AARON RENTS, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13941
AARON RENTS, INC.
(Exact name of registrant as
specified in its charter)
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Georgia
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58-0687630 |
(State or other jurisdiction of
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(I. R. S. Employer |
incorporation or organization)
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Identification No.) |
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309 E. Paces Ferry Road, N.E. |
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Atlanta, Georgia
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30305-2377 |
(Address of principal executive offices)
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(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 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer
þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date.
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Shares Outstanding as of |
Title of Each Class |
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May 5, 2006 |
Common Stock, $.50 Par Value
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42,106,072 |
Class A Common Stock, $.50 Par Value
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8,396,233 |
AARON RENTS, INC.
INDEX
2
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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(In Thousands, Except Share Data) |
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ASSETS: |
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Cash |
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$ |
6,179 |
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$ |
6,973 |
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Accounts Receivable (net of allowances of
$2,085 in 2006 and $2,742 in 2005) |
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43,563 |
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42,812 |
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Rental Merchandise |
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832,300 |
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811,335 |
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Less: Accumulated Depreciation |
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(263,160 |
) |
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(260,403 |
) |
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569,140 |
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550,932 |
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Property, Plant and Equipment, Net |
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134,367 |
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133,759 |
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Goodwill and Other Intangibles, Net |
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103,027 |
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101,085 |
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Prepaid Expenses and Other Assets |
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26,354 |
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22,954 |
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Total Assets |
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$ |
882,630 |
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$ |
858,515 |
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LIABILITIES & SHAREHOLDERS’ EQUITY: |
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Accounts Payable and Accrued Expenses |
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$ |
121,696 |
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$ |
112,817 |
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Dividends Payable |
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704 |
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699 |
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Deferred Income Taxes Payable |
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73,385 |
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75,197 |
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Customer Deposits and Advance Payments |
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23,975 |
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23,458 |
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Credit Facilities |
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200,611 |
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211,873 |
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Total Liabilities |
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420,371 |
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424,044 |
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Commitments & Contingencies |
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Shareholders’ Equity |
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Common Stock, Par Value $.50 Per
Share; Authorized: 50,000,000 Shares;
Shares Issued: 44,989,602 at March 31,
2006 and December 31, 2005 |
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22,495 |
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22,495 |
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Class A Common Stock, Par Value $.50
Per Share; Authorized: 25,000,000
Shares; Shares Issued: 12,063,856 at
March 31, 2006 and December 31, 2005 |
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6,032 |
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6,032 |
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Additional Paid-in Capital |
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96,990 |
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92,852 |
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Retained Earnings |
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370,235 |
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349,377 |
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Accumulated Other Comprehensive Loss |
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(9 |
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(14 |
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495,743 |
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470,742 |
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Less: Treasury Shares at Cost,
Common Stock, 2,899,350 Shares at
March 31, 2006 and 3,358,521 Shares at
December 31, 2005 |
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(17,580 |
) |
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(20,367 |
) |
Class A Common Stock, 3,667,623 Shares
at March 31, 2006 and December 31, 2005
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(15,904 |
) |
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(15,904 |
) |
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Total Shareholders’ Equity |
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462,259 |
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434,471 |
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Total Liabilities & Shareholders’ Equity |
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$ |
882,630 |
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$ |
858,515 |
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The accompanying notes are an integral part of the Consolidated Financial Statements
3
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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(In Thousands, Except
Per Share Data) |
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REVENUES: |
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Rentals and Fees |
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$ |
254,246 |
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$ |
209,145 |
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Retail Sales |
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19,170 |
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16,043 |
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Non-Retail Sales |
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64,027 |
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45,571 |
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Franchise Royalties and Fees |
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8,223 |
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7,191 |
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Other |
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1,621 |
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1,398 |
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347,287 |
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279,348 |
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COSTS AND EXPENSES: |
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Retail Cost of Sales |
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12,406 |
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10,736 |
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Non-Retail Cost of Sales |
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59,791 |
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42,633 |
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Operating Expenses |
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143,956 |
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119,631 |
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Depreciation of Rental Merchandise |
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93,281 |
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75,130 |
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Interest |
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3,222 |
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1,600 |
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312,656 |
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249,730 |
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EARNINGS BEFORE INCOME TAXES |
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34,631 |
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29,618 |
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INCOME TAXES |
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13,070 |
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11,196 |
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NET EARNINGS |
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$ |
21,561 |
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$ |
18,422 |
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COMMON STOCK AND CLASS A COMMON STOCK
EARNINGS PER SHARE: |
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Basic |
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$ |
.43 |
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$ |
.37 |
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Assuming Dilution |
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.42 |
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.36 |
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CASH DIVIDENDS DECLARED PER SHARE: |
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Common Stock |
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$ |
.014 |
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$ |
.013 |
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Class A Common Stock |
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.014 |
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|
.013 |
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COMMON STOCK AND CLASS A COMMON STOCK
WEIGHTED AVERAGE SHARES OUTSTANDING: |
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Basic |
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50,185 |
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49,767 |
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Assuming Dilution |
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51,085 |
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50,747 |
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The accompanying notes are an integral part of the Consolidated Financial Statements
4
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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(In Thousands) |
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OPERATING ACTIVITIES: |
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Net Earnings |
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$ |
21,561 |
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$ |
18,422 |
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Depreciation and Amortization |
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100,643 |
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81,805 |
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Additions to Rental Merchandise |
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(187,164 |
) |
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(140,294 |
) |
Book Value of Rental Merchandise Sold or Disposed |
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76,837 |
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56,308 |
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Change in Deferred Income Taxes |
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(1,812 |
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(1,702 |
) |
Loss on Sale of Property, Plant, and Equipment |
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14 |
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7 |
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Change in Income Tax Receivable, Prepaid Expenses and Other Assets |
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(1,042 |
) |
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15,095 |
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Change in Accounts Payable and Accrued Expenses |
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9,068 |
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25,220 |
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Change in Accounts Receivable |
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(751 |
) |
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(4,038 |
) |
Other Changes, Net |
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(961 |
) |
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(501 |
) |
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Cash Provided by Operating Activities |
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16,393 |
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50,322 |
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INVESTING ACTIVITIES: |
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Additions to Property, Plant and Equipment |
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(16,261 |
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(10,551 |
) |
Contracts and Other Assets Acquired |
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(3,248 |
) |
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(9,869 |
) |
Proceeds from Sale of Marketable Securities |
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— |
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9 |
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Proceeds from Sale of Property, Plant, and Equipment |
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8,804 |
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1,013 |
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Cash Used by Investing Activities |
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(10,705 |
) |
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(19,398 |
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FINANCING ACTIVITIES: |
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Proceeds from Credit Facilities |
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154,241 |
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30,534 |
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Repayments on Credit Facilities |
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(165,503 |
) |
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(62,288 |
) |
Dividends Paid |
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(698 |
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(647 |
) |
Excess Tax Benefits From Stock Option Exercises |
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3,026 |
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— |
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Issuance of Stock Under Stock Option Plans |
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2,452 |
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85 |
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Cash Used by Financing Activities |
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(6,482 |
) |
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(32,316 |
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Decrease in Cash |
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(794 |
) |
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(1,392 |
) |
Cash at Beginning of Period |
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6,973 |
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5,865 |
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Cash at End of Period |
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$ |
6,179 |
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$ |
4,473 |
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The accompanying notes are an integral part of the Consolidated Financial Statements
5
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2006
(Unaudited)
Note A — Basis of Presentation
The consolidated financial statements include the accounts of Aaron Rents, Inc. (the “Company”) and
its wholly owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
The consolidated balance sheet as of March 31, 2006 and the consolidated statements of earnings and
the consolidated statements of cash flows for the quarters ended March 31, 2006 and 2005 are
unaudited. The preparation of interim consolidated financial statements requires management to
make estimates and assumptions that affect the amounts reported in these financial statements and
accompanying notes. Management does not believe these estimates or assumptions will change
significantly in the future absent unsurfaced or unforeseen events. Generally, actual experience
has been consistent with management’s prior estimates and assumptions; however, actual results
could differ from those estimates.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States have been
condensed or omitted. We suggest you read these financial statements 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, 2005. The results of
operations for the quarter ended March 31, 2006 are not necessarily indicative of operating results
for the full year.
Accounting Policies and Estimates
See Note A to the consolidated financial statements in the 2005 Annual Report on Form 10-K.
