<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of l934
JUNE 30, 1998 0-12385
------------- -------
For Quarter Ended Commission File No.
AARON RENTS, INC.
(Exact name of registrant as
specified in its charter)
GEORGIA 58-0687630
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
309 E. PACES FERRY ROAD, N.E.
ATLANTA, GEORGIA 30305-2377
(Address of principal executive offices) (Zip Code)
(404) 231-0011
(Registrant's telephone number, including area code)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER
FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether registrant (l) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
l934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X
----
No
----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding as of
Title of Each Class August 11, 1998
--------------------- -----------------
Common Stock, $.50 Par Value 17,264,391
Class A Common Stock, $.50 Par Value 3,836,506
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1998 1997
---------- ------------
(in thousands)
<S> <C> <C>
ASSETS:
Cash $ 99 $ 96
Accounts Receivable 15,922 11,794
Rental Merchandise 268,403 246,498
Less: Accumulated Depreciation (77,879) (69,530)
--------- ---------
190,524 176,968
Property, Plant and Equipment, Net 45,575 39,757
Prepaid Expenses and Other Assets 14,390 10,767
--------- ---------
Total Assets $ 266,510 $ 239,382
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts Payable and Accrued Expenses $ 28,439 $ 31,071
Dividends Payable 422 379
Deferred Income Taxes Payable 7,675 6,687
Customer Deposits and Advance Payments 8,831 8,304
Bank Debt 50,880 75,904
Other Debt 2,967 582
--------- ---------
Total Liabilities 99,214 122,927
Shareholders' Equity:
Common Stock, Par Value $.50 Per
Share; Authorized: 25,000,000 Shares;
Shares Issued: 18,270,987 at June 30, 1998 9,135 8,085
and 16,170,987 at December 31, 1997
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 54,439 15,484
Retained Earnings 124,282 113,864
--------- ---------
190,537 140,114
Less: Treasury Shares at Cost,
Common Stock, 1,016,596 Shares
at June 30, 1998 and 1,058,041
Shares at December 31, 1997 (9,105) (9,523)
Class A Common Stock, 1,525,255 Shares
at June 30, 1998 and December 31, 1997 (14,136) (14,136)
--------- ---------
Total Shareholders' Equity 167,296 116,455
--------- ---------
Total Liabilities and
Shareholders' Equity $ 266,510 $ 239,382
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 3
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
------------------ ----------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Rentals and Fees $71,860 $58,006 $141,978 $115,021
Retail Sales 15,213 14,355 31,517 29,423
Non-Retail Sales 4,604 3,709 9,207 6,680
Other 2,155 1,395 3,939 2,821
------- ------- -------- --------
93,832 77,465 186,641 153,945
------- ------- -------- --------
COSTS AND EXPENSES:
Retail Cost of Sales 10,738 10,444 22,225 21,528
Non-Retail Cost of Sales 4,287 3,458 8,563 6,241
Operating Expenses 47,133 37,086 93,340 74,136
Depreciation
of Rental Merchandise 21,632 17,932 42,650 35,546
Interest 952 937 2,093 1,806
------- ------- -------- --------
84,742 69,857 168,871 139,257
------- ------- -------- --------
EARNINGS BEFORE
TAXES 9,090 7,608 17,770 14,688
INCOME TAXES 3,536 2,975 6,930 5,743
------- ------- -------- --------
NET EARNINGS $ 5,554 $ 4,633 $ 10,840 $ 8,945
======= ======= ======== ========
EARNINGS PER SHARE $ .27 $ .24 $ .55 $ .46
------- ------- -------- --------
EARNINGS PER SHARE
ASSUMING DILUTION $ .27 $ .24 $ .54 $ .45
------- ------- -------- --------
CASH DIVIDENDS DECLARED
PER SHARE
Common Stock $ .02 $ .02 $ .02 $ .02
------- ------- -------- --------
Class A Common Stock $ .02 $ .02 $ .02 $ .02
------- ------- -------- --------
WEIGHTED AVERAGE
SHARES OUTSTANDING 20,399 19,102 19,686 19,377
======= ======= ======== ========
WEIGHTED AVERAGE
SHARES OUTSTANDING
ASSUMING DILUTION 20,873 19,443 20,167 19,715
======= ======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 4
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
--------- --------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 10,840 $ 8,945
Depreciation and Amortization 46,845 38,682
Deferred Taxes 988 732
Change in Accounts Payable and
Accrued Expenses (2,632) 1,896
