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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
FOR THE YEAR ENDED COMMISSION FILE NO.
December 31, 1998 0-12385
AARON RENTS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-0687630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
309 E. PACES FERRY ROAD, N.E.
ATLANTA, GEORGIA 30305-2377
(Address of principal executive offices) (Zip Code)
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. X
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 22, 1999: $286,584,600. 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.
SHARES OUTSTANDING AS OF
TITLE OF EACH CLASS MARCH 22, 1999
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Common Stock, $.50 Par Value 16,201,696
Class A Common Stock, $.50 Par Value 3,836,506
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Shareholders for the year ended
December 31, 1998 are incorporated by reference into Part II of this Form 10-K.
Portions of the registrant's definitive proxy statement for the 1999 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 427 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 and the 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 December 31, 1998, Aaron Rents had 291 Company-operated stores and 136
franchised stores in 32 states nationwide. There were 109 rent-to-rent stores
in its Aaron Rents' Rent-to-Rent division, 182 Company-operated rental purchase
stores in its Aaron's Rental Purchase division and 136 Aaron's Rental Purchase
franchised 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 25, 40 and 40 franchised rental purchase
stores in 1996, 1997 and 1998, 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 operates six
furniture plants, four bedding facilities and one lamp manufacturing facility,
which supply approximately one half of the furniture and related accessories
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. Total revenues have increased from $173.7 million for calendar
year 1993 to $379.7 million for calendar year 1998, and earnings before income
taxes increased from $13.6 million in 1993 to $35.2 million in 1998,
representing a 16.9% and 20.9% 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 $41.1 million for 1993 to $200.0 million for 1998,
representing a 37.2% compound annual growth rate. During the same period, core
rent-to-rent revenues increased from $126.1 million to $173.8 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 in
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
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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
According to the Association of Progressive Rental Organizations ("APRO"),
the national trade association representing the rent-to-own industry, there are
7,500 - 8,000 rent-to-own stores in the United States, approximately 50% of
which are owned or franchised by the eight 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 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.
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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'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.
- 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-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.
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.
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- 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.
OPERATING DIVISIONS
Rental Purchase - Aaron's Rental Purchase
The Company established its Aaron's Rental Purchase division in 1987. At
December 31, 1998, there were 182 Company-operated Aaron's Rental Purchase
stores in 17 states and 136 franchised Aaron's Rental Purchase stores in 28
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 9,000 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 77% 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 44%
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.
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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 December 31, 1998, 227
franchises had been sold to 60 franchisees, and 136 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, 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
customer accounts. 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
core rent-to-rent business accounted for approximately 46% of the Company's
total revenues for the year ended December 31, 1998. 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 December 31, 1998, the Company
operated 109 rent-to-rent stores in 22 states.
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The Company's typical rent-to-rent store layout consists of a combination
showroom and warehouse comprising about 19,000 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.
Items held for rent, whether new or rental return, are available for
purchase and rental purchase at all rent-to-rent stores. 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 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.
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 643,000 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 six furniture manufacturing plants,
four bedding manufacturing facilities and one lamp manufacturing facility which
supply approximately one half of the furniture and accessories rented or sold
by the Company. The Company's manufacturing plants have the capacity to meet
the Company's needs for the foreseeable future, with a new 200,000 square foot
facility added during 1998 in Cairo, Georgia. The Company also does limited
manufacturing of residential furniture for several unaffiliated furniture
retailers, and manufactures lamps for selected national 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 bedroom sets, headboards, dressers,
mirrors, chests and night stands). MacTavish has designed special features for
the furniture it manufactures which make its furniture less expensive to
produce, more durable and better equipped for frequent transportation than
furniture purchased from third parties. These features include 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
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transport. The Company has patent applications pending for certain of these
features. MacTavish 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 by MacTavish in furniture manufacturing
are fabric, foam, fiber, wire-innerspring assemblies, plywoods 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.
In June, 1998, the Company acquired Lamps Forever, a manufacturer of designer
lamps, tables and matching accessories, to capitalize on the rapidly growing
coordinated room trend in furniture retailing.
STORE OPERATIONS
Management
The Company's rent-to-rent stores are organized geographically into four
residential and two office 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 has
five regional managers performing similar responsibilities. President's manage
the residential rent-to-rent, office rent-to-rent and rental purchase
divisions.
Stores are directly supervised by 20 rent-to-rent regional managers and 35
rental purchase district/city 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.
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
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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 2.0%, 1.9% and 2.6% for the
years ended December 31, 1998, 1997 and 1996. The Company does not extend
credit to rental purchase customers. For the same periods, net merchandise
shrinkage for the Company as a percentage of combined rental revenues was 2.4%,
2.3% and 2.5%, 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 rent-to-rent division's sales and management
training programs, conducted at the Company's Atlanta headquarters, cover all
areas of the Company's operations, with a heavy emphasis on customer service.
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 94% of rent-to-rent
rental revenues for the year ended December 31, 1998. In the Aaron's Rental
Purchase division, electronics, furniture, appliances, computers and other
accounted for approximately 49%, 31%, 14%, 5%, and 1%, respectively, of rental
purchase rental revenues for the year ended December 31, 1998. 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 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 five 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 one half 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.
Rent-to-rent stores receive merchandise directly from vendors who ship to
the stores' attached warehouses. Rental purchase operations utilize
distribution centers to control inventory. All rental purchase stores order
directly from the Company's five rental purchase distribution centers located
in Auburndale, Florida; Dallas and Houston, Texas; Duluth, Georgia; and
Columbus, Ohio. 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 fourteen
tractor-trailers, its local delivery trucks, and various contract carriers to
make weekly deliveries to individual stores.
