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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File No.
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December 31, 1996 0-12385
Aaron Rents, Inc.
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(Exact name of registrant as specified in its charter)
Georgia 58-0687630
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
309 E. Paces Ferry Road, N.E.
Atlanta, Georgia 30305-2377
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
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(404) 231-0011
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class
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Class A Common Stock, $.50 Par Value
Common Stock, $.50 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 17, 1997: $16,194,000. See Item 12.
Indicate the number of share outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Shares Outstanding as of
Title of Each Class March 17, 1997
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Class A Common Stock, $.50 Par Value 3,941,906
Common Stock, $.50 Par Value 15,696,246
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report to Shareholders for the fiscal year ended
December 31, 1996 are incorporated by reference into Part II of this Form 10-K.
Portions of the registrant's definitive proxy statement for the 1997 annual
meeting of shareholders are incorporated by reference into Part III of this Form
10-K.
PART I.
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Item 1. Business
GENERAL
Aaron Rents is one of the leading furniture rental companies in the United
States and has a growing and distinct presence in the rental purchase industry.
The Company rents and sells residential and office furniture and accessories,
consumer electronics, household appliances and business equipment. By
manufacturing its own specially designed residential and office furniture, the
Company enjoys an advantage over many of its competitors. Through its rent-to-
rent and rental purchase operations, the Company serves a broad range of
customers, including customers with temporary needs, customers who want the
option but not the obligation to purchase merchandise, and consumers financially
unable to purchase merchandise for cash or on credit. Cost-conscious consumers
can buy rental return merchandise at any of the Company's rental purchase or
rent-to-rent stores or at one of the Company's clearance centers. These sales
allow the Company to maximize the residual value of its rental return
merchandise.
Aaron Rents at December 31, 1996 had 240 Company operated stores and 61
franchised stores in 26 states, including 105 rent-to-rent stores in its Aaron
Rents' Rent-to-Rent division, 135 Company-operated rental purchase stores in its
Aaron's Rental Purchase division, and 61 Aaron's Rental Purchase franchised
stores. Aaron Rents stores are located primarily in the Southeast and
Southwest. While each store has a principal focus (rent-to-rent, rental
purchase or clearance sales), all stores give customers the option to rent only,
to rent to purchase, or to purchase any of the store's merchandise. The Company
expects to develop or acquire additional stores in clusters to achieve
marketing, distribution and other operating efficiencies. The Company
franchises Aaron's Rental Purchase stores in selected markets. The Company also
own five furniture manufacturing plants and four bedding manufacturing
facilities, which supply approximately 63% of the furniture rented or sold by
the Company.
In 1992, the Company accelerated development of its distinctive Aaron's
Rental Purchase concept to increase its share of the growing rent-to-own
industry. The Company took this opportunity to introduce innovative programs
and approaches that would differentiate the Company's rental purchase program
from the typical rent-to-own programs of its competitors. The Company's
innovations included offering 12-month rental purchase contract terms (compared
to the industry standard 18 to 24 months), larger and more attractive store
showrooms in more appealing locations, and a wider selection of merchandise. To
address opportunities primarily in non-metropolitan areas where the Company-
operated stores would be difficult to manage efficiently, the Company began its
Aaron's Rental Purchase franchise program in 1992.
For the fiscal year ended December 31, 1996, in the Company's rent-to-rent
and rental purchase stores, approximately 35% of its volume of business was the
rental of furniture and accessories, approximately 21% was the sale of rental
and other merchandise, and 44% was rental purchase. The rent-to-rent portion of
the business (including the sale of rental return merchandise) is mature and
stable, and accounts for approximately 58% of the Company's total revenues. At
December 31, 1996, the Company's 240 stores had an aggregate showroom and
warehouse space of approximately 3.3 million square feet, and approximately 70%
of the Company's rental merchandise inventory was on rent.
THE RENT-TO-OWN INDUSTRY
The Company believes its rental purchase concept differs significantly from
the typical rent-to-own program. The rent-to-own industry is a growing segment
of the retail industry that offers an alternative to traditional methods of
acquiring furniture, electronics and appliances. The rent-to-own concept is
particularly popular with consumers who are unable to pay for merchandise in
cash or who lack the credit to qualify under conventional financing programs.
It is also popular with consumers who, despite good credit, do not wish to incur
additional debt, have only a temporary need for the merchandise, or desire to
try out a particular brand or model before purchasing it. Historically,
electronic goods have been the dominant product category rented and sold in the
industry although furniture items are growing rapidly in popularity.
