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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
December 31, 1997 0-12385
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AARON RENTS, INC.
(Exact name of registrant as specified in its charter)
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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)
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Registrant's telephone number, including area code: (404) 231-0011
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
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Common Stock, $.50 Par Value
Class A Common Stock, $.50 Par Value
Securities registered pursuant to Section 12(g) of the Act: NONE
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 _____
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 20, 1998: $31,267,151. See Item 12.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
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<CAPTION>
SHARES OUTSTANDING AS OF
TITLE OF EACH CLASS MARCH 20, 1998
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Common Stock, $.50 Par Value 15,150,391
Class A Common Stock, $.50 Par Value 3,836,506
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Shareholders for the fiscal year
ended December 31, 1997 are incorporated by reference into Part II of this Form
10-K.
Portions of the registrant's definitive proxy statement for the 1998 annual
meeting of shareholders are incorporated by reference into Part III of this Form
10-K.
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PART I.
ITEM 1. BUSINESS
GENERAL
Aaron Rents is a U.S. leader in the rent-to-rent and rental purchase
industries with 402 stores in 32 states. The Company offers both individual and
business customers a wide range of residential and office furniture,
accessories, consumer electronics, and household appliances for rental, rental
purchase and sale. The Company's major operating divisions are the Aaron Rents'
Rent-to-Rent Division, the Aaron's Rental Purchase Division, the Aaron Rents'
Convention Furnishings Division and MacTavish Furniture Industries Division,
which manufactures much of the furniture for the Company's rental and rental
purchase stores. Aaron Rents' strategic focus is on expanding its higher growth
rental purchase business while also growing its rent-to-rent business in
selected markets.
At March 31, 1998, Aaron Rents had 297 Company-operated stores and 105
franchised stores in 32 states nationwide. There were 107 rent-to-rent stores in
its Aaron Rents' Rent-to-Rent Division, 183 Company-operated rental purchase
stores in its Aaron's Rental Purchase Division, 105 Aaron's Rental Purchase
franchised stores, and seven Aaron Rents' Convention Furnishings stores.
The Aaron Rents' Rent-to-Rent Division is well-positioned to take advantage
of the growing demand for furniture rental services. Management believes this
demand to be driven by continued growth in employment, the increasing importance
of flexibility and outsourcing to American businesses and the impact of a more
mobile and transitory population. Business customers, which represent an
increasing portion of rental customers, enter into leases for office furniture
to meet seasonal, temporary or start-up needs. Business customers also lease
residential furniture in order to provide furnishings for relocated employees or
those on temporary assignment.
The Aaron's Rental Purchase Division focuses on providing durable household
goods to lower to middle income consumers with limited or no access to
traditional credit sources such as bank financing, installment credit or credit
cards. The Company's rental purchase program allows customers to obtain
merchandise without incurring additional debt or long-term obligations.
Management believes that the segment of the U.S. population which its rental
purchase division targets is large and that the needs of these customers
generally are underserved.
In 1992 the Company began franchising Aaron's Rental Purchase stores to
place stores in selected markets where the Company has no immediate plans to
enter. The Company believes that its franchise program allows the Company to
grow more quickly, increase its name exposure in new markets and achieve
economies of scale in purchasing, manufacturing and advertising for its rental
purchase stores. The Company opened 12, 25 and 40 franchised rental purchase
stores in 1995, 1996 and 1997, respectively.
The Company is the only rental company in the United States that
manufactures its own furniture. By manufacturing its own specially designed
residential and office furniture through its MacTavish Furniture Industries
Division, the Company enjoys an advantage over many of its competitors.
Manufacturing enables the Company to control the quality, cost, timing, styling
and quantity of its furniture rental products. The Company owns five furniture
manufacturing plants and operates four bedding manufacturing facilities, which
supply approximately 49% of the furniture rented or sold by the Company.
The Company has grown significantly in recent years. Its growth is
attributed to the opening of Company-operated and franchised rental purchase
stores, as well as to the expansion of its rent-to-rent business and selected
acquisitions. The Company expects to continue to grow its store base and plans
to open five to 10 rent-to-rent stores, 10 to 15 Company-operated rental
purchase stores and 45 to 50 new franchised rental purchase stores in 1998.
Total revenues have increased from $155.7 million for calendar year 1992 to
$310.8 million for calendar year 1997, and earnings before income taxes
increased from $9.7 million in 1992 to $30.2 million in 1997, representing a
14.8% and 25.5% compound annual growth rate in the Company's revenues and
earnings before income taxes, respectively. The increase in revenues was driven
by a significant increase in rental purchase revenues, which increased from
$22.5 million for 1992 to $139.3 million for 1997, representing
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a 44.0% compound annual growth rate. During the same period, rent-to-rent
revenues increased from $111.3 million to $162.3 million.
The Company believes it possesses a valuable brand name in the rental
business, as well as operating characteristics which differentiate it from its
competitors. For instance, the Company's rental purchase concept is unique by
offering 12-month rental purchase agreements, larger and more attractive store
showrooms and a wider selection of merchandise. In the rent-to-rent business,
the Company believes that its ability to deliver residential and office
furniture and equipment to its customers quickly and efficiently gives the
Company an advantage over furniture retailers who often require several weeks to
effect delivery. By having its own manufacturing capabilities, an extensive
distribution network and sophisticated management information systems, the
Company is well-positioned to meet the distinct needs of its rent-to-rent and
rental purchase customers.
INDUSTRY OVERVIEW
The Rent-To-Own Industry
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,
approximately 50% of which are owned or franchised by the ten largest companies
in the industry. Industry-wide revenues are believed to have been approximately
$4.7 billion in 1997.
In a typical rent-to-own transaction, the customer has the option to
acquire merchandise over a fixed term, usually 18 to 24 months, by making weekly
rental payments. The customer may cancel the agreement 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, because the majority of
customers do not rent the item to the full term of the agreement. If the
customer rents the item to the full term, he obtains ownership of the item,
though he has the option to purchase it at any time.
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.
The Company believes its rental purchase concept differs significantly from
the typical rent-to-own program. Compared to the typical rent-to-own stores,
Aaron's Rental Purchase stores offer shorter agreement 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 agreement terms
compared to the typical rent-to-own customer.
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" agreement
price. Rental purchase allows the customer to have the item serviced free of
charge or replaced at any time during the rental agreement, and allows the
Company to re-rent an item to another customer if the agreement does not go to
term.
The Company's rental purchase operations differ from the 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
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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 whose typical location is in an office park that services
destination customers from a broad geographical area.
The Rent-To-Rent Industry
The furniture component of the rent-to-rent industry is estimated to be
greater than $600 million in annual rental revenues. The demand for rental
products is believed to be related to the mobility of the population, which
relies upon rented merchandise 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.
The rent-to-rent industry serves both individual 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 merchandise is
rented to individuals seeking to rent merchandise for their own homes and
apartments, apartment complex managers seeking to provide furnished apartments,
and third party companies that provide interim housing for their corporate
clients. Office merchandise is rented by customers ranging 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 three months, which may be extended by the customer
on a month-to-month basis. Although many rental agreements 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.
GROWTH AND OPERATING STRATEGIES
Aaron Rents is expanding its business through growth strategies that focus
on the opening of additional Company-operated rent-to-rent and rental purchase
stores, and franchised rental purchase stores. In addition, the Company seeks to
enhance profitability through operating strategies which differentiate the
Company from its competitors and improve operating efficiencies. The key
elements of the Company's growth and operating strategies are summarized below.
Growth Strategies
- EXPAND COMPANY-OPERATED RENTAL PURCHASE OPERATIONS IN SELECTED GEOGRAPHIC
MARKETS. The Company currently expects to open 10 to 15 additional
Company-operated Aaron's Rental Purchase stores during 1998, and to open
comparable numbers of stores in each of the next several years. The
Company's strategy is to open rental purchase stores primarily in the
Company's existing geographic markets where it can cluster stores to
realize the benefits of economies of scale in marketing and distribution
and other operating efficiencies.
- EXPAND AARON'S RENTAL PURCHASE FRANCHISE PROGRAM. The Company uses its
franchise program to place Aaron's Rental Purchase stores in selected
markets where the Company has no immediate plans to enter. The Company
believes that its franchise program allows the Company to grow more
quickly and increase its name exposure in new markets with a relatively
low investment of capital by the Company. In addition, the larger number
of systemwide rental purchase stores enables the Company and its
franchisees to realize economies of scale in purchasing, manufacturing
and advertising for its rental purchase stores. Franchise fees and
royalties also represent a growing source of revenues for the Company.
The Company expects that approximately 45 to 50 franchised Aaron's Rental
Purchase stores will open in 1998, and expects a larger number of stores
to open in each of the next several years.
- EXPAND RENT-TO-RENT OPERATIONS. The Company believes that there are
growth opportunities in the rent-to-rent market, particularly in the
business sector. The Company has recently begun opening rent-
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to-rent operations in new markets to better serve its national business
customers and is also expanding its presence in existing markets. The
recent introduction of warehouse-only stores in new markets has allowed
the Company to enter markets at a lower cost. The Company believes that
its rent-to-rent business will continue to provide the Company with cash
flow to finance a significant amount of the planned expansion of the
Aaron's Rental Purchase Division. The Company expects to open five to 10
rent-to-rent stores in 1998 in existing and new markets.
Operating Strategies
- PROVIDE HIGH LEVELS OF CUSTOMER SERVICE AND SATISFACTION. The Company
demonstrates its commitment to superior customer service by providing
large, attractive and conveniently located showrooms, offering a wide
selection of quality merchandise at competitive prices and flexible
acquisition options, and providing customers quick delivery of rented
merchandise, in many cases by same or next day delivery. The Company has
established an employee training program designed to enhance the customer
relations skills of its employees.
- DIFFERENTIATE AARON'S RENTAL PURCHASE CONCEPT. The Company believes that
the success of its rental purchase operations is attributable to its
distinctive approach to the business that sets it apart from its
rent-to-own competitors. The Company has pioneered innovative approaches
to meeting changing customer needs that differ from those of its
competitors -- such as offering 12-month rental purchase agreements which
result in a lower "all-in" price, larger and more attractive store
showrooms, and a wider selection of merchandise. Most rental purchase
customers make their rental payments in person, and the Company uses
these frequent visits to strengthen customer relationships and make
rental purchase customers feel welcome in the Company's stores.
- TARGET RENT-TO-RENT BUSINESS CUSTOMERS. The Company has successfully
operated rent-to-rent stores for over 40 years, using its superior
customer service, prompt delivery and wide selection of rental furniture
to attract a growing number of business customers. The Company believes
that its ability to deliver furniture and equipment to its business
customers quickly and efficiently gives the Company an advantage over
general furniture retailers who often require several weeks to effect
delivery. In addition, the location of 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. The Company has also
recently opened warehouse-only locations in a few selected markets where
the Company is seeking an immediate presence at a lower cost. The
warehouse-only locations rely on outside sale representatives who target
business customers.
- MANAGE FURNITURE REQUIREMENTS THROUGH MANUFACTURING AND
DISTRIBUTION. The Company believes that its furniture manufacturing
capability and distribution center network give it a strategic advantage
over its competitors by enabling the Company to control the quality,
cost, timing, styling, durability and quantity of a substantial portion
of its rental furniture merchandise. This control allows the Company to
offer prompt delivery of rented furniture and provides the Company a
reliable source of rental furniture.
- UTILIZE PROPRIETARY MANAGEMENT INFORMATION SYSTEMS. The Company has
developed proprietary computerized information systems to systematically
pursue cash collections and merchandise returns and to match inventory
with demand. Each of the Company's stores, including franchised rental
purchase stores, is linked by computer directly to corporate
headquarters, which enables headquarters to monitor the performance of
each store on a daily basis. Its separate systems are tailored to meet
the distinct needs of the Company's rent-to-rent and rental purchase
operations.
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OPERATING DIVISIONS
Rental Purchase -- Aaron's Rental Purchase
The Company established its Aaron's Rental Purchase Division in 1987. At
March 31, 1998, there were 183 Company-operated Aaron's Rental Purchase stores
in 16 states and 105 franchised Aaron's Rental Purchase stores in 27 states. The
Company has developed a distinctive concept for its Aaron's Rental Purchase
stores with specific merchandising selection and store layout, pricing and
agreement terms for 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.
The typical Aaron's Rental Purchase store layout consists of a combination
showroom and warehouse of 8,000 to 10,000 square feet, with an average of
approximately 8,700 total square feet. In selecting new locations for Aaron's
Rental Purchase stores, the Company generally looks for sites in well-maintained
strip shopping centers strategically located within ten miles of established
working class neighborhoods and communities with good access. 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 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
Company's MacTavish Furniture Industries Division. Aaron's Rental Purchase
stores also offer computers and jewelry.
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 81% of the Company's
rental purchase agreements have monthly payments as compared to the industry
standard weekly payments, and most monthly agreements are for 12 months compared
to the industry standard of 18 to 24 months. Approximately 37% of Aaron's Rental
Purchase agreements go to term, in contrast to an industry average of less than
25%. The merchandise from the agreements that do not go to term is either
re-rented or sold.
The Aaron's Rental Purchase Division's 11 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.
Aaron's Rental Purchase Franchise Program
The Company began franchising Aaron's Rental Purchase stores in selected
markets in 1992, and has continued to attract many franchisees. 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
presence and no current plans to expand. As of March 31, 1998, 206 franchises
had been sold to 56 franchisees, and 105 franchise stores were open. The Company
believes that its relations with its franchisees are good.
Franchisees are approved on the basis of the applicant's business
background and financial resources. The Company generally seeks franchisees who
will enter into development agreements for several stores, although many
franchisees currently operate a single store. Most franchisees are involved in
the day-to-day operations of the stores.
The Company enters into franchise agreements with its franchisees to govern
the opening and operation of franchised stores. Under the Company's current
agreement, the franchisee is required to pay a franchise fee of $35,000 per
store. Agreements are for a term of 10 years (with one 10-year renewal option)
and require payment to the Company of a royalty of 5% of weekly cash
collections.
The Company assists each franchisee in selecting the proper site for each
store. Because of the importance of location to the Aaron's Rental Purchase
concept, one of the Company's Pre-Opening Directors visits the intended market
and helps guide the franchisee through the selection process. Once a site is
selected,
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the Company helps in designing the floor plan, including the proper layout of
the showroom and warehouse. In addition, the Company provides assistance in
assuring that the design and decor of the showroom is consistent with the
Company's requirements. The Company also leases the exterior signage to the
franchisee, and assists with placing pre-opening advertising, ordering initial
inventory and purchasing delivery vehicles.
