AARON RENTS, INC.
As filed with the Securities and Exchange Commission on
May 9, 2006.
Registration
No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AARON RENTS, INC.
(Exact name of registrant as specified in its charter)
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Georgia |
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58-0687630 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
309 E. Paces Ferry Road
Atlanta, Georgia 30305-2377
(404) 231-0011
(Address, including zip code, and telephone number,
including area code, of issuers principal executive
offices)
Gilbert L. Danielson
Executive Vice President, Chief Financial Officer
Aaron Rents, Inc.
309 E. Paces Ferry Road, Atlanta, Georgia
30305-2377
(404) 231-0011
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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W. Benjamin Barkley, Esq.
David M. Eaton, Esq.
Kilpatrick Stockton LLP
1100 Peachtree Street, N.E., Suite 2800
Atlanta, Georgia 30309-4530
(404) 815-6500 |
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M. Hill Jeffries, Esq.
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
(404) 881-7000 |
Approximate date of commencement of proposed sale to the
public: From time to time after this Registration Statement
becomes effective.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans,
please check the following
box. o
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, other than
securities offered only in connection with dividend or interest
reinvestment plans, check the following
box. þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a registration statement pursuant to General
Instruction I.D. or a post-effective amendment thereto that
shall become effective upon filing with the Commission pursuant
to Rule 462(e) under the Securities Act, check the
following
box. þ
If this Form is a post-effective amendment to a registration
statement filed pursuant to General Instruction I.D. filed
to register additional securities or additional classes of
securities pursuant to Rule 413(b) under the Securities
Act, check the following
box. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum |
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Proposed Maximum |
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Amount of |
Title of Each Class of |
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Amount |
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Offering |
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Aggregate |
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Registration |
Securities to be Registered |
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to be Registered(1) |
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Price per Share(2) |
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Offering Price(2) |
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Fee(2) |
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Common Stock, par value $.50 per share
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4,600,000 shares |
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$ |
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(1) |
Includes 600,000 shares subject to the exercise of the
underwriters over-allotment option. |
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(2) |
In accordance with Rules 456(b) and 457(r) of the
Securities Act, the registrant is deferring payment of all of
the registration fee. |
The information
in this prospectus is not complete and may be changed. This
prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where
the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
MAY 9, 2006
PRELIMINARY PROSPECTUS
4,000,000 Shares
Aaron Rents, Inc.
Common Stock
This is a public offering of 4,000,000 shares of common
stock of Aaron Rents, Inc. We are selling 3,000,000 shares,
and the selling shareholder named in this prospectus is selling
1,000,000 shares. We will not receive any of the proceeds
from the sale of the shares by the selling shareholder.
Our common stock is listed on the New York Stock Exchange under
the symbol RNT. On May 5, 2006, the last reported sales
price of our common stock on the New York Stock Exchange was
$26.82 per share.
Holders of our common stock have no voting rights except as
provided in our articles of incorporation or as required by
Georgia law. Only the holders of shares of our Class A
common stock, which neither we nor the selling shareholder are
offering, vote for the election of directors and on most other
matters.
Investing in our common stock involves risks. See Risk
Factors beginning on page 6 of this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per Share | |
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Total | |
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Public offering price
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$ |
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Underwriting discount
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$ |
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$ |
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Proceeds, before expenses, to Aaron Rents
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$ |
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$ |
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Proceeds, before expenses, to the selling shareholder
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$ |
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$ |
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The underwriters may also purchase up to an additional
450,000 shares of our common stock from us and
150,000 shares from the selling shareholder at the public
offering price, less the underwriting discount, within
30 days from the date of the prospectus solely to cover
over-allotments.
The underwriters expect to deliver the shares on or
about ,
2006.
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SunTrust Robinson Humphrey |
Morgan Keegan & Company, Inc. |
Stifel Nicolaus
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2006
TABLE OF CONTENTS
It is important for you to read and consider all the
information contained in this prospectus, including the
documents incorporated by reference in this prospectus, in
making your investment decision. You should rely only on the
information contained or incorporated by reference in this
prospectus and information contained in any free-writing
prospectus we may authorize to be sent to you in connection with
this offering. None of Aaron Rents, the selling shareholder or
the underwriters has authorized anyone to provide you with
information different from this information. The information
contained or incorporated by reference in this prospectus is
accurate only as of the respective dates thereof, regardless of
the time of delivery of this prospectus or any sale of the
common stock. Our business, financial condition, results of
operations and prospects may have changed since those dates.
References to our website have been provided for textual
reference only, and information on our website does not
constitute part of this prospectus. This prospectus is not an
offer to sell or the solicitation of an offer to buy our common
stock in any circumstances or jurisdiction where the offer or
sale is not permitted.
Except as otherwise indicated or required by the context,
references to we, our, us, Aaron Rents or the company refer to
Aaron Rents, Inc. and its subsidiaries and predecessors. Except
as otherwise indicated, all information in this prospectus
assumes no exercise of the underwriters over-allotment
option to purchase an additional 450,000 shares from us and
150,000 shares from the selling shareholder.
PROSPECTUS SUMMARY
This summary contains basic information about us and this
offering. Because it is a summary, it does not contain all the
information that you should consider before investing. You
should read the entire prospectus carefully, including the
section entitled Risk Factors and our consolidated
financial statements and the accompanying notes included
elsewhere in this prospectus.
Aaron Rents, Inc.
We are a leading specialty retailer of consumer electronics,
computers, residential and office furniture, household
appliances and accessories. We engage in the lease ownership,
rental and retail sale of a wide variety of products such as
widescreen, LCD and plasma televisions, computers, living room,
dining room and bedroom furniture, washers, dryers and
refrigerators. We carry well-known brands such as JVC,
Mitsubishi, Philips, RCA, Sony, Dell, Hewlett-Packard,
La-Z-Boy, Simmons,
Frigidaire, General Electric and Maytag.
As of March 31, 2006, we had 1,164 Aarons
Sales & Lease Ownership stores, comprised of
764 company-operated stores in 34 states and Puerto
Rico and 400 independently-owned franchised stores in
43 states and Canada. We have added
501 company-operated and 207 franchised sales and lease
ownership stores since the beginning of 2001. In addition, we
operate our Aarons Corporate Furnishings division, which
rents residential and office furniture through
59 company-operated stores in 16 states as of
March 31, 2006. Our MacTavish Furniture Industries division
manufactures and supplies nearly one-half of the furniture and
related accessories leased and sold in our stores.
We have a long history of revenue growth and profitability.
Total revenues increased to $1.13 billion in 2005 from
$546.7 million in 2001, representing a 19.8% compound
annual growth rate. Our total net earnings increased to
$58.0 million in 2005 from $12.3 million in 2001,
representing a 47.2% compound annual growth rate. Total revenues
for the three months ended March 31, 2006 were
$347.3 million, an increase of $67.9 million, or
24.3%, over the comparable period in 2005.
Aarons Sales & Lease Ownership. Our
strategic focus is to expand our Aarons Sales &
Lease Ownership division by opening company-operated stores,
expanding our franchise program and making selective
acquisitions. Revenues from our sales and lease ownership
division increased to $1.00 billion in 2005 from
$394.3 million in 2001, representing a 26.3% compound
annual growth rate, and accounted for 89.3% of our total 2005
revenues of $1.13 billion.
We believe that our sales and lease ownership model is unique
and represents a more effective method of serving our primary
customers, who are lower to middle income consumers, than a
typical rent-to-own
business or the more traditional method of credit installment
sales. By providing customers with the option either to lease
merchandise with the opportunity to obtain ownership or to
purchase merchandise outright, we blend elements of
rent-to-own and
traditional retailing. We enable cash or credit-constrained
customers to obtain
quality-of-life
enhancing merchandise that they otherwise might not be able to
afford without incurring additional debt or long-term
obligations. In addition to these core customers, our concept is
also popular with consumers who have only a temporary need for
the merchandise or want to try out a particular brand or model
before buying it.
We offer an up-front cash and carry purchase option
on select merchandise at prices that are competitive with
discount and traditional retailers. Our merchandise selection
and store size are more typical of traditional retailers.
However, unlike most traditional retailers, our sales and lease
ownership transactions are not credit installment contracts, and
the customer may elect to terminate the transaction after a
short initial rental period. We encourage our customers to
obtain ownership of their rental merchandise while offering the
flexibility to return their merchandise without further
obligations.
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We believe our sales and lease ownership model offers the
following distinctive characteristics versus traditional
rent-to-own stores:
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Lower total cost our agreement terms
typically provide a lower cost of ownership to the customer. |
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Wider merchandise selection we
generally offer a larger selection of higher-quality merchandise
from well-known brands. |
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Larger store layout our stores average
approximately 9,000 square feet, nearly twice the size of
typical rent-to-own
stores. |
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Fewer payments our typical plan offers
semi-monthly or monthly payments versus the
rent-to-own industry
standard of weekly payments. Our agreements also usually provide
for a shorter term until the customer obtains ownership. |
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Flexible payment methods we offer our
customers the opportunity to pay by cash, check, credit card or
debit card. We receive approximately 47% of our payment volume
(in dollars) from customers by check, credit card or debit card. |
Aarons Corporate Furnishings. Our corporate
furnishings division (formerly known as the rent-to-rent
division) rents new and rental return merchandise to individuals
and businesses, with a focus on renting residential and office
furniture primarily to business customers. We have been in the
corporate furnishings business for over 50 years and
believe we are the second largest corporate furnishings rental
company in the United States.
MacTavish Furniture Industries. Aaron Rents is the
only major furniture rental company in the United States
that manufactures its own furniture. By manufacturing our own
specially designed residential and office furniture, we believe
we enjoy an advantage over our competitors. Manufacturing
enables us to control the quality, cost, delivery, styling,
durability and quantity of our furniture products.
Our Industry
Our sales and lease ownership concept blends what we believe to
be the best elements of the
rent-to-own industry
and the traditional retailing industry. The market for consumer
electronics, computers, home furnishings and appliances is large
and expanding. The
rent-to-own industry
offers an alternative to traditional methods of obtaining
electronics, computers, home furnishings and appliances. We
consider the rent-to-own market to be those U.S. households
that earn less than $50,000 per year, which includes over 50% of
U.S. households. According to industry sources, there are
approximately
8,300 rent-to-own
stores in the United States. Annual industry-wide revenues are
believed to be approximately $6.6 billion in the United
States.
Our Operating Strategies
We seek to enhance profitability through operating strategies
that distinguish us from our competitors and improve
efficiencies by striving to:
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Differentiate our Aarons Sales & Lease
Ownership concept our innovative approaches
to meeting changing customer needs differ from our competitors.
We offer lease ownership agreements which result in a lower
all-in price, larger and more attractive store
showrooms, a wider and higher-quality selection of merchandise
and up-front cash and carry purchase options on select
merchandise at prices that are competitive with traditional
retailers. |
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Offer high levels of customer service and
satisfaction we foster good relationships
with our customers to attract recurring business by providing
quick delivery and free repair of rented merchandise. We also
train associates in customer service through our Aarons
University program. |
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Promote our vendors and the Aarons brand
name our marketing programs target the prime
customer base for our products, such as our brand name
Dream Products merchandise which we advertise
through our Drive Dreams Home sponsorship of NASCAR
championship racing. We also |
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market our business through sponsorship of other sporting
events, including arena football, NBA basketball, major league
baseball and various college sports. In addition, we utilize
radio commercials and direct mail advertising featuring specific
products, with over 20 million flyers mailed monthly to
consumers in areas served by our stores. |
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Manage merchandise through our manufacturing and
distribution capabilities we believe our
manufacturing operations and network of 16 fulfillment centers
give us a strategic advantage over our competitors by enabling
us to provide timely shipment of merchandise to our stores in
order to meet customer demand quickly. |
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Utilize proprietary management information
systems we use our proprietary management
information systems to pursue systematically collections and
merchandise returns and to match inventory with demand. |
Our Growth Strategies
We seek to increase our revenues and profitability through the
execution of our growth strategies, which are to:
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Open additional company-operated sales and lease ownership
stores we plan to open additional sales and
lease ownership stores in existing and select new geographic
markets. Additional stores help us to realize economies of scale
in marketing and distribution and other operating efficiencies.
We opened 82 company-operated stores in 2005, and we
estimate that we will open approximately
90 company-operated stores in 2006. |
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Increase our sales and lease ownership
franchises we seek qualified franchisees to
grow our sales and lease ownership business more quickly,
increase our brand exposure and achieve economies of scale in
select markets where we have no immediate plans to enter.
Franchise fees and royalties represent a growing source of
company revenues. We anticipate that our franchisees will open
approximately 65 franchised sales and lease ownership stores in
2006. |
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Increase revenues and net earnings from existing sales and
lease ownership stores we experienced same
store revenue growth (revenues earned in stores open for the
entirety of both periods) from our company-operated sales and
lease ownership stores of 12.8% in 2003, 11.6% in 2004, 8.3% in
2005 and 10.7% for the first three months of 2006. We expect
revenues and net earnings of our sales and lease ownership
division to continue to grow as the large number of stores
opened in the past few years increase their number of customers. |
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Seek selective acquisitions in both new and existing sales
and lease ownership markets we will continue
to explore acquisitions of other
rent-to-own operations
and select company franchisees. In 2005, we acquired the rental
agreements, merchandise and assets of 96 sales and lease
ownership locations. Some of these locations were subsequently
merged with existing locations, resulting in 56 new stores from
acquisitions. |
Our Chairman and Chief Executive Officer, R. Charles
Loudermilk, Sr., established Aaron Rents in 1955, and we
were incorporated under the laws of Georgia in 1962. Our
principal business address is 309 E. Paces Ferry Road,
Atlanta, Georgia, 30305-2377, and our telephone number is
(404) 231-0011.
We own or have rights to various trademarks and trade names used
in our business. This prospectus also includes trademarks,
service marks and trade names owned by other companies.
3
The Offering
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Common stock offered: |
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By us |
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3,000,000 shares |
By the selling shareholder |
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1,000,000 shares |
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Common stock outstanding after this offering: |
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Common stock |
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45,106,072 shares |
Class A common stock |
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8,396,233 shares |
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Use of proceeds |
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Repayment of approximately $76.0 million of our
outstanding bank debt |
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General corporate purposes, including growth capital
and working capital needs |
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New York Stock Exchange symbols: |
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Common stock |
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RNT |
Class A common stock |
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RNT.A |
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Risk factors |
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See Risk Factors beginning on page 6 and other
information included or incorporated by reference in this
prospectus for a discussion of factors you should carefully
consider before deciding to invest in our common stock |
The number of shares estimated to be outstanding after this
offering is based on the number of our common shares outstanding
on May 5, 2006, and excludes 2,529,772 shares of
common stock issuable upon exercise of stock options outstanding
under our stock option plan on May 5, 2006, of which
options for 1,148,126 shares were exercisable on that date.
Holders of our common stock have no voting rights except as
provided in our articles of incorporation or as required by
Georgia law. Only the holders of our Class A common stock,
which neither we nor the selling shareholder are offering by
this prospectus, vote for the election of directors and on most
other matters. See Description of Capital Stock.
When we refer to our common shares in this prospectus, we are
referring to both our common stock and our Class A common
stock.
4
Summary Financial and Operating Data
The following table shows our summary financial and operating
data which you should read together with Use of
Proceeds, Managements Discussion and Analysis
of Financial Condition and Results of Operations, our
consolidated financial statements and accompanying notes and the
other financial and other data included elsewhere in this
prospectus. The as-adjusted balance sheet data give effect to
this offering as if it occurred on March 31, 2006 and
assumes an offering price of $26.82 per share, the last
reported sale price of our common stock on the New York Stock
Exchange on May 5, 2006.
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Three months ended | |
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Year ended December 31, | |
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March 31, | |
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2001 | |
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2002 | |
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2003 | |
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2004 | |
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2005 | |
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2005 | |
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2006 | |
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(Dollars in thousands, except share data) | |
Statement of Earnings Data:
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Revenues
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$ |
546,681 |
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$ |
640,688 |
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$ |
766,797 |
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$ |
946,480 |
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$ |
1,125,505 |
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$ |
279,348 |
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$ |
347,287 |
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Total cost of sales
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105,986 |
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136,263 |
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162,627 |
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188,587 |
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211,861 |
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53,369 |
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72,197 |
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Operating expenses
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276,682 |
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293,346 |
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344,884 |
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414,518 |
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507,158 |
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119,631 |
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143,956 |
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Depreciation of rental merchandise
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137,900 |
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162,660 |
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195,661 |
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253,456 |
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305,630 |
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75,130 |
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93,281 |
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Net earnings
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12,336 |
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27,440 |
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36,426 |
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52,616 |
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57,993 |
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18,422 |
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21,561 |
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Earnings per common share:
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Basic
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$ |
.28 |
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$ |
.58 |
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$ |
.74 |
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$ |
1.06 |
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$ |
1.16 |
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$ |
.37 |
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$ |
.43 |
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Assuming dilution
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.27 |
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.57 |
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.73 |
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1.04 |
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1.14 |
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.36 |
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.42 |
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Weighted average common shares outstanding:
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Basic
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44,838 |
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47,046 |
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48,964 |
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49,602 |
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49,846 |
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49,767 |
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50,185 |
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Assuming dilution
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45,320 |
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47,775 |
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49,783 |
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50,575 |
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50,805 |
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50,747 |
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51,085 |
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Dividends per common share
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$ |
.018 |
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$ |
.018 |
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$ |
.022 |
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$ |
.039 |
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$ |
.054 |
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$ |
.013 |
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$ |
.014 |
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Revenues by Operating Unit:
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Sales and lease ownership
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$ |
380,404 |
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$ |
501,390 |
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$ |
634,489 |
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$ |
804,723 |
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$ |
975,026 |
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$ |
240,618 |
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$ |
307,072 |
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Corporate furnishings
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150,002 |
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119,885 |
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109,083 |
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108,453 |
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117,476 |
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30,185 |
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32,283 |
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Franchise
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13,913 |
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16,663 |
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19,347 |
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25,253 |
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29,781 |
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7,270 |
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8,328 |
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Stores Open at End of Period:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and lease ownership:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
364 |
|
|
|
412 |
|
|
|
500 |
|
|
|
616 |
|
|
|
748 |
|
|
|
646 |
|
|
|
764 |
|
|
Franchised
|
|
|
209 |
|
|
|
232 |
|
|
|
287 |
|
|
|
357 |
|
|
|
392 |
|
|
|
361 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systemwide
|
|
|
573 |
|
|
|
644 |
|
|
|
787 |
|
|
|
973 |
|
|
|
1,140 |
|
|
|
1,007 |
|
|
|
1,164 |
|
Corporate furnishings
|
|
|
75 |
|
|
|
70 |
|
|
|
60 |
|
|
|
58 |
|
|
|
58 |
|
|
|
58 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores
|
|
|
648 |
|
|
|
714 |
|
|
|
847 |
|
|
|
1,031 |
|
|
|
1,198 |
|
|
|
1,065 |
|
|
|
1,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Sales and Lease Ownership Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store revenue growth
|
|
|
8.1 |
% |
|
|
6.9 |
% |
|
|
12.8 |
% |
|
|
11.6 |
% |
|
|
8.3 |
% |
|
|
8.3 |
% |
|
|
10.7 |
% |
Number of customers
|
|
|
203,653 |
|
|
|
243,662 |
|
|
|
314,408 |
|
|
|
386,865 |
|
|
|
468,228 |
|
|
|
409,046 |
|
|
|
480,812 |
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006 | |
|
|
| |
|
|
|
|
As adjusted for | |
|
|
Actual | |
|
this offering | |
|
|
| |
|
| |
|
|
(In thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Rental merchandise, net
|
|
$ |
569,140 |
|
|
$ |
569,140 |
|
Total assets
|
|
|
882,630 |
|
|
|
882,630 |
|
Interest-bearing debt
|
|
|
200,611 |
|
|
|
124,574 |
|
Shareholders equity
|
|
|
462,259 |
|
|
|
538,296 |
|
5
RISK FACTORS
You should carefully consider the following risk factors, as
well as other information in this prospectus and in the
documents we incorporate by reference, before investing in our
common stock. The risks and uncertainties described below are
not the only ones we face. The risks set forth below are in
addition to risks that apply to most businesses, which could
also seriously harm our business.
If any of these risks actually occur, our business, financial
condition or results of operations could be materially adversely
affected. This could cause the trading price of our common stock
to decline, and you could lose all or part of your
investment.
Our growth strategy depends considerably on opening new
company-operated stores. Our ability to expand our store base is
influenced by factors beyond our control, which may impair our
growth strategy and impede our revenue growth.
From January 1, 2005 through March 31, 2006, we added
a net of 148 company-operated sales and lease ownership
stores. Opening new company-operated stores is an important part
of our growth strategy. Our ability to continue opening new
stores is affected by, among other things:
|
|
|
|
|
the substantial outlay of financial resources required to open
new stores and initially operate them, and the availability of
capital sources to finance new openings and initial operation; |
|
|
|
competition in existing and new markets; |
|
|
|
consumer demand, tastes and spending patterns in new markets
that differ from those in our existing markets; |
|
|
|
difficulties associated with hiring, training and retaining
additional skilled personnel, including store managers; |
|
|
|
challenges in adapting our distribution and other operational
and management systems to an expanded network of stores; and |
|
|
|
our ability to identify suitable new store sites and to
negotiate acceptable leases for these sites. |
If we cannot address these challenges successfully, we may not
be able to expand our business or increase our revenues at the
rates we currently contemplate.
If we cannot manage the costs of opening new stores, our
profitability may suffer.
Opening a new store requires significant
start-up expenses, and
new stores are often not profitable until their second year of
operation. Consequently, opening many stores over a short period
can materially decrease our net earnings for a time. This effect
is sometimes called new store drag. During 2005, we
estimate that start-up
expenses for new stores reduced our pre-tax earnings by
approximately $8.0 million, or $.16 per diluted share.
We cannot be certain that we will be able to fully recover these
significant costs in the future.
We may not be able to attract qualified franchisees, which
may slow the growth of our business.
Our growth strategy depends significantly upon our franchisees
developing new franchised sales and lease ownership stores. We
generally seek franchisees who meet our stringent business
background and financial criteria and who are willing to enter
into area development agreements for several stores. A number of
factors, however, could inhibit our ability to find qualified
franchisees, including general economic downturns or legislative
or litigation developments that make the
rent-to-own industry
less attractive to potential franchisees. These developments
could also adversely affect our franchisees ability to
obtain adequate capital to develop and operate new stores on
time, or at all. Our inability to find qualified franchisees
could slow our growth.
Qualified franchisees who conform to our standards and
requirements are also important to the overall success of our
business. Our franchisees, however, are independent contractors
and not employees, and
6
consequently we cannot control them to the same extent as our
company-operated stores. Our franchisees may fail in key areas,
which could in turn slow our growth, reduce our franchise
revenues, or damage our image and reputation.
If we are unable to integrate acquired businesses
successfully and realize anticipated economic, operational and
other benefits in a timely manner, our profitability may
decrease.
We frequently acquire other sales and lease ownership
businesses. We acquired the rental agreements, merchandise and
assets of 96 stores through acquisitions in 2005. If we are
unable to integrate successfully the businesses we acquire, we
may incur substantial cost and delays in increasing our customer
base. In addition, the failure to integrate acquisitions
successfully may divert managements attention from Aaron
Rents existing business. Integration of an acquired
business may be more difficult when we acquire a business in an
unfamiliar market, or a business with a different management
philosophy or operating style.
Our competitors could impede our ability to attract new
customers or could attract current customers away from us.
The industries in which we compete are highly competitive. In
the sales and lease ownership market, our competitors include
national, regional and local operators of
rent-to-own stores and
credit retailers. We compete in the
rent-to-rent market
with national and local companies and, to a lesser extent, with
apartment owners who purchase or provide furniture for rental to
tenants. Some of our competitors have greater financial and
operating resources, and greater name recognition in certain
markets, than we have. Greater financial resources may allow our
competitors to grow faster than we can, including through
acquisitions. This in turn may enable them to enter new markets
before we can, which may decrease our opportunities in those
markets. Greater name recognition may help them attract market
share away from us, even in our established markets.
In addition, new competitors may emerge. Current and potential
competitors may establish financial or strategic relationships
among themselves or with third parties. Accordingly, it is
possible that new competitors or alliances among competitors
could emerge and rapidly acquire significant market share.
If our independent franchisees fail to meet their debt
service payments or other obligations under outstanding loans
guaranteed by us as part of a franchise loan program, amounts
that the lenders participating in the program could require us
to pay to satisfy these obligations could have a material
adverse effect on our business and financial condition.
We have guaranteed the borrowings of certain franchisees under a
franchise loan program with several banks with a maximum
commitment amount of $115.0 million, and we also guarantee
franchisee borrowings under certain other debt facilities. In
the event these franchisees are unable to meet their debt
service payments or otherwise experience an event of default, we
would be unconditionally liable for a portion of the outstanding
balance of the franchisees debt obligations, which at
March 31, 2006 was $105.6 million. Of this amount,
approximately $80.6 million represents franchisee
borrowings outstanding under the franchise loan program and
approximately $25.0 million represents franchisee
borrowings that we guarantee under other debt facilities.
Although we have had no significant losses associated with the
franchisee loan and guaranty program since its inception, and we
believe that any losses associated with any defaults would be
mitigated through recovery of rental merchandise and other
assets, we cannot guarantee that there will be no significant
losses in the future or that we will be able to adequately
mitigate any such losses. If we fail to adequately mitigate any
such future losses, our business and financial condition could
be materially adversely impacted.
Any loss of the services of our key executives, or our
inability to attract and retain qualified managers, could have a
material adverse impact on our operations.
We believe that we have benefited substantially from
Mr. Loudermilk, Sr.s leadership and that the
loss of his services at any time in the near future could
adversely affect our business and operations. We also depend on
the continued services of the rest of our management team,
including key executives. The loss of
7
these individuals without adequate replacement could also
adversely affect our business. Although we have employment
agreements with some of our key executives, they are generally
terminable on short notice, and we do not carry key man life
insurance on any of our officers.
Additionally, we need a growing number of qualified managers to
operate our stores successfully. The inability to attract and
retain qualified individuals, or a significant increase in costs
to do so, would materially adversely affect our operations.
Because our corporate furnishings division depends on
business customers, slowdowns in corporate spending may decrease
our revenues and profitability.
Our corporate furnishings division depends on business customers
for a significant percentage of its rental revenues. Because
businesses are likely to curb spending during economic
downturns, the revenues and profitability of our corporate
furnishings business may be adversely affected during these
periods. We cannot be certain that revenues and profits from our
corporate furnishings division will increase in the future.
You should not rely on our same store revenues as an
indication of our future results of operations because they
fluctuate significantly.
Our historical same store revenue growth figures have fluctuated
significantly from quarter to quarter. For example, we
experienced same store revenue growth of 11.6% in 2004, 8.3% in
2005 and 10.7% for the first quarter of 2006. We calculate same
store revenue growth by comparing revenues for comparable
periods for all stores open during the entirety of those
periods. Even though we achieved significant same store revenue
growth in the past, we may not be able to increase same store
revenues in the future. A number of factors have historically
affected, and will continue to affect, our same store revenues,
including:
|
|
|
|
|
changes in competition; |
|
|
|
general economic conditions; |
|
|
|
new product introductions; |
|
|
|
consumer trends; |
|
|
|
changes in our merchandise mix; |
|
|
|
the impact of our new stores on our existing stores, including
potential decreases in existing stores revenues as a
result of opening new stores; |
|
|
|
timing of promotional events; and |
|
|
|
our ability to execute our business strategy effectively. |
Changes in our quarterly and annual same store revenues could
cause the price of our common stock to fluctuate significantly.
Our operations are regulated by and subject to the
requirements of various federal and state laws and regulations.
These laws and regulations, as the same may be amended,
supplemented or interpreted by the courts from time to time,
could expose us to significant compliance costs or burdens or
force us to change our business practices in a manner that may
be detrimental to our operations, prospects or financial
condition.
We believe that 47 states specifically regulate
rent-to-own
transactions, including states in which we currently operate
Aarons Sales & Lease Ownership stores. At the
present time, no federal law specifically regulates the
rent-to-own industry,
although federal legislation to regulate the industry has been
proposed from time to time. Any adverse changes in existing laws
or the passage of new adverse legislation by states or the
federal government could materially increase both our costs of
complying with laws and the risk that we could be sued or be
subject to government sanctions if we are not in compliance. In
addition, new
8
burdensome legislation might force us to change our business
model and might reduce the economic potential of our sales and
lease ownership operations.
Most of the states that regulate
rent-to-own
transactions have enacted disclosure laws which require
rent-to-own companies
to disclose to their customers the total number of payments,
total amount and timing of all payments to acquire ownership of
any item, any other charges that may be imposed by them and
miscellaneous other items. Some state laws also require grace
periods for late fees and certain contract reinstatement rights
in the event the rent-to-own agreement is terminated. The more
restrictive state
rent-to-own laws limit
the total amount that a customer may be charged for an item, or
regulate the amount of deemed interest that
rent-to-own companies
may charge on
rent-to-own
transactions, generally defining interest as rental
fees paid in excess of the retail price of the
goods. We cannot guarantee that the federal government or states
will not enact additional or different legislation that would be
disadvantageous to us.
In addition to the risk of lawsuits related to the laws that
regulate rent-to-own
and consumer lease transactions, we could be subject to lawsuits
alleging violations of state laws and regulations and consumer
tort law, including fraud and consumer protection laws because
of the consumer-oriented nature of the
rent-to-own industry. A
large judgment could adversely affect our financial condition
and results of operations. Moreover, an adverse outcome from a
lawsuit, even one against one of our competitors, could result
in changes in the way we and others in the industry do business,
possibly leading to significant costs or decreased revenues or
profitability. On March 15, 2006, the New Jersey Supreme
Court ruled against one of our largest competitors, holding that
the New Jersey Retail Installment Sales Act applies to that
companys
rent-to-own contracts
in the state, and applying New Jerseys criminal usury
statute to those transactions. As a result of that ruling, we
began to implement changes in our business practices in New
Jersey, where we operate one Aarons Sales & Lease
Ownership store and have 11 franchised stores. However, a
lawsuit was filed in late March 2006 by a customer seeking class
action status on similar claims related to our lease ownership
contracts in New Jersey. At this stage, we are unable to
estimate any likely costs to us from this lawsuit or others like
it that might be filed in that state as a result of this change
in the way the New Jersey law is interpreted.
We are subject to laws that regulate franchisor-franchisee
relationships. Our ability to develop new franchised stores and
enforce our rights against franchisees may be adversely affected
by these laws, which could impair our growth strategy and cause
our franchise revenues to decline.
As a franchisor, we are subject to both regulation by the
Federal Trade Commission and state laws regulating the offer and
sale of franchises. Because we plan to expand our business in
part by selling more franchises, our failure to obtain or
maintain approvals to sell franchises could significantly impair
our growth strategy. In addition, our failure to comply with
franchise regulations could cause us to lose franchise fees and
ongoing royalty revenues. Moreover, state laws that regulate
substantive aspects of our relationships with franchisees may
limit our ability to terminate or otherwise resolve conflicts
with our franchisees.
Our Chairman and Chief Executive Officer owns a controlling
interest in our voting Class A common stock. He may vote
his shares in ways with which you may disagree.