In the typical rent-to-own transaction, the customer seeks to acquire
merchandise over a fixed term, usually 18 to 24 months, by making weekly rental
payments. The customer may cancel the contract at any time by returning the
merchandise to the store, with no further rental obligation. The average rental
period in the industry is about four months, as the majority of customers do not
rent the item to the full term of the contract. If the customer rents the item
to the full term, he obtains ownership of the item, though he has the option to
purchase it any time.
The estimated potential size of the United States rent-to-own market is
19.6 million households of which only 2.7 million are being served currently by
the industry. According to the Association of Progressive Rental Organizations
("APRO"), the national trade association representing the rent-to-own industry,
there are approximately 7,500 rent-to-own stores in the United States, 35% of
which are owned or franchised by the ten largest companies in the industry.
Industry-wide revenues are believed to have been approximately $4.0 billion in
1995.
Rent-to-own transactions currently are regulated at the state level by 45
states. See "Government Regulation."
THE RENT-TO-RENT INDUSTRY
The rent-to-rent industry serves both residential and business customers
who generally have immediate, temporary needs for office or residential
merchandise but who generally do not seek to own the merchandise. Residential
rental customers include both individual residents seeking to rent merchandise
for their own homes and apartments, and apartment complex managers seeking to
provide furnished apartments. Business customers range 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 four months, which may be extended by the customer
on a month-to-month basis. Although most rental contracts 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.
The furniture component of the rent-to-rent industry is estimated to be
greater than $650 million in annual rental revenues. Although, in general, the
rent-to-rent industry is mature, the Company believes that there is growth
potential in office furniture. The demand for rental products is believed to be
related to the mobility of the population, which relies upon rented merchandise
to fulfill temporary needs. The industry is highly competitive and
consolidating, with only a handful of companies accounting for a substantial
share of the market.
OPERATING DIVISIONS
Rental Purchase-Aaron's Rental Purchase
The Company established its Aaron's Rental Purchase division with stand-
alone stores in 1987, accelerated its expansion of the stores in 1990, and at
December 31, 1996 had 135 Company-operated and 61 franchised Aaron's Rental
Purchase stores. The Company has clearly defined its Aaron's Rental Purchase
stores with specific merchandising selection and store layout, pricing and
contract terms, and the customers it seeks to attract. The Company believes
that these features create a store and rental purchase concept that is
significantly different from the operations of most other rent-to-own stores,
the Company's traditional rent-to-rent business, and the operations of home
furnishings retailers who finance merchandise.
Compared to the typical rent-to-own stores, Aaron's Rental Purchase stores
offer shorter contract terms which are payable on a monthly basis and have
generally lower total payments to acquire merchandise. Aaron's Rental Purchase
stores offer a larger selection of merchandise in general and a greater
percentage of furniture merchandise in particular, and have a larger and more
visually appealing store layout. The Company believes that its rental purchase
customers demand and can afford both higher quality merchandise and more
competitive pricing on total contract terms compared to the typical rent-to-own
customer.
The Company's rental purchase operations differ from its traditional rent-
to-rent business. A typical rental purchase customer, while usually lacking the
cash or credit resources to acquire merchandise, desires the option of ownership
and may have the intention to utilize rental purchase to achieve ownership.
Accordingly, in rental purchase transactions, the customer is willing to pay a
higher monthly payment for the ownership option, as compared to the rent-to-rent
customer. Typically, the Company's rental purchase customers are more style and
brand name conscious than rent-to-rent customers who regard the merchandise as
temporary. Aaron's Rental Purchase stores are attractively appointed and are
typically in or near a shopping center strategically located near the residences
of its target customers, as opposed to the rent-to-rent store typical location
in an office park that services destination customers from a broad geographical
area.
The Company's rental purchase transactions differ from sales by home
furnishings retailers in that rental purchase allows the option, but not the
obligation, to purchase merchandise while paying a similar "all-in" contract
price. Rental purchase allows the customer to have the item serviced free of
charge or replaced at any time during the rental contract, and allows the
Company to re-rent an item to another customer if the contract does not go to
term. The Company also believes that rental purchase contracts have fewer
merchandise losses, as the customer is more likely to return merchandise that he
knows he does not own.
The Company's rental purchase store layout consists of a combination
showroom and warehouse, ranging from 3,000 to 20,000 square feet, with an
average of 8,700 total square feet. The stores are strategically located in or
near shopping centers within ten miles of the residential communities of a large
number of its target customers. The Company emphasizes a broad selection of
brand name products for its electronics and appliance items, and offers
customers a wide selection of furniture, including furniture manufactured by the
Company's MacTavish Furniture Industries division. Aaron's Rental Purchase
stores also offer jewelry and computers.
