-----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, IQxRGl0GORi7AWGz3RyVR0k3SjUjMk0EkyZzTr3g2queQISCAFvp2gA7hliYMXw8 5j3GYj6IVJ3PEgIcV4QP+A== 0000950144-99-003740.txt : 19990402 0000950144-99-003740.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003740 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 001-13941 FILM NUMBER: 99581453 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-K405 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 YEAR ENDED COMMISSION FILE NO. December 31, 1998 0-12385 AARON RENTS, INC. (Exact name of registrant as specified in its charter) GEORGIA 58-0687630 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 309 E. PACES FERRY ROAD, N.E. ATLANTA, GEORGIA 30305-2377 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (404) 231-0011 Securities registered pursuant to Section 12(b)of the Act: TITLE OF EACH CLASS ------------------- Common Stock, $.50 Par Value Class A Common Stock, $.50 Par Value Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 22, 1999: $286,584,600. See Item 12. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. SHARES OUTSTANDING AS OF TITLE OF EACH CLASS MARCH 22, 1999 ------------------- ------------------------ Common Stock, $.50 Par Value 16,201,696 Class A Common Stock, $.50 Par Value 3,836,506 A-1 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1998 Annual Report to Shareholders for the year ended December 31, 1998 are incorporated by reference into Part II of this Form 10-K. Portions of the registrant's definitive proxy statement for the 1999 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K. =============================================================================== A-2 3 PART I. ITEM 1. BUSINESS GENERAL Aaron Rents is a U.S. leader in the rent-to-rent and rental purchase industries with 427 stores in 32 states. The Company offers both individual and business customers a wide range of residential and office furniture, accessories, consumer electronics, and household appliances for rental, rental purchase and sale. The Company's major operating divisions are the Aaron Rents' Rent-to-Rent division, the Aaron's Rental Purchase division and the MacTavish Furniture Industries division, which manufactures much of the furniture for the Company's rental and rental purchase stores. Aaron Rents' strategic focus is on expanding its higher growth rental purchase business while also growing its rent-to-rent business in selected markets. At December 31, 1998, Aaron Rents had 291 Company-operated stores and 136 franchised stores in 32 states nationwide. There were 109 rent-to-rent stores in its Aaron Rents' Rent-to-Rent division, 182 Company-operated rental purchase stores in its Aaron's Rental Purchase division and 136 Aaron's Rental Purchase franchised stores. The Aaron Rents' Rent-to-Rent division is well-positioned to take advantage of the growing demand for furniture rental services. Management believes this demand to be driven by continued growth in employment, the increasing importance of flexibility and outsourcing to American businesses and the impact of a more mobile and transitory population. Business customers, which represent an increasing portion of rental customers, enter into leases for office furniture to meet seasonal, temporary or start-up needs. Business customers also lease residential furniture in order to provide furnishings for relocated employees or those on temporary assignment. The Aaron's Rental Purchase division focuses on providing durable household goods to lower to middle income consumers with limited or no access to traditional credit sources such as bank financing, installment credit or credit cards. The Company's rental purchase program allows customers to obtain merchandise without incurring additional debt or long-term obligations. Management believes that the segment of the U.S. population which its rental purchase division targets is large and that the needs of these customers generally are underserved. In 1992 the Company began franchising Aaron's Rental Purchase stores to place stores in selected markets where the Company has no immediate plans to enter. The Company believes that its franchise program allows the Company to grow more quickly, increase its name exposure in new markets and achieve economies of scale in purchasing, manufacturing and advertising for its rental purchase stores. The Company opened 25, 40 and 40 franchised rental purchase stores in 1996, 1997 and 1998, respectively. The Company is the only rental company in the United States that manufactures its own furniture. By manufacturing its own specially designed residential and office furniture through its MacTavish Furniture Industries division, the Company enjoys an advantage over many of its competitors. Manufacturing enables the Company to control the quality, cost, timing, styling and quantity of its furniture rental products. The Company operates six furniture plants, four bedding facilities and one lamp manufacturing facility, which supply approximately one half of the furniture and related accessories rented or sold by the Company. The Company has grown significantly in recent years. Its growth is attributed to the opening of Company-operated and franchised rental purchase stores, as well as to the expansion of its rent-to-rent business and selected acquisitions. Total revenues have increased from $173.7 million for calendar year 1993 to $379.7 million for calendar year 1998, and earnings before income taxes increased from $13.6 million in 1993 to $35.2 million in 1998, representing a 16.9% and 20.9% compound annual growth rate in the Company's revenues and earnings before income taxes, respectively. The increase in revenues was driven by a significant increase in rental purchase revenues, which increased from $41.1 million for 1993 to $200.0 million for 1998, representing a 37.2% compound annual growth rate. During the same period, core rent-to-rent revenues increased from $126.1 million to $173.8 million. The Company believes it possesses a valuable brand name in the rental business, as well as operating characteristics which differentiate it from its competitors. For instance, the Company's rental purchase concept is unique in offering 12-month rental purchase agreements, larger and more attractive store showrooms and a wider selection of merchandise. In the rent-to-rent business, the Company believes that its ability to deliver residential and office furniture and equipment to its customers quickly and efficiently A-3 4 gives the Company an advantage over furniture retailers who often require several weeks to effect delivery. By having its own manufacturing capabilities, an extensive distribution network and sophisticated management information systems, the Company is well-positioned to meet the distinct needs of its rent-to-rent and rental purchase customers. INDUSTRY OVERVIEW The Rent-to-Own Industry According to the Association of Progressive Rental Organizations ("APRO"), the national trade association representing the rent-to-own industry, there are 7,500 - 8,000 rent-to-own stores in the United States, approximately 50% of which are owned or franchised by the eight largest companies in the industry. Industry-wide revenues are believed to have been approximately $4.7 billion in 1997. In a typical rent-to-own transaction, the customer has the option to acquire merchandise over a fixed term, usually 18 to 24 months, by making weekly rental payments. The customer may cancel the agreement at any time by returning the merchandise to the store, with no further rental obligation. The average rental period in the industry is about four months, because the majority of customers do not rent the item to the full term of the agreement. If the customer rents the item to the full term, he obtains ownership of the item, though he has the option to purchase it at any time. The rent-to-own industry is a growing segment of the retail industry that offers an alternative to traditional methods of acquiring furniture, electronics and appliances. The rent-to-own concept is particularly popular with consumers who are unable to pay for merchandise in cash or who lack the credit to qualify under conventional financing programs. It is also popular with consumers who, despite good credit, do not wish to incur additional debt, have only a temporary need for the merchandise, or desire to try out a particular brand or model before purchasing it. Historically, electronic goods have been the dominant product category rented and sold in the industry although furniture items are growing rapidly in popularity. The Company believes its rental purchase concept differs significantly from the typical rent-to-own program. Compared to the typical rent-to-own stores, Aaron's Rental Purchase stores offer shorter agreement terms which are payable on a monthly basis and have generally lower total payments to acquire merchandise. Aaron's Rental Purchase stores offer a larger selection of merchandise in general and a greater percentage of furniture merchandise in particular, and have a larger and more visually appealing store layout. The Company believes that its rental purchase customers demand and can afford both higher quality merchandise and more competitive pricing on total agreement terms compared to the typical rent-to-own customer. The Company's rental purchase transactions differ from sales by home furnishings retailers in that rental purchase allows the option, but not the obligation, to purchase merchandise while paying a similar "all-in" agreement price. Rental purchase allows the customer to have the item serviced free of charge or replaced at any time during the rental agreement, and allows the Company to re-rent an item to another customer if the agreement does not go to term. The Company's rental purchase operations differ from the rent-to-rent business. A typical rental purchase customer, while usually lacking the cash or credit resources to acquire merchandise, desires the option of ownership and may have the intention to utilize rental purchase to achieve ownership. Accordingly, in rental purchase transactions, the customer is willing to pay a higher monthly payment for the ownership option, as compared to the rent-to-rent customer. Typically, the Company's rental purchase customers are more style and brand name conscious than rent-to-rent customers who regard the merchandise as temporary. Aaron's Rental Purchase stores are attractively appointed and are typically in or near a shopping center strategically located near the residences of its target customers, as opposed to the rent-to-rent store whose typical location is in an office park that services destination customers from a broad geographical area. The Rent-to-Rent Industry The furniture component of the rent-to-rent industry is estimated to be greater than $600 million in annual rental revenues. The demand for rental products is believed to be related to the mobility of the population, which relies upon rented merchandise to fulfill temporary needs. The industry is highly competitive and consolidating, with only a handful of companies accounting for a substantial share of the market. A-4 5 The rent-to-rent industry serves both individual and business customers who generally have immediate, temporary needs for office or residential merchandise but who generally do not seek to own the merchandise. Residential merchandise is rented to individuals seeking to rent merchandise for their own homes and apartments, apartment complex managers seeking to provide furnished apartments, and third party companies that provide interim housing for their corporate clients. Office merchandise is rented by customers ranging from small businesses and professionals who are in need of office furnishings but need to conserve capital, to large corporations with temporary or seasonal needs. In the typical rent-to-rent transaction, the customer agrees to rent one or more items for a minimum of three months, which may be extended by the customer on a month-to-month basis. Although many rental agreements give the customer the option of purchasing the rented item, most customers do not enter into the transaction with the desire to own the rented merchandise. GROWTH AND OPERATING STRATEGIES Aaron Rents is expanding its business through growth strategies that focus on the opening of additional Company-operated rent-to-rent and rental purchase stores, and franchised rental purchase stores. In addition, the Company seeks to enhance profitability through operating strategies which differentiate the Company from its competitors and improve operating efficiencies. The key elements of the Company's growth and operating strategies are summarized below. Growth Strategies - EXPAND COMPANY-OPERATED RENTAL PURCHASE OPERATIONS IN SELECTED GEOGRAPHIC MARKETS. The Company's strategy is to open rental purchase stores primarily in the Company's existing geographic markets where it can cluster stores to realize the benefits of economies of scale in marketing and distribution and other operating efficiencies. - EXPAND AARON'S RENTAL PURCHASE FRANCHISE PROGRAM. The Company uses its franchise program to place Aaron's Rental Purchase stores in selected markets where the Company has no immediate plans to enter. The Company believes that its franchise program allows the Company to grow more quickly and increase its name exposure in new markets with a relatively low investment of capital by the Company. In addition, the larger number of systemwide rental purchase stores enables the Company and its franchisees to realize economies of scale in purchasing, manufacturing and advertising for its rental purchase stores. Franchise fees and royalties also represent a growing source of revenues for the Company. - EXPAND RENT-TO-RENT OPERATIONS. The Company believes that there are growth opportunities in the rent-to-rent market, particularly in the business sector. The Company has recently begun opening rent-to-rent operations in new markets to better serve its national business customers and is also expanding its presence in existing markets. The recent introduction of warehouse-only stores in new markets has allowed the Company to enter markets at a lower cost. The Company believes that its rent-to-rent business will continue to provide the Company with cash flow to finance a significant amount of the planned expansion of the Aaron's Rental Purchase division. Operating Strategies - PROVIDE HIGH LEVELS OF CUSTOMER SERVICE AND SATISFACTION. The Company demonstrates its commitment to superior customer service by providing large, attractive and conveniently located showrooms, offering a wide selection of quality merchandise at competitive prices and flexible acquisition options, and providing customers quick delivery of rented merchandise, in many cases by same or next day delivery. The Company has established an employee training program designed to enhance the customer relations skills of its employees. - DIFFERENTIATE AARON'S RENTAL PURCHASE CONCEPT. The Company believes that the success of its rental purchase operations is attributable to its distinctive approach to the business that sets it apart from its rent-to-own competitors. The Company has pioneered innovative approaches to meeting changing customer needs that differ from those