<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of l934
MARCH 31, 1999 0-12385
----------------- -------------------
For Quarter Ended Commission File No.
AARON RENTS, INC.
-----------------
(Exact name of registrant as
specified in its charter)
GEORGIA 58-0687630
------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
309 E. PACES FERRY ROAD, N.E.
ATLANTA, GEORGIA 30305-2377
---------------- ----------
(Address of principal executive offices) (Zip Code)
(404) 231-0011
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER
FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether registrant (l) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
l934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding as of
Title of Each Class May 10, 1999
------------------- ------------
Common Stock, $.50 Par Value 16,116,231
Class A Common Stock, $.50 Par Value 3,829,506
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
March 31, December 31,
1999 1998
---------- ------------
(in thousands)
<S> <C> <C>
ASSETS:
Cash $ 92 $ 95
Accounts Receivable 15,262 16,226
Rental Merchandise 282,338 277,505
Less: Accumulated Depreciation (86,137) (83,342)
--------- ---------
196,201 194,163
Property, Plant and Equipment, Net 49,750 50,113
Prepaid Expenses and Other Assets 15,062 11,577
--------- ---------
Total Assets $ 276,367 $ 272,174
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts Payable and Accrued Expenses $ 38,731 $ 33,461
Dividends Payable 415
Deferred Income Taxes Payable 10,464 7,811
Customer Deposits and Advance Payments 11,056 9,889
Bank Debt 47,046 50,411
Other Debt 404 1,316
--------- ---------
Total Liabilities 107,701 103,303
Commitments & Contingencies
Shareholders' Equity:
Common Stock, Par Value $.50 Per Share;
Authorized: 25,000,000 Shares;
Shares Issued: 18,270,987 9,135 9,135
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 54,285 54,284
Retained Earnings 141,190 134,511
--------- ---------
207,291 200,611
Less: Treasury Shares at Cost,
Common Stock, 2,068,781 Shares
at March 31, 1999 and 1,558,991 Shares
at December 31, 1998 (24,489) (17,604)
Class A Common Stock, 1,525,255 Shares at
March 31, 1999 and December 31, 1998 (14,136) (14,136)
--------- ---------
Total Shareholders' Equity 168,666 168,871
--------- ---------
Total Liabilities & Shareholders' Equity $ 276,367 $ 272,174
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 3
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31,
-------------------------------
1999 1998
-------------------------------
(in thousands, except per share amounts)
<S> <C> <C>
REVENUES:
Rentals and Fees $ 77,261 $70,118
Retail Sales 16,463 16,304
Non-Retail Sales 7,971 4,603
Other 2,608 1,784
-------- -------
104,303 92,809
-------- -------
COSTS AND EXPENSES:
Retail Cost of Sales 11,858 11,487
Non-Retail Cost of Sales 7,362 4,276
Operating Expenses 48,721 46,207
Depreciation
of Rental Merchandise 24,769 21,018
Interest 814 1,141
-------- -------
93,524 84,129
-------- -------
EARNINGS BEFORE
TAXES 10,779 8,680
INCOME TAXES 4,100 3,394
-------- -------
NET EARNINGS $ 6,679 $ 5,286
======== =======
EARNINGS PER SHARE $ .33 $ .28
EARNINGS PER SHARE
ASSUMING DILUTION .33 .27
-------- -------
CASH DIVIDENDS DECLARED
PER SHARE
Common Stock $ -- $ --
Class A Common Stock -- --
-------- -------
WEIGHTED AVERAGE
SHARES OUTSTANDING 20,215 18,965
WEIGHTED AVERAGE
SHARES OUTSTANDING
ASSUMING DILUTION 20,444 19,468
-------- -------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 4
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31,
---------
1999 1998
--------- --------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 6,679 $ 5,286
Depreciation and Amortization 27,413 23,027
Deferred Income Taxes 2,653 2,987
Change in Accounts Payable and
Accrued Expenses 5,270 1,821
Change in Accounts Receivable 964 (2,377)
Other Changes, Net 1,042 (48)
-------- --------
Cash Provided by Operating Activities 44,021 30,696
-------- --------
INVESTING ACTIVITIES
Additions to Property, Plant and Equipment (10,366) (7,953)
Book Value of Property Retired or Sold 8,385 1,575
Additions to Rental Equipment (45,064) (46,528)
Book Value of Rental Equipment Sold 19,885 23,896
Contracts and Other Assets Acquired (5,281)
-------- --------
Cash Used by Investing Activities (32,441) (29,010)
-------- --------
FINANCING ACTIVITIES
Proceeds from Revolving Credit Agreement 29,374 35,827
Repayments on Revolving Credit Agreement (32,739) (37,341)
Decrease in Other Debt (912) (209)
Dividends Paid (415) (379)
Acquisition of Treasury Stock (6,891)
Issuance of Stock Under Stock Option Plan 415
-------- --------
Cash Used by Financing Activities (11,583) (1,687)
-------- --------
Decrease in Cash (3) (1)
Cash at Beginning of Year 95 96
-------- --------
Cash at End of Period $ 92 $ 95
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A: PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Aaron Rents, Inc.
