-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K3OijKVBBeh2ofvx7wp4gyhynyCrn5k58vBRsANtGQQkwHXZE22sdByJWI2w+Thk JyfIfh2KEZdT7jy7VoyD2w== 0000950144-98-003864.txt : 19980401 0000950144-98-003864.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950144-98-003864 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AARON RENTS INC CENTRAL INDEX KEY: 0000706688 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 580687630 STATE OF INCORPORATION: GA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13941 FILM NUMBER: 98581971 BUSINESS ADDRESS: STREET 1: 3001 N FULTON DR NE STREET 2: 1100 AARON BLDG CITY: ATLANTA STATE: GA ZIP: 30363 BUSINESS PHONE: 4042310011 MAIL ADDRESS: STREET 1: 309 E. PACES FERRY ROAD., N.E. STREET 2: 3001 N FULTON DRIVE NE CITY: ATLANTA STATE: GA ZIP: 30305-2377 10-K 1 AARON RENTS, INC. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. December 31, 1997 0-12385
AARON RENTS, INC. (Exact name of registrant as specified in its charter) GEORGIA 58-0687630 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 309 E. PACES FERRY ROAD, N.E. ATLANTA, GEORGIA 30305-2377 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 231-0011 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS ---------------- Common Stock, $.50 Par Value Class A Common Stock, $.50 Par Value Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 20, 1998: $31,267,151. See Item 12. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
SHARES OUTSTANDING AS OF TITLE OF EACH CLASS MARCH 20, 1998 ------------------- ------------------------ Common Stock, $.50 Par Value 15,150,391 Class A Common Stock, $.50 Par Value 3,836,506
DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997 are incorporated by reference into Part II of this Form 10-K. Portions of the registrant's definitive proxy statement for the 1998 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K. ================================================================================ 2 PART I. ITEM 1. BUSINESS GENERAL Aaron Rents is a U.S. leader in the rent-to-rent and rental purchase industries with 402 stores in 32 states. The Company offers both individual and business customers a wide range of residential and office furniture, accessories, consumer electronics, and household appliances for rental, rental purchase and sale. The Company's major operating divisions are the Aaron Rents' Rent-to-Rent Division, the Aaron's Rental Purchase Division, the Aaron Rents' Convention Furnishings Division and MacTavish Furniture Industries Division, which manufactures much of the furniture for the Company's rental and rental purchase stores. Aaron Rents' strategic focus is on expanding its higher growth rental purchase business while also growing its rent-to-rent business in selected markets. At March 31, 1998, Aaron Rents had 297 Company-operated stores and 105 franchised stores in 32 states nationwide. There were 107 rent-to-rent stores in its Aaron Rents' Rent-to-Rent Division, 183 Company-operated rental purchase stores in its Aaron's Rental Purchase Division, 105 Aaron's Rental Purchase franchised stores, and seven Aaron Rents' Convention Furnishings stores. The Aaron Rents' Rent-to-Rent Division is well-positioned to take advantage of the growing demand for furniture rental services. Management believes this demand to be driven by continued growth in employment, the increasing importance of flexibility and outsourcing to American businesses and the impact of a more mobile and transitory population. Business customers, which represent an increasing portion of rental customers, enter into leases for office furniture to meet seasonal, temporary or start-up needs. Business customers also lease residential furniture in order to provide furnishings for relocated employees or those on temporary assignment. The Aaron's Rental Purchase Division focuses on providing durable household goods to lower to middle income consumers with limited or no access to traditional credit sources such as bank financing, installment credit or credit cards. The Company's rental purchase program allows customers to obtain merchandise without incurring additional debt or long-term obligations. Management believes that the segment of the U.S. population which its rental purchase division targets is large and that the needs of these customers generally are underserved. In 1992 the Company began franchising Aaron's Rental Purchase stores to place stores in selected markets where the Company has no immediate plans to enter. The Company believes that its franchise program allows the Company to grow more quickly, increase its name exposure in new markets and achieve economies of scale in purchasing, manufacturing and advertising for its rental purchase stores. The Company opened 12, 25 and 40 franchised rental purchase stores in 1995, 1996 and 1997, respectively. The Company is the only rental company in the United States that manufactures its own furniture. By manufacturing its own specially designed residential and office furniture through its MacTavish Furniture Industries Division, the Company enjoys an advantage over many of its competitors. Manufacturing enables the Company to control the quality, cost, timing, styling and quantity of its furniture rental products. The Company owns five furniture manufacturing plants and operates four bedding manufacturing facilities, which supply approximately 49% of the furniture rented or sold by the Company. The Company has grown significantly in recent years. Its growth is attributed to the opening of Company-operated and franchised rental purchase stores, as well as to the expansion of its rent-to-rent business and selected acquisitions. The Company expects to continue to grow its store base and plans to open five to 10 rent-to-rent stores, 10 to 15 Company-operated rental purchase stores and 45 to 50 new franchised rental purchase stores in 1998. Total revenues have increased from $155.7 million for calendar year 1992 to $310.8 million for calendar year 1997, and earnings before income taxes increased from $9.7 million in 1992 to $30.2 million in 1997, representing a 14.8% and 25.5% compound annual growth rate in the Company's revenues and earnings before income taxes, respectively. The increase in revenues was driven by a significant increase in rental purchase revenues, which increased from $22.5 million for 1992 to $139.3 million for 1997, representing 1 3 a 44.0% compound annual growth rate. During the same period, rent-to-rent revenues increased from $111.3 million to $162.3 million. The Company believes it possesses a valuable brand name in the rental business, as well as operating characteristics which differentiate it from its competitors. For instance, the Company's rental purchase concept is unique by offering 12-month rental purchase agreements, larger and more attractive store showrooms and a wider selection of merchandise. In the rent-to-rent business, the Company believes that its ability to deliver residential and office furniture and equipment to its customers quickly and efficiently gives the Company an advantage over furniture retailers who often require several weeks to effect delivery. By having its own manufacturing capabilities, an extensive distribution network and sophisticated management information systems, the Company is well-positioned to meet the distinct needs of its rent-to-rent and rental purchase customers. INDUSTRY OVERVIEW The Rent-To-Own Industry The estimated potential size of the United States rent-to-own market is 19.6 million households of which only 2.7 million are being served currently by the industry. According to the Association of Progressive Rental Organizations ("APRO"), the national trade association representing the rent-to-own industry, there are approximately 7,500 rent-to-own stores in the United States, approximately 50% of which are owned or franchised by the ten largest companies in the industry. Industry-wide revenues are believed to have been approximately $4.7 billion in 1997. In a typical rent-to-own transaction, the customer has the option to acquire merchandise over a fixed term, usually 18 to 24 months, by making weekly rental payments. The customer may cancel the agreement at any time by returning the merchandise to the store, with no further rental obligation. The average rental period in the industry is about four months, because the majority of customers do not rent the item to the full term of the agreement. If the customer rents the item to the full term, he obtains ownership of the item, though he has the option to purchase it at any time. The rent-to-own industry is a growing segment of the retail industry that offers an alternative to traditional methods of acquiring furniture, electronics and appliances. The rent-to-own concept is particularly popular with consumers who are unable to pay for merchandise in cash or who lack the credit to qualify under conventional financing programs. It is also popular with consumers who, despite good credit, do not wish to incur additional debt, have only a temporary need for the merchandise, or desire to try out a particular brand or model before purchasing it. Historically, electronic goods have been the dominant product category rented and sold in the industry although furniture items are growing rapidly in popularity. The Company believes its rental purchase concept differs significantly from the typical rent-to-own program. Compared to the typical rent-to-own stores, Aaron's Rental Purchase stores offer shorter agreement terms which are payable on a monthly basis and have generally lower total payments to acquire merchandise. Aaron's Rental Purchase stores offer a larger selection of merchandise in general and a greater percentage of furniture merchandise in particular, and have a larger and more visually appealing store layout. The Company believes that its rental purchase customers demand and can afford both higher quality merchandise and more competitive pricing on total agreement terms compared to the typical rent-to-own customer. The Company's rental purchase transactions differ from sales by home furnishings retailers in that rental purchase allows the option, but not the obligation, to purchase merchandise while paying a similar "all-in" agreement price. Rental purchase allows the customer to have the item serviced free of charge or replaced at any time during the rental agreement, and allows the Company to re-rent an item to another customer if the agreement does not go to term. The Company's rental purchase operations differ from the rent-to-rent business. A typical rental purchase customer, while usually lacking the cash or credit resources to acquire merchandise, desires the option of ownership and may have the intention to utilize rental purchase to achieve ownership. Accordingly, in rental purchase transactions, the customer is willing to pay a higher monthly payment for the ownership option, as 2 4 compared to the rent-to-rent customer. Typically, the Company's rental purchase customers are more style and brand name conscious than rent-to-rent customers who regard the merchandise as temporary. Aaron's Rental Purchase stores are attractively appointed and are typically in or near a shopping center strategically located near the residences of its target customers, as opposed to the rent-to-rent store whose typical location is in an office park that services destination customers from a broad geographical area. The Rent-To-Rent Industry The furniture component of the rent-to-rent industry is estimated to be greater than $600 million in annual rental revenues. The demand for rental products is believed to be related to the mobility of the population, which relies upon rented merchandise to fulfill temporary needs. The industry is highly competitive and consolidating, with only a handful of companies accounting for a substantial share of the market. The rent-to-rent industry serves both individual and business customers who generally have immediate, temporary needs for office or residential merchandise but who generally do not seek to own the merchandise. Residential merchandise is rented to individuals seeking to rent merchandise for their own homes and apartments, apartment complex managers seeking to provide furnished apartments, and third party companies that provide interim housing for their corporate clients. Office merchandise is rented by customers ranging from small businesses and professionals who are in need of office furnishings but need to conserve capital, to large corporations with temporary or seasonal needs. In the typical rent-to-rent transaction, the customer agrees to rent one or more items for a minimum of three months, which may be extended by the customer on a month-to-month basis. Although many rental agreements give the customer the option of purchasing the rented item, most customers do not enter into the transaction with the desire to own the rented merchandise. GROWTH AND OPERATING STRATEGIES Aaron Rents is expanding its business through growth strategies that focus on the opening of additional Company-operated rent-to-rent and rental purchase stores, and franchised rental purchase stores. In addition, the Company seeks to enhance profitability through operating strategies which differentiate the Company from its competitors and improve operating efficiencies. The key elements of the Company's growth and operating strategies are summarized below. Growth Strategies - EXPAND COMPANY-OPERATED RENTAL PURCHASE OPERATIONS IN SELECTED GEOGRAPHIC MARKETS. The Company currently expects to open 10 to 15 additional Company-operated Aaron's Rental Purchase stores during 1998, and to open comparable numbers of stores in each of the next several years. The Company's strategy is to open rental purchase stores primarily in the Company's existing geographic markets where it can cluster stores to realize the benefits of economies of scale in marketing and distribution and other operating efficiencies. - EXPAND AARON'S RENTAL PURCHASE FRANCHISE PROGRAM. The Company uses its franchise program to place Aaron's Rental Purchase stores in selected markets where the Company has no immediate plans to enter. The Company believes that its franchise program allows the Company to grow more quickly and increase its name exposure in new markets with a relatively low investment of capital by the Company. In addition, the larger number of systemwide rental purchase stores enables the Company and its franchisees to realize economies of scale in purchasing, manufacturing and advertising for its rental purchase stores. Franchise fees and royalties also represent a growing source of revenues for the Company. The Company expects that approximately 45 to 50 franchised Aaron's Rental Purchase stores will open in 1998, and expects a larger number of stores to open in each of the next several years. - EXPAND RENT-TO-RENT OPERATIONS. The Company believes that there are growth opportunities in the rent-to-rent market, particularly in the business sector. The Company has recently begun opening rent- 3 5 to-rent operations in new markets to better serve its national business customers and is also expanding its presence in existing markets. The recent introduction of warehouse-only stores in new markets has allowed the Company to enter markets at a lower cost. The Company believes that its rent-to-rent business will continue to provide the Company with cash flow to finance a significant amount of the planned expansion of the Aaron's Rental Purchase Division. The Company expects to open five to 10 rent-to-rent stores in 1998 in existing and new markets. Operating Strategies - PROVIDE HIGH LEVELS OF CUSTOMER SERVICE AND SATISFACTION. The Company demonstrates its commitment to superior customer service by providing large, attractive and conveniently located showrooms, offering a wide selection of quality merchandise at competitive prices and flexible acquisition options, and providing customers quick delivery of rented merchandise, in many cases by same or next day delivery. The Company has established an employee training program designed to enhance the customer relations skills of its employees. - DIFFERENTIATE AARON'S RENTAL PURCHASE CONCEPT. The Company believes that the success of its rental purchase operations is attributable to its distinctive approach to the business that sets it apart from its rent-to-own competitors. The Company has pioneered innovative approaches to meeting changing customer needs that differ from those of its competitors -- such as offering 12-month rental purchase agreements which result in a lower "all-in" price, larger and more attractive store showrooms, and a wider selection of merchandise. Most rental purchase customers make their rental payments in person, and the Company uses these frequent visits to strengthen customer relationships and make rental purchase customers feel welcome in the Company's stores. - TARGET RENT-TO-RENT BUSINESS CUSTOMERS. The Company has successfully operated rent-to-rent stores for over 40 years, using its superior customer service, prompt delivery and wide selection of rental furniture to attract a growing number of business customers. The Company believes that its ability to deliver furniture and equipment to its business customers quickly and efficiently gives the Company an advantage over general furniture retailers who often require several weeks to effect delivery. In addition, the location of a warehouse next to each showroom permits the store manager to exercise greater control over inventory, merchandise condition and pickup and deliveries, resulting in more efficient and consistent service for the customer. The Company has also recently opened warehouse-only locations in a few selected markets where the Company is seeking an immediate presence at a lower cost. The warehouse-only locations rely on outside sale representatives who target business customers. - MANAGE FURNITURE REQUIREMENTS THROUGH MANUFACTURING AND DISTRIBUTION. The Company believes that its furniture manufacturing capability and distribution center network give it a strategic advantage over its competitors by enabling the Company to control the quality, cost, timing, styling, durability and quantity of a substantial portion of its rental furniture merchandise. This control allows the Company to offer prompt delivery of rented furniture and provides the Company a reliable source of rental furniture. - UTILIZE PROPRIETARY MANAGEMENT INFORMATION SYSTEMS. The Company has developed proprietary computerized information systems to systematically pursue cash collections and merchandise returns and to match inventory with demand. Each of the Company's stores, including franchised rental purchase stores, is linked by computer directly to corporate headquarters, which enables headquarters to monitor the performance of each store on a daily basis. Its separate systems are tailored to meet the distinct needs of the Company's rent-to-rent and rental purchase operations. 