The Company has an arrangement with a syndicate of banks to provide
financing to qualifying franchisees to assist with the establishment and
operation of their stores. A primary component of the financing program is an
inventory financing plan which provides franchisees with the capital to purchase
inventory. For established franchisees, the Company has arranged for these
institutions to provide a revolving credit line to allow franchisees the
flexibility to expand. The Company guarantees a portion of amounts outstanding
under the franchisee financing programs.
All franchisees are required to complete a comprehensive training program
and to operate their franchised Aaron's Rental Purchase stores in compliance
with the Company's policies, standards and specifications, including such
matters as decor, rental agreement terms, hours of operation, pricing and
merchandise. Franchisees are not required to purchase their rental merchandise
from the Company, although many do so in order to take advantage of bulk
purchasing discounts and favorable delivery terms. Many also purchase their
rental furniture from the Company's MacTavish Furniture Industries facilities.
The Company conducts a financial audit of its franchise stores every six to
12 months and also conducts regular operational audits, generally visiting each
franchise store almost as often as it visits its Company-owned stores. In
addition, the Company's proprietary management information system links each
store to corporate headquarters. With this system, each night the Company
automatically retrieves detailed financial information regarding the number of
customers served during the day, the revenues received and the status of all
accounts receivable. This information is compiled nightly into a detailed report
of every franchised and Company-operated rental purchase store, which is then
immediately made available to corporate and store management. On a weekly basis,
the system also automatically debits the franchisee's bank account for the 5%
royalty fee, resulting in essentially a 100% collection rate on franchise
royalties.
Rent-to-Rent -- Aaron Rents and Sells Furniture
The Company has been in the rent-to-rent business for over 40 years and is
the second largest furniture rent-to-rent company in the United States. The
rent-to-rent business accounted for approximately 53% of the Company's total
revenues for the fiscal year ended December 31, 1997. The Company rents new and
rental return merchandise to both the individual and the business segments of
the rent-to-rent industry, with a growing focus on rentals of residential and
office furniture to business customers. As of March 31, 1998, the Company
operated 107 rent-to-rent stores in 22 states.
Rental agreements may 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 21,000 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
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. The Company has also recently opened
warehouse-only locations in a few selected markets where the Company is seeking
an immediate presence at a lower cost. The warehouse-only locations rely on
outside sale representatives who target business customers.
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 obtain
and deliver office furniture and equipment to its customers quickly and
efficiently gives the
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Company an advantage over general office furniture retailers who often require
several weeks to effect delivery.
The Aaron Rents' Rent-to-Rent Division's four 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.
Aaron Rents' Convention Furnishings
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 division primarily serves various
national and local vendors that organize events at large convention centers. The
division also serves various smaller events on a regular basis with the
assistance of its rent-to-rent stores which have served smaller events for more
than 20 years. Convention rentals are characterized by very short terms
(generally one week) and significantly higher rental rates due to the
labor-intensive nature of the business.
The Company's convention furnishings stores are generally located near the
Company's existing distribution or warehouse facilities to enable the Company to
respond quickly and efficiently to the division's needs. The division also
benefits from the ability to sell its used furnishings through the Company's
clearance centers, which allows the division to keep its inventory refreshed.
In December 1997, the Company acquired the assets of Blackhawk Convention
Services, Inc., including three locations in Chicago, New York and Las Vegas. An
additional location was added in Dallas in the first quarter of 1998. As of
March 31, 1998, the Company had seven convention furnishings store locations.
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, styling, durability and quantity of its furniture rental products.
As the only major furniture rental company that manufactures its own furniture,
the Company believes its 391,000 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 facilities which supply 50% of the Company's rent-to-rent
furniture and bedding needs and 46% of Company-operated rental purchase stores'
furniture and bedding needs. Overall, approximately 49% 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 manufactures 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), office
furniture (including desks, credenzas, conference tables, bookcases and chairs),
and bedroom furniture (including
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bedroom sets, headboards, dressers, mirrors, chests and night tables). The
Company has designed special features for the furniture it manufactures which
make its furniture more durable and better equipped for frequent transportation
than furniture purchased from third parties. These features include 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; more resilient foam; durable,
soil-resistant fabrics and sturdy frames for longer life and higher residual
value; and collapsible box springs and devices which allow sofas to stand on end
for easier and more efficient transport. The Company has patent applications
pending for certain of these features. 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.
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 five regional managers performing similar responsibilities.
Stores are directly supervised by 18 rent-to-rent regional managers and 30
rental purchase district managers. At the individual store level, the store
manager is responsible for customer and credit relations, 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 several times each year, and
semi-annual 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.
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.
A different system is used to run the rent-to-rent and rental purchase
operations due to the significant differences in the businesses. 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.
8
<PAGE> 10
Rental Agreement Approval, Renewal and Collection
One of the keys to the success of the Company's Aaron's Rental Purchase
operations 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
agreement current and in force (rather than having to return the merchandise for
non-payment of rent) and to renew their agreements 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 agreement at any time and each payment is considered a renewal of the
agreement 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. 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 1.9%, 2.6%, and 3.0% for the
fiscal years ended December 31, 1997 and 1996, and for the nine months ended
December 31, 1995. The Company does not extend credit to rental purchase
customers. For the same periods, net merchandise shrinkage for both divisions as
a percentage of combined rental revenues was 2.3%, 2.5% and 3.0%, respectively.
The Company believes that its collection and repossession policies comply with
applicable 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 agreements 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. In the Company's rent-to-rent division, furniture is the
primary merchandise category, accounting for approximately 93% of rent-to-rent
rental revenues for the year ended December 31, 1997. In the Aaron's Rental
Purchase Division, electronics, furniture, appliances other accounted for
approximately 54%, 30%, 14% and 2%, respectively, of rental purchase rental
revenues for the year ended December 31, 1997. With approval from the applicable
operating management, store managers send their orders to the rental purchase or
rent-to-rent purchasing department at headquarters. The applicable purchasing
department reviews all purchase orders to determine whether
9
<PAGE> 11
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 49% of the furniture rented or sold by the Company. The
Company has no long-term agreements 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. Rent-to-rent stores in geographic proximity to the
Company's rent-to-rent distribution facility in Richmond, Virginia order
merchandise directly from the distribution center. 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 four rental purchase distribution centers located in Auburndale,
Florida; Dallas and Houston, 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 nine
tractor trailers, its local delivery trucks, and various contract carriers to
make weekly deliveries to individual stores. The Company recently began
construction of a 200,000 square foot furniture distribution facility in Cairo,
Georgia, which is located near the Company's furniture manufacturing plants in
Coolidge, Georgia and Quincy, Florida.
MARKETING AND ADVERTISING
In its rental purchase operations, the Company relies heavily on store
traffic, direct mail and television 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 local television 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 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.
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. The
Company believes that CORT Business Services Corporation and Globe Business
Resources, Inc. are its most significant rent-to-rent competitors. In the
rent-to-own market, the Company competes with several larger companies with
substantially greater financial resources than the Company. The Company believes
that the largest rent-to-own companies include Rent-A-Center (a division of
Thorn plc), Renters Choice, Inc., Alrenco, Inc., and Rent-Way, Inc.
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
10
<PAGE> 12
favorable competitive position in that industry because of its manufacturing
capabilities, prompt delivery, competitive pricing, name recognition and
commitment to customer service.
GOVERNMENT REGULATION
The Company believes that 48 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 terms 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 from time to time to regulate
the 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.
The Company's Aaron's Rental Purchase franchise program is subject to
Federal Trade Commission ("FTC") regulation and various state laws regulating
the offer and sale of franchises. Several state laws also regulate substantive
aspects of the franchisor-franchisee relationship. The FTC requires the Company
to furnish to prospective franchisees a franchise offering circular containing
prescribed information. A number of states in which the Company might consider
franchising also regulate the sale of franchises and require registration of the
franchise offering circular with state authorities. The Company believes it is
in material compliance with all applicable franchise laws.
EMPLOYEES
At March 31, 1998, the Company had approximately 3,100 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.
ITEM 2. PROPERTIES
The Company leases space for substantially all of its store and warehouse
operations under operating leases expiring at various times through June, 2007.
Most of the leases contain renewal options for additional periods ranging from
one to fifteen years at rental rates generally adjusted on the basis of the
consumer price index or other factors.
The following table sets forth certain information regarding the Company's
furniture manufacturing plants, bedding facilities and distribution centers:
<TABLE>
<CAPTION>
LOCATION PRIMARY USE SQUARE FT.
- -------- ----------- ----------
<S> <C> <C>
Coolidge, Georgia................... Furniture Manufacturing 77,000
Coolidge, Georgia................... Furniture Manufacturing 43,000
Coolidge, Georgia................... Furniture Manufacturing 38,000
Quincy, Florida..................... Furniture Manufacturing 80,000
Quincy, Florida..................... Furniture Manufacturing 91,000
Duluth, Georgia..................... Bedding Facility 30,000
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
LOCATION PRIMARY USE SQUARE FT.
- -------- ----------- ----------
<S> <C> <C>
Coolidge, Georgia................... Bedding Facility 3,000
Houston, Texas...................... Bedding Facility 13,000
Orlando, Florida.................... Bedding Facility 15,800
Richmond, Virginia.................. Rent-to-Rent Distribution Center 98,000
Auburndale, Florida................. Rental Purchase Distribution Center 40,000
Dallas, Texas....................... Rental Purchase Distribution Center 92,000
Duluth, Georgia..................... Rental Purchase Distribution Center 67,000
Houston, Texas...................... Rental Purchase Distribution Center 70,000
</TABLE>
The Company's executive and administrative offices occupy approximately
49,000 square feet in an 11-story, 80,000 square-foot office building that the
Company owns in Atlanta. The Company leases most of the remaining space to third
parties under leases with remaining terms averaging 2- 1/2 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
& Dividends" on page 24 of the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1997 is incorporated herein by reference. The
market quotations stated herein reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
(b) As of March 27, 1998, there were 861 holders of record of the Common
Stock and 171 holders of record of the Class A Common Stock.
(c) The information presented under "Note 5 -- Debt" on page 20 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1997 is incorporated herein by reference. During the fiscal year ended December
31, 1997, 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, 1997 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, 1997 is incorporated herein by reference.
12
<PAGE> 14
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, 1997 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, 1997, 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, 1997, 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, 1997, with respect to the ownership of common
stock by certain beneficial owners and management, is incorporated herein by
reference to this item.
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, 1997, with respect to certain relationships and
related transactions, is incorporated herein by reference in response to this
item.
13
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(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, 1997.
<TABLE>
<CAPTION>
REFERENCE PAGE
ANNUAL
REPORT
TO SHAREHOLDERS
----------------
<S> <C>
Consolidated Balance Sheets -- December 31, 1997 and 1996... 16
Consolidated Statements of Earnings -- Year ended December
31, 1997, Year ended December 31, 1996, and Nine Months
ended December 31, 1995................................... 17
Consolidated Statements of Shareholders' Equity -- Year
ended December 31, 1997, Year ended December 31, 1996 and
Nine Months ended December 31, 1995....................... 17
Consolidated Statements of Cash Flows -- Year ended December
31, 1997, Year ended December 31, 1996, and Nine Months
ended December 31, 1995................................... 18
Notes to Consolidated Financial Statements.................. 19-23
Report of Independent Auditors.............................. 23
</TABLE>
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
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
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.
4 See Exhibits 3 (a) through 3 (b).
10(a) Fifth Amendment to Second Amended and Restated Revolving
Credit and Term Loan Agreement, dated December 17, 1997.
10(b) Letter Agreements dated December 30, 1997 between SunTrust
Bank, Atlanta and the Company, and letter agreements dated
December 30, 1997 between First Chicago NBD and the Company
regarding Interest Rate Swap Transactions.
13 Aaron Rents, Inc. Annual Report to Shareholders for the
fiscal year ended December 31,1997. With the exception of
information expressly incorporated herein by direct
reference thereto, the Annual Report to Shareholders for the
fiscal year ended December 31, 1997 is not deemed to be
filed as a part of this Annual Report on Form 10-K.
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP
27 Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* 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.
15
<PAGE> 17
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 31st day of
March, 1998.
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 31st day of March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ R. CHARLES LOUDERMILK, SR. Chief Executive Officer (Principal
- ----------------------------------------------------------- Executive Officer) and Chairman of the
R. Charles Loudermilk, Sr. Board of Directors)
/s/ ROBERT C. LOUDERMILK, JR. President, Chief Operating Officer and
- ----------------------------------------------------------- Director
Robert C. Loudermilk, Jr.
/s/ GILBERT L. DANIELSON Vice President, Finance, Chief Financial
- ----------------------------------------------------------- Officer and Director, (Principal
Gilbert L. Danielson Financial Officer)
/s/ ROBERT P. SINCLAIR, JR. Controller (Principal Accounting Officer)
- -----------------------------------------------------------
Robert P. Sinclair, Jr.
/s/ RONALD W. ALLEN Director
- -----------------------------------------------------------
Ronald W. Allen
/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/ LTG. M. COLLIER ROSS USA (RET.) Director
- -----------------------------------------------------------
LTG M. Collier Ross USA (Ret.)
/s/ R. K. SEHGAL Director
- -----------------------------------------------------------
R. K. Sehgal
</TABLE>
16
<PAGE> 1
EXHIBIT 3(B)
AMENDED AND RESTATED BY-LAWS
OF
AARON RENTS, INC.
ADOPTED ON NOVEMBER 18, 1997
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be in the State
of Georgia, County of Fulton.
Section 2. Other Offices. The corporation may also have offices at such
other places both within and without the State of Georgia as the board of
directors may from time to time determine and the business of the corporation
may require or make desirable.
ARTICLE II
SHAREHOLDERS MEETINGS
Section 1. Annual Meetings. The annual meeting of the shareholders of the
corporation shall be held at the principal office of the corporation or at such
other place in the United States as may be determined by the board of directors,
at 10:00 a.m. on the last business day of the fifth month following the close of
each fiscal year or at such other time and date following the close of the
fiscal year as shall be determined by the board of directors, for the purpose of
electing directors and transacting such other business as may properly be
brought before the meeting.
Section 2. Special Meetings. (a) Special meetings of shareholders of one
or more classes or series of the corporation's shares shall be called by the
president or the secretary (i) when so directed by the chairman or by a majority
of the entire board of directors; or (ii) upon the demand of holders of at least
twenty five percent (25%) of all votes entitled to be cast on each issue to be
considered at a proposed special meeting of the shareholders. The business that
may be transacted at any special meeting of shareholders shall be limited to
that proposed in the notice of the special meeting given in accordance with
Section 3 (including related or incidental matters that may be necessary or
appropriate to effectuate the proposed business).