Aaron's Rental Purchase stores structure the pricing of merchandise to be
less expensive than similar items offered by other rent-to-own operators, and
substantially equivalent to the "all-in" contract price of similar items offered
by home furnishings retailers who finance merchandise. Over 84% of the
Company's rental purchase contracts have monthly payments as compared to the
industry standard weekly payments, and most monthly contracts are for 12 months
compared to the industry standard of 18 to 24 months. Approximately 39% of
Aaron's Rental Purchase contracts go to term, in contrast to an industry average
of less than 25%. The merchandise from the contracts that do not go to term is
either re-rented or sold.
In selecting new locations for Aaron's Rental Purchase stores, the Company
generally looks for locations near established working class neighborhoods and
communities with good access, typically in well-maintained strip shopping
centers. Many of the Company's stores are placed near existing rent-to-own
stores of competitors.
Each rental purchase store maintains at least two trucks and crews for
pickups and deliveries, and generally offers same or next day delivery for
addresses located within 15 miles of the store.
The Aaron's Rental Purchase division's 6 clearance centers serve primarily
as retail outlets for final sales of rental return merchandise that will not be
rented again, although they also sell some new merchandise. Sales by the
clearance centers, together with sales at the Company's rental purchase stores
are instrumental in enabling the Company to maximize residual values of
depreciated rental merchandise.
Franchise Program
The Company began franchising Aaron's Rental Purchase stores in selected
markets in 1992. It is not anticipated that franchised stores will compete with
Company-operated stores, as franchises are primarily awarded in markets into
which the Company has no current plans to expand. Franchised stores operate
under the same financial controls and audits as Company-operated stores and
process their financial and inventory information on the information system that
was developed and can be accessed by the Company. On a weekly basis,
franchisees pay a continuing licensing fee of 5% of gross receipts, and purchase
much of their rental purchase inventory through or from the Company. The
Company provides its franchisees with considerable support, including site
selection, advertising, collection procedures and store operating procedures.
The Company has an arrangement with a major financial institution to provide
financing to qualifying franchisees to assist with the establishment and
operation of their stores. As of December 31, 1996, 155 Aaron's Rental Purchase
franchises had been awarded.
Rent-to-Rent -- Aaron Rents and Sells Furniture
The Company has been in the rent-to-rent business for over 40 years and is
one of the largest furniture rent-to-rent companies in the United States. The
rent-to-rent business remains the Company's core business, and accounted for 58%
of the Company's total revenues for the fiscal year ended December 31, 1996,
even though the Company's rental purchase business is expanding rapidly. The
Company rents new and rental return merchandise to both the residential and the
office segments of the rent-to-rent industry, with approximately two-thirds of
its rental revenues generated from residential rentals.
Rental contracts typically give the customer the option to purchase the
merchandise rented, though few customers exercise the purchase option. Items
held for rent, whether new or rental return, are also available for purchase and
rental purchase at all rent-to-rent stores.
The Company's typical rent-to-rent store layout consists of a combination
showroom and warehouse comprising about 20,000 square feet. Each residential
showroom features attractive displays of dining-room, living-room and bedroom
furniture in a number of styles, fabrics, materials and colors. Office rental
showrooms feature lines of desks, chairs, conference tables, credenzas, sofas,
business equipment and accessories. The Company believes that having a
warehouse next to each showroom permits the store manager to exercise greater
control over inventory, merchandise condition and pickup and deliveries,
resulting in more efficient and consistent service for the customer, and gives
the Company an advantage over many of its competitors in the rent-to-rent market
who do not have attached warehouses.
Each rent-to-rent store generally offers next day delivery for addresses
located within 50 miles of the store, and maintains at least one truck and a
crew for pickups and deliveries. The Company believes that its ability to
deliver office furniture and equipment to its office customers quickly and
efficiently gives the Company and advantage over general office furniture
retailers who often require several weeks to effect delivery.
The Aaron Rents' Rent-to-Rent division's 5 clearance stores serve primarily
as retail outlets for final sales of rental return merchandise that will not be
rented again, though they also sell new merchandise. Sales by the clearance
stores, together with sales at the clearance centers located in most of the
Company's rent-to-rent stores, are instrumental in enabling the Company to
maximize residual values of depreciated rental merchandise.
The Company generally sells rental return merchandise at or above its book
value (cost less depreciation) plus selling expenses, a price which is usually
considerably lower than the price for comparable new merchandise. Most
merchandise held for sale in clearance stores may also be acquired through a
rental purchase option. Because new merchandise is sold at the same location as
rental return merchandise, the Company has the opportunity to sell both new and
rental return merchandise to customers who may have been attracted to the store
by the advertising and price appeal of rental return merchandise. The ability
to sell new and rental return merchandise at the same location allows for more
efficient use of facilities and personnel and minimizes overhead.