4 6 OPERATING DIVISIONS Rental Purchase -- Aaron's Rental Purchase The Company established its Aaron's Rental Purchase Division in 1987. At March 31, 1998, there were 183 Company-operated Aaron's Rental Purchase stores in 16 states and 105 franchised Aaron's Rental Purchase stores in 27 states. The Company has developed a distinctive concept for its Aaron's Rental Purchase stores with specific merchandising selection and store layout, pricing and agreement terms for the customers it seeks to attract. The Company believes that these features create a store and rental purchase concept that is significantly different from the operations of most other rent-to-own stores, the Company's traditional rent-to-rent business, and the operations of home furnishings retailers who finance merchandise. The typical Aaron's Rental Purchase store layout consists of a combination showroom and warehouse of 8,000 to 10,000 square feet, with an average of approximately 8,700 total square feet. In selecting new locations for Aaron's Rental Purchase stores, the Company generally looks for sites in well-maintained strip shopping centers strategically located within ten miles of established working class neighborhoods and communities with good access. Many of the Company's stores are placed near existing rent-to-own stores of competitors. Each rental purchase store maintains at least two trucks and crews for pickups and deliveries, and generally offers same or next day delivery for addresses located within 15 miles of the store. The Company emphasizes a broad selection of brand name products for its electronics and appliance items, and offers customers a wide selection of furniture, including furniture manufactured by the Company's MacTavish Furniture Industries Division. Aaron's Rental Purchase stores also offer computers and jewelry. Aaron's Rental Purchase stores structure the pricing of merchandise to be less expensive than similar items offered by other rent-to-own operators, and substantially equivalent to the "all-in" contract price of similar items offered by home furnishings retailers who finance merchandise. Over 81% of the Company's rental purchase agreements have monthly payments as compared to the industry standard weekly payments, and most monthly agreements are for 12 months compared to the industry standard of 18 to 24 months. Approximately 37% of Aaron's Rental Purchase agreements go to term, in contrast to an industry average of less than 25%. The merchandise from the agreements that do not go to term is either re-rented or sold. The Aaron's Rental Purchase Division's 11 clearance centers serve primarily as retail outlets for final sales of rental return merchandise that will not be rented again, although they also sell some new merchandise. Sales by the clearance centers, together with sales at the Company's rental purchase stores, are instrumental in enabling the Company to maximize residual values of depreciated rental merchandise. Aaron's Rental Purchase Franchise Program The Company began franchising Aaron's Rental Purchase stores in selected markets in 1992, and has continued to attract many franchisees. It is not anticipated that franchised stores will compete with Company-operated stores, as franchises are primarily awarded in markets into which the Company has no presence and no current plans to expand. As of March 31, 1998, 206 franchises had been sold to 56 franchisees, and 105 franchise stores were open. The Company believes that its relations with its franchisees are good. Franchisees are approved on the basis of the applicant's business background and financial resources. The Company generally seeks franchisees who will enter into development agreements for several stores, although many franchisees currently operate a single store. Most franchisees are involved in the day-to-day operations of the stores. The Company enters into franchise agreements with its franchisees to govern the opening and operation of franchised stores. Under the Company's current agreement, the franchisee is required to pay a franchise fee of $35,000 per store. Agreements are for a term of 10 years (with one 10-year renewal option) and require payment to the Company of a royalty of 5% of weekly cash collections. The Company assists each franchisee in selecting the proper site for each store. Because of the importance of location to the Aaron's Rental Purchase concept, one of the Company's Pre-Opening Directors visits the intended market and helps guide the franchisee through the selection process. Once a site is selected, 5 7 the Company helps in designing the floor plan, including the proper layout of the showroom and warehouse. In addition, the Company provides assistance in assuring that the design and decor of the showroom is consistent with the Company's requirements. The Company also leases the exterior signage to the franchisee, and assists with placing pre-opening advertising, ordering initial inventory and purchasing delivery vehicles. The Company has an arrangement with a syndicate of banks to provide financing to qualifying franchisees to assist with the establishment and operation of their stores. A primary component of the financing program is an inventory financing plan which provides franchisees with the capital to purchase inventory. For established franchisees, the Company has arranged for these institutions to provide a revolving credit line to allow franchisees the flexibility to expand. The Company guarantees a portion of amounts outstanding under the franchisee financing programs. All franchisees are required to complete a comprehensive training program and to operate their franchised Aaron's Rental Purchase stores in compliance with the Company's policies, standards and specifications, including such matters as decor, rental agreement terms, hours of operation, pricing and merchandise. Franchisees are not required to purchase their rental merchandise from the Company, although many do so in order to take advantage of bulk purchasing discounts and favorable delivery terms. Many also purchase their rental furniture from the Company's MacTavish Furniture Industries facilities. The Company conducts a financial audit of its franchise stores every six to 12 months and also conducts regular operational audits, generally visiting each franchise store almost as often as it visits its Company-owned stores. In addition, the Company's proprietary management information system links each store to corporate headquarters. With this system, each night the Company automatically retrieves detailed financial information regarding the number of customers served during the day, the revenues received and the status of all accounts receivable. This information is compiled nightly into a detailed report of every franchised and Company-operated rental purchase store, which is then immediately made available to corporate and store management. On a weekly basis, the system also automatically debits the franchisee's bank account for the 5% royalty fee, resulting in essentially a 100% collection rate on franchise royalties. Rent-to-Rent -- Aaron Rents and Sells Furniture The Company has been in the rent-to-rent business for over 40 years and is the second largest furniture rent-to-rent company in the United States. The rent-to-rent business accounted for approximately 53% of the Company's total revenues for the fiscal year ended December 31, 1997. The Company rents new and rental return merchandise to both the individual and the business segments of the rent-to-rent industry, with a growing focus on rentals of residential and office furniture to business customers. As of March 31, 1998, the Company operated 107 rent-to-rent stores in 22 states. Rental agreements may give the customer the option to purchase the merchandise rented, though few customers exercise the purchase option. Items held for rent, whether new or rental return, are also available for purchase and rental purchase at all rent-to-rent stores. The Company's typical rent-to-rent store layout consists of a combination showroom and warehouse comprising about 21,000 square feet. Each residential showroom features attractive displays of dining-room, living-room and bedroom furniture in a number of styles, fabrics, materials and colors. Office rental showrooms feature lines of desks, chairs, conference tables, credenzas, sofas and accessories. The Company believes that having a warehouse next to each showroom permits the store manager to exercise greater control over inventory, merchandise condition and pickup and deliveries, resulting in more efficient and consistent service for the customer. The Company has also recently opened warehouse-only locations in a few selected markets where the Company is seeking an immediate presence at a lower cost. The warehouse-only locations rely on outside sale representatives who target business customers. Each rent-to-rent store generally offers next day delivery for addresses located within 50 miles of the store, and maintains at least one truck and a crew for pickups and deliveries. The Company believes that its ability to obtain and deliver office furniture and equipment to its customers quickly and efficiently gives the 6 8 Company an advantage over general office furniture retailers who often require several weeks to effect delivery. The Aaron Rents' Rent-to-Rent Division's four clearance stores serve primarily as retail outlets for final sales of rental return merchandise that will not be rented again, though they also sell new merchandise. Sales by the clearance stores, together with sales at the clearance centers located in most of the Company's rent-to-rent stores, are instrumental in enabling the Company to maximize residual values of depreciated rental merchandise. The Company generally sells rental return merchandise at or above its book value (cost less depreciation) plus selling expenses, a price which is usually considerably lower than the price for comparable new merchandise. Most merchandise held for sale in clearance stores may also be acquired through a rental purchase option. Because new merchandise is sold at the same location as rental return merchandise, the Company has the opportunity to sell both new and rental return merchandise to customers who may have been attracted to the store by the advertising and price appeal of rental return merchandise. The ability to sell new and rental return merchandise at the same location allows for more efficient use of facilities and personnel and minimizes overhead. Aaron Rents' Convention Furnishings The Aaron Rents' Convention Furnishings Division specializes in supplying conventions and events of various sizes with furniture (such as tables, chairs, desks and sofas) on a temporary basis. The division primarily serves various national and local vendors that organize events at large convention centers. The division also serves various smaller events on a regular basis with the assistance of its rent-to-rent stores which have served smaller events for more than 20 years. Convention rentals are characterized by very short terms (generally one week) and significantly higher rental rates due to the labor-intensive nature of the business. The Company's convention furnishings stores are generally located near the Company's existing distribution or warehouse facilities to enable the Company to respond quickly and efficiently to the division's needs. The division also benefits from the ability to sell its used furnishings through the Company's clearance centers, which allows the division to keep its inventory refreshed. In December 1997, the Company acquired the assets of Blackhawk Convention Services, Inc., including three locations in Chicago, New York and Las Vegas. An additional location was added in Dallas in the first quarter of 1998. As of March 31, 1998, the Company had seven convention furnishings store locations. FURNITURE MANUFACTURING The Company believes that its manufacturing capability gives it a strategic advantage over its competitors by enabling the Company to control the quality, cost, timing, styling, durability and quantity of its furniture rental products. As the only major furniture rental company that manufactures its own furniture, the Company believes its 391,000 square feet of manufacturing facilities provide it more flexibility in scheduling production runs and in meeting inventory needs than rental companies that do not manufacture their own furniture and are dependent upon third party suppliers. The Company's MacTavish Furniture Industries Division has manufactured furniture for the Company's rental stores since 1971. The division has five manufacturing plants and four bedding manufacturing facilities which supply 50% of the Company's rent-to-rent furniture and bedding needs and 46% of Company-operated rental purchase stores' furniture and bedding needs. Overall, approximately 49% of the furniture rented or sold by the Company is manufactured by MacTavish Furniture Industries. The Company's manufacturing plants have the capacity to meet the Company's needs for such furniture for the foreseeable future. The Company also does limited manufacturing of residential furniture for several unaffiliated furniture retailers. MacTavish Furniture Industries manufactures upholstered living-room furniture (including contemporary sofas, sofabeds, chairs and modular sofa and ottoman collections in a variety of natural and synthetic fabrics and leathers), bedding (including standard sizes of mattresses and box springs), office furniture (including desks, credenzas, conference tables, bookcases and chairs), and bedroom furniture (including 7 9 bedroom sets, headboards, dressers, mirrors, chests and night tables). The Company has designed special features for the furniture it manufactures which make its furniture more durable and better equipped for frequent transportation than furniture purchased from third parties. These features include knock-down construction of upholstered furniture products for easy replacement of worn or damaged parts at lower cost; standardization of components; reduction of parts and features susceptible to wear or damage; more resilient foam; durable, soil-resistant fabrics and sturdy frames for longer life and higher residual value; and collapsible box springs and devices which allow sofas to stand on end for easier and more efficient transport. The Company has patent applications pending for certain of these features. The Company also manufactures replacement covers of all styles and fabrics of its upholstered furniture for use in reconditioning rental return furniture. The principal raw materials used in manufacturing are fabric, foam, wire-innerspring assemblies, cotton liners and hardwoods. All of these materials are purchased in the open market from sources not affiliated with the Company. The Company is not dependent on any single supplier, and none of the raw materials are in short supply. The Company generally maintains a three or four week inventory of such materials. STORE OPERATIONS Management The Company's rent-to-rent stores are managed by the President of the division and are organized geographically into five regions, each supervised by a vice president who is primarily responsible for monitoring individual store performance and inventory levels within the respective regions. The Aaron's Rental Purchase Division is managed separately by the President of the division, who has five regional managers performing similar responsibilities. Stores are directly supervised by 18 rent-to-rent regional managers and 30 rental purchase district managers. At the individual store level, the store manager is responsible for customer and credit relations, deliveries and pickups, warehouse and inventory management, and certain marketing efforts. Store managers are also responsible for inspecting rental return furniture to determine whether it should be sold as is, rented again as is, repaired and sold, or reconditioned for additional rental. A significant portion of the store manager's compensation is dependent upon store revenues and profits. Executive management at the Company's headquarters directs and coordinates purchasing, financial planning and control, manufacturing, employee training, and new store site selection for the Company-operated stores. The Company's internal audit department conducts periodic audits of every store, including audits of Company-operated rental purchase stores several times each year, and semi-annual audits of rent-to-rent stores and franchised rental purchase stores. The Company's business philosophy has always emphasized strict cost containment and fiscal controls. Executive and store level management monitor expenses vigilantly to contain costs. All invoices are paid out of the Company's headquarters in order to enhance fiscal accountability. The Company believes that its careful attention to the expense side of its operations has enabled it to maintain financial stability and profitability. Management Information Systems The Company utilizes computer-based management information systems to facilitate cash collections, merchandise returns and inventory monitoring. Through the use of proprietary software developed by the Company, each of the Company's stores is linked by computer directly to corporate headquarters, which enables headquarters to monitor the performance of each store on a daily basis. A different system is used to run the rent-to-rent and rental purchase operations due to the significant differences in the businesses. At the store level, the store manager is better able to track inventory on the showroom floor and in the warehouse to minimize delivery times, assist with product purchasing and match customer needs with available inventory. 8 10 Rental Agreement Approval, Renewal and Collection One of the keys to the success of the Company's Aaron's Rental Purchase operations is its ability to achieve timely cash collections. Individual store managers utilize the Company's computerized information system on a daily basis to track cash collections. They contact customers within a few days of when their rental payments are due in order to encourage customers to keep their agreement current and in force (rather than having to return the merchandise for non-payment of rent) and to renew their agreements for an additional rental period. Careful attention to cash collections is particularly important in the rental purchase operations, where the customer typically has the option to cancel the agreement at any time and each payment is considered a renewal of the agreement rather than a collection of a receivable. Each rent-to-rent store performs a credit check on most of its residential and business customers. The Company generally performs no formal credit check with respect to rental purchase customers other than to verify employment or other reliable sources of income and personal references supplied by the customer. All of the Company's rental agreements for residential and office merchandise require rental payments in advance, and the merchandise normally is picked up if a payment is significantly in arrears. Net bad debt losses from rent-to-rent rentals as a percentage of rent-to-rent rental revenues were approximately 1.9%, 2.6%, and 3.0% for the fiscal years ended December 31, 1997 and 1996, and for the nine months ended December 31, 1995. The Company does not extend credit to rental purchase customers. For the same periods, net merchandise shrinkage for both divisions as a percentage of combined rental revenues was 2.3%, 2.5% and 3.0%, respectively. The Company believes that its collection and repossession policies comply with applicable legal requirements, and the Company disciplines any employee that it discovers deviating from such policies. Customer Service The Company believes that customer service is one of the most important elements in the success of its rent-to-rent and rental purchase businesses. Customer satisfaction is critical because the customer usually has the option of returning the rented merchandise at any time. The Company's goal is to make its customers feel positive about the Company and its products from the moment they enter the Company's showrooms. Rented items are serviced at no charge to the customer, and quick, free delivery is available in many cases. In order to increase rentals at existing stores, the Company fosters relationships with existing customers to attract recurring business, and many new rental and rental purchase agreements are attributable to repeat customers. Because of the importance of customer service, the Company believes that a prerequisite for successful operations and growth is skilled, effective employees who value the Company's customers and project a genuine desire to serve the customers' needs. The Company has a comprehensive employee training program at its Atlanta headquarters for all rent-to-rent store managers and employees covering all areas of the Company's operations, with a heavy emphasis on customer service. Additionally, four field trainers are based out of the regional offices. Store managers and employees in the Aaron's Rental Purchase stores have similar training primarily on site by the division's training staff and regional managers. The Company's policy of promoting from within aids in employee retention and commitment to the Company's customer service and other business philosophies, which also allows the Company to realize greater benefits from its employee training programs. PURCHASING AND DISTRIBUTION The Company's product mix is determined by store managers in consultation with the regional managers and regional vice presidents, based on an analysis of customer demands. In the Company's rent-to-rent division, furniture is the primary merchandise category, accounting for approximately 93% of rent-to-rent rental revenues for the year ended December 31, 1997. In the Aaron's Rental Purchase Division, electronics, furniture, appliances other accounted for approximately 54%, 30%, 14% and 2%, respectively, of rental purchase rental revenues for the year ended December 31, 1997. With approval from the applicable operating management, store managers send their orders to the rental purchase or rent-to-rent purchasing department at headquarters. The applicable purchasing department reviews all purchase orders to determine whether 9 11 merchandise needs may be satisfied out of existing inventory at other stores before contacting vendors. If inventory is available at other stores, the purchasing department arranges for inventory shipments between stores. Virtually all merchandise for the Company's stores is purchased by the Company's six buyers, three of whom are solely responsible for rental purchase merchandise. The Company purchases the majority of its merchandise directly from manufacturers, with the balance