Our common stock, including the shares being sold in this
offering, generally do not have voting rights, and only
holders of Class A common stock may approve corporate
actions requiring shareholder approval, unless otherwise
required by law. R. Charles Loudermilk, Sr., our
founder, Chairman of the Board and Chief Executive Officer, owns
or controls over 60% of our voting Class A common stock,
and will continue to do so after this offering. As a result,
Mr. Loudermilk will continue to be able to elect all our
directors and effectively control Aaron Rents through his voting
power. He may vote his shares in ways with which you may
disagree, and this voting concentration may discourage, delay or
prevent a change in control or acquisition of Aaron Rents, even
one that you believe is beneficial to you as a shareholder.
9
FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and
expectations which are characterized as forward-looking
statements. For those statements we claim the protection
of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on managements
current beliefs, assumptions and expectations regarding our
future economic performance, taking into account the information
currently available to them. Generally, the words
anticipate, believe,
estimate, expect, intend,
project, and similar expressions identify
forward-looking statements, which generally are not historical
in nature. All statements which address operating performance,
events or developments that we expect or anticipate will occur
in the future, including growth in store openings, franchises
awarded, market share and statements expressing general optimism
about future operating results, are forward-looking statements.
Forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ
materially from the companys historical experience and the
companys present expectations or projections. Factors that
could cause our actual results to differ materially from any
forward-looking statements include changes in general economic
conditions, competition, pricing, customer demand and those
factors discussed in Risk Factors beginning on
page 6 and in other sections of this prospectus.
Given these uncertainties and that such statements speak only as
of the date made, you should not place undue reliance on
forward-looking statements. We undertake no obligation to update
publicly or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. You
should carefully consider the risks described in the Risk
Factors section, in addition to the other information set
forth in this prospectus and incorporated by reference from our
reports filed with the Securities and Exchange Commission,
before making an investment decision. We qualify any
forward-looking statements entirely by these cautionary factors.
10
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Our common stock is listed on the New York Stock Exchange under
the symbol RNT. The following table sets forth for
the periods indicated the high and low sales prices for our
common stock as reported on the New York Stock Exchange
composite tape, rounded to the nearest penny, and dividends
declared on our common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
| |
|
|
|
|
Cash | |
|
|
|
|
dividends per | |
|
|
High | |
|
Low | |
|
share | |
|
|
| |
|
| |
|
| |
Fiscal year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$ |
17.13 |
|
|
$ |
13.44 |
|
|
$ |
|
|
Second quarter
|
|
|
22.11 |
|
|
|
16.13 |
|
|
|
.013 |
|
Third quarter
|
|
|
22.60 |
|
|
|
18.50 |
|
|
|
.013 |
|
Fourth quarter
|
|
|
25.23 |
|
|
|
21.15 |
|
|
|
.013 |
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
25.15 |
|
|
|
19.20 |
|
|
|
.013 |
|
Second quarter
|
|
|
25.29 |
|
|
|
17.38 |
|
|
|
.013 |
|
Third quarter
|
|
|
25.73 |
|
|
|
19.62 |
|
|
|
.014 |
|
Fourth quarter
|
|
|
23.00 |
|
|
|
18.90 |
|
|
|
.014 |
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
28.08 |
|
|
|
20.82 |
|
|
|
.014 |
|
Second quarter (through May 5, 2006)
|
|
|
28.50 |
|
|
|
25.80 |
|
|
|
.014 |
|
On May 5, 2006, the last sale price of the common stock as
reported by the New York Stock Exchange was $26.82 per
share. As of May 5, 2006, there were 280 holders of
record of the common stock. We believe Aaron Rents has
approximately 13,600 beneficial holders of the common stock.
Subject to our continuing to earn sufficient income, any future
capital needs and other contingencies, we currently expect to
continue our policy of paying dividends.
Our articles of incorporation provide that no cash dividends may
be paid on our Class A common stock unless equal or higher
dividends are paid on the common stock. Under our revolving
credit agreement, we may pay cash dividends in any fiscal year
only if the dividends do not exceed 50% of our consolidated net
earnings for the prior fiscal year plus the excess, if any, of
the cash dividend limitation applicable to the prior year over
the dividends actually paid in the prior year.
11
USE OF PROCEEDS
Aaron Rents is offering for sale 3,000,000 shares of common
stock by this prospectus. Based on an assumed public offering
price of $26.82 per share, the last reported sale price of
our common stock on the New York Stock Exchange on
May 5, 2006, we estimate that our net proceeds from the
sale of these shares will be approximately $76.0 million
after deducting the underwriting discount and estimated offering
expenses. Our estimated net proceeds will be approximately
$87.5 million if the underwriters exercise their option to
purchase an additional 450,000 shares from us to cover
over-allotments.
We will not receive any proceeds from the sale of
1,000,000 shares of common stock by the selling shareholder
or any proceeds from the underwriters option to purchase
an additional 150,000 shares from the selling shareholder
to cover over-allotments.
We expect to use our net proceeds to repay approximately
$76.0 million of borrowings outstanding under our revolving
credit agreement. We will use the remaining net proceeds, if
any, for general corporate purposes, including growth capital
and working capital needs.
Our revolving credit agreement with several banks allows us to
borrow up to $140 million. This revolving credit agreement
includes a $15 million credit line to fund our daily
working capital requirements. Amounts borrowed bear interest at
the lower of the lenders prime rate or the London
Inter-Bank Offered Rate, or LIBOR, plus 1.25%. As of
March 31, 2006, approximately $81.0 million was
outstanding under our revolving credit agreement, bearing
interest at a weighted average variable rate of 5.84%. Our
revolving credit agreement expires on May 28, 2008.
Pending application of the net proceeds as described above, we
will invest the net proceeds in short-term, interest-bearing
investment grade or government securities.
12
CAPITALIZATION
The following table shows our capitalization as of
March 31, 2006:
|
|
|
|
|
on an actual basis; and |
|
|
|
on an as adjusted basis to reflect our receipt of
the estimated net proceeds from the sale by us in this offering
of 3,000,000 shares of our common stock, assuming an
offering price of $26.82 per share (the last reported sale
price of our common stock on the New York Stock Exchange on
May 5, 2006), after deducting the underwriting discount and
estimated offering expenses payable by us, and giving effect to
our use of a portion of such proceeds for the repayment of bank
debt as described in Use of Proceeds. |
You should read the following capitalization data in conjunction
with Use of Proceeds, Selected Financial and
Operating Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
the consolidated financial statements and accompanying notes and
the other financial data included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
|
| |
|
|
|
|
As adjusted for | |
|
|
Actual | |
|
this offering | |
|
|
| |
|
| |
|
|
(In thousands, | |
|
|
except share data) | |
Total interest-bearing debt(1)
|
|
$ |
200,611 |
|
|
$ |
124,574 |
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, par value $.50 per share
50,000,000(2) shares authorized; 44,989,602 shares issued,
47,989,602 shares issued as adjusted
|
|
$ |
22,495 |
|
|
$ |
23,995 |
|
|
Class A common stock, par value $.50 per
share 25,000,000 shares authorized;
12,063,856 shares issued
|
|
|
6,032 |
|
|
|
6,032 |
|
|
Additional paid-in capital
|
|
|
96,990 |
|
|
|
171,527 |
|
|
Retained earnings
|
|
|
370,235 |
|
|
|
370,235 |
|
|
Accumulated other comprehensive loss
|
|
|
(9 |
) |
|
|
(9 |
) |
Less: treasury shares at cost:
|
|
|
|
|
|
|
|
|
|
Common stock, 2,899,350 shares
|
|
|
(17,580 |
) |
|
|
(17,580 |
) |
|
Class A common stock, 3,667,623 shares
|
|
|
(15,904 |
) |
|
|
(15,904 |
) |
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
462,259 |
|
|
|
538,296 |
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
662,870 |
|
|
$ |
662,870 |
|
|
|
|
|
|
|
|
|
|
(1) |
Includes approximately $81.0 million outstanding under our
revolving credit agreement as of March 31, 2006. As of
May 5, 2006, approximately $80.1 million was
outstanding under this agreement. |
|
(2) |
As of May 2, 2006, our shareholders approved an amendment
to our articles of incorporation to increase the number of
authorized shares of common stock to 100,000,000 shares. |
The table above excludes 2,529,772 shares of common stock
issuable upon exercise of stock options outstanding under our
stock option plan on May 5, 2006, of which options for
1,148,126 shares were then exercisable.
13
SELECTED FINANCIAL AND OPERATING DATA
The following table shows selected financial and operating data
for Aaron Rents. We derived the selected statement of earnings
data for each of the years ended, and the selected balance sheet
data as of, December 31, 2001, 2002, 2003, 2004 and 2005
from our audited consolidated financial statements, some of
which are included in this prospectus. Those consolidated
financial statements and the accompanying notes have been
audited by Ernst & Young LLP, an independent registered
public accounting firm.
The selected statement of earnings data for the three months
ended March 31, 2005 and 2006, and the selected balance
sheet data as of March 31, 2006, have been derived from our
unaudited consolidated financial statements included in this
prospectus. In the opinion of management, the unaudited
consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to
present the data for those periods fairly. Operating results for
interim periods are not necessarily indicative of results for a
full fiscal year.
You should read the following selected financial and operating
data in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations,
the consolidated financial statements and accompanying notes and
the other financial and operating data included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months | |
|
|
Year ended December 31, | |
|
ended March 31, | |
|
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Statement of Earnings Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals and fees
|
|
$ |
403,385 |
|
|
$ |
459,179 |
|
|
$ |
553,773 |
|
|
$ |
694,293 |
|
|
$ |
845,162 |
|
|
$ |
209,145 |
|
|
$ |
254,246 |
|
|
Retail sales
|
|
|
60,481 |
|
|
|
72,698 |
|
|
|
68,786 |
|
|
|
56,259 |
|
|
|
58,366 |
|
|
|
16,043 |
|
|
|
19,170 |
|
|
Non-retail sales
|
|
|
66,212 |
|
|
|
88,969 |
|
|
|
120,355 |
|
|
|
160,774 |
|
|
|
185,622 |
|
|
|
45,571 |
|
|
|
64,027 |
|
|
Franchise royalties and fees
|
|
|
13,620 |
|
|
|
16,595 |
|
|
|
19,328 |
|
|
|
25,093 |
|
|
|
29,474 |
|
|
|
7,191 |
|
|
|
8,223 |
|
|
Other
|
|
|
2,983 |
|
|
|
3,247 |
|
|
|
4,555 |
|
|
|
10,061 |
|
|
|
6,881 |
|
|
|
1,398 |
|
|
|
1,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546,681 |
|
|
|
640,688 |
|
|
|
766,797 |
|
|
|
946,480 |
|
|
|
1,125,505 |
|
|
|
279,348 |
|
|
|
347,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail cost of sales
|
|
|
43,987 |
|
|
|
53,856 |
|
|
|
50,913 |
|
|
|
39,380 |
|
|
|
39,054 |
|
|
|
10,736 |
|
|
|
12,406 |
|
|
Non-retail cost of sales
|
|
|
61,999 |
|
|
|
82,407 |
|
|
|
111,714 |
|
|
|
149,207 |
|
|
|
172,807 |
|
|
|
42,633 |
|
|
|
59,791 |
|
|
Operating expenses
|
|
|
276,682 |
|
|
|
293,346 |
|
|
|
344,884 |
|
|
|
414,518 |
|
|
|
507,158 |
|
|
|
119,631 |
|
|
|
143,956 |
|
|
Depreciation of rental merchandise
|
|
|
137,900 |
|
|
|
162,660 |
|
|
|
195,661 |
|
|
|
253,456 |
|
|
|
305,630 |
|
|
|
75,130 |
|
|
|
93,281 |
|
|
Interest
|
|
|
6,258 |
|
|
|
4,767 |
|
|
|
5,782 |
|
|
|
5,413 |
|
|
|
8,519 |
|
|
|
1,600 |
|
|
|
3,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526,826 |
|
|
|
597,036 |
|
|
|
708,954 |
|
|
|
861,974 |
|
|
|
1,033,168 |
|
|
|
249,730 |
|
|
|
312,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
19,855 |
|
|
|
43,652 |
|
|
|
57,843 |
|
|
|
84,506 |
|
|
|
92,337 |
|
|
|
29,618 |
|
|
|
34,631 |
|
Income taxes
|
|
|
7,519 |
|
|
|
16,212 |
|
|
|
21,417 |
|
|
|
31,890 |
|
|
|
34,344 |
|
|
|
11,196 |
|
|
|
13,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
12,336 |
|
|
$ |
27,440 |
|
|
$ |
36,426 |
|
|
$ |
52,616 |
|
|
$ |
57,993 |
|
|
$ |
18,422 |
|
|
$ |
21,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.28 |
|
|
$ |
.58 |
|
|
$ |
.74 |
|
|
$ |
1.06 |
|
|
$ |
1.16 |
|
|
$ |
.37 |
|
|
$ |
.43 |
|
|
Assuming dilution
|
|
|
.27 |
|
|
|
.57 |
|
|
|
.73 |
|
|
|
1.04 |
|
|
|
1.14 |
|
|
|
.36 |
|
|
|
.42 |
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
44,838 |
|
|
|
47,046 |
|
|
|
48,964 |
|
|
|
49,602 |
|
|
|
49,846 |
|
|
|
49,767 |
|
|
|
50,185 |
|
|
Assuming dilution
|
|
|
45,320 |
|
|
|
47,775 |
|
|
|
49,783 |
|
|
|
50,575 |
|
|
|
50,805 |
|
|
|
50,747 |
|
|
|
51,085 |
|
Dividends per common share
|
|
$ |
.018 |
|
|
$ |
.018 |
|
|
$ |
.022 |
|
|
$ |
.039 |
|
|
$ |
.054 |
|
|
$ |
.013 |
|
|
$ |
.014 |
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months | |
|
|
Year ended December 31, | |
|
ended March 31, | |
|
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Revenues by Operating Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and lease ownership
|
|
$ |
380,404 |
|
|
$ |
501,390 |
|
|
$ |
634,489 |
|
|
$ |
804,723 |
|
|
$ |
975,026 |
|
|
$ |
240,618 |
|
|
$ |
307,072 |
|
Corporate furnishings
|
|
|
150,002 |
|
|
|
119,885 |
|
|
|
109,083 |
|
|
|
108,453 |
|
|
|
117,476 |
|
|
|
30,185 |
|
|
|
32,283 |
|
Franchise
|
|
|
13,913 |
|
|
|
16,663 |
|
|
|
19,347 |
|
|
|
25,253 |
|
|
|
29,781 |
|
|
|
7,270 |
|
|
|
8,328 |
|
|
Stores Open at End of Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and lease ownership:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
364 |
|
|
|
412 |
|
|
|
500 |
|
|
|
616 |
|
|
|
748 |
|
|
|
646 |
|
|
|
764 |
|
|
Franchised
|
|
|
209 |
|
|
|
232 |
|
|
|
287 |
|
|
|
357 |
|
|
|
392 |
|
|
|
361 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systemwide
|
|
|
573 |
|
|
|
644 |
|
|
|
787 |
|
|
|
973 |
|
|
|
1,140 |
|
|
|
1,007 |
|
|
|
1,164 |
|
Corporate furnishings
|
|
|
75 |
|
|
|
70 |
|
|
|
60 |
|
|
|
58 |
|
|
|
58 |
|
|
|
58 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores
|
|
|
648 |
|
|
|
714 |
|
|
|
847 |
|
|
|
1,031 |
|
|
|
1,198 |
|
|
|
1,065 |
|
|
|
1,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Sales and Lease Ownership Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store revenue growth
|
|
|
8.1% |
|
|
|
6.9% |
|
|
|
12.8% |
|
|
|
11.6% |
|
|
|
8.3% |
|
|
|
8.3% |
|
|
|
10.7% |
|
Number of customers
|
|
|
203,653 |
|
|
|
243,662 |
|
|
|
314,408 |
|
|
|
386,865 |
|
|
|
468,228 |
|
|
|
409,046 |
|
|
|
480,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
As of December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental merchandise, net
|
|
$ |
258,932 |
|
|
$ |
317,287 |
|
|
$ |
343,013 |
|
|
$ |
425,567 |
|
|
$ |
550,932 |
|
|
$ |
569,140 |
|
Property, plant and equipment, net
|
|
|
77,282 |
|
|
|
87,094 |
|
|
|
99,584 |
|
|
|
111,118 |
|
|
|
133,759 |
|
|
|
134,367 |
|
Total assets
|
|
|
403,881 |
|
|
|
487,468 |
|
|
|
559,884 |
|
|
|
700,288 |
|
|
|
858,515 |
|
|
|
882,630 |
|
Interest-bearing debt
|
|
|
77,713 |
|
|
|
73,265 |
|
|
|
79,570 |
|
|
|
116,655 |
|
|
|
211,873 |
|
|
|
200,611 |
|
Shareholders equity
|
|
|
219,967 |
|
|
|
280,545 |
|
|
|
320,186 |
|
|
|
375,178 |
|
|
|
434,471 |
|
|
|
462,259 |
|
15
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations should be read together with our
consolidated financial statements and the accompanying notes
included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties.
Our actual results may differ materially from those anticipated
in those forward-looking statements as a result of certain
factors, including, but not limited to, those described under
Risk Factors and in other portions of this
prospectus.
General
Aaron Rents has demonstrated strong revenue growth over the last
three years. Total revenues have increased from
$766.8 million in 2003 to $1.13 billion in 2005,
representing a compound annual growth rate of 21.2%. Total
revenues for the three months ended March 31, 2006 were
$347.3 million, an increase of $67.9 million, or
24.3%, over the comparable period in 2005.
Most of our growth comes from the opening of new sales and lease
ownership stores and increases in same store revenues from
previously opened stores. We opened 82 company-operated
sales and lease ownership stores in 2005, and we estimate that
we will open approximately 90 stores in 2006. We spend on
average approximately $550,000 to $600,000 in the first year of
operation of a new store, which includes purchases of rental
merchandise, investments in leasehold improvements and financing
first year start-up
costs. Our new sales and lease ownership stores typically
achieve revenues of approximately $1.1 million in their
third year of operation. Our comparable stores open more than
three years normally achieve approximately $1.4 million in
revenues, which we believe represents a higher unit revenue
volume than the typical
rent-to-own store. Most
of our stores are cash flow positive in the second year of
operations following their opening.
We also use our franchise program to help us expand our sales
and lease ownership concept more quickly and into more areas
than we otherwise would by opening only company-operated stores.
Our franchisees opened 71 stores in 2005. We expect our
franchisees to open approximately 65 stores during 2006.
Franchise royalties and other related fees represent a growing
source of high margin revenue for us, accounting for
approximately $29.5 million of revenues in 2005, up from
$19.3 million in 2003, representing a compound annual
growth rate of 23.5%.
Key Components of Income
In this managements discussion and analysis section, we
review the results of our sales and lease ownership and
corporate furnishings divisions, as well as the five components
of our revenues: rentals and fees, retail sales, non-retail
sales, franchise royalties and fees, and other revenues.
Revenues. We separate our total revenues into five
components: rentals and fees, retail sales, non-retail sales,
franchise royalties and fees, and other revenues. Rentals and
fees includes all revenues derived from rental agreements from
our sales and lease ownership and corporate furnishings stores,
including agreements that result in our customers acquiring
ownership at the end of the term. Retail sales represent sales
of both new and rental return merchandise from our sales and
lease ownership and corporate furnishings stores. Non-retail
sales mainly represent merchandise sales to our sales and lease
ownership division franchisees. Franchise royalties and fees
represent fees from the sale of franchise rights and royalty
payments from franchisees, as well as other related income from
our franchised stores. Other revenues at times include income
from the sale of equity investments held in third parties and
other miscellaneous revenues.
Cost of Sales. We separate our cost of sales into two
components: retail and non-retail. Retail cost of sales
represents the original or depreciated cost of merchandise sold
through our company-operated stores. Non-retail cost of sales
primarily represents the cost of merchandise sold to our
franchisees.
Depreciation of Rental Merchandise. Depreciation of
rental merchandise reflects the expense associated with
depreciating merchandise held for rent and rented to customers
by our company-operated sales and lease ownership and corporate
furnishings stores.
16
Critical Accounting Policies
Revenue Recognition. Rental revenues are recognized in
the month they are due on the accrual basis of accounting. For
internal management reporting purposes, rental revenues from the
sales and lease ownership division are recognized as revenue in
the month the cash is collected. On a monthly basis, we record
an accrual for rental revenues due but not yet received, net of
allowances, and a deferral of revenue for rental payments
received prior to the month due. Our revenue recognition
accounting policy matches the rental revenue with the
corresponding costs, mainly depreciation, associated with the
rental merchandise. At March 31, 2006 and at
December 31, 2005 and 2004, we had a revenue deferral
representing cash collected in advance of being due or otherwise
earned totaling $20.5 million, $20.3 million and
$15.9 million, respectively, and an accrued revenue
receivable net of allowance for doubtful accounts based on
historical collection rates of $3.3 million,
$4.8 million and $4.1 million, respectively. Revenues
from the sale of merchandise to franchisees are recognized at
the time of receipt by the franchisee, and revenues from such
sales to other customers are recognized at the time of shipment.
Rental Merchandise. Our sales and lease ownership
division depreciates merchandise over the agreement period,
generally 12 to 24 months when rented, and 36 months
when not rented, to 0% salvage value. Our corporate furnishings
division depreciates merchandise over its estimated useful life,
which ranges from six months to 60 months, net of salvage
value, which ranges from 0% to 60%. Sales and lease ownership
merchandise is generally depreciated at a faster rate than our
corporate furnishings merchandise. As sales and lease ownership
revenues continue to comprise an increasing percentage of total
revenues, we expect rental merchandise depreciation to increase
at a correspondingly faster rate.
Our policies require weekly rental merchandise counts by store
managers and write-offs for unsalable, damaged or missing
merchandise inventories. Full physical inventories are generally
taken at our fulfillment and manufacturing facilities on a
quarterly basis with appropriate provisions made for missing,
damaged and unsalable merchandise. In addition, we monitor
rental merchandise levels and mix by division, store and
fulfillment center, as well as the average age of merchandise on
hand. If unsalable rental merchandise cannot be returned to
vendors, its carrying value is adjusted to net realizable value
or written off. All rental merchandise is available for rental
and sale.
Effective September 30, 2004, we began recording rental
merchandise carrying value adjustments on the allowance method,
which estimates the merchandise losses incurred but not yet
identified by management as of the end of the accounting period.
Previously, we accounted for merchandise inventory adjustments
using the direct write-off method, which recognized merchandise
losses only after they were specifically identified. This
adoption of the allowance method had the effect of increasing
expenses in the third quarter of 2004 for a one-time adjustment
of $2.5 million to establish a rental merchandise allowance
reserve on our balance sheet. We expect rental merchandise
adjustments in the future under this new method to be materially
consistent with the prior years adjustments under the
direct write-off method. The 2005 rental merchandise
adjustments include write-offs of merchandise in the third
quarter that resulted from losses associated with Hurricanes
Katrina and Rita. These hurricane-related write-offs were
$2.8 million, net of expected insurance proceeds. Rental
merchandise adjustments, including the effect of the
establishment of the reserve mentioned above, totaled
$21.8 million, $18.0 million and $11.9 million
during the years ended December 31, 2005, 2004 and 2003,
respectively.
Leases and Closed Store Reserves. The majority of our
company-operated stores are operated from leased facilities
under operating lease agreements. The substantial majority of
these leases are for periods that do not exceed five years.
Leasehold improvements related to these leases are generally
amortized over periods that do not exceed the lesser of the
lease term or five years. While a majority of our leases do not
require escalating payments, for the leases which do contain
such provisions we record the related lease expense on a
straight-line basis over the lease term. Finally, we do not
generally obtain significant amounts of lease incentives or
allowances from landlords. The total amount of incentives and
allowances received in 2005, 2004, and 2003 totaled
$1.5 million, $1.3 million and $653,704, respectively.
Any incentive or allowance amounts we receive are recognized
ratably over the lease term.
17
From time to time, we close or consolidate stores. Our primary
cost associated with closing or consolidating stores is the
future lease payments and related commitments. We record an
estimate of the future obligation related to closed or
consolidated stores based upon the present value of the future
lease payments and related commitments, net of estimated
sublease income which we base upon historical experience. For
the three months ended March 31, 2006 and March 31,
2005, our reserve for closed or consolidated stores was
$1.0 million and $1.7 million, respectively. If our
estimates related to sublease income are not correct, our actual
liability may be more or less than the liability recorded at
March 31, 2006.
Insurance Programs. We maintain insurance contracts to
fund workers compensation and group health insurance claims.
Using actuarial analysis and projections, we estimate the
liabilities associated with open and incurred but not reported
workers compensation claims. This analysis is based upon an
assessment of the likely outcome or historical experience, net
of any stop loss or other supplementary coverages. We also
calculate the projected outstanding plan liability for our group
health insurance program. Effective September 30, 2004, we
revised certain estimates related to our accrual for group
health self-insurance based on our experience that the time
periods between our liability for a claim being incurred and the
claim being reported had declined and favorable claims
experience which resulted in a reduction in expenses of
$1.4 million for the nine-month period ended
September 30, 2004. Our liability for workers compensation
insurance claims and group health insurance was
$3.2 million and $3.9 million for the three months
ended March 31, 2006 and 2005, respectively.
If we resolve existing workers compensation claims for amounts
that are in excess of our current estimates and within policy
stop loss limits, we will be required to pay additional amounts
beyond those accrued at March 31, 2006. Additionally, if
the actual group health insurance liability exceeds our
projections, we will be required to pay additional amounts
beyond those accrued at March 31, 2006.
The assumptions and conditions described above reflect
managements best assumptions and estimates, but these
items involve inherent uncertainties as described above, which
may or may not be controllable by management. As a result, the
accounting for such items could result in different amounts if
management used different assumptions or if different conditions
occur in future periods.
Same Store Revenues. We view same store revenues as a key
performance indicator. For the three months ended March 31,
2006, we calculated the change in this amount by comparing
revenues for the three months ended March 31, 2006 to
revenues for the comparable period in 2005 for all stores open
for the entire 15-month
period ended March 31, 2006, excluding stores that received
rental agreements from other acquired, closed, or merged stores.
For the year ended December 31, 2005, we calculated the
change in this amount by comparing revenues for the years ended
December 31, 2005 and 2004 for all stores open for the
entire 24-month period
ended December 31, 2005, excluding stores that received
rental agreements from other acquired, closed or merged stores.
For the year ended December 31, 2004 we calculated the
change in this amount by comparing revenues for the years ended
December 31, 2004 and 2003 for all stores open for the
entire 24-month period
ended December 31, 2004, excluding stores that received
rental agreements from other acquired, closed or merged stores.
18
Results of Operations
The following table shows key selected financial data for the
three months ended March 31, 2006 and 2005, and the changes
in dollars as a percentage to 2006 from 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended | |
|
|
|
|
|
|
March 31, | |
|
Increase in | |
|
% Increase to | |
|
|
| |
|
dollars to 2006 | |
|
2006 from | |
|
|
2006 | |
|
2005 | |
|
from 2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals and fees
|
|
$ |
254,246 |
|
|
$ |
209,145 |
|
|
$ |
45,101 |
|
|
|
21.6 |
% |
|
Retail sales
|
|
|
19,170 |
|
|
|
16,043 |
|
|
|
3,127 |
|
|
|
19.5 |
|
|
Non-retail sales
|
|
|
64,027 |
|
|
|
45,571 |
|
|
|
18,456 |
|
|
|
40.5 |
|
|
Franchise royalties and fees
|
|
|
8,223 |
|
|
|
7,191 |
|
|
|
1,032 |
|
|
|
14.4 |
|
|
Other
|
|
|
1,621 |
|
|
|
1,398 |
|
|
|
223 |
|
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347,287 |
|
|
|
279,348 |
|
|
|
67,939 |
|
|
|
24.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail cost of sales
|
|
|
12,406 |
|
|
|
10,736 |
|
|
|
1,670 |
|
|
|
15.6 |
|
|
Non-retail cost of sales
|
|
|
59,791 |
|
|
|
42,633 |
|
|
|
17,158 |
|
|
|
40.2 |
|
|
Operating expenses
|
|
|
143,956 |
|
|
|
119,631 |
|
|
|
24,325 |
|
|
|
20.3 |
|
|
Depreciation of rental merchandise
|
|
|
93,281 |
|
|
|
75,130 |
|
|
|
18,151 |
|
|
|
24.2 |
|
|
Interest
|
|
|
3,222 |
|
|
|
1,600 |
|
|
|
1,622 |
|
|
|
101.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312,656 |
|
|
|
249,730 |
|
|
|
62,926 |
|
|
|
25.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
34,631 |
|
|
|
29,618 |
|
|
|
5,013 |
|
|
|
16.9 |
|
Income taxes
|
|
|
13,070 |
|
|
|
11,196 |
|
|
|
1,874 |
|
|
|
16.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
21,561 |
|
|
$ |
18,422 |
|
|
$ |
3,139 |
|
|
|
17.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2006 compared with three
months ended March 31, 2005 |
Revenues. The 24.3% increase in total revenues, to
$347.3 million for the three months ended March 31,
2006 from $279.3 million in the comparable period in 2005,
was due mainly to a $45.1 million, or 21.6%, increase in
rentals and fees revenues, plus an $18.5 million increase
in non-retail sales. The increase in rentals and fees revenues
was attributable to a $43.0 million increase in revenues
from our sales and lease ownership division, which had a 10.7%
increase in same store revenues during the three months ended
March 31, 2006 and added 132 company-operated stores
in 2005. The growth in our sales and lease ownership division
was augmented by a $2.3 million increase in revenues in our
corporate furnishings division.
The 19.5% increase in revenues from retail sales, to
$19.2 million in the three months ended March 31, 2006
from $16.0 million for the comparable period in 2005, was
primarily due to an increase of $3.0 million in the sales
and lease ownership division. Retail sales represent sales of
both new and return rental merchandise.
The 40.5% increase in non-retail sales (which mainly represent
merchandise sold to our franchisees), to $64.0 million for
the three months ended March 31, 2006 from
$45.6 million for the comparable period in 2005, was due to
the growth of our franchise operations. The total number of
franchised sales and lease ownership stores at March 31,
2006 was 400, reflecting a net addition of 39 stores since
March 31, 2005.
The 14.4% increase in franchise royalties and fees, to
$8.2 million for the three months ended March 31, 2006
from $7.2 million for the comparable period in 2005,
primarily reflects an increase in royalty income from
franchisees, increasing 20.0% to $6.6 million as of
March 31, 2006 compared to $5.5 million as of
March 31, 2005. The increase in royalty income from
franchisees was partially offset by decreased franchise
19
and financing fee revenues. Revenues increased in this area
primarily due to the previously mentioned growth of stores and
an increase in certain royalty rates.
The 16.0% increase in other revenues, to $1.6 million for
the three months ended March 31, 2006 from
$1.4 million for the comparable period in 2005, primarily
was attributable to gains on the disposal of capital assets in
our sales and lease ownership division during the first three
months of 2006.
With respect to our major operating units, revenues for our
sales and lease ownership division increased 26.4%, to
$314.3 million for the three months ended March 31,
2006 from $248.7 million for the comparable period in 2005.
This increase was attributable to the sales and lease ownership
division adding 157 stores since March 31, 2005, combined
with same store revenue growth of 10.7% for the three months
ended March 31, 2006. The 7.6% increase in corporate
furnishings division revenues, to $33.0 million for the
three months ended March 31, 2006 from $30.7 million
for the comparable period in 2005, is primarily the result of
improving economic and business conditions.