A-10
<PAGE> 11
MARKETING AND ADVERTISING
In its rental purchase operations, the Company relies heavily on store
traffic, direct mail and national and local 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 households 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 to the local apartment communities, calling on their leasing agents,
resident managers, and property managers. This group controls the individual
referral business as well as the corporate relocation professionals. The
Company also markets to interim housing providers (that offer temporary
housing) to corporations that relocate personnel around the country. The
Company has a regional and national marketing staff that focuses on this
growing segment of the rent-to-rent industry. The Company also relies on the
use of brochures, newspapers, radio, television, direct mail, trade
publications, yellow pages, and the internet
(http://www.aaronrentsfurniture.com) to reach its residential and office rental
and sales customers and believes such advertising benefits its residential and
office stores while increasing the Company's 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 two larger companies with
substantially greater financial resources than the Company. The Company
believes that the largest rent-to-own companies include Rent-A-Center, 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 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 45 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.
A-11
<PAGE> 12
EMPLOYEES
At December 31, 1998, the Company had approximately 3,400 employees. None
of the Company's employees are covered by a collective bargaining agreement,
and the Company believes that its relations with its employees are good.
CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS
In addition to the other information in this Annual Report on Form 10-K,
the following risk factors should be considered carefully in evaluating an
investment in the Common Stock offered hereby. This Annual Report on Form 10-K
contains certain forward-looking statements (as such term is defined in the
Securities Act of 1933, as amended, which represent expectations or beliefs,
including but not limited to, statements concerning industry performance, and
the Company's operations, performance and financial condition, including, in
particular, the likelihood of the Company's success in developing and expanding
its business. These statements are based upon a number of assumptions and
estimates which are inherently subject to significant uncertainties, many of
which are beyond the control of the Company. Actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to, those set forth below.
RISKS ASSOCIATED WITH EXPANSION STRATEGY
An important part of the Company's growth strategy is the opening of new
rent-to-rent and rental purchase stores. The Company's ability to continue
opening new stores will depend, among other things, upon its ability to hire
management and personnel to staff the new stores, and to find suitable sites at
reasonable rental rates to locate new stores. From time to time the Company also
expects to pursue opportunistic acquisitions of rent-to-rent and rental purchase
operations. There can be no assurance that future acquisitions will be
consummated on acceptable terms or that any acquired companies will be
successfully integrated. While the Company believes that the market for its
stores is underserved and offers attractive expansion opportunities, it does not
know if consumer preferences will remain unchanged, or the extent to which its
competitors may seek to serve the market.
SIGNIFICANT COMPETITION
The Company's businesses are highly competitive. The Company competes in the
rent-to-rent market with national and local companies and, to a lesser extent,
with apartment owners who purchase furniture for rental to tenants. In the
rental purchase market, the Company's competitors include national, regional and
local operators of rent-to-own stores. Some of these competitors may have
significantly greater financial and operating resources, and in certain markets,
greater name recognition, than the Company.
RISKS ASSOCIATED WITH SIGNIFICANT GOVERNMENT REGULATION
The Company believes that 45 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 their 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 fully 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
A-12
<PAGE> 13
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.
CONTROL BY AND DEPENDENCE UPON PRINCIPAL SHAREHOLDER
R. Charles Loudermilk, Sr., the Company's Chief Executive Officer and
Chairman of the Board, owns or controls over 60% of the Company's voting Class A
Common Stock and approximately 17% of the non-voting Common Stock outstanding.
As a result, Mr. Loudermilk will continue to be able to elect all the directors
of, and otherwise effectively control, the Company. The Company believes that
it has benefited substantially from Mr. Loudermilk's leadership and that if it
were to lose his services at anytime in the near future such loss could have an
adverse effect on the Company's business and operations.
ITEM 2. PROPERTIES
The Company leases space for substantially all of its store and warehouse
operations under operating leases expiring at various times through September
30, 2013. 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, lamp manufacturing facility
and distribution centers:
<TABLE>
<CAPTION>
LOCATION PRIMARY USE SQUARE FT.
-------- ----------- ----------
<S> <C> <C>
Cairo, Georgia.............................. Furniture Manufacturing 192,000
Coolidge, Georgia........................... Furniture Manufacturing 77,000
Coolidge, Georgia........................... Furniture Manufacturing 43,000
Coolidge, Georgia........................... Furniture Manufacturing 41,000
Quincy, Florida............................. Furniture Manufacturing 80,000
Quincy, Florida............................. Furniture Manufacturing 91,000
Los Angeles, California..................... Lamp and Accessory Manufacturing 52,000
Cairo, Georgia.............................. Bedding Facility 8,000
Duluth, Georgia............................. Bedding Facility 30,000
Houston, Texas.............................. Bedding Facility 13,000
Orlando, Florida............................ Bedding Facility 16,000
Auburndale, Florida......................... Rental Purchase Distribution Center 40,000
Columbus, Ohio.............................. Rental Purchase Distribution Center 98,800
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
53,000 square feet in an 11-story, 81,000 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
A-13
<PAGE> 14
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 28 of the Company's Annual Report to Shareholders for the
year ended December 31, 1998 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 22, 1999, there were 319 holders of record of the Common
Stock and 159 holders of record of the Class A Common Stock.
(c) The information presented under "Note D -- Debt" on page 22 of the
Company's Annual Report to Shareholders for the year ended December 31, 1998 is
incorporated herein by reference. During the year ended December 31, 1998, 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 12 of the Company's Annual Report to Shareholders for the
year ended December 31, 1998 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 Operations" on pages 13 through
15 of the Company's Annual Report to Shareholders for the year ended December
31, 1998 is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 13 through
15 and presented under "Note D - Debt" on page 22 of the Company's Annual
Report to Shareholders for the year ended December 31, 1998 is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information presented under the captions "Consolidated Balance Sheets,"
"Consolidated Statements of Earnings," "Consolidated Statements of
Shareholders' Equity," "Consolidated Statements of Cash Flows," "Notes to
Consolidated Financial Statements," and "Report of Independent Auditors" on
pages 16 through 27 of the Company's Annual Report to Shareholders for the year
ended December 31, 1998 is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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, 1998, 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.
A-14
<PAGE> 15
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, 1998, 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, 1998, 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, 1998, with respect to certain
relationships and related transactions, is incorporated herein by reference in
response to this item.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(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, 1998.