from local distributors. The Company's largest supplier is its MacTavish Furniture Industries manufacturing division, which supplies approximately 49% of the furniture rented or sold by the Company. The Company has no long-term agreements for the purchase of merchandise and believes that its relationships with suppliers are excellent. Both rent-to-rent and rental purchase operations utilize distribution centers to control inventory. Rent-to-rent stores in geographic proximity to the Company's rent-to-rent distribution facility in Richmond, Virginia order merchandise directly from the distribution center. The remaining rent-to-rent stores receive merchandise directly from vendors who ship to the stores' attached warehouses. All rental purchase stores order directly from the Company's four rental purchase distribution centers located in Auburndale, Florida; Dallas and Houston, Texas; and Duluth, Georgia. Rental purchase stores typically have smaller warehouses with less inventory storage space than the Company's rent-to-rent stores. Vendors ship directly to the distribution centers. Distribution centers result in freight savings from truckload discounts and a more efficient distribution of merchandise. The Company utilizes its nine tractor trailers, its local delivery trucks, and various contract carriers to make weekly deliveries to individual stores. The Company recently began construction of a 200,000 square foot furniture distribution facility in Cairo, Georgia, which is located near the Company's furniture manufacturing plants in Coolidge, Georgia and Quincy, Florida. MARKETING AND ADVERTISING In its rental purchase operations, the Company relies heavily on store traffic, direct mail and television advertising to reach its target markets. Rental purchase stores are located within neighborhood communities, and will typically distribute mass mailings of promotional material every two weeks, with the goal of reaching every known household within a specified radius of each store at least 12 times per year. In addition, delivery personnel are trained to leave promotional material at the door of each residence within five doors of the delivery destination. In concentrated geographic markets, and for special promotions, the Company also utilizes local television and radio advertising for special promotions. The Company markets its rent-to-rent operations through its outside sales staff for personal contact with apartment complex managers for the residential market as well as the decision maker for the office market. It also relies on the use of brochures, newspapers, radio, television, direct mail, trade publications, yellow pages and over the Internet (http://www.aaronrents.com) to reach its residential and office rental and sales customers. The Company believes that such advertising benefits its residential and office rental and sales operations because of increased awareness of rental and purchase options along with name recognition. COMPETITION The Company's businesses are highly competitive. The Company competes in the rent-to-rent market with national and local companies and, to a lesser extent, with apartment owners who purchase furniture for rental to tenants. The Company believes that CORT Business Services Corporation and Globe Business Resources, Inc. are its most significant rent-to-rent competitors. In the rent-to-own market, the Company competes with several larger companies with substantially greater financial resources than the Company. The Company believes that the largest rent-to-own companies include Rent-A-Center (a division of Thorn plc), Renters Choice, Inc., Alrenco, Inc., and Rent-Way, Inc. Although definitive industry statistics are not available, management believes that the Company is one of the largest furniture rental companies in the United States. Management also believes that it generally has a 10 12 favorable competitive position in that industry because of its manufacturing capabilities, prompt delivery, competitive pricing, name recognition and commitment to customer service. GOVERNMENT REGULATION The Company believes that 48 states specifically regulate rent-to-own transactions, including states in which the Company currently operates Aaron's Rental Purchase stores. Most of these states have enacted disclosure laws which require rent-to-own companies to disclose to its customers the total number of payments, total amount and timing of all payments to acquire ownership of any item, any other charges that may be imposed by the Company and miscellaneous other items. The most restrictive states limit the total amount that a customer may be charged for an item to twice the "retail" price for the item, or regulate the amount of "interest" that rent-to-own companies may charge on rent-to-own transactions, generally defining "interest" as rental fees paid in excess of the "retail" price of the goods. The Company's long-established policy in all states is to disclose the terms of its rental purchase transactions as a matter of good business ethics and customer service. At the present time, no federal law specifically regulates the rent-to-own industry. Federal legislation has been proposed from time to time to regulate the industry. Management cannot predict whether any such legislation will be enacted and what the impact of such legislation would be. Although the Company is unable to predict the results of these or any additional regulatory initiatives, the Company does not believe that the existing and proposed regulations will have a material adverse impact on the Company's rental purchase or other operations. The Company's Aaron's Rental Purchase franchise program is subject to Federal Trade Commission ("FTC") regulation and various state laws regulating the offer and sale of franchises. Several state laws also regulate substantive aspects of the franchisor-franchisee relationship. The FTC requires the Company to furnish to prospective franchisees a franchise offering circular containing prescribed information. A number of states in which the Company might consider franchising also regulate the sale of franchises and require registration of the franchise offering circular with state authorities. The Company believes it is in material compliance with all applicable franchise laws. EMPLOYEES At March 31, 1998, the Company had approximately 3,100 employees. None of the Company's employees are covered by a collective bargaining agreement, and the Company believes that its relations with its employees are good. ITEM 2. PROPERTIES The Company leases space for substantially all of its store and warehouse operations under operating leases expiring at various times through June, 2007. Most of the leases contain renewal options for additional periods ranging from one to fifteen years at rental rates generally adjusted on the basis of the consumer price index or other factors. The following table sets forth certain information regarding the Company's furniture manufacturing plants, bedding facilities and distribution centers:
LOCATION PRIMARY USE SQUARE FT. - -------- ----------- ---------- Coolidge, Georgia................... Furniture Manufacturing 77,000 Coolidge, Georgia................... Furniture Manufacturing 43,000 Coolidge, Georgia................... Furniture Manufacturing 38,000 Quincy, Florida..................... Furniture Manufacturing 80,000 Quincy, Florida..................... Furniture Manufacturing 91,000 Duluth, Georgia..................... Bedding Facility 30,000
11 13
LOCATION PRIMARY USE SQUARE FT. - -------- ----------- ---------- Coolidge, Georgia................... Bedding Facility 3,000 Houston, Texas...................... Bedding Facility 13,000 Orlando, Florida.................... Bedding Facility 15,800 Richmond, Virginia.................. Rent-to-Rent Distribution Center 98,000 Auburndale, Florida................. Rental Purchase Distribution Center 40,000 Dallas, Texas....................... Rental Purchase Distribution Center 92,000 Duluth, Georgia..................... Rental Purchase Distribution Center 67,000 Houston, Texas...................... Rental Purchase Distribution Center 70,000
The Company's executive and administrative offices occupy approximately 49,000 square feet in an 11-story, 80,000 square-foot office building that the Company owns in Atlanta. The Company leases most of the remaining space to third parties under leases with remaining terms averaging 2- 1/2 years. All of the Company's facilities are well maintained and adequate for their current and reasonably foreseeable uses. ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any legal proceedings the result of which it believes could have a material adverse impact upon its business, financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) The information presented under the caption "Common Stock Market Prices & Dividends" on page 24 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997 is incorporated herein by reference. The market quotations stated herein reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. (b) As of March 27, 1998, there were 861 holders of record of the Common Stock and 171 holders of record of the Class A Common Stock. (c) The information presented under "Note 5 -- Debt" on page 20 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997 is incorporated herein by reference. During the fiscal year ended December 31, 1997, the Company paid two semi-annual cash dividends. No assurance can be provided that such dividends will continue. ITEM 6. SELECTED FINANCIAL DATA The information presented under the caption "Selected Financial Information" on page 13 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information presented under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation" on pages 14 through 15 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997 is incorporated herein by reference. 12 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information presented under the captions "Consolidated Balance Sheets," "Consolidated Statements of Earnings," "Consolidated Statements of Shareholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Report of Independent Auditors" on pages 16 through 23 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997 is incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in the Company's definitive Proxy Statement, which the Company will file with the Securities and Exchange Commission no later than 120 days after December 31, 1997, with respect to the identity, background and Section 16 filings of directors and executive officers of the Company, is incorporated herein by reference to this item. ITEM 11. EXECUTIVE COMPENSATION The information contained in the Company's definitive Proxy Statement, which the Company will file with the Securities and Exchange Commission no later than 120 days after December 31, 1997, with respect to executive compensation, is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the Company's definitive Proxy Statement, which the Company will file with the Securities and Exchange Commission no later than 120 days after December 31, 1997, with respect to the ownership of common stock by certain beneficial owners and management, is incorporated herein by reference to this item. For purposes of determining the aggregate market value of the Company's voting stock held by non-affiliates, shares held by all directors and officers of the Company have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which person or entities may be "affiliates" of the Company as defined by the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the Company's definitive Proxy Statement, which the Company will file with the Securities and Exchange Commission no later than 120 days after December 31, 1997, with respect to certain relationships and related transactions, is incorporated herein by reference in response to this item. 13 15 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) 1. CONSOLIDATED FINANCIAL STATEMENTS The following financial statements and notes thereto of Aaron Rents, Inc. and Subsidiaries, and the related Report of Independent Auditors are incorporated in Item 8 by reference from the Company's Annual Report to Shareholders for the Year ended December 31, 1997.
REFERENCE PAGE ANNUAL REPORT TO SHAREHOLDERS ---------------- Consolidated Balance Sheets -- December 31, 1997 and 1996... 16 Consolidated Statements of Earnings -- Year ended December 31, 1997, Year ended December 31, 1996, and Nine Months ended December 31, 1995................................... 17 Consolidated Statements of Shareholders' Equity -- Year ended December 31, 1997, Year ended December 31, 1996 and Nine Months ended December 31, 1995....................... 17 Consolidated Statements of Cash Flows -- Year ended December 31, 1997, Year ended December 31, 1996, and Nine Months ended December 31, 1995................................... 18 Notes to Consolidated Financial Statements.................. 19-23 Report of Independent Auditors.............................. 23
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because they are inapplicable or the required information is included in the financial statements or notes thereto. 3. EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 3(a) Amended and Restated Articles of Incorporation of the Company, filed as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (the "March 31, 1996 10-Q") which exhibit is by this reference incorporated herein. 3(b) By-laws of the Company. 4 See Exhibits 3 (a) through 3 (b). 10(a) Fifth Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement, dated December 17, 1997. 10(b) Letter Agreements dated December 30, 1997 between SunTrust Bank, Atlanta and the Company, and letter agreements dated December 30, 1997 between First Chicago NBD and the Company regarding Interest Rate Swap Transactions. 13 Aaron Rents, Inc. Annual Report to Shareholders for the fiscal year ended December 31,1997. With the exception of information expressly incorporated herein by direct reference thereto, the Annual Report to Shareholders for the fiscal year ended December 31, 1997 is not deemed to be filed as a part of this Annual Report on Form 10-K.
14 16
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 21 Subsidiaries of the Registrant 23 Consent of Ernst & Young LLP 27 Financial Data Schedule (for SEC use only)
- --------------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to item 14 (c) of this report. (b) Reports on Form 8-K-none (c) Exhibits listed in item 14 (a) (3) are included elsewhere in this Report. 15 17 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 31st day of March, 1998. AARON RENTS, INC. By: /s/ GILBERT L. DANIELSON ------------------------------------ Gilbert L. Danielson Vice President, Finance Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 31st day of March, 1998.
SIGNATURE TITLE --------- ----- /s/ R. CHARLES LOUDERMILK, SR. Chief Executive Officer (Principal - ----------------------------------------------------------- Executive Officer) and Chairman of the R. Charles Loudermilk, Sr. Board of Directors) /s/ ROBERT C. LOUDERMILK, JR. President, Chief Operating Officer and - ----------------------------------------------------------- Director Robert C. Loudermilk, Jr. /s/ GILBERT L. DANIELSON Vice President, Finance, Chief Financial - ----------------------------------------------------------- Officer and Director, (Principal Gilbert L. Danielson Financial Officer) /s/ ROBERT P. SINCLAIR, JR. Controller (Principal Accounting Officer) - ----------------------------------------------------------- Robert P. Sinclair, Jr. /s/ RONALD W. ALLEN Director - ----------------------------------------------------------- Ronald W. Allen /s/ LEO BENATAR Director - ----------------------------------------------------------- Leo Benatar /s/ EARL DOLIVE Director - ----------------------------------------------------------- Earl Dolive /s/ REX FUQUA Director - ----------------------------------------------------------- J. Rex Fuqua /s/ KEITH C. GROEN Vice President, Legal Secretary and - ----------------------------------------------------------- Director Keith C. Groen /s/ INGRID SAUNDERS JONES Director - ----------------------------------------------------------- Ingrid Saunders Jones /s/ LTG. M. COLLIER ROSS USA (RET.) Director - ----------------------------------------------------------- LTG M. Collier Ross USA (Ret.) /s/ R. K. SEHGAL Director - ----------------------------------------------------------- R. K. Sehgal
16 EX-3.B 2 AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3(B) AMENDED AND RESTATED BY-LAWS OF AARON RENTS, INC. ADOPTED ON NOVEMBER 18, 1997 ARTICLE I OFFICES Section 1. Registered Office. The registered office shall be in the State of Georgia, County of Fulton. Section 2. Other Offices. The corporation may also have offices at such other places both within and without the State of Georgia as the board of directors may from time to time determine and the business of the corporation may require or make desirable. ARTICLE II SHAREHOLDERS MEETINGS Section 1. Annual Meetings. The annual meeting of the shareholders of the corporation shall be held at the principal office of the corporation or at such other place in the United States as may be determined by the board of directors, at 10:00 a.m. on the last business day of the fifth month following the close of each fiscal year or at such other time and date following the close of the fiscal year as shall be determined by the board of directors, for the purpose of electing directors and transacting such other business as may properly be brought before the meeting. Section 2. Special Meetings. (a) Special meetings of shareholders of one or more classes or series of the corporation's shares shall be called by the president or the secretary (i) when so directed by the chairman or by a majority of the entire board of directors; or (ii) upon the demand of holders of at least twenty five percent (25%) of all votes entitled to be cast on each issue to be considered at a proposed special meeting of the shareholders. The business that may be transacted at any special meeting of shareholders shall be limited to that proposed in the notice of the special meeting given in accordance with Section 3 (including related or incidental matters that may be necessary or appropriate to effectuate the proposed business). (b) Promptly after the date of receipt of written shareholder demands (the "Demand Date") purporting to comply with the provisions of the Georgia Business Corporation Code, as amended from time to time (the "Code"), and these by-laws, the president or the secretary of the corporation shall determine the validity of the demand. If the demand is valid, the president or the secretary of the corporation shall call a special shareholders meeting by mailing notice within 20 days of the Demand Date. (c) The time, date and place of any special shareholders meeting shall be determined by the board of directors and shall be set forth in the notice of meeting. Section 3. Notice of Meetings. Written notice of every meeting of shareholders, stating the place, date and hour of the meeting, shall be given personally or by mail to each shareholder of record not less than 10 nor more than 60 days before the date of the meeting. Such notice may be given in any manner permitted by, and shall be deemed to be effectively given at the times as provided in, the Georgia Business Corporation Code. A shareholder's attendance at a meeting waives objection to lack of notice or defective notice of such meeting, unless the shareholder at the beginning of the meeting objects to the holding of the meeting or transacting business at the meeting, and waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. A shareholder may waive notice of a meeting before or after the date and time stated in the notice, which waiver must be in writing, signed by the shareholder entitled to such notice and be delivered to the corporation for inclusion in the minutes or filing with the corporate records. 1 2 Section 4. Quorum. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the shareholders except as otherwise provided by statute, by the articles of incorporation, or by these by-laws. If a quorum is not present or represented at any meeting of the shareholders, a majority of the shareholders entitled to vote thereat, present in person or represented by proxy, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 5. Order of Business. At the annual meeting of shareholders the order of business shall be as follows: 1. Calling meeting to order. 2. Proof of notice of meeting. 3. Reading of minutes of last previous annual meeting. 4. Reports of officers. 5. Reports of committees. 6. Election of directors. 7. Miscellaneous business. Section 6. Voting. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which by express provision of law or of the articles of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of the question. Each shareholder shall at every meeting of the shareholders be entitled to one vote, in person or by proxy, for each share of the capital stock having voting power registered in his name on the books of the corporation, but no proxy shall be voted or acted upon after 11 months from its date, unless otherwise provided in the proxy. Section 7. Shareholder Proposals. (a) No shareholder proposal or resolution (each a "Shareholder Proposal"), whether purporting to be binding or non-binding on the corporation or its board of directors, shall be considered at any annual or special meeting of the shareholders unless: (i) If such Shareholder Proposal relates solely to the nomination and election of directors, it satisfies the requirements of Article III, Section 3; or (ii) With respect to any Shareholder Proposal to be considered at a special shareholders meeting called pursuant to Article II, Section 2, subsection (a)(i), the shareholder(s) proposing to make such Shareholder Proposal provided the information set forth in subsection (b) of this Section 7 to the board of directors within 14 days after the date of the notice calling such special shareholders meeting (or if less than 21 days notice of the meeting is given to shareholders, such information was delivered to the president not later than the close of the seventh day following the date on which the notice of the shareholders' meeting was mailed); or (iii) With respect to any Shareholder Proposal to be considered at a special shareholders meeting called pursuant to Article II, Section 2, subsection (a)(ii), the shareholder(s) proposing to make such Shareholder Proposal provided the information set forth in subsection (b) of this Section 7 to the board of directors concurrently with the filing of the initial demand by shareholders relating to such special shareholders meeting; or (iv) With respect to any Shareholder Proposal to be considered at any regular meeting of shareholders, other than as described in clause (i) hereof, the shareholder(s) proposing to make such Shareholder Proposal provided the information set forth in subsection (b) of this Section 7 to the board of directors between 90 to 120 days prior to the regular meeting at which they wish the Shareholder Proposal to be considered. 2 3 For the purposes of determining whether information was provided at the times or within the specified periods, the date of the applicable meeting shall be as set forth in the notice of meeting given by the corporation, and such times and periods will be determined without regard to any postponements, deferrals or adjournments of such meeting to a later date. (b) The following information must be provided to the board of directors, within or at the times specified in subsection (a) above, in order for the Shareholder Proposal to be considered at the applicable shareholders meeting: (i) The Shareholder Proposal, as it will be proposed, in full text and in writing; (ii) The purpose(s) for which the Shareholder Proposal is desired and the specific meeting at which such proposal is proposed to be considered; (iii) The name(s), address(es), and number of shares held of record by the shareholder(s) making such Shareholder Proposal (or owned beneficially and represented by a nominee certificate on file with the corporation); (iv) The number of shares that have been solicited with regard to the Shareholder Proposal and the number of shares the holders of which have agreed (in writing or otherwise) to vote in any specific fashion on said Shareholder Proposal; and (v) A written statement by said shareholder(s) that they intend to continue ownership of such voting shares through the date of the meeting at which said Shareholder Proposal is proposed to be considered. (c) Failure to fully comply with the provisions of this Section 7 shall bar discussion of and voting on the Shareholder Proposal at the applicable regular or special shareholders meeting. Any Shareholder Proposal that does not comply with the requirements of this Section 7 shall be disregarded by the chairman of the meeting, and any votes cast in support of the Shareholder Proposal, unless the Shareholder Proposal has been validly submitted by another shareholder, shall be disregarded by the chairman of such meeting. (d) The provisions of this Section 7 shall be read in accordance with and so as not to conflict with the rules and regulations promulgated by the Securities and Exchange Commission and any stock exchange or quotation system upon which the corporation's shares are traded. Nothing in these By-laws shall be deemed to require the consideration at any meeting of shareholders of any Shareholder Proposal that, pursuant to law, the corporation may refuse to permit consideration thereof. Section 8. Consent of Shareholders. Any action required or permitted to be taken at any meeting of the shareholders may be taken without a meeting if all of the shareholders consent thereto in writing, setting forth the action so taken. Such consent shall have the same force and effect as a unanimous vote of shareholders. Section 9. List of Shareholders; Inspection of Records. (a) The corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving their names and addresses and the number, class and series, if any, of the shares held by each. The officer who has charge of the stock transfer books of the corporation shall prepare and make, before every meeting of shareholders or any adjournment thereof, a complete list of the shareholders entitled to vote at the meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number and class and series, if any, of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder during the whole time of the meeting for the purposes thereof. The said list may be the corporation's regular record of shareholders if it is arranged in alphabetical order or contains an alphabetical index. (b) Shareholders are entitled to inspect the corporate records as and to the extent provided by the Code; provided, however, that only shareholders owning more than two percent (2%) of the outstanding shares of any class of the corporation's stock shall be entitled to inspect (1) the minutes from any board, board 3 4 committee or shareholders meeting (including any records of action taken thereby without a meeting); (2) the accounting records of the corporation; or (3) any record of the shareholders of the corporation. ARTICLE III DIRECTORS Section 1. Powers. Except as otherwise provided by any legal agreement among shareholders, the property, affairs and business of the corporation shall be managed and directed by its board of directors, which may exercise all powers of the corporation and do all lawful acts and things which are not by law, by any legal agreement among shareholders, by the articles of incorporation or by these by-laws directed or required to be exercised or done by the shareholders. Section 2. Number, Election and Term. The number of directors which shall constitute the whole board shall be eleven. Provided, however, the number of directors may be increased or decreased from time to time by the board of directors by amendment of this by-law, but no decrease shall have the effect of shortening the term of an incumbent director. The directors shall be elected by plurality vote at the annual meeting of shareholders, except as hereinafter provided, and each director elected shall hold office until his successor is elected and qualified or until his earlier resignation, removal from office or death. Directors shall be natural person who have attained the age of 18 years, but need not be residents of the State of Georgia or shareholders of the corporation. Section 3. Nominations. (a) If any shareholder intends to nominate or cause to be nominated any candidate for election to the board of directors (other than any candidate to be sponsored by and proposed at the instance of the management), such shareholder shall notify the president by first class registered mail sent not less than 14 nor more than 50 days before the scheduled meeting of the shareholders at which directors will be elected. However, if less than 21 days notice of the meeting is given to shareholders, such nomination shall be delivered or mailed to the president not later than the close of the seventh day following the date on which the notice of the shareholders' meeting was mailed. Such notification shall contain the following information with respect to each nominee, to the extent known to the shareholder giving such notification: (1) Name, address and principal present occupation; (2) To the knowledge of the shareholder who proposed to make such nomination, the total number of shares that may be voted for such proposed nominee; (3) The names and address of the shareholders who propose to make such nomination, and the number of shares of the corporation owned by each of such shareholders; and (4) The following additional information with respect to each nominee: age, past employment, education, beneficial ownership of shares in the corporation, past and present financial standing, criminal history (including any convictions, indictments or settlements thereof), involvement in any past or pending litigation or administrative proceedings (including threatened involvement), relationship to and agreements (whether or not in writing) with the shareholder(s) (and their relatives, subsidiaries and affiliates) intending to make such nomination, past and present relationships or dealings with the corporation or any of its subsidiaries, affiliates, directors, officers or agents, plans or ideas for managing the affairs of the corporation (including, without limitation, any termination of employees, any sales of corporate assets, any proposed merger, business combination or recapitalization involving the corporation, and any proposed dissolution or liquidation of the corporation), and all additional information relating to such person that would be required to be disclosed, or otherwise required, pursuant to Sections 13 or 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act"), in connection with any acquisition of shares by such nominee or in connection with the solicitation of proxies by such nominee for his election as a director, regardless of the applicability of such provisions of the Exchange Act. (b) Any nominations not in accordance with the provisions of this Section 3 may be disregarded by the chairman of the meeting, and upon instruction by the chairman, votes cast for each such nominee shall be 4 5 disregarded. In the event, however, that a person should be nominated by more than one shareholder, and if one such nomination complies with the provisions of this Section 3, such nomination shall be honored, and all shares voted for such nominee shall be counted. Section 4. Vacancies. Vacancies, including vacancies resulting from any increase in the number of directors, but not including vacancies resulting from removal from office by the shareholders, may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and a director so chosen shall hold office until the next annual election and until his successor is duly elected and qualified unless sooner displaced. If there are no directors in office, then vacancies shall be filled through election by the shareholders. Section 5. Meetings and Notice. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Georgia. Regular meetings of the board of directors may be held without notice at such time and place as shall from time to time be determined by resolution of the board. Special meetings of the board may be called by the chairman of the board or president or by any two directors on one day's oral, telegraphic or written notice duly given or served on each director personally, or three days' notice deposited, first class postage prepaid, in the United States mail. Such notice shall state a reasonable time, date and place of meeting, but the purpose need not be stated therein. A director may waive any notice required by the Code, the articles of incorporation, or these by-laws before or after the date and time of the matter to which the notice relates, by a written waiver signed by the director and delivered to the corporation for inclusion in the minutes or filing with the corporate records. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting and waiver of all objections to the place and time of the meeting, or the manner in which it has been called or convened except when the director states, at the beginning of the meeting, any such objection or objections to the transaction of business. Section 6. Quorum. At all meetings of the board a majority of directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board, except as may be otherwise specifically provided by law, by the articles of incorporation, or by these by-laws. If a quorum shall not be present at any meeting of the board, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 7. Conference Telephone Meeting. Unless the articles of incorporation or these by-laws otherwise provide, members of the board of directors, or any committee designated by such board, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person. Section 8. Consent of Directors. Unless otherwise restricted by the articles of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, setting forth the action so taken, and the writing or writings are delivered to the corporation for inclusion in the minutes or filing with the corporate records. Such consent shall have the same force and effect as a unanimous vote of the board. Section 9. Committees. The board of directors may, by resolution passed by a majority of the whole board, designate from among its members one or more committees, each committee to consist of two or more directors. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of such committee. Any such committee, to the extent provided in the resolution, shall have and may exercise all of the authority of the board of directors in the management of the business and affairs of the corporation except that it shall have no authority with respect to (1) amending the articles of incorporation or these by-laws; (2) adopting a plan of merger or consolidation; (3) the sale, lease, exchange or other disposition of all or substantially all of the property and assets of the corporation; (4) a voluntary dissolution of the corporation or a revocation thereof; and (5) any other action limited by law. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. A majority of each committee may determine its action and may 5 6 fix the time and place of its meetings, unless otherwise provided by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. Section 10. Removal of Directors. At any shareholders meeting with respect to which notice of such purpose has been given, any director may be removed from office, with or without cause, by the vote of shareholders representing a majority of the issued and outstanding capital stock entitled to vote for the election of directors, and his successor may be elected at the same or any subsequent meeting of shareholders; provided that to the extent any vacancy created by such removal is not filled by such an election within 60 days after such removal, the remaining directors shall, by majority vote, be entitled to fill any such vacancy. Section 11. Compensation of Directors. Directors shall be entitled to such reasonable compensation for their services as directors or members of any committee of the board as shall be fixed from time to time by resolution adopted by the board, and shall also be entitled to reimbursement for any reasonable expenses incurred in attending any meeting of the board or any such committee. ARTICLE IV OFFICERS Section 1. Number. The officers of the corporation shall be chosen by the board of directors and shall be a president, a secretary and a treasurer. The board of directors may also choose a chairman of the board, one or more vice-presidents, assistant secretaries and assistant treasurers. Any number of officers, except the offices of president and secretary may be held by the same person. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 2. Compensation. The salaries of all officers and agents of the corporation shall be fixed by the board of directors or a committee or officer appointed by the board. Section 3. Term of Office. Unless otherwise provided by resolution of the board of directors, the principal officers shall be chosen annually by the board at the first meeting of the board following the annual meeting of shareholders of the corporation, or as soon thereafter as is conveniently possible. Subordinate officers may be elected from time to time. Each officer shall serve until his successor shall have been chosen and qualified, or until his death, resignation or removal. Section 4. Removal. Any officer may be removed from office at any time, with or without cause, by the board of directors whenever in its judgment the best interest of the corporation will be served thereby. Section 5. Vacancies. Any vacancy in an office resulting from any cause may be filled by the board of directors. Section 6. Powers and Duties. Except as hereinafter provided, the officers of the corporation shall each have such powers and duties as generally pertain to their respective officers, as well as such powers and duties as from time to time may be conferred by the board of directors. (a) Chairman of the Board. The chairman of the board shall preside at all meetings of the shareholders and the board of directors. Except where by law the signature of the president is required, the chairman shall possess the same power as the president to sign all certificates representing shares of the corporation and all bonds, mortgages and other contracts requiring a seal, under the seal of the corporation. (b) Chief Executive Officer. The chief executive officer shall be the chief executive officer of the corporation and shall in the absence of the chairman of the board preside at all meetings of the shareholders and the board of directors, and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Except where by law the signature of the president is required, the chief executive officer shall possess the same power as the president to sign all certificates representing shares of the corporation and all bonds, mortgages and other contracts requiring a seal, under the seal of the corporation. 6 7 (c) President. The president shall in the absence of the chairman of the board and the chief executive officer preside at all meetings of the shareholders and the board of directors. The president shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. (d) Chief Operating Officer. The chief operating officer shall be the chief operations officer of the corporation. He shall superintend all operations of the corporation and in the absence of the chairman of the board, the chief executive officer and the president shall preside at all meetings of the shareholders and the board of directors, and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. (e) Vice President. In the absence of the president or in the event of his inability or refusal to act, the vice-president (or in the event there be more than one vice-president, the vice-president in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. (f) Secretary. The secretary shall attend all meetings of the board of directors and all meetings of the shareholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to the instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. (g) Assistant Secretary. The assistant secretary or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. (h) Treasurer. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. If required by the board of directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under this control belonging to the corporation. (i) Assistant Treasurer. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. 