Rental Merchandise
See Note A to the consolidated financial statements in the 2005 Annual Report on Form 10-K. Rental
merchandise adjustments for the three-month periods ended March 31 were $4.6 million in 2006 and
$3.1 million in 2005. These charges are recorded as a component of operating expenses.
Goodwill and Other Intangibles
During the three months ended March 31, 2006, the Company recorded $2.0 million in goodwill,
$184,000 in customer relationship intangibles, and $48,000 in acquired franchise development rights
in connection with a series of acquisitions of sales and lease ownership businesses. Customer
relationship intangibles are amortized on a straight-line basis over their estimated useful lives
of two years. Amortization expense was $464,000 and $486,000 for the three-month periods ended
March 31, 2006 and 2005, respectively. The aggregate purchase price for these asset acquisitions
totaled $3.2 million, with the principal tangible assets acquired consisting of rental merchandise
and certain fixtures and equipment. These purchase price allocations are tentative and
preliminary; we anticipate finalizing them prior to December 31, 2006. The results of operations
of the acquired businesses are included in the Company’s results of operations from the dates of
acquisition and are not significant.
Stock Compensation
The Company has stock-based employee compensation plans, which are more fully described below.
Prior to January 1, 2006, the Company accounted for awards granted under those plans following the
recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations. The Company’s non-qualified stock
options have 10-year terms and generally vest over a three-year service period from the date of
grant. The Company grants stock options for a fixed number of shares to employees primarily with
an exercise price equal to the fair value of the shares at the date of grant and, accordingly,
recognizes no compensation expense for these stock option grants. The Company also has granted
stock options for a fixed number of shares to certain key executives with an exercise price below
the fair value of the
6
shares at the date of grant. Compensation expense for these grants is recognized over the
three-year vesting period of the options for the difference between the exercise price and the fair
value of a share of Common Stock on the date of grant multiplied by the number of options granted.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of the
Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123(R),
Share-Based Payments (“SFAS 123R”), using the modified prospective application method. Under this
transition method, compensation expense recognized in the quarter ended March 31, 2006 includes the
applicable amounts of compensation expense of all stock-based payments granted prior to, but not
yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with
the original provisions of SFAS No. 123, Accounting for Stock-based Compensation (“SFAS 123”) and
previously presented in the pro forma footnote disclosures. The Company did not grant any stock
options in the three months ended March 31, 2006.
Under the modified prospective application method, results for prior periods have not been restated
to reflect the effects of implementing SFAS 123R. For purposes of pro forma disclosures under SFAS
123 as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and
Disclosure—an amendment of FASB Statement 123, the estimated fair value of the options is amortized
to expense over the options’ vesting period. The following table illustrates the effect on net
earnings and earnings per share if the fair value based method had been applied to all outstanding
and unvested awards for the following period:
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Three Months Ended |
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March 31, |
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(In Thousands, Except Share Data) |
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2005 |
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Net Earnings before effect of Key Executive grants |
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$ |
18,554 |
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Expense effect of Key Executive grants recognized |
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(132 |
) |
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Net Earnings as Reported |
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18,422 |
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Stock-based Employee Compensation Cost, Net of Tax — Pro Forma |
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(496 |
) |
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Pro Forma Net Earnings |
|
$ |
17,926 |
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Basic Earnings Per Share — As Reported |
|
$ |
.37 |
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Basic Earnings Per Share — Pro Forma |
|
$ |
.36 |
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Diluted Earnings Per Share — As Reported |
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$ |
.36 |
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Diluted Earnings Per share — Pro Forma |
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$ |
.35 |
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|
The Company estimates the fair value for the options granted on the grant date using a
Black-Scholes option-pricing model. The expected volatility is based on the historical volatility
of the Company’s Common Stock over the most recent period generally commensurate with the expected
estimated life of each respective grant. The expected lives of options are based on the Company’s
historical share option exercise experience. Forfeiture assumptions are based on the Company’s
historical forfeiture experience. The Company believes the historical experience method is the
best estimate of future exercise patterns currently available. The risk-free interest rates are
determined using the implied yield currently available for zero-coupon U.S. government issues with
a remaining term equal to the expected life of the options. The expected dividend yields are based
on the approved annual dividend rate in effect and current market
price of the underlying Common
Stock at the time of grant. No assumption for a future rate increase has been included unless
there is an approved plan to increase the dividend in the near term.
For the pro forma information regarding net income and earnings per share, the Company recognizes
compensation expense over the explicit service period up to the date of actual retirement. Upon
adoption of SFAS 123R, the Company is required to recognize
compensation expense over a period to the
date the employee first becomes eligible for retirement for awards granted or modified after the
adoption of SFAS 123R.
The results of operations for the three months ended March 31, 2006 include $950,000 in pre-tax
compensation expense related to unvested grants as of January 1, 2006. At March 31, 2006, there
was $4.3 million of total unrecognized compensation expense related to non-vested stock options
which is expected to be recognized over a period of 2.25 years. SFAS 123R requires that the
benefits of tax deductions in excess of recognized compensation expense to be reported as financing
cash flows, rather than an operating cash flow as required under prior guidance.
7
Excess tax benefits of $3.0 million were included in cash provided by financing activities for the
quarter ended March 31, 2006. The related net tax benefit from
the exercise of stock options in the first three months of 2006 was
$3.5 million.
Under the Company’s stock option plans, options granted become exercisable after a period of three
years and unexercised options lapse ten years after the date of the grant. Options are subject to
forfeiture upon termination of service. Under the plans, 954,000 of the Company’s shares are
reserved for future grants at March 31, 2006. The weighted average fair value of options granted
was $8.09 in 2005, $5.18 in 2004, and $5.48 in 2003. The fair value
for these options was estimated at the date of grant using a
Black-Scholes option pricing model with weighted average assumptions
of forfeiture rates of 5.85%, 9.87%, and 2.55% for 2005, 2004 and
2003, respectively.
The following table summarizes information about stock options outstanding at March 31, 2006:
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Options Outstanding |
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Options Exercisable |
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Weighted Average |
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Range of Exercise |
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Number Outstanding |
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Remaining Contractual |
|
Weighted Average |
|
Number Exercisable |
|
Weighted Average |
Prices |
|
March 31, 2006 |
|
Life (in years) |
|
Exercise Price |
|
March 31, 2006 |
|
Exercise Price |
|
|
|
$4.38-10.00
|
|
|
1,162,626 |
|
|
|
4.48 |
|
|
$ |
6.98 |
|
|
|
1,162,626 |
|
|
$ |
6.98 |
|
10.01-15.00
|
|
|
687,750 |
|
|
|
7.77 |
|
|
|
14.02 |
|
|
|
3,000 |
|
|
|
13.49 |
|
15.01-20.00
|
|
|
108,750 |
|
|
|
7.53 |
|
|
|
15.60 |
|
|
|
— |
|
|
—
|
20.01-24.94
|
|
|
595,146 |
|
|
|
8.62 |
|
|
|
22.41 |
|
|
|
2,000 |
|
|
|
21.84 |
|
|
|
|
$4.38-24.94
|
|
|
2,554,272 |
|
|
|
6.46 |
|
|
$ |
12.84 |
|
|
|
1,167,626 |
|
|
$ |
7.02 |
|
|
The table below summarizes option activity for the periods indicated in the Company’s stock option
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
Options |
|
Weighted Average |
|
Remaining Contractual |
|
Aggregate Intrinsic |
|
Weighted Average |
|
|
(In Thousands) |
|
Exercise Price |
|
Term |
|
Value (in Thousands) |
|
Fair Value |
|
Outstanding at January 1, 2006 |
|
|
3,026 |
|
|
$ |
11.73 |
|
|
|
|
|
|
$ |
46,726 |
|
|
$ |
4.01 |
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
Exercised |
|
|
(459 |
) |
|
|
5.34 |
|
|
|
|
|
|
|
(9,502 |
) |
|
|
2.84 |
|
Forfeited |
|
|
(13 |
) |
|
|
19.92 |
|
|
|
|
|
|
|
(95 |
) |
|
|
5.21 |
|
|
|
|
Outstanding at March 31, 2006 |
|
|
2,554 |
|
|
$ |
12.84 |
|
|
6.46 years |
|
$ |
36,611 |
|
|
$ |
4.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
1,168 |
|
|
$ |
7.02 |
|
|
4.47 years |
|
$ |
23,529 |
|
|
$ |
2.96 |
|
|
|
|
The
weighted average fair value of unvested options was $7.83 as of
January 1, 2006 and $8.19 as of March 31, 2006.