Cost of Sales. Cost of sales from retail sales increased
15.6% to $12.4 million for the three months ended
March 31, 2006 from $10.7 million for the comparable
period in 2005, and as a percentage of retail sales, decreased
to 64.7% from 66.9% in 2006 and 2005, respectively. The decrease
in retail cost of sales as a percentage of retail sales was
primarily due to increased sales in our sales and lease
ownership division which are at higher margins than our
corporate furnishings division. Cost of sales from non-retail
sales increased 40.2% to $59.8 million for the three months
ended March 31, 2006 from $42.6 million for the
comparable period in 2005, and as a percentage of non-retail
sales, decreased to 93.4% from 93.6% in 2006 and 2005,
respectively. The increased margins on non-retail sales were
primarily the result of slightly higher margins on certain
products sold to franchisees.
Expenses. Operating expenses for the three months ended
March 31, 2006 increased $24.3 million to
$144.0 million from $119.6 million for the comparable
period in 2005, a 20.3% increase. As a percentage of total
revenues, operating expenses were 41.5% for the three months
ended March 31, 2006 and 42.8% for the comparable period in
2005. Operating expenses decreased as a percentage of total
revenues for the three months ended March 31, 2006, mainly
due to the maturing of new company-operated sales and lease
ownership stores, the 10.7% increase in same store revenues
previously mentioned and to a lesser extent due to an unusual
decrease in the non-retail sales category for the comparable
period in 2005, which can vary from quarter to quarter based on
product demand and availability.
Depreciation of rental merchandise increased $18.2 million
to $93.3 million for the three months ended March 31,
2006 from $75.1 million during the comparable period in
2005, a 24.2% increase. As a percentage of total rentals and
fees, depreciation of rental merchandise increased to 36.7% from
35.9% from quarter to quarter. The increase as a percentage of
rentals and fees was primarily due to increased depreciation
expense associated with an increase in the early payout of lease
ownership agreements in our sales and lease ownership division
and to a lesser extent a greater percentage of our rentals and
fees revenues coming from our sales and lease ownership
division, which depreciates its rental merchandise at a faster
rate than our corporate furnishings division.
Interest expense increased to $3.2 million for the three
months ended March 31, 2006, compared with
$1.6 million for the comparable period in 2005, a 101.4%
increase. The increase in interest expense was primarily due to
higher debt levels and to a lesser extent higher interest rates
in the first three months of 2006.
Income tax expense increased $1.9 million to
$13.1 million for the three months ended March 31,
2006 compared with $11.2 million for the comparable period
in 2005, representing a 16.7% increase. Aaron Rents
effective tax rate was 37.7% in 2006 compared with 37.8% in 2005.
Net Earnings. Net earnings increased $3.1 million to
$21.6 million for the three months ended March 31,
2006, compared with $18.4 million for the comparable period
in 2005, representing a 17.0% increase. As a percentage of total
revenues, net earnings were 6.2% for the three months ended
March 31, 2006 and 6.6% for the three months ended
March 31, 2005. The increase in net earnings was primarily
the result of the maturing of new company-operated sales and
lease ownership stores added over the past several
20
years, contributing to a 10.7% increase in same store revenues
and a 14.4% increase in franchise royalties and fees.
|
|
|
Year ended December 31, 2005 compared with year ended
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ | |
|
% Increase/ | |
|
|
Years ended December 31, | |
|
(decrease) in | |
|
(decrease) to | |
|
|
| |
|
dollars to 2005 | |
|
2005 from | |
|
|
2005 | |
|
2004 | |
|
from 2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals and fees
|
|
$ |
845,162 |
|
|
$ |
694,293 |
|
|
$ |
150,869 |
|
|
|
21.7 |
% |
|
Retail sales
|
|
|
58,366 |
|
|
|
56,259 |
|
|
|
2,107 |
|
|
|
3.7 |
|
|
Non-retail sales
|
|
|
185,622 |
|
|
|
160,774 |
|
|
|
24,848 |
|
|
|
15.5 |
|
|
Franchise royalties and fees
|
|
|
29,474 |
|
|
|
25,093 |
|
|
|
4,381 |
|
|
|
17.5 |
|
|
Other
|
|
|
6,881 |
|
|
|
10,061 |
|
|
|
(3,180 |
) |
|
|
(31.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,125,505 |
|
|
|
946,480 |
|
|
|
179,025 |
|
|
|
18.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail cost of sales
|
|
|
39,054 |
|
|
|
39,380 |
|
|
|
(326 |
) |
|
|
(0.8 |
) |
|
Non-retail cost of sales
|
|
|
172,807 |
|
|
|
149,207 |
|
|
|
23,600 |
|
|
|
15.8 |
|
|
Operating expenses
|
|
|
507,158 |
|
|
|
414,518 |
|
|
|
92,640 |
|
|
|
22.3 |
|
|
Depreciation of rental merchandise
|
|
|
305,630 |
|
|
|
253,456 |
|
|
|
52,174 |
|
|
|
20.6 |
|
|
Interest
|
|
|
8,519 |
|
|
|
5,413 |
|
|
|
3,106 |
|
|
|
57.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,033,168 |
|
|
|
861,974 |
|
|
|
171,194 |
|
|
|
19.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
92,337 |
|
|
|
84,506 |
|
|
|
7,831 |
|
|
|
9.3 |
|
Income taxes
|
|
|
34,344 |
|
|
|
31,890 |
|
|
|
2,454 |
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
57,993 |
|
|
$ |
52,616 |
|
|
$ |
5,377 |
|
|
|
10.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. The 18.9% increase in total revenues, to
$1.13 billion in 2005 from $946.5 million in 2004, is
primarily attributable to continued growth in our sales and
lease ownership division, from both the opening and acquisition
of new company-operated stores and improvement in same store
revenues. Revenues for our sales and lease ownership division,
including sales to franchisees, increased $173.7 million to
$1.00 billion in 2005 compared with $831.1 million in
2004, a 20.9% increase. This increase was attributable to an
8.3% increase in same store revenues and the addition of 248
company-operated sales and lease ownership stores since the
beginning of 2004.
The 21.7% increase in rentals and fees revenues, to
$845.2 million in 2005 from $694.3 million in 2004,
was attributable to a $143.1 million increase from our
sales and lease ownership division related to the growth in same
store revenues and the increase in the number of stores
described above. Rental revenues in our corporate furnishings
division increased $7.7 million, or 10.1%, to
$83.7 million in 2005 from $76.0 million in 2004 as a
result of generally improved economic conditions.
The 3.7% increase in revenues from retail sales, to
$58.4 million in 2005 from $56.3 million in 2004, was
primarily due to a $1.5 million increase from our corporate
furnishings division as a result of generally improved economic
conditions.
The 15.5% increase in non-retail sales, to $185.6 million
in 2005 from $160.8 million in 2004, reflects the
significant growth of our franchise operations. The total number
of franchised stores at December 31, 2005 was 392,
reflecting a net addition of 105 since the beginning of 2004.
Franchise royalties and fees increased to $29.5 million in
2005 from $25.1 million in 2004, a 17.5% improvement. The
increase primarily reflects higher royalty income from
franchisees, which increased
21
$3.8 million to $21.6 million in 2005 compared to
$17.8 million in 2004, with increased franchise and
financing fee revenues comprising the majority of the remainder.
Revenue increased in this area primarily due to the previously
mentioned growth of stores and an increase in certain royalty
rates.
The 31.6% decrease in other revenues, to $6.9 million in
2005 from $10.1 million in 2004, is primarily attributable
to recognition of a $5.5 million gain in 2004 on the sale
of our holdings of Rainbow Rentals, Inc. common stock in
connection with that companys merger with
Rent-A-Center, Inc.,
partially offset by the recognition of a $565,000 gain in 2005
on the sale of our holdings of Rent-Way, Inc. common stock. In
addition, included in other income in 2005 is $934,000 of
expected proceeds from business interruption insurance
associated with our operations in hurricane-affected areas.
Cost of Sales. Retail cost of sales decreased 0.8%, to
$39.1 million in 2005 from $39.4 million in 2004, with
retail cost of sales as a percentage of retail sales decreased
to 66.9% in 2005 from 70.0% in 2004, primarily due to higher
margins on certain retail sales in our sales and lease ownership
division.
Cost of sales from non-retail sales increased to
$172.8 million in 2005 from $149.2 million in 2004, a
15.8% increase, following the increase in non-retail sales
described above, with the margin on non-retail sales remaining
comparable between the periods.
Expenses. Operating expenses increased 22.3% to
$507.2 million in 2005 from $414.5 million in 2004.
The increase was due primarily to the growth of our sales and
lease ownership division described above. Operating expenses for
the year also included the write-off of $4.4 million of
rental merchandise and property destroyed or severely damaged by
Hurricanes Katrina and Rita, of which approximately
$1.9 million is expected to be covered by insurance
proceeds. The net pre-tax expense recorded for the year for
these damages was $2.5 million. As a percentage of
revenues, operating expenses increased to 45.1% in 2005 compared
to 43.8% in 2004.
The 20.6% increase in depreciation of rental merchandise, to
$305.6 million in 2005 from $253.5 million in 2004,
was driven by the growth of our sales and lease ownership
division described above. As a percentage of total rentals and
fees, depreciation of rental merchandise decreased slightly to
36.2% in 2005 from 36.5% in 2004.
Interest expense increased 57.4% to $8.5 million in 2005
from $5.4 million in 2004, primarily as a result of higher
debt levels, which increased by 81.6% at December 31, 2005
compared to December 31, 2004, coupled with increasing
rates on our revolving credit facility, partially offset by a
shift of our borrowings to a new private placement financing in
2005, which had lower rates.
The reduction in the effective tax rate to 37.2% in 2005
compared to 37.7% in 2004 is due to lower state income taxes,
including adjustments resulting from favorable state income
allocations in connection with the companys filing of its
2004 tax return. The tax provision reflects the
year-to-date effect of
such adjustments.
Net Earnings. Net earnings increased to
$58.0 million in 2005 from $52.6 million in 2004, a
10.2% improvement. The increase was primarily due to the
maturation of new company-operated sales and lease ownership
stores added over the past several years contributing to an 8.3%
increase in same store revenues, and a 17.5% increase in
franchise fees, royalty income, and other related franchise
income. As a percentage of total revenues, net earnings
decreased to 5.2% in 2005 from 5.6% in 2004 primarily related to
increased expenses in 2005 and merchandise losses due to
Hurricanes Katrina and Rita, as well as a $3.4 million
after-tax gain in 2004 on the sale of Rainbow Rentals, Inc.
common stock.
22
|
|
|
Year ended December 31, 2004 compared with year ended
December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ | |
|
% Increase/ | |
|
|
Year ended December 31, | |
|
(decrease) in | |
|
(decrease) to | |
|
|
| |
|
dollars to 2004 | |
|
2004 from | |
|
|
2004 | |
|
2003 | |
|
from 2003 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals and fees
|
|
$ |
694,293 |
|
|
$ |
553,773 |
|
|
$ |
140,520 |
|
|
|
25.4 |
% |
|
Retail sales
|
|
|
56,259 |
|
|
|
68,786 |
|
|
|
(12,527 |
) |
|
|
(18.2 |
) |
|
Non-retail sales
|
|
|
160,774 |
|
|
|
120,355 |
|
|
|
40,419 |
|
|
|
33.6 |
|
|
Franchise royalties and fees
|
|
|
25,093 |
|
|
|
19,328 |
|
|
|
5,765 |
|
|
|
29.8 |
|
|
Other
|
|
|
10,061 |
|
|
|
4,555 |
|
|
|
5,506 |
|
|
|
120.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
946,480 |
|
|
|
766,797 |
|
|
|
179,683 |
|
|
|
23.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail cost of sales
|
|
|
39,380 |
|
|
|
50,913 |
|
|
|
(11,533 |
) |
|
|
(22.7 |
) |
|
Non-retail cost of sales
|
|
|
149,207 |
|
|
|
111,714 |
|
|
|
37,493 |
|
|
|
33.6 |
|
|
Operating expenses
|
|
|
414,518 |
|
|
|
344,884 |
|
|
|
69,634 |
|
|
|
20.2 |
|
|
Depreciation of rental merchandise
|
|
|
253,456 |
|
|
|
195,661 |
|
|
|
57,795 |
|
|
|
29.5 |
|
|
Interest
|
|
|
5,413 |
|
|
|
5,782 |
|
|
|
(369 |
) |
|
|
(6.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
861,974 |
|
|
|
708,954 |
|
|
|
153,020 |
|
|
|
21.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
84,506 |
|
|
|
57,843 |
|
|
|
26,663 |
|
|
|
46.1 |
|
Income taxes
|
|
|
31,890 |
|
|
|
21,417 |
|
|
|
10,473 |
|
|
|
48.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
52,616 |
|
|
$ |
36,426 |
|
|
$ |
16,190 |
|
|
|
44.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. The 23.4% increase in total revenues, to
$946.5 million in 2004 from $766.8 million in 2003, is
primarily attributable to continued growth in our sales and
lease ownership division, from both the opening and acquisition
of new company-operated stores and improvement in same store
revenues. Revenues for our sales and lease ownership division
increased $174.6 million to $831.1 million in 2004
compared with $656.5 million in 2003, a 26.6% increase.
This increase was attributable to an 11.6% increase in same
store revenues and the addition of 204 company-operated
stores since the beginning of 2003.
The 25.4% increase in rentals and fees revenues, to
$694.3 million in 2004 from $553.8 million in 2003,
was attributable to a $139.8 million increase from our
sales and lease ownership division related to the growth in same
store revenues and the increase in the number of stores
described above. Rental revenues in our corporate furnishings
division increased $714,000 to $76.0 million in 2004 from
$75.3 million in 2003.
Revenues from retail sales fell to $56.3 million in 2004
from $68.8 million in 2003, a 18.2% decrease, due to a
decline of $11.6 million in our sales and lease ownership
division, which reflects a decreased focus on retail sales in
certain stores and the impact of the introduction of an
alternative shorter-term lease, which we believe replaced many
retail sales.
Non-retail sales increased to $160.8 million in 2004 from
$120.4 million in 2003, a 33.6% improvement. The increase
reflects the significant growth of our franchise operations.
This franchisee-related revenue growth is the result of the net
addition of 125 franchised stores since the beginning of 2003
and improving operating revenues at maturing franchised stores.
The 29.8% increase in franchise royalties and fees, to
$25.1 million in 2004 from $19.3 million in 2003,
primarily reflects an increase in royalty income from
franchisees, increasing $3.8 million to $17.8 million
in 2004 compared to $14.0 million in 2003, with increased
franchise and franchising fee revenues comprising the majority
of the remainder.
23
Other revenues were $10.1 million in 2004 compared with
$4.6 million in 2003, a 120.9% increase. The increase is
attributable to recognition of a $5.5 million gain on the
sale of our holdings of Rainbow Rentals, Inc. common stock
in connection with that companys merger with
Rent-A-Center, Inc.
Cost of Sales. The 22.7% decrease in retail cost of sales
to $39.4 million in 2004 compared with $50.9 million
in 2003 is primarily a result of a decrease in retail sales in
our sales and lease ownership division, for the same reasons
discussed under retail sales revenue above. Retail cost of sales
as a percentage of retail sales decreased to 70.0% in 2004 from
74.0% in 2003 due to the 2004 discontinuation of certain
low-margin retail sales.
Cost of sales from non-retail sales increased to
$149.2 million in 2004 from $111.7 million in 2003, a
33.6% increase, primarily due to the growth of our franchise
operations as described above, corresponding to the similar
increase in non-retail sales. As a percentage of non-retail
sales, non-retail cost of sales remained steady at 92.8% in both
2004 and 2003.
Expenses. Operating expenses increased to
$414.5 million in 2004 compared with $344.9 million in
2003. This 20.2% increase was due primarily to the growth of our
sales and lease ownership division described above. As a
percentage of total revenues, operating expenses improved to
43.8% for 2004 from 45.0% for 2003, with the decrease driven by
the maturing of new company-operated sales and lease ownership
stores added over the past several years and an 11.6% increase
in same store revenues.
As explained in our discussion of critical accounting policies
above, effective September 30, 2004, we began recording
rental merchandise carrying value adjustments on the allowance
method rather than the direct write-off method. In connection
with the change of methods, we recorded a
catch-up adjustment of
$2.5 million to establish a rental merchandise allowance
reserve. We expect rental merchandise adjustments in the future
under this new method to be materially consistent with
adjustments under the former method. In addition, as discussed
above, the revision of certain estimates related to our accrual
for group health self-insurance resulted in a reduction in
expenses of $1.4 million in 2004, partially offsetting the
merchandise allowance reserve expense.
The 29.5% increase in depreciation of rental merchandise, to
$253.5 million in 2004 from $195.7 million in 2003,
was driven by the growth of our sales and lease ownership
division described above. As a percentage of total rentals and
fees, depreciation of rental merchandise increased slightly to
36.5% in 2004 from 35.3% in 2003. The increase as a percentage
of rentals and fees reflects increased depreciation expense as a
result of a larger number of short-term leases in 2004 as
described above under retail sales.
The decrease in interest expense as a percentage of total
revenues is primarily due to the growth of our sales and lease
ownership division related to increased same-store revenues and
store count described above.
The 48.9% increase in income tax expense between years is
primarily attributable to a comparable increase in pre-tax
income, in addition to a slightly higher effective tax rate of
37.7% in 2004 compared to 37.0% in 2003 arising from higher
state income taxes.
Net Earnings. Net earnings in 2004 were
$52.6 million compared with $36.4 million in 2003, a
44.4% improvement. The increase was primarily due to the
maturing of company-operated sales and lease ownership stores
opened and acquired over the past several years, an 11.6%
increase in same store revenues, a 29.8% increase in franchise
fees, royalty income, and other related franchise income, and
the recognition of a $3.4 million after-tax gain on the
sale of Rainbow Rentals, Inc. common stock. As a percentage of
total revenues, net earnings improved to 5.6% in 2004 from 4.8%
in 2003.
Balance Sheet
Cash. Our cash balance decreased to $6.2 million at
March 31, 2006 from $7.0 million at December 31,
2005. The decrease between periods is the result of normal
fluctuations in our cash balances that are the result of timing
differences between when our stores deposit cash and when that
cash is available for application against borrowings outstanding
under our revolving credit facility. For additional information,
refer to the Liquidity and Capital Resources section
below.
24
Rental Merchandise. The increase of $18.2 million in
rental merchandise, net of accumulated depreciation, to
$569.1 million at March 31, 2006 from
$550.9 million at December 31, 2005, is primarily the
result of a net increase of 16 company-operated sales and
lease ownership stores and one fulfillment center since
December 31, 2005 and the continued revenue growth of
existing company-operated stores.
Goodwill and Other Intangibles. The $1.9 million
increase in goodwill and other intangibles, to
$103.0 million at March 31, 2006 from
$101.1 million at December 31, 2005, is the result of
a series of acquisitions of sales and lease ownership
businesses, net of amortization of certain finite-life
intangible assets. The aggregate purchase price for these asset
acquisitions totaled $3.2 million, with the principal
tangible assets acquired consisting of rental merchandise and
certain fixtures and equipment.
Prepaid Expenses and Other Assets. Prepaid expenses and
other assets increased $3.4 million to $26.4 million
at March 31, 2006 from $23.0 million at
December 31, 2005. The increase is, in part, the result of
a $1.5 million increase in prepaid advertising in the sales
and lease ownership division.
Accounts Payable and Accrued Expenses. Accounts payable
and accrued expenses increased $8.9 million to
$121.7 million at March 31, 2006 from
$112.8 million at December 31, 2005. The increase
between periods is primarily the result of increased trade
payables associated with the purchase of rental merchandise
which, as previously discussed, increased $18.2 million,
net of accumulated depreciation, between March 31, 2006 and
December 31, 2005.
Deferred Income Taxes Payable. The decrease of
$1.8 million in deferred income taxes payable to
$73.4 million at March 31, 2006 from
$75.2 million at December 31, 2005 is primarily the
result of previously benefiting from the additional first-year
or bonus depreciation allowance under
U.S. federal income tax law, which generally allowed the
company to accelerate the depreciation on rental merchandise it
acquired after September 10, 2001 and placed in service
prior to January 1, 2005. Aaron Rents anticipates having to
make future tax payments on its income as a result of expected
profitability and the taxes that are now due on accelerated or
bonus depreciation deductions that were taken in
prior periods.
Credit Facilities and Senior Notes. The
$11.3 million decrease in the amounts we owe under our
credit facilities and senior notes to $200.6 million at
March 31, 2006 from $211.9 million at
December 31, 2005, reflects net payments under our
revolving credit facility during the first three months of 2006
with cash generated from operations.
Liquidity and Capital Resources
General
Cash flows (used by) and generated from operating activities for
the three months ended March 31, 2006 and the years ended
December 31, 2005 and 2004 were $16.4 million,
$(6.5) million and $34.7 million, respectively. Our
primary capital requirements consist of buying merchandise for
both company-operated sales and lease ownership and corporate
furnishings stores. As Aaron Rents continues to grow, the need
for additional merchandise will continue to be our major capital
requirement. These capital requirements historically have been
financed through:
|
|
|
|
|
cash flow from operations; |
|
|
|
bank credit; |
|
|
|
trade credit with vendors; |
|
|
|
proceeds from the sale of rental return merchandise; |
|
|
|
private debt offerings; and |
|
|
|
stock offerings. |
At March 31, 2006, $81.0 million was outstanding under
our revolving credit agreement. The credit facilities balance
decreased $11.3 million in the first three months of 2006
as a result of net payments made under our credit facility
during the period with cash generated from operations. The
decrease in borrowings is
25
primarily attributable to strong operating cash flows. Our
revolving credit agreement provides for maximum borrowings of
$140.0 million and expires on May 28, 2008. We have
$40.0 million currently outstanding in aggregate principal
amount of 6.88% senior unsecured notes due August 2009, the
first principal repayments for which were due and paid in 2005
in the aggregate amount of $10.0 million. Additionally, we
have $60.0 million currently outstanding in aggregate
principal amount of 5.03% senior unsecured notes due July
2012, principal repayments for which are first required in 2008.
From time to time, we use interest rate swap agreements as part
of our overall long-term financing program. See note D to
the audited consolidated financial statements.
Our revolving credit agreement, senior unsecured notes and the
construction and lease facility and franchisee loan program
discussed below, contain financial covenants which, among other
things, forbid us from exceeding certain debt to equity levels
and require us to maintain minimum fixed charge coverage ratios.
If we fail to comply with these covenants, we will be in default
under these agreements, and all amounts would become due
immediately. We were in compliance with all these covenants at
March 31, 2006 and anticipate remaining in compliance for
the foreseeable future.
We purchase our common shares in the market from time to time as
authorized by our board of directors. As of March 31, 2006,
Aaron Rents was authorized by its board of directors to purchase
up to an additional 2,670,502 common shares under previously
approved resolutions.
We have a consistent history of paying dividends, having paid
dividends for 19 consecutive years. Dividends are paid
quarterly, on both our common stock and Class A common
stock. Our board of directors increased the dividend 7.7% for
the third quarter of 2005 on August 4, 2005 to
$.014 per share from the previous quarterly dividend of
$.013 per share. Total cash outlay for dividends was
$698,000 for the three months ended March 31, 2006 and
$2.6 million and $2.0 million for the years ended
December 31, 2005 and 2004, respectively. The payment for
the fourth quarter of 2005 was paid in January 2006. Subject to
sufficient operating profits, any future capital needs and other
contingencies, we currently expect to continue our policy of
paying dividends.
If we achieve our expected level of growth in our operations, we
anticipate we will supplement our expected cash flows from
operations, existing credit facilities, vendor credit and
proceeds from the sale of rental return merchandise by expanding
our existing credit facilities, by securing additional debt
financing or by seeking other sources of capital, such as this
offering, to ensure we will be able to fund our capital and
liquidity needs for at least the next 24 months. We believe
we can secure these additional sources of liquidity in the
ordinary course of business.
Construction and Lease Facility. On October 31,
2001, we renewed our $25.0 million construction and lease
facility. From 1996 to 1999, we arranged for a bank holding
company to purchase or construct properties identified by us
pursuant to this facility, and we subsequently leased these
properties from the bank holding company under operating lease
agreements. The total amount advanced and outstanding under this
facility at March 31, 2006 was $24.5 million. Since
the resulting leases are accounted for as operating leases, we
do not record any debt obligation on our balance sheet. This
construction and lease facility expires in November 2006. Lease
payments fluctuate based upon current interest rates and are
generally based upon LIBOR plus 135 basis points. The lease
facility contains residual value guarantee and default guarantee
provisions that would require us to make payments to the lessor
if the underlying properties are worth less at termination of
the facility than agreed upon values in the agreement. Although
we believe the likelihood of funding to be remote, the maximum
guarantee obligation under the residual value and default
guarantee provisions upon termination are $20.9 million and
$24.5 million, respectively, at March 31, 2006.
Income Taxes. During the three months ended
March 31, 2006, we made $2.0 million in income tax
payments. Within the next nine months, we anticipate that we
will make cash payments for income taxes totaling approximately
$38.0 million. During 2005, we made $51.2 million in
income tax payments. Aaron Rents has benefited in the past from
the additional first-year or bonus depreciation
allowance under U.S. federal income tax law, which
generally allowed us to accelerate the depreciation on rental
merchandise
26
we acquired after September 10, 2001 and placed in service
prior to January 1, 2005. We anticipate having to make
future tax payments on our income as a result of expected
profitability and the taxes that are now due on accelerated or
bonus depreciation deductions that were taken in
prior periods.
Leases. We lease warehouse and retail store space for
substantially all of our operations under operating leases
expiring at various times through 2021. Most of the leases
contain renewal options for additional periods ranging from one
to 15 years or provide for options to purchase the related
property at predetermined purchase prices that do not represent
bargain purchase options. We also lease transportation and
computer equipment under operating leases expiring during the
next five years. We expect that most leases will be renewed or
replaced by other leases in the normal course of business.
We have 23 capital leases, 21 of which are with limited
liability companies, or LLCs, whose owners include certain Aaron
Rents executive officers and our controlling shareholder.
Eleven of these related party leases relate to properties
purchased from Aaron Rents in October and November 2004 by one
of the LLCs for a total purchase price of $6.8 million.
This LLC is leasing back these properties to Aaron Rents for a
15-year term, with a
five-year renewal at the companys option, at an aggregate
annual rental of $883,000. Another ten of these related party
leases relate to properties purchased from Aaron Rents in
December 2002 by one of the LLCs for a total purchase price of
approximately $5.0 million. This LLC is leasing back these
properties to Aaron Rents for a
15-year term at an
aggregate annual rental of $572,000.
The other related party capital lease relates to a property sold
by Aaron Rents to a second LLC for $6.3 million in April
2002 and leased back to Aaron Rents for a
15-year term at an
annual rental of $681,000. See note D to the audited
consolidated financial statements. None of the sale transactions
resulted in any gain or loss in our financial statements, and we
did not change the basis of the assets subject to the leases.
These transactions were accounted for as financings.
We finance a portion of our store expansion through
sale-leaseback transactions. The properties are sold at net book
value and the resulting leases qualify and are accounted for as
operating leases. We do not have any retained or contingent
interests in the stores nor do we provide any guarantees, other
than a corporate level guarantee of lease payments, in
connection with the sale-leasebacks. The operating leases that
resulted from these transactions are included in the table below.
Franchise Loan Guaranty. We have guaranteed the
borrowings of certain independent franchisees under a franchise
loan program with several banks with a maximum commitment amount
of $115.0 million, and we also guarantee franchisee
borrowings under certain other debt facilities. In the event
these franchisees are unable to meet their debt service payments
or otherwise experience an event of default, we would be
unconditionally liable for a portion of the outstanding balance
of the franchisees debt obligations, which would be due in
full within 90 days of the event of default. At
March 31, 2006, the portion that we might be obligated to
repay in the event our franchisees defaulted was
$105.6 million. Of this amount, approximately
$80.6 million represents franchisee borrowings outstanding
under the franchise loan program and approximately
$25.0 million represents franchisee borrowings that we
guarantee under other debt facilities. However, due to
franchisee borrowing limits, we believe any losses associated
with any defaults would be mitigated through recovery of rental
merchandise and other assets. Since its inception in 1994, we
have had no significant losses associated with the franchise
loan program, or with any other franchise guarantees. We believe
the likelihood of any significant amounts being funded in
connection with these commitments to be remote.
We have no long-term commitments to purchase merchandise. See
note F to the audited consolidated financial statements for
further information.
27
Contractual Obligations and Commitments. The following
table shows our approximate contractual obligations, including
interest, and commitments to make future payments as of
March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period less | |
|
Period 2-3 | |
|
Period 4-5 | |
|
Period over | |
|
|
Total | |
|
than 1 year | |
|
years | |
|
years | |
|
5 years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Credit facilities, excluding capital leases
|
|
$ |
184,366 |
|
|
$ |
10,004 |
|
|
$ |
125,048 |
|
|
$ |
34,012 |
|
|
$ |
15,302 |
|
Capital leases
|
|
|
16,244 |
|
|
|
645 |
|
|
|
1,681 |
|
|
|
2,095 |
|
|
|
11,823 |
|
Operating leases
|
|
|
244,216 |
|
|
|
67,576 |
|
|
|
94,264 |
|
|
|
41,517 |
|
|
|
40,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$ |
444,826 |
|
|
$ |
78,225 |
|
|
$ |
220,993 |
|
|
$ |
77,624 |
|
|
$ |
67,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows our approximate commercial commitments
as of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
|
|
|
|
|
|
|
|
|
amounts | |
|
Period less | |
|
Period 2-3 | |
|
Period 4-5 | |
|
Period over | |
|
|
committed | |
|
than 1 Year | |
|
years | |
|
years | |
|
5 years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Guaranteed borrowings of franchisees
|
|
$ |
105,577 |
|
|
$ |
105,577 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
Residual value guarantee under operating leases
|
|
|
20,858 |
|
|
|
20,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments
|
|
$ |
126,435 |
|
|
$ |
126,435 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase orders or contracts for the purchase of rental
merchandise and other goods and services are not included in the
table above. We are not able to determine the aggregate amount
of such purchase orders that represent contractual obligations,
as purchase orders may represent authorizations to purchase
rather than binding agreements. Our purchase orders are based on
our current distribution needs and are fulfilled by our vendors
within short time horizons. We do not have significant
agreements for the purchase of rental merchandise or other goods
specifying minimum quantities or set prices that exceed our
expected requirements for three months.
Market Risk
From time-to-time, we
manage our exposure to changes in short-term interest rates,
particularly to reduce the impact on our variable payment
construction and lease facility and floating-rate borrowings, by
entering into interest rate swap agreements. These swap
agreements involve the receipt of amounts by us when floating
rates exceed the fixed rates and the payment of amounts by us to
the counterparties when fixed rates exceed the floating rates in
the agreements over their term. We accrue the differential we
may pay or receive as interest rates change, and recognize it as
an adjustment to the floating rate interest expense related to
our debt. The counterparties to these contracts are high credit
quality commercial banks, which we believe largely minimizes the
risk of counterparty default. At March 31, 2006 we did not
have any swap agreements.