Change in Accounts Receivable (4,128) (332)
Other Changes, Net (2,108) (5,423)
--------- --------
Cash Provided by Operating Activities 49,805 44,500
--------- --------
INVESTING ACTIVITIES
Additions to Property, Plant and Equipment (15,850) (3,588)
Book Value of Property Retired or Sold 6,026 6,985
Additions to Rental Equipment (93,737) (67,655)
Book Value of Rental Equipment Sold 37,666 28,674
Contracts and Other Assets Acquired (1,312) (177)
--------- --------
Cash Used by Investing Activities (67,207) (35,761)
--------- --------
FINANCING ACTIVITIES
Proceeds from Revolving Credit Agreement 76,166 49,880
Repayments on Revolving Credit Agreement (101,190) (51,005)
Proceeds from Common Stock Offering 39,958
Increase of Other Debt 2,385 992
Dividends Paid (379) (382)
Acquisition of Treasury Stock 0 (8,378)
Issuance of Stock Under Stock Option Plan 465 166
--------- --------
Cash provided (used) by financing activities 17,405 (8,727)
--------- --------
Increase in Cash 3 12
Cash at Beginning of Year 96 84
--------- --------
Cash at End of Period $ 99 $ 96
========= ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Aaron Rents, Inc.
("the Company") and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated.
INTERIM FINANCIAL STATEMENTS:
The Consolidated Balance Sheet as of June 30, 1998, and the Consolidated
Statements of Earnings and Cash Flows for the six months ended June 30, 1998 and
1997, have been prepared without audit. In the opinion of management, all
adjustments necessary to present fairly the financial position, results of
operations and cash flows at June 30, 1998 and for all periods presented have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1997. The results of
operations for the period ended June 30, 1998 are not necessarily indicative of
the operating results for the full year.
PUBLIC OFFERING OF STOCK
On April 28, 1998, the Company issued through a public offering 2,100,000 shares
of Common Stock. The net proceeds to the Company after deducting underwriting
discounts and offering expenses were $40.0 million. The net proceeds were used
to reduce bank debt.
<PAGE> 6
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS:
THE QUARTER ENDED JUNE 30, 1998, COMPARED TO THE QUARTER ENDED JUNE 30, 1997:
Total revenues for the second quarter of 1998 increased $16.4 million (21.1%) to
$93.8 million compared to $77.5 million in 1997 due primarily to a $13.9 million
(23.9%) increase in rentals and fees revenues, plus a $1.8 million (9.7%)
increase in sales. Of this increase in rentals and fees revenues, $11.0 million
(79.1%) was attributable to the Aaron's Rental Purchase division. Rentals and
fees from the Company's rent-to-rent operations increased $2.8 million (10.1%)
during the same period.
Revenues from retail sales increased $858,000 (6.0%) to $15.2 million in 1998,
from $14.4 million for the same period last year. This increase was primarily
due to increased sales of both new and rental return merchandise in the Aaron's
Rental Purchase and Rent-to-Rent divisions. Non-retail sales, which primarily
represent merchandise sold to Aaron's Rental Purchase franchisees, increased
$895,000 (24.1%) to $4.6 million compared to $3.7 million for the same period
last year. The increased sales are due to the growth of the franchise
operations.
Other revenues for the second quarter 1998 increased $760,000 (54.5%) to $2.2
million compared to $1.4 million in 1997. This increase was attributable to
franchise fee and royalty income increasing $800,000 (80.6%) to $1.8 million
compared to $992,000 last year, reflecting the addition of 40 franchised stores
since the end of the second quarter of 1997 and increased operating revenues at
mature franchise stores.
Cost of sales from retail sales increased $294,000 (2.8%) to $10.7 million
compared to $10.4 million last year, and as a percentage of retail sales,
decreased to 70.6% from 72.8%. The decrease in cost of sales as a percentage of
sales is due to improved margins in the Company's rent-to-rent operations and a
greater percentage of the Company's sales coming from the Aaron's Rental
Purchase division which are at higher margins. Cost of sales from non-retail
sales increased $829,000 (24.0%) to $4.3 million from $3.5 million, and as a
percentage of sales, decreased slightly to 93.1% from 93.2%.