Income Taxes
The
Company has benefited in the past from the additional first-year or “bonus” depreciation
allowance under U.S. federal income tax law, which generally allowed the Company to accelerate the
depreciation on rental merchandise it acquired after September 10, 2001 and placed in service prior
to January 1, 2005. It is anticipated that the expiration of this temporary accelerated
depreciation allowance, combined with the Company’s profitability, will contribute to the Company
having to make future tax payments on its income.
Note B
— Credit Facilities
See Note D to the consolidated financial statements in the 2005 Annual Report on Form 10-K.
During the third quarter of 2005, the Company entered into a note purchase agreement with a
consortium of insurance companies. Pursuant to this agreement, the Company and its two
subsidiaries as co-obligors issued $60 million in senior unsecured notes to the purchasers in a
private placement. The notes bear interest at a rate of 5.03% per year and mature on July 27,
2012. Interest only payments are due quarterly for the first two years, followed by annual $12
million principal repayments plus interest for the five years thereafter, beginning on July 27,
2008. The Company used the proceeds from this financing to replace shorter-term borrowings under
its revolving credit agreement.
On February 27, 2006, the Company entered into a second amendment to the revolving credit agreement
to increase the maximum borrowing limit to $140.0 million from $87.0 million and to extend the
expiration date to May 28, 2008. In addition, the franchise loan facility and guaranty was amended
on that date to decrease the maximum commitment amount from $140.0 million to $115.0 million.
8
There were no significant changes in the nature of the Company’s capital leases with related
parties during the first quarter of 2006. The Company was in compliance with all restrictive
covenants contained in its credit facilities.
Note C
— Comprehensive Income
Comprehensive income is comprised of the net earnings of the Company, the change in the fair value
of interest rate swap agreements, net of income taxes, and the changes in unrealized gains or
losses on available-for-sale securities, net of income taxes, as summarized below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In Thousands) |
|
2006 |
|
|
2005 |
|
Net Earnings |
|
$ |
21,561 |
|
|
$ |
18,422 |
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
Derivative Instruments, Net of Taxes |
|
|
— |
|
|
|
120 |
|
Unrealized (Loss) Gain on
Marketable Securities, Net of Taxes |
|
|
(6 |
) |
|
|
82 |
|
|
|
|
|
|
|
|
Total Other Comprehensive Income |
|
|
(6 |
) |
|
|
202 |
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
21,555 |
|
|
$ |
18,624 |
|
|
|
|
|
|
|
|
9
Note D
— Segment Information
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In Thousands) |
|
2006 |
|
|
2005 |
|
Revenues From External Customers: |
|
|
|
|
|
|
|
|
Sales and Lease Ownership |
|
$ |
307,072 |
|
|
$ |
240,618 |
|
Corporate Furnishings |
|
|
32,283 |
|
|
|
30,185 |
|
Franchise |
|
|
8,328 |
|
|
|
7,270 |
|
Other |
|
|
1,853 |
|
|
|
1,199 |
|
Manufacturing |
|
|
21,872 |
|
|
|
25,949 |
|
Elimination of Intersegment Revenues |
|
|
(21,793 |
) |
|
|
(25,963 |
) |
Cash to Accrual Adjustments |
|
|
(2,328 |
) |
|
|
90 |
|
|
|
|
|
|
|
|
Total Revenues From External Customers |
|
$ |
347,287 |
|
|
$ |
279,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes: |
|
|
|
|
|
|
|
|
Sales and Lease Ownership |
|
$ |
28,264 |
|
|
$ |
21,213 |
|
Corporate Furnishings |
|
|
3,923 |
|
|
|
3,642 |
|
Franchise |
|
|
6,125 |
|
|
|
5,404 |
|
Other |
|
|
(1,464 |
) |
|
|
(623 |
) |
Manufacturing |
|
|
61 |
|
|
|
587 |
|
|
|
|
|
|
|
|
Earnings Before Income Taxes for Reportable
Segments |
|
|
36,909 |
|
|
|
30,223 |
|
Elimination of Intersegment (Profit) |
|
|
(7 |
) |
|
|
(530 |
) |
Cash to Accrual and Other Adjustments |
|
|
(2,271 |
) |
|
|
(75 |
) |
|
|
|
|
|
|
|
Total Earnings Before Income Taxes |
|
$ |
34,631 |
|
|
$ |
29,618 |
|
|
|
|
|
|
|
|
Earnings before income taxes for each reportable segment are generally determined in accordance
with accounting principles generally accepted in the United States with the following adjustments:
|
• |
|
A predetermined amount of approximately 2.3% of each reportable segment’s revenues is
charged to the reportable segment as an allocation of corporate overhead. |
|
|
• |
|
Accruals related to store closures are not recorded on the reportable segment’s
financial statements, but are rather maintained and controlled by corporate headquarters. |
|
|
• |
|
The capitalization and amortization of manufacturing and distribution variances are
recorded on the consolidated financial statements as part of Cash to Accrual and Other
Adjustments and are not allocated to the segment that holds the related rental merchandise. |
|
|
• |
|
Advertising expense in the sales and lease ownership division is estimated at the
beginning of each year and then allocated to the division ratably over time for management
reporting purposes. For financial reporting purposes, advertising expense is recognized
when the related advertising activities occur. The difference between these two methods is
reflected as part of Cash to Accrual and Other Adjustments. |
|
|
• |
|
Sales and lease ownership rental merchandise write-offs are recorded using the direct
write-off method for management reporting purposes. For financial reporting purposes the
allowance method is used and is reflected as part of Cash to Accrual and Other Adjustments. |
|
|
• |
|
Interest on borrowings is estimated at the beginning of each year. Interest is then
allocated to operating segments on the basis of relative total assets. |
|
|
• |
|
Sales and lease ownership revenues are reported on a cash basis for management reporting
purposes. |
Revenues
in the “Other” category are primarily from leasing space to
unrelated third parties in the
corporate headquarters building and revenues from several minor unrelated activities. The pre-tax
items in the “Other” category are the net result of the profits and losses from leasing a portion
of the corporate headquarters and several minor unrelated activities, and the portion of corporate
overhead not allocated to the reportable segments for management purposes.
Note E
— Adoption of New Accounting Principles
10
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4 (“SFAS 151”). SFAS 151 amends Accounting Research
Bulletin No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials (spoilage) should be recognized as current period charges. In
addition, SFAS 151 requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The Company adopted SFAS
151 effective January 1, 2006, and the impact was not material.
In
May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, a replacement
of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20,
Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and reporting of a change in accounting
principle. SFAS 154 applies to all voluntary changes in an accounting principle. It also applies to
changes required by an accounting pronouncement in the unusual instance that the pronouncement does
not include specific transition provisions. SFAS 154 is effective for accounting changes and error
corrections occurring in fiscal years beginning after December 15, 2005. The Company adopted SFAS
154 effective January 1, 2006, and this adoption did not have a material effect on the Company’s
financial position or results of operations.
Effective
January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS 123R using the modified
prospective application method. Under this transition method, compensation expense recognized in
the quarter ended March 31, 2006, includes the applicable amounts of compensation expense of all
stock-based payments granted prior to, but not yet vested as of, January 1, 2006 based on the
grant-date fair value estimated in accordance with the original provisions of SFAS 123 and
previously presented in the pro forma footnote disclosures. Refer to Note A for further
information on the impact of adoption.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments
(“SFAS 155”). SFAS 155 allows any hybrid financial instrument that contains an embedded derivative
that otherwise would require bifurcation under SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities” to be carried at fair value in its entirety, with changes in fair value
recognized in earnings. In addition, SFAS 155 requires that beneficial interests in securitized
financial assets be analyzed to determine whether they are freestanding derivatives or contain an
embedded derivative. SFAS 155 also eliminates a prior restriction on the types of passive
derivatives that a qualifying special purpose entity is permitted to hold. SFAS 155 is applicable
to new or modified financial instruments in fiscal years beginning after September 15, 2006, though
the provisions related to fair value accounting for hybrid financial instruments can also be
applied to existing instruments. Early adoption, as of the beginning of an entity’s fiscal year, is
also permitted, provided interim financial statements have not yet been issued. The adoption of
SFAS 155 is not anticipated to have a material effect on the Company’s financial position or
results of operations.
In
March 2006, the FASB issued SFAS No. 156, Accounting for
Servicing of Financial Assets, an
amendment of FASB Statement No. 140 (“SFAS 156”). SFAS 156 amends SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to the
accounting for separately recognized servicing assets and servicing liabilities. SFAS 156 requires
that all separately recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable. It also permits, but does not require, the subsequent measurement of
servicing assets and servicing liabilities at fair value. The adoption of SFAS 156 is not
anticipated to have a material effect on the Company’s financial position or results of operations.