<TABLE>
<CAPTION>
REFERENCE PAGE
ANNUAL
REPORT
TO SHAREHOLDERS
---------------
<S> <C>
Consolidated Balance Sheets-- December 31, 1998 and 1997................................ 16
Consolidated Statements of Earnings-- Years ended December 31, 1998, 1997 and 1996..... 17
Consolidated Statements of Shareholders' Equity-- Years ended December 31, 1998, 1997 and 18
1996....................................................................................
Consolidated Statements of Cash Flows-- Years ended December 31, 1998, 1997 and 1996.... 19
Notes to Consolidated Financial Statements.............................................. 20-27
Report of Independent Auditors.......................................................... 27
</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.
A-15
<PAGE> 16
3. EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3(a) Amended and Restated Articles of Incorporation of the Company,
filed as Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996 (the "March 31, 1996
10-Q"), which exhibit is by this reference incorporated herein.
3(b) Amended and Restated By-laws of the Company, filed as Exhibit
3(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, which exhibit is by this reference
incorporated herein.
4 See Exhibits 3 (a) through 3 (b).
10(a) Aaron Rents, Inc. 1996 Stock Option and Incentive Award Plan,
filed as Exhibit 4(a) to the Company's quarterly report on Form
10-Q for the quarter ended March 31, 1998 (the "March 31, 1998
10-Q"), which exhibit is incorporated by this reference.*
10(b) Aaron Rents, Inc. Employees Retirement Plan and Trust, filed as
Exhibit 4(a) to the Company's Registration Statement on Form
S-8, file number 33-62538, filed with the Commission on May 12,
1993, which exhibit is by this reference incorporated herein.*
10(c) Aaron Rents, Inc. 1990 Stock Option Plan, filed as Exhibit 4(a)
to the Company's Registration Statement on Form S-8, file
number 33-62536, filed with the Commission on May 12, 1993,
which exhibit is by this reference incorporated herein.*
10(d) Second Amended and Restated Revolving Credit and Term Loan
Agreement, dated January 6, 1995, filed as Exhibit 10(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994 (the "December 31, 1994 10-Q"), which exhibit
is by this reference incorporated herein.
10(e) Third Amendment to Second Amended and Restated Revolving Credit
and Term Loan Agreement, dated September 30, 1996, filed as
Exhibit 10 to the Company's quarterly report on Form 10-Q for
the Quarter ended September 30, 1996, which exhibit is by
reference incorporated herein.
10(f) Fifth Amendment to Second Amended and Restated Revolving Credit
and Term Loan Agreement, dated December 17, 1997, filed as
Exhibit 10(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 (the "1997 10-K"), which
exhibit is incorporated by this reference.
10(g) 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, filed as Exhibit
10(b) to the Company's 1997 10-K, which exhibit is incorporated
by this reference.
10(h) Loan Facility Agreement and Guaranty by and among Aaron Rents,
Inc., SunTrust Bank, Atlanta, as Servicer and each of the
Participants Party Hereto, Dated January 20, 1998, filed as
Exhibit 10(a) to the Company's March 31, 1998 10-Q, which
exhibit is incorporated by this reference.
10(i) Amendment No. 1 to Loan Facility Agreement and Guaranty dated
as of March 13, 1998, filed as Exhibit 10(b) to the Company's
March 31, 1998 10-Q, which exhibit is incorporated by this
reference.
13 Portions of the Aaron Rents, Inc. Annual Report to Shareholders
for the year ended December 31, 1998. With the exception of
information expressly incorporated herein by direct reference
thereto, the Annual Report to Shareholders for the year ended
December 31, 1998 is not deemed to be filed as part of this
Annual Report on Form 10-K.
21 Subsidiaries of the Registrant, filed as Exhibit 21 to the
Company's 1997 10-K, which exhibit is by this reference
incorporated herein.
23 Consent of Ernst & Young LLP
27 Financial Data Schedule (for SEC use only)
- ----------
* 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.
A-16
<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, 1999.
AARON RENTS, INC.
By: /s/ GILBERT L. DANIELSON
---------------------------------
Gilbert L. Danielson
Executive Vice President
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, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ R. CHARLES LOUDERMILK, SR. Chief Executive Officer (Principal Executive
- ----------------------------------------------------------------- Officer) and Chairman of the Board of
R. Charles Loudermilk, Sr. Directors)
/s/ ROBERT C. LOUDERMILK, JR. President, Chief Operating Officer and
- ----------------------------------------------------------------- Director
Robert C. Loudermilk, Jr.
/s/ GILBERT L. DANIELSON Executive Vice President, Chief Financial
- ----------------------------------------------------------------- Officer and Director, (Principal Financial Officer)
Gilbert L. Danielson
"CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS."
/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.)
</TABLE>
A-17
<PAGE> 1
Selected Financial Information
<TABLE>
<CAPTION>
Twelve Twelve
Year Ended Year Ended Year Ended Months Ended Months Ended
(Dollar Amounts in Thousands December 31, December 31, December 31, December 31, December 31,
Except Per Share) 1998 1997 1996 1995 1994
(unaudited) (unaudited)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Systemwide Revenues(1) $ 464,175 $ 364,306 $ 306,200 $ 256,500 $ 233,077
---------------------------------------------------------------------------
Revenues:
Rentals & Fees $ 289,272 $ 231,207 $ 208,463 $ 182,311 $ 167,093
Sales 81,561 73,223 61,527 52,999 53,978
Other 8,826 6,321 4,255 2,465 1,686
---------------------------------------------------------------------------
379,659 310,751 274,245 237,775 222,757
---------------------------------------------------------------------------
Costs & Expenses:
Cost of Sales 62,017 55,914 46,168 38,274 38,977
Operating Expenses 189,719 149,728 135,012 119,590 112,367
Depreciation of
Rental Merchandise 89,171 71,151 64,437 55,408 50,966
Interest 3,561 3,721 3,449 3,172 2,803
---------------------------------------------------------------------------
344,468 280,514 249,066 216,444 205,113
---------------------------------------------------------------------------
Earnings Before
Income Taxes 35,191 30,237 25,179 21,331 17,644
Income Taxes 13,707 11,841 9,786 8,113 6,938
---------------------------------------------------------------------------
Net Earnings $ 21,484 $ 18,396 $ 15,393 $ 13,218 $ 10,706
---------------------------------------------------------------------------
Earnings Per Share $ 1.06 $ .96 $ .81 $ .68 $ .58
Earnings Per Share
Assuming Dilution 1.04 .94 .77 .66 .56
---------------------------------------------------------------------------
Dividends Per Share:
Common $ .04 $ .04 $ .04 $ .05 $ .05
Class A .04 .04 .04 .02 .02
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Rental Merchandise, Net $ 194,163 $ 176,968 $ 149,984 $ 122,311 $ 119,781
Property, Plant &
Equipment, Net 50,113 39,757 33,267 23,492 23,532
Total Assets 272,174 239,382 198,103 158,645 155,914
Interest-Bearing Debt 51,727 76,486 55,365 37,479 46,894
Shareholders' Equity 168,871 116,455 107,335 91,094 81,418
- ----------------------------------------------------------------------------------------------------------------------
AT YEAR END
Stores Open:
Company-Operated 291 292 240 212 203
Franchised 136 101 61 36 24
Rental Agreements in Effect 227,400 219,800 179,600 158,900 152,100
Number of Employees 3,400 3,100 2,550 2,160 2,150
======================================================================================================================
</TABLE>
(1) Systemwide revenues include rental revenues of franchised Aaron's
Rental Purchase stores.