of its competitors -- such as offering 12-month rental purchase agreements which result in a lower "all-in" price, larger and more attractive store showrooms, and a wider selection of merchandise. Most rental purchase customers make their rental payments in person, and the Company uses these frequent visits to strengthen customer relationships and make rental purchase customers feel welcome in the Company's stores. A-5 6 - TARGET RENT-TO-RENT BUSINESS CUSTOMERS. The Company has successfully operated rent-to-rent stores for over 40 years, using its superior customer service, prompt delivery and wide selection of rental furniture to attract a growing number of business customers. The Company believes that its ability to deliver furniture and equipment to its business customers quickly and efficiently gives the Company an advantage over general furniture retailers who often require several weeks to effect delivery. In addition, the location of a warehouse next to each showroom permits the store manager to exercise greater control over inventory, merchandise condition and pickup and deliveries, resulting in more efficient and consistent service for the customer. The Company has also recently opened warehouse-only locations in a few selected markets where the Company is seeking an immediate presence at a lower cost. The warehouse-only locations rely on outside sale representatives who target business customers. - MANAGE FURNITURE REQUIREMENTS THROUGH MANUFACTURING AND DISTRIBUTION. The Company believes that its furniture manufacturing capability and distribution center network give it a strategic advantage over its competitors by enabling the Company to control the quality, cost, timing, styling, durability and quantity of a substantial portion of its rental furniture merchandise. This control allows the Company to offer prompt delivery of rented furniture and provides the Company a reliable source of rental furniture. - UTILIZE PROPRIETARY MANAGEMENT INFORMATION SYSTEMS. The Company has developed proprietary computerized information systems to systematically pursue cash collections and merchandise returns and to match inventory with demand. Each of the Company's stores, including franchised rental purchase stores, is linked by computer directly to corporate headquarters, which enables headquarters to monitor the performance of each store on a daily basis. Its separate systems are tailored to meet the distinct needs of the Company's rent-to-rent and rental purchase operations. OPERATING DIVISIONS Rental Purchase - Aaron's Rental Purchase The Company established its Aaron's Rental Purchase division in 1987. At December 31, 1998, there were 182 Company-operated Aaron's Rental Purchase stores in 17 states and 136 franchised Aaron's Rental Purchase stores in 28 states. The Company has developed a distinctive concept for its Aaron's Rental Purchase stores with specific merchandising selection and store layout, pricing and agreement terms for the customers it seeks to attract. The Company believes that these features create a store and rental purchase concept that is significantly different from the operations of most other rent-to-own stores, the Company's traditional rent-to-rent business, and the operations of home furnishings retailers who finance merchandise. The typical Aaron's Rental Purchase store layout consists of a combination showroom and warehouse of 8,000 to 10,000 square feet, with an average of approximately 9,000 total square feet. In selecting new locations for Aaron's Rental Purchase stores, the Company generally looks for sites in well-maintained strip shopping centers strategically located within ten miles of established working class neighborhoods and communities with good access. Many of the Company's stores are placed near existing rent-to-own stores of competitors. Each rental purchase store maintains at least two trucks and crews for pickups and deliveries, and generally offers same or next day delivery for addresses located within 15 miles of the store. The Company emphasizes a broad selection of brand name products for its electronics and appliance items, and offers customers a wide selection of furniture, including furniture manufactured by the Company's MacTavish Furniture Industries division. Aaron's Rental Purchase stores also offer computers and jewelry. Aaron's Rental Purchase stores structure the pricing of merchandise to be less expensive than similar items offered by other rent-to-own operators, and substantially equivalent to the "all-in" contract price of similar items offered by home furnishings retailers who finance merchandise. Over 77% of the Company's rental purchase agreements have monthly payments as compared to the industry standard weekly payments, and most monthly agreements are for 12 months compared to the industry standard of 18 to 24 months. Approximately 44% of Aaron's Rental Purchase agreements go to term, in contrast to an industry average of less than 25%. The merchandise from the agreements that do not go to term is either re-rented or sold. A-6 7 Aaron's Rental Purchase Franchise Program The Company began franchising Aaron's Rental Purchase stores in selected markets in 1992, and has continued to attract many franchisees. It is not anticipated that franchised stores will compete with Company-operated stores, as franchises are primarily awarded in markets into which the Company has no presence and no current plans to expand. As of December 31, 1998, 227 franchises had been sold to 60 franchisees, and 136 franchise stores were open. The Company believes that its relations with its franchisees are good. Franchisees are approved on the basis of the applicant's business background and financial resources. The Company generally seeks franchisees who will enter into development agreements for several stores, although many franchisees currently operate a single store. Most franchisees are involved in the day-to-day operations of the stores. The Company enters into franchise agreements with its franchisees to govern the opening and operation of franchised stores. Under the Company's current agreement, the franchisee is required to pay a franchise fee of $35,000 per store. Agreements are for a term of 10 years (with one 10-year renewal option) and require payment to the Company of a royalty of 5% of weekly cash collections. The Company assists each franchisee in selecting the proper site for each store. Because of the importance of location to the Aaron's Rental Purchase concept, one of the Company's Pre-Opening Directors visits the intended market and helps guide the franchisee through the selection process. Once a site is selected, the Company helps in designing the floor plan, including the proper layout of the showroom and warehouse. In addition, the Company provides assistance in assuring that the design and decor of the showroom is consistent with the Company's requirements. The Company also leases the exterior signage to the franchisee, and assists with placing pre-opening advertising, ordering initial inventory and purchasing delivery vehicles. The Company has an arrangement with a syndicate of banks to provide financing to qualifying franchisees to assist with the establishment and operation of their stores. A primary component of the financing program is an inventory financing plan which provides franchisees with the capital to purchase inventory. For established franchisees, the Company has arranged for these institutions to provide a revolving credit line to allow franchisees the flexibility to expand. The Company guarantees a portion of amounts outstanding under the franchisee financing programs. All franchisees are required to complete a comprehensive training program and to operate their franchised Aaron's Rental Purchase stores in compliance with the Company's policies, standards and specifications, including such matters as decor, rental agreement terms, hours of operation, pricing and merchandise. Franchisees are not required to purchase their rental merchandise from the Company, although many do so in order to take advantage of bulk purchasing discounts and favorable delivery terms. Many also purchase their rental furniture from the Company's MacTavish Furniture Industries facilities. The Company conducts a financial audit of its franchise stores every six to 12 months and also conducts regular operational audits, generally visiting each franchise store almost as often as it visits its Company-owned stores. In addition, the Company's proprietary management information system links each store to corporate headquarters. With this system, each night the Company automatically retrieves detailed financial information regarding the number of customers served during the day, the revenues received and the status of all customer accounts. This information is compiled nightly into a detailed report of every franchised and Company-operated rental purchase store, which is then immediately made available to corporate and store management. On a weekly basis, the system also automatically debits the franchisee's bank account for the 5% royalty fee, resulting in essentially a 100% collection rate on franchise royalties. Rent-to-Rent -- Aaron Rents and Sells Furniture The Company has been in the rent-to-rent business for over 40 years and is the second largest furniture rent-to-rent company in the United States. The core rent-to-rent business accounted for approximately 46% of the Company's total revenues for the year ended December 31, 1998. The Company rents new and rental return merchandise to both the individual and the business segments of the rent-to-rent industry, with a growing focus on rentals of residential and office furniture to business customers. As of December 31, 1998, the Company operated 109 rent-to-rent stores in 22 states. A-7 8 The Company's typical rent-to-rent store layout consists of a combination showroom and warehouse comprising about 19,000 square feet. Each residential showroom features attractive displays of dining-room, living-room and bedroom furniture in a number of styles, fabrics, materials and colors. Office rental showrooms feature lines of desks, chairs, conference tables, credenzas, sofas and accessories. The Company believes that having a warehouse next to each showroom permits the store manager to exercise greater control over inventory, merchandise condition and pickup and deliveries, resulting in more efficient and consistent service for the customer. The Company has also recently opened warehouse-only locations in a few selected markets where the Company is seeking an immediate presence at a lower cost. The warehouse-only locations rely on outside sale representatives who target business customers. Items held for rent, whether new or rental return, are available for purchase and rental purchase at all rent-to-rent stores. Each rent-to-rent store generally offers next day delivery for addresses located within 50 miles of the store, and maintains at least one truck and a crew for pickups and deliveries. The Company believes that its ability to obtain and deliver office furniture and equipment to its customers quickly and efficiently gives the Company an advantage over general office furniture retailers who often require several weeks to effect delivery. The Aaron Rents' Rent-to-Rent division's four clearance stores serve primarily as retail outlets for final sales of rental return merchandise that will not be rented again, though they also sell new merchandise. Sales by the clearance stores, together with sales at the clearance centers located in most of the Company's rent-to-rent stores, are instrumental in enabling the Company to maximize residual values of depreciated rental merchandise. The Company generally sells rental return merchandise at or above its book value (cost less depreciation) plus selling expenses, a price which is usually considerably lower than the price for comparable new merchandise. Most merchandise held for sale in clearance stores may also be acquired through a rental purchase option. Because new merchandise is sold at the same location as rental return merchandise, the Company has the opportunity to sell both new and rental return merchandise to customers who may have been attracted to the store by the advertising and price appeal of rental return merchandise. The ability to sell new and rental return merchandise at the same location allows for more efficient use of facilities and personnel and minimizes overhead. FURNITURE MANUFACTURING The Company believes that its manufacturing capability gives it a strategic advantage over its competitors by enabling the Company to control the quality, cost, timing, styling, durability and quantity of its furniture rental products. As the only major furniture rental company that manufactures its own furniture, the Company believes its 643,000 square feet of manufacturing facilities provide it more flexibility in scheduling production runs and in meeting inventory needs than rental companies that do not manufacture their own furniture and are dependent upon third party suppliers. The Company's MacTavish Furniture Industries division has manufactured furniture for the Company's rental stores since 1971. The division has six furniture manufacturing plants, four bedding manufacturing facilities and one lamp manufacturing facility which supply approximately one half of the furniture and accessories rented or sold by the Company. The Company's manufacturing plants have the capacity to meet the Company's needs for the foreseeable future, with a new 200,000 square foot facility added during 1998 in Cairo, Georgia. The Company also does limited manufacturing of residential furniture for several unaffiliated furniture retailers, and manufactures lamps for selected national retailers. MacTavish Furniture Industries manufactures upholstered living-room furniture (including contemporary sofas, sofabeds, chairs and modular sofa and ottoman collections in a variety of natural and synthetic fabrics and leathers), bedding (including standard sizes of mattresses and box springs), office furniture (including desks, credenzas, conference tables, bookcases and chairs), and bedroom furniture (including bedroom sets, headboards, dressers, mirrors, chests and night stands). MacTavish has designed special features for the furniture it manufactures which make its furniture less expensive to produce, more durable and better equipped for frequent transportation than furniture purchased from third parties. These features include standardization of components; reduction of parts and features susceptible to wear or damage; more resilient foam; durable, soil-resistant fabrics and sturdy frames for longer life and higher residual value; and collapsible box springs and devices which allow sofas to stand on end for easier and more efficient A-8 9 transport. The Company has patent applications pending for certain of these features. MacTavish also manufactures replacement covers of all styles and fabrics of its upholstered furniture for use in reconditioning rental return furniture. The principal raw materials used by MacTavish in furniture manufacturing are fabric, foam, fiber, wire-innerspring assemblies, plywoods and hardwoods. All of these materials are purchased in the open market from sources