(b) Promptly after the date of receipt of written shareholder demands (the
"Demand Date") purporting to comply with the provisions of the Georgia Business
Corporation Code, as amended from time to time (the "Code"), and these by-laws,
the president or the secretary of the corporation shall determine the validity
of the demand. If the demand is valid, the president or the secretary of the
corporation shall call a special shareholders meeting by mailing notice within
20 days of the Demand Date.
(c) The time, date and place of any special shareholders meeting shall be
determined by the board of directors and shall be set forth in the notice of
meeting.
Section 3. Notice of Meetings. Written notice of every meeting of
shareholders, stating the place, date and hour of the meeting, shall be given
personally or by mail to each shareholder of record not less than 10 nor more
than 60 days before the date of the meeting. Such notice may be given in any
manner permitted by, and shall be deemed to be effectively given at the times as
provided in, the Georgia Business Corporation Code. A shareholder's attendance
at a meeting waives objection to lack of notice or defective notice of such
meeting, unless the shareholder at the beginning of the meeting objects to the
holding of the meeting or transacting business at the meeting, and waives
objection to consideration of a particular matter at the meeting that is not
within the purpose or purposes described in the meeting notice, unless the
shareholder objects to considering the matter when it is presented. A
shareholder may waive notice of a meeting before or after the date and time
stated in the notice, which waiver must be in writing, signed by the shareholder
entitled to such notice and be delivered to the corporation for inclusion in the
minutes or filing with the corporate records.
1
<PAGE> 2
Section 4. Quorum. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum for the transaction of business at all meetings
of the shareholders except as otherwise provided by statute, by the articles of
incorporation, or by these by-laws. If a quorum is not present or represented at
any meeting of the shareholders, a majority of the shareholders entitled to vote
thereat, present in person or represented by proxy, may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified. If the
adjournment is for more than 30 days, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting shall
be given to each shareholder of record entitled to vote at the meeting.
Section 5. Order of Business. At the annual meeting of shareholders the
order of business shall be as follows:
1. Calling meeting to order.
2. Proof of notice of meeting.
3. Reading of minutes of last previous annual meeting.
4. Reports of officers.
5. Reports of committees.
6. Election of directors.
7. Miscellaneous business.
Section 6. Voting. When a quorum is present at any meeting, the vote of
the holders of a majority of the stock having voting power, present in person or
represented by proxy, shall decide any question brought before such meeting,
unless the question is one upon which by express provision of law or of the
articles of incorporation, a different vote is required, in which case such
express provision shall govern and control the decision of the question. Each
shareholder shall at every meeting of the shareholders be entitled to one vote,
in person or by proxy, for each share of the capital stock having voting power
registered in his name on the books of the corporation, but no proxy shall be
voted or acted upon after 11 months from its date, unless otherwise provided in
the proxy.
Section 7. Shareholder Proposals. (a) No shareholder proposal or
resolution (each a "Shareholder Proposal"), whether purporting to be binding or
non-binding on the corporation or its board of directors, shall be considered at
any annual or special meeting of the shareholders unless:
(i) If such Shareholder Proposal relates solely to the nomination and
election of directors, it satisfies the requirements of Article III,
Section 3; or
(ii) With respect to any Shareholder Proposal to be considered at a
special shareholders meeting called pursuant to Article II, Section 2,
subsection (a)(i), the shareholder(s) proposing to make such Shareholder
Proposal provided the information set forth in subsection (b) of this
Section 7 to the board of directors within 14 days after the date of the
notice calling such special shareholders meeting (or if less than 21 days
notice of the meeting is given to shareholders, such information was
delivered to the president not later than the close of the seventh day
following the date on which the notice of the shareholders' meeting was
mailed); or
(iii) With respect to any Shareholder Proposal to be considered at a
special shareholders meeting called pursuant to Article II, Section 2,
subsection (a)(ii), the shareholder(s) proposing to make such Shareholder
Proposal provided the information set forth in subsection (b) of this
Section 7 to the board of directors concurrently with the filing of the
initial demand by shareholders relating to such special shareholders
meeting; or
(iv) With respect to any Shareholder Proposal to be considered at any
regular meeting of shareholders, other than as described in clause (i)
hereof, the shareholder(s) proposing to make such Shareholder Proposal
provided the information set forth in subsection (b) of this Section 7 to
the board of directors between 90 to 120 days prior to the regular meeting
at which they wish the Shareholder Proposal to be considered.
2
<PAGE> 3
For the purposes of determining whether information was provided at the
times or within the specified periods, the date of the applicable meeting shall
be as set forth in the notice of meeting given by the corporation, and such
times and periods will be determined without regard to any postponements,
deferrals or adjournments of such meeting to a later date.
(b) The following information must be provided to the board of directors,
within or at the times specified in subsection (a) above, in order for the
Shareholder Proposal to be considered at the applicable shareholders meeting:
(i) The Shareholder Proposal, as it will be proposed, in full text and
in writing;
(ii) The purpose(s) for which the Shareholder Proposal is desired and
the specific meeting at which such proposal is proposed to be considered;
(iii) The name(s), address(es), and number of shares held of record by
the shareholder(s) making such Shareholder Proposal (or owned beneficially
and represented by a nominee certificate on file with the corporation);
(iv) The number of shares that have been solicited with regard to the
Shareholder Proposal and the number of shares the holders of which have
agreed (in writing or otherwise) to vote in any specific fashion on said
Shareholder Proposal; and
(v) A written statement by said shareholder(s) that they intend to
continue ownership of such voting shares through the date of the meeting at
which said Shareholder Proposal is proposed to be considered.
(c) Failure to fully comply with the provisions of this Section 7 shall bar
discussion of and voting on the Shareholder Proposal at the applicable regular
or special shareholders meeting. Any Shareholder Proposal that does not comply
with the requirements of this Section 7 shall be disregarded by the chairman of
the meeting, and any votes cast in support of the Shareholder Proposal, unless
the Shareholder Proposal has been validly submitted by another shareholder,
shall be disregarded by the chairman of such meeting.
(d) The provisions of this Section 7 shall be read in accordance with and
so as not to conflict with the rules and regulations promulgated by the
Securities and Exchange Commission and any stock exchange or quotation system
upon which the corporation's shares are traded. Nothing in these By-laws shall
be deemed to require the consideration at any meeting of shareholders of any
Shareholder Proposal that, pursuant to law, the corporation may refuse to permit
consideration thereof.
Section 8. Consent of Shareholders. Any action required or permitted to
be taken at any meeting of the shareholders may be taken without a meeting if
all of the shareholders consent thereto in writing, setting forth the action so
taken. Such consent shall have the same force and effect as a unanimous vote of
shareholders.
Section 9. List of Shareholders; Inspection of Records. (a) The
corporation shall keep at its registered office or principal place of business,
or at the office of its transfer agent or registrar, a record of its
shareholders, giving their names and addresses and the number, class and series,
if any, of the shares held by each. The officer who has charge of the stock
transfer books of the corporation shall prepare and make, before every meeting
of shareholders or any adjournment thereof, a complete list of the shareholders
entitled to vote at the meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number and class and series, if
any, of shares held by each. The list shall be produced and kept open at the
time and place of the meeting and shall be subject to inspection by any
shareholder during the whole time of the meeting for the purposes thereof. The
said list may be the corporation's regular record of shareholders if it is
arranged in alphabetical order or contains an alphabetical index.
(b) Shareholders are entitled to inspect the corporate records as and to
the extent provided by the Code; provided, however, that only shareholders
owning more than two percent (2%) of the outstanding shares of any class of the
corporation's stock shall be entitled to inspect (1) the minutes from any board,
board
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committee or shareholders meeting (including any records of action taken thereby
without a meeting); (2) the accounting records of the corporation; or (3) any
record of the shareholders of the corporation.
ARTICLE III
DIRECTORS
Section 1. Powers. Except as otherwise provided by any legal agreement
among shareholders, the property, affairs and business of the corporation shall
be managed and directed by its board of directors, which may exercise all powers
of the corporation and do all lawful acts and things which are not by law, by
any legal agreement among shareholders, by the articles of incorporation or by
these by-laws directed or required to be exercised or done by the shareholders.
Section 2. Number, Election and Term. The number of directors which shall
constitute the whole board shall be eleven. Provided, however, the number of
directors may be increased or decreased from time to time by the board of
directors by amendment of this by-law, but no decrease shall have the effect of
shortening the term of an incumbent director. The directors shall be elected by
plurality vote at the annual meeting of shareholders, except as hereinafter
provided, and each director elected shall hold office until his successor is
elected and qualified or until his earlier resignation, removal from office or
death. Directors shall be natural person who have attained the age of 18 years,
but need not be residents of the State of Georgia or shareholders of the
corporation.
Section 3. Nominations. (a) If any shareholder intends to nominate or
cause to be nominated any candidate for election to the board of directors
(other than any candidate to be sponsored by and proposed at the instance of the
management), such shareholder shall notify the president by first class
registered mail sent not less than 14 nor more than 50 days before the scheduled
meeting of the shareholders at which directors will be elected. However, if less
than 21 days notice of the meeting is given to shareholders, such nomination
shall be delivered or mailed to the president not later than the close of the
seventh day following the date on which the notice of the shareholders' meeting
was mailed. Such notification shall contain the following information with
respect to each nominee, to the extent known to the shareholder giving such
notification:
(1) Name, address and principal present occupation;
(2) To the knowledge of the shareholder who proposed to make such
nomination, the total number of shares that may be voted for such proposed
nominee;
(3) The names and address of the shareholders who propose to make such
nomination, and the number of shares of the corporation owned by each of
such shareholders; and
(4) The following additional information with respect to each nominee:
age, past employment, education, beneficial ownership of shares in the
corporation, past and present financial standing, criminal history
(including any convictions, indictments or settlements thereof),
involvement in any past or pending litigation or administrative proceedings
(including threatened involvement), relationship to and agreements (whether
or not in writing) with the shareholder(s) (and their relatives,
subsidiaries and affiliates) intending to make such nomination, past and
present relationships or dealings with the corporation or any of its
subsidiaries, affiliates, directors, officers or agents, plans or ideas for
managing the affairs of the corporation (including, without limitation, any
termination of employees, any sales of corporate assets, any proposed
merger, business combination or recapitalization involving the corporation,
and any proposed dissolution or liquidation of the corporation), and all
additional information relating to such person that would be required to be
disclosed, or otherwise required, pursuant to Sections 13 or 14 of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "Exchange Act"), in connection with any
acquisition of shares by such nominee or in connection with the
solicitation of proxies by such nominee for his election as a director,
regardless of the applicability of such provisions of the Exchange Act.
(b) Any nominations not in accordance with the provisions of this Section 3
may be disregarded by the chairman of the meeting, and upon instruction by the
chairman, votes cast for each such nominee shall be
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disregarded. In the event, however, that a person should be nominated by more
than one shareholder, and if one such nomination complies with the provisions of
this Section 3, such nomination shall be honored, and all shares voted for such
nominee shall be counted.
Section 4. Vacancies. Vacancies, including vacancies resulting from any
increase in the number of directors, but not including vacancies resulting from
removal from office by the shareholders, may be filled by a majority of the
directors then in office, though less than a quorum, or by a sole remaining
director, and a director so chosen shall hold office until the next annual
election and until his successor is duly elected and qualified unless sooner
displaced. If there are no directors in office, then vacancies shall be filled
through election by the shareholders.
Section 5. Meetings and Notice. The board of directors of the corporation
may hold meetings, both regular and special, either within or without the State
of Georgia. Regular meetings of the board of directors may be held without
notice at such time and place as shall from time to time be determined by
resolution of the board. Special meetings of the board may be called by the
chairman of the board or president or by any two directors on one day's oral,
telegraphic or written notice duly given or served on each director personally,
or three days' notice deposited, first class postage prepaid, in the United
States mail. Such notice shall state a reasonable time, date and place of
meeting, but the purpose need not be stated therein. A director may waive any
notice required by the Code, the articles of incorporation, or these by-laws
before or after the date and time of the matter to which the notice relates, by
a written waiver signed by the director and delivered to the corporation for
inclusion in the minutes or filing with the corporate records. Attendance of a
director at a meeting shall constitute a waiver of notice of such meeting and
waiver of all objections to the place and time of the meeting, or the manner in
which it has been called or convened except when the director states, at the
beginning of the meeting, any such objection or objections to the transaction of
business.
Section 6. Quorum. At all meetings of the board a majority of directors
shall constitute a quorum for the transaction of business, and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the board, except as may be otherwise specifically provided
by law, by the articles of incorporation, or by these by-laws. If a quorum shall
not be present at any meeting of the board, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 7. Conference Telephone Meeting. Unless the articles of
incorporation or these by-laws otherwise provide, members of the board of
directors, or any committee designated by such board, may participate in a
meeting of such board or committee by means of conference telephone or similar
communications equipment whereby all persons participating in the meeting can
hear each other. Participation in such a meeting shall constitute presence in
person.
Section 8. Consent of Directors. Unless otherwise restricted by the
articles of incorporation or these by-laws, any action required or permitted to
be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, setting forth the action so taken, and
the writing or writings are delivered to the corporation for inclusion in the
minutes or filing with the corporate records. Such consent shall have the same
force and effect as a unanimous vote of the board.
Section 9. Committees. The board of directors may, by resolution passed
by a majority of the whole board, designate from among its members one or more
committees, each committee to consist of two or more directors. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent member at any meeting of such committee. Any such committee,
to the extent provided in the resolution, shall have and may exercise all of the
authority of the board of directors in the management of the business and
affairs of the corporation except that it shall have no authority with respect
to (1) amending the articles of incorporation or these by-laws; (2) adopting a
plan of merger or consolidation; (3) the sale, lease, exchange or other
disposition of all or substantially all of the property and assets of the
corporation; (4) a voluntary dissolution of the corporation or a revocation
thereof; and (5) any other action limited by law. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the board of directors. A majority of each committee may
determine its action and may
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fix the time and place of its meetings, unless otherwise provided by the board
of directors. Each committee shall keep regular minutes of its meetings and
report the same to the board of directors when required.
Section 10. Removal of Directors. At any shareholders meeting with
respect to which notice of such purpose has been given, any director may be
removed from office, with or without cause, by the vote of shareholders
representing a majority of the issued and outstanding capital stock entitled to
vote for the election of directors, and his successor may be elected at the same
or any subsequent meeting of shareholders; provided that to the extent any
vacancy created by such removal is not filled by such an election within 60 days
after such removal, the remaining directors shall, by majority vote, be entitled
to fill any such vacancy.
Section 11. Compensation of Directors. Directors shall be entitled to
such reasonable compensation for their services as directors or members of any
committee of the board as shall be fixed from time to time by resolution adopted
by the board, and shall also be entitled to reimbursement for any reasonable
expenses incurred in attending any meeting of the board or any such committee.