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 2021. Most of the leases contain renewal
options for additional periods ranging from one to 15 years or provide for options to purchase the
related property at predetermined purchase prices that do not represent bargain purchase options.
We also lease transportation and computer equipment under operating leases expiring during the next
five years. We expect that most leases will be renewed or replaced by other leases in the normal
course of business.
The Company has guaranteed the borrowings of certain independent franchisees under a franchise loan
program with several banks. In the event these franchisees are unable to meet their debt service
payments or otherwise
11
experience an event of default, the Company would be unconditionally liable for a portion of the
outstanding balance of the franchisees’ debt obligations, which would be due in full within 90 days
of the event of default. At March 31, 2006, the portion that the Company might be obligated to
repay in the event franchisees defaulted was $105.6 million. Of
this amount, approximately $80.6 million represents franchisee
borrowings outstanding under the franchise loan program and
approximately $25.0 million represents franchisee borrowings that
the Company guarantees under other debt facilities. However, due to franchisee borrowing
limits, management believes any losses associated with any defaults would be mitigated through
recovery of rental merchandise as well as the associated rental agreements and other assets. Since
its inception in 1994, the Company has had no significant losses associated with the franchise
loan program.
The Company has no long-term commitments to purchase merchandise. See Note F to the consolidated
financial statements in the 2005 Annual Report on Form 10-K for further information.
Note G
— Related Party Transactions
The Company leases certain properties under capital leases with certain related parties that are
more fully described in Note D to the consolidated financial statements in the 2005 Annual Report
on Form 10-K.
As part of its extensive sports marketing program, the Company sponsors professional driver Michael
Waltrip’s Aaron’s Dream Machine in the NASCAR Busch Series. The sons of the president of the
Company’s sales and lease ownership division are employed by Mr. Waltrip’s company as drivers in
its driver development program. The two drivers race Aaron’s sponsored cars full time in the USAR
Hooters Pro Cup Series, one in the Northern Division and the other in the Southern Division. The
amount to be paid in 2006 by the Company for the sponsorship of Michael Waltrip attributable to the
driver development program is currently projected to be $983,000, to be adjusted by changes, if
any, in the racing schedule for the current year and credits for changes from the 2005 racing
season. Motor sports sponsorships and promotions have been an integral part of the Company’s
marketing programs for a number of years.
12
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Aaron Rents, Inc.
We have reviewed the consolidated balance sheet of Aaron Rents, Inc. and subsidiaries as of March
31, 2006, and the related consolidated statements of earnings for the three-month periods ended
March 31, 2006 and 2005, and the consolidated statements of cash
flows for the three-month periods ended
March 31, 2006 and 2005. These financial statements are the responsibility of the
Company’s
management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
consolidated financial statements referred to above for them to be in conformity with U.S.
generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Aaron Rents, Inc. and
subsidiaries as of December 31, 2005, and the related consolidated statements of income,
shareholders’ equity, and cash flows for the year then ended not presented herein, and in our
report dated March 14, 2006, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Atlanta, Georgia
May 6, 2006
13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF 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. Forward-looking
statements involve a number of risks and uncertainties that could cause actual results to differ
materially from any such statements, including risks and uncertainties associated with our growth
strategy, competition, trends in corporate spending, our franchise program, government regulation
and the other risks and uncertainties discussed under the caption “Certain Factors Affecting
Forward-Looking Statements” in Part I, Item 1 -“Business” in the Company’s Annual Report on Form
10-K for the Year Ended December 31, 2005 filed with the Securities and Exchange Commission and in
the Company’s other public filings.
The following discussion should be read in conjunction with the consolidated financial statements
as of and for the three months ended March 31, 2006, including the notes to those statements,
appearing elsewhere in this report. We also suggest that this management’s discussion and analysis
be read in conjunction with the management’s discussion and analysis and consolidated financial
statements included in our Annual Report on Form 10-K for the year ended December 31, 2005.
Overview
Aaron Rents is a leading
specialty retailer of consumer electronics, computers, residential and office
furniture, household appliances and accessories. Our major operating divisions are the Aaron’s
Sales & Lease Ownership Division, the Aaron’s Corporate Furnishings Division, and the MacTavish
Furniture Industries Division, which manufactures and supplies nearly one-half of the furniture and
related accessories rented and sold in our stores. Our sales and lease ownership division
accounted for 90% and 89% of our total revenues in the first three
months of 2006 and 2005,
respectively.
In this management’s discussion and analysis section we review the results of our sales and lease
ownership and corporate furnishings divisions, as well as the five components of our revenues:
rentals and fees, retail sales, non-retail sales, franchise royalties and fees, and other revenues.
Rentals and fees includes all revenues derived from rental agreements from our sales and lease
ownership and corporate furnishings stores, including agreements that result in our customers
acquiring ownership at the end of the term. Retail sales represents sales of both new and rental
return merchandise. Non-retail sales mainly represent merchandise sales to our franchisees from
our sales and lease ownership division. Franchise royalties and fees represent fees from sale of
franchise rights and royalty payments from franchisees as well as other related income from our
franchised stores. Other revenues represents other miscellaneous revenues ancillary to our core
operations, including the gain on the sale of investments.
We separate our cost of sales into two components: retail and non-retail. Retail cost of sales
represents the original or depreciated cost of merchandise sold
through our company-operated
stores. Non-retail cost of sales mainly represents the cost of merchandise sold to our
franchisees.
General
Aaron Rents has demonstrated strong
revenue growth over the last three years. Total
revenues have increased from $766.8 million in 2003 to $1.13 billion in 2005,
representing a
compound annual growth rate of 21.2%. Total revenues for the three months ended March 31,
2006
were $347.3 million, an increase of $67.9 million, or 24.3%, over the comparable period
in 2005.
Most of our growth comes from the opening of new sales and lease ownership stores and increases in
same store revenues from previously opened stores. We opened 82
company-operated sales and lease ownership stores in 2005, and we
estimate that we will open approximately 90 stores in 2006. We spend
on average approximately $550,000 to $600,000 in
the first year of operation of a new store, which includes purchases of rental merchandise,
investments in leasehold improvements and financing first year
start-up costs. Our new sales and lease ownership stores typically
achieve revenues of approximately $1.1 million in their third
year of operation. Our comparable stores open more than three years
normally achieve
approximately $1.4 million in revenues, which we believe
represents a higher unit revenue volume than the typical
rent-to-own store. Most of our stores are cash flow
positive in the second year of operations following
their opening.
We also use our franchise program to help us expand our sales and lease ownership concept more
quickly and into more areas than we otherwise would by opening only company-operated stores. Our
franchisees opened 71 stores in
14
2005. We expect our franchisees to open approximately 65 stores during 2006. Franchise royalties
and other related fees represent a growing source of high margin revenue for us, accounting for approximately
$29.5 million of revenues in 2005, up from $19.3 million in 2003, representing a compounded annual
growth rate of 23.5%.
Key Components of Income
In this management’s discussion and analysis section, we review the results of our sales and lease
ownership and corporate furnishings divisions, as well as the five components of our revenues:
rentals and fees, retail sales, non-retail sales, franchise royalties and fees, and other revenues.
Revenues. We separate our total revenues into five components: rentals and fees, retail sales,
non-retail sales, franchise royalties and fees, and other revenues. Rentals and fees includes all
revenues derived from rental agreements from our sales and lease ownership and corporate
furnishings stores, including agreements that result in our customers acquiring ownership at the
end of the term. Retail sales represent sales of both new and rental return merchandise from our
sales and lease ownership and corporate furnishings stores. Non-retail sales mainly represent
merchandise sales to our sales and lease ownership division franchisees. Franchise
royalties and fees represent fees from the sale of franchise rights and royalty payments from
franchisees, as well as other related income from our franchised
stores. Other revenues at
times include income from the sale of equity investments held in third parties and other miscellaneous
revenues.
Cost of Sales. We separate our cost of sales into two components: retail and non-retail. Retail
cost of sales represents the original or depreciated cost of merchandise sold through our
company-operated stores. Non-retail cost of sales primarily represents the cost of merchandise
sold to our franchisees.
Depreciation of Rental Merchandise. Depreciation of rental merchandise reflects the expense
associated with depreciating merchandise held for rent and rented to customers by our
company-operated sales and lease ownership and corporate furnishings stores.