not affiliated with the Company. The Company is not dependent on any single supplier, and none of the raw materials are in short supply. In June, 1998, the Company acquired Lamps Forever, a manufacturer of designer lamps, tables and matching accessories, to capitalize on the rapidly growing coordinated room trend in furniture retailing. STORE OPERATIONS Management The Company's rent-to-rent stores are organized geographically into four residential and two office regions, each supervised by a vice president who is primarily responsible for monitoring individual store performance and inventory levels within the respective regions. The Aaron's Rental Purchase division has five regional managers performing similar responsibilities. President's manage the residential rent-to-rent, office rent-to-rent and rental purchase divisions. Stores are directly supervised by 20 rent-to-rent regional managers and 35 rental purchase district/city managers. At the individual store level, the store manager is responsible for customer and credit relations, deliveries and pickups, warehouse and inventory management, and certain marketing efforts. Store managers are also responsible for inspecting rental return furniture to determine whether it should be sold as is, rented again as is, repaired and sold, or reconditioned for additional rental. A significant portion of the store manager's compensation is dependent upon store revenues and profits. Executive management at the Company's headquarters directs and coordinates purchasing, financial planning and control, manufacturing, employee training, and new store site selection for the Company-operated stores. The Company's internal audit department conducts periodic audits of every store, including audits of Company-operated rental purchase stores several times each year, and semi-annual audits of rent-to-rent stores and franchised rental purchase stores. The Company's business philosophy has always emphasized strict cost containment and fiscal controls. Executive and store level management monitor expenses vigilantly to contain costs. All invoices are paid out of the Company's headquarters in order to enhance fiscal accountability. The Company believes that its careful attention to the expense side of its operations has enabled it to maintain financial stability and profitability. Management Information Systems The Company utilizes computer-based management information systems to facilitate cash collections, merchandise returns and inventory monitoring. Through the use of proprietary software developed by the Company, each of the Company's stores is linked by computer directly to corporate headquarters, which enables headquarters to monitor the performance of each store on a daily basis. A different system is used to run the rent-to-rent and rental purchase operations due to the significant differences in the businesses. At the store level, the store manager is better able to track inventory on the showroom floor and in the warehouse to minimize delivery times, assist with product purchasing and match customer needs with available inventory. Rental Agreement Approval, Renewal and Collection One of the keys to the success of the Company's Aaron's Rental Purchase operations is its ability to achieve timely cash collections. Individual store managers utilize the Company's computerized information system on a daily basis to track cash collections. They contact customers within a few days of when their rental payments are due in order to encourage customers to keep their agreement current and in force (rather than having to return the merchandise for non-payment of rent) and to renew their agreements for an additional rental period. Careful attention to cash collections is particularly important in the rental purchase operations, where the customer typically has the option to cancel the agreement at any time and each payment is considered a renewal of the agreement rather than a collection of a receivable. Each rent-to-rent store performs a credit check on most of its residential and business customers. The Company generally performs no formal credit check with respect to rental purchase customers other than to verify employment or other reliable sources of A-9 10 income and personal references supplied by the customer. All of the Company's rental agreements for residential and office merchandise require rental payments in advance, and the merchandise normally is picked up if a payment is significantly in arrears. Net bad debt losses from rent-to-rent rentals as a percentage of rent-to-rent rental revenues were approximately 2.0%, 1.9% and 2.6% for the years ended December 31, 1998, 1997 and 1996. The Company does not extend credit to rental purchase customers. For the same periods, net merchandise shrinkage for the Company as a percentage of combined rental revenues was 2.4%, 2.3% and 2.5%, respectively. The Company believes that its collection and repossession policies comply with applicable legal requirements, and the Company disciplines any employee that it discovers deviating from such policies. Customer Service The Company believes that customer service is one of the most important elements in the success of its rent-to-rent and rental purchase businesses. Customer satisfaction is critical because the customer usually has the option of returning the rented merchandise at any time. The Company's goal is to make its customers feel positive about the Company and its products from the moment they enter the Company's showrooms. Rented items are serviced at no charge to the customer, and quick, free delivery is available in many cases. In order to increase rentals at existing stores, the Company fosters relationships with existing customers to attract recurring business, and many new rental and rental purchase agreements are attributable to repeat customers. Because of the importance of customer service, the Company believes that a prerequisite for successful operations and growth is skilled, effective employees who value the Company's customers and project a genuine desire to serve the customers' needs. The rent-to-rent division's sales and management training programs, conducted at the Company's Atlanta headquarters, cover all areas of the Company's operations, with a heavy emphasis on customer service. Store managers and employees in the Aaron's Rental Purchase stores have similar training primarily on site by the division's training staff and regional managers. The Company's policy of promoting from within aids in employee retention and commitment to the Company's customer service and other business philosophies, which also allows the Company to realize greater benefits from its employee training programs. PURCHASING AND DISTRIBUTION The Company's product mix is determined by store managers in consultation with the regional managers and regional vice presidents, based on an analysis of customer demands. In the Company's rent-to-rent division, furniture is the primary merchandise category, accounting for approximately 94% of rent-to-rent rental revenues for the year ended December 31, 1998. In the Aaron's Rental Purchase division, electronics, furniture, appliances, computers and other accounted for approximately 49%, 31%, 14%, 5%, and 1%, respectively, of rental purchase rental revenues for the year ended December 31, 1998. With approval from the applicable operating management, store managers send their orders to the rental purchase or rent-to-rent purchasing department at headquarters. The applicable purchasing department reviews all purchase orders to determine whether merchandise needs may be satisfied out of existing inventory at other stores before contacting vendors. If inventory is available at other stores, the purchasing department arranges for inventory shipments between stores. Virtually all merchandise for the Company's stores is purchased by the Company's five buyers, three of whom are solely responsible for rental purchase merchandise. The Company purchases the majority of its merchandise directly from manufacturers, with the balance from local distributors. The Company's largest supplier is its MacTavish Furniture Industries manufacturing division, which supplies approximately one half of the furniture rented or sold by the Company. The Company has no long-term agreements for the purchase of merchandise and believes that its relationships with suppliers are excellent. Rent-to-rent stores receive merchandise directly from vendors who ship to the stores' attached warehouses. Rental purchase operations utilize distribution centers to control inventory. All rental purchase stores order directly from the Company's five rental purchase distribution centers located in Auburndale, Florida; Dallas and Houston, Texas; Duluth, Georgia; and Columbus, Ohio. Rental purchase stores typically have smaller warehouses with less inventory storage space than the Company's rent-to-rent stores. Vendors ship directly to the distribution centers. Distribution centers result in freight savings from truckload discounts and a more efficient distribution of merchandise. The Company utilizes its fourteen tractor-trailers, its local delivery trucks, and various contract carriers to make weekly deliveries to individual stores. A-10 11 MARKETING AND ADVERTISING In its rental purchase operations, the Company relies heavily on store traffic, direct mail and national and local television advertising to reach its target markets. Rental purchase stores are located within neighborhood communities, and will typically distribute mass mailings of promotional material every two weeks, with the goal of reaching households within a specified radius of each store at least 12 times per year. In addition, delivery personnel are trained to leave promotional material at the door of each residence within five doors of the delivery destination. In concentrated geographic markets, and for special promotions, the Company also utilizes local television and radio advertising for special promotions. The Company markets its rent-to-rent operations through its outside sales staff to the local apartment communities, calling on their leasing agents, resident managers, and property managers. This group controls the individual referral business as well as the corporate relocation professionals. The Company also markets to interim housing providers (that offer temporary housing) to corporations that relocate personnel around the country. The Company has a regional and national marketing staff that focuses on this growing segment of the rent-to-rent industry. The Company also relies on the use of brochures, newspapers, radio, television, direct mail, trade publications, yellow pages, and the internet (http://www.aaronrentsfurniture.com) to reach its residential and office rental and sales customers and believes such advertising benefits its residential and office stores while increasing the Company's name recognition. COMPETITION The Company's businesses are highly competitive. The Company competes in the rent-to-rent market with national and local companies and, to a lesser extent, with apartment owners who purchase furniture for rental to tenants. The Company believes that CORT Business Services Corporation and Globe Business Resources, Inc. are its most significant rent-to-rent competitors. In the rent-to-own market, the Company competes with two larger companies with substantially greater financial resources than the Company. The Company believes that the largest rent-to-own companies include Rent-A-Center, Inc. and Rent-Way, Inc. Although definitive industry statistics are not available, management believes that the Company is one of the largest furniture rental companies in the United States. Management also believes that it generally has a favorable competitive position in that industry because of its manufacturing capabilities, prompt delivery, competitive pricing, name recognition and commitment to customer service. GOVERNMENT REGULATION The Company believes that 45 states specifically regulate rent-to-own transactions, including states in which the Company currently operates Aaron's Rental Purchase stores. Most of these states have enacted disclosure laws which require rent-to-own companies to disclose to its customers the total number of payments, total amount and timing of all payments to acquire ownership of any item, any other charges that may be imposed by the Company and miscellaneous other items. The most restrictive states limit the total amount that a customer may be charged for an item to twice the "retail" price for the item, or regulate the amount of "interest" that rent-to-own companies may charge on rent-to-own transactions, generally defining "interest" as rental fees paid in excess of the "retail" price of the goods. The Company's long-established policy in all states is to disclose the terms of its rental purchase transactions as a matter of good business ethics and customer service. At the present time, no federal law specifically regulates the rent-to-own industry. Federal legislation has been proposed from time to time to regulate the industry. Management cannot predict whether any such legislation will be enacted and what the impact of such legislation would be. Although the Company is unable to predict the results of these or any additional regulatory initiatives, the Company does not believe that the existing and proposed regulations will have a material adverse impact on the Company's rental purchase or other operations. The Company's Aaron's Rental Purchase franchise program is subject to Federal Trade Commission ("FTC") regulation and various state laws regulating the offer and sale of franchises. Several state laws also regulate substantive aspects of the franchisor-franchisee relationship. The FTC requires the Company to furnish to prospective franchisees a franchise offering circular containing prescribed information. A number of states in which the Company might consider franchising also regulate the sale of franchises and require registration of the franchise offering circular with state authorities. The Company believes it is in material compliance with all applicable franchise laws. A-11 12 EMPLOYEES At December 31, 1998, the Company had approximately 3,400 employees. None of the Company's employees are covered by a collective bargaining agreement, and the Company believes that its relations with its employees are good. CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating an investment in the Common Stock offered hereby. This Annual Report on Form 10-K contains certain forward-looking statements (as such term is defined in the Securities Act of 1933, as amended, which represent expectations or beliefs, including but not limited to, statements concerning industry performance, and the Company's operations, performance and financial condition, including, in particular, the likelihood of the Company's success in developing and expanding its business. These statements are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties, many of which are beyond the control of the Company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those set forth below. RISKS ASSOCIATED WITH EXPANSION STRATEGY An important part of the Company's growth strategy is the opening of new rent-to-rent and rental