As of December 31, 1996, the Company had 105 rent-to-rent store locations,
primarily in the Southeastern and Southwestern United States.
Furniture Manufacturing
The Company believes that its manufacturing capability gives it a strategic
advantage over its competitors by enabling the Company to control the quality,
cost, timing, styles and quantity of its furniture rental products. As the only
major furniture rental company that manufacturers its own furniture, the Company
believes its 375,000 square feet of manufacturing facilities provide it more
flexibility in scheduling production runs and in meeting inventory needs than
rental companies that do not manufacture their own furniture and are dependent
upon third party suppliers. The Company's MacTavish Furniture Industries
division has manufactured furniture for the Company's rental stores since 1971.
The division has five manufacturing plants and four bedding manufacturing
facilities which supply 76% of the Company's rent-to-rent furniture and bedding
needs and 34% of company-operated rental purchase stores' furniture and bedding
needs. Overall, approximately 63% of the furniture rented or sold by the
Company is manufactured by MacTavish Furniture Industries. The Company's
manufacturing plants have the capacity to meet the Company's needs for such
furniture for the foreseeable future. The Company also does limited
manufacturing of residential furniture for several unaffiliated furniture
retailers.
MacTavish Furniture Industries manufacturers upholstered living-room
furniture (including contemporary sofas, sofabeds, chairs and modular sofa and
ottoman collections in a variety of natural and synthetic fabrics and leathers),
bedding (including standard sizes of mattresses and box springs), upholstered
office furniture, bedroom furniture (including bedroom sets, headboards,
dressers, mirrors, chests and night tables), and cocktail, sofa and end tables.
The Company has designed special features for the furniture it manufactures,
which makes its furniture more durable than furniture purchased from third
parties. These features include wrench-disassembly (or knock-down) construction
of upholstered furniture products for easy replacement of worn or damaged parts
at lower cost; standardization of components; reduction of parts and features
susceptible to wear or damage; and durable, soil-resistant fabrics and solid-
hardwood frames for longer life and higher residual value. The Company also
manufactures replacement covers of all styles and fabrics of its upholstered
furniture for use in reconditioning rental return furniture.
The principal raw materials used in manufacturing are fabric, foam, wire-
innerspring assemblies, cotton liners and hardwoods. All of these materials are
purchased in the open market from sources not affiliated with the Company. The
Company is not dependent on any single supplier, and none of the raw materials
are in short supply. The Company generally maintains a three or four week
inventory of such materials.
Other Rental and Sales Operations
To supplement its rental purchase, rent-to-rent and sales operations, the
Company also operates three smaller divisions: Aaron Rents Business Equipment,
Aaron Rents Convention Furnishings and Aaron Rents Housewares and Linens. The
Aaron Rents Business Equipment division's three stores offer business equipment
(such as computers, copy machines, fax machines, word processors and paper
shredders) for rental, rental purchase and purchase. The Aaron Rents Convention
Furnishings division specializes in supplying conventions and events of various
sizes with furniture (such as tables, chairs, desks and sofas) on a temporary
basis. The Aaron Rents Housewares and Linens division supplies many of the
Company's rent-to-rent stores with a selection of common household and linen
items to complement the store's other items of merchandise.
STORE OPERATIONS
Management
The Company's rent-to-rent stores are managed by the President of the
division and are organized geographically into five regions, each supervised by
a vice-president who is primarily responsible for monitoring individual store
performance and inventory levels within the respective regions. The Aaron's
Rental Purchase division is managed separately by the President of the division,
who has four regional managers performing similar responsibilities.
Stores are directly supervised by 38 district managers. At the individual
store level, the store manager is responsible for customer and credit relations,
deliveries and pickups, warehouse and inventory management, and certain
marketing efforts. Store managers are also responsible for inspecting rental
return furniture to determine whether it should be sold as is, rented again as
is, repaired and sold, or reconditioned for additional rental. A significant
portion of the store manager's compensation is dependent upon store revenues and
profits.
Executive management at the Company's headquarters directs and coordinates
purchasing, financial planning and control, manufacturing, employee training,
and new store site selection for the Company-operated stores. The Company's
internal audit department conducts periodic audits of every store, including
audits of Company-operated rental purchase stores every 60 days, and semiannual
audits of rent-to-rent stores and franchised rental purchase stores. The
Company's business philosophy has always emphasized strict cost containment and
fiscal controls. Executive and store level management monitor expenses
vigilantly to contain costs. All invoices are paid out of the Company's
headquarters in order to enhance fiscal accountability. The Company believes
that its careful attention to the expense side of its operations has enabled it
to maintain financial stability and profitability even during periods of
declining revenues.