<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 and 1994
(unaudited), along with the years ended December 31, 1998, December
31, 1997 and December 31, 1996.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 versus Year Ended December 31, 1997
Total revenues for 1998 increased $68.9 million (22.2%) to $379.7
million compared to $310.8 million in 1997 due primarily to a $58.1
million (25.1%) increase in rentals and fees revenues, plus an $8.3
million (11.4%) increase in sales. Of this increase in rentals and
fees revenues, $46.5 million (80.0%) was attributable to the Aaron's
Rental Purchase division. Rentals and fees revenues from the Company's
rent-to-rent operations increased $11.5 million (10.5%) during the
same period.
Revenues from retail sales increased $4.0 million (6.8%) to
$62.6 million in 1998, from $58.6 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 and rental purchase divisions.
Non-retail sales, which primarily represent merchandise sold to
Aaron's Rental Purchase franchisees, increased $4.4 million (29.8%) to
$19.0 million compared to $14.6 million for the same period last year.
The increased sales are due to the growth of the franchise operations.
Other revenues for 1998 increased $2.5 million (39.6%) to
$8.8 million compared to $6.3 million in 1997. This increase was
attributable to franchise fee and royalty income increasing $2.3
million (46.0%) to $7.3 million compared to $5.0 million last year,
reflecting the net addition of 35 new franchised stores in 1998 and
improved operating revenues at mature franchised stores.
Cost of sales from retail sales increased $2.1 million (5.0%)
to $44.4 million compared to $42.3 million, and as a percentage of
sales, decreased slightly to 70.9% from 72.1% primarily due to product
mix. Cost of sales from non-retail sales increased $4.0 million
(29.2%) to $17.6 million from $13.7 million, and as a percentage of
sales, decreased to 92.9% from 93.4%. The decrease in 1998 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 $40.0 million (26.7%) to $189.7
million from $149.7 million. As a percentage of total revenues,
operating expenses were 50.0% in 1998 and 48.2% in 1997. Operating
expenses increased as a percentage of total revenues between years
primarily due to the Company's acquisitions of RentMart Rent-To-Own,
Inc. and Blackhawk Convention Services both in December 1997. The
RentMart stores were relatively immature and had lower revenues over
which to spread expenses and Blackhawk's convention furnishings
business had higher operating expenses as a percentage of revenues
than traditional rental purchase and rent-to-rent operations.
Depreciation of rental merchandise increased $18.0 million
(25.3%) to $89.2 million, from $71.2 million, and as a percentage of
total rentals and fees, was 30.8% for both years.
Interest expense decreased $160,000 (4.3%) to $3.6 million
compared to $3.7 million. As a percentage of total revenues, interest
expense was 0.9% in 1998 compared to 1.2% in 1997. The decrease in
interest expense as a percentage of revenues was due to the allocation
and capitalization of interest in the Company's manufacturing
operation.
The Company manages its exposure to changes in short-term
interest rates, particularly to reduce the impact on its floating-rate
term notes, by entering into interest rate swap agreements. The
counterparties to these contracts are high credit quality commercial
banks. Consequently, credit risk, which is inherent in all swaps, has
been minimized to a large extent. Interest expense is adjusted for the
differential to be paid or received as interest rates change. The
effect of such adjustments on interest expense has not been
significant. The level of floating-rate debt not fixed by swap
agreements was not significant during the year and the Company does
not expect a significant increase in these
<PAGE> 3
amounts in 1999. Accordingly, the Company does not believe it has
material exposure of potential, near-term losses in future earnings,
and/or cash flows from reasonably possible near-term changes in market
rates.
Income tax expense increased $1.9 million (15.8%) to $13.7
million compared to $11.8 million. The Company's effective tax rate
was 39.0% in 1998 compared to 39.2% in 1997, primarily due to lower
state income taxes.
As a result, net earnings increased $3.1 million (16.8%) to
$21.5 million for 1998 compared to $18.4 million for the same period in
1997. As a percentage of total revenues, net earnings were 5.7% in 1998
and 5.9% in 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 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations for the years ended December 31, 1998 and
1997 were $120.6 million and $105.3 million, respectively. Such cash
flows include profits on the sale of rental return merchandise. The
Company's primary capital requirements consist of acquiring rental
merchandise for both rent-to-rent and Company-operated Aaron's Rental
Purchase stores. As the Company continues to grow, the need for
additional rental merchandise will continue to be the Company's major
capital requirement. These capital requirements historically have been
financed through bank credit, cash flow from operations, trade credit,
proceeds from the sale of rental return merchandise and stock
offerings.
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, 1998,
an aggregate of $50.4 million was outstanding under this facility,
bearing interest at a weighted average variable rate of 6.12%. The
Company uses interest rate swap agreements as part of its overall
long-term financing program. At December 31, 1998, the Company had
swap agreements with notional principal amounts of $40.0 million which
effectively fixed the interest rates on an equal amount of the
Company's revolving credit agreement at 6.93%.
