EX-13 7 g67848ex13.txt PORTIONS OF THE AARON RENTS, INC. 1 EXHIBIT 13 FINANCIAL HIGHLIGHTS
YEAR ENDED YEAR ENDED (DOLLAR AMOUNTS IN THOUSANDS, DECEMBER 31, DECEMBER 31, PERCENTAGE EXCEPT PER SHARE) 2000 1999 CHANGE ------------------------------------------------------------------------------------- Operating Results Revenues $ 502,920 $ 437,359 15.0% Earnings Before Taxes 43,906 41,302 6.3 Net Earnings 27,261 25,602 6.5 Earnings Per Share 1.38 1.28 7.8 Earnings Per Share Assuming Dilution 1.37 1.26 8.7 ------------------------------------------------------------------------------------- Financial Position Total Assets $ 380,379 $ 318,408 19.5% Rental Merchandise, Net 267,713 219,831 21.8 Interest-Bearing Debt 104,769 72,760 44.0 Shareholders' Equity 208,538 183,718 13.5 Book Value Per Share 10.50 9.22 13.8 Debt to Capitalization 33.4% 28.4% Pre-Tax Profit Margin 8.7 9.4 Net Profit Margin 5.4 5.9 Return on Average Equity 13.9 14.5 ------------------------------------------------------------------------------------- Stores Open Sales & Lease Ownership 263 213 23.5% Sales & Lease Ownership Franchised 193 155 24.5 Rent-to-Rent 98 107 (8.4) ------------------------------------------------------------------------------------- Total Stores 554 475 16.6%
Revenues by calendar year [CHART] Net Earnings by calendar year [CHART] 2 SELECTED FINANCIAL INFORMATION
(DOLLAR AMOUNTS YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED IN THOUSANDS DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, EXCEPT PER SHARE) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------ Operating Results Systemwide Revenues(1) $ 656,096 $ 547,255 $ 464,175 $ 364,306 $ 306,200 Revenues: Rentals & Fees $ 359,880 $ 318,154 $ 289,272 $ 231,207 $ 208,463 Sales 127,915 107,690 81,561 73,223 61,527 Other 15,125 11,515 8,826 6,321 4,255 ------------------------------------------------------------------------ 502,920 437,359 379,659 310,751 274,245 ------------------------------------------------------------------------ Costs & Expenses: Cost of Sales 105,152 87,705 62,017 55,914 46,168 Operating Expenses 227,587 201,923 189,719 149,728 135,012 Depreciation of Rental Merchandise 120,650 102,324 89,171 71,151 64,437 Interest 5,625 4,105 3,561 3,721 3,449 ------------------------------------------------------------------------ 459,014 396,057 344,468 280,514 249,066 ------------------------------------------------------------------------ Earnings Before Income Taxes 43,906 41,302 35,191 30,237 25,179 Income Taxes 16,645 15,700 13,707 11,841 9,786 ------------------------------------------------------------------------ Net Earnings $ 27,261 $ 25,602 $ 21,484 $ 18,396 $ 15,393 ------------------------------------------------------------------------ Earnings Per Share $ 1.38 $ 1.28 $ 1.06 $ .96 $ .81 Earnings Per Share Assuming Dilution 1.37 1.26 1.04 .94 .77 ------------------------------------------------------------------------ Dividends Per Share: Common $ .04 $ .04 $ .04 $ .04 $ .04 Class A .04 .04 .04 .04 .04 ------------------------------------------------------------------------------------------------------ Financial Position Rental Merchandise, Net $ 267,713 $ 219,831 $ 194,163 $ 176,968 $ 149,984 Property, Plant & Equipment, Net 63,174 55,918 50,113 39,757 33,267 Total Assets 380,379 318,408 272,174 239,382 198,103 Interest-Bearing Debt 104,769 72,760 51,727 76,486 55,365 Shareholders' Equity 208,538 183,718 168,871 116,455 107,335 ------------------------------------------------------------------------------------------------------ At Year End Stores Open: Company-Operated 361 320 291 292 240 Franchised 193 155 136 101 61 Rental Agreements in Effect 281,000 254,000 227,400 219,800 179,600 Number of Employees 3,900 3,600 3,400 3,100 2,550 ------------------------------------------------------------------------------------------------------
(1) Systemwide revenues include rental revenues of franchised Aaron's Sales & Lease Ownership stores. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Year Ended December 31, 2000 versus Year Ended December 31, 1999 Total revenues for 2000 increased $65.6 million (15.0%) to $502.9 million compared to $437.4 million in 1999 due primarily to a $41.7 million (13.1%) increase in rentals and fees revenues, plus a $20.1 million (44.3%) increase in non-retail sales. Of this increase in rentals and fees revenues, $37.7 million was attributable to Aaron's Sales & Lease Ownership, the Company's rental purchase division. Rentals and fees revenues from the Company's rent-to-rent operations increased $4.0 million during the same period. Revenues from retail sales increased $121,000 (.2%) to $62.4 million in 2000, from $62.3 million for the same period last