purchase stores. The Company's ability to continue opening new stores will depend, among other things, upon its ability to hire management and personnel to staff the new stores, and to find suitable sites at reasonable rental rates to locate new stores. From time to time the Company also expects to pursue opportunistic acquisitions of rent-to-rent and rental purchase operations. There can be no assurance that future acquisitions will be consummated on acceptable terms or that any acquired companies will be successfully integrated. While the Company believes that the market for its stores is underserved and offers attractive expansion opportunities, it does not know if consumer preferences will remain unchanged, or the extent to which its competitors may seek to serve the market. SIGNIFICANT COMPETITION The Company's businesses are highly competitive. The Company competes in the rent-to-rent market with national and local companies and, to a lesser extent, with apartment owners who purchase furniture for rental to tenants. In the rental purchase market, the Company's competitors include national, regional and local operators of rent-to-own stores. Some of these competitors may have significantly greater financial and operating resources, and in certain markets, greater name recognition, than the Company. RISKS ASSOCIATED WITH SIGNIFICANT GOVERNMENT REGULATION The Company believes that 45 states specifically regulate rent-to-own transactions, including states in which the Company currently operates Aaron's Rental Purchase stores. Most of these states have enacted disclosure laws which require rent-to-own companies to disclose to their customers the total number of payments, total amount and timing of all payments to acquire ownership of any item, any other charges that may be imposed by the Company and miscellaneous other items. The most restrictive states limit the total amount that a customer may be charged for an item to twice the "retail" price for the item, or regulate the amount of "interest" that rent-to-own companies may charge on rent-to-own transactions, generally defining "interest" as rental fees paid in excess of the "retail" price of the goods. The Company's long-established policy in all states is to fully disclose the terms of its rental purchase transactions as a matter of good business ethics and customer service. At the present time, no federal law specifically regulates the rent-to-own industry. Federal legislation has been proposed from time to time to regulate the industry. Management cannot predict whether any such legislation will be enacted and what the impact of such legislation would be. Although the Company is unable to predict the results of these or any additional regulatory initiatives, the Company does not believe that the existing and proposed regulations will have a material adverse impact on the Company's rental purchase or other operations. The Company's Aaron's Rental Purchase franchise program is subject to Federal Trade Commission ("FTC") regulation and various state laws regulating the offer and sale of franchises. Several state laws also regulate substantive aspects of the franchisor-franchisee relationship. The FTC requires the Company to furnish to prospective franchisees a franchise offering circular containing A-12 13 prescribed information. A number of states in which the Company might consider franchising also regulate the sale of franchises and require registration of the franchise offering circular with state authorities. The Company believes it is in material compliance with all applicable franchise laws. CONTROL BY AND DEPENDENCE UPON PRINCIPAL SHAREHOLDER R. Charles Loudermilk, Sr., the Company's Chief Executive Officer and Chairman of the Board, owns or controls over 60% of the Company's voting Class A Common Stock and approximately 17% of the non-voting Common Stock outstanding. As a result, Mr. Loudermilk will continue to be able to elect all the directors of, and otherwise effectively control, the Company. The Company believes that it has benefited substantially from Mr. Loudermilk's leadership and that if it were to lose his services at anytime in the near future such loss could have an adverse effect on the Company's business and operations. ITEM 2. PROPERTIES The Company leases space for substantially all of its store and warehouse operations under operating leases expiring at various times through September 30, 2013. Most of the leases contain renewal options for additional periods ranging from one to fifteen years at rental rates generally adjusted on the basis of the consumer price index or other factors. The following table sets forth certain information regarding the Company's furniture manufacturing plants, bedding facilities, lamp manufacturing facility and distribution centers:
LOCATION PRIMARY USE SQUARE FT. -------- ----------- ---------- Cairo, Georgia.............................. Furniture Manufacturing 192,000 Coolidge, Georgia........................... Furniture Manufacturing 77,000 Coolidge, Georgia........................... Furniture Manufacturing 43,000 Coolidge, Georgia........................... Furniture Manufacturing 41,000 Quincy, Florida............................. Furniture Manufacturing 80,000 Quincy, Florida............................. Furniture Manufacturing 91,000 Los Angeles, California..................... Lamp and Accessory Manufacturing 52,000 Cairo, Georgia.............................. Bedding Facility 8,000 Duluth, Georgia............................. Bedding Facility 30,000 Houston, Texas.............................. Bedding Facility 13,000 Orlando, Florida............................ Bedding Facility 16,000 Auburndale, Florida......................... Rental Purchase Distribution Center 40,000 Columbus, Ohio.............................. Rental Purchase Distribution Center 98,800 Dallas, Texas............................... Rental Purchase Distribution Center 92,000 Duluth, Georgia............................. Rental Purchase Distribution Center 67,000 Houston, Texas.............................. Rental Purchase Distribution Center 70,000
The Company's executive and administrative offices occupy approximately 53,000 square feet in an 11-story, 81,000 square-foot office building that the Company owns in Atlanta. The Company leases most of the remaining space to third parties under leases with remaining terms averaging 2-1/2 years. All of the Company's facilities are well maintained and adequate for their current and reasonably foreseeable uses. ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any legal proceedings the result of which it believes could have a material adverse impact upon its business, financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None A-13 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) The information presented under the caption "Common Stock Market Prices & Dividends" on page 28 of the Company's Annual Report to Shareholders for the year ended December 31, 1998 is incorporated herein by reference. The market quotations stated herein reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. (b) As of March 22, 1999, there were 319 holders of record of the Common Stock and 159 holders of record of the Class A Common Stock. (c) The information presented under "Note D -- Debt" on page 22 of the Company's Annual Report to Shareholders for the year ended December 31, 1998 is incorporated herein by reference. During the year ended December 31, 1998, the Company paid two semi-annual cash dividends. No assurance can be provided that such dividends will continue. ITEM 6. SELECTED FINANCIAL DATA The information presented under the caption "Selected Financial Information" on page 12 of the Company's Annual Report to Shareholders for the year ended December 31, 1998 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information presented under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 13 through 15 of the Company's Annual Report to Shareholders for the year ended December 31, 1998 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information presented under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 13 through 15 and presented under "Note D - Debt" on page 22 of the Company's Annual Report to Shareholders for the year ended December 31, 1998 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information presented under the captions "Consolidated Balance Sheets," "Consolidated Statements of Earnings," "Consolidated Statements of Shareholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Report of Independent Auditors" on pages 16 through 27 of the Company's Annual Report to Shareholders for the year ended December 31, 1998 is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in the Company's definitive Proxy Statement, which the Company will file with the Securities and Exchange Commission no later than 120 days after December 31, 1998, with respect to the identity, background and Section 16 filings of directors and executive officers of the Company, is incorporated herein by reference to this item. A-14 15 ITEM 11. EXECUTIVE COMPENSATION The information contained in the Company's definitive Proxy Statement, which the Company will file with the Securities and Exchange Commission no later than 120 days after December 31, 1998, with respect to executive compensation, is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the Company's definitive Proxy Statement, which the Company will file with the Securities and Exchange Commission no later than 120 days after December 31, 1998, with respect to the ownership of common stock by certain beneficial owners and management, is incorporated herein by reference to this item. For purposes of determining the aggregate market value of the Company's voting stock held by non-affiliates, shares held by all directors and officers of the Company have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which person or entities may be "affiliates" of the Company as defined by the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the Company's definitive Proxy Statement, which the Company will file with the Securities and Exchange Commission no later than 120 days after December 31, 1998, with respect to certain relationships and related transactions, is incorporated herein by reference in response to this item. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) 1. CONSOLIDATED FINANCIAL STATEMENTS The following financial statements and notes thereto of Aaron Rents, Inc. and Subsidiaries, and the related Report of Independent Auditors are incorporated in Item 8 by reference from the Company's Annual Report to Shareholders for the year ended December 31, 1998.
REFERENCE PAGE ANNUAL REPORT TO SHAREHOLDERS --------------- Consolidated Balance Sheets-- December 31, 1998 and 1997................................ 16 Consolidated Statements of Earnings-- Years ended December 31, 1998, 1997 and 1996..... 17 Consolidated Statements of Shareholders' Equity-- Years ended December 31, 1998, 1997 and 18 1996.................................................................................... Consolidated Statements of Cash Flows-- Years ended December 31, 1998, 1997 and 1996.... 19 Notes to Consolidated Financial Statements.............................................. 20-27 Report of Independent Auditors.......................................................... 27
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because they are inapplicable or the required information is included in the financial statements or notes thereto. A-15 16 3. EXHIBITS EXHIBIT NO. DESCRIPTION OF EXHIBIT 3(a) Amended and Restated Articles of Incorporation of the Company, filed as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (the "March 31, 1996 10-Q"), which exhibit is by this reference incorporated herein. 3(b) Amended and Restated By-laws of the Company, filed as Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, which exhibit is by this reference incorporated herein. 4 See Exhibits 3 (a) through 3 (b). 10(a) Aaron Rents, Inc. 1996 Stock Option and Incentive Award Plan, filed as Exhibit 4(a) to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1998 (the "March 31, 1998 10-Q"), which exhibit is incorporated by this reference.* 10(b) Aaron Rents, Inc. Employees Retirement Plan and Trust, filed as Exhibit 4(a) to the Company's Registration Statement on Form S-8, file number 33-62538, filed with the Commission on May 12, 1993, which exhibit is by this reference incorporated herein.* 10(c) Aaron Rents, Inc. 1990 Stock Option Plan, filed as Exhibit 4(a) to the Company's Registration Statement on Form S-8, file number 33-62536, filed with the Commission on May 12, 1993, which exhibit is by this reference incorporated herein.* 10(d) Second Amended and Restated Revolving Credit and Term Loan Agreement, dated January 6, 1995, filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 (the "December 31, 1994 10-Q"), which exhibit is by this reference incorporated herein. 10(e) Third Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement, dated September 30, 1996, filed as Exhibit 10 to the Company's quarterly report on Form 10-Q for the Quarter ended September 30, 1996, which exhibit is by reference incorporated herein. 10(f) Fifth Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement, dated December 17, 1997, filed as Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 10-K"), which exhibit is incorporated by this reference. 10(g) Letter Agreements dated December 30, 1997 between SunTrust Bank, Atlanta and the Company, and letter agreements dated December 30, 1997 between First Chicago NBD and the Company regarding Interest Rate Swap Transactions, filed as Exhibit 10(b) to the Company's 1997 10-K, which exhibit is incorporated by this reference. 10(h) Loan Facility Agreement and Guaranty by and among Aaron Rents, Inc., SunTrust Bank, Atlanta, as Servicer and each of the Participants Party Hereto, Dated January 20, 1998, filed as Exhibit 10(a) to the Company's March 31, 1998 10-Q, which exhibit is incorporated by this reference. 10(i) Amendment No. 1 to Loan Facility Agreement and Guaranty dated as of March 13, 1998, filed as Exhibit 10(b) to the Company's March 31, 1998 10-Q, which exhibit is incorporated by this reference. 13 Portions of the Aaron Rents, Inc. Annual Report to Shareholders for the year ended December 31, 1998. With the exception of information expressly incorporated herein by direct reference thereto, the Annual Report to Shareholders for the year ended December 31, 1998 is not deemed to be filed as part of this Annual Report on Form 10-K. 21 Subsidiaries of the Registrant, filed as Exhibit 21 to the Company's 1997 10-K, which exhibit is by this reference incorporated herein. 23 Consent of Ernst & Young LLP 27 Financial Data Schedule (for SEC use only) - ---------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to item 14 (c) of this report. (b) Reports on Form 8-K-none (c) Exhibits listed in item 14 (a) (3) are included elsewhere in this Report. A-16 17 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 31st day of March, 1999. AARON RENTS, INC. By: /s/ GILBERT L. DANIELSON --------------------------------- Gilbert L. Danielson Executive Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 31st day of March, 1999.