On April 28, 1998, the Company issued through a public
offering 2.1 million shares of Common Stock. The net proceeds to the
Company after deducting underwriting discounts and offering expenses
were $40.0 million. The proceeds were used to reduce bank debt.
<PAGE> 4
The Company believes that the expected cash flows from
operations, proceeds from the sale of rental return merchandise, bank
borrowings and vendor credit will be sufficient to fund the Company's
capital and liquidity needs for at least the next 24 months.
In November 1998, the Company's Board of Directors authorized
the repurchase of up to 1,000,000 shares of the Company's Common Stock
and/or Class A Common Stock. During 1998, 736,400 shares of the
Company's stock were purchased at an aggregate cost of $10.6 million
and the Company was authorized to purchase an additional 471,690
shares at December 31, 1998. Subsequent to year end, in February 1999
the Company's Board of Directors authorized the purchase of an
additional 2,000,000 shares.
The Company has paid dividends for twelve consecutive years.
A $.02 per share dividend on Common Stock and on Class A Common Stock
was paid in January 1998 and July 1998, for a total fiscal year cash
outlay of $801,000. The Company currently expects to continue its
policy of paying dividends.
YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions, generate invoices, or engage in similar normal business
activities. The Company is continuing its assessments of the impact of
the Year 2000 across its business and operations, including its
customer and vendor base. The Company has substantially completed its
identification of information technology systems ("IT systems") that
are not Year 2000 compliant and is in the process of implementing a
comprehensive plan to make its IT systems and noninformation
technology systems ("non-IT systems"), including embedded electronic
circuits in equipment and hardware, products, telecommunication,
building security and manufacturing equipment, Year 2000 compliant.
The Company's plan to resolve the Year 2000 issue involves the
following four phases: (1) assessment, (2) remediation, (3) testing,
and (4) implementation. The Company is simultaneously working on all
four phases and anticipates that it will substantially complete phase
(1) by the end of the first quarter 1999, (2) and (3) by the end of
the second quarter 1999, and (4) by the end of the third quarter 1999.
The Company is in the process of querying its significant
suppliers and subcontractors (external agents). To date, the Company
is not aware of any external agents with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or
capital resources. However, the Company has no means of ensuring that
external agents will be Year 2000 compliant. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of
non-compliance by external agents is not determinable.
The Company's significant IT systems, 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 IT systems is being completed to gain
further strategic advantages over competitors and is not the result of
any anticipated Year 2000 issues. In addition, as part of the
Company's continuing process to update IT and non-IT systems,
management has required that vendor-purchased and internally developed
systems be Year 2000 compliant. Therefore, management expects the cost
of the Year 2000 project to be less than $300,000. The majority of
these costs will be incurred in 1999 as the portion related to 1998
was not significant.
The Company has contingency plans for certain critical
applications and is working on such plans for others. These
contingency plans involve, among other actions, manual workarounds and
backup vendors.
Management of the Company believes it has an effective
program in place to resolve the Year 2000 issue in a timely manner. As
noted above, the Company has not yet completed all necessary phases of
the Year 2000 program. In the event that the Company does not complete
any additional phases, the Company may be unable to take customer
orders, manufacture and ship products, invoice customers or collect
payments. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the
Company. The Company could be subject to litigation for computer
systems product failure, for example, equipment shutdown or failure to
properly date business records. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
<PAGE> 5
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
(In Thousands, Except Share Data) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 95 $ 96
Accounts Receivable 16,226 11,794
Rental Merchandise 277,505 246,498
Less: Accumulated Depreciation (83,342) (69,530)
---------------------------
194,163 176,968
Property, Plant & Equipment, Net 50,113 39,757
Prepaid Expenses & Other Assets 11,577 10,767
---------------------------
Total Assets $ 272,174 $ 239,382
- ---------------------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts Payable & Accrued Expenses $ 33,461 $ 31,071
Dividends Payable 415 379
Deferred Income Taxes Payable 7,811 6,687
Customer Deposits & Advance Payments 9,889 8,304
Bank Debt 50,411 75,904
Other Debt 1,316 582
---------------------------
Total Liabilities 103,303 122,927
Commitments & Contingencies
Shareholders' Equity
Common Stock, Par Value $.50 Per Share;
Authorized: 25,000,000 Shares;
Shares Issued: 18,270,987 at December 31, 1998
and 16,170,987 at December 31, 1997 9,135 8,085
Class A Common Stock, Par Value $.50 Per Share;
Authorized: 25,000,000 Shares;
Shares Issued: 5,361,761 2,681 2,681
Additional Paid-In Capital 54,284 15,484
Retained Earnings 134,511 113,864
---------------------------
200,611 140,114
Less: Treasury Shares at Cost,
Common Stock, 1,558,991 Shares
at December 31, 1998 and 1,058,041 Shares
at December 31, 1997 (17,604) (9,523)
Class A Common Stock, 1,525,255 Shares at
December 31, 1998 and December 31, 1997 (14,136) (14,136)
---------------------------
Total Shareholders' Equity 168,871 116,455
---------------------------
Total Liabilities & Shareholders' Equity $ 272,174 $ 239,382
=============================================================================================
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE> 6
Consolidated Statements
of Earnings
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
(In Thousands, December 31, December 31, December 31,
Except Per Share) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Rentals & Fees $ 289,272 $ 231,207 $ 208,463
Retail Sales 62,576 58,602 52,757
Non-Retail Sales 18,985 14,621 8,770
Other 8,826 6,321 4,255
-------------------------------------
379,659 310,751 274,245
- -----------------------------------------------------------------------------------------
COSTS & EXPENSES
Retail Cost of Sales 44,386 42,264 37,848
Non-Retail Cost of Sales 17,631 13,650 8,320
Operating Expenses 189,719 149,728 135,012
Depreciation of Rental Merchandise 89,171 71,151 64,437
Interest 3,561 3,721 3,449
-------------------------------------
344,468 280,514 249,066
Earnings Before Income Taxes 35,191 30,237 25,179
Income Taxes 13,707 11,841 9,786
-------------------------------------
Net Earnings $ 21,484 $ 18,396 $ 15,393
-------------------------------------