7 8 Section 7. Voting Securities of Corporation. Unless otherwise directed by the board of directors, the chairman of the board, and in his absence, the president shall have full power and authority on behalf of the corporation to attend and to act and vote at any meetings of security holders of corporations in which the corporation may hold securities, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the corporation might have possessed and exercised if it had been present. The board of directors by resolution from time to time may confer like powers upon any other person or persons. ARTICLE V CERTIFICATE Section 1. Form of Certificate. Every holder of fully-paid stock in the corporation shall be entitled to have a certificate in such form as the board of directors may from time to time prescribe. Section 2. Lost Certificates. The board of directors may direct that a new certificate be issued in place of any certificate theretofore issued by the corporation and alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 3. Transfers. (a) Transfers of shares of the capital stock of the corporation shall be made only on the books of the corporation by the registered holder thereof, or by his duly authorized attorney, or with a transfer clerk or transfer agent appointed as provided in Section 5 of this Article, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. (b) The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and for all other purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. (c) Shares of capital stock may be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificates or by separate written power of attorney to sell, assign and transfer the same, signed by the record holder, thereof, or by his duly authorized attorney-in-fact, but no transfer shall affect the right of the corporation to pay any dividend upon the stock to the holder of record as the holder in fact thereof for all purposes, and no transfer shall be valid, except between the parties thereto, until such transfer shall have been made upon the books of the corporation as herein provided. (d) The board may, from time to time, make such additional rules and regulations as it may deem expedient, not inconsistent with these by-laws or the articles of incorporation, concerning the issue, transfer and registration of certificates for shares of the capital stock of the corporation. Section 4. Record Date. In order that the corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than 70 days and, in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action requiring such determination of stockholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of and to vote at any meeting of shareholders, the record date shall be at the close of business on the day next preceding the day on which the notice is given, or, if notice is waived, at the chose of business on the day next preceding the day on which the meeting is held. If no record date is fixed for other purposes, the record date shall be at the close of 8 9 business on the day next preceding the day on which the board of directors adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the board of directors shall fix a new record date for the adjourned meeting. Section 5. Transfer Agent and Registrar. The board of directors may appoint one or more transfer agents or one or more transfer clerks and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them. ARTICLE VI GENERAL PROVISIONS Section 1. Distributions. Distributions upon the capital stock of the corporation, subject to the provisions of the articles of incorporation, if any, may be declared by the board of directors at any regular or special meetings, pursuant to law. Distributions may be paid in cash, in property, or in shares of the corporation's capital stock, subject to the provisions of the articles of incorporation. Before payment of any distribution, there may be set aside out of any funds of the corporation available for distributions such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing distributions, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 2. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the board of directors. Section 3. Seal. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal" and "Georgia". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. In the event it is inconvenient to use such a seal at any time, the signature of the corporation followed by the word "Seal" enclosed in parentheses shall be deemed the seal of the corporation. Section 4. Savings Clause. To the extent these by-laws conflict with any provision of any state or federal law as such laws may be amended from time to time, these by-laws shall be construed so as not to conflict with said law, and any discretionary actions made hereunder shall be made in accordance with applicable law. ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 1. Indemnification of Directors and Officers. The corporation shall indemnify and hold harmless any person (an "Indemnified Person") who is or was a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action or suit by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the corporation, against expenses (including, but not limited to, attorneys' fees and disbursements, court costs and expert witness fees), and against any judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; provided, in any case, that no indemnification shall be made in respect of expenses, judgments, fines and amounts paid in settlement attributable to circumstances as to which, under applicable provisions of the Code as in effect from time to time, such indemnification may not be authorized by action of the board of directors, the shareholders or otherwise. 9 10 Section 2. Indemnification of Directors and Officers for Derivative Actions. The corporation shall indemnify and hold harmless any Indemnified Person who is or was a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by or in the right of the corporation, by reason of the fact that he is or was a director or officer of the corporation, against expenses (including, but not limited to, attorneys' fees and disbursements, court costs and expert witness fees) actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. No indemnification shall be made pursuant to this Section 2 for any claim, issue or matter as to which an Indemnified Person shall have been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation, or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which such action or suit was brought or other court of competent jurisdiction shall determine upon application that such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 3. Indemnification of Employees and Agents. The board of directors shall have the power to cause the corporation to provide to any person who is or was an employee or agent of the corporation all or any part of the right to indemnification and other rights of the type provided under Sections 1, 2, 6 and 12 of this Article VII (subject to the conditions, limitations, obligations and other provisions specified herein), upon a resolution to that effect identifying such employee or agent (by position or name) and specifying the particular rights provided, which may be different for each employee or agent identified. Each employee or agent of the corporation so identified shall be an "Indemnified Person" for purposes of the provisions of this Article VII. Section 4. Subsidiaries and Other Organizations. The board of directors shall have the power to cause the corporation to provide to any person who is or was a director, officer, employee or agent of the corporation who also is or was a director, officer, trustee, partner, employee or agent of a Subsidiary (as defined below), or is or was serving at the corporation's request in such a position with any other organization, all or any part of the right to indemnification and other rights of the type provided under Sections 1, 2, 6 and 12 of this Article VII (subject to the conditions, limitations, obligations and other provisions specified herein), with respect to service by such person in such position with a Subsidiary or other organization, upon a resolution identifying such person, the Subsidiary or other organization involved (by name or other classification), and the particular rights provided, which may be different for each person so identified. Each person so identified shall be an "Indemnified Person" for purposes of the provisions of this Article VII. As used in this Article VII, "Subsidiary" shall mean (i) another corporation, joint venture, trust, partnership or unincorporated business association more than 20% of the voting capital stock or other voting equity interest of which was, at or after the time of the circumstances giving rise to such action, suit or proceeding, owned, directly or indirectly, by the corporation; or (ii) a nonprofit corporation that receives its principal financial support from the corporation or its Subsidiaries. Section 5. Determination. Notwithstanding any judgment, order, settlement, conviction or plea in any action, suit or proceeding of the kind referred to in Sections 1 and 2 of this Article VII, an Indemnified Person shall be entitled to indemnification as provided in such Sections 1 and 2 if a determination that such Indemnified Person is entitled to such indemnification shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who are not at the time parties to the proceeding; or (ii) if a quorum cannot be obtained under (i) above, by majority vote of a committee duly designated by the board of directors (in which designation interested directors may participate), consisting solely of two or more directors who are not at the time parties to the proceeding; or (iii) in a written opinion by special legal counsel selected as required by Section 14-2-855(b)(3) of the Code or any successor provision. To the extent that an Indemnified Person has been successful on the merits or otherwise in defense of any action, suit or proceeding of the kind referred to in Sections 1 and 2 of this Article VII, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 6. Advances. Expenses (including, but not limited to, attorneys' fees and disbursements, court costs, and expert witness fees) incurred by an Indemnified Person in defending any action, suit or proceeding of the kind described in Sections 1 and 2 hereof (or in Section 4 hereof if applicable to such 10 11 Indemnified Person) shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding as set forth herein. The corporation shall promptly pay the amount of such expenses to the Indemnified Person, but in no event later than ten days following the Indemnified Person's delivery to the corporation of a written request for an advance pursuant to this Section 6, together with a reasonable accounting of such expenses; provided, however, that the Indemnified Person shall furnish the corporation a written affirmation of his good faith belief that he has met the standard of conduct set forth in the Code and a written undertaking and agreement, executed personally or on his behalf, to repay to the corporation any advances made pursuant to this Section 6 if it shall be ultimately determined that the Indemnified Person is not entitled to be indemnified by the corporation for such amounts. The corporation shall make the advances contemplated by this Section 6 regardless of the Indemnified Person's financial ability to make repayment. Any advances and undertakings to repay pursuant to this Section 6 shall be unsecured and interest-free. Section 7. Non-Exclusivity. Subject to any applicable limitation imposed by the Code or the Articles of Incorporation, the indemnification and advancement of expenses provided by or granted pursuant to this Article VII shall not be exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any by-law, resolution or agreement specifically or in general terms approved or ratified by the affirmative vote of holders of a majority of the shares entitled to be cast thereon. Section 8. Insurance. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or who, while a director, officer, employee, or agent of the corporation, is or was serving as a director, officer, trustee, general partner, employee or agent of a Subsidiary or, at the request of the corporation, of any other organization, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VII. Section 9. Notice. If any expenses or other amounts are paid by way of indemnification, otherwise than by court order or action by the shareholders or by an insurance carrier pursuant to insurance maintained by the corporation, the corporation shall, not later than the next annual meeting of shareholders, unless such meeting is held within three months from the date of such payment, and in any event within 15 months from the date of such payment, send by first class mail to its shareholders of record at the time entitled to vote for the election of directors a statement specifying the persons paid, the amount paid and the nature and status at the time of such payment of the litigation or threatened litigation. Section 10. Security. The corporation may designate certain of its assets as collateral, provide self-insurance or otherwise secure its obligations under this Article VII, or under any indemnification agreement or plan of indemnification adopted and entered into in accordance with the provisions of this Article VII, as the board of directors deems appropriate. Section 11. Amendment. Any amendment to this Article VII that limits or otherwise adversely affects the right of indemnification, advancement of expenses, or other rights of any Indemnified Person hereunder shall, as to such Indemnified Person, apply only to claims, actions, suits or proceedings based on actions, events or omissions (collectively, "Post Amendment Events") occurring after such amendment and after delivery of notice of such amendment to the Indemnified Person so affected. Any Indemnified Person shall, as to any claim, action, suit or proceeding based on actions, events or omissions occurring prior to the date of receipt of such notice, be entitled to the right of indemnification, advancement of expenses and other rights under this Article VII to the same extent as if such provisions had continued as part of the by-laws of the corporation without such amendment. This Section 11 cannot be altered, amended or repealed in a manner effective as to any Indemnified Person (except as to Post Amendment Events) without the prior written consent of such Indemnified Person. Section 12. Agreements. In addition to the rights provided in this Article VII, the corporation shall have the power, upon authorization by the board of directors, to enter into an agreement or agreements providing to any person who is or was a director, officer, employee or agent of the corporation indemnification rights substantially similar to, or greater than, those provided in this Article VII. 11 12 Section 13. Continuing Benefits. The indemnification and advancement of expenses provided by or granted pursuant to this Article VII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 14. Successors. For purposes of this Article VII, the terms "the corporation" or "this corporation" shall include any corporation, joint venture, trust, partnership or unincorporated business association that is the successor to all or substantially all of the business or assets of this corporation, as a result of merger, consolidation, sale, liquidation or otherwise, and any such successor shall be liable to the persons indemnified under this Article VII on the same terms and conditions and to the same extent as this corporation. Section 15. Severability. Each of the sections of this Article VII, and each of the clauses set forth herein, shall be deemed separate and independent, and should any part of any such section or clause be declared invalid or unenforceable by any court of competent jurisdiction, such invalidity or unenforceability shall in no way render invalid or unenforceable any other part thereof or any other separate section or clause of this Article VII that is not declared invalid or unenforceable. Section 16. Additional Indemnification. In addition to the specific indemnification rights set forth herein, the corporation shall indemnify each of its directors and officers to the full extent permitted by action of the board of directors without shareholder approval under the Code or other laws of the State of Georgia as in effect from time to time. ARTICLE VIII AMENDMENTS The board of directors shall have power to alter, amend or repeal the by-laws by majority vote of all of the directors, but any by-laws adopted by the board of directors may be altered, amended or repealed and new by-laws adopted, by the shareholders by majority vote of all of the shares having voting power. 12 EX-10.A 3 AMEND.TO REVOLVING CREDIT & TERM LOAN AGREEMENT 1 EXHIBIT 10(A) FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT THIS FIFTH AMENDMENT (the "Fifth Amendment") TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT, made as of this 19th day of December, 1997, among AARON RENTS, INC., a Georgia corporation (the "Company"), SUNTRUST BANK, ATLANTA (formerly known as Trust Company Bank), a Georgia banking corporation, FIRST UNION NATIONAL BANK (formerly known as First Union National Bank of Georgia), a national banking association, THE FIRST NATIONAL BANK OF CHICAGO, a national banking association, as assignee of NBD Bank, SOUTHTRUST BANK, N.A. (formerly known as SouthTrust Bank of Georgia, N.A.), a national banking association (collectively, the "Banks") and SUNTRUST BANK, ATLANTA, as Agent for the Banks (the "Agent"). WITNESSETH: WHEREAS, the Company, the Banks and the Agent are parties to that certain Second Amended and Restated Revolving Credit and Term Loan Agreement dated as of January 6, 1995, as heretofore amended (the "Loan Agreement"); and WHEREAS, the Company has requested that certain terms of the Loan Agreement be amended and the Agent and the Banks have agreed to the requested amendments on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree that all capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the Loan Agreement and further agree as follows: 1. Section 2.03 of the Loan Agreement is hereby amended by replacing subsection (a) thereof with the following: (a) the aggregate Revolving Credit Commitments shall not exceed the least of the following: (i) an amount equal to 700% of the Company's Rental Income for the most recent calendar month; (ii) an amount equal to 70% of the Net Book Value of the Company's Rental Equipment and Furniture Inventory as of the most recent calendar month; or (iii) $90,000,000. 2. Section 8.11 of the Loan Agreement is hereby amended by replacing said section with the following: Section 8.11. Corporate Existence. Except as expressly permitted under Section 9.05 hereof, the Company will maintain and will cause each Subsidiary to maintain its corporate existence and good standing in the jurisdiction of its incorporation, and the Company will qualify and will cause each Subsidiary to qualify and remain qualified to do business as a foreign corporation in each jurisdiction in 2 which the nature of the business conducted by it or its ownership of property makes such qualification necessary and where failure to qualify would have a Materially Adverse Effect. 3. Section 9.03 of the Loan Agreement is hereby amended by replacing subsection (d) thereof with the following: (d) own, purchase or acquire stock, obligations or securities of a Subsidiary or of a corporation which immediately after such purchase or acquisition will be a Subsidiary or will be merged into Borrower, provided, however, written consent of the Banks, which any of them may withhold in their sole discretion, is required for purchases and acquisitions with (A) a cash purchase price greater than or equal to $10,000,000, or (B) a total purchase price (including cash, stock of the Company and any of its Subsidiaries and any other consideration) greater than or equal to $15,000,000; 4. Section 9.03 of the Loan Agreement is hereby further amended by replacing subsection (i) thereof with the following: (i) guarantee the indebtedness of obligations of certain franchise operators, provided such guarantees are (A) given by the Company in connection with (1) such franchise operators' purchase of merchandise financed through a third-party lender or (2) loans made for other purposes pursuant to the terms of that certain Loan Facility Agreement and Guaranty, to be dated on or about December , 1997, by and among the Company, SunTrust Bank, Atlanta, as Servicer, and the banks from time to time party thereto (as thereafter amended or modified, the "Loan Facility Agreement and Guaranty"), and (B) limited to $40,000,000 in aggregate outstanding principal amount at any one time for all franchise operators; and 5. Section 9.06 of the Loan Agreement is hereby amended by replacing said Section with the following: Section 9.06. Additional Negative Pledges. The Company shall not, and shall not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective, directly or indirectly, any prohibition or restriction on the creation or existence of any Lien upon any assets of the Company or any of its Subsidiaries, other than pursuant to (a) Section 9.01, (b) the terms of any agreement, instrument or other document pursuant to which any debt permitted by Section 9.01(e) is incurred by the Company or any of its Subsidiaries, so long as such prohibition or restriction applies only to the property or asset being financed by such debt, (c) any requirement of applicable law or any regulatory authority having jurisdiction over the Company or any of its Subsidiaries, (d) the terms of the Synthetic Lease Documents and (e) the terms of the Loan Facility Agreement and Guaranty. 