SIGNATURE TITLE --------- ----- /s/ R. CHARLES LOUDERMILK, SR. Chief Executive Officer (Principal Executive - ----------------------------------------------------------------- Officer) and Chairman of the Board of R. Charles Loudermilk, Sr. Directors) /s/ ROBERT C. LOUDERMILK, JR. President, Chief Operating Officer and - ----------------------------------------------------------------- Director Robert C. Loudermilk, Jr. /s/ GILBERT L. DANIELSON Executive Vice President, Chief Financial - ----------------------------------------------------------------- Officer and Director, (Principal Financial Officer) Gilbert L. Danielson "CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24B-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS." /s/ ROBERT P. SINCLAIR, JR. Controller (Principal Accounting Officer) - ----------------------------------------------------------------- Robert P. Sinclair, Jr. /s/ RONALD W. ALLEN Director - ----------------------------------------------------------------- Ronald W. Allen /s/ LEO BENATAR Director - ----------------------------------------------------------------- Leo Benatar /s/ EARL DOLIVE Director - ----------------------------------------------------------------- Earl Dolive /s/ REX FUQUA Director - ----------------------------------------------------------------- J. Rex Fuqua /s/ KEITH C. GROEN Vice President, Legal Secretary and Director - ----------------------------------------------------------------- Keith C. Groen /s/ INGRID SAUNDERS JONES Director - ----------------------------------------------------------------- Ingrid Saunders Jones /s/ LTG. M. COLLIER ROSS USA (RET.) Director - ----------------------------------------------------------------- LTG M. Collier Ross USA (Ret.)
A-17 EX-13 2 PORTIONS OF ANNUAL REPORT 1 Selected Financial Information
Twelve Twelve Year Ended Year Ended Year Ended Months Ended Months Ended (Dollar Amounts in Thousands December 31, December 31, December 31, December 31, December 31, Except Per Share) 1998 1997 1996 1995 1994 (unaudited) (unaudited) - ----------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Systemwide Revenues(1) $ 464,175 $ 364,306 $ 306,200 $ 256,500 $ 233,077 --------------------------------------------------------------------------- Revenues: Rentals & Fees $ 289,272 $ 231,207 $ 208,463 $ 182,311 $ 167,093 Sales 81,561 73,223 61,527 52,999 53,978 Other 8,826 6,321 4,255 2,465 1,686 --------------------------------------------------------------------------- 379,659 310,751 274,245 237,775 222,757 --------------------------------------------------------------------------- Costs & Expenses: Cost of Sales 62,017 55,914 46,168 38,274 38,977 Operating Expenses 189,719 149,728 135,012 119,590 112,367 Depreciation of Rental Merchandise 89,171 71,151 64,437 55,408 50,966 Interest 3,561 3,721 3,449 3,172 2,803 --------------------------------------------------------------------------- 344,468 280,514 249,066 216,444 205,113 --------------------------------------------------------------------------- Earnings Before Income Taxes 35,191 30,237 25,179 21,331 17,644 Income Taxes 13,707 11,841 9,786 8,113 6,938 --------------------------------------------------------------------------- Net Earnings $ 21,484 $ 18,396 $ 15,393 $ 13,218 $ 10,706 --------------------------------------------------------------------------- Earnings Per Share $ 1.06 $ .96 $ .81 $ .68 $ .58 Earnings Per Share Assuming Dilution 1.04 .94 .77 .66 .56 --------------------------------------------------------------------------- Dividends Per Share: Common $ .04 $ .04 $ .04 $ .05 $ .05 Class A .04 .04 .04 .02 .02 - ---------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION Rental Merchandise, Net $ 194,163 $ 176,968 $ 149,984 $ 122,311 $ 119,781 Property, Plant & Equipment, Net 50,113 39,757 33,267 23,492 23,532 Total Assets 272,174 239,382 198,103 158,645 155,914 Interest-Bearing Debt 51,727 76,486 55,365 37,479 46,894 Shareholders' Equity 168,871 116,455 107,335 91,094 81,418 - ---------------------------------------------------------------------------------------------------------------------- AT YEAR END Stores Open: Company-Operated 291 292 240 212 203 Franchised 136 101 61 36 24 Rental Agreements in Effect 227,400 219,800 179,600 158,900 152,100 Number of Employees 3,400 3,100 2,550 2,160 2,150 ======================================================================================================================
(1) Systemwide revenues include rental revenues of franchised Aaron's Rental Purchase stores. 2 Management's Discussion and Analysis of Financial Condition and Results of Operations CHANGE IN FISCAL YEAR END During 1995, the Company changed its fiscal year end from March 31 to December 31, which resulted in a nine month fiscal year ended December 31, 1995. The decision to change the fiscal year end was made for more convenience in both internal and external communications. To aid comparative analysis, the Company has elected to present the results of operations for the twelve months ended December 31, 1995 and 1994 (unaudited), along with the years ended December 31, 1998, December 31, 1997 and December 31, 1996. RESULTS OF OPERATIONS Year Ended December 31, 1998 versus Year Ended December 31, 1997 Total revenues for 1998 increased $68.9 million (22.2%) to $379.7 million compared to $310.8 million in 1997 due primarily to a $58.1 million (25.1%) increase in rentals and fees revenues, plus an $8.3 million (11.4%) increase in sales. Of this increase in rentals and fees revenues, $46.5 million (80.0%) was attributable to the Aaron's Rental Purchase division. Rentals and fees revenues from the Company's rent-to-rent operations increased $11.5 million (10.5%) during the same period. Revenues from retail sales increased $4.0 million (6.8%) to $62.6 million in 1998, from $58.6 million for the same period last year. This increase was due to increased sales of both new and rental return furniture in the rent-to-rent and rental purchase divisions. Non-retail sales, which primarily represent merchandise sold to Aaron's Rental Purchase franchisees, increased $4.4 million (29.8%) to $19.0 million compared to $14.6 million for the same period last year. The increased sales are due to the growth of the franchise operations. Other revenues for 1998 increased $2.5 million (39.6%) to $8.8 million compared to $6.3 million in 1997. This increase was attributable to franchise fee and royalty income increasing $2.3 million (46.0%) to $7.3 million compared to $5.0 million last year, reflecting the net addition of 35 new franchised stores in 1998 and improved operating revenues at mature franchised stores. Cost of sales from retail sales increased $2.1 million (5.0%) to $44.4 million compared to $42.3 million, and as a percentage of sales, decreased slightly to 70.9% from 72.1% primarily due to product mix. Cost of sales from non-retail sales increased $4.0 million (29.2%) to $17.6 million from $13.7 million, and as a percentage of sales, decreased to 92.9% from 93.4%. The decrease in 1998 in cost of sales as a percentage of sales is due to slightly higher margins on sales through the Company's distribution centers. Operating expenses increased $40.0 million (26.7%) to $189.7 million from $149.7 million. As a percentage of total revenues, operating expenses were 50.0% in 1998 and 48.2% in 1997. Operating expenses increased as a percentage of total revenues between years primarily due to the Company's acquisitions of RentMart Rent-To-Own, Inc. and Blackhawk Convention Services both in December 1997. The RentMart stores were relatively immature and had lower revenues over which to spread expenses and Blackhawk's convention furnishings business had higher operating expenses as a percentage of revenues than traditional rental purchase and rent-to-rent operations. Depreciation of rental merchandise increased $18.0 million (25.3%) to $89.2 million, from $71.2 million, and as a percentage of total rentals and fees, was 30.8% for both years. Interest expense decreased $160,000 (4.3%) to $3.6 million compared to $3.7 million. As a percentage of total revenues, interest expense was 0.9% in 1998 compared to 1.2% in 1997. The decrease in interest expense as a percentage of revenues was due to the allocation and capitalization of interest in the Company's manufacturing operation. The Company manages its exposure to changes in short-term interest rates, particularly to reduce the impact on its floating-rate term notes, by entering into interest rate swap agreements. The counterparties to these contracts are high credit quality commercial banks. Consequently, credit risk, which is inherent in all swaps, has been minimized to a large extent. Interest expense is adjusted for the differential to be paid or received as interest rates change. The effect of such adjustments on interest expense has not been significant. The level of floating-rate debt not fixed by swap agreements was not significant during the year and the Company does not expect a significant increase in these 3 amounts in 1999. Accordingly, the Company does not believe it has material exposure of potential, near-term losses in future earnings, and/or cash flows from reasonably possible near-term changes in market rates. Income tax expense increased $1.9 million (15.8%) to $13.7 million compared to $11.8 million. The Company's effective tax rate was 39.0% in 1998 compared to 39.2% in 1997, primarily due to lower state income taxes. As a result, net earnings increased $3.1 million (16.8%) to $21.5 million for 1998 compared to $18.4 million for the same period in 1997. As a percentage of total revenues, net earnings were 5.7% in 1998 and 5.9% in 1997. Year Ended December 31, 1997 versus Year Ended December 31, 1996 Total revenues for 1997 increased $36.5 million (13.3%) to $310.8 million compared to $274.2 million in 1996 due primarily to a $22.7 million (10.9%) increase in rentals and fees revenues, plus an $11.7 million (19.0%) increase in sales. Of this increase in rentals and fees revenues, $19.2 million (84.4%) was attributable to the Aaron's Rental Purchase division. Rentals and fees revenues from the Company's rent-to-rent operations increased $3.5 million (3.3%) during the same period. Revenues from retail sales increased $5.8 million (11.1%) to $58.6 million in 1997, from $52.8 million for the same period last year. This increase was due to increased sales of both new and rental return furniture in the rent-to-rent division. Non-retail sales, which primarily represent merchandise sold to Aaron's Rental Purchase franchisees, increased $5.9 million (66.7%) to $14.6 million compared to $8.8 million for the same period last year. The increased sales are due to the growth of the franchise operations. Other revenues for 1997 increased $2.1 million (48.6%) to $6.3 million compared to $4.3 million in 1996. This increase was attributable to franchise fee and royalty income increasing $2.1 million (70.8%) to $5.0 million compared to $2.9 million last year, reflecting the addition of 40 new franchise stores in 1997 and improved operating revenues at mature franchise stores. Cost of sales from retail sales increased $4.4 million (11.7%) to $42.3 million compared to $37.8 million, and as a percentage of sales, increased slightly to 72.1% from 71.7% primarily due to product mix. Cost of sales from non-retail sales increased $5.3 million (64.1%) to $13.7 million from $8.3 million, and as a percentage of sales, decreased to 93.4% from 94.9%. The decrease in 1997 in cost of sales as a percentage of sales is due to slightly higher margins on sales through the Company's distribution centers. Operating expenses increased $14.7 million (10.9%) to $149.7 million from $135.0 million. As a percentage of total revenues, operating expenses were 48.2% in 1997 and 49.2% in 1996. Operating expenses declined as a percentage of total revenues between years due to the spreading of expenses over higher revenues. Depreciation of rental merchandise increased $6.7 million (10.4%) to $71.2 million, from $64.4 million, and as a percentage of total rentals and fees, decreased to 30.8% from 30.9%. Interest expense increased $272,000 (7.9%) to $3.7 million compared to $3.4 million. As a percentage of total revenues, interest expense was 1.2% in 1997 compared to 1.3% in 1996. The slight decrease in interest expense as a percentage of revenues was due to the effect of lower debt levels as a percentage of revenues throughout the year being offset by slightly higher interest rates. Income tax expense increased $2.1 million (21.0%) to $11.8 million compared to $9.8 million. The Company's effective tax rate was 39.2% in 1997 compared to 38.9% in 1996, primarily due to higher state income taxes. As a result, net earnings increased $3.0 million (19.5%) to $18.4 million for 1997 compared to $15.4 million for the same period in 1996. As a percentage of total revenues, net earnings were 5.9% in 1997 and 5.6% in 1996. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operations for the years ended December 31, 1998 and 1997 were $120.6 million and $105.3 million, respectively. Such cash flows include profits on the sale of rental return merchandise. The Company's primary capital requirements consist of acquiring rental merchandise for both rent-to-rent and Company-operated Aaron's Rental Purchase stores. As the Company continues to grow, the need for additional rental merchandise will continue to be the Company's major capital requirement. These capital requirements historically have been financed through bank credit, cash flow from operations, trade credit, proceeds from the sale of rental return merchandise and stock offerings. The Company has financed its growth through a revolving credit agreement with several banks, trade credit and internally generated funds. The revolving credit agreement provides for unsecured borrowings up to $90.0 million which includes a $6.0 million credit line to fund daily working capital requirements. At December 31, 1998, an aggregate of $50.4 million was outstanding under this facility, bearing interest at a weighted average variable rate of 6.12%. The Company uses interest rate swap agreements as part of its overall long-term financing program. At December 31, 1998, the Company had swap agreements with notional principal amounts of $40.0 million which effectively fixed the interest rates on an equal amount of the Company's revolving credit agreement at 6.93%. On April 28, 1998, the Company issued through a public offering 2.1 million shares of Common Stock. The net proceeds to the Company after deducting underwriting discounts and offering expenses were $40.0 million. The proceeds were used to reduce bank debt. 4 The Company believes that the expected cash flows from operations, proceeds from the sale of rental return merchandise, bank borrowings and vendor credit will be sufficient to fund the Company's capital and liquidity needs for at least the next 24 months. In November 1998, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company's Common Stock and/or Class A Common Stock. During 1998, 736,400 shares of the Company's stock were purchased at an aggregate cost of $10.6 million and the Company was authorized to purchase an additional 471,690 shares at December 31, 1998. Subsequent to year end, in February 1999 the Company's Board of Directors authorized the purchase of an additional 2,000,000 shares. The Company has paid dividends for twelve consecutive years. A $.02 per share dividend on Common Stock and on Class A Common Stock was paid in January 1998 and July 1998, for a total fiscal year cash outlay of $801,000. The Company currently expects to continue its policy of paying dividends. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, generate invoices, or engage in similar normal business activities. The Company is continuing its assessments of the impact of the Year 2000 across its business and operations, including its customer and vendor base. The Company has substantially completed its identification of information technology systems ("IT systems") that are not Year 2000 compliant and is in the process of implementing a comprehensive plan to make its IT systems and noninformation technology systems ("non-IT systems"), including embedded electronic circuits in equipment and hardware, products, telecommunication, building security and manufacturing equipment, Year 2000 compliant. The Company's plan to resolve the Year 2000 issue involves the following four phases: (1) assessment, (2) remediation, (3) testing, and (4) implementation. The Company is simultaneously working on all four phases and anticipates that it will substantially complete phase (1) by the end of the first quarter 1999, (2) and (3) by the end of the second quarter 1999, and (4) by the end of the third quarter 1999. The Company is in the process of querying its significant suppliers and subcontractors (external agents). To date, the Company is not aware of any external agents with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 compliant. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. The Company's significant IT systems, including financial, accounting, store operating and point-of-sale software, have recently been or are in the process of being updated. The upgrading and rewriting of the Company's IT systems is being completed to gain further strategic advantages over competitors and is not the result of any anticipated Year 2000 issues. In addition, as part of the Company's continuing process to update IT and non-IT systems, management has required that vendor-purchased and internally developed systems be Year 2000 compliant. Therefore, management expects the cost of the Year 2000 project to be less than $300,000. The majority of these costs will be incurred in 1999 as the portion related to 1998 was not significant. The Company has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and backup vendors. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event that the Company does not complete any additional phases, the Company may be unable to take customer orders, manufacture and ship products, invoice customers or collect payments. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The Company could be subject to litigation for computer systems product failure, for example, equipment shutdown or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. 5 Consolidated Balance Sheets
December 31, December 31, (In Thousands, Except Share Data) 1998 1997 - ----------------------------------------------------------------------------------------------- ASSETS Cash $ 95 $ 96 Accounts Receivable 16,226 11,794 Rental Merchandise 277,505 246,498 Less: Accumulated Depreciation (83,342) (69,530) --------------------------- 194,163 176,968 Property, Plant & Equipment, Net 50,113 39,757 Prepaid Expenses & Other Assets 11,577 10,767 --------------------------- Total Assets $ 272,174 $ 239,382 - --------------------------------------------------------------------------------------------- LIABILITIES & SHAREHOLDERS' EQUITY Accounts Payable & Accrued Expenses $ 33,461 $ 31,071 Dividends Payable 415 379 Deferred Income Taxes Payable 7,811 6,687 Customer Deposits & Advance Payments 9,889 8,304 Bank Debt 50,411 75,904 Other Debt 1,316 582 --------------------------- Total Liabilities 103,303 122,927 Commitments & Contingencies Shareholders' Equity Common Stock, Par Value $.50 Per Share; Authorized: 25,000,000 Shares; Shares Issued: 18,270,987 at December 31, 1998 and 16,170,987 at December 31, 1997 9,135 8,085 Class A Common Stock, Par Value $.50 Per Share; Authorized: 25,000,000 Shares; Shares Issued: 5,361,761 2,681 2,681 Additional Paid-In Capital 54,284 15,484 Retained Earnings 134,511 113,864 --------------------------- 200,611 140,114 Less: Treasury Shares at Cost, Common Stock, 1,558,991 Shares at December 31, 1998 and 1,058,041 Shares at December 31, 1997 (17,604) (9,523) Class A Common Stock, 1,525,255 Shares at December 31, 1998 and December 31, 1997 (14,136) (14,136) --------------------------- Total Shareholders' Equity 168,871 116,455 --------------------------- Total Liabilities & Shareholders' Equity $ 272,174 $ 239,382 =============================================================================================
The accompanying notes are an integral part of the Consolidated Financial Statements. 6 Consolidated Statements of Earnings
Year Ended Year Ended Year Ended (In Thousands, December 31, December 31, December 31, Except Per Share) 1998 1997 1996 - ------------------------------------------------------------------------------------------- REVENUES Rentals & Fees $ 289,272 $ 231,207 $ 208,463 Retail Sales 62,576 58,602 52,757 Non-Retail Sales 18,985 14,621 8,770 Other 8,826 6,321 4,255 ------------------------------------- 379,659 310,751 274,245 - ----------------------------------------------------------------------------------------- COSTS & EXPENSES Retail Cost of Sales 44,386 42,264 37,848 Non-Retail Cost of Sales 17,631 13,650 8,320 Operating Expenses 189,719 149,728 135,012 Depreciation of Rental Merchandise 89,171 71,151 64,437 Interest 3,561 3,721 3,449 ------------------------------------- 344,468 280,514 249,066 Earnings Before Income Taxes 35,191 30,237 25,179 Income Taxes 13,707 11,841 9,786 ------------------------------------- Net Earnings $ 21,484 $ 18,396 $ 15,393 ------------------------------------- Earnings Per Share $ 1.06 $ .96 $ .81 Earnings Per Share Assuming Dilution 1.04 .94 .77 =========================================================================================
The accompanying notes are an integral part of the Consolidated Financial Statements. 7 Consolidated Statements of Shareholders' Equity
Additional Treasury Stock Common Stock Paid-In Retained (In Thousands) Shares Amount Common Class A Capital Earnings - ------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1995 (2,360) $(16,640) $3,318 $2,681 $15,370 $ 86,365 Stock Dividend 4,767 (4,767) Reacquired Shares (164) (2,889) Dividends (765) Reissued Shares 689 4,427 75 Net Earnings 15,393 - ------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1996 (1,835) (15,102) 8,085 2,681 15,445 96,226 Reacquired Shares (795) (8,918) Dividends (758) Reissued Shares 47 361 39 Net Earnings 18,396 - ------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1997 (2,583) (23,659) 8,085 2,681 15,484 113,864 Stock Offering 1,050 38,908 Reacquired Shares (736) (10,560) Dividends (837) Reissued Shares 235 2,479 (108) Net Earnings 21,484 - ------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1998 (3,084) $(31,740) $9,135 $2,681 $54,284 $134,511 ============================================================================================================
The accompanying notes are an integral part of the Consolidated Financial Statements. 8 Consolidated Statements of Cash Flows
Year Ended Year Ended Year Ended December 31, December 31, December 31, (In Thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Earnings $ 21,484 $ 18,396 $ 15,393 Depreciation & Amortization 98,090 77,487 70,693 Deferred Income Taxes 1,124 3,805 (899) Change in Accounts Payable & Accrued Expenses 3,109 5,103 5,695 Change in Accounts Receivable (4,432) (1,083) (2,339) Other Changes, Net 1,253 1,587 982 ----------------------------------------- Cash Provided by Operating Activities 120,628 105,295 89,525 - -------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to Property, Plant & Equipment (22,209) (15,165) (17,534) Book Value of Property Retired or Sold 3,521 6,531 1,823 Additions to Rental Merchandise (174,496) (145,262) (137,023) Book Value of Rental Merchandise Sold 69,018 58,436 48,352 Contracts & Other Assets Acquired (1,841) (21,665) (3,891) ----------------------------------------- Cash Used by Investing Activities (126,007) (117,125) (108,273) - -------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from Revolving Credit Agreement 157,622 118,545 85,299 Repayments on Revolving Credit Agreement (183,115) (97,766) (67,434) Proceeds from Common Stock Offering 39,958 Increase in Other Debt 734 342 21 Dividends Paid (801) (761) (765) Acquisition of Treasury Stock (10,560) (8,918) (2,889) Issuance of Stock Under Stock Option Plan 1,540 400 4,502 ----------------------------------------- Cash Provided by Financing Activities 5,378 11,842 18,734 (Decrease) Increase in Cash (1) 12 (14) Cash at Beginning of Year 96 84 98 ----------------------------------------- Cash at End of Year $ 95 $ 96 $ 84 ----------------------------------------- Cash Paid During the Year: Interest $ 4,082 $ 3,713 $ 3,384 Income Taxes 10,004 6,989 7,531 ==================================================================================================
The accompanying notes are an integral part of the Consolidated Financial Statements. 9 Notes to Consolidated Financial Statements As of December 31, 1998 and 1997, and for the Years Ended December 31, 1998, 1997 and 1996. NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation--The consolidated financial statements include the accounts of Aaron Rents, Inc. and its wholly-owned subsidiary, Aaron Investment Company (the Company). All significant intercompany accounts and transactions have been eliminated. The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Line of Business--The Company is engaged in the business of renting and selling residential and office furniture and other merchandise throughout the U.S. The Company manufactures furniture principally for its rental and sales operations. Rental Merchandise consists primarily of residential and office furniture, consumer electronics and other merchandise and is recorded at cost. Prior to January 1, 1996, depreciation was provided using the straight-line method over the estimated useful life of the merchandise, principally from 1 to 5 years, after allowing for a salvage value of 5% to 60%. Effective January 1, 1996, the Company prospectively changed its depreciation method on merchandise in the rental purchase division acquired after December 31, 1995, from generally 14 months straight-line with a 5% salvage value to a method that depreciates the merchandise over the agreement period, generally 12 months, when on rent, and 36 months, when not on rent, to a 0% salvage value. This new method is similar to a method referred to as the income forecasting method in the rental purchase industry. The Company adopted the new method because management believes that it provides a more systematic and rational allocation of the cost of rental purchase merchandise over its useful life. The effect for the year ended December 31, 1996 of the change in the depreciation method on merchandise purchased after December 31, 1995 was to decrease net income by approximately $850,000 ($.04 per share). In addition, based on an analysis of the average composite life of the division's rental purchase merchandise on rent or on hand at December 31, 1995, the Company extended the depreciable lives of that merchandise from generally 14 months to 18 months, and made other refinements to depreciation rates on rental and rental purchase merchandise. The effect of such change in depreciable lives and other refinements was to increase net income for the year ended December 31, 1996 by approximately $709,000 ($.04 per share). The Company recognizes rental revenues over the rental period and recognizes all costs of servicing and maintaining merchandise on rent as incurred. Property, Plant and Equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the respective assets, which are from 8 to 27 years for buildings and improvements and from 2 to 5 years for other depreciable property and equipment. Gains and losses related to dispositions and retirements are included in income. Maintenance and repairs are charged to income as incurred; renewals and betterments are capitalized. Deferred Income Taxes are provided for temporary differences between the amounts of assets and liabilities for financial and tax reporting purposes. Such temporary differences arise principally from the use of accelerated depreciation methods on rental merchandise for tax purposes. Cost of Sales includes the depreciated cost of rental return residential and office merchandise sold and the cost of new residential and office merchandise sold. It is not practicable to allocate operating expenses between selling and rental operations. Advertising--The Company expenses advertising costs as incurred. Such costs aggregated $11,523,000 in 1998, $9,530,000 in 1997, and $10,422,000 in 1996. Stock Based Compensation--The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options and adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (FAS 123). The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant and, accordingly, recognizes no compensation expense for the stock option grants. 