Earnings Per Share $ 1.06 $ .96 $ .81
Earnings Per Share Assuming Dilution 1.04 .94 .77
=========================================================================================
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE> 7
Consolidated Statements
of Shareholders' Equity
<TABLE>
<CAPTION>
Additional
Treasury Stock Common Stock Paid-In Retained
(In Thousands) Shares Amount Common Class A Capital Earnings
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, 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
Stock Offering 1,050 38,908
Reacquired Shares (736) (10,560)
Dividends (837)
Reissued Shares 235 2,479 (108)
Net Earnings 21,484
- ------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 (3,084) $(31,740) $9,135 $2,681 $54,284 $134,511
============================================================================================================
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE> 8
Consolidated Statements
of Cash Flows
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
(In Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 21,484 $ 18,396 $ 15,393
Depreciation & Amortization 98,090 77,487 70,693
Deferred Income Taxes 1,124 3,805 (899)
Change in Accounts Payable &
Accrued Expenses 3,109 5,103 5,695
Change in Accounts Receivable (4,432) (1,083) (2,339)
Other Changes, Net 1,253 1,587 982
-----------------------------------------
Cash Provided by Operating Activities 120,628 105,295 89,525
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to Property, Plant & Equipment (22,209) (15,165) (17,534)
Book Value of Property Retired or Sold 3,521 6,531 1,823
Additions to Rental Merchandise (174,496) (145,262) (137,023)
Book Value of Rental Merchandise Sold 69,018 58,436 48,352
Contracts & Other Assets Acquired (1,841) (21,665) (3,891)
-----------------------------------------
Cash Used by Investing Activities (126,007) (117,125) (108,273)
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from Revolving Credit Agreement 157,622 118,545 85,299
Repayments on Revolving Credit Agreement (183,115) (97,766) (67,434)
Proceeds from Common Stock Offering 39,958
Increase in Other Debt 734 342 21
Dividends Paid (801) (761) (765)
Acquisition of Treasury Stock (10,560) (8,918) (2,889)
Issuance of Stock Under Stock Option Plan 1,540 400 4,502
-----------------------------------------
Cash Provided by Financing Activities 5,378 11,842 18,734
(Decrease) Increase in Cash (1) 12 (14)
Cash at Beginning of Year 96 84 98
-----------------------------------------
Cash at End of Year $ 95 $ 96 $ 84
-----------------------------------------
Cash Paid During the Year:
Interest $ 4,082 $ 3,713 $ 3,384
Income Taxes 10,004 6,989 7,531
==================================================================================================
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE> 9
Notes to Consolidated
Financial Statements
As of December 31, 1998 and 1997, and for the Years Ended December 31,
1998, 1997 and 1996.
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--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.
Deferred Income Taxes are provided for temporary differences
between the amounts of assets and liabilities for financial and tax
reporting purposes. Such temporary differences arise principally from
the use of accelerated depreciation methods on rental merchandise for
tax purposes.
Cost of Sales includes the depreciated cost of rental return
residential and office merchandise sold and the cost of new
residential and office merchandise sold. It is not practicable to
allocate operating expenses between selling and rental operations.
Advertising--The Company expenses advertising costs as
incurred. Such costs aggregated $11,523,000 in 1998, $9,530,000 in
1997, and $10,422,000 in 1996.
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.
<PAGE> 10
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.
Fair Value of Financial Instruments--The carrying amounts
reflected in the consolidated balance sheets for cash, accounts
receivable, bank and other debt approximate their respective fair
values.
Revenue Recognition--Rental revenues are recognized as
revenue in the month they are due. Rental payments received prior to
the month due are recorded as deferred rental revenue.
Comprehensive Income--As of January 1, 1998, the Company
adopted Financial Accounting Standards Board ("FASB") Statement
No. 130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its
components. Statement 130 requires foreign currency translation
adjustments and other items to be included in other comprehensive
income. There were no differences between net income and comprehensive
income in 1998, 1997 or 1996.
Segment Information--In 1998, the Company adopted FASB
Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information. The new rules establish revised standards for
public companies relating to the reporting of financial and
descriptive information about their operating segments in financial
statements.
New Accounting Pronouncements--In June 1998, the FASB issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The statement requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes
in the fair value of derivatives are either offset against the change
in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in
earnings.
The Company plans to adopt Statement 133 in 2000, but has not
yet completed its analysis of the impact, if any, that Statement 133
may have on its consolidated financial statements.
NOTE B: EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year which were
20,312,000 shares in 1998, 19,165,000 shares in 1997, and 19,099,000
shares in 1996. 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 421,000, 497,000 and 885,000 in 1998,
1997 and 1996, respectively.
NOTE C: PROPERTY, PLANT & EQUIPMENT
<TABLE>
<CAPTION>
December 31, December 31,
(In Thousands) 1998 1997
=========================================================================================
<S> <C> <C>
Land $ 6,342 $ 4,643
Buildings & Improvements 21,770 17,698
Leasehold Improvements & Signs 27,069 19,243
Fixtures & Equipment 19,450 19,402
Construction in Progress 4,958 3,380
--------------------------
79,589 64,366
Less: Accumulated Depreciation & Amortization (29,476) (24,609)
--------------------------
$ 50,113 $ 39,757
=======================================================================================
</TABLE>
<PAGE> 11
NOTE D: 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, 1998 and 1997, an
aggregate of $50,411,000 (bearing interest of 6.12%) and $75,904,000
(bearing interest at 6.57%), 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
6.41% in 1998, 6.29% in 1997, and 6.17% in 1996. The effects of
interest rate swaps on the weighted average interest rate were 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 $2,400,000 at December 31, 1998.
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, 1998,
$48,400,000 of retained earnings were available for dividend payments
and stock repurchases under the debt restrictions.
During 1998, the Company's allocation of interest to its
MacTavish Furniture Industries division was $406,000. All expenses of
MacTavish are capitalized as furniture manufacturing costs.