Critical Accounting Policies
Revenue Recognition. Rental revenues are recognized in the month they are due on the accrual basis
of accounting. For internal management reporting purposes, rental revenues from the sales and
lease ownership division are recognized as revenue in the month the cash is collected. On a
monthly basis, we record an accrual for rental revenues due but not yet received, net of
allowances, and a deferral of revenue for rental payments received prior to the month due. Our
revenue recognition accounting policy matches the rental revenue with the corresponding costs,
mainly depreciation, associated with the rental merchandise. At March 31, 2006 and 2005, we had a revenue deferral representing cash collected in advance of being
due or otherwise earned totaling $20.5 million and $14.9 million, respectively, and an accrued
revenue receivable net of allowance for doubtful accounts based on historical collection rates of
$3.3 million and $3.4 million, respectively. Revenues from the sale of merchandise to franchisees
are recognized at the time of receipt by the franchisee, and revenues from such sales to other
customers are recognized at the time of shipment.
Rental Merchandise Our sales and lease ownership division depreciates merchandise over the
agreement period, generally 12 to 24 months when rented, and 36 months when not rented, to 0%
salvage value. Our corporate furnishings division depreciates merchandise over its estimated
useful life, which ranges from six months to 60 months, net of salvage value, which ranges from 0%
to 60%. Sales and lease ownership merchandise is generally depreciated at a faster rate than our
corporate furnishings merchandise. As sales and lease ownership revenues continue to comprise an
increasing percentage of total revenues, we expect rental merchandise depreciation to increase at a
correspondingly faster rate.
Our policies require weekly rental merchandise counts by store managers and write-offs for
unsalable, damaged, or missing merchandise inventories. Full physical inventories are generally
taken at our fulfillment and manufacturing facilities on a quarterly basis with appropriate
provisions made for missing, damaged and unsalable merchandise. In addition, we monitor rental
merchandise levels and mix by division, store and fulfillment center, as well as the average age of
merchandise on hand. If unsalable rental merchandise cannot be returned to vendors, its carrying
value is adjusted to net realizable value or written off. All rental merchandise is available for
rental and sale.
15
We record rental merchandise carrying value adjustments on the allowance method, which estimates
the merchandise losses incurred but not yet identified by management as of the end of the
accounting period.
Leases and Closed Store Reserves. The majority of our company-operated stores are operated from
leased facilities under operating lease agreements. The substantial majority of these leases are
for periods that do not exceed five years. Leasehold improvements related to these leases are
generally amortized over periods that do not exceed the lesser of the lease term or five years.
While a majority of our leases do not require escalating payments, for the leases which do contain
such provisions we record the related lease expense on a straight-line basis over the lease term.
Finally, we do not generally obtain significant amounts of lease incentives or allowances from
landlords. Any incentive or allowance amounts we receive are recognized ratably over the lease
term.
From time to time, we close or consolidate stores. Our primary cost associated with closing or
consolidating stores is the future lease payments and related commitments. We record an estimate
of the future obligation related to closed or consolidated stores based upon the present value of
the future lease payments and related commitments, net of estimated sublease income which we base
upon historical experience. For the three months ended March 31, 2006 and March 31, 2005, our
reserve for closed or consolidated stores was $1.0 million and
$1.7 million, respectively. If our
estimates related to sublease income are not correct, our actual liability may be more or less than
the liability recorded at March 31, 2006.
Insurance Programs. We maintain insurance contracts to fund workers compensation and group health
insurance claims. Using actuarial analysis and projections, we estimate the liabilities associated
with open and incurred but not reported workers compensation claims. This analysis is based upon an
assessment of the likely outcome or historical experience, net of any stop loss or other
supplementary coverages. We also calculate the projected outstanding plan liability for our group
health insurance program. Our liability for workers compensation insurance claims and group health
insurance was $3.2 million and $3.9 million at March 31, 2006 and 2005, respectively.
If we resolve existing workers compensation claims for amounts that are in excess of our current
estimates and within policy stop loss limits, we will be required to pay additional amounts beyond
those accrued at March 31, 2006. Additionally, if the actual group health insurance liability
exceeds our projections, we will be required to pay additional amounts beyond those accrued at
March 31, 2006.
The assumptions and conditions described above reflect management’s best assumptions and estimates,
but these items involve inherent uncertainties as described above, which may or may not be
controllable by management. As a result, the accounting for such items could result in different
amounts if management used different assumptions or if different conditions occur in future
periods.
Same
Store Revenues. We view same store revenues as a key performance indicator.
For the three months ended March 31, 2006, we calculated
the change in this amount by comparing revenues for the three months ended
March 31, 2006 to revenues for the comparable period in 2005 for all stores open for the entire 15-month period ended March 31,
2006, excluding stores that received rental agreements from other acquired, closed, or merged
stores.
16
Results of Operations
Three
months ended March 31, 2006 compared with three months ended March 31, 2005
The following table shows key selected financial data for the quarters ended March 31, 2006 and
2005, and the changes in dollars and as a percentage to 2006 from 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
Dollar Increase |
|
% Increase to |
|
|
Ended March 31, |
|
Ended March 31, |
|
to 2006 from |
|
2006 from |
(Dollars in Thousands) |
|
2006 |
|
2005 |
|
2005 |
|
2005 |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals and Fees |
|
$ |
254,246 |
|
|
$ |
209,145 |
|
|
$ |
45,101 |
|
|
|
21.6 |
% |
Retail Sales |
|
|
19,170 |
|
|
|
16,043 |
|
|
|
3,127 |
|
|
|
19.5 |
|
Non-Retail Sales |
|
|
64,027 |
|
|
|
45,571 |
|
|
|
18,456 |
|
|
|
40.5 |
|
Franchise Royalties and Fees |
|
|
8,223 |
|
|
|
7,191 |
|
|
|
1,032 |
|
|
|
14.4 |
|
Other |
|
|
1,621 |
|
|
|
1,398 |
|
|
|
223 |
|
|
|
16.0 |
|
|
|
|
|
|
|
347,287 |
|
|
|
279,348 |
|
|
|
67,939 |
|
|
|
24.3 |
|
|
|
|
COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Cost of Sales |
|
|
12,406 |
|
|
|
10,736 |
|
|
|
1,670 |
|
|
|
15.6 |
|
Non-Retail Cost of Sales |
|
|
59,791 |
|
|
|
42,633 |
|
|
|
17,158 |
|
|
|
40.2 |
|
Operating Expenses |
|
|
143,956 |
|
|
|
119,631 |
|
|
|
24,325 |
|
|
|
20.3 |
|
Depreciation of Rental Merchandise |
|
|
93,281 |
|
|
|
75,130 |
|
|
|
18,151 |
|
|
|
24.2 |
|
Interest |
|
|
3,222 |
|
|
|
1,600 |
|
|
|
1,622 |
|
|
|
101.4 |
|
|
|
|
|
|
|
312,656 |
|
|
|
249,730 |
|
|
|
62,926 |
|
|
|
25.2 |
|
|
|
|
EARNINGS BEFORE INCOME
TAXES |
|
|
34,631 |
|
|
|
29,618 |
|
|
|
5,013 |
|
|
|
16.9 |
|
INCOME TAXES |
|
|
13,070 |
|
|
|
11,196 |
|
|
|
1,874 |
|
|
|
16.7 |
|
|
|
|
NET EARNINGS |
|
$ |
21,561 |
|
|
$ |
18,422 |
|
|
$ |
3,139 |
|
|
|
17.0 |
% |
|
|
|
Revenues. The 24.3% increase in total revenues, to $347.3 million for the three months ended March
31, 2006 from $279.3 million in the comparable period in 2005, was due mainly to a $45.1 million,
or 21.6%, increase in rentals and fees revenues, plus an $18.5 million increase in non-retail sales.
The increase in rentals and fees revenues was attributable to a $43.0 million increase in revenues
from our sales and lease ownership division, which had a 10.7% increase in same store revenues
during the first quarter 2006 and added 132 company-operated stores in 2005. The growth in our
sales and lease ownership division was augmented by a $2.3 million increase in revenues in our
corporate furnishings division.
The 19.5% increase in revenues from retail sales, to $19.2 million for the three months ended March
31, 2006 from $16.0 million for the comparable period in 2005, was primarily due to an increase of
$3.0 million in the sales and lease ownership division. Retail sales represents sales of both new
and return rental merchandise.
The 40.5%
increase in non-retail sales (which mainly represent merchandise sold to our
franchisees), to $64.0 million for the three months of March 31, 2006 from $45.6 million for the
comparable period in 2005, was due to the growth of our franchise
operations. The total number of
franchised sales and lease ownership stores at March 31, 2006 was 400, reflecting a net addition of
39 stores since March 31, 2005.