ARTICLE IV
OFFICERS
Section 1. Number. The officers of the corporation shall be chosen by the
board of directors and shall be a president, a secretary and a treasurer. The
board of directors may also choose a chairman of the board, one or more
vice-presidents, assistant secretaries and assistant treasurers. Any number of
officers, except the offices of president and secretary may be held by the same
person. The board of directors may appoint such other officers and agents as it
shall deem necessary who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the board.
Section 2. Compensation. The salaries of all officers and agents of the
corporation shall be fixed by the board of directors or a committee or officer
appointed by the board.
Section 3. Term of Office. Unless otherwise provided by resolution of the
board of directors, the principal officers shall be chosen annually by the board
at the first meeting of the board following the annual meeting of shareholders
of the corporation, or as soon thereafter as is conveniently possible.
Subordinate officers may be elected from time to time. Each officer shall serve
until his successor shall have been chosen and qualified, or until his death,
resignation or removal.
Section 4. Removal. Any officer may be removed from office at any time,
with or without cause, by the board of directors whenever in its judgment the
best interest of the corporation will be served thereby.
Section 5. Vacancies. Any vacancy in an office resulting from any cause
may be filled by the board of directors.
Section 6. Powers and Duties. Except as hereinafter provided, the
officers of the corporation shall each have such powers and duties as generally
pertain to their respective officers, as well as such powers and duties as from
time to time may be conferred by the board of directors.
(a) Chairman of the Board. The chairman of the board shall preside at all
meetings of the shareholders and the board of directors. Except where by law the
signature of the president is required, the chairman shall possess the same
power as the president to sign all certificates representing shares of the
corporation and all bonds, mortgages and other contracts requiring a seal, under
the seal of the corporation.
(b) Chief Executive Officer. The chief executive officer shall be the
chief executive officer of the corporation and shall in the absence of the
chairman of the board preside at all meetings of the shareholders and the board
of directors, and shall perform such other duties and have such other powers as
the board of directors may from time to time prescribe. Except where by law the
signature of the president is required, the chief executive officer shall
possess the same power as the president to sign all certificates representing
shares of the corporation and all bonds, mortgages and other contracts requiring
a seal, under the seal of the corporation.
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(c) President. The president shall in the absence of the chairman of the
board and the chief executive officer preside at all meetings of the
shareholders and the board of directors. The president shall have general and
active management of the business of the corporation and shall see that all
orders and resolutions of the board of directors are carried into effect. He
shall execute bonds, mortgages and other contracts requiring a seal, under the
seal of the corporation, except where required or permitted by law to be
otherwise signed and executed and except where the signing and execution thereof
shall be expressly delegated by the board of directors to some other officer or
agent of the corporation.
(d) Chief Operating Officer. The chief operating officer shall be the
chief operations officer of the corporation. He shall superintend all operations
of the corporation and in the absence of the chairman of the board, the chief
executive officer and the president shall preside at all meetings of the
shareholders and the board of directors, and shall perform such other duties and
have such other powers as the board of directors may from time to time
prescribe.
(e) Vice President. In the absence of the president or in the event of his
inability or refusal to act, the vice-president (or in the event there be more
than one vice-president, the vice-president in the order designated, or in the
absence of any designation, then in the order of their election) shall perform
the duties of the president, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the president. The vice-presidents
shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
(f) Secretary. The secretary shall attend all meetings of the board of
directors and all meetings of the shareholders and record all the proceedings of
the meetings of the corporation and of the board of directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the shareholders and special meetings of the board of directors, and shall
perform such other duties as may be prescribed by the board of directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to the instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The board of directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
(g) Assistant Secretary. The assistant secretary or if there be more than
one, the assistant secretaries in the order determined by the board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the secretary or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the secretary and
shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
(h) Treasurer. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the board of directors. He shall
disburse the funds of the corporation as may be ordered by the board of
directors, taking proper vouchers for such disbursements, and shall render to
the president and the board of directors, at its regular meetings, or when the
board of directors so requires, an account of all his transactions as treasurer
and of the financial condition of the corporation. If required by the board of
directors, he shall give the corporation a bond (which shall be renewed every
six years) in such sum and with such surety or sureties as shall be satisfactory
to the board of directors for the faithful performance of the duties of his
office and for the restoration to the corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under this
control belonging to the corporation.
(i) Assistant Treasurer. The assistant treasurer, or if there shall be
more than one, the assistant treasurers in the order determined by the board of
directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as the
board of directors may from time to time prescribe.
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Section 7. Voting Securities of Corporation. Unless otherwise directed by
the board of directors, the chairman of the board, and in his absence, the
president shall have full power and authority on behalf of the corporation to
attend and to act and vote at any meetings of security holders of corporations
in which the corporation may hold securities, and at such meetings shall possess
and may exercise any and all rights and powers incident to the ownership of such
securities which the corporation might have possessed and exercised if it had
been present. The board of directors by resolution from time to time may confer
like powers upon any other person or persons.
ARTICLE V
CERTIFICATE
Section 1. Form of Certificate. Every holder of fully-paid stock in the
corporation shall be entitled to have a certificate in such form as the board of
directors may from time to time prescribe.
Section 2. Lost Certificates. The board of directors may direct that a
new certificate be issued in place of any certificate theretofore issued by the
corporation and alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 3. Transfers. (a) Transfers of shares of the capital stock of the
corporation shall be made only on the books of the corporation by the registered
holder thereof, or by his duly authorized attorney, or with a transfer clerk or
transfer agent appointed as provided in Section 5 of this Article, and on
surrender of the certificate or certificates for such shares properly endorsed
and the payment of all taxes thereon.
(b) The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends, and
to vote as such owner, and for all other purposes, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by law.
(c) Shares of capital stock may be transferred by delivery of the
certificates therefor, accompanied either by an assignment in writing on the
back of the certificates or by separate written power of attorney to sell,
assign and transfer the same, signed by the record holder, thereof, or by his
duly authorized attorney-in-fact, but no transfer shall affect the right of the
corporation to pay any dividend upon the stock to the holder of record as the
holder in fact thereof for all purposes, and no transfer shall be valid, except
between the parties thereto, until such transfer shall have been made upon the
books of the corporation as herein provided.
(d) The board may, from time to time, make such additional rules and
regulations as it may deem expedient, not inconsistent with these by-laws or the
articles of incorporation, concerning the issue, transfer and registration of
certificates for shares of the capital stock of the corporation.
Section 4. Record Date. In order that the corporation may determine the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than 70 days and, in case of a meeting of shareholders,
not less than 10 days prior to the date on which the particular action requiring
such determination of stockholders is to be taken. If no record date is fixed
for the determination of shareholders entitled to notice of and to vote at any
meeting of shareholders, the record date shall be at the close of business on
the day next preceding the day on which the notice is given, or, if notice is
waived, at the chose of business on the day next preceding the day on which the
meeting is held. If no record date is fixed for other purposes, the record date
shall be at the close of
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business on the day next preceding the day on which the board of directors
adopts the resolution relating thereto. A determination of shareholders of
record entitled to notice of or to vote at a meeting of shareholders shall apply
to any adjournment of the meeting unless the board of directors shall fix a new
record date for the adjourned meeting.
Section 5. Transfer Agent and Registrar. The board of directors may
appoint one or more transfer agents or one or more transfer clerks and one or
more registrars, and may require all certificates of stock to bear the signature
or signatures of any of them.
ARTICLE VI
GENERAL PROVISIONS
Section 1. Distributions. Distributions upon the capital stock of the
corporation, subject to the provisions of the articles of incorporation, if any,
may be declared by the board of directors at any regular or special meetings,
pursuant to law. Distributions may be paid in cash, in property, or in shares of
the corporation's capital stock, subject to the provisions of the articles of
incorporation. Before payment of any distribution, there may be set aside out of
any funds of the corporation available for distributions such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing distributions, or
for repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
Section 2. Fiscal Year. The fiscal year of the corporation shall be fixed
by resolution of the board of directors.
Section 3. Seal. The corporate seal shall have inscribed thereon the name
of the corporation, the year of its organization and the words "Corporate Seal"
and "Georgia". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise. In the event it is inconvenient
to use such a seal at any time, the signature of the corporation followed by the
word "Seal" enclosed in parentheses shall be deemed the seal of the corporation.
Section 4. Savings Clause. To the extent these by-laws conflict with any
provision of any state or federal law as such laws may be amended from time to
time, these by-laws shall be construed so as not to conflict with said law, and
any discretionary actions made hereunder shall be made in accordance with
applicable law.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Indemnification of Directors and Officers. The corporation
shall indemnify and hold harmless any person (an "Indemnified Person") who is or
was a party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action or suit by or in the right of the
corporation) by reason of the fact that he is or was a director or officer of
the corporation, against expenses (including, but not limited to, attorneys'
fees and disbursements, court costs and expert witness fees), and against any
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful;
provided, in any case, that no indemnification shall be made in respect of
expenses, judgments, fines and amounts paid in settlement attributable to
circumstances as to which, under applicable provisions of the Code as in effect
from time to time, such indemnification may not be authorized by action of the
board of directors, the shareholders or otherwise.
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Section 2. Indemnification of Directors and Officers for Derivative
Actions. The corporation shall indemnify and hold harmless any Indemnified
Person who is or was a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by or in the right of the
corporation, by reason of the fact that he is or was a director or officer of
the corporation, against expenses (including, but not limited to, attorneys'
fees and disbursements, court costs and expert witness fees) actually and
reasonably incurred by him in connection with such action, suit or proceeding,
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. No indemnification shall be
made pursuant to this Section 2 for any claim, issue or matter as to which an
Indemnified Person shall have been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation, or for amounts paid in settlement to the corporation, unless and
only to the extent that the court in which such action or suit was brought or
other court of competent jurisdiction shall determine upon application that such
person is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper.
Section 3. Indemnification of Employees and Agents. The board of
directors shall have the power to cause the corporation to provide to any person
who is or was an employee or agent of the corporation all or any part of the
right to indemnification and other rights of the type provided under Sections 1,
2, 6 and 12 of this Article VII (subject to the conditions, limitations,
obligations and other provisions specified herein), upon a resolution to that
effect identifying such employee or agent (by position or name) and specifying
the particular rights provided, which may be different for each employee or
agent identified. Each employee or agent of the corporation so identified shall
be an "Indemnified Person" for purposes of the provisions of this Article VII.
Section 4. Subsidiaries and Other Organizations. The board of directors
shall have the power to cause the corporation to provide to any person who is or
was a director, officer, employee or agent of the corporation who also is or was
a director, officer, trustee, partner, employee or agent of a Subsidiary (as
defined below), or is or was serving at the corporation's request in such a
position with any other organization, all or any part of the right to
indemnification and other rights of the type provided under Sections 1, 2, 6 and
12 of this Article VII (subject to the conditions, limitations, obligations and
other provisions specified herein), with respect to service by such person in
such position with a Subsidiary or other organization, upon a resolution
identifying such person, the Subsidiary or other organization involved (by name
or other classification), and the particular rights provided, which may be
different for each person so identified. Each person so identified shall be an
"Indemnified Person" for purposes of the provisions of this Article VII. As used
in this Article VII, "Subsidiary" shall mean (i) another corporation, joint
venture, trust, partnership or unincorporated business association more than 20%
of the voting capital stock or other voting equity interest of which was, at or
after the time of the circumstances giving rise to such action, suit or
proceeding, owned, directly or indirectly, by the corporation; or (ii) a
nonprofit corporation that receives its principal financial support from the
corporation or its Subsidiaries.
Section 5. Determination. Notwithstanding any judgment, order,
settlement, conviction or plea in any action, suit or proceeding of the kind
referred to in Sections 1 and 2 of this Article VII, an Indemnified Person shall
be entitled to indemnification as provided in such Sections 1 and 2 if a
determination that such Indemnified Person is entitled to such indemnification
shall be made (i) by the board of directors by a majority vote of a quorum
consisting of directors who are not at the time parties to the proceeding; or
(ii) if a quorum cannot be obtained under (i) above, by majority vote of a
committee duly designated by the board of directors (in which designation
interested directors may participate), consisting solely of two or more
directors who are not at the time parties to the proceeding; or (iii) in a
written opinion by special legal counsel selected as required by Section
14-2-855(b)(3) of the Code or any successor provision. To the extent that an
Indemnified Person has been successful on the merits or otherwise in defense of
any action, suit or proceeding of the kind referred to in Sections 1 and 2 of
this Article VII, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Section 6. Advances. Expenses (including, but not limited to, attorneys'
fees and disbursements, court costs, and expert witness fees) incurred by an
Indemnified Person in defending any action, suit or proceeding of the kind
described in Sections 1 and 2 hereof (or in Section 4 hereof if applicable to
such
10
<PAGE> 11
Indemnified Person) shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding as set forth herein. The
corporation shall promptly pay the amount of such expenses to the Indemnified
Person, but in no event later than ten days following the Indemnified Person's
delivery to the corporation of a written request for an advance pursuant to this
Section 6, together with a reasonable accounting of such expenses; provided,
however, that the Indemnified Person shall furnish the corporation a written
affirmation of his good faith belief that he has met the standard of conduct set
forth in the Code and a written undertaking and agreement, executed personally
or on his behalf, to repay to the corporation any advances made pursuant to this
Section 6 if it shall be ultimately determined that the Indemnified Person is
not entitled to be indemnified by the corporation for such amounts. The
corporation shall make the advances contemplated by this Section 6 regardless of
the Indemnified Person's financial ability to make repayment. Any advances and
undertakings to repay pursuant to this Section 6 shall be unsecured and
interest-free.
Section 7. Non-Exclusivity. Subject to any applicable limitation imposed
by the Code or the Articles of Incorporation, the indemnification and
advancement of expenses provided by or granted pursuant to this Article VII
shall not be exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any by-law,
resolution or agreement specifically or in general terms approved or ratified by
the affirmative vote of holders of a majority of the shares entitled to be cast
thereon.
Section 8. Insurance. The corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or who, while a director,
officer, employee, or agent of the corporation, is or was serving as a director,
officer, trustee, general partner, employee or agent of a Subsidiary or, at the
request of the corporation, of any other organization, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Article VII.
Section 9. Notice. If any expenses or other amounts are paid by way of
indemnification, otherwise than by court order or action by the shareholders or
by an insurance carrier pursuant to insurance maintained by the corporation, the
corporation shall, not later than the next annual meeting of shareholders,
unless such meeting is held within three months from the date of such payment,
and in any event within 15 months from the date of such payment, send by first
class mail to its shareholders of record at the time entitled to vote for the
election of directors a statement specifying the persons paid, the amount paid
and the nature and status at the time of such payment of the litigation or
threatened litigation.