We do not use any market risk sensitive instruments to hedge
commodity, foreign currency or risks other than interest rate
risk, and we hold no market risk sensitive instruments for
trading or speculative purposes.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting Standards, or
SFAS, No. 151, Inventory Costs, an amendment of ARB
No. 43, Chapter 4, or SFAS 151. SFAS 151
amends ARB 43, Chapter 4, to clarify that abnormal amounts
of idle facility expense, freight, handling costs and wasted
materials (spoilage) should be recognized as current-period
charges. In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be
28
based on the normal capacity of the production facilities. We
adopted SFAS 151 effective January 1, 2006, and the
impact was not material.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a replacement
of APB Opinion No. 20 and FASB Statement No. 3, or
SFAS 154. SFAS 154 replaces APB Opinion No. 20,
Accounting Changes and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements, and
changes the requirements for the accounting for and reporting of
a change in accounting principle. SFAS 154 applies to all
voluntary changes in an accounting principle. It also applies to
changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific
transition provisions. SFAS 154 is effective for accounting
changes and error corrections occurring in fiscal years
beginning after December 15, 2005. The adoption of
SFAS 154 did not have a material effect on our financial
position or results of operations.
Effective January 1, 2006, we adopted the fair value
recognition provisions issued by the FASB under
SFAS No. 123R, Share-Based Payment, using the
modified prospective application method. Under this transition
method, compensation expense recognized in the quarter ended
March 31, 2006 includes the applicable amounts of
compensation expense of all stock-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original
provisions of SFAS 123, Accounting for Stock-Based
Compensation, and previously presented in pro forma footnote
disclosures. Refer to note A to our unaudited consolidated
financials statements for the three months ended March 31,
2006 for further information on the impact of adoption.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments, or
SFAS 155. SFAS 155 allows any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities,
to be carried at fair value in its entirety, with changes in
fair value recognized in earnings. In addition, SFAS 155
requires that beneficial interests in securitized financial
assets be analyzed to determine whether they are freestanding
derivatives or contain an embedded derivative. SFAS 155
also eliminates a prior restriction on the types of passive
derivatives that a qualifying special purpose entity is
permitted to hold. SFAS 155 is applicable to new or
modified financial instruments in fiscal years beginning after
September 15, 2006, though the provisions related to fair
value accounting for hybrid financial instruments can also be
applied to existing instruments. Early adoption, as of the
beginning of an entitys fiscal year, is also permitted,
provided interim financial statements have not yet been issued.
The adoption of SFAS 155 is not anticipated to have a
material effect on our financial position or results of
operations.
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets, an
amendment of FASB Statement No. 140, or SFAS 156.
SFAS 156 amends SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, with respect to the accounting for
separately recognized servicing assets and servicing
liabilities. SFAS 156 requires that all separately
recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. It also
permits, but does not require, the subsequent measurement of
servicing assets and servicing liabilities at fair value. The
adoption of SFAS 156 is not anticipated to have a material
effect on the companys financial position or results of
operations.
29
BUSINESS
General
Aaron Rents is a leading specialty retailer of consumer
electronics, computers, residential and office furniture,
household appliances and accessories. We engage in the lease
ownership, rental and retail sale of a wide variety of products
such as widescreen, LCD and plasma televisions, computers,
living room, dining room and bedroom furniture, washers, dryers
and refrigerators. We carry well-known brands such as JVC,
Mitsubishi, Philips, RCA, Sony, Dell, Hewlett-Packard,
La-Z-Boy, Simmons,
Frigidaire, General Electric and Maytag.
As of March 31, 2006, we had 1,164 Aarons
Sales & Lease Ownership stores, comprised of
764 company-operated stores in 34 states and Puerto
Rico and 400 independently-owned franchised stores in
43 states and Canada. We have added
501 company-operated and 207 franchised sales and lease
ownership stores since the beginning of 2001. In addition, we
operate the Aarons Corporate Furnishings division, which
rents residential and office furniture through
59 company-operated stores in 16 states as of
March 31, 2006. Our MacTavish Furniture Industries division
manufactures and supplies nearly one-half of the furniture and
related accessories leased and sold in our stores.
We have a long history of revenue growth and profitability.
Total revenues increased to $1.13 billion in 2005 from
$546.7 million in 2001, representing a 19.8% compound
annual growth rate. Our total net earnings increased to
$58.0 million in 2005 from $12.3 million in 2001,
representing a 47.2% compound annual growth rate. Total revenues
for the three months ended March 31, 2006 were
$347.3 million, an increase of $67.9 million, or
24.3%, over the comparable period in 2005.
An overview of our three divisions follows.
Aarons Sales & Lease Ownership. Our
sales and lease ownership division focuses on providing durable
household goods to lower to middle income consumers who have
limited or no access to traditional credit sources such as bank
financing, installment credit or credit cards. Our sales and
lease ownership program enables these customers to obtain
quality-of-life
enhancing merchandise that they might otherwise not be able to
afford, without incurring additional debt or long-term
obligations.
We franchise our sales and lease ownership stores in select
markets where we have no immediate plans to enter. Our franchise
program:
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allows us to grow more quickly; |
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enables us to achieve economies of scale in purchasing,
distribution, manufacturing and advertising for our sales and
lease ownership stores; |
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increases exposure to our brand; and |
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provides additional revenues from franchise fees and royalties. |
We opened 82 company-operated and 71 franchised sales and
lease ownership stores in 2005. We estimate that we will open
approximately 90 company-operated sales and lease ownership
stores in 2006 and will seek selective acquisitions. We
anticipate that our franchisees will open approximately 65
franchised sales and lease ownership stores in 2006.
Aarons Corporate Furnishings. Our corporate
furnishings division rents new and rental return merchandise to
individuals and businesses, with a focus on renting residential
and office furniture to business customers. We have been in the
corporate furnishings business (referred to in the industry as
rent-to-rent)
for over 50 years and believe we are the second largest
corporate furnishings company in the United States.
Business customers, who represent an increasing portion of
rental customers, rent residential furniture in order to provide
furnishings for relocated employees or those on temporary
assignment. Business customers also enter into rental agreements
for office furniture to meet seasonal, temporary or
start-up needs. At
March 31, 2006, we had 59 company-operated stores in
16 states.
30
MacTavish Furniture Industries. Aaron Rents is the
only major furniture rental company in the United States
that manufactures its own furniture. We operate six furniture
plants, four bedding facilities and two lamp manufacturing
facilities. By manufacturing our own specially designed
residential and office furniture through our MacTavish Furniture
Industries division, we believe we enjoy an advantage over many
of our competitors. Manufacturing enables us to control the
quality, cost, delivery, styling, durability and quantity of our
furniture rental merchandise.
Industry Overview
The rent-to-own
industry offers customers an alternative to traditional methods
of obtaining electronics, computers, home furnishings and
appliances. According to the Association of Progressive Rental
Organizations, or APRO, there are approximately
8,300 rent-to-own
stores in the United States that serve more than
2.7 million households. Annual industry-wide revenues are
believed to be approximately $6.6 billion in the United
States.
In a typical
rent-to-own
transaction, the customer has the option to acquire merchandise
over a fixed term, usually 12 to 24 months, normally 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. If the customer rents the
item to the full term, he obtains ownership of the item, though
he can choose to buy it at any time.
The rent-to-own concept
is particularly popular with consumers who cannot pay the full
purchase price for merchandise at once or who lack the credit to
qualify under conventional financing programs. According to
APRO, approximately 73% of
rent-to-own customers
have incomes between $15,000 and $50,000 per year and 95%
are estimated to have high school diplomas.
Rent-to-own 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 want to try out a particular brand or model
before buying it.
According to an April 2000 Federal Trade Commission study, 75%
of rent-to-own
customers were satisfied with their experience with
rent-to-own
transactions. The study noted that customers gave a wide variety
of reasons for their satisfaction, including the ability
to obtain merchandise they otherwise could not, the low
payments, the lack of a credit check, the convenience and
flexibility of the transaction, the quality of the merchandise,
the quality of the maintenance, delivery, and other services,
the friendliness and flexibility of the store employees, and the
lack of any problems or hassles.
We believe that the decline in the number of furniture stores
and the limited number of retailers that focus on credit
installment sales to lower and middle income consumers has
created a market opportunity for our unique sales and lease
ownership concept. The traditional retail consumer durable goods
market is much larger than the rental market, leaving
substantial potential for growth for our sales and lease
ownership division. We believe that the segment of the
population targeted by our sales and lease ownership division
comprises approximately 50% of all households in the United
States and that the needs of these consumers are generally
underserved.
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Aarons Sales & Lease Ownership versus
Traditional
Rent-to-Own |
We believe that our sales and lease ownership model is unique.
By providing customers with the option either to lease
merchandise with the opportunity to obtain ownership or to
purchase merchandise outright, we blend elements of
rent-to-own and
traditional retailing. We enable cash or credit-constrained
customers to obtain
quality-of-life
enhancing merchandise that they otherwise might not be able to
afford without incurring additional debt or long-term
obligations. In addition to these core customers, our concept is
also popular with consumers who have only a temporary need for
the merchandise or want to try out a particular brand or model
before purchase. We believe our sales and lease ownership
program is a more effective method of retailing our merchandise
to lower to middle income consumers than a typical
rent-to-own business or
the more traditional method of credit installment sales.
31
Our sales and lease ownership model is also distinctive from a
typical rent-to-own
business in that we encourage our customers to obtain ownership
of their rental merchandise. Based on industry data, we believe
that more of the initial renters of our merchandise (over 45%)
obtain ownership versus
rent-to-own businesses
in general (approximately 25%). We believe our sales and lease
ownership model offers the following unique characteristics
versus traditional
rent-to-own stores:
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Lower total cost our agreement terms
typically provide a lower cost of ownership to the customer. |
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Wider merchandise selection we
generally offer a larger selection of higher-quality merchandise. |
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Larger store layout our stores are
typically 9,000 square feet, nearly twice the size of
typical rent-to-own
stores. |
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Fewer payments our typical plan offers
semi-monthly or monthly payments versus the industry standard of
weekly payments. Our agreements also usually provide for a
shorter term until the customer obtains ownership. |
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Flexible payment methods we offer our
customers the opportunity to pay by cash, check, credit card or
debit card, compared with the more common cash payment method at
rent-to-own stores. We
receive approximately 47% of our payment volume (in dollars)
from customers by check, credit card or debit card. |
We believe our sales and lease ownership model also has
attractive features in common with traditional retailers. Among
these features are store size, merchandise selection and the
latest product offerings, such as
state-of-the-art
electronics and computers. As technology has advanced and home
furnishings and appliances have evolved, we have strived to
offer our customers the latest product developments at
affordable prices. Although the categories of products we offer
have remained substantially the same over the years, we have
experienced a percentage increase in revenues from electronics
and computers in our sales and lease ownership division.
In addition, our sales and lease ownership stores offer an
up-front cash and carry purchase option on select
merchandise at prices that are competitive with discount and
traditional retailers. However, unlike transactions with most
traditional retailers, where the customer is committed to
purchase the merchandise, our sales and lease ownership
transactions are not credit installment contracts, and the
customer may elect to terminate the transaction after a short
initial rental period.
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The Rent-to-Rent
Industry |
We believe the furniture component of the
rent-to-rent industry
is greater than $600 million in annual revenues. The demand
for rental products is believed to be related to the mobility of
the population, which relies upon rented merchandise to meet
temporary needs. The industry is highly competitive and has
consolidated, with only a handful of companies accounting for a
substantial share of the market.
The rent-to-rent
industry serves both individual and business customers who
generally have immediate, temporary needs for residential or
office furniture but who usually do not seek to own the
merchandise. Residential furniture and accessories are rented to:
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individuals seeking to rent furnishings for their own homes and
apartments; |
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apartment complex managers seeking to provide furnished
apartments; and |
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third party companies that provide interim housing for their
corporate clients. |
Office furniture 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, a term 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.
32
Operating Strategies
Our operating strategies are focused on differentiation from our
competitors and improved efficiencies. We strive to:
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Differentiate our Aarons Sales & Lease
Ownership concept. We believe that the success of our
sales and lease ownership operation is attributable to our
distinctive approach to the business that sets us apart from our
rent-to-own and credit
retail competitors. We have pioneered innovative approaches to
meeting changing customer needs that differ from our
competitors, such as offering lease ownership agreements
which result in a lower all-in price, larger and
more attractive store showrooms, a wider selection of
higher-quality merchandise and up-front cash and carry purchase
options on select merchandise at prices that are competitive
with traditional retailers. Most sales and lease ownership
customers make their payments in person, and we use these
frequent visits to strengthen customer relationships and make
these customers feel welcome in our stores. |
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Offer high levels of customer service and
satisfaction. We foster good relationships with our
customers to attract recurring business and encourage them to
rent merchandise for the full agreement term by providing high
levels of service and satisfaction. We demonstrate our
commitment to superior customer service by providing customers
quick delivery of rented merchandise, in many cases by same or
next day delivery, and repair service at no charge to the
customer. We have also established an employee training program
called Aarons University, which is a 30-course curriculum
designed to enhance the customer relations skills of both
company-operated and franchised store managers. |
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Promote our vendors and the Aarons brand
name. Our marketing programs target the prime customer
base for our products, such as our brand name Dream
Products merchandise, which we advertise through our
Drive Dreams Home sponsorship of NASCAR championship
racing. Sponsorship of other sporting events, such as arena
football, NBA basketball, major league baseball and various
college sports, also reaches this market. We typically
distribute mass mailings of promotional material outlining
specific products every two weeks, with the goal of reaching
households within a specified radius of each store at least 24
times per year. We currently mail over 20 million flyers
monthly to consumers in areas served by our stores. We also
utilize local television and radio advertising in concentrated
geographic markets and for special promotions. |
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Manage merchandise through our manufacturing and
distribution capabilities. We believe that our furniture
manufacturing operations and network of 16 fulfillment centers
at March 31, 2006 give us a strategic advantage over our
competitors. Manufacturing enables us to control the quality,
cost, delivery, styling, durability and quantity of a
substantial portion of our furniture merchandise, and provides
us a reliable source of furniture. Our distribution system
allows us to deliver merchandise promptly to our stores in order
to meet customer demand quickly and manage inventory levels more
effectively. We expect to open one additional fulfillment center
in 2006. |
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Utilize proprietary management information
systems. We use proprietary computerized information
systems to pursue systematically collections and merchandise
returns and to match inventory with demand. Each of our stores,
including franchised sales and lease ownership stores, is linked
by computer directly to our corporate headquarters, which
enables us to monitor the performance of each store on a daily
basis. Our separate systems are tailored to meet the distinct
needs of our sales and lease ownership and corporate furnishings
operations. |
Growth Strategies
We seek to increase our revenues and profitability through the
execution of our growth strategies, which are to:
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Open additional company-operated sales and lease ownership
stores. We plan to open sales and lease ownership stores
in existing and select new geographic markets. Additional stores
help us to realize economies of scale in purchasing, management,
marketing and distribution. We opened 82 company- |
33
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operated store locations in 2005 and expect to open
approximately 90 company-operated stores in 2006. |
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Increase our sales and lease ownership franchises.
We believe that our franchise program allows us to grow more
quickly and increase our brand exposure in new markets. In
addition, the combination of company-operated and franchised
stores creates a larger store base that enhances the economies
of scale in purchasing, distribution, manufacturing and
advertising for our sales and lease ownership stores. Franchise
fees and royalties also represent a growing source of company
revenues. In 2005, we opened 71 franchised locations and had a
pipeline at March 31, 2006 of 250 franchise stores
scheduled to open over the next few years. We anticipate our
franchisees will open approximately 65 franchised sales and
lease ownership stores in 2006. |
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Increase revenues and net earnings from existing sales and
lease ownership stores. We experienced same store
revenue growth for our existing company-operated sales and lease
ownership stores of 12.8% in 2003, 11.6% in 2004, 8.3% in 2005
and 10.7% for the first quarter of 2006. We calculate same store
revenue growth by comparing revenues from comparable periods for
all stores open during the entirety of those periods, excluding
stores that received rental agreements from other acquired,
closed or merged stores. We expect revenues and net earnings of
our sales and lease ownership division to continue to grow as
the large number of stores opened in the past few years become
more established. |
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Seek selective acquisitions in both new and existing sales
and lease ownership markets. We will continue to explore
acquisitions of other
rent-to-own operations
and select company franchisees from time to time. In 2005, we
acquired the rental agreements, merchandise and assets of 96
sales and lease ownership locations. Some of these locations
were subsequently merged with existing locations, resulting in
56 new stores. |
Operations
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Sales and Lease Ownership |
We established our Aarons Sales & Lease Ownership
operation in 1987. At March 31, 2006, we had
764 company-operated sales and lease ownership stores in
34 states and Puerto Rico and 400 franchised sales and
lease ownership stores in 43 states and Canada.
We have developed a distinctive concept for our sales and lease
ownership stores with specific merchandising, store layout,
pricing, and agreement terms for our target customer market. We
believe that these features create a store and a sales and lease
ownership concept significantly different from the operations of
rent-to-own stores, our
traditional corporate furnishings
(rent-to-rent)
business, and the operations of consumer electronics and home
furnishings retailers who finance merchandise.
The typical Aarons Sales & Lease Ownership store
layout is 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 locations for new sales and
lease ownership stores, we generally look for sites in
well-maintained strip shopping centers with good access, which
are strategically located within ten miles of established
working class neighborhoods and communities. We also build to
suit stand alone stores in certain markets. Many of our stores
are placed near existing competitors stores. Each sales
and lease ownership store usually maintains at least two trucks
and crews for pickups and deliveries and generally offers same
or next day delivery for addresses located within ten miles of
the store. We emphasize a broad selection of brand name
electronics, computers and appliances, and offer customers a
wide selection of furniture, including furniture manufactured by
our MacTavish Furniture Industries division. Our sales and lease
ownership stores also offer lawn tractors and jewelry.
We believe that our sales and lease ownership stores offer lower
merchandise prices than similar items offered by traditional
rent-to-own operators,
and substantially equivalent to the all-in contract
price of similar items offered by retailers who finance
merchandise. Approximately 71% of our sales and lease ownership
agreements are monthly and approximately 28% are semi-monthly as
compared to the industry standard of weekly agreements, and our
agreements usually provide for a shorter term leading to
customer ownership. Customers can have the item serviced free of
charge or replaced at any time during the rental
34
agreement. We re-rent or sell merchandise that customers return
to us prior to the expiration of their agreements. We also
offer, for select merchandise, an up-front cash and carry
purchase option at prices that are competitive with discount and
traditional retailers.
During the later part of 2004, we opened two experimental stores
under the RIMCO name that lease automobile tires and rims to
customers under sales and lease ownership agreements. Although
the products offered are different, these stores are managed,
monitored and operated similar to our other sales and lease
ownership stores. At March 31, 2006, we had nine RIMCO
stores open and expect to expand this business during 2006 by
opening additional company-operated stores as well as several
franchised stores.
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Sales and Lease Ownership Franchise Program |
We began franchising Aarons Sales & Lease
Ownership stores in select markets in 1992 and have continued to
attract franchisees. Our franchised stores do not compete with
company-operated stores, nor do we anticipate any such
competition, as we mainly award franchises in markets where we
have no operations and no current plans to enter. As of
March 31, 2006, we had 400 franchised stores open and area
development agreements with franchisees to open 250 stores in
the future. We believe that our relations with our franchisees
are generally good.
Franchisees are approved on the basis of the applicants
business background and financial resources. We generally seek
franchisees who will enter into area 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.
We enter into franchise agreements with our franchisees to
govern the opening and operation of franchised stores. Under our
current standard agreement, we require the franchisee to pay a
franchise fee of $50,000 per store. Agreements are for a
term of ten years, with one ten-year renewal option, and
franchisees are obligated to remit to us royalty payments of 5%
or 6% of the franchisees weekly cash collections. The
royalty payments increased from 5% to 6% for all franchise
agreements entered into or renewed after December 31, 2002.
We assist each franchisee in selecting the proper site for each
store. Because of the importance of location to the Aarons
Sales & Lease Ownership concept, one of our pre-opening
directors visits the intended market and helps guide the
franchisee through the selection process. Once a site is
selected, we help in designing the floor plan, including the
proper layout of the showroom and warehouse. In addition, we
provide assistance in assuring that the design and decor of the
showroom is consistent with our requirements. We also lease the
exterior signage to the franchisee and assist with placing
pre-opening advertising, ordering initial inventory and
obtaining delivery vehicles.
We have an arrangement with several banks to provide financing
to qualifying franchisees to assist with establishing and
operating their stores. An inventory financing plan to provide
franchisees with the capital to purchase inventory is the
primary component of the financing program. For qualified
established franchisees, we have arranged in some cases for
these institutions to provide a revolving credit line to allow
franchisees the flexibility to expand. We guarantee amounts
outstanding under the franchisee financing programs.
All franchisees are required to complete a comprehensive
training program and to operate their franchised sales and lease
ownership stores in compliance with our policies, standards and
specifications, including such matters as decor, rental
agreement terms, hours of operation, pricing and merchandise.
Franchisees in general are not required to purchase their rental
merchandise from our fulfillment centers, although most do so in
order to take advantage of company sponsored financing, bulk
purchasing discounts and favorable delivery terms. Several
franchisees also purchase their rental furniture directly from
our MacTavish Furniture Industries division.
We conduct a financial audit of our franchised stores every six
to 12 months and also conduct regular operational
audits generally visiting each franchised store
almost as often as we visit our company-operated stores. In
addition, our proprietary management information system links
each franchised store to corporate headquarters.
35
We have been in the
rent-to-rent business
for over 50 years and believe we are the second largest
corporate furnishings rental company in the United States. Our
corporate furnishings business accounted for approximately 10%
of our total revenues in 2005. We rent new and rental return
merchandise to both individuals and businesses, with a growing
focus on renting residential and office furniture to business
customers. As of March 31, 2006, we operated 59 corporate
furnishings stores in 16 states.
Our typical corporate furnishings store layout consists of a
combination showroom and warehouse comprising about
19,000 square feet. Each residential showroom features
attractive displays of living room, dining 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. We believe
that locating a warehouse next to each showroom permits store
managers to exercise greater control over inventory, merchandise
condition, and pickup and deliveries, resulting in more
efficient and consistent service for the customer.
Items held for rent, whether new or rental return, are available
for purchase and lease purchase at all corporate furnishings
stores. Each corporate furnishings 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. We believe that our ability to obtain and
deliver furniture and equipment to customers quickly and
efficiently gives us an advantage over general furniture
retailers who often require several weeks to effect delivery.
We generally sell rental return merchandise at stores at or
above its book value that is, cost less
depreciation, plus selling expenses a price which is
usually lower than the price for comparable new merchandise.
Most merchandise held for sale in stores may also be acquired
through a lease purchase option. Because new merchandise is sold
at the same location as rental return merchandise, we have 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.
Our MacTavish Furniture Industries division has manufactured
furniture for our stores since 1971. The division has six
furniture manufacturing plants, four bedding manufacturing
facilities and two lamp manufacturing facilities, totaling
approximately 697,000 square feet in the aggregate, that
supply nearly one-half of our furniture and accessories. We
believe our manufacturing plants have the capacity to meet our
needs for the foreseeable future.
Our MacTavish Furniture Industries division manufactures:
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upholstered living-room furniture, including contemporary sofas,
sofabeds, chairs and modular sofa and ottoman collections in a
variety of natural and synthetic fabrics; |
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bedding, including standard sizes of mattresses and box springs; |
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office furniture, including desks, credenzas, conference tables,
bookcases and chairs; and |
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designer lamps, tables and accessories, which we also
manufacture for select retailers. |
MacTavish has designed special features for the furniture it
manufactures that we believe reduce production costs, enhance
product durability, and improve the shipping process relative to
furniture purchased from third parties. These features include:
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standardization of components; |
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reduction of parts and features susceptible to wear or damage; |
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more resilient foam; |
36
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durable, soil-resistant fabrics and sturdy frames for longer
life and higher residual value; and |
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devices that allow sofas to stand on end for easier and more
efficient transport. |
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 we use in furniture manufacturing
are fabric, foam, fiber, wire-innerspring assemblies, plywood
and hardwood. All of these materials are purchased in the open
market from unaffiliated sources. We are not dependent on any
single supplier, and none of the raw materials we use are in
short supply.
Marketing and Advertising
In our sales and lease ownership operations, we rely heavily on
national and local television advertising, direct mail, and
direct delivery of promotional materials. We focus our
television advertising on our successful Dream
Products program. This program features dream
products such as brand name widescreen televisions, computers,
stainless steel refrigerators, washers and dryers and lawn
tractors.
We have garnered significant value from our sports marketing
initiatives. We advertise and sponsor motorsports at various
levels and collegiate and professional sports, such as NBA and
ACC basketball and major league baseball, among others.
Our premier event partnership continues to be the Aarons
Dream Weekend at Talladega Superspeedway consisting of the
Aarons 499 NASCAR Nextel Cup Series Race and the
Aarons 312 NASCAR Busch Series Race. Both races are
broadcast live on FOX television and are among the most watched
NASCAR events.
We have continued our sponsorship of driver Michael
Waltrips #99 Aarons Dream Machine in the Busch
Series and driver Hermie Sadlers #00 Aarons Dream
Machine in select NEXTEL Cup races.
In addition, we sponsor the Arena Football League, which is
broadcast nationally on NBC and regionally on Fox Sports Net and
the Outdoor Life Network. This sponsorship includes uniform
patches on all visiting teams jerseys, arena signage and
local promotions throughout the country. National in-store
sweepstakes for a trip for two to the ArenaBowl in Las Vegas
help drive arena football fans into our locations around the
country.
These sports partnerships are integrated into advertising,
promotional and marketing initiatives, which we believe
significantly boosts the companys brand awareness and
customer loyalty.
Each month our in-house advertising and promotions department
distributes over 20 million direct mail circulars, which
highlight featured merchandise and demonstrate the cost
advantage to consumers of sales and lease ownership rather than
traditional rent-to-own.
We market our corporate furnishings operations with print-based
marketing programs targeting corporate customers. In addition,
the division has a national accounts program that develops
strategic partnerships to service clients nationwide
needs. As an example, the corporate furnishings division has
developed an alliance with a large trailer company to handle all
of the short term furnishings for trailers used at NASCAR races
and has been a sponsor in the Tour de Georgia professional
cycling racing program. We also rely on the use of brochures,
newspapers, radio, television, direct mail, trade publications,
yellow pages and the internet (http://www.aaronrents.com;
www.aaronrentsfurniture.com; www.shopaarons.com) to reach
customers. In addition to advertising specific vendor products,
we believe this advertising increases Aaron Rents brand
recognition.
37
Store Operations
Our Aarons Sales & Lease Ownership division has
nine regional vice presidents who are primarily responsible for
monitoring individual store performance and inventory levels
within their respective regions. Our corporate furnishings
division is organized geographically into two regions, each
supervised by a vice president. Presidents manage the sales and
lease ownership and corporate furnishings divisions.
Stores are currently supervised by 77 sales and lease ownership
regional managers and six corporate furnishings regional
managers. At the individual store level, the store manager is
responsible for:
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customer and credit relations; |
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deliveries and pickups; |
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warehouse and inventory management; and |
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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 managers
compensation is dependent upon store revenues and profits.
Executive management directs and coordinates:
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purchasing; |
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financial planning and control; |
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franchise operations; |
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manufacturing; |
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employee training; |
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new store site selection and construction for company-operated
stores; |
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long range and strategic planning; |
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organizational issues; and |
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acquisitions. |
Our internal audit department conducts periodic operational
audits of every store, including audits of company-operated
sales and lease ownership stores several times each year, and
semi-annual audits of corporate furnishings stores and
franchised sales and lease ownership stores. Our business
philosophy has always emphasized safeguarding of company assets,
strict cost containment and fiscal controls. Executive and store
level management monitors expenses to contain costs. We pay all
invoices from company headquarters in order to enhance fiscal
accountability. We believe that careful attention to the
safeguarding of rental merchandise, our most significant asset,
as well as the expense side of our operations has enabled us to
maintain financial stability and profitability.
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Management Information Systems |
We use computer-based management information systems to
facilitate cash collections, merchandise returns and inventory
management. Through the use of proprietary software developed
in-house, each of our stores is linked by computer directly to
corporate headquarters, which enables us to monitor the
performance of each store on a daily basis. Different systems
are used to run the sales and lease ownership and corporate
furnishings operations due to the significant differences in the
businesses. At the store level, the store manager is able to use
our computer system to effectively track merchandise on the
showroom floor and in the warehouse to minimize delivery times,
assist with product purchasing and match customer needs with
available inventory.
38
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Rental Agreement Approval, Renewal and Collection |
One of the keys to the success of our sales and lease ownership
operation is timely cash collections. Individual store managers
use our computerized information system on a daily basis to
track cash collections. They contact customers within a few days
of when their lease 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, and to
renew their agreements for an additional period. Careful
attention to cash collections is particularly important in the
sales and lease ownership 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.
We generally perform no formal credit check with respect to
sales and lease ownership customers, other than to verify
employment or other reliable sources of income and personal
references supplied by the customer. Each corporate furnishings
store performs a credit check on most of its residential and
business customers. All of our agreements for residential and
office merchandise require payments in advance, and the
merchandise normally is repossessed if a payment is
significantly in arrears.
Net bad debt losses from corporate furnishings rentals as a
percentage of corporate furnishings rental revenues were
approximately 0.3%, 1.1%, 1.4% and 2.5% for the three months
ended March 31, 2006 and years ended December 31,
2005, 2004 and 2003, respectively. We do not extend credit to
sales and lease ownership customers. For the same periods, net
company-wide merchandise shrinkage as a percentage of combined
rental revenues was 1.3%, 2.6%, 2.6% and 2.2%, respectively. We
believe that our collection and repossession policies comply
with applicable legal requirements, and we discipline any
employee that we discover deviating from such policies.
We believe that customer service is one of the most important
elements in the success of our sales and lease ownership and
corporate furnishings businesses. Customer satisfaction is
critical because the customer typically has the option of
returning the rented merchandise at any time. Our goal is to
make our customers feel positive about Aaron Rents and our
products from the moment they enter our showrooms. 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, we foster relationships with existing customers
to attract recurring business, and many new rental and lease
ownership agreements are attributable to repeat customers.
Because of the importance of customer service, we believe that a
prerequisite for successful operations and growth is skilled,
effective employees who value our customers and project a
genuine desire to serve customers needs. Our Aarons
Sales & Lease Ownership division has 41 training
facilities where store managers and employees learn and review
all areas of our operations, with a heavy emphasis on customer
service. We also have a training program we call Aarons
University designed to provide a uniform customer service
experience regardless of the store location, whether
company-operated or franchised. Standardizing operating
procedures throughout our system is a primary focus of
Aarons University. We have a 30-course curriculum for
sales and lease ownership managers. We conduct similar sales and
management training programs for our corporate furnishings
division employees at our Atlanta headquarters. Approximately
once a month we distribute a DVD entitled Inside
Aarons. These DVDs are intended to communicate a
wide variety of topics of interest to our store personnel
regarding current company initiatives. Our policy of promoting
from within boosts employee retention and underscores our
commitment to customer service and other business philosophies,
allowing us to realize greater benefits from our employee
training programs.