year. Non-retail sales, which primarily represent merchandise sold to Aaron's Sales & Lease Ownership franchisees, increased $20.1 million (44.3%) to $65.5 million compared to $45.4 million for the same period last year. The increased sales are due to the growth of the franchise operations. Other revenues for 2000 increased $3.6 million (31.4%) to $15.1 million compared to $11.5 million in 1999. This increase was attributable to franchise fee and royalty income increasing $3.3 million (36.3%) to $12.4 million compared to $9.1 million last year, reflecting the net addition of 38 new franchised stores in 2000 and improved operating revenues at mature franchised stores. Cost of sales from retail sales decreased $1.1 million (2.4%) to $44.2 million compared to $45.3 million, and as a percentage of sales, decreased to 70.7% from 72.6% primarily due to product mix. Cost of sales from non-retail sales increased $18.5 million (43.7%) to $61.0 million from $42.5 million, and as a percentage of sales, decreased to 93.1% from 93.5%. The increased margins on non-retail sales was primarily the result of slightly higher margins on certain products sold to franchisees. Operating expenses increased $25.7 million (12.7%) to $227.6 million from $201.9 million. As a percentage of total revenues, operating expenses were 45.3% in 2000 and 46.2% in 1999. Operating expenses decreased as a percentage of total revenues between years primarily due to increased revenues in the Aaron's Sales & Lease Ownership division. Depreciation of rental merchandise increased $18.3 million (17.9%) to $120.7 million, from $102.3 million, and as a percentage of total rentals and fees increased to 33.5% from 32.2% in 1999. The increase as a percentage of rentals and fees is primarily due to a greater percentage of the Company's rentals and fees coming from the Aaron's Sales & Lease Ownership division which depreciates its rental merchandise at a faster rate than the rent-to-rent division. Interest expense increased $1.5 million (37.0%) to $5.6 million compared to $4.1 million. As a percentage of total revenues, interest expense was 1.1% in 2000 compared to .9% in 1999. The increase in interest expense as a percentage of revenues was due to increased interest rates along with higher daily average debt levels. The Company manages its exposure to changes in short-term interest rates, particularly to reduce the impact on its floating-rate revolving credit facility, 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 fixed by swap agreements was $40.0 million during the year and the Company does not expect a significant change in this amount in 2001. 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 $945,000 (6.0%) to $16.6 million compared to $15.7 million. The Company's effective tax rate was 37.9% in 2000 compared to 38.0% in 1999. As a result, net earnings increased $1.7 million (6.5%) to $27.3 million for 2000 compared to $25.6 million for the same period in 1999. As a percentage of total revenues, net earnings were 5.4% in 2000 and 5.9% in 1999. The decrease in net earnings as a percentage of total revenues is the result of startup losses associated with the increased rate at which the Company opened new Aaron's Sales & Lease Ownership stores with 32 stores opened in 2000 compared to 17 in 1999. Year Ended December 31, 1999 versus Year Ended December 31, 1998 Total revenues for 1999 increased $57.7 million (15.2%) to $437.4 million compared to $379.7 million in 1998 due primarily to a $28.9 million (10.0%) increase in rentals and fees revenues, plus a $26.4 million (139.1%) increase in non-retail sales. Of this increase in rentals and fees revenues, $32.7 million was attributable to the Aaron's Sales & Lease Ownership division. Rentals and fees from the Company's rent-to-rent operations increased $2.0 million excluding $5.8 million of rentals and fees from the Company's convention furnishings division, which was sold in the fourth quarter of 1998. Revenues from retail sales decreased $280,000 (.4%) to $62.3 million in 1999 from $62.6 million for the same period in 1998. The decrease was the result of new sales in the rent-to-rent division decreasing and the discontinued sale of prepaid cellular air time in the rental purchase division. Non-retail sales, which primarily represent merchandise sold to Aaron's Sales & Lease Ownership franchisees, increased $26.4 million (139.1%) to $45.4 million compared to $19.0 million for the same period in 1998. The increased sales are due to the growth of the franchise operations coupled with the addition of a new distribution center. 