Section 10. Security. The corporation may designate certain of its assets
as collateral, provide self-insurance or otherwise secure its obligations under
this Article VII, or under any indemnification agreement or plan of
indemnification adopted and entered into in accordance with the provisions of
this Article VII, as the board of directors deems appropriate.
Section 11. Amendment. Any amendment to this Article VII that limits or
otherwise adversely affects the right of indemnification, advancement of
expenses, or other rights of any Indemnified Person hereunder shall, as to such
Indemnified Person, apply only to claims, actions, suits or proceedings based on
actions, events or omissions (collectively, "Post Amendment Events") occurring
after such amendment and after delivery of notice of such amendment to the
Indemnified Person so affected. Any Indemnified Person shall, as to any claim,
action, suit or proceeding based on actions, events or omissions occurring prior
to the date of receipt of such notice, be entitled to the right of
indemnification, advancement of expenses and other rights under this Article VII
to the same extent as if such provisions had continued as part of the by-laws of
the corporation without such amendment. This Section 11 cannot be altered,
amended or repealed in a manner effective as to any Indemnified Person (except
as to Post Amendment Events) without the prior written consent of such
Indemnified Person.
Section 12. Agreements. In addition to the rights provided in this
Article VII, the corporation shall have the power, upon authorization by the
board of directors, to enter into an agreement or agreements providing to any
person who is or was a director, officer, employee or agent of the corporation
indemnification rights substantially similar to, or greater than, those provided
in this Article VII.
11
<PAGE> 12
Section 13. Continuing Benefits. The indemnification and advancement of
expenses provided by or granted pursuant to this Article VII shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Section 14. Successors. For purposes of this Article VII, the terms "the
corporation" or "this corporation" shall include any corporation, joint venture,
trust, partnership or unincorporated business association that is the successor
to all or substantially all of the business or assets of this corporation, as a
result of merger, consolidation, sale, liquidation or otherwise, and any such
successor shall be liable to the persons indemnified under this Article VII on
the same terms and conditions and to the same extent as this corporation.
Section 15. Severability. Each of the sections of this Article VII, and
each of the clauses set forth herein, shall be deemed separate and independent,
and should any part of any such section or clause be declared invalid or
unenforceable by any court of competent jurisdiction, such invalidity or
unenforceability shall in no way render invalid or unenforceable any other part
thereof or any other separate section or clause of this Article VII that is not
declared invalid or unenforceable.
Section 16. Additional Indemnification. In addition to the specific
indemnification rights set forth herein, the corporation shall indemnify each of
its directors and officers to the full extent permitted by action of the board
of directors without shareholder approval under the Code or other laws of the
State of Georgia as in effect from time to time.
ARTICLE VIII
AMENDMENTS
The board of directors shall have power to alter, amend or repeal the
by-laws by majority vote of all of the directors, but any by-laws adopted by the
board of directors may be altered, amended or repealed and new by-laws adopted,
by the shareholders by majority vote of all of the shares having voting power.
12
<PAGE> 1
EXHIBIT 10(A)
FIFTH AMENDMENT TO SECOND AMENDED
AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT
THIS FIFTH AMENDMENT (the "Fifth Amendment") TO SECOND AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT, made as of this 19th day of December,
1997, among AARON RENTS, INC., a Georgia corporation (the "Company"), SUNTRUST
BANK, ATLANTA (formerly known as Trust Company Bank), a Georgia banking
corporation, FIRST UNION NATIONAL BANK (formerly known as First Union National
Bank of Georgia), a national banking association, THE FIRST NATIONAL BANK OF
CHICAGO, a national banking association, as assignee of NBD Bank, SOUTHTRUST
BANK, N.A. (formerly known as SouthTrust Bank of Georgia, N.A.), a national
banking association (collectively, the "Banks") and SUNTRUST BANK, ATLANTA, as
Agent for the Banks (the "Agent").
WITNESSETH:
WHEREAS, the Company, the Banks and the Agent are parties to that certain
Second Amended and Restated Revolving Credit and Term Loan Agreement dated as of
January 6, 1995, as heretofore amended (the "Loan Agreement"); and
WHEREAS, the Company has requested that certain terms of the Loan Agreement
be amended and the Agent and the Banks have agreed to the requested amendments
on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree that
all capitalized terms used but not otherwise defined herein shall have the
meanings ascribed thereto in the Loan Agreement and further agree as follows:
1.
Section 2.03 of the Loan Agreement is hereby amended by replacing
subsection (a) thereof with the following:
(a) the aggregate Revolving Credit Commitments shall not exceed the
least of the following:
(i) an amount equal to 700% of the Company's Rental Income for the
most recent calendar month;
(ii) an amount equal to 70% of the Net Book Value of the Company's
Rental Equipment and Furniture Inventory as of the most recent calendar
month; or
(iii) $90,000,000.
2.
Section 8.11 of the Loan Agreement is hereby amended by replacing said
section with the following:
Section 8.11. Corporate Existence. Except as expressly permitted
under Section 9.05 hereof, the Company will maintain and will cause each
Subsidiary to maintain its corporate existence and good standing in the
jurisdiction of its incorporation, and the Company will qualify and will
cause each Subsidiary to qualify and remain qualified to do business as a
foreign corporation in each jurisdiction in
<PAGE> 2
which the nature of the business conducted by it or its ownership of
property makes such qualification necessary and where failure to qualify
would have a Materially Adverse Effect.
3.
Section 9.03 of the Loan Agreement is hereby amended by replacing
subsection (d) thereof with the following:
(d) own, purchase or acquire stock, obligations or securities of a
Subsidiary or of a corporation which immediately after such purchase or
acquisition will be a Subsidiary or will be merged into Borrower, provided,
however, written consent of the Banks, which any of them may withhold in
their sole discretion, is required for purchases and acquisitions with (A)
a cash purchase price greater than or equal to $10,000,000, or (B) a total
purchase price (including cash, stock of the Company and any of its
Subsidiaries and any other consideration) greater than or equal to
$15,000,000;
4.
Section 9.03 of the Loan Agreement is hereby further amended by replacing
subsection (i) thereof with the following:
(i) guarantee the indebtedness of obligations of certain franchise
operators, provided such guarantees are (A) given by the Company in
connection with (1) such franchise operators' purchase of merchandise
financed through a third-party lender or (2) loans made for other purposes
pursuant to the terms of that certain Loan Facility Agreement and Guaranty,
to be dated on or about December , 1997, by and among the Company,
SunTrust Bank, Atlanta, as Servicer, and the banks from time to time party
thereto (as thereafter amended or modified, the "Loan Facility Agreement
and Guaranty"), and (B) limited to $40,000,000 in aggregate outstanding
principal amount at any one time for all franchise operators; and
5.
Section 9.06 of the Loan Agreement is hereby amended by replacing said
Section with the following:
Section 9.06. Additional Negative Pledges. The Company shall not, and
shall not permit any of its Subsidiaries to, create or otherwise cause or
suffer to exist or become effective, directly or indirectly, any
prohibition or restriction on the creation or existence of any Lien upon
any assets of the Company or any of its Subsidiaries, other than pursuant
to (a) Section 9.01, (b) the terms of any agreement, instrument or other
document pursuant to which any debt permitted by Section 9.01(e) is
incurred by the Company or any of its Subsidiaries, so long as such
prohibition or restriction applies only to the property or asset being
financed by such debt, (c) any requirement of applicable law or any
regulatory authority having jurisdiction over the Company or any of its
Subsidiaries, (d) the terms of the Synthetic Lease Documents and (e) the
terms of the Loan Facility Agreement and Guaranty.
6.
The Revolving Credit Commitment of each Bank (other than SunTrust Bank,
Atlanta) is amended to be the Revolving Credit Commitment of such Bank listed on
its signature page to this Fifth Amendment.
7.
The Company represents and warrants that all representations and warranties
set forth in the Loan Agreement are true and correct in all material respects on
the date hereof and no Default or Event of Default exists under the Loan
Agreement as of the date hereof.
2
<PAGE> 3
8.
The effectiveness of this Fifth Amendment is conditioned upon the Agent's
receipt of:
(a) three Revolving Notes, each dated the date hereof, executed by the
Company, in favor of each Bank other than SunTrust Bank, Atlanta, in the
amount of such Bank's Revolving Credit Commitment as set forth on the
signature pages hereto;
(b) a Second Amendment and Ratification of Subsidiary Guaranty
Agreement, in form and substance satisfactory to the Banks, executed by the
Guarantors;
(c) certificates of the Secretary or Assistant Secretary of each of
the Credit Parties attaching and certifying copies of the resolutions of
the boards of directors of the Credit Parties, authorizing the execution,
delivery and performance of this Fifth Amendment and the other Loan
Documents described in this Section 7, as applicable (the "Amendment
Documents");
(d) certificates of the Secretary or an Assistant Secretary of each of
the Credit Parties certifying (i) the name, title and true signature of
each officer of each entity executing the Amendment Documents, (ii) the
certificate or articles of incorporation of such Credit Party, and (iii)
the bylaws or comparable governing documents of such Credit Party;
(f) certificates of existence or other good standing certificates for
each Credit Party issued by the Secretary of State of the jurisdiction of
such Credit Party's incorporation and of each state where the failure to be
in good standing would have a Materially Adverse Effect; and
(g) the favorable opinion of Kilpatrick Stockton, general counsel to
the Credit Parties, addressed to the Agent and each of the Banks.
9.
Except for the amendments and agreements expressly set forth above, the
text of the Loan Agreement and all other Loan Documents shall remain unchanged
and in full force and effect. The Company acknowledges and expressly agrees that
the Agent and the Banks reserve the right to, and do, in fact, require strict
compliance with the terms and provisions of the Loan Agreement, as amended by
this Fifth Amendment.
10.
Each reference in the Loan Agreement to "this Agreement," "hereunder,"
"hereof," "herein," or words of like import, shall mean and be a reference to
the Loan Agreement as amended by this Fifth Amendment and each reference to the
Loan Agreement in any other document, instrument or agreement executed or
delivered in connection with the Loan Agreement shall mean and be a reference to
the Loan Agreement as amended by this Fifth Amendment.
11.
THIS FIFTH AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF GEORGIA.
12.
This Fifth Amendment may be executed by one or more of the parties hereto
in any number of separate counterparts, each of which shall be deemed an
original and all of which, taken together, shall be deemed to constitute one and
the same instrument. Delivery of an executed counterpart of this Fifth Amendment
by facsimile transmission shall be as effective as delivery of a manually
executed counterpart hereof.
3
<PAGE> 4
13.
This Fifth Amendment shall be binding on, and shall inure to the benefit
of, the parties hereto and their respective successors and assigns.
14.
This Fifth Amendment constitutes the entire understanding of the parties
with respect to the subject matter hereof, and any other prior or
contemporaneous agreements, whether written or oral, with respect thereto, are
expressly superseded hereby.
15.
The Company agrees to pay all reasonable, out-of-pocket costs and expenses
of the Agent in connection with the preparation, execution and delivery of, this
Fifth Amendment (including, without limitation, the reasonable fees actually
incurred and disbursements of counsel for the Agent).
4
<PAGE> 5
IN WITNESS WHEREOF, this Fifth Amendment has been duly executed as of the
date first above written.
<TABLE>
<S> <C>
COMPANY:
AARON RENTS, INC.
Address for Notices:
309 East Paces Ferry Road By:
Atlanta, Georgia 30305 --------------------------------------------
Attention: Gilbert L. Danielson Name:
Title:
</TABLE>
[SIGNATURE PAGE FOR FIFTH AMENDMENT TO
SECOND AMENDED AND RESTATED REVOLVING CREDIT
AND TERM LOAN AGREEMENT]
5
<PAGE> 6
<TABLE>
<S> <C>
AGENT:
Address for Notices: SUNTRUST BANK, ATLANTA, as Agent for the
Banks
25 Park Place, 23rd Floor By:
Atlanta, Georgia 30303 --------------------------------------------
Attention: Willem-Jan O. Hattink or Name:
Michael Dunlap Title:
Payment Office:
25 Park Place By:
23rd Floor --------------------------------------------
Atlanta, Georgia 30303 Name:
Title:
</TABLE>
[SIGNATURE PAGE FOR FIFTH AMENDMENT TO
SECOND AMENDED AND RESTATED REVOLVING CREDIT
AND TERM LOAN AGREEMENT]
6
<PAGE> 7
<TABLE>
<S> <C>
BANKS:
Address for Notices: SUNTRUST BANK, ATLANTA
25 Park Place, 23rd Floor By:
Atlanta, Georgia 30303 --------------------------------------------
Attention: Willem-Jan O. Hattink or Name:
Michael Dunlap Title:
Payment Office:
25 Park Place By:
23rd Floor --------------------------------------------
Atlanta, Georgia 30303 Name:
Title:
REVOLVING CREDIT COMMITMENT: $25,000,000.00
PRO RATA SHARE OF REVOLVING
LOAN COMMITMENTS: 27.7778%
</TABLE>
FIFTH AMENDMENT TO
SECOND AMENDED AND RESTATED REVOLVING CREDIT
AND TERM LOAN AGREEMENT
7
<PAGE> 8
<TABLE>
<S> <C>
FIRST UNION NATIONAL BANK
Address for Notices:
999 Peachtree Street By:
12th Floor, Suite 640 --------------------------------------------
Atlanta, Georgia 30309 Name:
Attention: Jonathan D. Hook Title:
Payment Office:
999 Peachtree Street
12th Floor, Suite 640
P.O. Box 740074
Atlanta, Georgia 30374
REVOLVING CREDIT COMMITMENT: $30,000,000.00
PRO RATE SHARE OF REVOLVING LOAN 33.3333%
COMMITMENTS:
</TABLE>
FIFTH AMENDMENT TO
SECOND AMENDED AND RESTATED REVOLVING CREDIT
AND TERM LOAN AGREEMENT
8
<PAGE> 9
<TABLE>
<S> <C>
THE FIRST NATIONAL BANK OF CHICAGO
Address for Notices:
One First National Plaza -- MC0324 By:
Chicago, Illinois 60670-0324 --------------------------------------------
Attention: Ms. Noreen St. Lawrence Name:
Title:
Payment Office:
One First National Plaza -- MC0324
Chicago, Illinois 60670-0324
Attention: Ms. Noreen St. Lawrence
REVOLVING CREDIT COMMITMENT: $20,000,000.00
PRO RATA SHARE OF REVOLVING LOAN
COMMITMENTS: 22.2222%
</TABLE>
FIFTH AMENDMENT TO
SECOND AMENDED AND RESTATED REVOLVING CREDIT
AND TERM LOAN AGREEMENT]
9
<PAGE> 10
<TABLE>
<S> <C>
SOUTHTRUST BANK, N.A.