39
Purchasing and Distribution
Our product mix is determined by store managers in consultation
with regional managers and regional vice presidents, based on an
analysis of customer demands. The following table shows the
percentage of sales and lease ownership division revenues for
the fiscal year ended December 31, 2005 attributable to
different merchandise categories:
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Percentage of | |
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2005 | |
Merchandise Category |
|
Revenues | |
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| |
Electronics
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37 |
% |
Computers
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13 |
% |
Furniture
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33 |
% |
Appliances
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|
|
15 |
% |
Other
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2 |
% |
In our corporate furnishings division, furniture is the primary
merchandise category, accounting for approximately 93% of
corporate furnishings revenues for the year ended
December 31, 2005.
We purchase the majority of our merchandise directly from
manufacturers, with the balance from local distributors. One of
our largest suppliers is our MacTavish Furniture Industries
division, which supplies nearly one-half of the furniture and
accessories we rent or sell. We have no long-term agreements for
the purchase of merchandise and believe that our relationships
with suppliers are good.
Sales and lease ownership operations utilize fulfillment
centers, which are on average approximately 86,000 square
feet, to control merchandise. All company-operated sales and
lease ownership stores receive merchandise directly from our 16
fulfillment centers, together totaling approximately
1,379,000 square feet, located in Auburndale, Florida;
Dallas and Sugarland, Texas; Duluth, Georgia; Columbus, Ohio;
Baltimore, Maryland; Winston-Salem, North Carolina; Phoenix,
Arizona; Carolina, Puerto Rico; Oklahoma City, Oklahoma;
Madison, Tennessee; Magnolia, Mississippi; Plainfield, Indiana;
Portland, Oregon; Westfield, Massachusetts; and Columbia, South
Carolina. We plan to open one additional fulfillment center in
2006. Most of our stores are within a
250-mile radius of a
fulfillment center, facilitating timely shipment of supplies to
the stores and fast delivery of orders to customers.
Corporate furnishings stores receive merchandise directly from
vendors who ship to the stores attached warehouses. Sales
and lease ownership stores typically have smaller warehouses
with less merchandise storage space than our corporate
furnishings stores. Vendors normally ship directly to our
fulfillment centers, who in turn ship merchandise to our stores.
We realize freight savings from truckload discounts and more
efficient distribution of merchandise by using fulfillment
centers. We use our own tractor-trailers, local delivery trucks,
and various contract carriers to make weekly deliveries to
individual stores.
Legal Proceedings
From time to time, we are party to various legal proceedings
arising in the ordinary course of business. Aaron Rents is not
currently a party to any other legal proceeding the result of
which it believes could have a material adverse impact upon its
business, financial position or results of operations.
40
MANAGEMENT
Executive Officers and Directors
The following table sets forth our executive officers and
directors, their ages and positions as of March 31, 2006:
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Name |
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Age | |
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Position |
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| |
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|
R. Charles Loudermilk, Sr.
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78 |
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Chairman of the Board of Directors and Chief Executive Officer |
Robert C. Loudermilk, Jr.
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46 |
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President, Chief Operating Officer and Director |
Gilbert L. Danielson
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59 |
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Executive Vice President, Chief Financial Officer and Director |
William K. Butler, Jr.
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53 |
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President of Aarons Sales & Lease Ownership
Division and Director |
James L. Cates
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55 |
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Senior Group Vice President and Secretary |
Eduardo Quinones
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45 |
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President of Aarons Corporate Furnishings Division |
Christopher M. Champion
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35 |
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Vice President, General Counsel |
B. Lee Landers
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47 |
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Vice President, Chief Information Officer |
Robert P. Sinclair, Jr.
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44 |
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Vice President, Corporate Controller |
Mitchell S. Paull
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47 |
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Senior Vice President, Merchandising and Logistics, Aarons
Sales & Lease Ownership Division |
K. Todd Evans
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42 |
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Vice President, Franchising |
Marc S. Rogovin
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46 |
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Vice President, Real Estate and Construction |
Ronald W. Allen+
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64 |
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Director |
Leo Benatar*
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76 |
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Director |
Earl Dolive+
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88 |
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Director |
David L. Kolb+
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67 |
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Director |
Ray M. Robinson*
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58 |
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Director |
John Schuerholz
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65 |
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|
Director |
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|
* |
Member of the compensation committee |
+ Member of the audit committee
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Member of the special committee on corporate governance |
Mr. Loudermilk, Sr. founded Aaron Rents in 1955
and has served as Chairman of the Board and Chief Executive
Officer of Aaron Rents since our incorporation in 1962. From
1962 to 1997, he was also President of Aaron Rents. He has been
a director of Americas Mart Corporation, owner and manager
of the Atlanta Merchandise Mart, a wholesale market, since 1996.
He is one of the founders and Chairman of the Board of The
Buckhead Community Bank, and formerly the Chairman of the board
of directors of the Metropolitan Atlanta Rapid Transit Authority.
Mr. Loudermilk, Jr., has served in various
positions since joining Aaron Rents as an Assistant Store
Manager in 1985. He has served as a director of Aaron Rents
since 1983, and as President and Chief Operating Officer of
Aaron Rents since 1997.
Mr. Danielson has served as Chief Financial Officer
and a director of Aaron Rents since 1990 and Executive Vice
President since 1998. From 1990 to 1998 he was Vice President,
Finance of Aaron Rents. He has also served as a director of
Abrams Industries, Inc., a company engaged in real estate
investment and development and energy services, since 2000.
41
Mr. Butler joined Aaron Rents in 1974 as a Store
Manager. He served as Vice President of the Aarons Rental
Purchase Division from 1986 to 1995, when he became President of
that division, now known as the Aarons Sales &
Lease Ownership Division. Mr. Butler has served as a
director of Aaron Rents since 2000.
Mr. Cates has served as Senior Group Vice President
of Aaron Rents since 2002 and as Secretary since 1999. He served
as Vice President of Risk Management of Aaron Rents from 1994
until his promotion to Senior Group Vice President in 2002.
Mr. Quinones joined Aaron Rents in 1985 as a Store
Manager. He served as Vice President of Aarons Corporate
Furnishings Division from 1989 until becoming President of that
division in 2000.
Mr. Champion has served as Vice President, General
Counsel since 2005. Prior to then, he was employed from 1997
with Russell Corporation, an apparel and sporting goods
manufacturer, serving most recently as Deputy General Counsel.
Mr. Landers has served as Vice President, Chief
Information Officer since 1999. Prior to 1999, he held various
engineering and technology management positions with The
Southern Company, a regional energy company.
Mr. Sinclair has served as Controller of Aaron Rents
since 1990, Chief Financial Officer of the Aarons
Sales & Lease Ownership Division from 1995 to 1999, and
Vice President, Corporate Controller since 1999.
Mr. Paull served as Vice President, Treasurer of
Aaron Rents from 1991 until 1999. From 1999 to 2001,
Mr. Paull served as Chief Financial Officer and Vice
President, Finance and Administration of The Winter Group of
Companies, Inc., a construction management company, and as Chief
Financial Officer and Vice President, Finance for Career Fair, a
computer software company. Mr. Paull rejoined Aaron Rents
as Senior Vice President in 2001 and in 2005 was appointed to
Senior Vice President, Merchandising and Logistics, Aarons
Sales & Lease Ownership Division.
Mr. Evans served as Director of Franchise
Development for Aaron Rents from 1991 until 1998 and Vice
President, Franchise Development from 1998 to 2000. From March
2000 to October 2000, Mr. Evans served as President of
Her-Kel Investments, a franchisee of Aaron Rents. Mr. Evans
rejoined Aaron Rents in October 2000 as Vice President, Business
Development and was promoted to Vice President, Franchising in
2001.
Mr. Rogovin served as Director of Real Estate and
Construction for Aaron Rents from 1997 to 1998, and has served
as Vice President, Real Estate and Construction since 1998.
Mr. Allen has served as a director of Aaron Rents
since 1997. From 1997 to 2005, Mr. Allen served as a
consultant to Delta Air Lines, Inc., an international air
passenger carrier. He was Chairman and Chief Executive Officer
of Delta Air Lines from 1987 to 1997. He also served as
President of Delta Air Lines from 1983 to 1987 and from 1993 to
1997, and Chief Operating Officer from 1983 to 1997. He
currently serves as an advisory director of Delta Air Lines and
a director of The Coca-Cola Company.
Mr. Benatar has served as a director of Aaron Rents
since 1994. He has been a Principal with Benatar &
Associates since 1996. Previously, he was an associated
consultant with A.T. Kearney, Inc., a management consultant and
executive search company, from 1996 to 2002. He was Chairman of
Engraph, Inc., a maker of consumer packages, and served as Chief
Executive Officer of that company from 1981 to 1995.
Mr. Benatar serves as a director of Interstate
Bakeries Corporation, a baker and distributor of fresh
bakery products, Mohawk Industries, Inc., a designer and
manufacturer of floor covering products, and Paxar Corporation,
a provider of merchandising systems to retailers and apparel
manufacturers. He previously served as Chairman of the Federal
Reserve Bank of Atlanta.
Mr. Dolive has served as a director of Aaron Rents
since 1977. He currently serves as a director of Greenway
Medical Technologies, Inc., a provider of web-based healthcare
management software, and as director emeritus of Genuine Parts
Company, a distributor of automotive and industrial replacement
parts, office products and electrical materials. Prior to his
retirement in 1988, he was Vice Chairman of the board of Genuine
Parts Company.
42
Mr. Kolb has been a director of Aaron Rents since
2003. Mr. Kolb was Chairman of the board of directors of Mohawk
Industries, Inc. from 2001 until 2004. Prior to his retirement
as Chairman in 2004, he also served as CEO from 1988 to 2001. He
also serves on the board of directors of Mohawk Industries,
Inc., Chromcraft Revington, Inc., a furniture manufacturer, and
Paxar Corporation.
Mr. Robinson has served as a director of Aaron Rents
since 2002. Mr. Robinson is President Emeritus of the East Lake
Golf Club and Vice Chairman of the East Lake Community
Foundation. Prior to his retirement in 2003 as Southern Region
President, Mr. Robinson was employed with AT&T from
1968. Mr. Robinson currently serves on the board of
directors for Avnet, Inc., an electronic components and computer
products distribution company, Acuity Brands, Inc., a lighting
equipment and products manufacturer, Citizens Trust Bank,
AMR Corporation, an international air passenger carrier and
ChoicePoint, Inc., an identification and credential verification
company.
Mr. Schuerholz has served as a director of Aaron
Rents since 2006. Mr. Schuerholz is Executive Vice President and
General Manager of the Atlanta Braves professional baseball
organization. Prior to joining the Atlanta Braves in 1990, he
was employed from 1968 with the Kansas City Royals professional
baseball organization in various management positions until
being named Executive Vice President and General Manager of that
organization in 1981.
There are no family relationships among any of the executive
officers and directors of the company, except that Robert C.
Loudermilk, Jr. is the son of R. Charles
Loudermilk, Sr.
43
SELLING SHAREHOLDER
Mr. R. Charles Loudermilk, Sr., our Chairman of the
Board and Chief Executive Officer, is the selling shareholder in
this offering. Mr. Loudermilk is offering
1,000,000 shares of his common stock. The following table
shows the amount of Class A common stock and common stock
that Mr. Loudermilk beneficially owns currently and
assuming completion of the offering. Percentages are based on
outstanding common shares as of May 5, 2006.
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Before the Offering | |
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After the Offering | |
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| |
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| |
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|
Class of | |
|
Shares | |
|
Percent of | |
|
Shares to | |
|
Shares | |
|
Percent of | |
|
|
Common | |
|
Beneficially | |
|
Class | |
|
be Sold in | |
|
Beneficially | |
|
Class | |
Shareholder |
|
Stock | |
|
Owned | |
|
Outstanding | |
|
Offering | |
|
Owned | |
|
Outstanding | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
R. Charles Loudermilk, Sr.
|
|
|
Class A |
|
|
|
5,312,441 |
|
|
|
63.27 |
% |
|
|
|
|
|
|
5,312,441 |
|
|
|
63.27 |
% |
|
|
|
Common |
|
|
|
2,627,378 |
|
|
|
6.24 |
% |
|
|
1,000,000 |
|
|
|
1,627,378 |
|
|
|
3.61 |
% |
The table does not reflect that the common stock may be
converted, on a share for share basis, into shares of
Class A common stock:
|
|
|
|
|
by resolution of the board of directors if either the common
stock or Class A common stock is excluded from listing on
any national securities exchange on which it is then traded
because of the existence of the common stock; or |
|
|
|
automatically if the number of outstanding shares of
Class A common stock falls below 10% of the total number of
outstanding shares of both the common stock and Class A
common stock. |
The shares of Class A common stock beneficially owned by
Mr. Loudermilk include 1,200 shares held by Mr.
Loudermilks spouse and minor step-children. The shares of
common stock beneficially owned by Mr. Loudermilk include
currently exercisable options to
purchase 210,000 shares of common stock and
11,788 shares of common stock held by
Mr. Loudermilks spouse.
Upon completion of this offering, Mr. Loudermilk will
continue to be able to elect all of the directors of, and
otherwise effectively control, Aaron Rents. Because the common
stock is non-voting, Mr. Loudermilk will continue to be
able to sell additional shares of common stock in the future
without adversely affecting his voting percentage.
DESCRIPTION OF CAPITAL STOCK
We are authorized under our articles of our incorporation to
issue 100 million shares of non-voting common stock, par
value $.50 per share, and 25 million shares of voting
Class A common stock, par value $.50 per share. We are
also authorized to issue 1 million shares of preferred
stock, par value $1.00 per share. On May 5, 2006, we
had issued and outstanding 42,106,072 shares of common
stock, 8,396,233 shares of Class A common stock and no
shares of preferred stock.
Shareholders rights and related matters are governed by
the Georgia Business Corporation Code, our articles of
incorporation and our by-laws. Some of the provisions of our
articles of incorporation and by-laws, which are summarized
below, could prevent a change in control of the company. The
total effect of these terms could make it more difficult for any
person or entity to acquire or exercise control of us and to
make changes in management more difficult. The following summary
is qualified in its entirety by reference to our articles of
incorporation and by-laws, which set forth the full rights,
powers and limitations of each class of our capital stock.
Common Stock and Class A Common Stock
The Class A common stock has one vote per share on all
matters submitted to our shareholders, except to the extent
voting rights may be affected by the common stock protection
feature described below. Holders of our common stock are not
entitled to any vote except as described below or as otherwise
required by law.
Actions submitted to a vote of shareholders are generally voted
upon only by holders of Class A common stock. As a result,
the holders of Class A common stock may elect, by plurality
of the votes cast, the entire
44
board of directors. In addition, the Class A holders may
approve, by the affirmative vote of a majority of the votes
entitled to be cast, any merger, liquidation or similar
transaction involving Aaron Rents. The holders of Class A
common stock may also, by the affirmative vote of a majority of
the votes entitled to be cast, amend our articles of
incorporation. However, amendments adversely affecting the
rights of the common stock shareholders would also require the
affirmative vote of two-thirds of the outstanding shares of
common stock voting as a separate class.
Under our articles of incorporation, holders of common stock are
not entitled to vote on any matters, except for amendments to
our articles of incorporation:
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adversely changing the designation, rights, preferences or
limitations of the common stock; |
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|
|
modifying, in any manner that may adversely affect the common
stock, the common stock protection feature described
below; and |
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|
|
decreasing the aggregate number of authorized shares of common
stock below the number of shares of common stock outstanding at
that time. |
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Dividends and Other Distributions |
Our articles of incorporation permit:
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payment of cash dividends to the holders of our common stock
without paying any dividend on the Class A common stock; and |
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payment of cash dividends on the common stock that are higher
(but in no event lower) than any dividend paid on the
Class A common stock. |
We may not pay cash dividends on our Class A common stock
unless they are equal or higher to the dividends paid on the
common stock.
Subject to the following restrictions, any dividends or other
distributions payable in any class of our capital stock to the
holders of either class of our common stock must be paid in like
form and equal amounts on both classes of common stock.
Dividends or other distributions payable on our common stock in
shares of common stock may be made as follows:
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in shares of common stock to the holders of both Class A
common stock and common stock; |
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in shares of Class A common stock to the holders of
Class A common stock, and in shares of common stock to the
holders of common stock; and |
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in any other authorized class or series of capital stock to the
holders of both classes of common stock. |
Our Class A common stock and common stock share equally
with respect to distributions in cash, stock or property in
connection with any recapitalization of Aaron Rents and upon
liquidation or dissolution of Aaron Rents. Neither the
Class A common stock nor the common stock may be split,
subdivided or combined unless the other is proportionately
split, subdivided or combined.
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Mergers, Consolidations and Share Exchanges |
Each holder of our common stock is entitled to receive the same
amount and form of consideration per share as the per share
consideration, if any, received by any holder of the
Class A common stock if we engage in a merger,
consolidation or statutory share exchange involving our common
stock.
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The Common Stock Protection Feature |
Voting rights disproportionate to equity ownership may be
acquired through acquisitions of Class A common stock
without corresponding purchases of common stock. The common
stock protection feature is intended to make it more difficult
for a buyer who has not acquired a proportionate percentage of
our common stock to acquire a significant block 20%
or more of our Class A common stock. Although
the
45
common stock protection feature might make us a less attractive
target for a takeover bid, it is intended to help reduce or
eliminate any discount in the prices at which the common stock
might trade vis-à-vis the Class A common stock, and to
give holders of the common stock the opportunity to participate
in any premium that might be paid for a significant block of the
Class A common stock.
If any person or group acquires beneficial ownership of 20% or
more of the Class A common stock and the person or group
does not own an equal or greater percentage of common stock, the
common stock protection feature requires that the buyer commence
a public tender offer to acquire enough additional shares of our
common stock so that the buyer owns at least an equal percentage
of the common stock and the Class A common stock within a
90-day period beginning
the day after acquiring the shares of Class A common stock
that result in such person or group beneficially owning 20% or
more of the Class A common stock. In addition, an acquiror
of 20% or more of the Class A common stock is also required
to commence a tender offer if the acquiror obtains an additional
5% of the Class A common stock after the last acquisition
which triggered the tender offer requirement, if that acquiror
does not own an equal or greater percentage of common stock. In
either case, the requirements related to the common stock
protection feature are satisfied by making the requisite offer
and purchasing validly tendered shares, even if the number of
shares tendered is less than the number of shares required to
make the buyers common stock interest equal to or greater
than the buyers Class A common stock interest.
This feature does not apply to people or groups who acquire
Class A common stock upon issuance from us, by operation of
law, by will or the laws of descent and distribution, by
charitable contribution or gift, or by foreclosure of a bona
fide loan. In addition, this feature does not apply to any
increase in percentage ownership of Class A common stock
resulting solely from a change in the total amount of
Class A common stock outstanding. Finally, this feature
does not apply to a shareholder who beneficially owned 20% or
more of the Class A common stock on or before
October 31, 1992. In order for the common stock protection
features to apply to a shareholder who owns 20% or more
Class A common stock on or before that date, the
shareholder would have to acquire beneficial ownership of an
additional 20% of Class A common stock, in addition to the
shareholders interest at October 31, 1992.
If the acquiror fails to commence the tender offer, the voting
rights of the shares of Class A common stock beneficially
owned by the acquiror that exceed his, her or its comparable
percentage of common stock will be suspended until the tender
offer is completed or until the holder disposes of the
Class A common stock that triggered the feature.
The common stock protection feature does not prevent anyone from
acquiring a significant or controlling interest in us, provided
the person or group acquires a proportionate percentage of the
common stock by undertaking a tender offer or is willing to
forego some Class A common stock voting rights, as provided
by the common stock protection feature. If a tender offer is
required, the purchase price the acquiror might have to pay
might be higher than the price at which the acquiror might
otherwise be able to buy an identical amount of common stock.
Consequently, the tender offer requirement could make an
acquisition of a significant or controlling interest in Aaron
Rents more expensive and, if a tender offer is required, time
consuming, than if the requirement did not exist. This might
deter a person or group from acquiring a significant or
controlling interest in us. Moreover, by restricting an
acquirors ability to buy a significant interest in the
Class A common stock by paying a control
premium for the Class A common stock without
acquiring, or paying a similar premium for, common stock, the
common stock protection feature should help to reduce any
discount on either class of common stock.
Neither the Class A common stock nor the common stock is
convertible into another class of common stock or any other
Aaron Rents security, except that the common stock may be
converted into Class A common stock on a share-for-share
basis:
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by resolution of the board of directors if either the common
stock or the Class A common stock is excluded from trading
on any national securities exchange on which it is then traded
because of the existence of the common stock; or |
46
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automatically if the number of outstanding shares of
Class A common stock falls below 10% of the total number of
outstanding shares of both the common stock and Class A
common stock. |
Upon any such conversion, the voting interest of the holders of
Class A common stock would be diluted, and to the extent
that the market price of one class exceeds the other immediately
prior to such conversion, the market price of the higher priced
class may be decreased.
The holders of our Class A common stock and common stock do
not have preemptive rights enabling them to subscribe for or
receive shares of any class of our stock or any other securities
convertible into shares of any class of our stock.
Preferred Stock
Our board of directors may, without approval of our
shareholders, from time to time authorize the issuance of
preferred stock in one or more series for such consideration
and, within certain limits, with such relative rights, powers,
preferences and limitations as our board of directors may
determine. Because the board of directors has the power to
establish the preferences, powers and rights of each series of
preferred stock, it may give to the holders of any such series
preferences, powers and rights, voting or otherwise, senior to
the rights of holders of either class of our common stock.
Although the board of directors has no present intention of
doing so, it could issue preferred stock that could discourage
an acquisition attempt or other transaction that some, or a
majority, of our shareholders might believe to be in their best
interest or in which the shareholders might receive a premium
for their stock over its market price.
Limitation of Directors Liability
Our articles of incorporation eliminate, subject to exceptions
under Georgia law, the liability of our directors to us or our
shareholders for breach of any duty as a director, whether as a
fiduciary or otherwise. Georgia law provides that no provision
in our articles of incorporation or by-laws shall eliminate or
limit the liability of a director for:
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any appropriation, in violation of the directors duties,
of any business opportunity of the company; |
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acts or omissions which involve intentional misconduct or a
knowing violation of law; |
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unlawful corporate distributions; or |
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any transaction from which the director received an improper
benefit. |
Liability for monetary damages would remain unaffected by the
articles of incorporation if liability is based on any of these
grounds. Liability for monetary damages for violations of
federal securities laws also remains unaffected. This provision
of the articles of incorporation will limit the remedies
available to a shareholder dissatisfied with a board decision
which is protected by this provision, and a shareholders
only remedy in such a circumstance may be to bring a suit to
prevent the boards action. In many situations, this remedy
may not be effective, for example, when shareholders are not
aware of a transaction or an event until it is too late to
prevent it. In these cases, the shareholders and Aaron Rents
could be injured by a board decision and have no effective
remedy.
Transfer Agent
The transfer agent and registrar for our Class A common
stock and common stock is SunTrust Bank, Atlanta, Georgia.
47
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement
between us, the selling shareholder and each of the underwriters
named below, dated the date of this prospectus, the underwriters
named below have severally agreed to purchase from us and the
selling shareholder the number of shares of our common stock
indicated in the following table.
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Number of | |
Underwriters |
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Shares | |
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SunTrust Capital Markets, Inc.
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Morgan Keegan & Company, Inc.
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Stifel, Nicolaus & Company, Incorporated
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Wachovia Capital Markets, LLC
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BB&T Capital Markets,
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A Division of Scott & Stringfellow, Inc.
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Total
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4,000,000 |
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The underwriters have advised us that they propose to offer
shares of our common stock to the public at the public offering
price set forth on the cover page of this prospectus. Any shares
sold by the underwriters to securities dealers will be sold at
the public offering price less a selling concession not in
excess of
$ per
share. The underwriters may allow, and these selected dealers
may re-allow, a concession of not more than
$ per
share to other brokers and dealers. No such reduction will
change the amount of proceeds that we or the selling shareholder
are to receive, as set forth on the cover page of this
prospectus. The offering of the shares of common stock is made
for delivery when, as and if accepted by the underwriters and
subject to prior sale and to withdrawal, cancellation or
modification of this offering without notice. The underwriters
reserve the right to reject an order for the purchase of shares,
in whole or in part.
The underwriting agreement provides that the underwriters
obligations to purchase shares of our common stock are subject
to conditions contained in the underwriting agreement, including
the continued accuracy of representations contained in the
underwriting agreement, the delivery of certain certificates,
opinions and letters from us, our attorneys and independent
auditors, and the absence of any material adverse change
affecting us. The underwriters are obligated to purchase all of
the common stock that they have agreed to purchase under the
underwriting agreement, other than those covered by the
over-allotment option, if they purchase any shares of our common
stock.
The shares of our common stock included in this offering may not
be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements in
connection with the offer and sale of any of our common stock be
distributed or published, in any jurisdiction except under
circumstances that will result in compliance with the applicable
rules and regulations of that jurisdiction. Persons who receive
this prospectus are advised to inform themselves about and to
observe any restrictions relating to this offering of our common
stock and the distribution of this prospectus. This prospectus
is neither an offer to sell nor a solicitation of any offer to
buy any of our common stock included in this offering in any
jurisdiction where that would not be permitted.
The underwriters have advised us that they do not intend to
confirm sales to any account over which they exercise
discretionary authority.
Over-allotment Option
We and the selling shareholder have granted to the underwriters
an option, exercisable not later than 30 days after the
date of this prospectus, to purchase up to 450,000 additional
shares of our common stock from us and up to 150,000 shares
from the selling shareholder to cover over-allotments at the
public offering price, less the underwriting discount, set forth
on the cover page of this prospectus. The underwriters may
exercise the option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the
underwriters exercise the option, each underwriter will become
obligated, as long as the conditions
48
of the underwriting agreement are satisfied, to purchase a
number of the option shares approximately proportionate to the
underwriters initial commitment as indicated in the table
above. We and the selling shareholder will be obligated,
pursuant to the option, to sell these additional shares of our
common stock to the underwriters to the extent the option is
exercised. If any additional shares of our common stock are
purchased pursuant to the option, the underwriters will offer
the additional shares on the same terms as those on which the
other shares are being offered hereby. If this option is
exercised in full, the total price to the public will be
$ and
the net proceeds to us will be approximately
$ .
Underwriting Discount and Expenses
The following table summarizes the per share and total
underwriting discount to be paid to the underwriters in
connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters
over-allotment option.
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Total | |
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Per Share | |
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Without Option | |
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With Option | |
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Underwriting discount payable by us
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$ |
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$ |
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$ |
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Underwriting discount payable by the selling shareholder
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We will pay all expenses of the offering that we incur, except
that the selling shareholder will pay his pro rata share of all
registration, filing and listing fees. We estimate that the
total expenses of this offering, excluding the underwriting
discount, will be approximately $400,000. This estimate includes
expenses of the underwriters that we have agreed to reimburse.
Indemnification
We and the selling shareholder have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, or to contribute to payments
the underwriters may be required to make with respect to any of
these liabilities.
Lock-up
Agreements
Subject to certain limited exceptions, we, our directors and our
executive officers have agreed, except with regard to the shares
offered hereby, not to offer, sell, contract to sell or
otherwise dispose of, or enter into any transaction that is
designed to, or could reasonably be expected to, result in the
disposition of any of our common shares or other securities
convertible into or exchangeable or exercisable for our common
shares for a period of 90 days after the date of this
prospectus without the prior written consent of SunTrust Capital
Markets, Inc. This
90-day period may be
extended if (1) during the last 17 days of the
90-day
lock-up period, we
issue an earnings release or material news or a material event
relating to us occurs or (2) prior to the expiration of the
90-day
lock-up period, we
announce that we will release earnings results or become aware
that material news or a material event will occur during the
16-day period beginning
on the last day of the
90-day
lock-up period. The
period of such extension will be 18 days, beginning on the
issuance of the earnings release or the occurrence of the
material news or material event. SunTrust Capital Markets, Inc.
may, in its sole discretion and at any time or from time to time
before the termination of the
lock-up period, without
notice, release all or any portion of the shares subject to the
lock-up agreements.
With the exception of the underwriters over-allotment
option, there are no existing agreements between SunTrust
Capital Markets, Inc. and us or any of our shareholders who will
execute a lock-up
agreement providing consent to the sale of shares prior to the
expiration of the
lock-up period.
49
Stabilization, Short Positions and Penalty Bids
In connection with this offering, the underwriters may engage in
over-allotment, syndicate covering transactions, stabilizing
transactions and penalty bids or purchases for the purpose of
pegging, fixing or maintaining the price of our common stock:
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Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
The underwriters may close out any short position by either
exercising their over-allotment option, in whole or in part, or
purchasing shares in the open market. |
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Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there could
be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who
purchase in the offering. |
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specific maximum. |
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Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions. |
These syndicate covering transactions, stabilizing transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common shares or preventing or retarding
a decline in the market price of our common shares. As a result,
the price of our common shares may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the NYSE or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our common shares. In addition, neither we nor any of the
underwriters make any representation that the underwriters will
engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without
notice.
Business Relationships with Underwriters and Their
Affiliates
From time to time, the underwriters and their affiliates have
provided, and continue to provide, commercial banking, financial
advisory and investment banking services to us in the ordinary
course of business. These firms have received, and may receive,
customary fees for their services. SunTrust Bank, an affiliate
of SunTrust Capital Markets, Inc., is a lender and the
administrative agent, and Regions Bank, Wachovia Bank N.A. and
Branch Banking & Trust Co., affiliates of Morgan
Keegan & Company, Inc., Wachovia Capital Markets, LLC
and BB&T Capital Markets, a division of Scott &
Stringfellow, Inc., respectively, are lenders, under our
revolving credit agreement, and we will use a portion of the
proceeds of this offering to repay part of the amount
outstanding under that agreement. See Use of
Proceeds.
50
LEGAL MATTERS
The legality of the shares of common stock offered in this
prospectus will be passed upon for us by Kilpatrick Stockton
LLP, Atlanta, Georgia. Members of that law firm own
45,516 shares of our common stock and 19,448 shares of
our Class A common stock. Certain legal matters related to
the offering will be passed upon for the underwriters by
Alston & Bird LLP.
EXPERTS
Ernst & Young LLP, an independent registered public
accounting firm, has audited our consolidated financial
statements included in our annual report on
Form 10-K for the
year ended December 31, 2005, and managements
assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005, as set forth
in their reports, which are included in and incorporated by
reference in this prospectus and elsewhere in the registration
statement. Our financial statements and managements
assessment are included in and incorporated by reference in
reliance on Ernst & Young LLPs reports, given on
their authority as experts in accounting and auditing.
With respect to the unaudited consolidated interim financial
information of Aaron Rents, Inc. and subsidiaries for the
three-month periods ended March 31, 2006 and March 31,
2005, included in and incorporated by reference in this
prospectus, Ernst & Young LLP reported that they have
applied limited procedures in accordance with professional
standards for a review of such information. However, their
separate report dated May 6, 2006 included in our quarterly
report on
Form 10-Q for the
three months ended March 31, 2006, and included in and
incorporated by reference herein, states that they did not audit
and they do not express an opinion on that interim financial
information. Accordingly, the degree of reliance on their report
on such information should be restricted in light of the limited
nature of the review procedures applied. Ernst & Young
LLP is not subject to the liability provisions of
Section 11 of the Securities Act of 1933 for their report
on the unaudited consolidated interim financial information
because that report is not a report or a
part of the registration statement prepared or
certified by Ernst & Young LLP within the meaning of
Sections 7 and 11 of the Securities Act of 1933.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission, or SEC, allows us to
incorporate by reference information into this prospectus. This
means that we may refer you to important information about us
provided in other documents on file with the SEC. The
information incorporated by reference is considered to be part
of this prospectus, unless that information has been updated in
the prospectus. In addition, we may, from time to time, update
information contained in this prospectus or in another document
that is incorporated by reference. Whenever we file a document
with the SEC that updates information in this prospectus or in
any other document incorporated by reference, the new
information will be considered to replace the old information.