4 Other revenues for 1999 increased $2.7 million (30.5%) to $11.5 million compared to $8.8 million in 1998. This increase was attributable to franchise fee and royalty income increasing $1.8 million (25.3%) to $9.1 million compared to $7.3 million in 1998, reflecting the net addition of 19 new franchised stores in 1999 and increasing operating revenues at mature franchised stores. Cost of sales from retail sales increased $868,000 (2.0%) to $45.3 million compared to $44.4 million, and as a percentage of sales, increased slightly to 72.6% from 70.9% primarily due to product mix. Cost of sales from non-retail sales increased $24.8 million (140.8%) to $42.5 million from $17.6 million, and as a percentage of sales, increased to 93.5% from 92.9%. The reduced margins on non-retail sales was primarily the result of lower margins on certain products sold to franchisees. Operating expenses increased $12.2 million (6.4%) to $201.9 million from $189.7 million. As a percentage of total revenues, operating expenses were 46.2% in 1999 and 50.0% in 1998. Operating expenses decreased as a percentage of total revenues between years primarily due to increased revenues in the Aaron's Sales & Lease Ownership division and the sale of the Company's convention furnishings division which had higher operating expenses than traditional rent-to-rent and rental purchase operations. Depreciation of rental merchandise increased $13.2 million (14.8%) to $102.3 million, from $89.2 million, and as a percentage of total rentals and fees, was 32.2% compared to 30.8% in 1998. The increase as a percentage of rentals and fees is primarily due to a greater percentage of the Company's rentals and fees coming from the Aaron's Sales & Lease Ownership division which depreciates its rental merchandise at a faster rate than the rent-to-rent division. Interest expense increased $544,000 (15.3%) to $4.1 million compared to $3.6 million. As a percentage of total revenues, interest expense remained unchanged at 0.9%. Income tax expense increased $2.0 million (14.5%) to $15.7 million compared to $13.7 million. The Company's effective tax rate was 38.0% in 1999 compared to 39.0% in 1998. As a result, net earnings increased $4.1 million (19.2%) to $25.6 million for 1999 compared to $21.5 million for the same period in 1998. As a percentage of total revenues, net earnings were 5.9% in 1999 and 5.7% in 1998. Liquidity and Capital Resources Cash flows from operations for the years ended December 31, 2000 and 1999 were $166.2 million and $140.3 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 Sales & Lease Ownership 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, 2000, an aggregate of $90.0 million was outstanding under this facility, bearing interest at a weighted average variable rate of 7.04%. The Company uses interest rate swap agreements as part of its overall long-term financing program. At December 31, 2000, 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%. In 2000, the Company entered into a credit agreement with two banks providing for unsecured borrowings up to $10,000,000. At December 31, 2000 and aggregate of $10,000,000 bearing interest at libor plus 1.00% was outstanding under the agreement. The debt matures in 2001. In addition, the Company issued $4,200,000 of industrial development corporation revenue bonds. The average weighted borrowing rate on these bonds in 2000 was 4.55%. No principal payments are due on the bonds until maturity in 2015. 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. 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. During 2000, 327,500 shares of the Company's stock were purchased at an aggregate cost of $4.6 million and the Company was authorized to purchase an additional 1,284,690 shares at December 31, 2000. The Company has paid dividends for fourteen consecutive years. A $.02 per share dividend on Common Stock and on Class A Common Stock was paid in January 2000 and July 2000, for a total fiscal year cash outlay of $792,000. The Company currently expects to continue its policy of paying dividends. 5 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, (IN THOUSANDS, EXCEPT SHARE DATA) 2000 1999 --------------------------------------------------------------------------------------- Assets Cash $ 95 $ 99 Accounts Receivable 23,637 21,030 Rental Merchandise 381,930 316,294 Less: Accumulated Depreciation (114,217) (96,463) ----------------------------- 267,713 219,831 Property, Plant & Equipment, Net 63,174 55,918 Prepaid Expenses & Other Assets 25,760 21,530 ----------------------------- Total Assets $ 380,379 $ 318,408 --------------------------------------------------------------------------------------- Liabilities & Shareholders' Equity Accounts Payable & Accrued Expenses $ 34,693 $ 36,941 Dividends Payable 399 399 Deferred Income Taxes Payable 20,986 14,410 Customer Deposits & Advance