Other Debt--Other debt of $1,300,000 at December 31, 1998 and
$582,000 at December 31, 1997 primarily represents insurance premium
and software financing agreements with interest rates ranging from
4.94% to 6.22%. Other debt matures in 2000.
NOTE E: INCOME TAXES
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
(In Thousands) 1998 1997 1996
===================================================================================================
<S> <C> <C> <C>
Current Income Tax Expense:
Federal $ 11,422 $ 7,375 $ 9,503
State 1,161 661 1,182
------------------------------------
12,583 8,036 10,685
Deferred Income Tax Expense (Benefit):
Federal 949 3,287 (889)
State 175 518 (10)
------------------------------------
1,124 3,805 (899)
------------------------------------
$ 13,707 $ 11,841 $ 9,786
=================================================================================================
</TABLE>
<PAGE> 12
Significant components of the Company's deferred income tax
liabilities and assets are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
(In Thousands) 1998 1997
===============================================================================================
<S> <C> <C>
Deferred Tax Liabilities:
Rental Merchandise and Property, Plant & Equipment $ 11,222 $ 9,265
Other, Net 1,413 1,244
-----------------------
Total Deferred Tax Liabilities 12,635 10,509
Deferred Tax Assets:
Accrued Liabilities 836 1,015
Advance Payments 2,725 2,276
Other, Net 1,263 531
-----------------------
Total Deferred Tax Assets 4,824 3,822
-----------------------
Net Deferred Tax Liabilities $ 7,811 $ 6,687
============================================================================================
</TABLE>
The Company's effective tax rate differs from the federal income tax
statutory rate as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
(In Thousands) 1998 1997 1996
=====================================================================================================
<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 2.4 2.5 3.0
Other, Net 1.6 1.7 .9
---------------------------------
Effective Tax Rate 39.0% 39.2% 38.9%
=====================================================================================================
</TABLE>
NOTE F: COMMITMENTS
The Company leases warehouse and retail store space for substantially
all of its operations under operating leases expiring at various times
through 2013. 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, 1998,
are as follows: $22,009,000 in 1999; $17,949,000 in 2000; $13,874,000
in 2001; $7,740,000 in 2002; $4,272,000 in 2003; and $8,848,000
thereafter.
Rental expense was $25,563,000 in 1998, $22,146,000 in 1997,
and $17,886,000 in 1996.
The Company leases one building from an officer of the
Company under a lease expiring in 2008 for annual rentals aggregating
$212,700.
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 $415,000 in 1998, $357,000 in 1997, and
$308,000 in 1996.
NOTE G: SHAREHOLDERS' EQUITY
On April 28, 1998 the Company issued, through a public offering,
2,100,000 shares of Common Stock. The net proceeds to the Company
after deducting underwriting discounts and offering expenses were
$39,958,000. The net proceeds were used to reduce indebtedness and for
general business purposes.
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.
In November 1998, the Company's Board of Directors authorized
the repurchase of up to 1,000,000 shares of the Company's Common Stock
and/or Class A Common Stock. During 1998, 736,400 shares of the
Company's stock were purchased at an aggregate cost of $10,560,000 and
the Company was authorized to purchase an additional 471,690 shares at
December 31, 1998. At December 31, 1998, the Company held a total of
3,084,246 common shares in its treasury. Subsequent to year end, in
February 1999 the Company's Board of Directors authorized the purchase
of an additional 2,000,000 shares.
<PAGE> 13
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.
NOTE H: 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, 1,766,000 of the Company
shares are reserved for issuance at December 31, 1998. The
weighted-average fair value of options granted was $9.26 in 1998,
$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 had accounted for its employee stock options granted in 1998,
1997 and 1996 under the fair value method. 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 1998, 1997 and 1996, respectively: risk-free interest rates of
5.36%, 5.88%, and 6.72%; a dividend yield of .26%, .25%, and .40%; a
volatility factor of the expected market price of the Company's Common
Stock of .43, .39, and .34; 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>
Years Ended December 31,
(In Thousands Except Per Share) 1998 1997 1996
===============================================================================================
<S> <C> <C> <C>
Pro forma net earnings $ 20,076 $ 17,508 $ 14,825
Pro forma earnings per share .99 .91 .78
Pro forma earnings per share assuming dilution .97 .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.
The table below summarizes option activity for the periods
indicated in the Company's stock option plans.
<TABLE>
<CAPTION>
Weighted
Average
Exercise
(In Thousands Except Per Share) Options Price
================================================================================
<S> <C> <C>
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
Granted 133 16.73
Exercised (235) 6.53
Forfeited (101) 15.47
--------------------------------------------------------------------------------
Outstanding at December 31, 1998 1,382 10.92
--------------------------------------------------------------------------------
Exercisable at December 31, 1998 266 $ 6.69
================================================================================
</TABLE>
Exercise prices for options outstanding as of December 31,
1998 ranged from $6.00 to $19.00. The weighted-average remaining
contractual life of those options is 6.55 years.
<PAGE> 14
NOTE I: FRANCHISING OF AARON'S RENTAL PURCHASE STORES
The Company franchises Aaron's Rental Purchase stores. As of December
31, 1998 and December 31, 1997, 227 and 186 franchises had been
awarded, respectively. Franchisees pay a non-refundable initial
franchise fee of $35,000 and an ongoing royalty of 5% of cash
receipts. The Company recognizes this income as earned and includes it
in Other Revenues in the Consolidated Statements of Earnings. The
Company has guaranteed certain lease and debt obligations (primarily
extending through 1999) of some of the franchisees amounting to
$461,891 and $16,022,964, respectively, at December 31, 1998. The
Company receives a guarantee and servicing fee based on such
franchisees' outstanding debt obligations which it recognizes as
income over the fee 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.
NOTE J: ACQUISITIONS AND DISPOSITIONS
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. Also, 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. During 1998,
the Company acquired five rental purchase stores from a franchisee and
acquired a lamp designer and manufacturer, Lamps Forever, Inc. The
aggregate purchase price of these 1998 acquisitions was not
significant.
These 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
1998 and 1997 consolidated financial statements was not significant.