("the Company") and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated.
The Consolidated Balance Sheet as of March 31, 1999, and the Consolidated
Statements of Earnings and Cash Flows for the quarter ended March 31, 1999 and
1998, have been prepared without audit. In the opinion of management, all
adjustments necessary to present fairly the financial position, results of
operations and cash flows at March 31, 1999 and for all periods presented have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1998. The results of
operations for the period ended March 31, 1999 are not necessarily indicative of
the operating results for the full year.
NOTE B: COMPREHENSIVE INCOME
There were no differences between net income and comprehensive income for the
three month periods ended March 31, 1999 and 1998.
NOTE C: SEGMENT INFORMATION
<TABLE>
<CAPTION>
Quarters Ended March 31
1999 1998
--------- --------
(in thousands)
<S> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS:
Rent-to-Rent $ 44,769 $ 43,901
Rental Purchase 58,106 46,541
Franchise 2,088 1,385
Other (49) 1,588
Manufacturing 5,789 5,025
Elimination of intersegment revenues (5,742) (5,057)
Cash to accrual adjustments (658) (574)
--------- --------
Total revenues from external customers $ 104,303 $ 92,809
========= ========
EARNINGS BEFORE INCOME TAXES:
Rent-to-Rent $ 5,469 $ 6,012
Rental Purchase 5,258 3,740
Franchise 1,225 525
Other (631) (332)
Manufacturing 164 198
--------- --------
Earnings before income taxes for reportable segments 11,485 10,143
Elimination of intersegment profit (63) (194)
Cash to accrual adjustments (702) (770)
Other allocations and adjustments 59 (499)
--------- --------
Total earnings before income taxes $ 10,779 $ 8,680
========= ========
</TABLE>
<PAGE> 6
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Special Note Regarding Forward Looking Information: Except for historical
information contained herein, the matters set forth in this Form 10-Q are
forward-looking statements. The Company notes that the forward-looking
statements set forth involve a number of risks and uncertainties that could
cause actual results to differ materially from any such statement, including the
risks and uncertainties discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, filed with the Securities and Exchange
Commission, under the caption "Certain Factors Affecting Forward Looking
Statements" which discussion is incorporated herein by this reference.
RESULTS OF OPERATIONS:
QUARTER ENDED MARCH 31, 1999 VERSUS QUARTER ENDED MARCH 31, 1998:
Total revenues for the first quarter of 1999 increased $11.5 million (12.4%) to
$104.3 million compared to $92.8 million in 1998 due primarily to a $7.1 million
(10.2%) increase in rentals and fees revenues, plus a $3.5 million (16.9%)
increase in sales. Of this increase in rentals and fees revenues, $8.3 million
was attributable to the Aaron's Rental Purchase division. Rentals and fees
revenues from the Company's rent-to-rent operations, which included in 1998 $1.6
million of rentals and fees revenues from the Company's convention furnishings
division, decreased $1.2 million during the same period. The convention
furnishings business was sold in the fourth quarter of 1998.
Revenues from retail sales increased $159,000 (1.0%) to $16.5 million in 1999,
from $16.3 million for the same period last year. This increase was due to
increased sales of rental return merchandise in the Company's rent-to-rent
operations. Non-retail sales, which primarily represent merchandise sold to
Aaron's Rental Purchase franchisees, increased $3.4 million (73.2%) to $8.0
million compared to $4.6 million for the same period last year. The increased
sales are due to the growth of the franchise operations.
Other revenues for the first quarter 1999 increased $824,000 (46.2%) to $2.6
million compared to $1.8 million in 1998. This increase was attributable to fees
and royalties from franchise operations increasing $598,000 (50.3%) to $1.8
million compared to $1.2 million last year, reflecting the addition of 33
franchised stores since the end of the first quarter of 1998 and increasing
operating revenues at maturing franchise stores.
Cost of sales from retail sales increased $371,000 (3.2%) to $11.9 million
compared to $11.5 million last year, and as a percentage of retail sales,
increased to 72.0% from 70.5%. The increase in cost of sales as a percentage of
sales is due to lower margins from the sale of rental return merchandise in the
Company's rent-to-rent operations. Cost of sales from non-retail sales increased
$3.1 million (72.2%) to $7.4 million from $4.3 million, and as a percentage of
sales, decreased to 92.4% from 92.9%. The decrease in cost of sales as a
percentage of sales is due to slightly higher margins on sales through the
Company's distribution centers.