Any statement in this document that is subsequently updated will
no longer be considered a part of this prospectus.
The following documents are incorporated by reference into this
prospectus:
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our annual report on
Form 10-K for the
year ended December 31, 2005 filed with the SEC on
March 15, 2006; |
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our quarterly report on
Form 10-Q for the
three months ended March 31, 2006 filed with the SEC on
May 9, 2006; |
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our current reports on
Form 8-K filed
with the SEC on February 1, 2006 and February 27, 2006; |
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the description of our capital stock contained in our
registration statement on
Form 8-A filed
with the SEC on March 10, 1998 pursuant to
Section 12(b) of the Securities Exchange Act of 1934, and
any amendment or report subsequently filed by us for the purpose
of updating the description; and |
51
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all documents we subsequently file pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 after the date of this prospectus and
before this offering terminates. |
Upon written or oral request, we will provide, at no cost to
each person, including any beneficial owner, who receives a copy
of this prospectus, a copy of any and all of the documents
incorporated by reference into this prospectus. We will not
provide exhibits to any of these documents, however, unless the
exhibits are specifically incorporated by reference into this
prospectus. Requests for copies should be addressed to:
Corporate Secretary, Aaron Rents, Inc., 309 E. Paces
Ferry Road, Atlanta, Georgia 30305, telephone
number (404) 231-0011.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on
Form S-3 that we
have filed with the SEC covering the shares of common stock
Aaron Rents and the selling shareholder are offering. This
prospectus does not contain all of the information in that
registration statement. For further information about Aaron
Rents and the shares of common stock offered by this prospectus,
you should review the registration statement. You can obtain the
registration statement from the SEC at the public reference
facilities and Internet site we refer to below. Statements
contained in this prospectus regarding the contents of any
contract, agreement or other document to which reference is made
are not complete. Those statements are qualified in their
entirety by reference to the complete text of those documents.
We file annual, quarterly, and current reports, proxy
statements, and other information with the SEC. You may read and
copy any materials we file with the SEC, including the
registration statement that includes this prospectus, at the
SECs Public Reference Room at 100 F Street, N.E.,
Room 1080, Washington, D.C. 20549. For information on
the operation of the Public Reference Room, call the SEC at
1-800-SEC-0330.
Additionally, you can obtain reports, proxy and information
statements, and other information regarding issuers that file
electronically with the SEC from the SECs internet site.
The address of that site is www.sec.gov.
Our Internet address is www.aaronrents.com. We make
available free of charge on or through our Internet website our
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC. The
information at our Internet website is not incorporated into,
and you should not consider it a part of, this prospectus.
52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Unaudited Consolidated Financial Statements
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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Audited Consolidated Financial Statements
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F-13 |
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F-14 |
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F-15 |
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F-16 |
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F-17 |
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F-18 |
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F-19 |
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F-20 |
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F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Aaron Rents, Inc.
We have reviewed the consolidated balance sheet of Aaron Rents,
Inc. and subsidiaries as of March 31, 2006, and the related
consolidated statements of earnings for the three-month periods
ended March 31, 2006 and 2005, and the consolidated
statements of cash flows for the three-month periods ended
March 31, 2006 and 2005. These financial statements are the
responsibility of the Companys management.
We conducted our review in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the consolidated financial
statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of Aaron Rents, Inc. and
subsidiaries as of December 31, 2005, and the related
consolidated statements of income, shareholders equity,
and cash flows for the year then ended not presented herein, and
in our report dated March 14, 2006, we expressed an
unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2005, is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
Atlanta, Georgia
May 6, 2006
F-2
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
|
|
2006 | |
|
December 31, | |
|
|
(Unaudited) | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands, except | |
|
|
share data) | |
ASSETS:
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
6,179 |
|
|
$ |
6,973 |
|
Accounts Receivable (net of allowances of $2,085 in 2006 and
$2,742 in 2005)
|
|
|
43,563 |
|
|
|
42,812 |
|
Rental Merchandise
|
|
|
832,300 |
|
|
|
811,335 |
|
Less: Accumulated Depreciation
|
|
|
(263,160 |
) |
|
|
(260,403 |
) |
|
|
|
|
|
|
|
|
|
|
569,140 |
|
|
|
550,932 |
|
Property, Plant and Equipment, Net
|
|
|
134,367 |
|
|
|
133,759 |
|
Goodwill and Other Intangibles, Net
|
|
|
103,027 |
|
|
|
101,085 |
|
Prepaid Expenses and Other Assets
|
|
|
26,354 |
|
|
|
22,954 |
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
882,630 |
|
|
$ |
858,515 |
|
|
|
|
|
|
|
|
|
LIABILITIES & SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Accounts Payable and Accrued Expenses
|
|
$ |
121,696 |
|
|
$ |
112,817 |
|
Dividends Payable
|
|
|
704 |
|
|
|
699 |
|
Deferred Income Taxes Payable
|
|
|
73,385 |
|
|
|
75,197 |
|
Customer Deposits and Advance Payments
|
|
|
23,975 |
|
|
|
23,458 |
|
Credit Facilities
|
|
|
200,611 |
|
|
|
211,873 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
420,371 |
|
|
|
424,044 |
|
Commitments & Contingencies
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
Common Stock, Par Value $.50 Per Share; Authorized:
50,000,000 Shares; Shares Issued: 44,989,602 at
March 31, 2006 and December 31, 2005
|
|
|
22,495 |
|
|
|
22,495 |
|
|
Class A Common Stock, Par Value $.50 Per Share; Authorized:
25,000,000 Shares; Shares Issued: 12,063,856 at
March 31, 2006 and December 31, 2005
|
|
|
6,032 |
|
|
|
6,032 |
|
|
Additional Paid-in Capital
|
|
|
96,990 |
|
|
|
92,852 |
|
|
Retained Earnings
|
|
|
370,235 |
|
|
|
349,377 |
|
|
Accumulated Other Comprehensive Loss
|
|
|
(9 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
495,743 |
|
|
|
470,742 |
|
Less: Treasury Shares at Cost,
|
|
|
|
|
|
|
|
|
|
Common Stock, 2,899,350 Shares at March 31, 2006 and
3,358,521 Shares at December 31, 2005
|
|
|
(17,580 |
) |
|
|
(20,367 |
) |
|
Class A Common Stock, 3,667,623 Shares at
March 31, 2006 and December 31, 2005
|
|
|
(15,904 |
) |
|
|
(15,904 |
) |
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
462,259 |
|
|
|
434,471 |
|
|
|
|
|
|
|
|
Total Liabilities & Shareholders Equity
|
|
$ |
882,630 |
|
|
$ |
858,515 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated
Financial Statements.
F-3
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands, except per | |
|
|
share data) | |
|
|
(Unaudited) | |
REVENUES:
|
|
|
|
|
|
|
|
|
|
Rentals and Fees
|
|
$ |
254,246 |
|
|
$ |
209,145 |
|
|
Retail Sales
|
|
|
19,170 |
|
|
|
16,043 |
|
|
Non-Retail Sales
|
|
|
64,027 |
|
|
|
45,571 |
|
|
Franchise Royalties and Fees
|
|
|
8,223 |
|
|
|
7,191 |
|
|
Other
|
|
|
1,621 |
|
|
|
1,398 |
|
|
|
|
|
|
|
|
|
|
|
347,287 |
|
|
|
279,348 |
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
Retail Cost of Sales
|
|
|
12,406 |
|
|
|
10,736 |
|
|
Non-Retail Cost of Sales
|
|
|
59,791 |
|
|
|
42,633 |
|
|
Operating Expenses
|
|
|
143,956 |
|
|
|
119,631 |
|
|
Depreciation of Rental Merchandise
|
|
|
93,281 |
|
|
|
75,130 |
|
|
Interest
|
|
|
3,222 |
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
312,656 |
|
|
|
249,730 |
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES
|
|
|
34,631 |
|
|
|
29,618 |
|
INCOME TAXES
|
|
|
13,070 |
|
|
|
11,196 |
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$ |
21,561 |
|
|
$ |
18,422 |
|
|
|
|
|
|
|
|
COMMON STOCK AND CLASS A COMMON STOCK EARNINGS PER
SHARE:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.43 |
|
|
$ |
.37 |
|
|
|
|
|
|
|
|
|
Assuming Dilution
|
|
|
.42 |
|
|
|
.36 |
|
|
|
|
|
|
|
|
CASH DIVIDENDS DECLARED PER SHARE:
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
$ |
.014 |
|
|
$ |
.013 |
|
|
Class A Common Stock
|
|
|
.014 |
|
|
|
.013 |
|
|
COMMON STOCK AND CLASS A COMMON STOCK WEIGHTED AVERAGE
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
50,185 |
|
|
|
49,767 |
|
|
Assuming Dilution
|
|
|
51,085 |
|
|
|
50,747 |
|
The accompanying notes are an integral part of the Consolidated
Financial Statements.
F-4
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$ |
21,561 |
|
|
$ |
18,422 |
|
|
Depreciation and Amortization
|
|
|
100,643 |
|
|
|
81,805 |
|
|
Additions to Rental Merchandise
|
|
|
(187,164 |
) |
|
|
(140,294 |
) |
|
Book Value of Rental Merchandise Sold or Disposed
|
|
|
76,837 |
|
|
|
56,308 |
|
|
Change in Deferred Income Taxes
|
|
|
(1,812 |
) |
|
|
(1,702 |
) |
|
Loss on Sale of Property, Plant, and Equipment
|
|
|
14 |
|
|
|
7 |
|
|
Change in Income Tax Receivable, Prepaid Expenses and Other
Assets
|
|
|
(1,042 |
) |
|
|
15,095 |
|
|
Change in Accounts Payable and Accrued Expenses
|
|
|
9,068 |
|
|
|
25,220 |
|
|
Change in Accounts Receivable
|
|
|
(751 |
) |
|
|
(4,038 |
) |
|
Other Changes, Net
|
|
|
(961 |
) |
|
|
(501 |
) |
|
|
|
|
|
|
|
|
|
Cash Provided by Operating Activities
|
|
|
16,393 |
|
|
|
50,322 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Additions to Property, Plant and Equipment
|
|
|
(16,261 |
) |
|
|
(10,551 |
) |
|
Contracts and Other Assets Acquired
|
|
|
(3,248 |
) |
|
|
(9,869 |
) |
|
Proceeds from Sale of Marketable Securities
|
|
|
|
|
|
|
9 |
|
|
Proceeds from Sale of Property, Plant, and Equipment
|
|
|
8,804 |
|
|
|
1,013 |
|
|
|
|
|
|
|
|
|
|
Cash Used by Investing Activities
|
|
|
(10,705 |
) |
|
|
(19,398 |
) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds from Credit Facilities
|
|
|
154,241 |
|
|
|
30,534 |
|
|
Repayments on Credit Facilities
|
|
|
(165,503 |
) |
|
|
(62,288 |
) |
|
Dividends Paid
|
|
|
(698 |
) |
|
|
(647 |
) |
|
Excess Tax Benefits From Stock Option Exercise
|
|
|
3,026 |
|
|
|
|
|
|
Issuance of Stock Under Stock Option Plans
|
|
|
2,452 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
Cash Used by Financing Activities
|
|
|
(6,482 |
) |
|
|
(32,316 |
) |
|
|
|
|
|
|
|
Decrease in Cash
|
|
|
(794 |
) |
|
|
(1,392 |
) |
|
Cash at Beginning of Period
|
|
|
6,973 |
|
|
|
5,865 |
|
|
|
|
|
|
|
|
|
Cash at End of Period
|
|
$ |
6,179 |
|
|
$ |
4,473 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated
Financial Statements.
F-5
AARON RENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2006
NOTE A: BASIS OF
PRESENTATION
The consolidated financial statements include the accounts of
Aaron Rents, Inc. (the Company) and its wholly owned
subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
The consolidated balance sheet as of March 31, 2006 and the
consolidated statements of earnings and the consolidated
statements of cash flows for the quarters ended March 31,
2006 and 2005, are unaudited. The preparation of interim
consolidated financial statements requires management to make
estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. Management
does not believe these estimates or assumptions will change
significantly in the future absent unsurfaced or unforeseen
events. Generally, actual experience has been consistent with
managements prior estimates and assumptions; however,
actual results could differ from those estimates.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been
condensed or omitted. We suggest you read these financial
statements in conjunction with the financial statements and
notes thereto included in the Companys Annual Report on
Form 10-K filed
with the Securities and Exchange Commission for the year ended
December 31, 2005. The results of operations for the
quarter ended March 31, 2006 are not necessarily indicative
of operating results for the full year.
|
|
|
Accounting Policies and Estimates |
See Note A to the consolidated financial statements in the
2005 Annual Report on
Form 10-K.
See Note A to the consolidated financial statements in the
2005 Annual Report on
Form 10-K. Rental
merchandise adjustments for the three-month periods ended
March 31 were $4.6 million in 2006 and
$3.1 million in 2005. These charges are recorded as a
component of operating expenses.
|
|
|
Goodwill and Other Intangibles |
During the three months ended March 31, 2006, the Company
recorded $2.0 million in goodwill, $184,000 in customer
relationship intangibles, and $48,000 in acquired franchise
development rights in connection with a series of acquisitions
of sales and lease ownership businesses. Customer relationship
intangibles are amortized on a straight-line basis over their
estimated useful lives of two years. Amortization expense was
$464,000 and $486,000 for the three-month periods ended
March 31, 2006 and 2005, respectively. The aggregate
purchase price for these asset acquisitions totaled
$3.2 million, with the principal tangible assets acquired
consisting of rental merchandise and certain fixtures and
equipment. These purchase price allocations are tentative and
preliminary; we anticipate finalizing them prior to
December 31, 2006. The results of operations of the
acquired businesses are included in the Companys results
of operations from the dates of acquisition and are not
significant.
The Company has stock-based employee compensation plans, which
are more fully described below. Prior to January 1, 2006,
the Company accounted for awards granted under those plans
following the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations.
The Companys non-qualified stock options have
10-year terms and
generally vest over a three-year service period from the date of
grant. The Company grants stock options for a fixed number of
shares to employees primarily with an exercise price equal to
the fair value of the shares at the date of grant and,
accordingly, recognizes no compensation expense for these stock
option
F-6
AARON RENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
grants. The Company also has granted stock options for a fixed
number of shares to certain key executives with an exercise
price below the fair value of the shares at the date of grant.
Compensation expense for these grants is recognized over the
three-year vesting period of the options for the difference
between the exercise price and the fair value of a share of
Common Stock on the date of grant multiplied by the number of
options granted.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of the Financial Accounting
Standards Boards Statement of Financial Accounting
Standards No. 123(R), Share-Based Payments
(SFAS 123R), using the modified prospective
application method. Under this transition method, compensation
expense recognized in the quarter ended March 31, 2006
includes the applicable amounts of compensation expense of all
stock-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of
SFAS No. 123, Accounting for Stock-based
Compensation (SFAS 123) and previously
presented in the pro forma footnote disclosures. The Company did
not grant any stock options in the three months ended
March 31, 2006.
Under the modified prospective application method, results for
prior periods have not been restated to reflect the effects of
implementing SFAS 123R. For purposes of pro forma
disclosures under SFAS 123 as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure
an amendment of FASB Statement 123, the estimated fair
value of the options is amortized to expense over the
options vesting period. The following table illustrates
the effect on net earnings and earnings per share if the fair
value based method had been applied to all outstanding and
unvested awards for the following period:
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, 2005 | |
|
|
| |
|
|
(In thousands, | |
|
|
except share data) | |
Net Earnings before effect of Key Executive grants
|
|
$ |
18,554 |
|
Expense effect of Key Executive grants recognized
|
|
|
(132 |
) |
|
|
|
|
Net Earnings as Reported
|
|
|
18,422 |
|
Stock-based Employee Compensation Cost, Net of Tax
Pro Forma
|
|
|
(496 |
) |
|
|
|
|
Pro Forma Net Earnings
|
|
$ |
17,926 |
|
|
|
|
|
Basic Earnings Per Share As Reported
|
|
$ |
.37 |
|
|
|
|
|
Basic Earnings Per Share Pro Forma
|
|
$ |
.36 |
|
|
|
|
|
Diluted Earnings Per Share As Reported
|
|
$ |
.36 |
|
|
|
|
|
Diluted Earnings Per share Pro Forma
|
|
$ |
.35 |
|
|
|
|
|
The Company estimates the fair value for the options granted on
the grant date using a Black-Scholes option-pricing model. The
expected volatility is based on the historical volatility of the
Companys Common Stock over the most recent period
generally commensurate with the expected estimated life of each
respective grant. The expected lives of options are based on the
Companys historical share option exercise experience.
Forfeiture assumptions are based on the Companys
historical forfeiture experience. The Company believes the
historical experience method is the best estimate of future
exercise patterns currently available. The risk-free interest
rates are determined using the implied yield currently available
for zero-coupon U.S. government issues with a remaining
term equal to the expected life of the options. The expected
dividend yields are based on the approved annual dividend rate
in effect and current market price of the underlying Common
Stock at the time of grant. No assumption for a future rate
increase has been included unless there is an approved plan to
increase the dividend in the near term.
F-7
AARON RENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the pro forma information regarding net income and earnings
per share, the Company recognizes compensation expense over the
explicit service period up to the date of actual retirement.
Upon adoption of SFAS 123R, the Company is required to
recognize compensation expense over a period to the date the
employee first becomes eligible for retirement for awards
granted or modified after the adoption of SFAS 123R.
The results of operations for the three months ended
March 31, 2006 include $950,000 in pre-tax compensation
expense related to unvested grants as of January 1, 2006.
At March 31, 2006, there was $4.3 million of total
unrecognized compensation expense related to non-vested stock
options which is expected to be recognized over a period of
2.25 years. SFAS 123R requires that the benefits of
tax deductions in excess of recognized compensation expense to
be reported as financing cash flows, rather than an operating
cash flow as required under prior guidance. Excess tax benefits
of $3.0 million were included in cash provided by financing
activities for the quarter ended March 31, 2006. The
related net tax benefit from the exercise of stock options in
the first three months of 2006 was $3.5 million.
Under the Companys stock option plans, options granted
become exercisable after a period of three years and unexercised
options lapse ten years after the date of the grant. Options are
subject to forfeiture upon termination of service. Under the
plans, 954,000 of the Companys shares are reserved for
future grants at March 31, 2006. The weighted average fair
value of options granted was $8.09 in 2005, $5.18 in 2004, and
$5.48 in 2003. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model
with weighted average assumptions of forfeiture rates of 5.85%,
9.87% and 2.55% for 2005, 2004 and 2003, respectively.
The following table summarizes information about stock options
outstanding at March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
|
|
|
|
|
|
|
Remaining | |
|
|
|
|
|
|
Number Outstanding | |
|
Contractual Life | |
|
Weighted Average | |
|
Number Exercisable | |
|
Weighted Average | |
Range of Exercise Prices |
|
March 31, 2006 | |
|
(In Years) | |
|
Exercise Price | |
|
March 31, 2006 | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 4.38 - 10.00
|
|
|
1,162,626 |
|
|
|
4.48 |
|
|
$ |
6.98 |
|
|
|
1,162,626 |
|
|
$ |
6.98 |
|
10.01 - 15.00
|
|
|
687,750 |
|
|
|
7.77 |
|
|
|
14.02 |
|
|
|
3,000 |
|
|
|
13.49 |
|
15.01 - 20.00
|
|
|
108,750 |
|
|
|
7.53 |
|
|
|
15.60 |
|
|
|
|
|
|
|
|
|
20.01 - 24.94
|
|
|
595,146 |
|
|
|
8.62 |
|
|
|
22.41 |
|
|
|
2,000 |
|
|
|
21.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 4.38 - 24.94
|
|
|
2,554,272 |
|
|
|
6.46 |
|
|
$ |
12.84 |
|
|
|
1,167,626 |
|
|
$ |
7.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes option activity for the periods
indicated in the Companys stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
|
|
|
|
|
|
Weighted Average | |
|
Remaining | |
|
Aggregate Intrinsic | |
|
Weighted Average | |
|
|
Options | |
|
Exercise Price | |
|
Contractual Term | |
|
Value | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
|
|
|
(In thousands) | |
|
|
Outstanding at January 1, 2006
|
|
|
3,026 |
|
|
$ |
11.73 |
|
|
|
|
|
|
$ |
46,726 |
|
|
$ |
4.01 |
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(459 |
) |
|
|
5.34 |
|
|
|
|
|
|
|
(9,502 |
) |
|
|
2.84 |
|
|
Forfeited
|
|
|
(13 |
) |
|
|
19.92 |
|
|
|
|
|
|
|
(95 |
) |
|
|
5.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
2,554 |
|
|
$ |
12.84 |
|
|
|
6.46 years |
|
|
$ |
36,611 |
|
|
$ |
4.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006
|
|
|
1,168 |
|
|
$ |
7.02 |
|
|
|
4.47 years |
|
|
$ |
23,529 |
|
|
$ |
2.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of unvested options was $7.83 as
of January 1, 2006 and $8.19 as of March 31, 2006.
F-8
AARON RENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has benefited in the past from the additional
first-year or bonus depreciation allowance under
U.S. federal income tax law, which generally allowed the
Company to accelerate the depreciation on rental merchandise it
acquired after September 10, 2001 and placed in service
prior to January 1, 2005. It is anticipated that the
expiration of this temporary accelerated depreciation allowance,
combined with the Companys profitability, will contribute
to the Company having to make future tax payments on its income.
NOTE B CREDIT FACILITIES
See Note D to the consolidated financial statements in the
2005 Annual Report on
Form 10-K.
During the third quarter of 2005, the Company entered into a
note purchase agreement with a consortium of insurance
companies. Pursuant to this agreement, the Company and its two
subsidiaries as co-obligors issued $60 million in senior
unsecured notes to the purchasers in a private placement. The
notes bear interest at a rate of 5.03% per year and mature
on July 27, 2012. Interest only payments are due quarterly
for the first two years, followed by annual $12 million
principal repayments plus interest for the five years
thereafter, beginning on July 27, 2008. The Company used
the proceeds from this financing to replace shorter-term
borrowings under its revolving credit agreement.
On February 27, 2006, the Company entered into a second
amendment to the revolving credit agreement to increase the
maximum borrowing limit to $140.0 million from
$87.0 million and to extend the expiration date to
May 28, 2008. In addition, the franchise loan facility and
guaranty was amended on that date to decrease the maximum
commitment amount from $140.0 million to
$115.0 million.
There were no significant changes in the nature of the
Companys capital leases with related parties during the
first quarter of 2006. The Company was in compliance with all
restrictive covenants contained in its credit facilities.
NOTE C COMPREHENSIVE INCOME
Comprehensive income is comprised of the net earnings of the
Company, the change in the fair value of interest rate swap
agreements, net of income taxes, and the changes in unrealized
gains or losses on available-for-sale securities, net of income
taxes, as summarized below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Net Earnings
|
|
$ |
21,561 |
|
|
$ |
18,422 |
|
Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
Derivative Instruments, Net of Taxes
|
|
|
|
|
|
|
120 |
|
Unrealized (Loss) Gain on Marketable Securities, Net of Taxes
|
|
|
(6 |
) |
|
|
82 |
|
|
|
|
|
|
|
|
Total Other Comprehensive Income
|
|
|
(6 |
) |
|
|
202 |
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$ |
21,555 |
|
|
$ |
18,624 |
|
|
|
|
|
|
|
|
F-9
AARON RENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE D SEGMENT INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Revenues From External Customers:
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership
|
|
$ |
307,072 |
|
|
$ |
240,618 |
|
Corporate Furnishings
|
|
|
32,283 |
|
|
|
30,185 |
|
Franchise
|
|
|
8,328 |
|
|
|
7,270 |
|
Other
|
|
|
1,853 |
|
|
|
1,199 |
|
Manufacturing
|
|
|
21,872 |
|
|
|
25,949 |
|
Elimination of Intersegment Revenues
|
|
|
(21,793 |
) |
|
|
(25,963 |
) |
Cash to Accrual Adjustments
|
|
|
(2,328 |
) |
|
|
90 |
|
|
|
|
|
|
|
|
Total Revenues From External Customers
|
|
$ |
347,287 |
|
|
$ |
279,348 |
|
|
|
|
|
|
|
|
Earnings Before Income Taxes:
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership
|
|
$ |
28,264 |
|
|
$ |
21,213 |
|
Corporate Furnishings
|
|
|
3,923 |
|
|
|
3,642 |
|
Franchise
|
|
|
6,125 |
|
|
|
5,404 |
|
Other
|
|
|
(1,464 |
) |
|
|
(623 |
) |
Manufacturing
|
|
|
61 |
|
|
|
587 |
|
|
|
|
|
|
|
|
Earnings Before Income Taxes for Reportable Segments
|
|
|
36,909 |
|
|
|
30,223 |
|
Elimination of Intersegment (Profit)
|
|
|
(7 |
) |
|
|
(530 |
) |
Cash to Accrual and Other Adjustments
|
|
|
(2,271 |
) |
|
|
(75 |
) |
|
|
|
|
|
|
|
Total Earnings Before Income Taxes
|
|
$ |
34,631 |
|
|
$ |
29,618 |
|
|
|
|
|
|
|
|
Earnings before income taxes for each reportable segment are
generally determined in accordance with accounting principles
generally accepted in the United States with the following
adjustments:
|
|
|
|
|
A predetermined amount of approximately 2.3% of each reportable
segments revenues is charged to the reportable segment as
an allocation of corporate overhead. |
|
|
|
Accruals related to store closures are not recorded on the
reportable segments financial statements, but are rather
maintained and controlled by corporate headquarters. |
|
|
|
The capitalization and amortization of manufacturing and
distribution variances are recorded on the consolidated
financial statements as part of Cash to Accrual and Other
Adjustments and are not allocated to the segment that holds the
related rental merchandise. |
|
|
|
Advertising expense in the sales and lease ownership division is
estimated at the beginning of each year and then allocated to
the division ratably over time for management reporting
purposes. For financial reporting purposes, advertising expense
is recognized when the related advertising activities occur. The
difference between these two methods is reflected as part of
Cash to Accrual and Other Adjustments. |
|
|
|
Sales and lease ownership rental merchandise write-offs are
recorded using the direct write-off method for management
reporting purposes. For financial reporting purposes the
allowance method is used and is reflected as part of Cash to
Accrual and Other Adjustments. |
F-10
AARON RENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Interest on borrowings is estimated at the beginning of each
year. Interest is then allocated to operating segments on the
basis of relative total assets. |
|
|
|
Sales and lease ownership revenues are reported on a cash basis
for management reporting purposes. |
Revenues in the Other category are primarily from
leasing space to unrelated third parties in the corporate
headquarters building and revenues from several minor unrelated
activities. The pre-tax items in the Other category
are the net result of the profits and losses from leasing a
portion of the corporate headquarters and several minor
unrelated activities, and the portion of corporate overhead not
allocated to the reportable segments for management purposes.
NOTE E ADOPTION OF NEW ACCOUNTING PRINCIPLES
In November 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4
(SFAS 151). SFAS 151 amends Accounting
Research Bulletin No. 43, Chapter 4, to clarify
that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be
recognized as current period charges. In addition, SFAS 151
requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the
production facilities. The Company adopted SFAS 151
effective January 1, 2006, and the impact was not material.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a replacement
of APB Opinion No. 20 and FASB Statement No. 3
(SFAS 154). SFAS 154 replaces APB Opinion
No. 20, Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting
for and reporting of a change in accounting principle.
SFAS 154 applies to all voluntary changes in an accounting
principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. SFAS 154
is effective for accounting changes and error corrections
occurring in fiscal years beginning after December 15,
2005. The Company adopted SFAS 154 effective
January 1, 2006, and this adoption did not have a material
effect on the Companys financial position or results of
operations.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 123R
using the modified prospective application method. Under this
transition method, compensation expense recognized in the
quarter ended March 31, 2006, includes the applicable
amounts of compensation expense of all stock-based payments
granted prior to, but not yet vested as of, January 1, 2006
based on the grant-date fair value estimated in accordance with
the original provisions of SFAS 123 and previously
presented in the pro forma footnote disclosures. Refer to
Note A for further information on the impact of adoption.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
(SFAS 155). SFAS 155 allows any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities to be carried at fair
value in its entirety, with changes in fair value recognized in
earnings. In addition, SFAS 155 requires that beneficial
interests in securitized financial assets be analyzed to
determine whether they are freestanding derivatives or contain
an embedded derivative. SFAS 155 also eliminates a prior
restriction on the types of passive derivatives that a
qualifying special purpose entity is permitted to hold.
SFAS 155 is applicable to new or modified financial
instruments in fiscal years beginning after September 15,
2006, though the provisions related to fair value accounting for
hybrid financial instruments can also be applied to existing
instruments. Early adoption, as of the beginning of an
entitys fiscal year, is also permitted, provided interim
financial statements have not yet been issued. The adoption of
SFAS 155 is not anticipated to have a material effect on
the Companys financial position or results of operations.
F-11
AARON RENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets, an
amendment of FASB Statement No. 140
(SFAS 156). SFAS 156 amends
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities with respect to the accounting for separately
recognized servicing assets and servicing liabilities.
SFAS 156 requires that all separately recognized servicing
assets and servicing liabilities be initially measured at fair
value, if practicable. It also permits, but does not require,
the subsequent measurement of servicing assets and servicing
liabilities at fair value. The adoption of SFAS 156 is not
anticipated to have a material effect on the Companys
financial position or results of operations.
NOTE F COMMITMENTS
The Company leases warehouse and retail store space for
substantially all of its operations under operating leases
expiring at various times through 2021. Most of the leases
contain renewal options for additional periods ranging from one
to 15 years or provide for options to purchase the related
property at predetermined purchase prices that do not represent
bargain purchase options. We also lease transportation and
computer equipment under operating leases expiring during the
next five years. We expect that most leases will be renewed or
replaced by other leases in the normal course of business.
The Company has guaranteed the borrowings of certain independent
franchisees under a franchise loan program with several banks.
In the event these franchisees are unable to meet their debt
service payments or otherwise experience an event of default,
the Company would be unconditionally liable for a portion of the
outstanding balance of the franchisees debt obligations,
which would be due in full within 90 days of the event of
default. At March 31, 2006, the portion that the Company
might be obligated to repay in the event franchisees defaulted
was $105.6 million. Of this amount, approximately
$80.6 million represents franchisee borrowings outstanding
under the franchise loan program and approximately
$25.0 million represents franchisee borrowings that the
Company guarantees under other debt facilities. However, due to
franchisee borrowing limits, management believes any losses
associated with any defaults would be mitigated through recovery
of rental merchandise as well as the associated rental
agreements and other assets. Since its inception in 1994, the
Company has had no significant losses associated with the
franchise loan program.
The Company has no long-term commitments to purchase
merchandise. See Note F to the consolidated financial
statements in the 2005 Annual Report on
Form 10-K for
further information.