In October 1998, the Company sold substantially all of the
assets of its convention furnishings division. The effect of the sale
on the 1998 consolidated financial statements was not significant.
NOTE K: SEGMENTS
Description of Products and Services of Reportable Segments
Aaron Rents, Inc. has four reportable segments: rent-to-rent, rental
purchase, franchise and manufacturing. The rent-to-rent division rents
and sells residential and office furniture to businesses and consumers
who meet certain minimum credit requirements. The rental purchase
division offers residential furniture, appliances, and electronics to
consumers on a monthly payment basis with no credit requirements. The
Company's franchise operation sells and supports franchises of its
rental purchase concept. The manufacturing division manufactures
upholstery, bedroom and office furniture, lamps and accessories, and
bedding predominantly for use by the other divisions.
The principal source of revenue in the "Other" category was
the Company's convention furnishings division which was sold during
1998.
Measurement of Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources based on
revenue growth and pretax profit or loss from operations. The
accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies except that
the rental purchase division revenues and certain other items are
presented on a cash basis. Intersegment sales are completed at
internally negotiated amounts ensuring competitiveness with outside
vendors. Since the intersegment profit and loss affect inventory
valuation, depreciation and cost of goods sold are adjusted when
intersegment profit is eliminated in consolidation.
Factors Used by Management to Identify the Reportable Segments
Aaron Rents, Inc.'s reportable segments are business units that
service different customer profiles using distinct payment
arrangements. The reportable segments are each managed separately
because of differences in both customer base and infrastructure.
<PAGE> 15
Information on segments and a reconciliation to earnings before income
taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1998 1997 1996
===================================================================================================
<S> <C> <C> <C>
Revenues from external customers:
Rent-to-Rent $ 173,657 $ 163,263 $ 149,282
Rental Purchase 193,283 139,893 112,304
Franchise 7,209 4,880 2,872
Other 5,470 2,089 8,475
Manufacturing 52,628 49,302 46,978
Elimination of intersegment revenues (52,067) (48,344) (45,197)
Cash to accrual adjustments (521) (332) (469)
-----------------------------------------
Total revenues from external customers $ 379,659 $ 310,751 $ 274,245
=========================================
Earnings before income taxes:
Rent-to-Rent $ 19,565 $ 18,883 $ 16,196
Rental Purchase 11,668 10,807 6,370
Franchise 3,607 1,880 766
Other (744) (743) 589
Manufacturing 1,068 2,877 2,844
-----------------------------------------
Earnings before income taxes for reportable segments 35,164 33,704 26,765
Elimination of intersegment profit (901) (2,856) (3,051)
Cash to accrual adjustments (344) (271) (342)
Other allocations and adjustments 1,272 (340) 1,807
-----------------------------------------
Total earnings before income taxes $ 35,191 $ 30,237 $ 25,179
=========================================
Assets:
Rent-to-Rent $ 138,734 $ 135,094 $ 123,563
Rental Purchase 103,930 83,742 56,205
Franchise 5,415 3,287 2,064
Other 9,286 5,453 4,227
Manufacturing 14,809 11,806 12,044
-----------------------------------------
Total assets $ 272,174 $ 239,382 $ 198,103
=========================================
Depreciation and amortization:
Rent-to-Rent $ 29,327 $ 27,685 $ 24,854
Rental Purchase 67,401 48,879 42,631
Franchise 276 197 117
Other 616 661 1,503
Manufacturing 524 502 400
Elimination of intersegment profit and allocation (54) (437) 1,188
=========================================
Total depreciation and amortization $ 98,090 $ 77,487 $ 70,693
=========================================
Interest expense:
Rent-to-Rent $ 1,698 $ 1,648 $ 1,313
Rental Purchase 2,874 1,646 1,712
Franchise 9 8
Other 234 19 45
Manufacturing 406
Elimination of intersegment allocations (1,651) 399 371
-----------------------------------------
Total interest expense $ 3,561 $ 3,721 $ 3,449
===================================================================================================
</TABLE>
<PAGE> 16
NOTE L: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(In Thousands Except Per Share) First Quarter Second Quarter Third Quarter Fourth Quarter
==================================================================================================================
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Revenues $ 92,809 $ 93,832 $ 95,882 $ 97,136
Gross Profit 54,244 55,020 55,413 54,968
Earnings Before Taxes 8,680 9,090 8,029 9,392
Net Earnings 5,286 5,554 4,906 5,738
Earnings Per Share $ .28 $ .27 $ .23 $ .28
Earnings Per Share Assuming Dilution .27 .27 .23 .27
==================================================================================================================
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
==================================================================================================================
</TABLE>
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, 1998 and 1997, and the
related consolidated statements of earnings, shareholders' equity and
cash flows for the years ended December 31, 1998, 1997 and 1996. 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, 1998
and 1997, and the consolidated results of their operations and their
cash flows for the years ended December 31, 1998, 1997 and 1996, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 15, 1999
<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 15, 1999, included in the
1998 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 15,
1999, 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, 1998.
- - 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
- - Registration No. 333-33363 on Form S-8 pertaining to the Aaron Rents, Inc.
1996 Stock Option Incentive Award Plan.
Ernst & Young LLP
Atlanta, Ga
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AARON RENTS, INC. FOR THE YEAR ENDED DECEMBER 31, 1998
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 95
<SECURITIES> 0
<RECEIVABLES> 16,226
<ALLOWANCES> 0<F1>
<INVENTORY> 194,163<F2>
<CURRENT-ASSETS> 0<F3>
<PP&E> 50,113<F4>
<DEPRECIATION> 0<F4>
<TOTAL-ASSETS> 272,174
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 0
0
0
<COMMON> 11,816
<OTHER-SE> 157,055
<TOTAL-LIABILITY-AND-EQUITY> 272,174
<SALES> 81,561
<TOTAL-REVENUES> 379,659
<CGS> 62,017
<TOTAL-COSTS> 340,907
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,561
<INCOME-PRETAX> 35,191
<INCOME-TAX> 13,707
<INCOME-CONTINUING> 21,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,484
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.04
<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 83,342 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>