The 14.4% increase in franchise royalties and fees, to $8.2 million for the three months ended
March 31, 2006 from $7.2 million for the comparable period in 2005, primarily reflects an increase
in royalty income from franchisees, increasing 20.0% to $6.6 million as of March 31, 2006 compared
to $5.5 million as of March 31, 2005. The increase in royalty income from franchisees was
partially offset by decreased franchise and financing fee revenues. Revenues increased in this
area primarily due to the previously mentioned growth of stores and an increase in certain royalty
rates.
17
The 16.0% increase in other revenues, to $1.6 million for the three months ended March 31,
2006 from $1.4 million for the comparable period in 2005, was primarily attributable to gains on the
disposal of capital assets in our sales and lease ownership division
during the first three months of
2006.
With respect to our major operating units, revenues for our sales and lease ownership division
increased 26.4%, to $314.3 million for the three months ended March 31, 2006 from $248.7 million
for the comparable period in 2005. This increase was attributable to the sales and lease ownership
division adding 157 stores since March 31, 2005 combined with same store revenue growth
of 10.7% for the three months ended March 31, 2006. The 7.6% increase in corporate furnishings
division revenues, to $33.0 million for the three months ended March 31, 2006 from $30.7 million
for the comparable period in 2005, is primarily the result of
improving economic and business conditions.
Cost of Sales. Cost of sales from retail sales
increased 15.6% to $12.4 million for the three
months ended March 31, 2006 compared to $10.7 million for the comparable period in 2005, and as a
percentage of retail sales, decreased to 64.7% from 66.9% in 2006 and 2005,
respectively. The decrease in retail
cost of sales as a percentage of retail sales was primarily due to increased sales in our sales and lease
ownership division which are at higher margins than our corporate furnishings division. Cost of
sales from non-retail sales increased 40.2%, to $59.8 million for the three months ended March 31,
2006 from $42.6 million for the comparable period in 2005, and
as a percentage of non-retail sales, decreased
to 93.4% from 93.6% in 2006 and 2005, respectively. The increased margins on non-retail sales were primarily the result of
slightly higher margins on certain products sold to franchisees.
Expenses. Operating expenses for the three months ended March 31, 2006 increased $24.3 million to
$144.0 million from $119.6 million for the comparable period in 2005, a 20.3% increase. As a
percentage of total revenues, operating expenses were 41.5% for the three months ended March 31,
2006 and 42.8% for the comparable period in 2005. Operating expenses decreased as a percentage of
total revenues for the three months ended March 31, 2006, mainly due to the maturing of new
company-operated sales and lease ownership stores, the 10.7% increase in same store revenues
previously mentioned and to a lesser extent due to an unusual decrease in the non-retail sales
category for the comparable period in 2005, which can vary from quarter to quarter based on
product demand and availability.
Depreciation of rental merchandise increased $18.2 million to $93.3 million for the three months
ended March 31, 2006 from $75.1 million during the comparable period in 2005, a 24.2% increase. As
a percentage of total rentals and fees, depreciation of rental merchandise increased to 36.7% from
35.9% from quarter to quarter. The increase as a percentage of rentals and fees was primarily due
to increased depreciation expense associated with an increase in the early payout of lease
ownership agreements in our sales and lease ownership division and to a lesser extent a greater
percentage of our rentals and fees revenues coming from our sales and lease ownership division,
which depreciates its rental merchandise at a faster rate than our corporate furnishings division.
Interest expense increased to $3.2 million for the
three months ended March 31, 2006, compared with
$1.6 million for the comparable period in 2005, a 101.4% increase. The increase in interest expense was primarily due to higher debt levels and to a lesser extent higher
interest rates in the first three months of 2006.
Income tax expense increased $1.9 million to $13.1 million for the three months ended March 31,
2006, compared with $11.2 million for the comparable period in 2005, representing a 16.7% increase. Aaron Rents’ effective tax
rate was 37.7% in 2006 compared with 37.8% in 2005.
Net Earnings. Net earnings increased $3.1 million to $21.6 million for the three months ended
March 31, 2006, compared with $18.4 million for the
comparable period in 2005, representing a 17.0%
increase. As a percentage of total revenues, net earnings were 6.2%
for the three months ended March 31, 2006 and 6.6% for the three months ended March 31, 2005. The
increase in net earnings was primarily the result of the maturing of
new company-operated sales and
lease ownership stores added over the past several years, contributing to a 10.7% increase in same
store revenues and a 14.4% increase in franchise royalties and fees.
Balance Sheet
Cash. Our cash balance decreased to $6.2 million at March 31, 2006 from $7.0 million at
December 31, 2005. The decrease between periods is the result of normal fluctuations in our cash
balances that are the result of timing
18
differences between when our stores deposit cash and when
that cash is available for application against borrowings outstanding under our revolving credit
facility. For additional information, refer to the “Liquidity and Capital Resources” section
below.
Rental Merchandise. The increase of $18.2 million in rental merchandise, net of accumulated
depreciation, to $569.1 million at March 31, 2006 from $550.9 million at December 31, 2005, is
primarily the result of a net increase of 16 company-operated sales and lease ownership stores and
one fulfillment center since December 31, 2005 and the continued revenue growth of existing
company-operated stores.
Goodwill and Other Intangibles. The $1.9 million increase in goodwill and other intangibles, to
$103.0 million at March 31, 2006 from $101.1 million at December 31, 2005, is the result of a
series of acquisitions of sales and lease ownership businesses, net of amortization of certain
finite-life intangible assets. The aggregate purchase price for these asset acquisitions totaled
$3.2 million, with the principal tangible assets acquired consisting of rental merchandise and
certain fixtures and equipment.
Prepaid Expenses and Other Assets. Prepaid expenses and other assets increased $3.4 million to
$26.4 million at March 31, 2006 from $23.0 million at
December 31, 2005. The increase is, in part,
the result of a $1.5 million increase in prepaid advertising in the sales and lease ownership
division.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased $8.9
million to $121.7 million at March 31, 2006 from $112.8 million at December 31, 2005. The increase
between periods is primarily the result of increased trade payables associated with the purchase of
rental merchandise which, as previously discussed, increased $18.2 million, net of accumulated
depreciation, between March 31, 2006 and December 31, 2005.
Deferred Income Taxes Payable. The decrease of $1.8 million in deferred income taxes payable to
$73.4 million at March 31, 2006 from $75.2 million at December 31, 2005 is primarily the result of
previously benefiting from the additional first-year or “bonus” depreciation allowance under U.S.
federal income tax law, which generally allowed the company to accelerate the depreciation on
rental merchandise it acquired after September 10, 2001 and placed in service prior to January 1,
2005. Aaron Rents anticipates having to make future tax payments on its income as a result of
expected profitability and the taxes that are now due on accelerated or “bonus” depreciation
deductions that were taken in prior periods.
Credit Facilities and Senior Notes. The $11.3 million decrease in the amounts we owe under our
credit facilities and senior notes to $200.6 million at March 31, 2006 from $211.9 million at
December 31, 2005, reflects net payments under our revolving credit facility during the first
three months of 2006 with cash generated from operations.
Liquidity and Capital Resources
General
Cash flows from operations for the three months ended March 31, 2006 and 2005 were $16.4 million
and $50.3 million, respectively. The higher amount of cash flows from operations for the
three-month period ended March 31, 2005, as compared to the period ended March 31, 2006, was
primarily due to our receipt of a $15.0 million income tax
refund in 2005 and increased outflows for
purchases of rental merchandise during the first three months of 2006. Our cash flows include profits
on the sale of rental return merchandise. Our primary capital requirements consist of buying
merchandise for both company-operated sales and lease ownership and corporate furnishings stores. As Aaron
Rents continues to grow, the need for additional merchandise will continue to be our major
capital requirement. These capital requirements historically have been financed through:
|
• |
|
cash flow from operations;
|
|
|
• |
|
bank credit;
|
|
|
• |
|
trade credit with vendors; |
|
|
• |
|
proceeds from the sale of rental return merchandise; |
|
|
• |
|
private debt offerings; and |
|
|
• |
|
stock offerings. |
19
Subsequent
to March 31, 2006, the company announced that it intends to file a registration
statement with the SEC for a proposed underwritten offering of 4,000,000 shares of its common stock
(excluding shares subject to the underwriters’ over-allotment option).