Operating expenses increased $10.0 million (27.1%) to $47.1 million from $37.1
million. As a percentage of total revenues, operating expenses were 50.2% in
1998 and 47.9% in 1997. Operating expenses increased as a percentage of total
revenues between quarters primarily due to the Company's acquisition of RentMart
Rent-To-Own, Inc. in December 1997. The RentMart stores are relatively immature
and have lower revenues over which to spread expenses.
Depreciation of rental merchandise increased $3.7 million (20.6%) to $21.6
million, from $17.9 million, and as a percentage of total rentals and fees,
decreased to 30.1% from 30.9%. The decrease as a percentage of revenues is
primarily due to decreased depreciation in relation to revenues in both the
Company's Aaron's Rental Purchase and Rent-to-Rent divisions.
<PAGE> 7
Interest expense increased $15,000 (1.6%) to $952,000 compared to $937,000. As a
percentage of total revenues, interest expense was 1.0% in 1998 compared to 1.2%
in 1997. The slight decrease in interest expense as a percentage of revenues was
due to lower debt levels after the Company's April 1998 public offering.
Income tax expense increased $561,000 (18.9%) to $3.5 million for 1998 compared
to $3.0 million for the same period in 1997. The Company's effective tax rate
was 38.9% for the quarter versus 39.1% for the same period in 1997 due to lower
state income taxes.
As a result, net earnings increased $921,000 (19.9%) to $5.6 million in the
second quarter of 1998 compared to $4.6 million for the same period in 1997. As
a percentage of total revenues, net earnings were 5.9% in the current quarter as
compared to 6.0% for the same period last year.
The weighted average number of shares outstanding during the second quarter of
1998 was 20,399,000 compared to 19,102,000 (20,873,000 versus 19,443,000
assuming dilution) for the same period last year.
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997:
Total revenues for the first six months of 1998 increased $32.7 million (21.2%)
to $186.6 million compared to $153.9 million in 1997 due primarily to a $27.0
million (23.4%) increase in rentals and fees revenues, plus a $4.6 million
(12.8%) increase in sales. Of this increase in rentals and fees revenues, $21.6
million (80.0%) was attributable to the Aaron's Rental Purchase division.
Rentals and fees from the Company's rent-to-rent operations increased $5.4
million (9.6%) during the same period.
Revenues from retail sales increased $2.1 million (7.1%) to $31.5 million in
1998, from $29.4 million for the same period last year. This increase was
primarily due to increased sales of both new and rental return merchandise in
the Aaron's Rental Purchase division. Non-retail sales, which primarily
represent merchandise sold to Aaron's Rental Purchase franchisees, increased
$2.5 million (37.8%) to $9.2 million compared to $6.7 million for the same
period last year. The increased sales are due to the growth of the franchise
operations.
Other revenues for the first six months of 1998 increased $1.1 million (39.6%)
to $3.9 million compared to $2.8 million in 1997. This increase was attributable
to franchise fee and royalty income increasing $954,000 (52.4%) to $3.2 million
compared to $2.1 million last year, reflecting the addition of 40 franchised
stores since the end of the second quarter of 1997 and increased operating
revenues at mature franchise stores.
Cost of sales from retail sales increased $697,000 (3.2%) to $22.2 million
compared to $21.5 million last year, and as a percentage of retail sales,
decreased to 70.5% from 73.2%. The decrease in cost of sales as a percentage of
sales is due to improved margins in the Company's rent-to-rent operations and a
greater percentage of the Company's sales coming from the Aaron's Rental
Purchase division which are at higher margins. Cost of sales from non-retail
sales increased $2.3 million (37.2%) to $8.6 million from $6.2 million, and as a
percentage of sales, decreased to 93.0% from 93.4%. The decrease in cost of
sales as a percentage of sales is due to slightly higher margins on sales
through the Company's distribution centers.
<PAGE> 8
Operating expenses increased $19.2 million (25.9%) to $93.3 million from $74.1
million. As a percentage of total revenues, operating expenses were 50.0% in
1998 and 48.2% in 1997. Operating expenses increased as a percentage of total
revenues between the periods primarily due to the Company's acquisition of
RentMart Rent-To-Own, Inc. in December 1997. The RentMart stores are relatively
immature and have lower revenues over which to spread expenses.
Depreciation of rental merchandise increased $7.1 million (20.0%) to $42.7
million, from $35.5 million, and as a percentage of total rentals and fees,
decreased to 30.0% from 30.9%. The decrease as a percentage of revenues is
primarily due to decreased depreciation in relation to revenues in both the
Company's Aaron's Rental Purchase and Rent-to-Rent divisions.