Address for Notices:
One Georgia Center By:
600 West Peachtree Street --------------------------------------------
Atlanta, Georgia 30308 Name:
Attention: Mark Crosswell Title:
Payment Office:
One Georgia Center
600 West Peachtree Street
Atlanta, Georgia 30308
Attention: Mark Crosswell
REVOLVING CREDIT COMMITMENT: $15,000,000.00
PRO RATE SHARE OF REVOLVING LOAN 16.6667%
COMMITMENTS:
</TABLE>
10
<PAGE> 1
EXHIBIT 10(B)
CONFIRMATION OF INTEREST RATE SWAP TRANSACTION
REVISED
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 AMENDED terms and
conditions, AS OF DECEMBER 31, 1997 of the Rate Swap Transaction entered into
between you and SunTrust Bank, Atlanta on the Trade Date of DECEMBER 26, 1996
WITH NOTIONAL AMOUNT OF US $10,000,000.00 AND MATURITY DATE OF NOVEMBER 16,
2000, specified below (the "Transaction" or "Rate Swap Transaction"). This
letter agreement constitutes a "Confirmation" as referred to in either the ISDA
Master Agreement or the Interest Rate and Currency Exchange Agreement entered
into by the parties hereto, prior to, or on the date hereof.
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.
<PAGE> 2
<TABLE>
<S> <C>
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 17, 2003, with adjustment in accordance
with the Modified Following Business Day
Convention
FIXED AMOUNTS:
Fixed Rate Payer: Counterparty
Fixed Rate Payer Payment Dates: The 16th day of each February, May, August and
November, beginning February 16, 1997 through
and including the Termination Date, subject to
adjustment in accordance with the Modified
Following Business Day Convention.
Fixed Rate: 6.71% PER ANNUM FROM DECEMBER 30, 1996 TO BUT
EXCLUDING DECEMBER 31, 1997. 6.50% PER ANNUM
FROM DECEMBER 31, 1997 TO BUT EXCLUDING THE
TERMINATION DATE.
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 through
and including the Termination Date, subject to
adjustment in accordance with the Modified
Following Business Day Convention.
Floating Rate for the Calculation Period 5.875% per annum.
Starting December 31, 1997:
Designated Maturity for all subsequent Three month
Calculation Periods:
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
</TABLE>
2
<PAGE> 3
2. 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".
3. ACCOUNT DETAILS:
Payment to Fixed Rate Payer:
SunTrust Bank, Atlanta
ABA# 061000104
FBO: Aaron Rents, Inc.
A/C#: 8800-527-494
Payments to Floating Rate Payer:
SunTrust Bank, Atlanta
ABA# 061000104
Bond Wire Clearing, Center 095
Attn: Financial Risk Management, Operations
4. 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: Leslie Bales. An original
execution copy will be forwarded to you upon us 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:
- 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
- Liquidity Risk: the risk that the Transaction cannot be closed out or
disposed of quickly at or near its value.
3
<PAGE> 4
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:
4
<PAGE> 5
<TABLE>
<S> <C>
To: Aaron Rents, Inc.
Attn: Mitch Paull
Phone: (404) 231-0011 EXT. 309
Fax No.: (404) 240-6584
From: NBD Bank
Date: 30 Dec 97
Re: Our Ref: 8544.AB TRN ID: 1046030
</TABLE>
- --------------------------------------------------------------------------------
*AMENDED CONFIRMATION
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).
<TABLE>
<S> <C>
Type of transaction: Interest Rate Swap
Notional Amount: USD 10,000,000.00
TERM:
Trade Date: 26 Dec 96
Effective Date: 30 Dec 96
Termination Date: 17 Nov 03, 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: *
From and Including To But Excluding Rate
30 Dec 96 17 Nov 97 6.7125 Pct.
17 Nov 97 17 Nov 03 6.5000 Pct.
</TABLE>
5
<PAGE> 6
<TABLE>
<S> <C>
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.
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: *
</TABLE>
This confirmation supplements, forms part of, and is subject to, the ISDA
master agreement dated as of 26 Dec 96 between the parties, as amended and
supplemented from time to time (the "Agreement"). Terms used and not otherwise
defined herein shall have their meanings as defined in the 1991 ISDA
definitions.
<TABLE>
<S> <C>
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
</TABLE>
Please confirm the foregoing correctly sets forth the terms of our
agreement by executing this letter and returning it via facsimile to:
Derivatives Product Support -- Confirmations
NBD Bank
(312) 336-4403 (Fax)
6
<PAGE> 7
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:
By:
----------------------------------
Name:
Title:
7
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
TWELVE
MONTHS NINE MONTHS NINE MONTHS YEAR YEAR
YEAR ENDED YEAR ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1996 1995 1995 1994 1995 1994
------------ ------------ ------------ ------------ ------------ --------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Systemwide Revenues(1)... $364,306 $306,200 $256,500 $192,953 $177,773 $241,286 $189,781
Revenues:
Rentals & Fees......... 231,207 208,463 182,311 137,098 127,995 173,208 130,962
Sales.................. 73,223 61,527 52,999 39,218 39,875 53,655 53,139
Other.................. 6,321 4,255 2,465 1,908 1,471 2,029 1,083
-------- -------- -------- -------- -------- -------- --------
310,751 274,245 237,775 178,224 169,341 228,892 185,184
-------- -------- -------- -------- -------- -------- --------
Costs & Expenses:
Cost of Sales.......... 55,914 46,168 38,274 28,350 28,772 38,696 38,879
Operating Expenses..... 149,728 135,012 119,590 90,027 85,464 115,028 91,927
Depreciation of Rental
Merchandise.......... 71,151 64,437 55,408 41,612 39,912 53,708 37,310
Interest............... 3,721 3,449 3,172 2,323 2,185 3,033 2,063
-------- -------- -------- -------- -------- -------- --------
280,514 249,066 216,444 162,312 156,333 210,465 170,179
-------- -------- -------- -------- -------- -------- --------
Earnings Before Income
Taxes.................. 30,237 25,179 21,331 15,912 13,008 18,427 15,005
Income Taxes............. 11,841 9,786 8,113 6,032 5,021 7,102 6,209
-------- -------- -------- -------- -------- -------- --------
Net Earnings......... $ 18,396 $ 15,393 $ 13,218 $ 9,880 $ 7,987 $ 11,325 $ 8,796
-------- -------- -------- -------- -------- -------- --------
Earnings Per Share....... $ .96 $ .81 $ .68 $ .51 $ .42 $ .59 $ .52
Earnings Per Share
Assuming Dilution...... .94 .77 .66 .49 .40 .58 .51
-------- -------- -------- -------- -------- -------- --------
Dividends Per Share:
Common................. $ .04 $ .04 $ .05 $ .05 $ .05 $ .045 $ .04
Class A................ .04 .04 .02 .02 .02 .025 .03
======== ======== ======== ======== ======== ======== ========
FINANCIAL POSITION
Rental Merchandise,
Net.................... $176,968 $149,984 $122,311 $122,311 $119,781 $121,356 $113,599
Property, Plant &
Equipment, Net......... 39,757 33,267 23,492 23,492 23,532 24,181 18,819
Total Assets............. 239,382 198,103 158,645 158,645 155,914 157,527 144,917
Interest-Bearing Debt.... 76,486 55,365 37,479 37,479 46,894 43,159 53,123
Shareholders' Equity..... 116,455 107,335 91,094 91,094 81,418 84,951 59,830
======== ======== ======== ======== ======== ======== ========
AT YEAR END
Stores Open:
Company-Operated....... 292 240 212 212 203 203 200
Franchised............. 101 61 36 36 24 26 15
Rental Agreements in
Effect................. 219,800 179,600 158,900 158,900 152,100 156,600 126,700
Number of Employees...... 3,100 2,550 2,160 2,160 2,150 2,200 2,100
======== ======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Systemwide revenues include rental revenues of franchised Aaron's Rental
Purchase stores.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGE IN FISCAL YEAR END
During 1995, the Company changed its fiscal year end from March 31 to
December 31, which resulted in a nine month fiscal year ended December 31, 1995.
The decision to change the fiscal year end was made for more convenience in both
internal and external communications. To aid comparative analysis, the Company
has elected to present the results of operations for the twelve months ended
December 31, 1995 (unaudited), along with the years ended December 31, 1996 and
December 31, 1997.
Year Ended December 31, 1997 versus Year Ended December 31, 1996
Total revenues for 1997 increased $36.5 million (13.3%) to $310.8 million
compared to $274.2 million in 1996 due primarily to a $22.7 million (10.9%)
increase in rentals and fees revenues, plus an $11.7 million (19.0%) increase in
sales. Of this increase in rentals and fees revenues, $19.2 million (84.4%) was
attributable to the Aaron's Rental Purchase Division. Rentals and fees revenues
from the Company's rent-to-rent operations increased $3.5 million (3.3%) during
the same period.
Revenues from retail sales increased $5.8 million (11.1%) to $58.6 million
in 1997, from $52.8 million for the same period last year. This increase was
primarily due to increased sales of both new and rental return furniture in the
rent-to-rent division. Non-retail sales, which primarily represent merchandise
sold to Aaron's Rental Purchase franchisees, increased $5.9 million (66.7%) to
$14.6 million compared to $8.8 million for the same period last year. The
increased sales are due to the growth of the franchise operations.
Other revenues for 1997 increased $2.1 million (48.6%) to $6.3 million
compared to $4.3 million in 1996. This increase was attributable to franchise
fee and royalty income increasing $2.1 million (70.8%) to $5.0 million compared
to $2.9 million last year, reflecting the addition of 40 new franchise stores in
1997 and improved operating revenues at mature franchise stores.
Cost of sales from retail sales increased $4.4 million (11.7%) to $42.3
million compared to $37.8 million, and as a percentage of sales, increased
slightly to 72.1% from 71.7% primarily due to product mix. Cost of sales from
non-retail sales increased $5.3 million (64.1%) to $13.7 million from $8.3
million, and as a percentage of sales, decreased to 93.4% from 94.9%. The
decrease in 1997 in cost of sales as a percentage of sales is due to slightly
higher margins on sales through the Company's distribution centers.
Operating expenses increased $14.7 million (10.9%) to $149.7 million from
$135.0 million. As a percentage of total revenues, operating expenses were 48.2%
in 1997 and 49.2% in 1996. Operating expenses declined as a percentage of total
revenues between years due to the spreading of expenses over higher revenues.
Depreciation of rental merchandise increased $6.7 million (10.4%) to $71.2
million from $64.4 million, and as a percentage of total rentals and fees,
decreased to 30.8% from 30.9%.
Interest expense increased $272,000 (7.9%) to $3.7 million compared to $3.4
million. As a percentage of total revenues, interest expense was 1.2% in 1997
compared to 1.3% in 1996. The slight decrease in interest expense as a
percentage of revenues was due to the effect of lower debt levels as a
percentage of revenues throughout the year being offset by slightly higher
interest rates.
Income tax expense increased $2.1 million (21.0%) to $11.8 million compared
to $9.8 million. The Company's effective tax rate was 39.2% in 1997 compared to
38.9% in 1996, primarily due to higher state income taxes.
As a result, net earnings increased $3.0 million (19.5%) to $18.4 million
for 1997 compared to $15.4 million for the same period in 1996. As a percentage
of total revenues, net earnings were 5.9% in 1997 and 5.6% in 1996.
2
<PAGE> 3
Year Ended December 31, 1996 versus Twelve Months Ended December 31, 1995
(unaudited)
Total revenues for 1996 increased $36.5 million (15.3%) to $274.2 million
compared to $237.8 million in 1995 due primarily to a $26.2 million (14.3%)
increase in rentals and fees revenues, plus an $8.5 million (16.1%) increase in
sales. Of this increase in rentals and fees revenues, $16.6 million (19.6%) was
attributable to the Aaron's Rental Purchase Division. Rentals and fees revenues
from the Company's rent-to-rent operations increased $9.5 million (9.8%) during
the same period.
Revenues from retail sales increased $5.6 million (11.8%) to $52.8 million
in 1996, from $47.2 million for the same period last year. This increase was due
to increased sales of both new and rental return furniture in the rent-to-rent
division. Non-retail sales, which represent wholesale sales to primarily Aaron's
Rental Purchase franchisees, increased $3.0 million (51.0%) to $8.8 million
compared to $5.8 million for the same period last year. The increased sales are
due to the growth of the franchise operations.
Other revenues increased $1.5 million (105.4%) to $2.9 million compared to
$1.4 million last year. This increase was due to adding 25 new franchise stores
in 1996 as well as older franchise stores gaining in revenues.
Cost of sales from retail sales increased $4.8 million (14.5%) to $37.8
million compared to $33.1 million, and as a percentage of sales, increased
slightly to 71.7% from 70.1% primarily due to product mix. Cost of sales from
non-retail sales increased $3.1 million (59.5%) to $8.3 million from $5.2
million, and as a percentage of sales, increased to 94.9% from 89.8%. The
increase in cost of sales as a percentage of sales is due to a larger percentage
of franchise sales in 1996 which are at lower margins than other miscellaneous
wholesale sales.
Operating expenses increased $15.4 million (12.9%) to $135.0 million from
$119.6 million. As a percentage of total revenues, operating expenses were 49.2%
in 1996 and 50.3% in 1995. Operating expenses declined as a percentage of total
revenues between years due to the spreading of expenses over higher revenues.
Depreciation of rental merchandise increased $9.0 million (16.3%) to $64.4
million and, as a percentage of total rentals and fees, increased to 30.9% from
30.4%. This increase is primarily due to a change in the rental merchandise mix
during the year.
Interest expense increased $277,000 (8.7%) to $3.4 million compared to $3.2
million. As a percentage of total revenues, interest is unchanged at 1.3% due to
stability in interest rates during 1996.
Income tax expense increased $1.7 million (20.6%) to $9.8 million compared
to $8.1 million. The Company's effective tax rate was 38.9% in 1996 versus 38.0%
for the same period in 1995.
As a result, net earnings increased $2.2 million (16.5%) to $15.4 million
for 1996 compared to $13.2 million for the same period in 1995. As a percentage
of total revenues, net earnings were 5.6% in both 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations for the years ended December 31, 1997 and 1996
was $105.3 million and $89.5 million, respectively. Such cash flows include
profits on the sale of rental return merchandise. The Company's primary capital
requirements consist of acquiring rental merchandise for both rent-to-rent and
Company-operated Aaron's Rental Purchase stores. As the Company continues to
grow, the need for additional rental merchandise will continue to be the
Company's major capital requirement. These capital requirements historically
have been financed through bank credit, cash flow from operations, trade credit
and proceeds from the sale of rental return merchandise.