Of the shares being offered, it is anticipated that 3,000,000 shares
will be offered by the company
and 1,000,000 shares will be offered by the company’s chairman, chief executive officer and
controlling shareholder. It is anticipated that the net proceeds to
the company from the proposed
offering will be used for the repayment of outstanding borrowings under its credit facility and for
general corporate purposes, including working capital needs.
At March 31, 2006, $81.0 million was outstanding under our revolving credit agreement. The credit
facilities balance decreased $11.3 million in the first three months of 2006 as a
result of net payments made under our credit facility during the period with cash generated from
operations. The decrease in borrowings is primarily attributable to strong operating cash flows.
We renegotiated our revolving credit agreement on February 27, 2006, extending the life of the
agreement until May 28, 2008 and increasing the total available credit to $140.0 million. We have
$40.0 million currently outstanding in aggregate principal amount of 6.88% senior unsecured notes
due August 2009, the first principal repayments for which were due and paid in 2005 in the
aggregate amount of $10.0 million. Additionally, we have $60.0 million currently outstanding in
aggregate principal amount of 5.03% senior unsecured notes due July 2012, principal repayments for
which are first required in 2008. From time to time, we use interest rate swap agreements as part
of our overall long-term financing program. See Note D to the consolidated financial statements
appearing in the company’s 2005 Annual Report on Form 10-K for further information.
Our revolving credit agreement, senior unsecured notes and the construction and lease facility and
franchisee loan program discussed below, contain financial covenants which, among other things,
forbid us from exceeding certain debt to equity levels and require us to maintain minimum fixed
charge coverage ratios. These agreements also contain negative covenants regarding the company’s
other indebtedness, its guarantees and investments and other customary covenants, some of which
were amended in July 2005 in connection with the note issuance described above in order to make
them less restrictive. If we fail to comply with these covenants, we will be in default under
these commitments, and all amounts would become due immediately. We were in compliance with all
these covenants at March 31, 2006 and anticipate remaining in compliance for the foreseeable
future.
We purchase our common shares in the market from time to time as authorized by our Board of
Directors. As of March 31, 2006 Aaron Rents was authorized by its Board of Directors to purchase
up to an additional 2,670,502 common shares under previously approved resolutions.
We have a consistent history of paying dividends, having paid dividends for 19 consecutive years.
Our Board of Directors increased the dividend 7.7% for the third quarter of 2005 on August 4, 2005
to $.014 per share from the previous quarterly dividend of $.013 per
share. Total cash outlay for dividends was $698,000 for the three
months ended March 31, 2006. The fourth quarter of
2005 dividend was $.014 per share and was paid in January 2006. Subject to sufficient operating
profits, any future capital needs and other contingencies, we currently expect to continue
our policy of paying dividends.
If we achieve our expected level of growth in our operations, we anticipate we will supplement our
expected cash flows from operations, existing credit facilities, vendor credit, and proceeds from
the sale of rental return merchandise by expanding our existing credit facilities, by securing
additional debt financing, or by seeking other sources of capital to ensure we will be able to fund
our capital and liquidity needs for at least the next 24 months. We believe we can secure these
additional sources of liquidity in the ordinary course of business.
Commitments
Construction and Lease Facility. We maintain a $25 million construction and lease facility. From
1996 to 1999, we arranged for a bank holding company to purchase or construct properties identified
by us pursuant to this facility, and we subsequently leased these properties from the bank holding
company under operating lease agreements. The total amount advanced and outstanding under this
facility at March 31, 2006 was $24.5 million. Since the resulting leases are accounted for as
operating leases, we do not record any debt obligation on our balance sheet. This
construction and lease facility expires in November 2006. Lease payments fluctuate based upon
current interest rates and are generally based upon LIBOR plus 135 basis points. The lease
facility contains residual value guarantee and default guarantee provisions that would require us
to make payments to the lessor if the underlying properties are
20
worth less at termination of the
facility than specified values in the agreement. Although we believe the likelihood of funding to
be remote, the maximum guarantee obligation under the residual value and default guarantee
provisions upon termination are $20.9 million and $24.5 million, respectively, at March 31, 2006.
Income Taxes. During the three
months ended March 31, 2006, we made $2.0 million in income tax
payments. Within the next nine months, we anticipate that we will make cash payments for income
taxes totaling approximately $38.0 million. The company has benefited in the past from the additional
first-year or “bonus” depreciation allowance under U.S. federal income tax law, which generally
allowed us to accelerate the depreciation on rental merchandise we acquired after
September 10, 2001 and placed in service prior to January 1, 2005. We anticipate having to make
future tax payments on our income as a result of expected profitability and the taxes that are now
due on accelerated or “bonus” depreciation deductions that were taken in prior periods.
Leases. We lease warehouse and retail store space for substantially all of our operations
under operating leases expiring at various times through 2021. Most of the leases contain renewal
options for additional periods ranging from one to 15 years or provide for options to purchase the
related property at predetermined purchase prices that do not represent bargain purchase options.
We also lease transportation and computer equipment under operating leases expiring during the next
five years. We expect that most leases will be renewed or replaced by other leases in the normal
course of business. Approximate future minimum rental payments required under operating leases
that have initial or remaining non-cancelable terms in excess of one year as of March 31, 2006,
including leases under our construction and lease facility described above, are shown in the table
under “Contractual Obligations and Commitments” below.
We have 23 capital leases, 21 of which are with a limited liability company (“LLC”) whose managers
and owners are 14 Aaron Rents’ executive officers and its controlling shareholder, with no
individual, including the controlling shareholder, owning more than 10.53% of the LLC. Eleven of
these related party leases relate to properties purchased from Aaron Rents in October and November
2004 by one of the LLCs for a total purchase price of $6.8 million. This LLC is leasing back these
properties to Aaron Rents for a 15-year term, with a five-year renewal at Aaron Rents’ option, at
an aggregate annual rental of $883,000. Another ten of these related party leases relate to
properties purchased from Aaron Rents in December 2002 by one of
the LLCs for a total purchase price
of approximately $5.0 million. This LLC is leasing back these properties to Aaron Rents for a 15-year term at an
aggregate annual rental of $572,000.
The other related party capital lease relates to a property sold by Aaron Rents to a second LLC for
$6.3 million in April 2002 and leased back to Aaron Rents for a 15-year term at an annual rental of
$681,000.
The company does not currently plan to enter into any similar related party transactions in the
future. See Note D to the Consolidated Financial Statements in the 2005 Annual Report on Form
10-K.
We finance a portion of our store expansion through sale-leaseback transactions. The properties are
sold at net book value and the resulting leases qualify and are accounted for as operating leases.
We do not have any retained or contingent interests in the stores nor do we provide any guarantees,
other than a corporate level guarantee of lease payments, in connection with the sale-leasebacks.
The operating leases that resulted from these transactions are included in the table below.
Franchise Loan Guaranty. We have guaranteed the borrowings of certain independent franchisees
under a franchise loan program with several banks and we also guarantee franchisee borrowings under
certain other debt facilities. On February 27, 2006, the franchise loan facility and guaranty was
amended to decrease the maximum commitment amount from
$140.0 million to $115.0 million. In the event these
franchisees are unable to meet their debt service payments or
otherwise experience an event of default, we would be unconditionally
liable for a portion of the outstanding balance of the franchisees'
debt obligations, which would be due in full within 90 days of
the event of default. At March
31, 2006, the portion that we might be obligated to repay in the event franchisees
defaulted was $105.6 million. Of this amount, approximately $80.6 million represents franchisee
borrowings outstanding under the franchise loan program and
approximately $25.0 million represents
franchisee borrowings that we guarantee under other debt facilities. However, due to franchisee
borrowing limits, we believe any losses associated with any defaults would be mitigated through
recovery of rental merchandise and other assets. Since its inception in 1994, we have had no
significant losses associated with the
franchise loan program, or with any other franchise
guarantees. We believe the likelihood of any significant
amounts being funded in connection with these commitments to be remote.