Management Information Systems
The Company utilizes computer-based management information systems to
facilitate cash collections, merchandise returns and inventory monitoring.
Through the use of proprietary software developed by the Company, each of the
Company's stores is linked by computer directly to corporate headquarters, which
enables headquarters to monitor the performance of each store on a daily basis.
At the store level, the store manager is better able to track inventory on the
showroom floor and in the warehouse to minimize delivery times, assist with
product purchasing and match customer needs with available inventory.
Contract Approval, Renewal and Collection
One of the keys to the Company's success is its ability to achieve timely
cash collections. Individual store managers utilize the Company's computerized
information system on a daily basis to track cash collections. They contact
customers within a few days of when their rental payments are due in order to
encourage customers to keep their contracts current and in force (rather than
having to return the merchandise for non-payment of rent) and to renew their
contracts for an additional rental period. Careful attention to cash
collections is particularly important in the rental purchase operations, where
the customer typically has the option to cancel the contract at any time and
each payment is considered a renewal of the contract rather than a collection of
a receivable.
Each rent-to-rent store performs a credit check on most of its residential
and business customers. The Company generally performs no formal credit check
with respect to rental purchase customers other than to verify employment or
other reliable sources of income and personal references supplied by the
customer because the Company does not extend credit to rental purchase
customers. All of the Company's rental agreements for residential and office
merchandise require rental payments in advance, and the merchandise normally is
picked up if a payment is significantly in arrears. Net bad debt losses from
rent-to-rent rentals as a percentage of rent-to-rent rental revenues were
approximately 2.5%, 3.0% and 4.0% for the fiscal year ended December 31, 1996,
for the nine months ended December 31, 1995, and for the fiscal year ended March
31, 1995. Bad debt losses in the rental purchase division are not significant.
For the same periods, net merchandise shrinkage as a percentage of all rental
revenues was 2.5%, 2.8% and 2.7%, respectively. The Company's collection and
repossession policies comply with governing legal requirements, and the Company
disciplines any employee that it discovers deviating from such policies.
CUSTOMER SERVICE
The Company believes that customer service is one of the most important
elements in the success of its rent-to-rent and rental purchase businesses.
Customer satisfaction is critical because the customer usually has the option of
returning the rented merchandise at any time. The Company's goal is to make its
customers feel positive about the Company and its products from the moment they
enter the Company's showrooms. Rented items are serviced at no charge to the
customer, and quick, free delivery is available in many cases. In order to
increase rentals at existing stores, the Company fosters relationships with
existing customers to attract recurring business, and many new rental and rental
purchase contracts are attributable to repeat customers.
Because of the importance of customer service, the Company believes that a
prerequisite for successful operations and growth is skilled, effective
employees who value the Company's customers and project a genuine desire to
serve the customers' needs. The Company has a comprehensive employee training
program at its Atlanta headquarters for all rent-to-rent store managers and
employees covering all areas of the Company's operations, with a heavy emphasis
on customer service. Additionally, four field trainers are based out of the
regional offices. Store managers and employees in the Aaron's Rental Purchase
stores have similar training primarily on site by the division's training staff
and regional managers. The Company's policy of promoting from within aids in
employee retention and commitment to the Company's customer service and other
business philosophies, which also allows the Company to realize greater benefits
from its employee training programs.
PURCHASING AND DISTRIBUTION
The Company's product mix is determined by store managers in consultation
with the regional managers and regional vice presidents, based on an analysis of
customer demands. With approval from the applicable operating management, store
managers send their orders to the purchasing department at headquarters. The
purchasing department reviews all purchase orders to determine whether
merchandise needs may be satisfied out of existing inventory at other stores
before contacting vendors. If inventory is available at other stores, the
purchasing department arranges for inventory shipments between stores.
Virtually all merchandise for the Company's stores is purchased by the Company's
six buyers, three of whom are solely responsible for rental purchase
merchandise.
The Company purchases the majority of its merchandise directly from
manufacturers, with the balance from local distributors. The Company's largest
supplier is its MacTavish Furniture Industries manufacturing division, which
supplies approximately 66% of the furniture rented or sold by the Company. The
Company has no long-term contracts for the purchase of merchandise and believes
that its relationships with suppliers are excellent.
Both rent-to-rent and rental purchase operations utilize distribution
centers to control inventory. During fiscal year 1996, the Company opened two
such rent-to-rent facilities in Richmond, Virginia and Dallas, Texas. Rent-to-
rent stores in geographic proximity to these facilities order merchandise
directly from the distribution centers. The remaining rent-to-rent stores
receive merchandise directly from vendors who ship to the stores' attached
warehouses. All rental purchase stores order directly from the Company's three
rental purchase distribution centers located in Auburndale, Florida; Houston,
Texas; and Duluth, Georgia. Rental purchase stores typically have smaller
warehouses with less inventory storage space than the Company's rent-to-rent
stores. Vendors ship directly to the distribution centers.
