $67,610 $71,224 $70,718
Gross Profit 38,873 39,980 41,273 39,259
Earnings Before Taxes 6,791 6,375 6,198 5,815
Net Earnings 4,159 3,914 3,787 3,533
Earnings Per Share $ .21 $ .20 $ .19 $ .18
- --------------------------------------------------------------------------------
Twelve Months ended December 31, 1995
Revenues $59,551 $59,135 $59,012 $60,077
Gross Profit 35,273 35,534 35,127 35,694
Earnings Before Taxes 5,419 5,347 5,152 5,413
Net Earnings 3,338 3,315 3,205 3,360
Earnings Per Share $ .17 $ .17 $ .16 $ .17
- --------------------------------------------------------------------------------
22
<PAGE>
Note K: Franchising of Aaron's Rental Purchase Stores
The Company franchises Aaron's Rental Purchase stores. As of December 31, 1996
and December 31, 1995, 151 and 106 franchises had been awarded, respectively.
Franchisees pay a non-refundable initial franchise fee of $35,000 and an ongoing
royalty of 5% of cash receipts. The Company recognizes this income as earned and
includes it in Other Revenues in the Consolidated Statements of Earnings. The
Company has guaranteed certain lease and debt obligations of some of the
franchisees amounting to $304,000 and $4,513,000, respectively, at December 31,
1996. The Company has recourse rights to the leased property and to the assets
securing the debt obligations. As a result, the Company does not expect to incur
any significant losses under these guarantees.
Common Stock Market Prices
& Dividends
The Company's Common Stock and Class A Common Stock are traded on The NASDAQ
Stock Market under the symbols "ARON" and "ARONA," respectively. The approximate
number of shareholders of record of the Company's Common Stock and Class A
Common Stock at March 17, 1997, was 2,000. The following table shows, for the
periods indicated, the range of high and low closing bid prices per share for
the Common Stock and Class A Common Stock as reported by NASDAQ, and the cash
dividends declared per share.
The average closing bid quotation for Common Stock and Class A Common Stock on
March 17, 1997, was $11.625 and $11.00 respectively. The Company currently
expects to continue its policy of paying dividends.
Cash
Dividends
Common Stock High Low Per Share
- ---------------------------------------------------
December 31, 1996
First Quarter $10.125 $ 9.00 $
Second Quarter 15.00 9.875 .02
Third Quarter 13.625 11.00
Fourth Quarter 14.625 11.125 .02
- ---------------------------------------------------
December 31, 1995
First Quarter $ 7.875 $ 6.875 $.025
Second Quarter 9.50 7.688
Third Quarter 9.25 8.625 .025
Cash
Class A Dividends
Common Stock High Low Per Share
- ---------------------------------------------------
December 31, 1996
First Quarter $10.875 $ 8.875 $
Second Quarter 15.125 10.875 .02
Third Quarter 15.75 11.50
Fourth Quarter 15.00 12.75 .02
- ---------------------------------------------------
December 31, 1995
First Quarter $ 7.75 $ 7.00 $ .01
Second Quarter 9.50 7.75
Third Quarter 9.25 8.688 .01
Report of Independent Auditors
To the Board of Directors and Shareholders of
Aaron Rents, Inc.:
We have audited the accompanying consolidated balance sheets of Aaron Rents,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
year ended December 31, 1996, the nine months ended December 31, 1995 and the
year ended March 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aaron Rents, Inc.
and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for the year ended December 31, 1996,
the nine months ended December 31, 1995 and the year ended March 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note A to the Consolidated Financial Statements, in 1996 the
Company changed its method of accounting for depreciation of rental purchase
merchandise.
Atlanta, Georgia
March 14, 1997
23
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF AARON RENTS, INC.
Name State of Incorporation
- ---- ----------------------
Aaron Enterprises, Inc. Georgia
Aaron Investment Company Delaware
<PAGE>
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Aaron Rents, Inc. of our report dated March 14, 1997, included in the
1996 Annual Report to Shareholders of Aaron Rents, Inc.
We also consent to the incorporation by reference in the Registration Statements
of Aaron Rents, Inc. listed below of our report dated March 14, 1997, with
respect to the consolidated financial statements of Aaron Rents, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
o Registration Statement No. 33-62536 on Form S-8 pertaining to the 1990 Stock
Option Plan
o Registration Statement No. 33-9026 on Form S-8 pertaining to the Aaron
Rents, Inc. Retirement Plan and Trust
o Registration Statement No. 33-62538 on Form S-8 pertaining to the Aaron
Rents, Inc. Retirement Plan and Trust
/s/ Ernst & Young LLP
Atlanta, Georgia
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 84
<SECURITIES> 0
<RECEIVABLES> 10,491
<ALLOWANCES> 0<F1>
<INVENTORY> 149,984<F2>
<CURRENT-ASSETS> 0<F3>
<PP&E> 33,267
<DEPRECIATION> 0<F4>
<TOTAL-ASSETS> 198,103
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 0
0
0
<COMMON> 10,766
<OTHER-SE> 96,569
<TOTAL-LIABILITY-AND-EQUITY> 198,103
<SALES> 61,527
<TOTAL-REVENUES> 274,245
<CGS> 46,168
<TOTAL-COSTS> 245,617
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,449
<INCOME-PRETAX> 25,179
<INCOME-TAX> 9,786
<INCOME-CONTINUING> 15,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,393
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
<FN>
<F1>The allowance of doubtful accounts is netted against total accounts receivable
in the Accounts Receivable balance.
<F2>Rental merchandise has been classified as inventory for purposes of this
schedule. Rental merchandise has been shown net of 60,532 accumulated
depreciation.
<F3>The financial statements are presented with an unclassified balance sheet.
<F4>PP&E has been shown net of accumulated depreciation.
</FN>
</TABLE>