10 Excess Costs over Net Assets Acquired--Goodwill is amortized on a straight-line basis over a period of twenty years. Long-lived assets, including goodwill, are periodically reviewed for impairment based on an assessment of future operations. The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Fair Value of Financial Instruments--The carrying amounts reflected in the consolidated balance sheets for cash, accounts receivable, bank and other debt approximate their respective fair values. Revenue Recognition--Rental revenues are recognized as revenue in the month they are due. Rental payments received prior to the month due are recorded as deferred rental revenue. Comprehensive Income--As of January 1, 1998, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components. Statement 130 requires foreign currency translation adjustments and other items to be included in other comprehensive income. There were no differences between net income and comprehensive income in 1998, 1997 or 1996. Segment Information--In 1998, the Company adopted FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. The new rules establish revised standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. New Accounting Pronouncements--In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company plans to adopt Statement 133 in 2000, but has not yet completed its analysis of the impact, if any, that Statement 133 may have on its consolidated financial statements. NOTE B: EARNINGS PER SHARE Earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year which were 20,312,000 shares in 1998, 19,165,000 shares in 1997, and 19,099,000 shares in 1996. The computation of earnings per share assuming dilution includes the dilutive effect of stock options. Such stock options had the effect of increasing the weighted average shares outstanding assuming dilution by 421,000, 497,000 and 885,000 in 1998, 1997 and 1996, respectively. NOTE C: PROPERTY, PLANT & EQUIPMENT
December 31, December 31, (In Thousands) 1998 1997 ========================================================================================= Land $ 6,342 $ 4,643 Buildings & Improvements 21,770 17,698 Leasehold Improvements & Signs 27,069 19,243 Fixtures & Equipment 19,450 19,402 Construction in Progress 4,958 3,380 -------------------------- 79,589 64,366 Less: Accumulated Depreciation & Amortization (29,476) (24,609) -------------------------- $ 50,113 $ 39,757 =======================================================================================
11 NOTE D: DEBT Bank Debt--The Company has a revolving credit agreement with four banks providing for unsecured borrowings up to $90,000,000, which includes a $6,000,000 credit line to fund daily working capital requirements. Amounts borrowed bear interest at the lower of the lender's prime rate, LIBOR plus .50%, or the rate at which certificates of deposit are offered in the secondary market plus .625%. The pricing under the working capital line is based upon overnight bank borrowing rates. At December 31, 1998 and 1997, an aggregate of $50,411,000 (bearing interest of 6.12%) and $75,904,000 (bearing interest at 6.57%), respectively, was outstanding under this agreement. The Company pays a .22% commitment fee on unused balances. The weighted average interest rate on borrowings under the revolving credit agreement (before giving effect to interest rate swaps) was 6.41% in 1998, 6.29% in 1997, and 6.17% in 1996. The effects of interest rate swaps on the weighted average interest rate were not material. The Company has entered into interest rate swap agreements that effectively fix the interest rate on $20,000,000 of borrowings under the revolving credit agreement at an average rate of 7.0% until November 2003 and an additional $20,000,000 at an average rate of 6.85% until June 2005. These swap agreements involve the receipt of amounts when the floating rates exceed the fixed rates and the payment of amounts when the fixed rates exceed the floating rates in such agreements over the life of the agreements. The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment to the floating rate interest expense related to the debt. The related amount payable to or receivable from counterparties is included in accrued liabilities or other assets. Unrealized losses under the swap agreements aggregated $2,400,000 at December 31, 1998. The revolving credit agreement may be terminated on ninety days' notice by the Company or six months' notice by the lenders. The debt is payable in 60 monthly installments following the termination date if terminated by the lenders. The agreement requires that the Company not permit its consolidated net worth as of the last day of any fiscal quarter to be less than the sum of (a) $105,000,000 plus (b) 50% of the Company's consolidated net income (but not loss) for the period beginning July 1, 1997 and ending on the last day of such fiscal quarter. It also places other restrictions on additional borrowings and requires the maintenance of certain financial ratios. At December 31, 1998, $48,400,000 of retained earnings were available for dividend payments and stock repurchases under the debt restrictions. During 1998, the Company's allocation of interest to its MacTavish Furniture Industries division was $406,000. All expenses of MacTavish are capitalized as furniture manufacturing costs. Other Debt--Other debt of $1,300,000 at December 31, 1998 and $582,000 at December 31, 1997 primarily represents insurance premium and software financing agreements with interest rates ranging from 4.94% to 6.22%. Other debt matures in 2000. NOTE E: INCOME TAXES
Year Ended Year Ended Year Ended December 31, December 31, December 31, (In Thousands) 1998 1997 1996 =================================================================================================== Current Income Tax Expense: Federal $ 11,422 $ 7,375 $ 9,503 State 1,161 661 1,182 ------------------------------------ 12,583 8,036 10,685 Deferred Income Tax Expense (Benefit): Federal 949 3,287 (889) State 175 518 (10) ------------------------------------ 1,124 3,805 (899) ------------------------------------ $ 13,707 $ 11,841 $ 9,786 =================================================================================================
12 Significant components of the Company's deferred income tax liabilities and assets are as follows:
December 31, December 31, (In Thousands) 1998 1997 =============================================================================================== Deferred Tax Liabilities: Rental Merchandise and Property, Plant & Equipment $ 11,222 $ 9,265 Other, Net 1,413 1,244 ----------------------- Total Deferred Tax Liabilities 12,635 10,509 Deferred Tax Assets: Accrued Liabilities 836 1,015 Advance Payments 2,725 2,276 Other, Net 1,263 531 ----------------------- Total Deferred Tax Assets 4,824 3,822 ----------------------- Net Deferred Tax Liabilities $ 7,811 $ 6,687 ============================================================================================
The Company's effective tax rate differs from the federal income tax statutory rate as follows:
Year Ended Year Ended Year Ended December 31, December 31, December 31, (In Thousands) 1998 1997 1996 ===================================================================================================== Statutory Rate 35.0% 35.0% 35.0% Increases in Taxes Resulting From State Income Taxes, Net of Federal Income Tax Benefit 2.4 2.5 3.0 Other, Net 1.6 1.7 .9 --------------------------------- Effective Tax Rate 39.0% 39.2% 38.9% =====================================================================================================
NOTE F: COMMITMENTS The Company leases warehouse and retail store space for substantially all of its operations under operating leases expiring at various times through 2013. Most of the leases contain renewal options for additional periods ranging from 1 to 15 years or provide for options to purchase the related property at predetermined purchase prices which do not represent bargain purchase options. The Company also leases transportation equipment under operating leases expiring during the next 3 years. Management expects that most leases will be renewed or replaced by other leases in the normal course of business. Future minimum rental payments, including guaranteed residual values, required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 1998, are as follows: $22,009,000 in 1999; $17,949,000 in 2000; $13,874,000 in 2001; $7,740,000 in 2002; $4,272,000 in 2003; and $8,848,000 thereafter. Rental expense was $25,563,000 in 1998, $22,146,000 in 1997, and $17,886,000 in 1996. The Company leases one building from an officer of the Company under a lease expiring in 2008 for annual rentals aggregating $212,700. The Company maintains a 401(k) savings plan for all full-time employees with at least one year of service with the Company and who meet certain eligibility requirements. The plan allows employees to contribute up to 10% of their annual compensation with 50% matching by the Company on the first 4% of compensation. The Company's expense related to the plan was $415,000 in 1998, $357,000 in 1997, and $308,000 in 1996. NOTE G: SHAREHOLDERS' EQUITY On April 28, 1998 the Company issued, through a public offering, 2,100,000 shares of Common Stock. The net proceeds to the Company after deducting underwriting discounts and offering expenses were $39,958,000. The net proceeds were used to reduce indebtedness and for general business purposes. During 1996, the Company declared a 100% stock dividend on its Common Stock and Class A Common Stock. Each stockholder received one share of Common Stock for each share of Common Stock and Class A Common Stock held. All share and per share amounts have been restated to reflect the 100% stock dividend. Common Stock is non-voting. In November 1998, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company's Common Stock and/or Class A Common Stock. During 1998, 736,400 shares of the Company's stock were purchased at an aggregate cost of $10,560,000 and the Company was authorized to purchase an additional 471,690 shares at December 31, 1998. At December 31, 1998, the Company held a total of 3,084,246 common shares in its treasury. Subsequent to year end, in February 1999 the Company's Board of Directors authorized the purchase of an additional 2,000,000 shares. 13 The Company has 1,000,000 shares of preferred stock authorized. The shares are issuable in series with terms for each series fixed by the Board and such issuance is subject to approval by the Board of Directors. No preferred shares have been issued. NOTE H: STOCK OPTIONS The Company has stock option plans under which options to purchase shares of the Company's Common Stock are granted to certain key employees. Under the plans, options granted become exercisable after a period of two or three years and unexercised options lapse five or ten years after the date of the grant. Options are subject to forfeiture upon termination of service. Under the plans, 1,766,000 of the Company shares are reserved for issuance at December 31, 1998. The weighted-average fair value of options granted was $9.26 in 1998, $8.58 in 1997, and $4.99 in 1996. Pro forma information regarding net earnings and earnings per share is required by FAS 123, and has been determined as if the Company had accounted for its employee stock options granted in 1998, 1997 and 1996 under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 5.36%, 5.88%, and 6.72%; a dividend yield of .26%, .25%, and .40%; a volatility factor of the expected market price of the Company's Common Stock of .43, .39, and .34; and a weighted-average expected life of the option of 8 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
Years Ended December 31, (In Thousands Except Per Share) 1998 1997 1996 =============================================================================================== Pro forma net earnings $ 20,076 $ 17,508 $ 14,825 Pro forma earnings per share .99 .91 .78 Pro forma earnings per share assuming dilution .97 .89 .74 ===============================================================================================
Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until future years. The table below summarizes option activity for the periods indicated in the Company's stock option plans.