Distribution centers result in freight savings from truckload discounts and
a more efficient distribution of merchandise. The Company utilizes its four
tractor trailers, its local delivery trucks, and various contract carriers to
make weekly deliveries to individual stores.
MARKETING AND ADVERTISING
In its rental purchase operations, the Company relies heavily on store
traffic and direct mail advertising to reach its target markets. Rental
purchase stores are located within neighborhood communities, and will typically
distribute mass mailings of promotional material every two weeks, with the goal
of reaching every known household within a specified radius of each store at
least 12 times per year. In addition, delivery personnel are trained to leave
promotional material at the door of each residence within five doors of the
delivery destination. In concentrated geographic markets, and for special
promotions, the Company also utilizes television advertising and radio
advertising for special promotions.
The Company markets its rent-to-rent operations through its outside sales
staff for personal contact with apartment complex managers for the residential
market as well as the decision maker for the office market. It also relies on
the use of brochures, newspapers, radio, television, direct mail, trade
publications, yellow pages and electronic mail over the Internet
(http://www.aaronrents.com) to reach its residential and office rental and sales
customers. The Company believes that such advertising benefits its residential
and office rental and sales operations because of increased awareness of rental
and purchase options along with name recognition.
EMPLOYEES
At December 31, 1996, the Company had 2,550 employees. None of the
Company's employees are covered by a collective bargaining agreement, and the
Company believes that its relations with its employees are good.
CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS
Many of the matters discussed in this Annual Report on Form 10-K are
forward looking statements. These statements involve a number of risks and
uncertainties that could cause actual results to differ materially from any such
statement. The following is a nonexclusive list of factors that could cause
actual results to differ materially:
Risks Associated with the Opening of New Stores
An important part of the Company's growth strategy is to open new rental
purchase stores, many of which may be in new markets.
Competition
The Company's businesses are highly competitive. The Company competes in
the rent-to-rent market with national and local companies and, to a lesser
extent, with apartment owners who purchase furniture for rental to tenants. In
the rent-to-own market, the Company competes with several larger companies.
Although definitive industry statistics are not available, management
believes that the Company is one of the largest furniture rental companies in
the United States. Management also believes that it generally has a favorable
competitive position in that industry because of its manufacturing and
reconditioning capabilities, its prompt delivery and its commitment to customer
service.
Government Regulation
The Company believes that 43 states specifically regulate rent-to-own
transactions, including states in which the Company currently operates Aaron's
Rental Purchase stores. Most of these states have enacted disclosure laws which
require rent-to-own companies to disclose to its customers the total number of
payments, total amount and timing of all payments to acquire ownership of any
item, any other charges that may be imposed by the Company and miscellaneous
other items. The most restrictive states limit the total amount that a customer
may be charged for an item to twice the "retail" price for the item, or regulate
the amount of "interest" that rent-to-own companies may charge on rent-to-own
transactions, generally defining "interest" as rental fees paid in excess of the
"retail" price of the goods. The Company's long-established policy in all
states is to disclose the term of its rental purchase transactions as a matter
of good business ethics and customer service.
At the present time, no federal law specifically regulates the rent-to-own
industry. Federal legislation has been proposed in the past which could affect
the rental purchase industry. Management cannot predict whether any such
legislation will be enacted and what the impact of such legislation would be.
Although the Company is unable to predict the results of these or any additional
regulatory initiatives, the Company does not believe that the existing and
proposed regulations will have a material adverse impact on the Company's rental
purchase or other operations.
Limited Voting Rights
The Company's capital stock consists of Class A Common Stock and Common
Stock (formerly known as the Class B Common Stock). Only the holders of shares
of Class A Common Stock vote for the election of directors of the Company and on
most other matters. The Common Stock has only limited voting rights.
Control by and Dependence Upon Principal Shareholder
R. Charles Loudermilk, Sr., the Company's President, Chief Executive
Officer and Chairman of the Board, own or controls approximately 60% of the
Company's voting stock and 22% of the non-voting stock outstanding. As a
result, Mr. Loudermilk will continue to be able to elect all the directors of,
and otherwise effectively control, the Company. The Company believes that it
has benefited substantially from Mr. Loudermilk's leadership and that if it were
to lose his services at any time in the near future such loss could have an
adverse effect on the Company's business and operations.
Item 2. Properties
The Company leases space for substantially all of its store and warehouse
operations under operating leases expiring at various times through August,
2005. Most of the leases contain renewal options for additional periods ranging
from two to ten years at rental rates generally adjusted on the basis of the
consumer price index or other factors. For further information regarding the
Company's store and warehouse leases, see Note G of the Notes to the Company's
Consolidated Financial Statements.