6. The Revolving Credit Commitment of each Bank (other than SunTrust Bank, Atlanta) is amended to be the Revolving Credit Commitment of such Bank listed on its signature page to this Fifth Amendment. 7. The Company represents and warrants that all representations and warranties set forth in the Loan Agreement are true and correct in all material respects on the date hereof and no Default or Event of Default exists under the Loan Agreement as of the date hereof. 2 3 8. The effectiveness of this Fifth Amendment is conditioned upon the Agent's receipt of: (a) three Revolving Notes, each dated the date hereof, executed by the Company, in favor of each Bank other than SunTrust Bank, Atlanta, in the amount of such Bank's Revolving Credit Commitment as set forth on the signature pages hereto; (b) a Second Amendment and Ratification of Subsidiary Guaranty Agreement, in form and substance satisfactory to the Banks, executed by the Guarantors; (c) certificates of the Secretary or Assistant Secretary of each of the Credit Parties attaching and certifying copies of the resolutions of the boards of directors of the Credit Parties, authorizing the execution, delivery and performance of this Fifth Amendment and the other Loan Documents described in this Section 7, as applicable (the "Amendment Documents"); (d) certificates of the Secretary or an Assistant Secretary of each of the Credit Parties certifying (i) the name, title and true signature of each officer of each entity executing the Amendment Documents, (ii) the certificate or articles of incorporation of such Credit Party, and (iii) the bylaws or comparable governing documents of such Credit Party; (f) certificates of existence or other good standing certificates for each Credit Party issued by the Secretary of State of the jurisdiction of such Credit Party's incorporation and of each state where the failure to be in good standing would have a Materially Adverse Effect; and (g) the favorable opinion of Kilpatrick Stockton, general counsel to the Credit Parties, addressed to the Agent and each of the Banks. 9. Except for the amendments and agreements expressly set forth above, the text of the Loan Agreement and all other Loan Documents shall remain unchanged and in full force and effect. The Company acknowledges and expressly agrees that the Agent and the Banks reserve the right to, and do, in fact, require strict compliance with the terms and provisions of the Loan Agreement, as amended by this Fifth Amendment. 10. Each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import, shall mean and be a reference to the Loan Agreement as amended by this Fifth Amendment and each reference to the Loan Agreement in any other document, instrument or agreement executed or delivered in connection with the Loan Agreement shall mean and be a reference to the Loan Agreement as amended by this Fifth Amendment. 11. THIS FIFTH AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA. 12. This Fifth Amendment may be executed by one or more of the parties hereto in any number of separate counterparts, each of which shall be deemed an original and all of which, taken together, shall be deemed to constitute one and the same instrument. Delivery of an executed counterpart of this Fifth Amendment by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. 3 4 13. This Fifth Amendment shall be binding on, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. 14. This Fifth Amendment constitutes the entire understanding of the parties with respect to the subject matter hereof, and any other prior or contemporaneous agreements, whether written or oral, with respect thereto, are expressly superseded hereby. 15. The Company agrees to pay all reasonable, out-of-pocket costs and expenses of the Agent in connection with the preparation, execution and delivery of, this Fifth Amendment (including, without limitation, the reasonable fees actually incurred and disbursements of counsel for the Agent). 4 5 IN WITNESS WHEREOF, this Fifth Amendment has been duly executed as of the date first above written. COMPANY: AARON RENTS, INC. Address for Notices: 309 East Paces Ferry Road By: Atlanta, Georgia 30305 -------------------------------------------- Attention: Gilbert L. Danielson Name: Title:
[SIGNATURE PAGE FOR FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT] 5 6 AGENT: Address for Notices: SUNTRUST BANK, ATLANTA, as Agent for the Banks 25 Park Place, 23rd Floor By: Atlanta, Georgia 30303 -------------------------------------------- Attention: Willem-Jan O. Hattink or Name: Michael Dunlap Title: Payment Office: 25 Park Place By: 23rd Floor -------------------------------------------- Atlanta, Georgia 30303 Name: Title:
[SIGNATURE PAGE FOR FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT] 6 7 BANKS: Address for Notices: SUNTRUST BANK, ATLANTA 25 Park Place, 23rd Floor By: Atlanta, Georgia 30303 -------------------------------------------- Attention: Willem-Jan O. Hattink or Name: Michael Dunlap Title: Payment Office: 25 Park Place By: 23rd Floor -------------------------------------------- Atlanta, Georgia 30303 Name: Title: REVOLVING CREDIT COMMITMENT: $25,000,000.00 PRO RATA SHARE OF REVOLVING LOAN COMMITMENTS: 27.7778%
FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT 7 8 FIRST UNION NATIONAL BANK Address for Notices: 999 Peachtree Street By: 12th Floor, Suite 640 -------------------------------------------- Atlanta, Georgia 30309 Name: Attention: Jonathan D. Hook Title: Payment Office: 999 Peachtree Street 12th Floor, Suite 640 P.O. Box 740074 Atlanta, Georgia 30374 REVOLVING CREDIT COMMITMENT: $30,000,000.00 PRO RATE SHARE OF REVOLVING LOAN 33.3333% COMMITMENTS:
FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT 8 9 THE FIRST NATIONAL BANK OF CHICAGO Address for Notices: One First National Plaza -- MC0324 By: Chicago, Illinois 60670-0324 -------------------------------------------- Attention: Ms. Noreen St. Lawrence Name: Title: Payment Office: One First National Plaza -- MC0324 Chicago, Illinois 60670-0324 Attention: Ms. Noreen St. Lawrence REVOLVING CREDIT COMMITMENT: $20,000,000.00 PRO RATA SHARE OF REVOLVING LOAN COMMITMENTS: 22.2222%
FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT] 9 10 SOUTHTRUST BANK, N.A. Address for Notices: One Georgia Center By: 600 West Peachtree Street -------------------------------------------- Atlanta, Georgia 30308 Name: Attention: Mark Crosswell Title: Payment Office: One Georgia Center 600 West Peachtree Street Atlanta, Georgia 30308 Attention: Mark Crosswell REVOLVING CREDIT COMMITMENT: $15,000,000.00 PRO RATE SHARE OF REVOLVING LOAN 16.6667% COMMITMENTS:
10 EX-10.B 4 CONFIRMATION OF INTEREST RATE SWAP TRANSACTION 1 EXHIBIT 10(B) CONFIRMATION OF INTEREST RATE SWAP TRANSACTION REVISED Mr. Mitch Paull Treasurer Aaron Rents, Inc. 309 East Paces Ferry Road, N.E. Atlanta, GA 30305 Ph#: 404/231-0011 Fax #: 404/240-6584 Dear Mr. Paull: The purpose of this letter agreement is to set forth the AMENDED terms and conditions, AS OF DECEMBER 31, 1997 of the Rate Swap Transaction entered into between you and SunTrust Bank, Atlanta on the Trade Date of DECEMBER 26, 1996 WITH NOTIONAL AMOUNT OF US $10,000,000.00 AND MATURITY DATE OF NOVEMBER 16, 2000, specified below (the "Transaction" or "Rate Swap Transaction"). This letter agreement constitutes a "Confirmation" as referred to in either the ISDA Master Agreement or the Interest Rate and Currency Exchange Agreement entered into by the parties hereto, prior to, or on the date hereof. The definitions and provisions contained in the 1991 ISDA Definitions (the "Definitions") published by the International Swap Dealers Association, Inc. ("ISDA") are incorporated by reference into this Confirmation. In the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern. 1. This Confirmation supplements, forms a part of, and is subject to the ISDA Master Agreement (a "Swap Agreement"), as amended and supplemented from time to time, between you and SunTrust Bank, Atlanta. All provisions contained or incorporated by reference in the Swap Agreement shall govern this Confirmation except as expressly modified below. Prior to the execution and delivery of such Swap Agreement, this Confirmation alone shall constitute a complete and binding agreement with respect to the Transaction. Each party is hereby advised, and each such party acknowledges, that the other party has engaged in (or refrained from engaging in) substantial financial transactions and has taken other material actions in reliance upon the parties' entry in the Transaction to which this Confirmation relates on the terms and conditions set forth below. This Confirmation will be governed by and construed in accordance with the laws of the state of New York without reference to choice of law doctrine. 2 Type of Transaction: Rate Swap Notional Amount: US $10,000,000.00 Trade Date: December 26, 1996 Effective Date: December 30, 1996 Termination Date: NOVEMBER 17, 2003, with adjustment in accordance with the Modified Following Business Day Convention FIXED AMOUNTS: Fixed Rate Payer: Counterparty Fixed Rate Payer Payment Dates: The 16th day of each February, May, August and November, beginning February 16, 1997 through and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Fixed Rate: 6.71% PER ANNUM FROM DECEMBER 30, 1996 TO BUT EXCLUDING DECEMBER 31, 1997. 6.50% PER ANNUM FROM DECEMBER 31, 1997 TO BUT EXCLUDING THE TERMINATION DATE. Fixed Rate Day Count Fraction: Actual/360 FLOATING AMOUNTS: Floating Rate Payer: SunTrust Bank, Atlanta Floating Rate Payer Payment Dates: The 16th day of each February, May, August and November, beginning February 16, 1997 through and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Floating Rate for the Calculation Period 5.875% per annum. Starting December 31, 1997: Designated Maturity for all subsequent Three month Calculation Periods: Floating Rate Option: USD-LIBOR-BBA Spread: Inapplicable Floating Rate Day Count Fraction: Actual/360 Reset Dates: The Effective Date and each Floating Rate Payer Payment Date except the Termination date. Calculation Agent: SunTrust Bank, Atlanta Business Days: New York
2 3 2. OTHER PROVISIONS a) Aaron Rents, Inc. agrees to provide a certificate of signing authority and incumbency with respect to the individual executing this Confirmation as well as a Corporate Resolution authorizing Aaron Rents, Inc. to enter into this Transaction. This provision will constitute an additional Agreement for the purpose of Section 3 of the Interest Rate Swap Agreement. b) By signing this confirmation, Counterparty acknowledges they have received and understand the SunTrust Bank, Atlanta "Terms of Dealing for OTC Risk Management Transactions" and the "Risk Disclosure Statement for OTC Risk Management Transactions". 3. ACCOUNT DETAILS: Payment to Fixed Rate Payer: SunTrust Bank, Atlanta ABA# 061000104 FBO: Aaron Rents, Inc. A/C#: 8800-527-494 Payments to Floating Rate Payer: SunTrust Bank, Atlanta ABA# 061000104 Bond Wire Clearing, Center 095 Attn: Financial Risk Management, Operations 4. OFFICES (a) The Office of Fixed Rate Payer for the Transaction is its Atlanta office; and (b) The Office of Floating Rate Payer for the Transaction is its Atlanta office. Please confirm that the foregoing correctly sets forth the terms of our agreement by signing this copy of this Confirmation and faxing it back to us at the following fax number: 404-658-4835, Attn: Leslie Bales. An original execution copy will be forwarded to you upon us receiving your faxed copy. By signing below, you also acknowledge and agree that we have explained to you the risks involved in this Transaction, which risks include but are not limited to the following: - Market Risk: the risk that the Transaction may increase or decrease in value with a change in, among other things, interest rates or the yield curve; and - Liquidity Risk: the risk that the Transaction cannot be closed out or disposed of quickly at or near its value. 3 4 You further acknowledge and agree that you understand these risks and the Transaction as a whole, that you are capable of managing the risks associated with this Transaction, that the risks involved in this Transaction are consistent with your financial goals, policies and procedures, and risk tolerance, and that you have determined that this Transaction is appropriate for you. Very truly yours, SUNTRUST BANK, ATLANTA By: ------------------------------------ Name: Title: By: ------------------------------------ Name: Title: Accepted and Confirmed as of the Date First Written: AARON RENTS, INC. By: ---------------------------------- Name: Title: By: ---------------------------------- Name: Title: 4 5 To: Aaron Rents, Inc. Attn: Mitch Paull Phone: (404) 231-0011 EXT. 309 Fax No.: (404) 240-6584 From: NBD Bank Date: 30 Dec 97 Re: Our Ref: 8544.AB TRN ID: 1046030
- -------------------------------------------------------------------------------- *AMENDED CONFIRMATION We are pleased to confirm the terms of the transaction described below between NBD Bank ("NBD") (the floating rate payer), and Aaron Rents, Inc. ("Aaron") (the fixed rate payer). Type of transaction: Interest Rate Swap Notional Amount: USD 10,000,000.00 TERM: Trade Date: 26 Dec 96 Effective Date: 30 Dec 96 Termination Date: 17 Nov 03, subject to adjustment in accordance with the modified following business day convention FIXED AMOUNTS: Fixed Rate Payer: Aaron Payment Dates: Each February 16, May 16, August 16, and November 16, commencing February 16, 1997 and ending November 16, 2000. Business Day Convention: Modified Following Fixed Rate: * From and Including To But Excluding Rate 30 Dec 96 17 Nov 97 6.7125 Pct. 17 Nov 97 17 Nov 03 6.5000 Pct.
5 6 Fixed Rate Day Count Fraction: Actual/360 FLOATING AMOUNTS: Floating Rate Payer: NBD Payment Dates: Each February 16, May 16, August 16, and November 16, commencing February 16, 1997 and ending November 16, 2000. Business Day Convention: Modified Following Floating Rate Option: USD-LIBOR-BBA Designated Maturity: 3 months Floating Rate Day Count Fraction: Actual/360 Reset Dates: The first day of each calculation period Spread PCT: None Initial Floating Rate: (including spread) 5.62153 Pct. Compounding: Inapplicable Averaging: Inapplicable Method of Averaging: Rounding Convention: 5 decimal places as per ISDA Business Days: New York and London Documentation: *
This confirmation supplements, forms part of, and is subject to, the ISDA master agreement dated as of 26 Dec 96 between the parties, as amended and supplemented from time to time (the "Agreement"). Terms used and not otherwise defined herein shall have their meanings as defined in the 1991 ISDA definitions. Dealing with confirmations on our behalf: Dianne Schuyler 312-732-2148 Dealing with Settlements on our behalf: Edward Lazowski 312-732-2623 NBD Bank Payment Instructions: NBD Bank N.A. ABA Number: 072000326 Account Name: NBD Bank N.A. Account Number: 132664 Aaron Rents, Inc. Payment Instructions: Please Advise
Please confirm the foregoing correctly sets forth the terms of our agreement by executing this letter and returning it via facsimile to: Derivatives Product Support -- Confirmations NBD Bank (312) 336-4403 (Fax) 6 7 It has been a pleasure working with you on this interest rate swap transaction and we look forward to completing similar transactions with you in the near future. Regards, NBD Bank By: ------------------------------------ Name: Title: By: ---------------------------------- Name: Title: 7 EX-13 5 ANNUAL REPORT FOR YEAR END DECEMBER 31, 1997 1 EXHIBIT 13 SELECTED FINANCIAL INFORMATION
TWELVE MONTHS NINE MONTHS NINE MONTHS YEAR YEAR YEAR ENDED YEAR ENDED ENDED ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1997 1996 1995 1995 1994 1995 1994 ------------ ------------ ------------ ------------ ------------ --------- --------- (UNAUDITED) (UNAUDITED) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE) OPERATING RESULTS Systemwide Revenues(1)... $364,306 $306,200 $256,500 $192,953 $177,773 $241,286 $189,781 Revenues: Rentals & Fees......... 231,207 208,463 182,311 137,098 127,995 173,208 130,962 Sales.................. 73,223 61,527 52,999 39,218 39,875 53,655 53,139 Other.................. 6,321 4,255 2,465 1,908 1,471 2,029 1,083 -------- -------- -------- -------- -------- -------- -------- 310,751 274,245 237,775 178,224 169,341 228,892 185,184 -------- -------- -------- -------- -------- -------- -------- Costs & Expenses: Cost of Sales.......... 55,914 46,168 38,274 28,350 28,772 38,696 38,879 Operating Expenses..... 149,728 135,012 119,590 90,027 85,464 115,028 91,927 Depreciation of Rental Merchandise.......... 71,151 64,437 55,408 41,612 39,912 53,708 37,310 Interest............... 3,721 3,449 3,172 2,323 2,185 3,033 2,063 -------- -------- -------- -------- -------- -------- -------- 280,514 249,066 216,444 162,312 156,333 210,465 170,179 -------- -------- -------- -------- -------- -------- -------- Earnings Before Income Taxes.................. 30,237 25,179 21,331 15,912 13,008 18,427 15,005 Income Taxes............. 11,841 9,786 8,113 6,032 5,021 7,102 6,209 -------- -------- -------- -------- -------- -------- -------- Net Earnings......... $ 18,396 $ 15,393 $ 13,218 $ 9,880 $ 7,987 $ 11,325 $ 8,796 -------- -------- -------- -------- -------- -------- -------- Earnings Per Share....... $ .96 $ .81 $ .68 $ .51 $ .42 $ .59 $ .52 Earnings Per Share Assuming Dilution...... .94 .77 .66 .49 .40 .58 .51 -------- -------- -------- -------- -------- -------- -------- Dividends Per Share: Common................. $ .04 $ .04 $ .05 $ .05 $ .05 $ .045 $ .04 Class A................ .04 .04 .02 .02 .02 .025 .03 ======== ======== ======== ======== ======== ======== ======== FINANCIAL POSITION Rental Merchandise, Net.................... $176,968 $149,984 $122,311 $122,311 $119,781 $121,356 $113,599 Property, Plant & Equipment, Net......... 39,757 33,267 23,492 23,492 23,532 24,181 18,819 Total Assets............. 239,382 198,103 158,645 158,645 155,914 157,527 144,917 Interest-Bearing Debt.... 76,486 55,365 37,479 37,479 46,894 43,159 53,123 Shareholders' Equity..... 116,455 107,335 91,094 91,094 81,418 84,951 59,830 ======== ======== ======== ======== ======== ======== ======== AT YEAR END Stores Open: Company-Operated....... 292 240 212 212 203 203 200 Franchised............. 101 61 36 36 24 26 15 Rental Agreements in Effect................. 219,800 179,600 158,900 158,900 152,100 156,600 126,700 Number of Employees...... 3,100 2,550 2,160 2,160 2,150 2,200 2,100 ======== ======== ======== ======== ======== ======== ========