The Company has financed its growth through a revolving credit agreement
with several banks, trade credit and internally generated funds. The revolving
credit agreement provides for unsecured borrowings up to $90.0 million which
includes a $6.0 million credit line to fund daily working capital requirements.
At December 31, 1997, an aggregate of $75.9 million was outstanding under this
facility, bearing interest at an average rate of 6.57%. The Company uses
interest rate swap agreements as part of its overall long-term
3
<PAGE> 4
financing program. At December 31, 1997, the Company had swap agreements with
notional principal amounts of $40 million which effectively fixed the interest
rates on an equal amount under the Company's revolving credit agreement at
6.93%.
The Company believes that the expected cash flows from operations, proceeds
from the sale of rental return merchandise, bank borrowings and vendor credit,
together with the proceeds of the proposed offering described in Note 13 to the
Consolidated Financial Statements, will be sufficient to fund the Company's
capital and liquidity needs for at least the next 24 months.
In February 1997, the Company's Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's Common Stock and Class A
Common Stock. During 1997, 795,000 shares were purchased at an aggregate cost of
$8.9 million.
The Company has paid dividends for eleven consecutive years. A $.02 per
share dividend on Common Stock and on Class A Common Stock was paid in January
1997 and July 1997, for a total fiscal year cash outlay of $761,000. The Company
currently expects to continue its policy of paying dividends.
YEAR 2000
The Year 2000 issue arises from the widespread use of computer programs
that rely on two-digit date codes to perform computations or decision-making
functions. The Company's significant computer programs, including financial,
accounting, store operating and point of sale software, have recently been or
are in the process of being updated. The upgrading and rewriting of the
Company's software is being done to gain further strategic advantages over its
competitors and is not the result of any anticipated Year 2000 issues. However,
as part of the Company's continuing process to update systems, management has
required that vendor purchased and internally developed software be Year 2000
compliant. Therefore, based on recent and continuing strategic enhancement of
the Company's software, management does not expect any material impact to the
Company's business, operations or financial condition as a result of Year 2000
issues.
4
<PAGE> 5
AARON RENTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Cash........................................................ $ 96 $ 84
Accounts Receivable......................................... 11,794 10,491
Rental Merchandise.......................................... 246,498 210,516
Less: Accumulated Depreciation.............................. (69,530) (60,532)
-------- --------
176,968 149,984
Property, Plant & Equipment, Net............................ 39,757 33,267
Prepaid Expenses & Other Assets............................. 10,767 4,277
-------- --------
Total Assets...................................... $239,382 $198,103
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts Payable & Accrued Expenses......................... $ 31,071 $ 24,999
Dividends Payable........................................... 379 382
Deferred Income Taxes Payable............................... 6,687 2,882
Customer Deposits & Advance Payments........................ 8,304 7,140
Bank Debt................................................... 75,904 55,125
Other Debt.................................................. 582 240
-------- --------
Total Liabilities................................. 122,927 90,768
Commitments & Contingencies
Shareholders' Equity
Common Stock, Par Value $.50 Per Share; Authorized:
25,000,000 Shares; Shares Issued: 16,170,987........... 8,085 8,085
Common Stock, Class A, Par Value $.50 Per Share;
Authorized: 25,000,000 Shares; Shares Issued:
5,361,761.............................................. 2,681 2,681
Additional Paid-In Capital................................ 15,484 15,445
Retained Earnings......................................... 113,864 96,226
-------- --------
140,114 122,437
Less: Treasury Shares at Cost, Common Stock, 1,058,041
Shares at December 31, 1997 and 415,941 Shares at December
31, 1996.................................................. (9,523) (2,315)
Class A Common Stock, 1,525,255 Shares at December 31,
1997 and 1,418,855 Shares at December 31, 1996......... (14,136) (12,787)
-------- --------
Total Shareholders' Equity........................ 116,455 107,335
-------- --------
Total Liabilities & Shareholders' Equity.......... $239,382 $198,103
======== ========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
5
<PAGE> 6
AARON RENTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C>
REVENUES
Rentals and Fees.......................................... $231,207 $208,463 $137,098
Retail Sales.............................................. 58,602 52,757 35,537
Non-Retail Sales.......................................... 14,621 8,770 3,681
Other..................................................... 6,321 4,255 1,908
-------- -------- --------
310,751 274,245 178,224
COSTS & EXPENSES
Retail Cost of Sales...................................... 42,264 37,848 24,983
Non-Retail Cost of Sales.................................. 13,650 8,320 3,367
Operating Expenses........................................ 149,728 135,012 90,027
Depreciation of Rental Merchandise........................ 71,151 64,437 41,612
Interest.................................................. 3,721 3,449 2,323
-------- -------- --------
280,514 249,066 162,312
-------- -------- --------
Earnings Before Income Taxes.............................. 30,237 25,179 15,912
Income Taxes.............................................. 11,841 9,786 6,032
-------- -------- --------
Net Earnings.............................................. $ 18,396 $ 15,393 $ 9,880
======== ======== ========
Earnings Per Share........................................ $ .96 $ .81 $ .51
Earnings Per Share Assuming Dilution...................... .94 .77 .49
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
6
<PAGE> 7
AARON RENTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TREASURY STOCK COMMON STOCK ADDITIONAL
----------------- ---------------- PAID-IN RETAINED
SHARES AMOUNT COMMON CLASS A CAPITAL EARNINGS
------ -------- ------ ------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995................. (2,179) $(13,578) $3,318 $2,681 $15,314 $ 77,216
Reacquired Shares..................... (194) (3,134)
Dividends............................. (732)
Reissued Shares....................... 13 72 56 1
Net Earnings.......................... 9,880
------ -------- ------ ------ ------- --------
BALANCE, DECEMBER 31, 1995.............. (2,360) (16,640) 3,318 2,681 15,370 86,365
Stock Dividend........................ 4,767 (4,767)
Reacquired Shares..................... (164) (2,889)
Dividends............................. (765)
Reissued Shares....................... 689 4,427 75
Net Earnings.......................... 15,393
------ -------- ------ ------ ------- --------
BALANCE, DECEMBER 31, 1996.............. (1,835) (15,102) 8,085 2,681 15,445 96,226
Reacquired Shares..................... (795) (8,918)
Dividends............................. (758)
Reissued Shares....................... 47 361 39
Net Earnings.......................... 18,396
------ -------- ------ ------ ------- --------
BALANCE, DECEMBER 31, 1997.............. (2,583) $(23,659) $8,085 $2,681 $15,484 $113,864
====== ======== ====== ====== ======= ========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
7
<PAGE> 8
AARON RENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE
YEAR ENDED YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Earnings............................................. $ 18,396 $ 15,393 $ 9,880
Depreciation & Amortization.............................. 77,487 70,693 45,798
Deferred Income Taxes.................................... 3,805 (899) (345)
Change in Accounts Payable & Accrued Expenses............ 5,103 5,695 242
Change in Accounts Receivable............................ (1,083) (2,339) 255
Other Changes, Net....................................... 1,587 982 (711)
--------- --------- --------
Cash Provided by Operating Activities.................... 105,295 89,525 55,119
INVESTING ACTIVITIES
Additions to Property, Plant & Equipment................. (15,165) (17,534) (5,476)
Book Value of Property Retired or Sold................... 6,531 1,823 1,979
Additions to Rental Merchandise.......................... (145,262) (137,023) (72,926)
Book Value of Rental Merchandise Sold.................... 58,436 48,352 30,892
Contracts & Other Assets Acquired........................ (21,665) (3,891) (533)
--------- --------- --------
Cash Used by Investing Activities........................ (117,125) (108,273) (46,064)
FINANCING ACTIVITIES
Proceeds from Revolving Credit Agreement................. 118,545 85,299 51,933
Repayments on Revolving Credit Agreement................. (97,766) (67,434) (56,845)
Increase (Decrease) in Other Debt........................ 342 21 (768)
Dividends Paid........................................... (761) (765) (367)
Acquisition of Treasury Stock............................ (8,918) (2,889) (3,134)
Issuance of Stock Under Stock Option Plan................ 400 4,502 129
--------- --------- --------
Cash Provided (Used) by Financing Activities............. 11,842 18,734 (9,052)
Increase (Decrease) in Cash.............................. 12 (14) 3
Cash at Beginning of Year................................ 84 98 95
--------- --------- --------
Cash at End of Year...................................... $ 96 $ 84 $ 98
========= ========= ========
Cash Paid During the Year:
Interest............................................... $ 3,713 $ 3,384 $ 2,642
Income Taxes........................................... 6,989 7,531 7,677
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
8
<PAGE> 9
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997 and 1996, and for the Years Ended December 31, 1997
and 1996, and the Nine Months Ended December 31, 1995.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Aaron Rents, Inc. and its wholly-owned subsidiary, Aaron
Investment Company (the "Company"). All significant intercompany accounts and
transactions have been eliminated. The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying notes. Actual results
could differ from those estimates.
LINE OF BUSINESS -- The Company is engaged in the business of renting and
selling residential and office furniture and other merchandise throughout the
U.S. The Company manufactures furniture principally for its rental and sales
operations.
RENTAL MERCHANDISE consists primarily of residential and office furniture,
consumer electronics and other merchandise and is recorded at cost. Prior to
January 1, 1996, depreciation was provided using the straight-line method over
the estimated useful life of the merchandise, principally from 1 to 5 years,
after allowing for a salvage value of 5% to 60%. Effective January 1, 1996, the
Company prospectively changed its depreciation method on merchandise in the
rental purchase division acquired after December 31, 1995, from generally 14
months straight-line with a 5% salvage value to a method that depreciates the
merchandise over the agreement period, generally 12 months, when on rent, and 36
months, when not on rent, to a 0% salvage value. This new method is similar to a
method referred to as the income forecasting method in the rental purchase
industry. The Company adopted the new method because management believes that it
provides a more systematic and rational allocation of the cost of rental
purchase merchandise over its useful life. The effect for the year ended
December 31, 1996 of the change in the depreciation method on merchandise
purchased after December 31, 1995 was to decrease net income by approximately
$850,000 ($.04 per share). In addition, based on an analysis of the average
composite life of the division's rental purchase merchandise on rent or on hand
at December 31, 1995, the Company extended the depreciable lives of that
merchandise from generally 14 months to 18 months, and made other refinements to
depreciation rates on rental and rental purchase merchandise. The effect of such
change in depreciable lives and other refinements was to increase net income for
the year ended December 31, 1996 by approximately $709,000 ($.04 per share). The
Company recognizes rental revenues over the rental period and recognizes all
costs of servicing and maintaining merchandise on rent as incurred.
PROPERTY, PLANT AND EQUIPMENT are recorded at cost. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives of the respective assets, which are from 8 to 27 years for buildings and
improvements and from 2 to 5 years for other depreciable property and equipment.
Gains and losses related to dispositions and retirements are included in income.
Maintenance and repairs are charged to income as incurred; renewals and
betterments are capitalized. The Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), in the first
quarter of 1996. The effect of the adoption was not material.
DEFERRED INCOME TAXES are provided for temporary differences between the
amounts of assets and liabilities for financial and tax reporting purposes. Such
temporary differences arise principally from the use of accelerated depreciation
methods on rental merchandise for tax purposes.
COST OF SALES includes the depreciated cost of rental return residential
and office merchandise sold and the cost of new residential and office
merchandise sold. It is not practicable to allocate operating expenses between
selling and rental operations.
9
<PAGE> 10
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING -- The Company expenses advertising costs as incurred. Such
costs aggregated $9,530,000 in 1997, $10,422,000 in 1996, and $6,258,000 for the
nine months ended December 31, 1995.
STOCK BASED COMPENSATION -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"(APB
25) and related Interpretations in accounting for its employee stock options and
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (FAS 123). The
Company grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant and,
accordingly, recognizes no compensation expense for the stock option grants.
EXCESS COSTS OVER NET ASSETS ACQUIRED -- Goodwill is amortized on a
straight-line basis over a period of twenty years. Long-lived assets, including
goodwill, are periodically reviewed for impairment based on an assessment of
future operations. The Company records impairment losses on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD -- In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (FAS 131), which is effective for 1998. FAS 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires that those companies report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt the new
requirements in its annual financial statements in 1998. Management has not
completed its analysis of the effect of FAS 131 on its reported segments.
2. CHANGE IN FISCAL YEAR END
During 1995, the Company changed its fiscal year end from March 31 to
December 31, which resulted in a nine month fiscal period ended December 31,
1995. The decision to change the fiscal year end was made for more convenience
in both internal and external reporting.
Results of operations (condensed) for the nine-month periods ended December
31, 1995 and December 31, 1994 are shown below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $178,224 $169,341
Cost of Sales............................................... 28,350 28,772
Operating And Other Expenses................................ 92,350 87,649
Depreciation of Rental Merchandise.......................... 41,612 39,912
-------- --------
Earnings Before Income Taxes................................ 15,912 13,008
Income Taxes................................................ 6,032 5,021
-------- --------
Net Earnings................................................ $ 9,880 $ 7,987
======== ========
Earnings Per Share.......................................... $ .51 $ .42
Earnings Per Share Assuming Dilution........................ .49 .40
</TABLE>
10
<PAGE> 11
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EARNINGS PER SHARE
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share", (FAS 128). FAS 128 replaced the
calculation of primary and fully diluted earnings per share with earnings per
share and earnings per share assuming dilution. Earnings per share is computed
by dividing net income by the weighted average number of common shares
outstanding during the year which were 19,165,000 shares in 1997, 19,099,000
shares in 1996, and 19,461,000 shares in the nine months ended December 31,
1995. The computation of earnings per share assuming dilution includes the
dilutive effect of stock options. Such stock options had the effect of
increasing the weighted average shares outstanding assuming dilution by 497,000
and 885,000 in 1997 and 1996, respectively, and 576,000 shares in the nine
months ended December 31, 1995.
4. PROPERTY, PLANT & EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 4,643 $ 3,662
Buildings & Improvements.................................... 17,698 15,787
Leasehold Improvements & Signs.............................. 19,243 16,068
Fixtures & Equipment........................................ 19,402 15,738
Construction in Progress.................................... 3,380 2,726
-------- --------
64,366 53,981
Less: Accumulated Depreciation & Amortization............... (24,609) (20,714)
-------- --------
$ 39,757 $ 33,267
======== ========
</TABLE>
5. DEBT
BANK DEBT -- The Company has a revolving credit agreement with four banks
providing for unsecured borrowings up to $90,000,000, which includes a
$6,000,000 credit line to fund daily working capital requirements. Amounts
borrowed bear interest at the lower of the lender's prime rate, LIBOR plus .50%,
or the rate at which certificates of deposit are offered in the secondary market
plus .625%. The pricing under the working capital line is based upon overnight
bank borrowing rates. At December 31, 1997 and 1996, an aggregate of $75,904,000
(bearing interest at 6.57%) and $55,125,000, respectively, was outstanding under
this agreement. The Company pays a .22% commitment fee on unused balances. The
weighted average interest rate on borrowings under the revolving credit
agreement (before giving effect to interest rate swaps) was 6.29% in 1997, 6.17%
in 1996 and 6.99% for the nine months ended December 31, 1995. The effect of
interest rate swaps on the weighted average interest rate was not material.