The Company owns five furniture manufacturing plants and operates four
bedding facilities and five distribution centers. It manufactures wood bedroom
furniture at an 80,000 square foot plant, and office furniture at a 91,000
square foot plant, both located on a four-acre site in Quincy, Florida, near
Tallahassee. Three plants are located in a five acre site in Coolidge, Georgia
(approximately 200 miles south of Atlanta). Upholstered residential furniture
is produced at a 77,000 square foot plant. A second plant of 46,000 square feet
assembles chairs, manufactures leather upholstery, sleepers, and box springs and
mattresses. A third plant of 20,000 square feet cuts and sews fabric for
upholstered furniture. The Company's bedding operations are located in Atlanta
and Coolidge, Georgia; Houston, Texas, and Orlando, Florida. Distribution
centers in Auburndale, Florida; Houston, Texas; and Duluth, Georgia (average
57,000 square feet each) service the Aaron's Rental Purchase division.
Distribution centers in Richmond, Virginia and Dallas, Texas (approximately
100,000 square feet each) service the Aaron's Rent-to-Rent Division.
The Company's executive and administrative offices occupy approximately
37,000 square feet in an 11 story, 81,000 square-foot building that the Company
owns in Atlanta. The Company leases most of the remaining space to third
parties under leases with remaining terms averaging four years.
All of the Company's facilities are well maintained and adequate for their
current and reasonably foreseeable uses.
Item 3. Legal Proceedings
The Company is not currently a party to any legal proceedings the result of
which it believes could have a material adverse impact upon its business,
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
- -------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
(a) The information presented under the caption "Common Stock Market Prices
and Dividends" on page 23 of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1996 is
incorporated herein by reference. The over-the-counter market
quotations stated herein reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
(b) There were approximately 2,000 stockholders of record as of March 17,
1997.
(c) The information presented under "Note E - Debt" on page 20 of the
Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1996 is incorporated herein by reference. During the
fiscal year ended December 31,1996, the Company paid two semi-annual
cash dividends. No assurance can be provided that such dividends will
continue.
Item 6. Selected Financial Data
The information presented under the caption "Selected Financial
Information" on page 13 of the Company's Annual Report to Shareholders
for the fiscal year ended December 31, 1996 is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information presented under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operation" on pages 14 through 15
of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1996 is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The information presented under the captions "Consolidated Balance Sheets,"
"Consolidated Statements of Earnings," "Consolidated Statements of Shareholders'
Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated
Financial Statements," and "Report of Independent Auditors" on pages 16 through
23 of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1996 is incorporated herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1996, with respect to the identity, background
and Section 16 filings of directors and executive officers of the Company, is
incorporated herein by reference to this item.
Item 11. Executive Compensation
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1996, with respect to executive compensation,
is incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1996, with respect to the ownership of common
stock by certain beneficial owners and management, is incorporated herein by
reference to this item.
For purposes of determining the aggregate market value of the Company's
voting stock held by non-affiliates, shares held by all directors and officers
of the Company have been excluded. The exclusion of such shares is not intended
to, and shall not, constitute a determination as to which person or entities may
be "affiliates" of the Company as defined by the Securities and Exchange
Commission.
Item 13. Certain Relationships and Related Transactions
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1996, with respect to certain relationships and
related transactions, is incorporated herein by reference in response to this
item.
PART IV
- -------
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K
Reference
Form 10-K Report to Shareholders Page
- --------------------------------
(a) 1. Consolidated Financial Statements
The following financial statements and notes thereto of
Aaron Rents, Inc. and Subsidiaries, and the related
Report of Independent Auditors are incorporated in
Item 8 by reference from the Company's Annual Report to
Shareholders for the Year ended December 31,
1996.
Consolidated Balance Sheets - December 31, 1996 and 1995 16
Consolidated Statements of Earnings - Year ended
December 31, 1996, Nine months ended December 31, 1995, and
Year ended March 31, 1995 17
Consolidated Statements of Shareholders' Equity - Year ended
December 31, 1996, Nine Months ended December 31, 1995
and Year ended March 31, 1995 17
Consolidated Statements of Cash Flows - Year ended
December 31, 1996, Nine Months ended December 31, 1995,
and Year ended March 31, 1995 18
Notes to Consolidated Financial Statements 19-23
Report of Independent Auditors 23
2. Consolidated Financial Statement Schedules
All schedules have been omitted because they are inapplicable
or the required information is included in the financial
statements or notes thereto.
3. Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
3 (a) Amended and Restated Articles of Incorporation of the Company, filed
as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 (the "March 31, 1996 10-Q") which exhibit is
by this reference incorporated herein.
3 (b) By-laws of the Company, filed as Exhibit 2.2 to the Company's
Registration Statement on form 8-A filed with the Commission on
October 22, 1992, which exhibit is by this reference incorporated herein.
4 See Exhibits 3 (a) through 3 (b).
10 (a) Aaron Rents, Inc. Employees Retirement Plan and Trust, filed as
Exhibit 4 (a) to the Company's Registration Statement on Form S-8, file
number 33-62538, filed with the Commission on May 12, 1993, which exhibit
is by this reference incorporated herein.*
10 (b) Aaron Rents, Inc. 1990 Stock Option Plan, filed as Exhibit 4 (a) to
the Company's Registration Statement on Form S-8, file number 33-62536,
filed with the Commission on May 12, 1993, which exhibit is by this
reference incorporated herein.*
10 (c) Amended and Restated Revolving Credit and Term Loan Agreement,
dated January 6, 1995, filed as Exhibit 10 (a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1994 (the
"December 31, 1994 10-Q"), which exhibit is by this reference
incorporated herein.
10 (d) Letter Agreements dated November 14, 1994, between Trust Company
Bank and the Company, and November 21, 1994 between Bank of America and
the Company regarding an Interest Rate Swap Transaction, filed as Exhibit
10 (b) to the December 31, 1994 10-Q, which exhibit is by this reference
incorporated herein.
10 (e) Letter Agreements dated June 19, 1995, between First Union National
Bank of North Carolina and the Company and June 20, 1995, between Trust
Company Bank and the Company regarding an Interest Rate Swap Transaction,
filed as Exhibit 10 (b) to the June 30, 1995 10-Q, which exhibit is by
this reference incorporated herein.
10 (f) Third Amendment to Second Amended and Restated Revolving Credit
and Term Loan Agreement, dated September 30, 1996, filed as Exhibit 10 to
the September 30, 1996 10-Q, which exhibit is by reference incorporated
herein.
10 (g) Letter agreements dated December 26, 1996 between SunTrust Bank,
Atlanta and the Company, and letter agreements dated December 27, 1996
between First Chicago NBD, Bank of America NT & SA and the Company
regarding Interest Rate Swap Transactions.
11 Computation of Earnings Per Share.
13 Aaron Rents, Inc. Annual Report to Shareholders for the fiscal year
ended December 31,1996. With the exception of information expressly
incorporated herein by direct reference thereto, the Annual Report to
Shareholders for the fiscal year ended December 31, 1996 is not deemed to
be filed as a part of this Annual Report on Form 10-K.
18 Letter Re Change in Accounting Principles dated May 13, 1996, filed as
Exhibit 18 to the March 31, 1996 10-Q, which exhibit is by this reference
incorporated herein.
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
99 Press release dated May 7, 1996, filed as Exhibit 99 to the March 31,
1996 10-Q, which exhibit is by this reference incorporated herein.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to item 14 (c) of this report.
(b) Reports on Form 8-K-none
(c) Exhibits listed in item 14 (a) (3) are included elsewhere in this
Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
March, 1997.
AARON RENTS, INC.
By: /s/ Gilbert L. Danielson
------------------------
Gilbert L. Danielson
Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 28th day of March, 1997.
SIGNATURE TITLE
- --------- -----
/s/ R. Charles Loudermilk, Sr. Chief Executive Officer
- ------------------------------ (Principal Executive Officer)
R. Charles Loudermilk, Sr. and Chairman of the Board of Directors
/s/ Gilbert L. Danielson Vice President, Finance, Chief
- ------------------------ Financial Officer and Director,
Gilbert L. Danielson (Principal Financial Officer)
/s/ Robert P. Sinclair, Jr. Controller
- --------------------------- (Principal Accounting Officer)
Robert P. Sinclair, Jr.
/s/ Leo Benatar Director
- ---------------
Leo Benatar
/s/ Earl Dolive Director
- ---------------
Earl Dolive
/s/ Rex Fuqua Director
- -------------
J. Rex Fuqua
/s/ Keith C. Groen Vice President, Legal
- ------------------ Secretary and Director
Keith C. Groen
/s/ Ingrid Saunders Jones Director
- -------------------------
Ingrid Saunders Jones
/s/ Robert C. Loudermilk, Jr. Vice President, Real Estate
- ----------------------------- and Director
Robert C. Loudermilk, Jr.
/s/ LTG. M. Collier Ross USA (Ret.) Director
- -----------------------------------
LTG M. Collier Ross USA (Ret.)
/s/ R. K. Sehgal Director
- ----------------
R. K. Sehgal