Interest expense increased $287,000 (15.9%) to $2.1 million compared to $1.8
million. As a percentage of total revenues, interest expense was 1.1% in 1998
compared to 1.2% in 1997. The slight decrease in interest expense as a
percentage of revenues was due to lower debt levels after the Company's April
1998 public offering.
Income tax expense increased $1.2 million (20.7%) to $6.9 million for 1998
compared to $5.7 million for the same period in 1997. The Company's effective
tax rate was 39.0% for first six months of 1998 versus 39.1% for the same period
in 1997.
As a result, net earnings increased $1.9 million (21.2%) to $10.8 million in the
first six months of 1998 compared to $8.9 million for the same period in 1997.
As a percentage of total revenues, net earnings were 5.8% both periods.
The weighted average number of shares outstanding during the first six months of
1998 was 19,686,000 compared to 19,377,000 (20,167,000 versus 19,715,000
assuming dilution) for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES:
During the first quarter of 1998, the Company paid a semi-annual dividend that
was declared in December 1997 of $.02 per share on both Common Stock and Class A
Common Stock, respectively. On May 5, 1998, the Company declared a semi-annual
dividend payable on July 7, 1998 of $.02 per share on both Common Stock and
Class A Common Stock, respectively.
On April 28, 1998, the Company issued through a public offering 2,100,000 shares
of Common Stock. The net proceeds to the Company after deducting underwriting
discounts and offering expenses were $40.0 million. The net proceeds were used
to reduce bank debt.
Cash flow from operations for the six months ended June 30, 1998 and 1997 was
$49.8 million and $44.5 million, respectively. Such cash flows include profits
on the sale of rental return merchandise. The Company's primary capital
requirements consist of acquiring rental merchandise for both rent-to-rent and
Company-operated Aaron's Rental Purchase stores. As the Company continues to
grow, the need for additional rental merchandise will continue to be the
Company's major capital requirement. These capital requirements historically
have been financed through bank credit, cash flow from operations, trade credit,
proceeds from the sale of rental return merchandise, and proceeds from public
stock offerings.
<PAGE> 9
The Company has financed its growth through a revolving credit agreement with
several banks, trade credit and internally generated funds. The revolving credit
agreement provides for unsecured borrowings up to $90.0 million which includes a
$6.0 million credit line to fund daily working capital requirements. At June 30,
1998, an aggregate of $50.9 million was outstanding under this facility, bearing
interest at a average rate of 6.47%. The Company uses interest rate swap
agreements as part of its overall long-term financing program. At June 30, 1998,
the Company had swap agreements with notional principal amounts of $40.0 million
which effectively fixed the interest rates on an equal amount of borrowings
under the Company's revolving credit agreement at 7.18%.
The Company believes that the expected cash flows from operations, proceeds from
the sale of rental return merchandise, bank borrowings and vendor credit,
together with the proceeds from the stock offering on April 28, 1998, will be
sufficient to fund the Company's capital and liquidity needs for at least the
next 24 months.
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) The following exhibits are furnished herewith:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were filed by the Registrant during the
three months ended June 30, 1998
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AARON RENTS, INC.
(Registrant)
Date - August 12, 1998 /s/ Gilbert L. Danielson
--------------- ------------------------
Gilbert L. Danielson
Executive Vice President
Chief Financial Officer
Date - August 12, 1998
---------------
/s/ Robert P. Sinclair, Jr.
---------------------------
Robert P. Sinclair, Jr.
Corporate Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 99
<SECURITIES> 0
<RECEIVABLES> 15,922
<ALLOWANCES> 0<F1>
<INVENTORY> 190,524<F2>
<CURRENT-ASSETS> 0<F3>
<PP&E> 45,575<F4>
<DEPRECIATION> 0<F4>
<TOTAL-ASSETS> 266,510
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 0
0
0
<COMMON> 11,816
<OTHER-SE> 155,480
<TOTAL-LIABILITY-AND-EQUITY> 266,510
<SALES> 40,724
<TOTAL-REVENUES> 186,641
<CGS> 30,788
<TOTAL-COSTS> 166,778
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,093
<INCOME-PRETAX> 17,770
<INCOME-TAX> 6,930
<INCOME-CONTINUING> 10,840
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,840
<EPS-PRIMARY> .55
<EPS-DILUTED> .54
<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 77,879 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>