Payments 10,994 10,180 Bank Debt 100,000 72,225 Other Debt 4,769 535 ----------------------------- Total Liabilities 171,841 134,690 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 53,662 54,181 Retained Earnings 185,782 159,313 ----------------------------- 251,260 225,310 Less: Treasury Shares at Cost, Common Stock, 2,230,446 Shares at December 31, 2000 & 2,177,956 Shares at December 31, 1999 (28,486) (27,356) Class A Common Stock, 1,532,255 Shares (14,236) (14,236) ----------------------------- Total Shareholders' Equity 208,538 183,718 ----------------------------- Total Liabilities & Shareholders' Equity $ 380,379 $ 318,408 ---------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial Statements. 6 CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED YEAR ENDED YEAR ENDED (IN THOUSANDS, DECEMBER 31, DECEMBER 31, DECEMBER 31, EXCEPT PER SHARE) 2000 1999 1998 ------------------------------------------------------------------------------------ Revenues Rentals & Fees $ 359,880 $ 318,154 $ 289,272 Retail Sales 62,417 62,296 62,576 Non-Retail Sales 65,498 45,394 18,985 Other 15,125 11,515 8,826 -------------------------------------------- 502,920 437,359 379,659 ------------------------------------------------------------------------------------ Costs & Expenses Retail Cost of Sales 44,156 45,254 44,386 Non-Retail Cost of Sales 60,996 42,451 17,631 Operating Expenses 227,587 201,923 189,719 Depreciation of Rental Merchandise 120,650 102,324 89,171 Interest 5,625 4,105 3,561 -------------------------------------------- 459,014 396,057 344,468 -------------------------------------------- Earnings Before Income Taxes 43,906 41,302 35,191 Income Taxes 16,645 15,700 13,707 -------------------------------------------- Net Earnings $ 27,261 $ 25,602 $ 21,484 -------------------------------------------- Earnings Per Share $ 1.38 $ 1.28 $ 1.06 Earnings Per Share Assuming Dilution 1.37 1.26 1.04 ------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL TREASURY STOCK COMMON STOCK PAID-IN RETAINED (IN THOUSANDS) SHARES AMOUNT COMMON CLASS CAPITAL EARNINGS ----------------------------------------------------------------------------------------------------------- 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 Reacquired Shares (860) (12,673) Dividends (800) Reissued Shares 234 2,821 (103) Net Earnings 25,602 ----------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 (3,710) (41,592) 9,135 2,681 54,181 159,313 Reacquired Shares (328) (4,625) Dividends (792) Reissued Shares 275 3,495 (519) Net Earnings 27,261 ----------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 (3,763) $ (42,722) $ 9,135 $ 2,681 $ 53,662 $ 185,782 -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial Statements. 7 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, (IN THOUSANDS) 2000 1999 1998 ========================================================================================== Operating Activities Net Earnings $ 27,261 $ 25,602 $ 21,484 Depreciation & Amortization 133,109 112,746 98,090 Deferred Income Taxes 6,576 6,599 1,124 Change in Accounts Payable & Accrued Expenses (2,248) 3,480 3,109 Change in Accounts Receivable (2,607) (4,804) (4,432) Other Changes, Net 4,074 (3,330) 1,253 ---------------------------------------------- Cash Provided by Operating Activities 166,165 140,293 120,628 ========================================================================================== Investing Activities Additions to Property, Plant & Equipment (23,761) (21,030) (22,209) Book Value of Property Retired or Sold 7,326 5,833 3,521 Additions to Rental Merchandise (279,580) (218,933) (174,496) Book Value of Rental Merchandise Sold 115,601 95,840 69,018 Contracts & Other Assets Acquired (14,273) (11,393) (1,841) ---------------------------------------------- Cash Used by Investing Activities (194,687) (149,683) (126,007) ========================================================================================== Financing Activities Proceeds from Revolving Credit Agreement 198,403 180,213 157,622 Repayments on Revolving Credit Agreement (170,628) (158,399) (183,115) Proceeds from Common Stock Offering 39,958 Increase (Decrease) in Other Debt 4,234 (781) 734 Dividends Paid (792) (816) (801) Acquisition of Treasury Stock (4,625) (12,673) (10,560) Issuance of Stock under Stock Option Plans 1,926 1,850 1,540 ---------------------------------------------- Cash Provided by Financing Activities 28,518 9,394 5,378 (Decrease) Increase in Cash (4) 4 (1) Cash at Beginning of Year 99 95 96 ---------------------------------------------- Cash at End of Year $ 95 $ 99 $ 95 ---------------------------------------------- Cash Paid During the Year: Interest $ 5,674 $ 4,025 $ 4,082 Income Taxes 5,762 15,289 10,004 ==========================================================================================