The Company has entered into interest rate swap agreements that effectively
fix the interest rate on $20,000,000 of borrowings under the revolving credit
agreement at an average rate of 7.0% until November 2003 and an additional
$20,000,000 at an average rate of 6.85% until June 2005. These swap agreements
involve the receipt of amounts when the floating rates exceed the fixed rates
and the payment of amounts when the fixed rates exceed the floating rates in
such agreements over the life of the agreements. The differential to be paid or
received is accrued as interest rates change and is recognized as an adjustment
to the floating rate interest expense related to the debt. The related amount
payable to or receivable from counterparties is included in accrued liabilities
or other assets. Unrealized losses under the swap agreements aggregated $926,000
at December 31, 1997. The fair value of the Company's bank debt approximates its
carrying value.
11
<PAGE> 12
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The revolving credit agreement may be terminated on ninety days' notice by
the Company or six months' notice by the lenders. The debt is payable in 60
monthly installments following the termination date if terminated by the
lenders.
The agreement requires that the Company not permit its consolidated net
worth as of the last day of any fiscal quarter to be less than the sum of (a)
$105,000,000 plus (b) 50% of the Company's consolidated net income (but not
loss) for the period beginning July 1, 1997 and ending on the last day of such
fiscal quarter. It also places other restrictions on additional borrowings and
requires the maintenance of certain financial ratios. At December 31, 1997, $6.7
million of retained earnings was available for dividend payments and stock
repurchases under the debt restrictions.
OTHER DEBT -- Other debt of $582,000 at December 31, 1997 and $240,000 at
December 31, 1996 primarily represents an insurance premium financing agreement
bearing interest at 6.22%. Other debt matures in 1998.
6. INCOME TAXES
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current Income Tax Expense:
Federal..................................... $ 7,375 $ 9,503 $5,577
State....................................... 661 1,182 800
------- ------- ------
8,036 10,685 6,377
Deferred Income
Tax Expense (Benefit):
Federal..................................... 3,287 (889) (302)
State....................................... 518 (10) (43)
------- ------- ------
3,805 (899) (345)
------- ------- ------
$11,841 $ 9,786 $6,032
======= ======= ======
</TABLE>
Significant components of the Company's deferred income tax liabilities and
assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Rental Merchandise and Property, Plant & Equipment...... $ 9,265 $5,486
Other, Net.............................................. 1,244 1,141
------- ------
Total Deferred Tax Liabilities.................. 10,509 6,627
Deferred Tax Assets:
Accrued Liabilities..................................... 1,015 892
Advance Payments........................................ 2,276 2,150
Other, Net.............................................. 531 703
------- ------
Total Deferred Tax Assets....................... 3,822 3,745
------- ------
Net Deferred Tax Liabilities.................... $ 6,687 $2,882
======= ======
</TABLE>
12
<PAGE> 13
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective tax rate differs from the federal income tax
statutory rate as follows:
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Statutory Rate.............................. 35.0% 35.0% 35.0%
Increases in Taxes Resulting From State
Income Taxes, Net of Federal Income Tax
Benefit................................... 2.5 3.0 3.2
Other, Net.................................. 1.7 .9 (.3)
---- ---- ----
Effective Tax Rate.......................... 39.2% 38.9% 37.9%
==== ==== ====
</TABLE>
7. COMMITMENTS
The Company leases warehouse and retail store space for substantially all
of its operations under operating leases expiring at various times through 2007.
Most of the leases contain renewal options for additional periods ranging from 1
to 15 years or provide for options to purchase the related property at
predetermined purchase prices which do not represent bargain purchase options.
The Company also leases transportation equipment under operating leases expiring
during the next 3 years. Management expects that most leases will be renewed or
replaced by other leases in the normal course of business.
Future minimum rental payments, including guaranteed residual values,
required under operating leases that have initial or remaining non-cancelable
terms in excess of one year as of December 31, 1997, are as follows: $20,838,000
in 1998; $16,819,000 in 1999; $12,444,000 in 2000; $19,319,000 in 2001;
$4,164,000 in 2002; and $4,457,000 thereafter.
Rental expense was $22,146,000 in 1997, $17,886,000 in 1996 and $11,513,000
for the nine months ended December 31, 1995.
The Company leases five buildings from certain officers of the Company
under leases expiring through 1998 for annual rentals aggregating $383,000.
The Company maintains a 401(k) savings plan for all full-time employees
with at least one year of service with the Company and who meet certain
eligibility requirements. The plan allows employees to contribute up to 10% of
their annual compensation with 50% matching by the Company on the first 4% of
compensation. The Company's expense related to the plan was $357,000 in 1997,
$308,000 in 1996 and $162,000 for the nine months ended December 31, 1995.
8. SHAREHOLDERS' EQUITY
During 1996, the Company declared a 100% stock dividend on its Common Stock
and Class A Common Stock. Each stockholder received one share of Common Stock
for each share of Common Stock and Class A Common Stock held. All share and per
share amounts have been restated to reflect the 100% stock dividend. Common
stock is non-voting.
At December 31, 1997, the Company held a total of 2,583,296 common shares
in its treasury, and is authorized by the Board of Directors to acquire up to an
additional 208,090 shares.
The Company has 1,000,000 shares of preferred stock authorized. The shares
are issuable in series with terms for each series fixed by the Board and such
issuance is subject to approval by the Board of Directors. No preferred shares
have been issued.
13
<PAGE> 14
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTIONS
The Company has stock option plans under which options to purchase shares
of the Company's Common Stock are granted to certain key employees. Under the
plans, options granted become exercisable after a period of two or three years
and unexercised options lapse five or ten years after the date of the grant.
Options are subject to forfeiture upon termination of service. Under the plans,
2,000,500 of the Company shares are reserved for issuance at December 31, 1997.
The weighted-average fair value of options granted was $8.58 in 1997 and $4.99
in 1996.
Pro forma information regarding net earnings and earnings per share is
required by FAS 123, and has been determined as if the Company has accounted for
its employee stock options granted in 1997 and 1996 under the fair value method
of that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997 and 1996, respectively: risk-free interest
rates of 5.88% and 6.72%; a dividend yield of .25% and .4%; volatility factor of
the expected market price of the Company's common stock of .39 and .335; and a
weighted-average expected life of the option of 8 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Pro forma net earnings............................... $17,508 $14,825
Pro forma earnings per share......................... .91 .78
Pro forma earnings per share assuming dilution....... .89 .74
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until future
years.
14
<PAGE> 15
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below summarizes option activity for the periods indicated in the
Company's stock option plans.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
-------- ---------
(IN THOUSANDS, EXCEPT
PRICE PER SHARE)
<S> <C> <C>
Outstanding at April 1, 1995................................ 1,294 $ 4.54
Exercised................................................. (24) 3.00
Forfeited................................................. (22) 6.68
----- ------
Outstanding at December 31, 1995............................ 1,248 4.54
Granted................................................... 780 9.88
Exercised................................................. (701) 3.00
Forfeited................................................. (8) 9.68
----- ------
Outstanding at December 31, 1996............................ 1,319 8.48
Granted................................................... 322 15.95
Exercised................................................. (47) 5.28
Forfeited................................................. (9) 10.83
----- ------
Outstanding at December 31, 1997............................ 1,585 $10.07
===== ======
Exercisable at December 31, 1997............................ 501 $ 6.62
===== ======
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$4.88 to $16.50. The weighted-average remaining contractual life of those
options is 6.58 years.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Revenues.................................................. $76,480 $77,465 $76,238 $80,568
Gross Profit.............................................. 43,574 44,236 43,996 45,559
Earnings Before Taxes..................................... 7,080 7,608 7,883 7,666
Net Earnings.............................................. 4,312 4,633 4,805 4,646
Earnings Per Share........................................ $ .22 $ .24 $ .25 $ .25
Earnings Per Share Assuming Dilution...................... .22 .24 .25 .24
YEAR ENDED DECEMBER 31, 1996
Revenues.................................................. $64,693 $67,610 $71,224 $70,718
Gross Profit.............................................. 38,873 39,980 41,273 39,259
Earnings Before Taxes..................................... 6,791 6,375 6,198 5,815
Net Earnings.............................................. 4,159 3,914 3,787 3,533
Earnings Per Share........................................ $ .22 $ .21 $ .20 $ .18
Earnings Per Share Assuming Dilution...................... .21 .20 .19 .18
</TABLE>
11. FRANCHISING OF AARON'S RENTAL PURCHASE STORES
The Company franchises Aaron's Rental Purchase stores. As of December 31,
1997 and December 31, 1996, 186 and 155 franchises had been awarded,
respectively. Franchisees pay a non-refundable initial franchise fee of $35,000
and an ongoing royalty of 5% of cash receipts. The Company recognizes this
income
15
<PAGE> 16
AARON RENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as earned and includes it in Other Revenues in the Consolidated Statements of
Earnings. The Company has guaranteed certain lease and debt obligations
(primarily extending through 1999) of some of the franchisees amounting to
$127,000 and $8,131,000, respectively, at December 31, 1997. The Company
receives a guarantee and servicing fee based on such franchisees outstanding
debt obligations which it recognizes as income over the guaranty and servicing
period. The Company has recourse rights to the leased property and to the assets
securing the debt obligations. As a result, the Company does not expect to incur
any significant losses under these guarantees.
12. ACQUISITIONS
In December 1997, the Company acquired substantially all of the assets of
RentMart Rent-To-Own, Inc., a wholly-owned subsidiary of the Associates Capital
Corporation, for $18,012,000 in cash. The excess cost over the fair market value
of tangible assets acquired was approximately $4,300,000.
In December 1997, the Company acquired substantially all of the assets of
Blackhawk Convention Services, Inc. for $3,500,000 in cash. The excess cost over
the fair market value of tangible assets acquired was approximately $2,700,000.
Both acquisitions were accounted for under the purchase method and,
accordingly, the results of operations of the acquired businesses are included
in the Company's results of operations from their dates of acquisition. The
effect of these acquisitions on the 1997 consolidated financial statements was
not significant.
13. PROPOSED STOCK OFFERING
On or about March 31, 1998, the Company intends to file a registration
statement for the sale by the Company of 2,100,000 shares of Common Stock. The
proceeds of the offering, if consummated, would be used to reduce indebtedness
and for general business purposes, including opening additional rent-to-rent and
rental purchase stores and expansion of manufacturing and distribution capacity.
16
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Aaron Rents, Inc.:
We have audited the accompanying consolidated balance sheets of Aaron
Rents, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
years ended December 31, 1997 and 1996, and the nine months ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Aaron Rents,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1997 and 1996, and the nine months ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, in 1996,
the Company changed its method of accounting for depreciation of rental purchase
merchandise.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 23, 1998
17
<PAGE> 18
COMMON STOCK MARKET PRICES & DIVIDENDS
On March 20, 1998, the Company's Common Stock and Class A Common Stock were
listed on the New York Stock Exchange under the symbols "RNT" and "RNT.A,"
respectively. Previously, the Company's Common Stock and Class A Common Stock
were traded on The NASDAQ Stock Market under the symbols "ARON" and "ARONA,"
respectively.
The approximate number of shareholders of the Company's Common Stock and
Class A Common Stock at March 23, 1998, was 2,000. The following table shows,
for the periods indicated, the range of high and low closing prices per share
for the Common Stock and Class A Common Stock as reported by NASDAQ, and the
cash dividends declared per share.
The closing prices for the Common Stock and Class A Common Stock on March
23, 1998, was $23.438 and $22.625, respectively. The Company currently expects
to continue its policy of paying dividends.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
PER
COMMON STOCK HIGH LOW SHARE
- ------------ ------- ------- ---------
<S> <C> <C> <C>
December 31, 1997
First Quarter............................................. $12.875 $10.063 $
Second Quarter............................................ 13.375 10.375 .02
Third Quarter............................................. 18.250 12.750
Fourth Quarter............................................ 20.250 15.500 .02
December 31, 1996
First Quarter............................................. $10.375 $ 9.000 $
Second Quarter............................................ 15.000 9.688 .02
Third Quarter............................................. 14.250 11.000
Fourth Quarter............................................ 14.625 10.750 .02
</TABLE>
<TABLE>
<CAPTION>
CASH
DIVIDENDS
CLASS A PER
COMMON STOCK HIGH LOW SHARE
- ------------ ------- ------- ---------
<S> <C> <C> <C>
December 31, 1997
First Quarter............................................. $14.000 $ 9.750 $
Second Quarter............................................ 13.750 10.000 .02
Third Quarter............................................. 18.000 11.938
Fourth Quarter............................................ 18.500 14.500 .02
December 31, 1996
First Quarter............................................. $11.250 $ 8.875 $
Second Quarter............................................ 16.000 10.750 .02
Third Quarter............................................. 16.250 12.750
Fourth Quarter............................................ 15.750 12.625 .02
</TABLE>
18
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF AARON RENTS, INC.
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
- ---- ----------------------
<S> <C>
Aaron Investment Company Delaware
</TABLE>
<PAGE> 1
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 23, 1998, included in the
1997 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 23, 1998,
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, 1997.
- - Registration Statement No. 33-62536 on Form S-8 pertaining to the 1990 Stock
Option Plan
- - Registration Statement No. 33-9026 on Form S-8 pertaining to the Aaron Rents,
Inc. Retirement Plan and Trust
- - 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 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AARON RENTS FOR THE YEAR ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 96
<SECURITIES> 0
<RECEIVABLES> 11,794
<ALLOWANCES> 0<F1>
<INVENTORY> 176,968<F2>
<CURRENT-ASSETS> 0<F3>
<PP&E> 39,757<F4>
<DEPRECIATION> 0<F4>
<TOTAL-ASSETS> 239,382
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 0
0
0
<COMMON> 10,766
<OTHER-SE> 105,689
<TOTAL-LIABILITY-AND-EQUITY> 239,382
<SALES> 73,223
<TOTAL-REVENUES> 310,751
<CGS> 55,914
<TOTAL-COSTS> 276,793
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,721
<INCOME-PRETAX> 30,237
<INCOME-TAX> 11,841
<INCOME-CONTINUING> 18,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,396
<EPS-PRIMARY> .96
<EPS-DILUTED> .94
<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 69,530 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>