NOTE G RELATED PARTY TRANSACTIONS
The Company leases certain properties under capital leases with
certain related parties that are more fully described in
Note D to the consolidated financial statements in the 2005
Annual Report on
Form 10-K.
As part of its extensive sports marketing program, the Company
sponsors professional driver Michael Waltrips Aarons
Dream Machine in the NASCAR Busch Series. The sons of the
president of the Companys sales and lease ownership
division are employed by Mr. Waltrips company as
drivers in its driver development program. The two drivers race
Aarons sponsored cars full time in the USAR Hooters Pro
Cup Series, one in the Northern Division and the other in the
Southern Division. The amount to be paid in 2006 by the Company
for the sponsorship of Michael Waltrip attributable to the
driver development program is currently projected to be
$983,000, to be adjusted by changes, if any, in the racing
schedule for the current year and credits for changes from the
2005 racing season. Motor sports sponsorships and promotions
have been an integral part of the Companys marketing
programs for a number of years.
F-12
Report of Independent Registered Public Accounting Firm
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, 2005
and 2004, and the related consolidated statements of earnings,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2005. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Aaron Rents, Inc. and Subsidiaries at
December 31, 2005 and 2004, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Aaron Rents, Inc.s internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 14, 2006
expressed an unqualified opinion thereon.
Atlanta, Georgia
March 14, 2006
F-13
Management Report on Internal Control Over Financial
Reporting
Management of Aaron Rents, Inc. (the Company) is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in
Rules 13a-15(f)
and 15d-15(f) under the
Securities Exchange Act of 1934, as amended.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there
is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, the risk.
The Companys management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2005. In making this assessment, the
Companys management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
Based on our assessment, management believes that, as of
December 31, 2005, the Companys internal control over
financial reporting is effective based on those criteria.
The Companys independent auditor has issued an audit
report on our assessment of the Companys internal control
over financial reporting. This report appears on the following
page.
March 14, 2006
F-14
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Aaron Rents, Inc.
We have audited managements assessment, included in the
accompanying Management Report on Internal Control Over
Financial Reporting that Aaron Rents, Inc. maintained effective
internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Aaron Rents, Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. In
addition, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Aaron Rents,
Inc. maintained effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, Aaron Rents, Inc. maintained, in all material respects,
effective internal control over financial reporting as
December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Aaron Rents, Inc. as of
December 31, 2005 and 2004, and the related consolidated
statement of earnings, shareholders equity, and cash flows for
each of the three years in the period ended December 31,
2005 of Aaron Rents, Inc. and our report dated March 14,
2006 expressed an unqualified opinion thereon.
Atlanta, Georgia
March 14, 2006
F-15
AARON RENTS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except share | |
|
|
data) | |
ASSETS: |
Cash
|
|
$ |
6,973 |
|
|
$ |
5,865 |
|
Accounts Receivable (net of allowances of $2,742 in 2005 and
$1,963 in 2004)
|
|
|
42,812 |
|
|
|
32,736 |
|
Rental Merchandise
|
|
|
811,335 |
|
|
|
639,192 |
|
Less: Accumulated Depreciation
|
|
|
(260,403 |
) |
|
|
(213,625 |
) |
|
|
|
|
|
|
|
|
|
|
550,932 |
|
|
|
425,567 |
|
Property, Plant and Equipment, Net
|
|
|
133,759 |
|
|
|
111,118 |
|
Goodwill and Other Intangibles, Net
|
|
|
101,085 |
|
|
|
74,874 |
|
Prepaid Expenses and Other Assets
|
|
|
22,954 |
|
|
|
50,128 |
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
858,515 |
|
|
$ |
700,288 |
|
|
|
|
|
|
|
|
|
LIABILITIES & SHAREHOLDERS EQUITY: |
Accounts Payable and Accrued Expenses
|
|
$ |
112,817 |
|
|
$ |
93,565 |
|
Dividends Payable
|
|
|
699 |
|
|
|
647 |
|
Deferred Income Taxes Payable
|
|
|
75,197 |
|
|
|
95,173 |
|
Customer Deposits and Advance Payments
|
|
|
23,458 |
|
|
|
19,070 |
|
Credit Facilities
|
|
|
211,873 |
|
|
|
116,655 |
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
424,044 |
|
|
|
325,110 |
|
Commitments & Contingencies
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
Common Stock, Par Value $.50 Per Share; Authorized:
50,000,000 Shares; Shares Issued: 44,989,602 at
December 31, 2005 and 2004
|
|
|
22,495 |
|
|
|
22,495 |
|
|
Class A Common Stock, Par Value $.50 Per Share; Authorized:
25,000,000 Shares; Shares Issued: 12,063,856 at
December 31, 2005 and 2004
|
|
|
6,032 |
|
|
|
6,032 |
|
|
Additional Paid-in Capital
|
|
|
92,852 |
|
|
|
91,032 |
|
|
Retained Earnings
|
|
|
349,377 |
|
|
|
294,077 |
|
|
Accumulated Other Comprehensive Loss
|
|
|
(14 |
) |
|
|
(539 |
) |
|
|
|
|
|
|
|
|
|
|
470,742 |
|
|
|
413,097 |
|
Less: Treasury Shares at Cost,
|
|
|
|
|
|
|
|
|
|
Common Stock, 3,358,521 and 3,625,230 Shares at
December 31, 2005 and 2004, respectively
|
|
|
(20,367 |
) |
|
|
(22,015 |
) |
|
Class A Common Stock, 3,667,623 Shares at
December 31, 2005 and 2004
|
|
|
(15,904 |
) |
|
|
(15,904 |
) |
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
434,471 |
|
|
|
375,178 |
|
|
|
|
|
|
|
|
Total Liabilities & Shareholders Equity
|
|
$ |
858,515 |
|
|
$ |
700,288 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated
Financial Statements.
F-16
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share) | |
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals and Fees
|
|
$ |
845,162 |
|
|
$ |
694,293 |
|
|
$ |
553,773 |
|
|
Retail Sales
|
|
|
58,366 |
|
|
|
56,259 |
|
|
|
68,786 |
|
|
Non-Retail Sales
|
|
|
185,622 |
|
|
|
160,774 |
|
|
|
120,355 |
|
|
Franchise Royalties and Fees
|
|
|
29,474 |
|
|
|
25,093 |
|
|
|
19,328 |
|
|
Other
|
|
|
6,881 |
|
|
|
10,061 |
|
|
|
4,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,125,505 |
|
|
|
946,480 |
|
|
|
766,797 |
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Cost of Sales
|
|
|
39,054 |
|
|
|
39,380 |
|
|
|
50,913 |
|
|
Non-Retail Cost of Sales
|
|
|
172,807 |
|
|
|
149,207 |
|
|
|
111,714 |
|
|
Operating Expenses
|
|
|
507,158 |
|
|
|
414,518 |
|
|
|
344,884 |
|
|
Depreciation of Rental Merchandise
|
|
|
305,630 |
|
|
|
253,456 |
|
|
|
195,661 |
|
|
Interest
|
|
|
8,519 |
|
|
|
5,413 |
|
|
|
5,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,033,168 |
|
|
|
861,974 |
|
|
|
708,954 |
|
EARNINGS BEFORE INCOME TAXES
|
|
|
92,337 |
|
|
|
84,506 |
|
|
|
57,843 |
|
INCOME TAXES
|
|
|
34,344 |
|
|
|
31,890 |
|
|
|
21,417 |
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$ |
57,993 |
|
|
$ |
52,616 |
|
|
$ |
36,426 |
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE
|
|
$ |
1.16 |
|
|
$ |
1.06 |
|
|
$ |
0.74 |
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE ASSUMING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTION
|
|
$ |
1.14 |
|
|
$ |
1.04 |
|
|
$ |
0.73 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated
Financial Statements.
F-17
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (Loss) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
Treasury Stock | |
|
Common Stock | |
|
Additional | |
|
|
|
Derivatives | |
|
|
|
|
| |
|
| |
|
Paid-In | |
|
Retained | |
|
Designated as | |
|
Marketable | |
|
|
Shares | |
|
Amount | |
|
Common | |
|
Class A | |
|
Capital | |
|
Earnings | |
|
Hedges | |
|
Securities | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share) | |
Balance, January 1, 2003
|
|
|
(8,197 |
) |
|
$ |
(41,696 |
) |
|
$ |
9,998 |
|
|
$ |
2,681 |
|
|
$ |
87,502 |
|
|
$ |
223,928 |
|
|
$ |
(1,972 |
) |
|
$ |
104 |
|
Dividends, $.022 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,090 |
) |
|
|
|
|
|
|
|
|
Stock Dividend
|
|
|
|
|
|
|
|
|
|
|
4,999 |
|
|
|
1,340 |
|
|
|
(54 |
) |
|
|
(6,340 |
) |
|
|
|
|
|
|
|
|
Reissued Shares
|
|
|
306 |
|
|
|
1,635 |
|
|
|
|
|
|
|
|
|
|
|
857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,426 |
|
|
|
|
|
|
|
|
|
Change in Fair Value of Financial Instruments, Net of Income
Taxes of $1,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,031 |
|
|
|
837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
(7,891 |
) |
|
|
(40,061 |
) |
|
|
14,997 |
|
|
|
4,021 |
|
|
|
88,305 |
|
|
|
252,924 |
|
|
|
(941 |
) |
|
|
941 |
|
Dividends, $.039 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,954 |
) |
|
|
|
|
|
|
|
|
Stock Dividend
|
|
|
|
|
|
|
|
|
|
|
7,498 |
|
|
|
2,011 |
|
|
|
(80 |
) |
|
|
(9,509 |
) |
|
|
|
|
|
|
|
|
Reissued Shares
|
|
|
598 |
|
|
|
2,142 |
|
|
|
|
|
|
|
|
|
|
|
2,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,616 |
|
|
|
|
|
|
|
|
|
Change in Fair Value of Financial Instruments, Net of Income
Taxes of $119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
662 |
|
|
|
(1,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
(7,293 |
) |
|
|
(37,919 |
) |
|
|
22,495 |
|
|
|
6,032 |
|
|
|
91,032 |
|
|
|
294,077 |
|
|
|
(279 |
) |
|
|
(260 |
) |
Dividends, $.054 Per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,693 |
) |
|
|
|
|
|
|
|
|
Reissued Shares
|
|
|
267 |
|
|
|
1,648 |
|
|
|
|
|
|
|
|
|
|
|
1,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,993 |
|
|
|
|
|
|
|
|
|
Change in Fair Value of Financial Instruments, Net of Income
Taxes of $284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279 |
|
|
|
246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
(7,026 |
) |
|
$ |
(36,271 |
) |
|
$ |
22,495 |
|
|
$ |
6,032 |
|
|
$ |
92,852 |
|
|
$ |
349,377 |
|
|
$ |
|
|
|
$ |
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated
Financial Statements.
F-18
AARON RENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$ |
57,993 |
|
|
$ |
52,616 |
|
|
$ |
36,426 |
|
|
Depreciation and Amortization
|
|
|
333,131 |
|
|
|
277,187 |
|
|
|
215,397 |
|
|
Additions to Rental Merchandise
|
|
|
(647,657 |
) |
|
|
(528,255 |
) |
|
|
(384,429 |
) |
|
Book Value of Rental Merchandise Sold or Disposed
|
|
|
233,861 |
|
|
|
206,589 |
|
|
|
178,460 |
|
|
Deferred Income Taxes
|
|
|
(20,261 |
) |
|
|
39,919 |
|
|
|
3,496 |
|
|
Gain on Marketable Securities
|
|
|
(579 |
) |
|
|
(5,481 |
) |
|
|
|
|
|
Loss (Gain) on Sale of Property, Plant, and Equipment
|
|
|
148 |
|
|
|
84 |
|
|
|
(814 |
) |
|
Change in Income Taxes Receivable, included in Prepaid Expenses
and Other Assets
|
|
|
18,553 |
|
|
|
(20,023 |
) |
|
|
|
|
|
Change in Accounts Payable and Accrued Expenses
|
|
|
17,025 |
|
|
|
4,118 |
|
|
|
17,275 |
|
|
Change in Accounts Receivable
|
|
|
(10,076 |
) |
|
|
(1,858 |
) |
|
|
(3,905 |
) |
|
Other Changes, Net
|
|
|
11,375 |
|
|
|
9,842 |
|
|
|
6,630 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash (Used by) Provided by Operating Activities
|
|
|
(6,487 |
) |
|
|
34,738 |
|
|
|
68,536 |
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to Property, Plant and Equipment
|
|
|
(61,449 |
) |
|
|
(37,723 |
) |
|
|
(37,898 |
) |
|
Contracts and Other Assets Acquired
|
|
|
(46,725 |
) |
|
|
(38,497 |
) |
|
|
(44,347 |
) |
|
Proceeds from Sale of Marketable Securities
|
|
|
6,993 |
|
|
|
7,592 |
|
|
|
|
|
|
Investment in Marketable Securities
|
|
|
|
|
|
|
(6,436 |
) |
|
|
(715 |
) |
|
Proceeds from Sale of Property, Plant, and Equipment
|
|
|
14,000 |
|
|
|
4,760 |
|
|
|
8,025 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used by Investing Activities
|
|
|
(87,181 |
) |
|
|
(70,304 |
) |
|
|
(74,935 |
) |
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of senior notes
|
|
|
60,000 |
|
|
|
|
|
|
|
|
|
|
Proceeds from Credit Facilities
|
|
|
450,854 |
|
|
|
287,307 |
|
|
|
86,424 |
|
|
Repayments on Credit Facilities
|
|
|
(415,636 |
) |
|
|
(250,222 |
) |
|
|
(80,119 |
) |
|
Dividends Paid
|
|
|
(2,641 |
) |
|
|
(2,042 |
) |
|
|
(924 |
) |
|
Issuance of Stock Under Stock Option Plans
|
|
|
2,199 |
|
|
|
1,701 |
|
|
|
1,789 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by Financing Activities
|
|
|
94,776 |
|
|
|
36,744 |
|
|
|
7,170 |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Cash
|
|
|
1,108 |
|
|
|
1,178 |
|
|
|
771 |
|
|
Cash at Beginning of Year
|
|
|
5,865 |
|
|
|
4,687 |
|
|
|
3,916 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash at End of Year
|
|
$ |
6,973 |
|
|
$ |
5,865 |
|
|
$ |
4,687 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid During the Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
8,395 |
|
|
$ |
5,361 |
|
|
$ |
6,759 |
|
|
|
Income Taxes
|
|
$ |
51,228 |
|
|
$ |
16,783 |
|
|
$ |
4,987 |
|
The accompanying notes are an integral part of the Consolidated
Financial Statements.
F-19
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
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As of December 31, 2005 and 2004, and for the Years
Ended December 31, 2005, 2004 and 2003. |
Basis of Presentation The consolidated
financial statements include the accounts of Aaron Rents, Inc.
and its wholly owned subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminated. The
preparation of the Companys consolidated financial
statements in conformity with accounting principles generally
accepted in the United States 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. Generally, actual
experience has been consistent with managements prior
estimates and assumptions. Management does not believe these
estimates or assumptions will change significantly in the future
absent unsurfaced or unforeseen events.
On July 12, 2004, the Company announced a 3-for-2 stock
split effected in the form of a 50% stock dividend on both
Common Stock and Class A Common Stock. New shares were
distributed on August 16, 2004 to shareholders of record as
of the close of business on August 2, 2004. All share and
per share information has been restated for all periods
presented to reflect this stock dividend.
On July 21, 2003, the Company announced a 3-for-2 stock
split effected in the form of a 50% stock dividend on both
Common Stock and Class A Common Stock. New shares were
distributed on August 15, 2003 to shareholders of record as
of the close of business on August 1, 2003. All share and
per share information has been restated for all periods
presented to reflect this stock dividend.
Line of Business The Company is engaged in
the business of renting and selling residential and office
furniture, consumer electronics, appliances, computers, and
other merchandise throughout the U.S., Puerto Rico, and Canada.
The Company manufactures furniture principally for its corporate
furnishings and sales and lease ownership operations.
Cash In balance sheet and statement of cash
flow presentations prior to December 31, 2004, checks
outstanding were classified as a reduction to cash. Since the
financial institutions with checks outstanding and those with
deposits on hand did not and do not have legal right of offset,
we have reclassified checks outstanding in certain zero balance
bank accounts to accounts payable for all consolidated balance
sheets and consolidated statements of cash flows presented. This
reclassification had the effect of increasing both cash and
accounts payable and accrued expenses by $4.6 million and
$3.8 million for the years ended December 31, 2003 and
2002, respectively.
Certain transactions previously reflected as a reduction of book
value of rental merchandise sold or disposed in the accompanying
consolidated statement of cash flows for the years ended
December 31, 2003 are reflected as an addition to rental
merchandise for the year ended December 31, 2004. These
transactions were reclassified in the accompanying consolidated
statements of cash flows, resulting in increases in both
additions to rental merchandise and book value of rental
merchandise sold or disposed of $10.6 million for the year
ended December 31, 2003.
Rental Merchandise The Companys rental
merchandise consists primarily of residential and office
furniture, consumer electronics, appliances, computers, and
other merchandise and is recorded at cost. The sales and lease
ownership division depreciates merchandise over the rental
agreement period, generally 12 to 24 months when on rent
and 36 months when not on rent, to a 0% salvage value. The
corporate furnishings division depreciates merchandise over its
estimated useful life, which ranges from six months to
60 months, net of its salvage value, which ranges from 0%
to 60% of historical cost. The Companys policies require
weekly rental merchandise counts by store managers, which
include write-offs for unsalable, damaged, or missing
merchandise inventories. Full physical inventories are generally
taken at the fulfillment and manufacturing facilities on a
quarterly basis, and appropriate provisions are made for
missing, damaged and unsalable merchandise. In addition, the
Company monitors rental merchandise levels and mix by division,
F-20
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
store, and fulfillment center, as well as the average age of
merchandise on hand. If unsalable rental merchandise cannot be
returned to vendors, it is adjusted to its net realizable value
or written off.
All rental merchandise is available for rental or sale. On a
monthly basis, all damaged, lost or unsalable merchandise
identified is written off. Effective September 30, 2004,
the Company began recording rental merchandise adjustments on
the allowance method. In connection with the adoption of this
method, a one-time adjustment of $2.5 million was recorded
to establish a rental merchandise allowance reserve. Rental
merchandise adjustments in the future under this new method are
expected to be materially consistent with the prior years
adjustments under the direct-write off method. Rental
merchandise write-offs, including the effect of the
establishment of the reserve mentioned above, totaled
$22.9 million, $18.0 million, and $11.9 million
during the years ended December 31, 2005, 2004, and 2003,
respectively, and are included in operating expenses in the
accompanying consolidated statements of earnings.
Property, Plant and Equipment The Company
records property, plant, and equipment 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 40 years for buildings and improvements and from one
to five years for other depreciable property and equipment.
Gains and losses related to dispositions and retirements are
recognized as incurred. Maintenance and repairs are also
expensed as incurred; renewals and betterments are capitalized.
Depreciation expense, included in operating expenses in the
accompanying consolidated statements of earnings, for property,
plant, and equipment was $25.6 million, $22.2 million,
and $19.2 million during the years ended December 31,
2005, 2004, and 2003, respectively.
Goodwill and Other Intangibles Goodwill
represents the excess of the purchase price paid over the fair
value of the net assets acquired in connection with business
acquisitions. The Company accounts for goodwill and other
intangible assets in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142).
SFAS No. 142 requires that entities assess the fair
value of the net assets underlying all acquisition-related
goodwill on a reporting unit basis. When the fair value is less
than the related carrying value, entities are required to reduce
the carrying value of goodwill. The approach to evaluating the
recoverability of goodwill as outlined in SFAS No. 142
requires the use of valuation techniques using estimates and
assumptions about projected future operating results and other
variables. The Company has elected to perform this annual
evaluation on September 30. More frequent evaluations will
be completed if indicators of impairment become evident. The
impairment approach required by SFAS No. 142 may have
the effect of increasing the volatility of the Companys
earnings if goodwill impairment occurs at a future date. Other
Intangibles represent the value of customer relationships
acquired in connection with business acquisitions as well as
acquired franchise development rights, recorded at fair value as
determined by the Company. As of December 31, 2005 and
2004, the net intangibles other than goodwill was
$3.6 million and $1.9 million, respectively. The
customer relationship intangible is amortized on a straight-line
basis over a two-year useful life while acquired franchise
development rights are amortized over the unexpired life of the
franchisees ten year area development agreement.
Amortization expense on intangibles, included in operating
expenses in the accompanying consolidated statements of
earnings, was $2.0 million, $1.6 million, and
$.5 million during the years ended December 31, 2005,
2004, and 2003, respectively.
Impairment The Company assesses its
long-lived assets other than goodwill for impairment whenever
facts and circumstances indicate that the carrying amount may
not be fully recoverable. To analyze recoverability, the Company
projects undiscounted net future cash flows over the remaining
life of such assets. If these projected cash flows were less
than the carrying amount, an impairment would be recognized,
resulting in a write-down of assets with a corresponding charge
to earnings. Impairment losses, if any, are measured based upon
the difference between the carrying amount and the fair value of
the assets.
Investments in Marketable Securities The
Company holds certain marketable equity securities and has
designated these securities as available-for-sale. The fair
value of these securities was $59,000 and
F-21
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$6.0 million as of December 31, 2005 and 2004,
respectively. These amounts are included in prepaid expenses and
other assets in the accompanying consolidated balance sheets. In
May of 2004, the Company sold its holdings in Rainbow Rentals,
Inc. with a cost basis of $2.1 million for cash proceeds of
$7.6 million in connection with
Rent-A-Center,
Inc.s acquisition of Rainbow Rentals, Inc. The Company
recognized an after-tax gain of $3.4 million on this
transaction. In May and June of 2005, the Company sold its
holdings in Rent-Way, Inc. with a cost basis of
$6.4 million for cash proceeds of $7.0 million. The
Company recognized an after-tax gain of $355,000 on this
transaction. In connection with this gain recognition, $355,000
and $3.4 million was transferred from unrealized gains
within accumulated other comprehensive income to net income on
the accompanying Consolidated Statement of Earnings for the
years ended December 31, 2005 and 2004, respectively.
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.
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. The fair value of the liability
for interest rate swap agreements, included in accounts payable
and accrued expenses in the accompanying consolidated balance
sheets, was $346,000 at December 31, 2004, based upon
quotes from financial institutions. At December 31, 2004
the carrying amount for variable rate debt approximates fair
market value since the interest rates on these instruments are
reset periodically to current market rates. At December 31,
2005 the Company did not have any swap agreements.
At December 31, 2005 and 2004 the fair market value of
fixed rate long-term debt was $113.9 million and
$51.4 million, respectively, based on quoted prices for
similar instruments.
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. Until all payments are received under sales and lease
ownership agreements, the Company maintains ownership of the
rental merchandise. Revenues from the sale of merchandise to
franchisees are recognized at the time of receipt by the
franchisee, and revenues from such sales to other customers are
recognized at the time of shipment, at which time title and risk
of ownership are transferred to the customer. Please refer to
Note I for discussion of recognition of other franchise
related revenues.
Cost of Sales Included in cost of sales is
the net book value of merchandise sold, primarily using specific
identification in the sales and lease ownership division and
first-in, first-out in
the corporate furnishings division. It is not practicable to
allocate operating expenses between selling and rental
operations.
Shipping and Handling Costs The Company
classifies shipping and handling costs as operating expenses in
the accompanying consolidated statements of earnings and these
costs totaled $40.5 million in 2005, $31.1 million in
2004, and $24.9 million in 2003.
Advertising The Company expenses advertising
costs as incurred. Advertising costs are recorded as expense the
first time an advertisement appears. Such costs aggregated
$27.1 million in 2005, $22.4 million in 2004, and
$18.7 million in 2003. In addition, certain advertising
expenses were offset by cooperative advertising consideration
received from vendors, substantially all of which represents
reimbursement of specific, identifiable, and incremental costs
incurred in selling those vendors products.
Stock Based Compensation The Company has
elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees and
related Interpretations in accounting for its employee stock
options and adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting
for Stock Based Compensation (SFAS 123). The Company
grants stock options for a fixed number of shares to employees
primarily with an exercise price equal to the fair value of the
shares at the
F-22
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
date of grant and, accordingly, recognizes no compensation
expense for these stock option grants. The Company also has
granted stock options for a fixed number of shares to certain
key executives with an exercise price below the fair value of
the shares at the date of grant (Key Executive
grants). Compensation expense for Key Executive grants is
recognized over the three-year vesting period of the options for
the difference between the exercise price and the fair value of
a share of Common Stock on the date of grant times the number of
options granted. Income tax benefits resulting from stock option
exercises credited to additional paid-in capital totaled
$1.9 million, $3.2 million, and $703,000 in 2005,
2004, and 2003, respectively.
For purposes of pro forma disclosures under
SFAS No. 123 as amended by SFAS No. 148, the
estimated fair value of the options is amortized to expense over
the options vesting period. The following table
illustrates the effect on net earnings and earnings per share if
the fair value based method had been applied to all outstanding
and unvested awards in each period:
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Year Ended | |
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Year Ended | |
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Year Ended | |
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December 31, | |
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December 31, | |
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December 31, | |
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2005 | |
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2004 | |
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2003 | |
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(In thousands, except per share) | |
Net Earnings before effect of Key Executive grants
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$ |
58,522 |
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$ |
52,854 |
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$ |
36,426 |
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Expense effect of Key Executive grants recognized
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(529 |
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(238 |
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Net earnings as reported
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57,993 |
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52,616 |
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36,426 |
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Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
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(1,996 |
) |
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(1,687 |
) |
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(1,345 |
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Pro forma net earnings
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$ |
55,997 |
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$ |
50,929 |
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$ |
35,081 |
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Earnings per share:
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Basic as reported
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$ |
1.16 |
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$ |
1.06 |
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$ |
.74 |
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Basic pro forma
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$ |
1.12 |
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$ |
1.03 |
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$ |
.71 |
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Diluted as reported
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$ |
1.14 |
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$ |
1.04 |
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$ |
.73 |
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Diluted pro forma
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$ |
1.11 |
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$ |
1.01 |
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$ |
.70 |
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Closed Store Reserves From time to time the
Company closes or consolidates stores. The charges related to
the closing or consolidating of these stores primarily consist
of reserving the net present value of future minimum payments
under the stores real estate leases. As of both
December 31, 2005 and 2004, accounts payable and accrued
expenses in the accompanying Consolidated Balance Sheets
included $1.3 million and $2.2 million, respectively,
for closed store expenses.
Insurance Reserves Estimated insurance
reserves are accrued primarily for group health and workers
compensation benefits provided to the Companys employees.
Estimates for these insurance reserves are made based on actual
reported but unpaid claims and actuarial analyses of the
projected claims run off for both reported and incurred but not
reported claims. Effective on September 30, 2004, the
Company revised certain estimates related to the accrual for
group health self-insurance based on favorable claims experience
as well as on the experience that the time periods between the
liability for a claim being incurred and the claim being
reported had declined. The change in estimates resulted in a
reduction in expenses of $1.4 million in 2004. The group
health self-insurance liability and expense are included in
accounts payable and accrued expenses, and in operating expenses
in the accompanying consolidated balance sheets and statements
of earnings, respectively.
F-23
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Derivative Instruments and Hedging Activities
From time to time, the Company uses interest rate swap
agreements to synthetically manage the interest rate
characteristics of a portion of its outstanding debt and to
limit the Companys exposure to rising interest rates. The
Company designates at inception that interest rate swap
agreements hedge risks associated with future variable interest
payments and monitors each swap agreement to determine if it
remains an effective hedge. The effectiveness of the derivative
as a hedge is based on a high correlation between changes in the
value of the underlying hedged item and the derivative
instrument. The Company records amounts to be received or paid
as a result of interest swap agreements as an adjustment to
interest expense. Generally, the Companys interest rate
swaps are designated as cash flow hedges. In the event of early
termination or redesignation of interest rate swap agreements,
any resulting gain or loss would be deferred and amortized as an
adjustment to interest expense of the related debt instrument
over the remaining term of the original contract life of the
agreement. In the event of early extinguishment of a designated
debt obligation, any realized or unrealized gain or loss from
the associated swap would be recognized in income or expense at
the time of extinguishment. There was no net income effect
related to swap ineffectiveness in 2004. For the year ended
December 31, 2003, the Companys net income included
an after-tax benefit of $170,000 related to swap
ineffectiveness. The Company does not enter into derivatives for
speculative or trading purposes. The fair value of the swaps as
of December 31, 2004 and 2003 of $.3 million and
$1.4 million, respectively, are included in accounts
payable and accrued expenses in the accompanying consolidated
balance sheets. At December 31, 2005 the Company did not
have any swap agreements.
Comprehensive Income For the years ended
December 31, 2005, 2004 and 2003, comprehensive income
totaled $58.0 million, $52.1 million, and
$38.3 million, respectively.
New Accounting Pronouncements In September
2004, the Emerging Issues Task Force of the FASB
(EITF) issued EITF Issue No. 04-1,
Accounting for Preexisting Relationships Between the Parties
to a Business Combination
(EITF 04-1).
EITF 04-1 requires
an acquirer in a business combination to evaluate any
preexisting relationships with the acquire party to determine if
the business combination in effect contains a settlement of the
preexisting relationship. A business combination between parties
with a preexisting relationship should be viewed as a multiple
element transaction.
EITF 04-1 is
effective for business combinations after October 13, 2004,
but requires goodwill resulting from prior business combinations
involving parties with a preexisting relationship to be tested
for impairment by applying the guidance in the consensus. The
adoption of
EITF 04-1 did not
have a material impact on the Companys financial condition
or results of operations.
In November 2004, the FASB issued Statement of Financial
Accounting Standards No. 151, Inventory
Costs An Amendment of ARB No. 43,
Chapter 4 (SFAS 151). SFAS 151 amends ARB 43,
Chapter 4, to clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges.
In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the
normal capacity of the production facilities. SFAS 151 is
effective for the Company beginning January 1, 2006.
Management is currently assessing the impact of SFAS 151,
but does not expect the impact to be material.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-based
Payment (SFAS 123R). SFAS 123R amends
SFAS 123 to require adoption of the fair value method of
accounting for employee stock options. In April 2005, the SEC
extended the adoption date of SFAS 123R to January 1,
2006 for calendar-year companies. The transition guidance in
SFAS 123R specifies that compensation expense for options
granted prior to the effective date be recognized over the
remaining vesting period of those options, and that compensation
expense for options granted subsequent to the effective date be
recognized over the vesting period of those options. Management
is currently assessing the impact of SFAS 123R, but does
not expect the impact to be material.
F-24
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement
No. 3. SFAS 154 replaces APB Opinion No. 20,
Accounting Changes and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements, and
changes the requirements for the accounting for and reporting of
a change in accounting principle. SFAS 154 applies to all
voluntary changes in an accounting principle. It also applies to
changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific
transition provisions. SFAS 154 is effective for accounting
changes and error corrections occurring in fiscal years
beginning after December 15, 2005. The adoption of
SFAS 154 is not anticipated to have a material effect on
the Companys financial position or results of operations.
In March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations
(FIN 47). FIN 47 clarifies that the term
conditional asset retirement obligation as used in
SFAS No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an
asset retirement activity in which the timing and method of
settlement are conditional on a future event that may or may not
be within the control of the entity. FIN 47 is effective no
later than the end of fiscal years ending after
December 15, 2005. The Companys leases contain asset
retirement obligations related to the removal of signage at the
termination of these leases. The Company adopted FIN 47 for
the year ended December 31, 2005. The impact of adoption
was not material.