The accompanying notes are an integral part of the Consolidated Financial Statements. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2000 and 1999, and for the Years Ended December 31, 2000, 1999 and 1998. 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 subsidiaries (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, consumer electronics, appliances and other merchandise throughout the U.S. and Puerto Rico. The Company manufactures furniture principally for its rental and sales operations. RENTAL MERCHANDISE consists primarily of residential and office furniture, consumer electronics, appliances and other merchandise and is recorded at cost. The sales & lease ownership division depreciates merchandise over the agreement period, generally 12 months, when on rent, and 36 months, when not on rent, to a 0% salvage value. This method is similar to a method referred to as the income forecasting method in the rental purchase industry. The rent-to-rent division depreciates merchandise over its estimated useful life which ranges from 6 months to 60 months, net of its salvage value which ranges from 0% to 60%. All rental merchandise is available for rental and sale. 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 1 to 5 years for other depreciable property and equipment. Gains and losses related to dispositions and retirements are expensed as incurred. Maintenance and repairs are also expensed 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 net book value of merchandise sold, primarily using specific identification in the sales & lease ownership division and first-in, first-out in the rent-to-rent division. It is not practicable to allocate operating expenses between selling and rental operations. SHIPPING AND HANDLING COSTS -- Shipping and handling costs are classified as operating expenses in the accompanying consolidated statements of operations and totaled approximately $17,397,000 in 2000, $15,129,000 in 1999 and $13,458,000 in 1998. ADVERTISING -- The Company expenses advertising costs as incurred. Such costs aggregated $11,937,000 in 2000, $12,496,000 in 1999, and $11,523,000 in 1998. STOCK BASED COMPENSATION -- The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees 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. Income tax benefits resulting from stock option exercises credited to additional paid-in capital totaled approximately $540,000, $867,000 and $830,000, in 2000, 1999 and 1998, respectively. 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. Measurement of an impairment loss is based on the estimated fair value of the asset. 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. Revenues from the sale of residential and office furniture and other merchandise are recognized at the time of shipment. 9 NEW ACCOUNTING PRONOUNCEMENTS -- In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133). 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 adopted Statement 133 on January 1, 2001. The cumulative effect of this adoption had no significant effect on the Company's financial position or results of operations. 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 19,825,000 shares in 2000, 20,062,000 shares in 1999, and 20,312,000 in 1998. The computation of earnings per share assuming dilution includes the dilutive effect of stock options and awards. Such stock options and awards had the effect of increasing the weighted average shares outstanding assuming dilution by 142,000 in 2000, 273,000 in 1999 and 421,000 in 1998, respectively. Note C: Property, Plant & Equipment
DECEMBER 31, DECEMBER 31, (IN THOUSANDS) 2000 1999 -------------------------------------------------------------------------------- Land $ 8,977 $ 8,837 Buildings & Improvements 28,681 25,612 Leasehold Improvements & Signs 34,128 31,294 Fixtures & Equipment 25,786 24,622 Construction in Progress 2,051 1,043 --------------------------- 99,623 91,408 Less: Accumulated Depreciation & Amortization (36,449) (35,490) --------------------------- $ 63,174 $ 55,918 --------------------------------------------------------------------------------