21
Contractual
Obligations and Commitments. The following table shows the company’s approximate
contractual obligations, including interest, and commitments to make
future payments as of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Less |
|
|
Period 2-3 |
|
|
Period 4-5 |
|
|
Period Over |
|
(In Thousands) |
|
Total |
|
|
Than 1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Credit Facilities, Excluding
Capital Leases |
|
$ |
184,366 |
|
|
$ |
10,004 |
|
|
$ |
125,048 |
|
|
$ |
34,012 |
|
|
$ |
15,302 |
|
Capital Leases |
|
|
16,244 |
|
|
|
645 |
|
|
|
1,681 |
|
|
|
2,095 |
|
|
|
11,823 |
|
Operating Leases |
|
|
244,216 |
|
|
|
67,576 |
|
|
|
94,264 |
|
|
|
41,517 |
|
|
|
40,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations |
|
$ |
444,826 |
|
|
$ |
78,225 |
|
|
$ |
220,993 |
|
|
$ |
77,624 |
|
|
$ |
67,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table shows the company’s approximate commercial commitments as of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts |
|
|
Period Less |
|
|
Period 1-3 |
|
|
Period 4-5 |
|
|
Period Over |
|
(In Thousands) |
|
Committed |
|
|
Than 1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Guaranteed Borrowings of
Franchisees |
|
$ |
105,577 |
|
|
$ |
105,577 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Residual Value Guarantee
Under Operating Leases |
|
|
20,858 |
|
|
|
20,858 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Commitments |
|
$ |
126,435 |
|
|
$ |
126,435 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Risk
Occasionally, we manage our exposure to changes in short-term interest rates, particularly to
reduce the impact on our variable payment construction and lease facility and floating-rate
borrowings, by entering into interest rate swap agreements.
At March 31, 2006, we did not have any swap agreements.
We do not use any market risk sensitive instruments to hedge commodity, foreign currency or risks
other than interest rate risk, and hold no market risk sensitive instruments for trading or
speculative purposes.
New Accounting Pronouncements
See Note E to the Consolidated
Financial Statements contained in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
22
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
The information called for by this item is provided under Item 7A in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2005, and Part I, Item 2 of this Quarterly Report above.
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|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures.
An evaluation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, was carried out by management, with the participation of
the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as of the end of the period
covered by this Quarterly Report on Form 10-Q.
No system of controls, no matter how well designed and operated, can provide absolute assurance
that the objectives of the system of controls are met, and no evaluation of controls can provide
absolute assurance that the system of controls has operated effectively in all cases. Our
disclosure controls and procedures, however, are designed to provide reasonable assurance that the
objectives of disclosure controls and procedures are met.
Based on management’s evaluation, the CEO and CFO concluded that the Company’s disclosure controls
and procedures were effective as of the date of the evaluation to provide reasonable assurance that
the objectives of disclosure controls and procedures are met.
Internal Control Over Financial Reporting.
There were no changes in Aaron Rents’ internal control over financial reporting, as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934, during the Company’s first quarter of 2006
that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
23
PART
II — OTHER INFORMATION
The Company has updated its risk factors disclosure, from that previously reported in its Annual
Report on Form 10-K for the fiscal year ended December 31, 2005, to include the following risk
factors:
If our
independent franchisees fail to meet their debt service payments or other obligations under
outstanding loans guaranteed by us as part of a franchise loan program, amounts that the lenders
participating in the program could require us to pay to satisfy these obligations could have a
material adverse effect on our business and financial condition.
We have guaranteed the borrowings of certain
franchisees under a franchise loan program with
several banks with a maximum commitment amount of $115.0 million, and we also guarantee franchisee
borrowings under certain other debt facilities. In the event these franchisees are unable to meet
their debt service payments or otherwise experience an event of default, we would be
unconditionally liable for a portion of the outstanding balance of
the franchisees’ debt
obligations, which at March 31, 2006 was $105.6 million. Of
this amount, approximately $80.6 million
represents franchisee borrowings outstanding under the franchise loan program and approximately
$25.0 million represents franchisee borrowings that we guarantee under other debt facilities.
Although we have had no significant losses associated with the franchise loan and guaranty program
since its inception and we believe that any losses associated with any defaults would be mitigated
through recovery of rental merchandise and other assets, we cannot guarantee that there will be no
significant losses in the future or that we will be able to adequately mitigate any such losses.
If we fail to adequately mitigate any such future losses, our business and financial condition
could be materially adversely impacted.
You
should not rely on our same store revenues as an indication of our future results of
operations because they fluctuate significantly.
Our
historical same store revenue growth figures have fluctuated significantly from quarter to
quarter. For example, we experienced same store revenue growth of 11.6% in 2004, 8.3% in 2005 and
10.7% for the first quarter of 2006. We calculate same store revenue
growth by comparing revenues for comparable periods for all stores
open during the entirety of those periods. Even though we achieved significant same store revenue growth in
the past, we may not be able to increase same store revenues in the future. A number of factors have
historically affected, and will continue to affect, our same store revenues including:
|
• |
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changes in competition; |
|
|
• |
|
general economic conditions; |
|
|
• |
|
new product introductions; |
|
|
• |
|
consumer trends; |
|
|
• |
|
changes in our merchandise mix; |
|
|
• |
|
the impact of our new stores on our existing stores, including potential decreases
in existing stores’ revenues as a result of opening new stores; |
|
|
• |
|
timing of promotional events; and |
|
|
• |
|
our ability to execute our business strategy effectively. |
Changes in
our quarterly and annual same store revenues could cause the price of our
common stock to fluctuate significantly.
Our operations are regulated by and subject to the requirements of various federal and state
laws and regulations. These laws and regulations, as the same may be amended, supplemented or
interpreted by the
24
courts from time to time, could expose us to significant compliance costs or burdens or force us to
change our business practices in a manner that may be detrimental to our operations, prospects or
financial condition.
We believe that 47 states specifically regulate rent-to-own transactions, including states in which
we currently operate Aaron’s Sales & Lease Ownership stores. At the present time, no federal law
specifically regulates the rent-to-own industry, although federal legislation to regulate the
industry has been proposed from time to time. Any adverse changes in existing laws, or the passage
of new adverse legislation by states or the federal government could materially increase both our
costs of complying with laws and the risk that we could be sued or be subject to government
sanctions if we are not in compliance. In addition, new burdensome legislation might force us to
change our business model, and might reduce the economic potential of our sales and lease ownership
operations.
Most of the states that regulate rent-to-own transactions 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 them and miscellaneous other items. Some state laws also require grace periods for late
fees and certain contract reinstatement rights in the event the rental purchase agreement is
terminated. The more restrictive state rent-to-own laws limit the total amount that a customer may
be charged for an item, or regulate the amount of deemed “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. We cannot guarantee that the federal government or states will not
enact additional or different legislation that would be disadvantageous to us.
In addition to the risk of lawsuits related to the laws that regulate rent-to-own and consumer
lease transactions, we could be subject to lawsuits alleging violations of state laws and
regulations and consumer tort law, including fraud and consumer protection laws because of the
consumer-oriented nature of the rent-to-own industry. A large judgment could adversely affect our
financial condition and results of operations. Moreover, an adverse outcome from a lawsuit, even
one against one of our competitors, could result in changes in the way we and others in the
industry do business, possibly leading to significant costs or decreased revenues or profitability.
On March 15, 2006, the New Jersey Supreme Court ruled against one of our largest competitors,
holding that the New Jersey Retail Installment Sales Act applies to that company’s rent-to-own
contracts in the state, and applied New Jersey’s criminal usury statute to those transactions. As
a result of that ruling, we began to implement changes in our business practices in New Jersey,
where we operate one Aaron’s Sales & Lease Ownership store and have 11 franchised stores. However,
a law suit was filed in late March 2006 by a customer seeking class action status on similar claims
related to our lease ownership contracts in New Jersey. At this stage we are unable to estimate
any likely costs to us from this lawsuit or others like it that might be filed in that state as a
result of this change in the way the New Jersey law is interpreted.
ITEM 6. EXHIBITS:
The following exhibits are furnished herewith:
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15
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Letter Re: Unaudited Interim Financial Information. |
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31(a)
|
|
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Certification of Chief Executive Officer, pursuant to Rules 13a-14(a)/15d-14(a). |
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31(b)
|
|
|
|
Certification of Chief Financial Officer, pursuant to Rules 13a-14(a)/15d-14(a). |
|
|
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32(a)
|
|
|
|
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
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32(b)
|
|
|
|
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
25
SIGNATURES
Pursuant
to the requirements 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.
|
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|
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AARON RENTS, INC. |
|
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(Registrant) |
|
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Date – May 8, 2006
|
|
By:
|
|
/s/ Gilbert L. Danielson
Gilbert L. Danielson
|
|
|
|
|
|
|
Executive Vice President, |
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
Date – May 8, 2006
|
|
|
|
/s/ Robert P. Sinclair, Jr. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert P. Sinclair, Jr. |
|
|
|
|
|
|
Vice President, |
|
|
|
|
|
|
Corporate Controller |
|
|
26