Operating expenses increased $2.5 million (5.4%) to $48.7 million from $46.2
million. As a percentage of total revenues, operating expenses were 46.7% in
1999 and 49.8% in 1998. Operating expenses decreased as a percentage of total
revenues between quarters primarily due to increased revenues in the Aaron's
Rental Purchase division and the sale of the Company's convention furnishings
business which had higher operating expenses than traditional rent-to-rent and
rental purchase operations.
<PAGE> 7
Depreciation of rental merchandise increased $3.8 million (17.8%) to $24.8
million, from $21.0 million, and as a percentage of total rentals and fees,
increased to 32.1% from 30.0%. The increase as a percentage of revenues is
primarily due to a greater percentage of the Company's rentals and fees coming
from the Aaron's Rental Purchase division which depreciates its rental
merchandise at a faster rate than the Rent-to-Rent division.
Interest expense decreased $327,000 (28.7%) to $814,000 compared to $1.1
million. As a percentage of total revenues, interest expense was 0.8% in 1999
compared to 1.2% in 1998. The decrease in interest expense as a percentage of
total revenues was due to lower debt levels after the Company's April 1998
public stock offering.
Income tax expense increased $706,000 (20.8%) to $4.1 million for 1999 compared
to $3.4 million for the same period in 1998. The Company's effective tax rate
was 38.0% for the first quarter of 1999 compared to 39.1% for the same period
last year, primarily due to lower state income tax rates.
As a result, net earnings increased $1.4 million (26.4%) to $6.7 million in the
first quarter of 1999 compared to $5.3 million for the same period in 1998. As a
percentage of total revenues, net earnings were 6.4% in the current quarter as
compared to 5.7% for the same period last year.
The weighted average number of shares outstanding during the first quarter of
1999 was 20,215,000 compared to 18,965,000 (20,444,000 versus 19,468,000
assuming dilution) for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES:
During the first quarter of 1999, the Company paid a semi-annual dividend that
was declared in December 1998 of $.02 per share on both Common Stock and Class A
Common Stock respectively. On May 4, 1999, the Company declared a semi-annual
dividend payable on July 6, 1999 of $.02 per share on both Common Stock and
Class A Common Stock.
Cash flow from operations for the quarters ended March 31, 1999 and 1998 was
$44.0 million and $30.7 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 a revolving credit agreement, cash flow from
operations, trade credit, proceeds from the sale of rental return merchandise,
and stock offerings. 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 March 31, 1999, an aggregate of $47.0
million was outstanding under this facility, bearing interest at a average rate
of 5.46%. The Company uses interest rate swap agreements as part of its overall
long-term financing program. At March 31, 1999, the Company had swap agreements
with notional principal amounts of $40.0 million which effectively fixed the
interest rates on an equal amount under the Company's revolving credit agreement
at 7.18%.
<PAGE> 8
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.
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
non-information 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 has substantially
completed phase (1) and anticipates that it will substantially complete phase
(2) and (3) by the end of the third quarter 1999, and (4) by the end of the
fourth 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 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 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.
<PAGE> 9
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. See "Special Note Regarding Forward-Looking Information".
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) The following exhibits are furnished herewith:
Exhibit
Number Description of Exhibit
-------- -----------------------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Registrant during the
three months ended March 31, 1999.
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AARON RENTS, INC.
(Registrant)
Date - May 11, 1999 /s/ Gilbert L. Danielson
------------ ----------------------------------
Gilbert L. Danielson
Executive Vice President
Chief Financial Officer
Date - May 11, 1999 /s/ Robert P. Sinclair, Jr.
------------ ---------------------------------
Robert P. Sinclair, Jr.
Corporate Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AARON RENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 92
<SECURITIES> 0
<RECEIVABLES> 15,262
<ALLOWANCES> 0<F1>
<INVENTORY> 191,201<F2>
<CURRENT-ASSETS> 0<F3>
<PP&E> 49,750<F4>
<DEPRECIATION> 0<F4>
<TOTAL-ASSETS> 276,367
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 0
0
0
<COMMON> 11,816
<OTHER-SE> 156,850
<TOTAL-LIABILITY-AND-EQUITY> 276,367
<SALES> 24,434
<TOTAL-REVENUES> 104,303
<CGS> 19,220
<TOTAL-COSTS> 92,710
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 814
<INCOME-PRETAX> 10,779
<INCOME-TAX> 4,100
<INCOME-CONTINUING> 6,679
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,679
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<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 86,137 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>