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, 2000 and 1999, an aggregate of $90,000,000 (bearing interest at 7.04%) and $72,225,000 (bearing interest at 6.88%), 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 7.07% in 2000, 5.94% in 1999 and 6.41% in 1998. 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 $804,000 at December 31, 2000. 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 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2000, $61,640,000 of retained earnings were available for dividend payments and stock repurchases under the debt restrictions. In September 2000, the Company entered into a credit agreement with two banks providing for unsecured borrowings up to $10,000,000. At December 31, 2000 an aggregate of $10,000,000 bearing interest at LIBOR plus 1.00% was outstanding under the agreement. The debt matures in 2001. OTHER DEBT -- Other debt at December 31, 2000 of $4,769,000 is primarily comprised of $4,200,000 of industrial development corporation revenue bonds. The average weighted borrowing rate on these bonds in 2000 was 4.55%. No principal payments are due on the bonds until maturity in 2015. Note E: Income Taxes
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, (IN THOUSANDS) 2000 1999 1998 --------------------------------------------------------------------------------- Current Income Tax Expense: Federal $ 9,461 $ 8,020 $ 11,422 State 608 1,081 1,161 -------------------------------------------- 10,069 9,101 12,583 Deferred Income Tax Expense: Federal 5,520 5,989 949 State 1,056 610 175 -------------------------------------------- 6,576 6,599 1,124 -------------------------------------------- $ 16,645 $ 15,700 $ 13,707 ---------------------------------------------------------------------------------
Significant components of the Company's deferred income tax liabilities and assets are as follows:
DECEMBER 31, DECEMBER 31, (IN THOUSANDS) 2000 1999 ----------------------------------------------------------------------------- Deferred Tax Liabilities: Rental Merchandise and Property, Plant & Equipment $ 25,770 $ 19,345 Other, Net 1,531 577 --------------------------- Total Deferred Tax Liabilities 27,301 19,922 Deferred Tax Assets: Accrued Liabilities 1,324 961 Advance Payments 3,179 2,858 Other, Net 1,812 1,693 --------------------------- Total Deferred Tax Assets 6,315 5,512 --------------------------- Net Deferred Tax Liabilities $ 20,986 $ 14,410 -----------------------------------------------------------------------------
The Company's effective tax rate differs from the federal income tax statutory rate as follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 1998 ----------------------------------------------------------------------------------- Statutory Rate 35.0% 35.0% 35.0% Increases in Taxes Resulting From: State Income Taxes, Net of Federal Income Tax Benefit 2.5 2.7 2.4 Other, Net 0.4 0.3 1.6 ---------------------------------------------- Effective Tax Rate 37.9% 38.0% 39.0% -----------------------------------------------------------------------------------
11 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, 2000, are as follows: $28,238,000 in 2001; $19,892,000 in 2002; $14,388,000 in 2003; $10,558,000 in 2004; $9,252,000 in 2005; and $6,404,000 thereafter. Rental expense was $30,659,000 in 2000; $28,851,000 in 1999; and $25,563,000 in 1998. 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 $427,000 in 2000; $447,000 in 1999; and $415,000 in 1998. Note G: Shareholders' Equity In February 1999, the Company's Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company's Common Stock and/or Class A Common Stock. During 2000, 327,500 shares of the Company's common shares were purchased at an aggregate cost of $4,625,000 and the Company was authorized to purchase an additional 1,284,690 at December 31, 2000. At December 31, 2000, the Company held a total of 3,762,701 common shares in its treasury. 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. 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, 1,425,000 of the Company shares are reserved for issuance at December 31, 2000. The weighted average fair value of options granted was $8.11 in 2000, $9.55 in 1999 and $9.26 in 1998. 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 2000, 1999 and 1998 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 2000, 1999 and 1998, respectively: risk-free interest rates of 6.47%, 6.36% and 5.36%, a dividend yield of .28%, .23% and .26%; a volatility factor of the expected market price of the Company's Common Stock of .45, .42 and .43; 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. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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:
YEARS ENDED DECEMBER 31, (IN THOUSANDS EXCEPT PER SHARE) 2000 1999 1998 ----------------------------------------------------------------------------------------- Pro Forma Net Earnings $25,910 $24,424 $20,076 Pro Forma Earnings Per Share 1.31 1.22 .99 Pro Forma Earnings Per Share Assuming Dilution 1.30 1.20 .97 -----------------------------------------------------------------------------------------
The table below summarizes option activity for the periods indicated in the Company's stock option plans.