NOTE B: EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the
weighted average number of common and class A common shares
outstanding during the year, which were approximately
49,846,000 shares in 2005, 49,602,000 shares in 2004,
and 48,964,000 shares in 2003. The computation of earnings
per share assuming dilution includes the dilutive effect of
stock options and awards. Such stock options and awards had the
effect of increasing the weighted average shares outstanding
assuming dilution by approximately 959,000 in 2005, 973,000 in
2004, and 819,000 in 2003.
NOTE C: PROPERTY, PLANT AND
EQUIPMENT
Following is a summary of the Companys property, plant,
and equipment at December 31:
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2005 | |
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2004 | |
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(In thousands) | |
Land
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$ |
15,934 |
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$ |
11,687 |
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Buildings and Improvements
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46,805 |
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39,305 |
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Leasehold Improvements and Signs
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72,842 |
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63,291 |
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Fixtures and Equipment
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45,343 |
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36,518 |
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Assets Under Capital Lease:
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with Related Parties
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15,734 |
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15,734 |
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with Unrelated Parties
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1,475 |
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1,475 |
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Construction in Progress
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6,449 |
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4,339 |
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204,582 |
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172,349 |
|
Less: Accumulated Depreciation and Amortization
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(70,823 |
) |
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(61,231 |
) |
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$ |
133,759 |
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$ |
111,118 |
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F-25
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE D: CREDIT FACILITIES
Following is a summary of the Companys credit facilities
at December 31:
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2005 | |
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2004 | |
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(In thousands) | |
Bank Debt
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$ |
91,336 |
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$ |
45,528 |
|
Senior Unsecured Notes
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100,000 |
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50,000 |
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Capital Lease Obligation:
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with Related Parties
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16,141 |
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16,596 |
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with Unrelated Parties
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1,066 |
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1,197 |
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Other Debt
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|
3,330 |
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|
3,334 |
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$ |
211,873 |
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$ |
116,655 |
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Bank Debt The Company has a revolving credit
agreement dated May 28, 2004 with several banks providing
for unsecured borrowings up to $87.0 million, which
includes a $12.0 million credit line to fund daily working
capital requirements. Amounts borrowed bear interest at the
lower of the lenders prime rate or LIBOR plus
125 basis points. The pricing under the working capital
line is based upon overnight bank borrowing rates. At
December 31, 2005 and 2004, respectively, an aggregate of
$81.3 million (bearing interest at 5.35%) and
$45.5 million (bearing interest at 3.41%) was outstanding
under the revolving credit agreement. The Company pays a .20%
commitment fee on unused balances. The weighted average interest
rate on borrowings under the revolving credit agreement (before
giving effect to interest rate swaps in 2004 and 2003) was 4.42%
in 2005, 2.72% in 2004, and 2.53% in 2003. The revolving credit
agreement expires May 28, 2007. See Note N for
subsequent event disclosures.
The revolving credit agreement contains certain covenants which
require 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) $338,340,000 plus (b) 50% of the Companys
consolidated net income (but not loss) for the period beginning
April 1, 2004 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. The revolving credit agreement was amended in July 2005
as a result of entry into a note purchase agreement for
$60.0 million in senior unsecured notes. The agreement was
amended for the purpose of permitting a new issuance of senior
unsecured notes and amending the negative covenants in the
revolving credit agreement. At December 31, 2005,
$47.2 million of retained earnings was available for
dividend payments and stock repurchases under the debt
restrictions, and the Company was in compliance with all
covenants.
In December 16, 2005 the Company entered into an
$18.0 million demand note as a means of temporary financing
and at December 31, 2005 $10.0 million was outstanding
at a rate of LIBOR plus 100 basis points.
Senior Unsecured Notes On August 14,
2002, the Company sold $50.0 million in aggregate principal
amount of senior unsecured notes in a private placement to a
consortium of insurance companies. The unsecured notes mature
August 13, 2009. Quarterly interest only payments at an
annual rate of 6.88% are due for the first two years followed by
annual $10,000,000 principal repayments plus interest for the
five years thereafter. The notes were amended in July 2005 as a
result of entry into a note purchase agreement for an additional
$60.0 million in senior unsecured notes to the purchasers
in a private placement. The agreement was amended for the
purpose of permitting the new issuance of the notes and amending
the negative covenants in the revolving credit agreement.
On July 27, 2005, the Company entered into a note purchase
agreement with a consortium of insurance companies. Pursuant to
this agreement, the Company and its two subsidiaries as
co-obligors issued $60.0 million in senior unsecured notes
to the purchasers in a private placement. The notes bear
interest at a
F-26
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
rate of 5.03% per year and mature on July 27, 2012.
Interest only payments are due quarterly for the first two
years, followed by annual $12 million principal repayments
plus interest for the five years thereafter, beginning on
July 27, 2008. The Company used the proceeds from this
financing to replace shorter-term borrowings under the
Companys revolving credit agreement. The new note purchase
agreement contains financial maintenance covenants, negative
covenants regarding the Companys other indebtedness, its
guarantees and investments, and other customary covenants
substantially similar to the covenants in the Companys
existing note purchase agreement, revolving credit facility,
loan facility agreement and guaranty, and its construction and
lease facility, as modified by the amendments described herein.
Capital Leases with Related Parties In
October and November 2004, the Company sold eleven properties,
including leasehold improvements, to a separate limited
liability corporation (LLC) controlled by a group of
Company executives and managers, including the Companys
chairman, chief executive officer, and controlling shareholder.
The LLC obtained borrowings collateralized by the land and
buildings totaling $6.8 million. The Company occupies the
land and buildings collateralizing the borrowings under a
15-year term lease,
with a five-year renewal at the Companys option, at an
aggregate annual rental of $883,000. The transaction has been
accounted for as a financing in the accompanying consolidated
financial statements. The rate of interest implicit in the
leases is approximately 9.7%. Accordingly, the land and
buildings, associated depreciation expense, and lease
obligations are recorded in the Companys consolidated
financial statements. No gain or loss was recognized in this
transaction.
In December 2002, the Company sold eleven properties, including
leasehold improvements, to a separate limited liability
corporation (LLC) controlled by a group of Company
executives and managers, including the Companys chairman,
chief executive officer, and controlling shareholder. The LLC
obtained borrowings collateralized by the land and buildings
totaling $5.0 million. The Company occupies the land and
buildings collateralizing the borrowings under a
15-year term lease at
an aggregate annual rental of approximately $702,000. The
transaction has been accounted for as a financing in the
accompanying consolidated financial statements. The rate of
interest implicit in the leases is approximately 11.1%.
Accordingly, the land and buildings, associated depreciation
expense, and lease obligations are recorded in the
Companys consolidated financial statements. No gain or
loss was recognized in this transaction.
In April 2002, the Company sold land and buildings with a
carrying value of $6.3 million to a limited liability
corporation (LLC) controlled by the Companys
major shareholder. Simultaneously, the Company and the LLC
entered into a 15-year
lease for the building and a portion of the land, with two
five-year renewal options at the discretion of the Company. The
LLC obtained borrowings collateralized by the land and building
totaling $6.4 million. The Company occupies the land and
building collateralizing the borrowings under a
15-year term lease at
an aggregate annual rental of $681,000. The transaction has been
accounted for as a financing in the accompanying consolidated
financial statements. The rate of interest implicit in the lease
financing is 8.7%. Accordingly, the land and building,
associated depreciation expense, and debt obligation are
recorded in the Companys consolidated financial
statements. No gain or loss was recognized in this transaction.
Leases The Company finances a portion of
store expansion through sale-leaseback transactions. The
properties are sold at net book value and the resulting leases
qualify and are accounted for as operating leases. The Company
does not have any retained or contingent interests in the stores
nor does the Company provide any guarantees, other than a
corporate level guarantee of lease payments, in connection with
the sale-leasebacks.
F-27
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other Debt Other debt at December 31,
2005 and 2004 includes $3.3 million of industrial
development corporation revenue bonds. The average weighted
borrowing rate on these bonds in 2005 was 2.61%. No principal
payments are due on the bonds until maturity in 2015.
Future maturities under the Companys Credit Facilities are
as follows:
|
|
|
|
|
|
|
(In thousands) | |
|
|
| |
2006
|
|
$ |
20,647 |
|
2007
|
|
|
92,094 |
|
2008
|
|
|
22,915 |
|
2009
|
|
|
23,004 |
|
2010
|
|
|
13,116 |
|
Thereafter
|
|
|
40,097 |
|
NOTE E: INCOME TAXES
Following is a summary of the Companys income tax expense
for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Current Income Tax Expense (Benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
50,064 |
|
|
$ |
(7,720 |
) |
|
$ |
16,506 |
|
|
State
|
|
|
4,541 |
|
|
|
(309 |
) |
|
|
1,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,605 |
|
|
|
(8,029 |
) |
|
|
17,921 |
|
Deferred Income Tax (Benefit) Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(17,751 |
) |
|
|
35,967 |
|
|
|
3,220 |
|
|
State
|
|
|
(2,510 |
) |
|
|
3,952 |
|
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,261 |
) |
|
|
39,919 |
|
|
|
3,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,344 |
|
|
$ |
31,890 |
|
|
$ |
21,417 |
|
|
|
|
|
|
|
|
|
|
|
F-28
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of the Companys deferred income tax
liabilities and assets at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
Rental Merchandise and Property, Plant and Equipment
|
|
$ |
81,388 |
|
|
$ |
101,577 |
|
|
Other, Net
|
|
|
6,543 |
|
|
|
4,054 |
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities
|
|
|
87,931 |
|
|
|
105,631 |
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
Accrued Liabilities
|
|
|
4,915 |
|
|
|
4,948 |
|
|
Advance Payments
|
|
|
7,556 |
|
|
|
5,510 |
|
|
Other, Net
|
|
|
3,256 |
|
|
|
2,918 |
|
|
|
|
|
|
|
|
Total Deferred Tax Assets
|
|
|
15,727 |
|
|
|
13,376 |
|
Less Deferred Tax Valuation Allowance*
|
|
|
(2,993 |
) |
|
|
(2,918 |
) |
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
|
12,734 |
|
|
|
10,458 |
|
|
|
|
|
|
|
|
Net Deferred Tax Liabilities
|
|
$ |
75,197 |
|
|
$ |
95,173 |
|
|
|
|
|
|
|
|
|
|
* |
The Company has a net tax loss carryforward of $1.9 million
which expires on varying dates through December 31, 2012. |
The Companys effective tax rate differs from the statutory
U.S. Federal income tax rate for the years ended
December 31 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Statutory Rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increases in U.S. Federal Taxes Resulting From:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Income Taxes, Net of Federal Income Tax Benefit
|
|
|
2.2 |
|
|
|
2.8 |
|
|
|
2.0 |
|
|
Other, Net
|
|
|
|
|
|
|
(.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
|
37.2 |
% |
|
|
37.7 |
% |
|
|
37.0 |
% |
|
|
|
|
|
|
|
|
|
|
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 2019. The Company also leases
certain properties under capital leases that are more fully
described in Note D. Most of the leases contain renewal
options for additional periods ranging from one to 15 years
or provide for options to purchase the related property at
predetermined purchase prices that do not represent bargain
purchase options. In addition, certain properties occupied under
operating leases contain normal purchase options. The Company
also has a $25.0 million construction and lease facility.
Properties acquired by the lessor are purchased or constructed
and then leased to the Company under operating lease agreements.
The total amount advanced and outstanding under this facility at
December 31, 2005 was $24.5 million. Since the
resulting leases are operating leases, no debt obligation is
recorded on the Companys balance sheet. The Company also
leases transportation and computer equipment under operating
leases expiring during the next five years. Management expects
that most leases will be renewed or replaced by other leases in
the normal course of business.
F-29
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum rental payments required under operating leases
that have initial or remaining non-cancelable terms in excess of
one year as of December 31, 2005, are as follows:
$68.3 million in 2006; $55.7 million in 2007;
$40.9 million in 2008; $27.2 million in 2009;
$15.1 million in 2010; and $40.8 million thereafter.
Certain operating leases expiring in 2006 contain residual value
guarantee provisions and other guarantees in the event of a
default. Although the likelihood of funding under these
guarantees is considered by the Company to be remote, the
maximum amount the Company may be liable for under such
guarantees is $24.5 million.
The Company has guaranteed certain debt obligations of some of
the franchisees amounting to $100.6 and $99.7 million at
December 31, 2005, and 2004, respectively. The Company
receives guarantee fees based on such franchisees
outstanding debt obligations, which it recognizes as the
guarantee obligation is satisfied. The Company has recourse
rights to the assets securing the debt obligations. As a result,
the Company has never incurred any, nor does management expect
to incur any, significant losses under these guarantees.
Rental expense was $59.9 million in 2005,
$50.3 million in 2004, and $44.1 million in 2003.
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 Companys expense related to the plan was
$676,000 in 2005, $506,000 in 2004, and $512,000 in 2003.
NOTE G: SHAREHOLDERS
EQUITY
The Company held 7,026,144 common shares in its treasury and was
authorized to purchase an additional 2,670,502 shares at
December 31, 2005. The Companys articles of
incorporation provide that no cash dividends may be paid on the
Class A Common Stock unless equal or higher dividends are
paid on the Common Stock.
If the number of the Class A Common Stock
(voting) falls below 10% of the total number of outstanding
shares of the Company, the Common Stock (non-voting)
automatically converts into Class A Common Stock. The
Common Stock may convert to Class A Common Stock in certain
other limited situations whereby a national securities exchange
rule might cause the Board of Directors to issue a resolution
requiring such conversion. Management considers the likelihood
of any conversion to be remote at the present time.
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 Companys Common Stock are granted
to certain key employees. Under the plans, options granted
become exercisable after a period of three years and unexercised
options lapse ten years after the date of the grant. Options are
subject to forfeiture upon termination of service. Under the
plans, 954,000 of the Companys shares are reserved for
future grants at December 31, 2005. The weighted average
fair value of options granted was $8.09 in 2005, $5.18 in 2004,
and $5.48 in 2003.
Pro forma information regarding net earnings and earnings per
share, presented in Note A, is required by SFAS 123,
and has been determined as if the Company had accounted for its
employee stock options granted in 2005, 2004 and 2003 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 2005, 2004, and 2003, respectively: risk-free interest rates
of 3.86%, 3.16%, and 3.41%; a dividend yield of
F-30
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
..25%, .28%, and .23%; a volatility factor of the expected market
price of the Companys Common Stock of .43, .43, and .52;
and weighted average expected lives of the option of five, four,
and six years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that 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 Companys 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
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options.
The following table summarizes information about stock options
outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
|
|
|
|
|
|
|
Remaining | |
|
|
|
|
|
|
Number Outstanding | |
|
Contractual Life | |
|
Weighted Average | |
|
Number Exercisable | |
|
Weighted Average | |
Range of Exercise Prices |
|
December 31, 2005 | |
|
(In years) | |
|
Exercise Price | |
|
December 31, 2005 | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 4.38 - 10.00
|
|
|
1,622,626 |
|
|
|
3.78 |
|
|
$ |
6.51 |
|
|
|
1,477,501 |
|
|
$ |
6.28 |
|
10.01 - 15.00
|
|
|
689,250 |
|
|
|
8.04 |
|
|
|
14.02 |
|
|
|
3,000 |
|
|
|
13.49 |
|
15.01 - 20.00
|
|
|
108,750 |
|
|
|
7.78 |
|
|
|
15.60 |
|
|
|
|
|
|
|
|
|
20.01 - 24.94
|
|
|
605,646 |
|
|
|
8.90 |
|
|
|
22.40 |
|
|
|
2,000 |
|
|
|
21.84 |
|
$ 4.38 - 24.94
|
|
|
3,026,272 |
|
|
|
5.92 |
|
|
$ |
11.73 |
|
|
|
1,482,501 |
|
|
$ |
6.31 |
|
The table below summarizes option activity for the periods
indicated in the Companys stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
Options | |
|
Exercise Price | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
Outstanding at January 1, 2003
|
|
|
3,010 |
|
|
$ |
6.31 |
|
|
Granted
|
|
|
738 |
|
|
|
13.29 |
|
|
Exercised
|
|
|
(321 |
) |
|
|
6.18 |
|
|
Forfeited
|
|
|
(142 |
) |
|
|
8.08 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
3,285 |
|
|
|
7.82 |
|
|
Granted
|
|
|
865 |
|
|
|
19.79 |
|
|
Exercised
|
|
|
(738 |
) |
|
|
5.30 |
|
|
Forfeited
|
|
|
(89 |
) |
|
|
13.27 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
3,323 |
|
|
|
11.35 |
|
|
Granted
|
|
|
102 |
|
|
|
23.17 |
|
|
Exercised
|
|
|
(266 |
) |
|
|
8.01 |
|
|
Forfeited
|
|
|
(133 |
) |
|
|
18.39 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
3,026 |
|
|
$ |
11.73 |
|
|
|
|
|
|
|
|
Exercisable at December 31, 2005
|
|
|
1,483 |
|
|
$ |
6.31 |
|
|
|
|
|
|
|
|
NOTE I: FRANCHISING OF
AARONS SALES AND LEASE OWNERSHIP STORES
The Company franchises Aarons Sales and Lease Ownership
stores. As of December 31, 2005 and 2004, 664 and 658
franchises had been awarded, respectively. Franchisees typically
pay a non-refundable initial
F-31
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
franchise fee of $50,000 and an ongoing royalty of either 5% or
6% of gross revenues. Franchise fees and area development fees
are generated from the sale of rights to develop, own and
operate Aarons Sales and Lease Ownership stores. These
fees are recognized as income when substantially all of the
Companys obligations per location are satisfied, generally
at the date of the store opening. Franchise fees and area
development fees received before the substantial completion of
the Companys obligations are deferred. Substantially all
of the amounts reported as non-retail sales and non-retail cost
of sales in the accompanying consolidated statements of earnings
relate to the sale of rental merchandise to franchisees.
Franchise agreement fee revenue was $3.0 million,
$3.3 million, and $2.2 million and royalty revenues
was $21.6 million, $17.8 million, and
$14.0 million for the years ended December 31, 2005,
2004 and 2003, respectively. Deferred franchise and area
development agreement fees, included in customer deposits and
advance payments in the accompanying consolidated balance
sheets, was $5.2 million and $4.8 million as of
December 31, 2005 and 2004, respectively.
Franchised Aarons Sales and Lease Ownership store activity
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Franchised stores open at January 1,
|
|
|
357 |
|
|
|
287 |
|
|
|
232 |
|
Opened
|
|
|
71 |
|
|
|
79 |
|
|
|
79 |
|
Added through acquisition
|
|
|
0 |
|
|
|
12 |
|
|
|
3 |
|
Purchased by the Company
|
|
|
(35 |
) |
|
|
(19 |
) |
|
|
(26 |
) |
Closed
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Franchised stores open at December 31,
|
|
|
392 |
|
|
|
357 |
|
|
|
287 |
|
|
|
|
|
|
|
|
|
|
|
Company-operated Aarons Sales and Lease Ownership store
activity is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Company-operated stores open at January 1,
|
|
|
616 |
|
|
|
500 |
|
|
|
412 |
|
Opened
|
|
|
82 |
|
|
|
68 |
|
|
|
38 |
|
Added through acquisition
|
|
|
56 |
|
|
|
61 |
|
|
|
59 |
|
Closed or merged
|
|
|
(6 |
) |
|
|
(13 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
Company-operated stores open at December 31,
|
|
|
748 |
|
|
|
616 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
In 2005, the Company acquired the rental contracts, merchandise,
and other related assets of 96 stores, including 35 franchised
stores. Many of these stores and/or their accompanying assets
were merged into other stores resulting in a net gain of 56
stores. In 2004, the Company acquired the rental contracts,
merchandise, and other related assets of 85 stores, including 19
franchised stores. Many of these stores and/or their
accompanying assets were merged into other stores resulting in a
net gain of 61 stores. In 2003, the Company acquired the rental
contracts, merchandise, and other related assets of 98 stores,
including 26 franchised stores. Many of these stores and/or
their accompanying assets were merged into other stores
resulting in a net gain of 59 stores.
NOTE J: ACQUISITIONS AND
DISPOSITIONS
During 2005, the Company acquired the rental contracts,
merchandise, and other related assets of 96 sales and lease
ownership stores with an aggregate purchase price of
$46.6 million. Fair value of acquired tangible assets
included $16.8 million for rental merchandise,
$1.5 million for fixed assets, and $1.4 million for
other assets. Fair value of liabilities assumed approximated
$.4 million. The excess cost over the fair value of the
assets and liabilities acquired in 2005, representing goodwill
was $24.7 million. The fair value of acquired separately
identifiable intangible assets included $2.6 million for
customer lists and $.4 million for
F-32
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
acquired franchise development rights. The estimated
amortization of these customer lists and acquired franchise
development rights in future years approximates
$1.8 million, $912,000, $82,000, $60,000, and $52,000 for
2006, 2007, 2008, 2009, and 2010, respectively. The purchase
price allocations for certain acquisitions during December 2005
are preliminary pending finalization of the Companys
assessment of the fair values of tangible assets acquired.
During 2004, the Company acquired the rental contracts,
merchandise, and other related assets of 85 sales and lease
ownership stores with an aggregate purchase price of
$36.0 million. Fair value of acquired tangible assets
included approximately $12.9 million for rental
merchandise, $0.8 million for fixed assets, and
$2.4 million for other assets. Fair value of liabilities
assumed approximated $47,000. The excess cost over the fair
value of assets and liabilities acquired, representing goodwill
was $19.4 million. The fair value of acquired separately
identifiable intangible assets included $1.2 million for
customer lists. The estimated amortization of these customer
lists in future years is $456,000 and $19,000 for 2006 and 2007,
respectively. In addition, in 2004 the Company acquired three
corporate furnishings stores. The purchase price of the 2004
corporate furnishings acquisitions was $2.2 million. Fair
value of acquired tangible assets included $1.5 million for
rental merchandise and $309,000 for other assets. The excess
cost over the fair value of assets and liabilities acquired,
representing goodwill was $399,000. The fair value of acquired
separately identifiable intangible assets included $42,000 for
customer lists.
The results of operations of the acquired businesses are
included in the Companys results of operations from their
dates of acquisition. The effect of these acquisitions on the
2005, 2004 and 2003 consolidated financial statements was not
significant.
The Company sold five of its sales and lease ownership locations
to an existing franchisee in 2005. In 2004, the Company sold two
of its sales and lease ownership locations to an existing
franchisee. In 2003, the Company sold three of its sales and
lease ownership locations to an existing franchisee and sold one
of its corporate furnishings stores. The effect of these sales
on the consolidated financial statements was not significant.
NOTE K: SEGMENTS
|
|
|
Description of Products and Services of Reportable
Segments |
Aaron Rents, Inc. has four reportable segments: sales and lease
ownership, corporate furnishings (formerly known as
rent-to-rent),
franchise, and manufacturing. The sales and lease ownership
division offers electronics, residential furniture, appliances,
and computers to consumers primarily on a monthly payment basis
with no credit requirements. The corporate furnishings division
rents and sells residential and office furniture to businesses
and consumers who meet certain minimum credit requirements. The
Companys franchise operation sells and supports franchises
of its sales and lease ownership concept. The manufacturing
division manufactures upholstered furniture, office furniture,
lamps and accessories, and bedding predominantly for use by the
other divisions.
Earnings before income taxes for each reportable segment are
generally determined in accordance with accounting principles
generally accepted in the United States with the following
adjustments:
|
|
|
|
|
A predetermined amount of each reportable segments
revenues is charged to the reportable segment as an allocation
of corporate overhead. This allocation was approximately 2.3% in
2005, 2004, and 2003. |
|
|
|
Accruals related to store closures are not recorded on the
reportable segments financial statements, but are rather
maintained and controlled by corporate headquarters. |
F-33
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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|
|
|
|
The capitalization and amortization of manufacturing variances
are recorded on the consolidated financial statements as part of
Cash to Accrual and Other Adjustments and are not allocated to
the segment that holds the related rental merchandise. |
|
|
|
Advertising expense in the sales and lease ownership division is
estimated at the beginning of each year and then allocated to
the division ratably over time for management reporting
purposes. For financial reporting purposes, advertising expense
is recognized when the related advertising activities occur. The
difference between these two methods is reflected as part of the
Cash to Accrual and Other Adjustments line below. |
|
|
|
Sales and lease ownership rental merchandise write-offs are
recorded using the direct write-off method for management
reporting purposes and, effective in 2004, using the allowance
method for financial reporting purposes. The difference between
these two methods is reflected as part of the Cash to Accrual
and Other Adjustments line below for 2004. |
|
|
|
Interest on borrowings is estimated at the beginning of each
year. Interest is then allocated to operating segments based on
relative total assets. |
|
|
|
Sales and lease ownership revenues are reported on the cash
basis for management reporting purposes. |
Revenues in the Other category are primarily from
leasing space to unrelated third parties in the corporate
headquarters building and revenues from several minor unrelated
activities. The pre-tax losses in the Other category
are the net result of the activity mentioned above, net of the
portion of corporate overhead not allocated to the reportable
segments for management purposes, and the $565,000 and
$5.5 million gains recognized on the sale of marketable
securities in 2005 and 2004, respectively.
|
|
|
Measurement of Segment Profit or Loss and Segment
Assets |
The Company evaluates performance and allocates resources based
on revenue growth and pre-tax profit or loss from operations.
The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting
policies except that the sales and lease ownership division
revenues and certain other items are presented on a cash basis.
Intersegment sales are completed at internally negotiated
amounts ensuring competitiveness with outside vendors. Since the
intersegment profit and loss affect inventory valuation,
depreciation and cost of goods sold are adjusted when
intersegment profit is eliminated in consolidation.
|
|
|
Factors Used by Management to Identify the Reportable
Segments |
The Companys 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.
F-34
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information on segments and a reconciliation to earnings before
income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Revenues From External Customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership
|
|
$ |
975,026 |
|
|
$ |
804,723 |
|
|
$ |
634,489 |
|
|
Corporate Furnishings
|
|
|
117,476 |
|
|
|
108,453 |
|
|
|
109,083 |
|
|
Franchise
|
|
|
29,781 |
|
|
|
25,253 |
|
|
|
19,347 |
|
|
Other
|
|
|
5,411 |
|
|
|
10,185 |
|
|
|
4,206 |
|
Manufacturing
|
|
|
83,803 |
|
|
|
70,440 |
|
|
|
60,608 |
|
Elimination of Intersegment Revenues
|
|
|
(83,509 |
) |
|
|
(70,884 |
) |
|
|
(60,995 |
) |
Cash to Accrual Adjustments
|
|
|
(2,483 |
) |
|
|
(1,690 |
) |
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues from External Customers
|
|
$ |
1,125,505 |
|
|
$ |
946,480 |
|
|
$ |
766,797 |
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership
|
|
$ |
63,317 |
|
|
$ |
56,578 |
|
|
$ |
43,325 |
|
|
Corporate Furnishings
|
|
|
10,802 |
|
|
|
8,842 |
|
|
|
6,341 |
|
|
Franchise
|
|
|
22,143 |
|
|
|
18,374 |
|
|
|
13,600 |
|
|
Other
|
|
|
(585 |
) |
|
|
2,118 |
|
|
|
(2,356 |
) |
|
Manufacturing
|
|
|
1,280 |
|
|
|
(175 |
) |
|
|
1,222 |
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes for Reportable Segments
|
|
|
96,957 |
|
|
|
85,737 |
|
|
|
62,132 |
|
Elimination of Intersegment (Profit) Loss
|
|
|
(1,103 |
) |
|
|
178 |
|
|
|
(2,338 |
) |
Cash to Accrual and Other Adjustments
|
|
|
(3,517 |
) |
|
|
(1,409 |
) |
|
|
(1,951 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Earnings Before Income Taxes
|
|
$ |
92,337 |
|
|
$ |
84,506 |
|
|
$ |
57,843 |
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership
|
|
$ |
669,376 |
|
|
$ |
524,492 |
|
|
$ |
412,836 |
|
|
Corporate Furnishings
|
|
|
91,536 |
|
|
|
83,478 |
|
|
|
79,984 |
|
|
Franchise
|
|
|
26,902 |
|
|
|
23,495 |
|
|
|
19,493 |
|
|
Other
|
|
|
46,355 |
|
|
|
50,452 |
|
|
|
29,244 |
|
|
Manufacturing
|
|
|
24,346 |
|
|
|
18,371 |
|
|
|
18,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
858,515 |
|
|
$ |
700,288 |
|
|
$ |
559,884 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership
|
|
$ |
309,022 |
|
|
$ |
255,606 |
|
|
$ |
191,777 |
|
|
Corporate Furnishings
|
|
|
20,376 |
|
|
|
19,213 |
|
|
|
21,266 |
|
|
Franchise
|
|
|
924 |
|
|
|
722 |
|
|
|
547 |
|
|
Other
|
|
|
1,373 |
|
|
|
711 |
|
|
|
839 |
|
|
Manufacturing
|
|
|
1,436 |
|
|
|
935 |
|
|
|
968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation and Amortization
|
|
$ |
333,131 |
|
|
$ |
277,187 |
|
|
$ |
215,397 |
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership
|
|
$ |
7,326 |
|
|
$ |
5,197 |
|
|
$ |
5,215 |
|
|
Corporate Furnishings
|
|
|
1,382 |
|
|
|
1,044 |
|
|
|
1,583 |
|
|
Franchise
|
|
|
93 |
|
|
|
96 |
|
|
|
93 |
|
|
Other
|
|
|
(282 |
) |
|
|
(924 |
) |
|
|
(1,109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
$ |
8,519 |
|
|
$ |
5,413 |
|
|
$ |
5,782 |
|
|
|
|
|
|
|
|
|
|
|
F-35
AARON RENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE L: RELATED PARTY
TRANSACTIONS
The Company leases certain properties under capital leases with
certain related parties that are more fully described in
Note D above.
As part of its marketing program, the Company sponsors
professional driver Michael Waltrips Aarons Dream
Machine in the NASCAR Busch Series. In 2005, as a part of this
marketing program, the Company began sponsoring a driver
development program implemented by Mr. Waltrips
company. The two drivers participating in the driver development
program for 2005 are both the sons of the president of the
Companys sales and lease ownership division. The portion
of the Companys sponsorship of Michael Waltrip
attributable to the driver development program is $890,000 for
2005.
NOTE M: EFFECTS OF HURRICANES
KATRINA AND RITA
Operating expenses for the year also include the write-off of
$4.4 million of rental merchandise and property destroyed
or severely damaged by Hurricanes Katrina and Rita, of which
approximately $1.9 million is expected to be covered by
insurance proceeds. The net pre-tax expense recorded for the
year for these damages is $2.5 million. In addition,
included in other income for 2005 is $934,000 of expected
proceeds from business interruption insurance associated with
the operations of hurricane affected areas.
NOTE N: QUARTERLY FINANCIAL
INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter | |
|
Second Quarter | |
|
Third Quarter | |
|
Fourth Quarter | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share) | |
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
279,348 |
|
|
$ |
271,338 |
|
|
$ |
278,667 |
|
|
$ |
296,152 |
|
Gross Profit*
|
|
|
142,260 |
|
|
|
139,797 |
|
|
|
142,287 |
|
|
|
147,315 |
|
|