- --------------- (1) Systemwide revenues include rental revenues of franchised Aaron's Rental Purchase stores. 1 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHANGE IN FISCAL YEAR END During 1995, the Company changed its fiscal year end from March 31 to December 31, which resulted in a nine month fiscal year ended December 31, 1995. The decision to change the fiscal year end was made for more convenience in both internal and external communications. To aid comparative analysis, the Company has elected to present the results of operations for the twelve months ended December 31, 1995 (unaudited), along with the years ended December 31, 1996 and December 31, 1997. Year Ended December 31, 1997 versus Year Ended December 31, 1996 Total revenues for 1997 increased $36.5 million (13.3%) to $310.8 million compared to $274.2 million in 1996 due primarily to a $22.7 million (10.9%) increase in rentals and fees revenues, plus an $11.7 million (19.0%) increase in sales. Of this increase in rentals and fees revenues, $19.2 million (84.4%) was attributable to the Aaron's Rental Purchase Division. Rentals and fees revenues from the Company's rent-to-rent operations increased $3.5 million (3.3%) during the same period. Revenues from retail sales increased $5.8 million (11.1%) to $58.6 million in 1997, from $52.8 million for the same period last year. This increase was primarily due to increased sales of both new and rental return furniture in the rent-to-rent division. Non-retail sales, which primarily represent merchandise sold to Aaron's Rental Purchase franchisees, increased $5.9 million (66.7%) to $14.6 million compared to $8.8 million for the same period last year. The increased sales are due to the growth of the franchise operations. Other revenues for 1997 increased $2.1 million (48.6%) to $6.3 million compared to $4.3 million in 1996. This increase was attributable to franchise fee and royalty income increasing $2.1 million (70.8%) to $5.0 million compared to $2.9 million last year, reflecting the addition of 40 new franchise stores in 1997 and improved operating revenues at mature franchise stores. Cost of sales from retail sales increased $4.4 million (11.7%) to $42.3 million compared to $37.8 million, and as a percentage of sales, increased slightly to 72.1% from 71.7% primarily due to product mix. Cost of sales from non-retail sales increased $5.3 million (64.1%) to $13.7 million from $8.3 million, and as a percentage of sales, decreased to 93.4% from 94.9%. The decrease in 1997 in cost of sales as a percentage of sales is due to slightly higher margins on sales through the Company's distribution centers. Operating expenses increased $14.7 million (10.9%) to $149.7 million from $135.0 million. As a percentage of total revenues, operating expenses were 48.2% in 1997 and 49.2% in 1996. Operating expenses declined as a percentage of total revenues between years due to the spreading of expenses over higher revenues. Depreciation of rental merchandise increased $6.7 million (10.4%) to $71.2 million from $64.4 million, and as a percentage of total rentals and fees, decreased to 30.8% from 30.9%. Interest expense increased $272,000 (7.9%) to $3.7 million compared to $3.4 million. As a percentage of total revenues, interest expense was 1.2% in 1997 compared to 1.3% in 1996. The slight decrease in interest expense as a percentage of revenues was due to the effect of lower debt levels as a percentage of revenues throughout the year being offset by slightly higher interest rates. Income tax expense increased $2.1 million (21.0%) to $11.8 million compared to $9.8 million. The Company's effective tax rate was 39.2% in 1997 compared to 38.9% in 1996, primarily due to higher state income taxes. As a result, net earnings increased $3.0 million (19.5%) to $18.4 million for 1997 compared to $15.4 million for the same period in 1996. As a percentage of total revenues, net earnings were 5.9% in 1997 and 5.6% in 1996. 2 3 Year Ended December 31, 1996 versus Twelve Months Ended December 31, 1995 (unaudited) Total revenues for 1996 increased $36.5 million (15.3%) to $274.2 million compared to $237.8 million in 1995 due primarily to a $26.2 million (14.3%) increase in rentals and fees revenues, plus an $8.5 million (16.1%) increase in sales. Of this increase in rentals and fees revenues, $16.6 million (19.6%) was attributable to the Aaron's Rental Purchase Division. Rentals and fees revenues from the Company's rent-to-rent operations increased $9.5 million (9.8%) during the same period. Revenues from retail sales increased $5.6 million (11.8%) to $52.8 million in 1996, from $47.2 million for the same period last year. This increase was due to increased sales of both new and rental return furniture in the rent-to-rent division. Non-retail sales, which represent wholesale sales to primarily Aaron's Rental Purchase franchisees, increased $3.0 million (51.0%) to $8.8 million compared to $5.8 million for the same period last year. The increased sales are due to the growth of the franchise operations. Other revenues increased $1.5 million (105.4%) to $2.9 million compared to $1.4 million last year. This increase was due to adding 25 new franchise stores in 1996 as well as older franchise stores gaining in revenues. Cost of sales from retail sales increased $4.8 million (14.5%) to $37.8 million compared to $33.1 million, and as a percentage of sales, increased slightly to 71.7% from 70.1% primarily due to product mix. Cost of sales from non-retail sales increased $3.1 million (59.5%) to $8.3 million from $5.2 million, and as a percentage of sales, increased to 94.9% from 89.8%. The increase in cost of sales as a percentage of sales is due to a larger percentage of franchise sales in 1996 which are at lower margins than other miscellaneous wholesale sales. Operating expenses increased $15.4 million (12.9%) to $135.0 million from $119.6 million. As a percentage of total revenues, operating expenses were 49.2% in 1996 and 50.3% in 1995. Operating expenses declined as a percentage of total revenues between years due to the spreading of expenses over higher revenues. Depreciation of rental merchandise increased $9.0 million (16.3%) to $64.4 million and, as a percentage of total rentals and fees, increased to 30.9% from 30.4%. This increase is primarily due to a change in the rental merchandise mix during the year. Interest expense increased $277,000 (8.7%) to $3.4 million compared to $3.2 million. As a percentage of total revenues, interest is unchanged at 1.3% due to stability in interest rates during 1996. Income tax expense increased $1.7 million (20.6%) to $9.8 million compared to $8.1 million. The Company's effective tax rate was 38.9% in 1996 versus 38.0% for the same period in 1995. As a result, net earnings increased $2.2 million (16.5%) to $15.4 million for 1996 compared to $13.2 million for the same period in 1995. As a percentage of total revenues, net earnings were 5.6% in both 1996 and 1995. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations for the years ended December 31, 1997 and 1996 was $105.3 million and $89.5 million, respectively. Such cash flows include profits on the sale of rental return merchandise. The Company's primary capital requirements consist of acquiring rental merchandise for both rent-to-rent and Company-operated Aaron's Rental Purchase stores. As the Company continues to grow, the need for additional rental merchandise will continue to be the Company's major capital requirement. These capital requirements historically have been financed through bank credit, cash flow from operations, trade credit and proceeds from the sale of rental return merchandise. The Company has financed its growth through a revolving credit agreement with several banks, trade credit and internally generated funds. The revolving credit agreement provides for unsecured borrowings up to $90.0 million which includes a $6.0 million credit line to fund daily working capital requirements. At December 31, 1997, an aggregate of $75.9 million was outstanding under this facility, bearing interest at an average rate of 6.57%. The Company uses interest rate swap agreements as part of its overall long-term 3 4 financing program. At December 31, 1997, the Company had swap agreements with notional principal amounts of $40 million which effectively fixed the interest rates on an equal amount under the Company's revolving credit agreement at 6.93%. The Company believes that the expected cash flows from operations, proceeds from the sale of rental return merchandise, bank borrowings and vendor credit, together with the proceeds of the proposed offering described in Note 13 to the Consolidated Financial Statements, will be sufficient to fund the Company's capital and liquidity needs for at least the next 24 months. In February 1997, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company's Common Stock and Class A Common Stock. During 1997, 795,000 shares were purchased at an aggregate cost of $8.9 million. The Company has paid dividends for eleven consecutive years. A $.02 per share dividend on Common Stock and on Class A Common Stock was paid in January 1997 and July 1997, for a total fiscal year cash outlay of $761,000. The Company currently expects to continue its policy of paying dividends. YEAR 2000 The Year 2000 issue arises from the widespread use of computer programs that rely on two-digit date codes to perform computations or decision-making functions. The Company's significant computer programs, including financial, accounting, store operating and point of sale software, have recently been or are in the process of being updated. The upgrading and rewriting of the Company's software is being done to gain further strategic advantages over its competitors and is not the result of any anticipated Year 2000 issues. However, as part of the Company's continuing process to update systems, management has required that vendor purchased and internally developed software be Year 2000 compliant. Therefore, based on recent and continuing strategic enhancement of the Company's software, management does not expect any material impact to the Company's business, operations or financial condition as a result of Year 2000 issues. 4 5 AARON RENTS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Cash........................................................ $ 96 $ 84 Accounts Receivable......................................... 11,794 10,491 Rental Merchandise.......................................... 246,498 210,516 Less: Accumulated Depreciation.............................. (69,530) (60,532) -------- -------- 176,968 149,984 Property, Plant & Equipment, Net............................ 39,757 33,267 Prepaid Expenses & Other Assets............................. 10,767 4,277 -------- -------- Total Assets...................................... $239,382 $198,103 ======== ======== LIABILITIES & SHAREHOLDERS' EQUITY Accounts Payable & Accrued Expenses......................... $ 31,071 $ 24,999 Dividends Payable........................................... 379 382 Deferred Income Taxes Payable............................... 6,687 2,882 Customer Deposits & Advance Payments........................ 8,304 7,140 Bank Debt................................................... 75,904 55,125 Other Debt.................................................. 582 240 -------- -------- Total Liabilities................................. 122,927 90,768 Commitments & Contingencies Shareholders' Equity Common Stock, Par Value $.50 Per Share; Authorized: 25,000,000 Shares; Shares Issued: 16,170,987........... 8,085 8,085 Common Stock, Class A, Par Value $.50 Per Share; Authorized: 25,000,000 Shares; Shares Issued: 5,361,761.............................................. 2,681 2,681 Additional Paid-In Capital................................ 15,484 15,445 Retained Earnings......................................... 113,864 96,226 -------- -------- 140,114 122,437 Less: Treasury Shares at Cost, Common Stock, 1,058,041 Shares at December 31, 1997 and 415,941 Shares at December 31, 1996.................................................. (9,523) (2,315) Class A Common Stock, 1,525,255 Shares at December 31, 1997 and 1,418,855 Shares at December 31, 1996......... (14,136) (12,787) -------- -------- Total Shareholders' Equity........................ 116,455 107,335 -------- -------- Total Liabilities & Shareholders' Equity.......... $239,382 $198,103 ======== ========
The accompanying notes are an integral part of the Consolidated Financial Statements. 5 6 AARON RENTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS
NINE MONTHS YEAR ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE) REVENUES Rentals and Fees.......................................... $231,207 $208,463 $137,098 Retail Sales.............................................. 58,602 52,757 35,537 Non-Retail Sales.......................................... 14,621 8,770 3,681 Other..................................................... 6,321 4,255 1,908 -------- -------- -------- 310,751 274,245 178,224 COSTS & EXPENSES Retail Cost of Sales...................................... 42,264 37,848 24,983 Non-Retail Cost of Sales.................................. 13,650 8,320 3,367 Operating Expenses........................................ 149,728 135,012 90,027 Depreciation of Rental Merchandise........................ 71,151 64,437 41,612 Interest.................................................. 3,721 3,449 2,323 -------- -------- -------- 280,514 249,066 162,312 -------- -------- -------- Earnings Before Income Taxes.............................. 30,237 25,179 15,912 Income Taxes.............................................. 11,841 9,786 6,032 -------- -------- -------- Net Earnings.............................................. $ 18,396 $ 15,393 $ 9,880 ======== ======== ======== Earnings Per Share........................................ $ .96 $ .81 $ .51 Earnings Per Share Assuming Dilution...................... .94 .77 .49
The accompanying notes are an integral part of the Consolidated Financial Statements. 6 7 AARON RENTS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TREASURY STOCK COMMON STOCK ADDITIONAL ----------------- ---------------- PAID-IN RETAINED SHARES AMOUNT COMMON CLASS A CAPITAL EARNINGS ------ -------- ------ ------- ---------- -------- (IN THOUSANDS) BALANCE, MARCH 31, 1995................. (2,179) $(13,578) $3,318 $2,681 $15,314 $ 77,216 Reacquired Shares..................... (194) (3,134) Dividends............................. (732) Reissued Shares....................... 13 72 56 1 Net Earnings.......................... 9,880 ------ -------- ------ ------ ------- -------- BALANCE, DECEMBER 31, 1995.............. (2,360) (16,640) 3,318 2,681 15,370 86,365 Stock Dividend........................ 4,767 (4,767) Reacquired Shares..................... (164) (2,889) Dividends............................. (765) Reissued Shares....................... 689 4,427 75 Net Earnings.......................... 15,393 ------ -------- ------ ------ ------- -------- BALANCE, DECEMBER 31, 1996.............. (1,835) (15,102) 8,085 2,681 15,445 96,226 Reacquired Shares..................... (795) (8,918) Dividends............................. (758) Reissued Shares....................... 47 361 39 Net Earnings.......................... 18,396 ------ -------- ------ ------ ------- -------- BALANCE, DECEMBER 31, 1997.............. (2,583) $(23,659) $8,085 $2,681 $15,484 $113,864 ====== ======== ====== ====== ======= ========
The accompanying notes are an integral part of the Consolidated Financial Statements. 7 8 AARON RENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE YEAR ENDED YEAR ENDED MONTHS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ------------ ------------ ------------ (IN THOUSANDS) OPERATING ACTIVITIES Net Earnings............................................. $ 18,396 $ 15,393 $ 9,880 Depreciation & Amortization.............................. 77,487 70,693 45,798 Deferred Income Taxes.................................... 3,805 (899) (345) Change in Accounts Payable & Accrued Expenses............ 5,103 5,695 242 Change in Accounts Receivable............................ (1,083) (2,339) 255 Other Changes, Net....................................... 1,587 982 (711) --------- --------- -------- Cash Provided by Operating Activities.................... 105,295 89,525 55,119 INVESTING ACTIVITIES Additions to Property, Plant & Equipment................. (15,165) (17,534) (5,476) Book Value of Property Retired or Sold................... 6,531 1,823 1,979 Additions to Rental Merchandise.......................... (145,262) (137,023) (72,926) Book Value of Rental Merchandise Sold.................... 58,436 48,352 30,892 Contracts & Other Assets Acquired........................ (21,665) (3,891) (533) --------- --------- -------- Cash Used by Investing Activities........................ (117,125) (108,273) (46,064) FINANCING ACTIVITIES Proceeds from Revolving Credit Agreement................. 118,545 85,299 51,933 Repayments on Revolving Credit Agreement................. (97,766) (67,434) (56,845) Increase (Decrease) in Other Debt........................ 342 21 (768) Dividends Paid........................................... (761) (765) (367) Acquisition of Treasury Stock............................ (8,918) (2,889) (3,134) Issuance of Stock Under Stock Option Plan................ 400 4,502 129 --------- --------- -------- Cash Provided (Used) by Financing Activities............. 11,842 18,734 (9,052) Increase (Decrease) in Cash.............................. 12 (14) 3 Cash at Beginning of Year................................ 84 98 95 --------- --------- -------- Cash at End of Year...................................... $ 96 $ 84 $ 98 ========= ========= ======== Cash Paid During the Year: Interest............................................... $ 3,713 $ 3,384 $ 2,642 Income Taxes........................................... 6,989 7,531 7,677
The accompanying notes are an integral part of the Consolidated Financial Statements. 8 9 AARON RENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1997 and 1996, and for the Years Ended December 31, 1997 and 1996, and the Nine Months Ended December 31, 1995. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of Aaron Rents, Inc. and its wholly-owned subsidiary, Aaron Investment Company (the "Company"). All significant intercompany accounts and transactions have been eliminated. The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. LINE OF BUSINESS -- The Company is engaged in the business of renting and selling residential and office furniture and other merchandise throughout the U.S. The Company manufactures furniture principally for its rental and sales operations. RENTAL MERCHANDISE consists primarily of residential and office furniture, consumer electronics and other merchandise and is recorded at cost. Prior to January 1, 1996, depreciation was provided using the straight-line method over the estimated useful life of the merchandise, principally from 1 to 5 years, after allowing for a salvage value of 5% to 60%. Effective January 1, 1996, the Company prospectively changed its depreciation method on merchandise in the rental purchase division acquired after December 31, 1995, from generally 14 months straight-line with a 5% salvage value to a method that depreciates the merchandise over the agreement period, generally 12 months, when on rent, and 36 months, when not on rent, to a 0% salvage value. This new method is similar to a method referred to as the income forecasting method in the rental purchase industry. The Company adopted the new method because management believes that it provides a more systematic and rational allocation of the cost of rental purchase merchandise over its useful life. The effect for the year ended December 31, 1996 of the change in the depreciation method on merchandise purchased after December 31, 1995 was to decrease net income by approximately $850,000 ($.04 per share). In addition, based on an analysis of the average composite life of the division's rental purchase merchandise on rent or on hand at December 31, 1995, the Company extended the depreciable lives of that merchandise from generally 14 months to 18 months, and made other refinements to depreciation rates on rental and rental purchase merchandise. The effect of such change in depreciable lives and other refinements was to increase net income for the year ended December 31, 1996 by approximately $709,000 ($.04 per share). The Company recognizes rental revenues over the rental period and recognizes all costs of servicing and maintaining merchandise on rent as incurred. PROPERTY, PLANT AND EQUIPMENT are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the respective assets, which are from 8 to 27 years for buildings and improvements and from 2 to 5 years for other depreciable property and equipment. Gains and losses related to dispositions and retirements are included in income. Maintenance and repairs are charged to income as incurred; renewals and betterments are capitalized. The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), in the first quarter of 1996. The effect of the adoption was not material. DEFERRED INCOME TAXES are provided for temporary differences between the amounts of assets and liabilities for financial and tax reporting purposes. Such temporary differences arise principally from the use of accelerated depreciation methods on rental merchandise for tax purposes. COST OF SALES includes the depreciated cost of rental return residential and office merchandise sold and the cost of new residential and office merchandise sold. It is not practicable to allocate operating expenses between selling and rental operations. 9 10 AARON RENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVERTISING -- The Company expenses advertising costs as incurred. Such costs aggregated $9,530,000 in 1997, $10,422,000 in 1996, and $6,258,000 for the nine months ended December 31, 1995. STOCK BASED COMPENSATION -- The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"(APB 25) and related Interpretations in accounting for its employee stock options and adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (FAS 123). The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant and, accordingly, recognizes no compensation expense for the stock option grants. EXCESS COSTS OVER NET ASSETS ACQUIRED -- Goodwill is amortized on a straight-line basis over a period of twenty years. Long-lived assets, including goodwill, are periodically reviewed for impairment based on an assessment of future operations. The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD -- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131), which is effective for 1998. FAS 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires that those companies report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt the new requirements in its annual financial statements in 1998. Management has not completed its analysis of the effect of FAS 131 on its reported segments. 2. CHANGE IN FISCAL YEAR END During 1995, the Company changed its fiscal year end from March 31 to December 31, which resulted in a nine month fiscal period ended December 31, 1995. The decision to change the fiscal year end was made for more convenience in both internal and external reporting. Results of operations (condensed) for the nine-month periods ended December 31, 1995 and December 31, 1994 are shown below:
NINE MONTHS ENDED --------------------------- DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.................................................... $178,224 $169,341 Cost of Sales............................................... 28,350 28,772 Operating And Other Expenses................................ 92,350 87,649 Depreciation of Rental Merchandise.......................... 41,612 39,912 -------- -------- Earnings Before Income Taxes................................ 15,912 13,008 Income Taxes................................................ 6,032 5,021 -------- -------- Net Earnings................................................ $ 9,880 $ 7,987 ======== ======== Earnings Per Share.......................................... $ .51 $ .42 Earnings Per Share Assuming Dilution........................ .49 .40
10 11 AARON RENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. EARNINGS PER SHARE During 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share", (FAS 128). FAS 128 replaced the calculation of primary and fully diluted earnings per share with earnings per share and earnings per share assuming dilution. Earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year which were 19,165,000 shares in 1997, 19,099,000 shares in 1996, and 19,461,000 shares in the nine months ended December 31, 1995. The computation of earnings per share assuming dilution includes the dilutive effect of stock options. Such stock options had the effect of increasing the weighted average shares outstanding assuming dilution by 497,000 and 885,000 in 1997 and 1996, respectively, and 576,000 shares in the nine months ended December 31, 1995. 4. PROPERTY, PLANT & EQUIPMENT
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ (IN THOUSANDS) Land........................................................ $ 4,643 $ 3,662 Buildings & Improvements.................................... 17,698 15,787 Leasehold Improvements & Signs.............................. 19,243 16,068 Fixtures & Equipment........................................ 19,402 15,738 Construction in Progress.................................... 3,380 2,726 -------- -------- 64,366 53,981 Less: Accumulated Depreciation & Amortization............... (24,609) (20,714) -------- -------- $ 39,757 $ 33,267 ======== ========
5. DEBT BANK DEBT -- The Company has a revolving credit agreement with four banks providing for unsecured borrowings up to $90,000,000, which includes a $6,000,000 credit line to fund daily working capital requirements. Amounts borrowed bear interest at the lower of the lender's prime rate, LIBOR plus .50%, or the rate at which certificates of deposit are offered in the secondary market plus .625%. The pricing under the working capital line is based upon overnight bank borrowing rates. At December 31, 1997 and 1996, an aggregate of $75,904,000 (bearing interest at 6.57%) and $55,125,000, respectively, was outstanding under this agreement. The Company pays a .22% commitment fee on unused balances. The weighted average interest rate on borrowings under the revolving credit agreement (before giving effect to interest rate swaps) was 6.29% in 1997, 6.17% in 1996 and 6.99% for the nine months ended December 31, 1995. The effect of interest rate swaps on the weighted average interest rate was not material. The Company has entered into interest rate swap agreements that effectively fix the interest rate on $20,000,000 of borrowings under the revolving credit agreement at an average rate of 7.0% until November 2003 and an additional $20,000,000 at an average rate of 6.85% until June 2005. These swap agreements involve the receipt of amounts when the floating rates exceed the fixed rates and the payment of amounts when the fixed rates exceed the floating rates in such agreements over the life of the agreements. The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment to the floating rate interest expense related to the debt. The related amount payable to or receivable from counterparties is included in accrued liabilities or other assets. Unrealized losses under the swap agreements aggregated $926,000 at December 31, 1997. The fair value of the Company's bank debt approximates its carrying value. 11 12 AARON RENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The revolving credit agreement may be terminated on ninety days' notice by the Company or six months' notice by the lenders. The debt is payable in 60 monthly installments following the termination date if terminated by the lenders. The agreement requires that the Company not permit its consolidated net worth as of the last day of any fiscal quarter to be less than the sum of (a) $105,000,000 plus (b) 50% of the Company's consolidated net income (but not loss) for the period beginning July 1, 1997 and ending on the last day of such fiscal quarter. It also places other restrictions on additional borrowings and requires the maintenance of certain financial ratios. At December 31, 1997, $6.7 million of retained earnings was available for dividend payments and stock repurchases under the debt restrictions. OTHER DEBT -- Other debt of $582,000 at December 31, 1997 and $240,000 at December 31, 1996 primarily represents an insurance premium financing agreement bearing interest at 6.22%. Other debt matures in 1998. 6. INCOME TAXES
NINE MONTHS YEAR ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ------------ ------------ ------------ (IN THOUSANDS) Current Income Tax Expense: Federal..................................... $ 7,375 $ 9,503 $5,577 State....................................... 661 1,182 800 ------- ------- ------ 8,036 10,685 6,377 Deferred Income Tax Expense (Benefit): Federal..................................... 3,287 (889) (302) State....................................... 518 (10) (43) ------- ------- ------ 3,805 (899) (345) ------- ------- ------ $11,841 $ 9,786 $6,032 ======= ======= ======
Significant components of the Company's deferred income tax liabilities and assets are as follows:
DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ (IN THOUSANDS) Deferred Tax Liabilities: Rental Merchandise and Property, Plant & Equipment...... $ 9,265 $5,486 Other, Net.............................................. 1,244 1,141 ------- ------ Total Deferred Tax Liabilities.................. 10,509 6,627 Deferred Tax Assets: Accrued Liabilities..................................... 1,015 892 Advance Payments........................................ 2,276 2,150 Other, Net.............................................. 531 703 ------- ------ Total Deferred Tax Assets....................... 3,822 3,745 ------- ------ Net Deferred Tax Liabilities.................... $ 6,687 $2,882 ======= ======
12 13 AARON RENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's effective tax rate differs from the federal income tax statutory rate as follows:
NINE MONTHS YEAR ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ------------ ------------ ------------ Statutory Rate.............................. 35.0% 35.0% 35.0% Increases in Taxes Resulting From State Income Taxes, Net of Federal Income Tax Benefit................................... 2.5 3.0 3.2 Other, Net.................................. 1.7 .9 (.3) ---- ---- ---- Effective Tax Rate.......................... 39.2% 38.9% 37.9% ==== ==== ====
7. COMMITMENTS The Company leases warehouse and retail store space for substantially all of its operations under operating leases expiring at various times through 2007. Most of the leases contain renewal options for additional periods ranging from 1 to 15 years or provide for options to purchase the related property at predetermined purchase prices which do not represent bargain purchase options. The Company also leases transportation equipment under operating leases expiring during the next 3 years. Management expects that most leases will be renewed or replaced by other leases in the normal course of business. Future minimum rental payments, including guaranteed residual values, required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 1997, are as follows: $20,838,000 in 1998; $16,819,000 in 1999; $12,444,000 in 2000; $19,319,000 in 2001; $4,164,000 in 2002; and $4,457,000 thereafter. Rental expense was $22,146,000 in 1997, $17,886,000 in 1996 and $11,513,000 for the nine months ended December 31, 1995. The Company leases five buildings from certain officers of the Company under leases expiring through 1998 for annual rentals aggregating $383,000. The Company maintains a 401(k) savings plan for all full-time employees with at least one year of service with the Company and who meet certain eligibility requirements. The plan allows employees to contribute up to 10% of their annual compensation with 50% matching by the Company on the first 4% of compensation. The Company's expense related to the plan was $357,000 in 1997, $308,000 in 1996 and $162,000 for the nine months ended December 31, 1995. 8. SHAREHOLDERS' EQUITY During 1996, the Company declared a 100% stock dividend on its Common Stock and Class A Common Stock. Each stockholder received one share of Common Stock for each share of Common Stock and Class A Common Stock held. All share and per share amounts have been restated to reflect the 100% stock dividend. Common stock is non-voting. At December 31, 1997, the Company held a total of 2,583,296 common shares in its treasury, and is authorized by the Board of Directors to acquire up to an additional 208,090 shares. The Company has 1,000,000 shares of preferred stock authorized. The shares are issuable in series with terms for each series fixed by the Board and such issuance is subject to approval by the Board of Directors. No preferred shares have been issued. 13 14 AARON RENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. STOCK OPTIONS The Company has stock option plans under which options to purchase shares of the Company's Common Stock are granted to certain key employees. Under the plans, options granted become exercisable after a period of two or three years and unexercised options lapse five or ten years after the date of the grant. Options are subject to forfeiture upon termination of service. Under the plans, 2,000,500 of the Company shares are reserved for issuance at December 31, 1997. The weighted-average fair value of options granted was $8.58 in 1997 and $4.99 in 1996. Pro forma information regarding net earnings and earnings per share is required by FAS 123, and has been determined as if the Company has accounted for its employee stock options granted in 1997 and 1996 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996, respectively: risk-free interest rates of 5.88% and 6.72%; a dividend yield of .25% and .4%; volatility factor of the expected market price of the Company's common stock of .39 and .335; and a weighted-average expected life of the option of 8 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- Pro forma net earnings............................... $17,508 $14,825 Pro forma earnings per share......................... .91 .78 Pro forma earnings per share assuming dilution....... .89 .74
Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until future years. 14 15 AARON RENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The table below summarizes option activity for the periods indicated in the Company's stock option plans.
WEIGHTED AVERAGE EXERCISE OPTIONS PRICE -------- --------- (IN THOUSANDS, EXCEPT PRICE PER SHARE) Outstanding at April 1, 1995................................ 1,294 $ 4.54 Exercised................................................. (24) 3.00 Forfeited................................................. (22) 6.68 ----- ------ Outstanding at December 31, 1995............................ 1,248 4.54 Granted................................................... 780 9.88 Exercised................................................. (701) 3.00 Forfeited................................................. (8) 9.68 ----- ------ Outstanding at December 31, 1996............................ 1,319 8.48 Granted................................................... 322 15.95 Exercised................................................. (47) 5.28 Forfeited................................................. (9) 10.83 ----- ------ Outstanding at December 31, 1997............................ 1,585 $10.07 ===== ====== Exercisable at December 31, 1997............................ 501 $ 6.62 ===== ======
Exercise prices for options outstanding as of December 31, 1997 ranged from $4.88 to $16.50. The weighted-average remaining contractual life of those options is 6.58 years. 10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE) YEAR ENDED DECEMBER 31, 1997 Revenues.................................................. $76,480 $77,465 $76,238 $80,568 Gross Profit.............................................. 43,574 44,236 43,996 45,559 Earnings Before Taxes..................................... 7,080 7,608 7,883 7,666 Net Earnings.............................................. 4,312 4,633 4,805 4,646 Earnings Per Share........................................ $ .22 $ .24 $ .25 $ .25 Earnings Per Share Assuming Dilution...................... .22 .24 .25 .24 YEAR ENDED DECEMBER 31, 1996 Revenues.................................................. $64,693 $67,610 $71,224 $70,718 Gross Profit.............................................. 38,873 39,980 41,273 39,259 Earnings Before Taxes..................................... 6,791 6,375 6,198 5,815 Net Earnings.............................................. 4,159 3,914 3,787 3,533 Earnings Per Share........................................ $ .22 $ .21 $ .20 $ .18 Earnings Per Share Assuming Dilution...................... .21 .20 .19 .18
11. FRANCHISING OF AARON'S RENTAL PURCHASE STORES The Company franchises Aaron's Rental Purchase stores. As of December 31, 1997 and December 31, 1996, 186 and 155 franchises had been awarded, respectively. Franchisees pay a non-refundable initial franchise fee of $35,000 and an ongoing royalty of 5% of cash receipts. The Company recognizes this income 15 16 AARON RENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) as earned and includes it in Other Revenues in the Consolidated Statements of Earnings. The Company has guaranteed certain lease and debt obligations (primarily extending through 1999) of some of the franchisees amounting to $127,000 and $8,131,000, respectively, at December 31, 1997. The Company receives a guarantee and servicing fee based on such franchisees outstanding debt obligations which it recognizes as income over the guaranty and servicing period. The Company has recourse rights to the leased property and to the assets securing the debt obligations. As a result, the Company does not expect to incur any significant losses under these guarantees. 12. ACQUISITIONS In December 1997, the Company acquired substantially all of the assets of RentMart Rent-To-Own, Inc., a wholly-owned subsidiary of the Associates Capital Corporation, for $18,012,000 in cash. The excess cost over the fair market value of tangible assets acquired was approximately $4,300,000. In December 1997, the Company acquired substantially all of the assets of Blackhawk Convention Services, Inc. for $3,500,000 in cash. The excess cost over the fair market value of tangible assets acquired was approximately $2,700,000. Both acquisitions were accounted for under the purchase method and, accordingly, the results of operations of the acquired businesses are included in the Company's results of operations from their dates of acquisition. The effect of these acquisitions on the 1997 consolidated financial statements was not significant. 13. PROPOSED STOCK OFFERING On or about March 31, 1998, the Company intends to file a registration statement for the sale by the Company of 2,100,000 shares of Common Stock. The proceeds of the offering, if consummated, would be used to reduce indebtedness and for general business purposes, including opening additional rent-to-rent and rental purchase stores and expansion of manufacturing and distribution capacity. 16 17 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Aaron Rents, Inc.: We have audited the accompanying consolidated balance sheets of Aaron Rents, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity and cash flows for the years ended December 31, 1997 and 1996, and the nine months ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aaron Rents, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the years ended December 31, 1997 and 1996, and the nine months ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the Consolidated Financial Statements, in 1996, the Company changed its method of accounting for depreciation of rental purchase merchandise. /s/ ERNST & YOUNG LLP Atlanta, Georgia March 23, 1998 17 18 COMMON STOCK MARKET PRICES & DIVIDENDS On March 20, 1998, the Company's Common Stock and Class A Common Stock were listed on the New York Stock Exchange under the symbols "RNT" and "RNT.A," respectively. Previously, the Company's Common Stock and Class A Common Stock were traded on The NASDAQ Stock Market under the symbols "ARON" and "ARONA," respectively. The approximate number of shareholders of the Company's Common Stock and Class A Common Stock at March 23, 1998, was 2,000. The following table shows, for the periods indicated, the range of high and low closing prices per share for the Common Stock and Class A Common Stock as reported by NASDAQ, and the cash dividends declared per share. The closing prices for the Common Stock and Class A Common Stock on March 23, 1998, was $23.438 and $22.625, respectively. The Company currently expects to continue its policy of paying dividends.
CASH DIVIDENDS PER COMMON STOCK HIGH LOW SHARE - ------------ ------- ------- --------- December 31, 1997 First Quarter............................................. $12.875 $10.063 $ Second Quarter............................................ 13.375 10.375 .02 Third Quarter............................................. 18.250 12.750 Fourth Quarter............................................ 20.250 15.500 .02 December 31, 1996 First Quarter............................................. $10.375 $ 9.000 $ Second Quarter............................................ 15.000 9.688 .02 Third Quarter............................................. 14.250 11.000 Fourth Quarter............................................ 14.625 10.750 .02
CASH DIVIDENDS CLASS A PER COMMON STOCK HIGH LOW SHARE - ------------ ------- ------- --------- December 31, 1997 First Quarter............................................. $14.000 $ 9.750 $ Second Quarter............................................ 13.750 10.000 .02 Third Quarter............................................. 18.000 11.938 Fourth Quarter............................................ 18.500 14.500 .02 December 31, 1996 First Quarter............................................. $11.250 $ 8.875 $ Second Quarter............................................ 16.000 10.750 .02 Third Quarter............................................. 16.250 12.750 Fourth Quarter............................................ 15.750 12.625 .02
18 EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF AARON RENTS, INC.
NAME STATE OF INCORPORATION - ---- ---------------------- Aaron Investment Company Delaware
EX-23 7 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Aaron Rents, Inc. of our report dated March 23, 1998, included in the 1997 Annual Report to Shareholders of Aaron Rents, Inc. We also consent to the incorporation by reference in the Registration Statements of Aaron Rents, Inc. listed below of our report dated March 23, 1998, with respect to the consolidated financial statements of Aaron Rents, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1997. - - Registration Statement No. 33-62536 on Form S-8 pertaining to the 1990 Stock Option Plan - - Registration Statement No. 33-9026 on Form S-8 pertaining to the Aaron Rents, Inc. Retirement Plan and Trust - - Registration Statement No. 33-62538 on Form S-8 pertaining to the Aaron Rents, Inc. Retirement Plan and Trust /s/ Ernst & Young LLP Atlanta, Georgia March 31, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AARON RENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 96 0 11,794 0 176,968 0 39,757 0 239,382 0 0 0 0 10,766 105,689 239,382 73,223 310,751 55,914 276,793 0 0 3,721 30,237 11,841 18,396 0 0 0 18,396 .96 .94 THE ALLOWANCE OF DOUBTFUL ACCOUNTS IS NETTED AGAINST TOTAL ACCOUNTS RECEIVABLE IN THE ACCOUNTS RECEIVABLE BALANCE. RENTAL MERCHANDISE HAS BEEN CLASSIFIED AS INVENTORY FOR PURPOSES OF THIS SCHEDULE. RENTAL MERCHANDISE HAS BEEN SHOWN NET OF 69,530 ACCUMULATED DEPRECIATION. THE FINANCIAL STATEMENTS ARE PRESENTED WITH AN UNCLASSIFIED BALANCE SHEET. PP&E HAS BEEN SHOWN NET OF ACCUMULATED DEPRECIATION.
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