Weighted Average Exercise (In Thousands Except Per Share) Options Price ================================================================================ Outstanding at December 31, 1995 1,248 $ 4.54 Granted 780 9.88 Exercised (701) 3.00 Forfeited (8) 9.68 -------------------------------------------------------------------------------- Outstanding at December 31, 1996 1,319 8.48 Granted 322 15.95 Exercised (47) 5.28 Forfeited (9) 10.83 -------------------------------------------------------------------------------- Outstanding at December 31, 1997 1,585 10.07 Granted 133 16.73 Exercised (235) 6.53 Forfeited (101) 15.47 -------------------------------------------------------------------------------- Outstanding at December 31, 1998 1,382 10.92 -------------------------------------------------------------------------------- Exercisable at December 31, 1998 266 $ 6.69 ================================================================================
Exercise prices for options outstanding as of December 31, 1998 ranged from $6.00 to $19.00. The weighted-average remaining contractual life of those options is 6.55 years. 14 NOTE I: FRANCHISING OF AARON'S RENTAL PURCHASE STORES The Company franchises Aaron's Rental Purchase stores. As of December 31, 1998 and December 31, 1997, 227 and 186 franchises had been awarded, respectively. Franchisees pay a non-refundable initial franchise fee of $35,000 and an ongoing royalty of 5% of cash receipts. The Company recognizes this income as earned and includes it in Other Revenues in the Consolidated Statements of Earnings. The Company has guaranteed certain lease and debt obligations (primarily extending through 1999) of some of the franchisees amounting to $461,891 and $16,022,964, respectively, at December 31, 1998. The Company receives a guarantee and servicing fee based on such franchisees' outstanding debt obligations which it recognizes as income over the fee period. The Company has recourse rights to the leased property and to the assets securing the debt obligations. As a result, the Company does not expect to incur any significant losses under these guarantees. NOTE J: ACQUISITIONS AND DISPOSITIONS In December 1997, the Company acquired substantially all of the assets of RentMart Rent-To-Own, Inc., a wholly-owned subsidiary of the Associates Capital Corporation, for $18,012,000 in cash. The excess cost over the fair market value of tangible assets acquired was approximately $4,300,000. Also, in December 1997, the Company acquired substantially all of the assets of Blackhawk Convention Services, Inc. for $3,500,000 in cash. The excess cost over the fair market value of tangible assets acquired was approximately $2,700,000. During 1998, the Company acquired five rental purchase stores from a franchisee and acquired a lamp designer and manufacturer, Lamps Forever, Inc. The aggregate purchase price of these 1998 acquisitions was not significant. These acquisitions were accounted for under the purchase method and, accordingly, the results of operations of the acquired businesses are included in the Company's results of operations from their dates of acquisition. The effect of these acquisitions on the 1998 and 1997 consolidated financial statements was not significant. In October 1998, the Company sold substantially all of the assets of its convention furnishings division. The effect of the sale on the 1998 consolidated financial statements was not significant. NOTE K: SEGMENTS Description of Products and Services of Reportable Segments Aaron Rents, Inc. has four reportable segments: rent-to-rent, rental purchase, franchise and manufacturing. The rent-to-rent division rents and sells residential and office furniture to businesses and consumers who meet certain minimum credit requirements. The rental purchase division offers residential furniture, appliances, and electronics to consumers on a monthly payment basis with no credit requirements. The Company's franchise operation sells and supports franchises of its rental purchase concept. The manufacturing division manufactures upholstery, bedroom and office furniture, lamps and accessories, and bedding predominantly for use by the other divisions. The principal source of revenue in the "Other" category was the Company's convention furnishings division which was sold during 1998. Measurement of Segment Profit or Loss and Segment Assets The Company evaluates performance and allocates resources based on revenue growth and pretax profit or loss from operations. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies except that the rental purchase division revenues and certain other items are presented on a cash basis. Intersegment sales are completed at internally negotiated amounts ensuring competitiveness with outside vendors. Since the intersegment profit and loss affect inventory valuation, depreciation and cost of goods sold are adjusted when intersegment profit is eliminated in consolidation. Factors Used by Management to Identify the Reportable Segments Aaron Rents, Inc.'s reportable segments are business units that service different customer profiles using distinct payment arrangements. The reportable segments are each managed separately because of differences in both customer base and infrastructure. 15 Information on segments and a reconciliation to earnings before income taxes are as follows:
Years Ended December 31, (In Thousands) 1998 1997 1996 =================================================================================================== Revenues from external customers: Rent-to-Rent $ 173,657 $ 163,263 $ 149,282 Rental Purchase 193,283 139,893 112,304 Franchise 7,209 4,880 2,872 Other 5,470 2,089 8,475 Manufacturing 52,628 49,302 46,978 Elimination of intersegment revenues (52,067) (48,344) (45,197) Cash to accrual adjustments (521) (332) (469) ----------------------------------------- Total revenues from external customers $ 379,659 $ 310,751 $ 274,245 ========================================= Earnings before income taxes: Rent-to-Rent $ 19,565 $ 18,883 $ 16,196 Rental Purchase 11,668 10,807 6,370 Franchise 3,607 1,880 766 Other (744) (743) 589 Manufacturing 1,068 2,877 2,844 ----------------------------------------- Earnings before income taxes for reportable segments 35,164 33,704 26,765 Elimination of intersegment profit (901) (2,856) (3,051) Cash to accrual adjustments (344) (271) (342) Other allocations and adjustments 1,272 (340) 1,807 ----------------------------------------- Total earnings before income taxes $ 35,191 $ 30,237 $ 25,179 ========================================= Assets: Rent-to-Rent $ 138,734 $ 135,094 $ 123,563 Rental Purchase 103,930 83,742 56,205 Franchise 5,415 3,287 2,064 Other 9,286 5,453 4,227 Manufacturing 14,809 11,806 12,044 ----------------------------------------- Total assets $ 272,174 $ 239,382 $ 198,103 ========================================= Depreciation and amortization: Rent-to-Rent $ 29,327 $ 27,685 $ 24,854 Rental Purchase 67,401 48,879 42,631 Franchise 276 197 117 Other 616 661 1,503 Manufacturing 524 502 400 Elimination of intersegment profit and allocation (54) (437) 1,188 ========================================= Total depreciation and amortization $ 98,090 $ 77,487 $ 70,693 ========================================= Interest expense: Rent-to-Rent $ 1,698 $ 1,648 $ 1,313 Rental Purchase 2,874 1,646 1,712 Franchise 9 8 Other 234 19 45 Manufacturing 406 Elimination of intersegment allocations (1,651) 399 371 ----------------------------------------- Total interest expense $ 3,561 $ 3,721 $ 3,449 ===================================================================================================
16 NOTE L: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In Thousands Except Per Share) First Quarter Second Quarter Third Quarter Fourth Quarter ================================================================================================================== Year Ended December 31, 1998 Revenues $ 92,809 $ 93,832 $ 95,882 $ 97,136 Gross Profit 54,244 55,020 55,413 54,968 Earnings Before Taxes 8,680 9,090 8,029 9,392 Net Earnings 5,286 5,554 4,906 5,738 Earnings Per Share $ .28 $ .27 $ .23 $ .28 Earnings Per Share Assuming Dilution .27 .27 .23 .27 ================================================================================================================== Year Ended December 31, 1997 Revenues $ 76,480 $ 77,465 $ 76,238 $ 80,568 Gross Profit 43,574 44,236 43,996 45,559 Earnings Before Taxes 7,080 7,608 7,883 7,666 Net Earnings 4,312 4,633 4,805 4,646 Earnings Per Share $ .22 $ .24 $ .25 $ .25 Earnings Per Share Assuming Dilution .22 .24 .25 .24 ==================================================================================================================
REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Aaron Rents, Inc.: We have audited the accompanying consolidated balance sheets of Aaron Rents, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, shareholders' equity and cash flows for the years ended December 31, 1998, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aaron Rents, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for the years ended December 31, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Atlanta, Georgia March 15, 1999 EX-23 3 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 15, 1999, included in the 1998 Annual Report to Shareholders of Aaron Rents, Inc. We also consent to the incorporation by reference in the Registration Statements of Aaron Rents, Inc. listed below of our report dated March 15, 1999, with respect to the consolidated financial statements of Aaron Rents, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1998. - - Registration Statement No. 33-62536 on Form S-8 pertaining to the 1990 Stock Option Plan. - - Registration Statement No. 33-9026 on Form S-8 pertaining to the Aaron Rents, Inc. Retirement Plan and Trust - - Registration Statement No. 33-62538 on Form S-8 pertaining to the Aaron Rents, Inc. Retirement Plan and Trust - - Registration No. 333-33363 on Form S-8 pertaining to the Aaron Rents, Inc. 1996 Stock Option Incentive Award Plan. Ernst & Young LLP Atlanta, Ga March 26, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AARON RENTS, INC. FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 95 0 16,226 0 194,163 0 50,113 0 272,174 0 0 0 0 11,816 157,055 272,174 81,561 379,659 62,017 340,907 0 0 3,561 35,191 13,707 21,484 0 0 0 21,484 1.06 1.04 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 83,342 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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