WEIGHTED AVERAGE EXERCISE (IN THOUSANDS EXCEPT PER SHARE) OPTIONS PRICE ----------------------------------------------------------------------------------------- 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 Granted 230 16.74 Exercised (233) 7.91 Forfeited (77) 16.33 ---------------------------------------------------------------------------------------- Outstanding at December 31, 1999 1,302 12.17 Granted 405 13.73 Exercised (235) 8.22 Forfeited (95) 16.18 ---------------------------------------------------------------------------------------- Outstanding at December 31, 2000 1,377 13.02 ---------------------------------------------------------------------------------------- Exercisable at December 31, 2000 726 $11.38 ----------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------------ ---------------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE RANGE OF EXERCISE PRICES DECEMBER 31, 2000 LIFE PRICE DECEMBER 31, 2000 PRICE ------------------------------------------------------------------ ---------------------------------------------- $ 9.87 - $10.00 544,500 5.27 years $ 9.88 544,500 $9.88 $10.01 - $15.00 449,500 9.18 years 13.49 $15.01 - $20.25 383,250 8.16 years 16.94 182,000 15.94 ------------------------------------------------------------------ ---------------------------------------------- $ 9.87 - $20.25 1,377,250 7.19 years $13.02 726,500 $11.38 ------------------------------------------------------------------ ----------------------------------------------
13 Note I: Franchising of Aaron's Sales & Lease Ownership Stores The Company franchises Aaron's Sales & Lease Ownership stores. As of December 31, 2000 and December 31, 1999, 339 and 277 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. Franchise fees and area development franchise fees are generated from the sale of rights to develop, own and operate Aaron's Sales & Lease Ownership stores. These fees are recognized when substantially all of the Company's obligations per location are satisfied (generally at the date of the store opening). Franchise fees and area development fees received prior to the substantial completion of the Company's obligations are deferred. The Company includes this income in Other Revenues in the Consolidated Statement of Earnings. The Company has guaranteed certain debt obligations of some of the franchisees amounting to $39,127,000 at December 31, 2000. The Company receives a guarantee and servicing fee based on such franchisees' outstanding debt obligations which it recognizes as income as earned. The Company has recourse rights 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 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. In 1999, the Company acquired 18 rental purchase stores with an aggregate purchase price of $10,252,000. The excess cost over the fair market value of tangible assets acquired was approximately $5,985,000. Also in 1999, the Company acquired two rent-to-rent stores. The aggregate purchase price of these 1999 acquisitions was not significant. During 2000, the Company acquired 20 rental purchase stores including nine stores purchased from franchisees and 10 stores located in Puerto Rico. The aggregate purchase price of these 2000 acquisitions was $14,273,000 and the excess cost over the fair market value of tangible assets acquired was approximately $7,150,000. 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 2000, 1999 and 1998 consolidated financial statements was not significant. In October 1998, the Company sold substantially all of the assets of its convention furnishings division. In 2000, the Company sold four of its rent-to-rent stores and an additional four in 1999. The effect of these sales on the consolidated financial statements was not significant. Note K: Segments DESCRIPTION OF PRODUCTS AND SERVICES OF REPORTABLE SEGMENTS Aaron Rents, Inc. has four reportable segments: sales & lease ownership, rent-to-rent, franchise and manufacturing. The sales & lease ownership division offers electronics, residential furniture and appliances to consumers primarily on a monthly payment basis with no credit requirements. The rent-to-rent division rents and sells residential and office furniture to businesses and consumers who meet certain minimum credit requirements. The Company's franchise operation sells and supports franchises of its sales & lease ownership concept. The manufacturing division manufactures upholstery, 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 pre-tax 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 sales & lease ownership 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. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information on segments and a reconciliation to earnings before income taxes are as follows:
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 2000 1999 1998 -------------------------------------------------------------------------------------------------------------- Revenues From External Customers: Sales & Lease Ownership $ 312,921 $ 252,284 $ 193,283 Rent-to-Rent 174,918 173,579 173,657 Franchise 12,621 9,079 7,209 Other 4,057 1,551 5,470 Manufacturing 54,340 54,550 52,628 Elimination of Intersegment Revenues (54,807) (53,941) (52,067) Cash to Accrual Adjustments (1,130) 257 (521) ----------------------------------------------- Total Revenues From External Customers $ 502,920 $ 437,359 $ 379,659 ----------------------------------------------- Earnings Before Income Taxes: Sales & Lease Ownership $ 19,527 $ 20,630 $ 11,668 Rent-to-Rent 16,346 14,369 19,565 Franchise 7,484 5,042 3,607 Other (943) (1,072) (744) Manufacturing 728 717 1,068 ----------------------------------------------- Earnings Before Income Taxes For Reportable Segments 43,142 39,686 35,164 Elimination of Intersegment Profit (441) (357) (901) Cash to Accrual Adjustments (804) 855 (344) Other Allocations & Adjustments 2,009 1,118 1,272 ----------------------------------------------- Total Earnings Before Income Taxes $ 43,906 $ 41,302 $ 35,191 ----------------------------------------------- Assets: Sales & Lease Ownership $ 205,043 $ 139,177 $ 103,930 Rent-to-Rent 128,163 138,349 138,734 Franchise 12,961 10,755 5,415 Other 17,485 16,097 9,286 Manufacturing 16,727 14,030 14,809 ----------------------------------------------- Total Assets $ 380,379 $ 318,408 $ 272,174 ----------------------------------------------- Depreciation & Amortization: Sales & Lease Ownership $ 97,139 $ 78,385 $ 67,401 Rent-to-Rent 34,557 32,946 29,327 Franchise 412 347 276 Other 354 492 562 Manufacturing 647 576 524 ----------------------------------------------- Total Depreciation & Amortization $ 133,109 $ 112,746 $ 98,090 ----------------------------------------------- Interest Expense: Sales & Lease Ownership $ 2,750 $ 1,702 $ 2,826 Rent-to-Rent 2,496 2,317 1,698 Franchise 144 117 48 Other 235 (31) (1,011) Manufacturing 406 Elimination of Intersegment Allocations (406) ----------------------------------------------- Total Interest Expense $ 5,625 $ 4,105 $ 3,561 --------------------------------------------------------------------------------------------------------------
15 Note L: Quarterly Financial Information (Unaudited)
FIRST SECOND THIRD FOURTH (IN THOUSANDS EXCEPT PER SHARE) QUARTER QUARTER QUARTER QUARTER ---------------------------------------------------------------------------------------- Year Ended December 31, 2000 Revenues $125,372 $121,910 $124,850 $130,788 Gross Profit 65,660 64,357 64,818 67,158 Earnings Before Taxes 11,741 11,177 10,799 10,189 Net Earnings 7,278 6,929 6,706 6,348 Earnings Per Share $ .37 $ .35 $ .34 $ .32 Earnings Per Share Assuming Dilution .36 .35 .34 .32 ---------------------------------------------------------------------------------------- Year Ended December 31, 1999 Revenues $104,303 $107,364 $109,379 $116,313 Gross Profit 57,706 59,246 59,340 59,523 Earnings Before Taxes 10,779 10,615 9,860 10,048 Net Earnings 6,679 6,575 6,108 6,240 Earnings Per Share $ .33 $ .33 $ .30 $ .32 Earnings Per Share Assuming Dilution .33 .32 .30 .31 ----------------------------------------------------------------------------------------
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, 2000 and 1999, and the related consolidated statements of earnings, shareholders' equity and cash flows for the years ended December 31, 2000, 1999 and 1998. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years ended December 31, 2000, 1999 and 1998, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Atlanta, Georgia February 19, 2001 16 COMMON STOCK MARKET PRICES & DIVIDENDS The following table shows, for the periods indicated, the range of high and low prices per share for the Common Stock and Class A Common Stock and the cash dividends declared per share. The Company's Common Stock and Class A Common Stock are listed on the New York Stock Exchange under the symbols "RNT" and "RNT.A," respectively. The approximate number of shareholders of the Company's Common Stock and Class A Common Stock at March 15, 2001, was 4,000. The closing price for the Common Stock and Class A Common Stock on March 15, 2001, was $15.65 and $15.35, respectively.
CASH DIVIDENDS CLASS A COMMON STOCK HIGH LOW PER SHARE ----------------------------------------------------------------- December 31, 2000 First Quarter $17.89 $13.46 Second Quarter 14.96 11.45 .02 Third Quarter 15.48 12.61 Fourth Quarter 18.00 11.74 .02 ----------------------------------------------------------------- December 31, 1999 First Quarter $17.00 $12.88 Second Quarter 22.25 15.06 .02 Third Quarter 22.00 16.50 Fourth Quarter 20.00 15.25 .02 -----------------------------------------------------------------
CASH DIVIDENDS CLASS A COMMON STOCK HIGH LOW PER SHARE ----------------------------------------------------------------- December 31, 2000 First Quarter $18.58 $16.46 Second Quarter 17.08 14.59 .02 Third Quarter 16.10 15.35 Fourth Quarter 15.92 13.44 .02 ----------------------------------------------------------------- December 31, 1999 First Quarter $15.50 $11.63 Second Quarter 18.00 11.88 .02 Third Quarter 18.56 14.75 Fourth Quarter 20.00 14.75 .02 -----------------------------------------------------------------
STORE LOCATION MAP [MAP] At December 31, 2000 - Company-Operated Sales & Lease Ownership 263 - Franchised Sales & Lease Ownership 193 - Rent-to-Rent 98 ------ Total Stores 554 -------------------------------------------------- - Manufacturing & Distribution Centers 17