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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
December 31, 1997 0-12385
AARON RENTS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-0687630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
309 E. PACES FERRY ROAD, N.E.
ATLANTA, GEORGIA 30305-2377
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 231-0011
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
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Common Stock, $.50 Par Value
Class A Common Stock, $.50 Par Value
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1998: $31,267,151. See Item 12.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
SHARES OUTSTANDING AS OF
TITLE OF EACH CLASS MARCH 20, 1998
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Common Stock, $.50 Par Value 15,150,391
Class A Common Stock, $.50 Par Value 3,836,506
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Shareholders for the fiscal year
ended December 31, 1997 are incorporated by reference into Part II of this Form
10-K.
Portions of the registrant's definitive proxy statement for the 1998 annual
meeting of shareholders are incorporated by reference into Part III of this Form
10-K.
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PART I.
ITEM 1. BUSINESS
GENERAL
Aaron Rents is a U.S. leader in the rent-to-rent and rental purchase
industries with 402 stores in 32 states. The Company offers both individual and
business customers a wide range of residential and office furniture,
accessories, consumer electronics, and household appliances for rental, rental
purchase and sale. The Company's major operating divisions are the Aaron Rents'
Rent-to-Rent Division, the Aaron's Rental Purchase Division, the Aaron Rents'
Convention Furnishings Division and MacTavish Furniture Industries Division,
which manufactures much of the furniture for the Company's rental and rental
purchase stores. Aaron Rents' strategic focus is on expanding its higher growth
rental purchase business while also growing its rent-to-rent business in
selected markets.
At March 31, 1998, Aaron Rents had 297 Company-operated stores and 105
franchised stores in 32 states nationwide. There were 107 rent-to-rent stores in
its Aaron Rents' Rent-to-Rent Division, 183 Company-operated rental purchase
stores in its Aaron's Rental Purchase Division, 105 Aaron's Rental Purchase
franchised stores, and seven Aaron Rents' Convention Furnishings stores.
The Aaron Rents' Rent-to-Rent Division is well-positioned to take advantage
of the growing demand for furniture rental services. Management believes this
demand to be driven by continued growth in employment, the increasing importance
of flexibility and outsourcing to American businesses and the impact of a more
mobile and transitory population. Business customers, which represent an
increasing portion of rental customers, enter into leases for office furniture
to meet seasonal, temporary or start-up needs. Business customers also lease
residential furniture in order to provide furnishings for relocated employees or
those on temporary assignment.
The Aaron's Rental Purchase Division focuses on providing durable household
goods to lower to middle income consumers with limited or no access to
traditional credit sources such as bank financing, installment credit or credit
cards. The Company's rental purchase program allows customers to obtain
merchandise without incurring additional debt or long-term obligations.
Management believes that the segment of the U.S. population which its rental
purchase division targets is large and that the needs of these customers
generally are underserved.
In 1992 the Company began franchising Aaron's Rental Purchase stores to
place stores in selected markets where the Company has no immediate plans to
enter. The Company believes that its franchise program allows the Company to
grow more quickly, increase its name exposure in new markets and achieve
economies of scale in purchasing, manufacturing and advertising for its rental
purchase stores. The Company opened 12, 25 and 40 franchised rental purchase
stores in 1995, 1996 and 1997, respectively.
The Company is the only rental company in the United States that
manufactures its own furniture. By manufacturing its own specially designed
residential and office furniture through its MacTavish Furniture Industries
Division, the Company enjoys an advantage over many of its competitors.
Manufacturing enables the Company to control the quality, cost, timing, styling
and quantity of its furniture rental products. The Company owns five furniture
manufacturing plants and operates four bedding manufacturing facilities, which
supply approximately 49% of the furniture rented or sold by the Company.
The Company has grown significantly in recent years. Its growth is
attributed to the opening of Company-operated and franchised rental purchase
stores, as well as to the expansion of its rent-to-rent business and selected
acquisitions. The Company expects to continue to grow its store base and plans
to open five to 10 rent-to-rent stores, 10 to 15 Company-operated rental
purchase stores and 45 to 50 new franchised rental purchase stores in 1998.
Total revenues have increased from $155.7 million for calendar year 1992 to
$310.8 million for calendar year 1997, and earnings before income taxes
increased from $9.7 million in 1992 to $30.2 million in 1997, representing a
14.8% and 25.5% compound annual growth rate in the Company's revenues and
earnings before income taxes, respectively. The increase in revenues was driven
by a significant increase in rental purchase revenues, which increased from
$22.5 million for 1992 to $139.3 million for 1997, representing
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a 44.0% compound annual growth rate. During the same period, rent-to-rent
revenues increased from $111.3 million to $162.3 million.
The Company believes it possesses a valuable brand name in the rental
business, as well as operating characteristics which differentiate it from its
competitors. For instance, the Company's rental purchase concept is unique by
offering 12-month rental purchase agreements, larger and more attractive store
showrooms and a wider selection of merchandise. In the rent-to-rent business,
the Company believes that its ability to deliver residential and office
furniture and equipment to its customers quickly and efficiently gives the
Company an advantage over furniture retailers who often require several weeks to
effect delivery. By having its own manufacturing capabilities, an extensive
distribution network and sophisticated management information systems, the
Company is well-positioned to meet the distinct needs of its rent-to-rent and
rental purchase customers.
INDUSTRY OVERVIEW
The Rent-To-Own Industry
The estimated potential size of the United States rent-to-own market is
19.6 million households of which only 2.7 million are being served currently by
the industry. According to the Association of Progressive Rental Organizations
("APRO"), the national trade association representing the rent-to-own industry,
there are approximately 7,500 rent-to-own stores in the United States,
approximately 50% of which are owned or franchised by the ten largest companies
in the industry. Industry-wide revenues are believed to have been approximately
$4.7 billion in 1997.
In a typical rent-to-own transaction, the customer has the option to
acquire merchandise over a fixed term, usually 18 to 24 months, by making weekly
rental payments. The customer may cancel the agreement at any time by returning
the merchandise to the store, with no further rental obligation. The average
rental period in the industry is about four months, because the majority of
customers do not rent the item to the full term of the agreement. If the
customer rents the item to the full term, he obtains ownership of the item,
though he has the option to purchase it at any time.
The rent-to-own industry is a growing segment of the retail industry that
offers an alternative to traditional methods of acquiring furniture, electronics
and appliances. The rent-to-own concept is particularly popular with consumers
who are unable to pay for merchandise in cash or who lack the credit to qualify
under conventional financing programs. It is also popular with consumers who,
despite good credit, do not wish to incur additional debt, have only a temporary
need for the merchandise, or desire to try out a particular brand or model
before purchasing it. Historically, electronic goods have been the dominant
product category rented and sold in the industry although furniture items are
growing rapidly in popularity.
The Company believes its rental purchase concept differs significantly from
the typical rent-to-own program. Compared to the typical rent-to-own stores,
Aaron's Rental Purchase stores offer shorter agreement terms which are payable
on a monthly basis and have generally lower total payments to acquire
merchandise. Aaron's Rental Purchase stores offer a larger selection of
merchandise in general and a greater percentage of furniture merchandise in
particular, and have a larger and more visually appealing store layout. The
Company believes that its rental purchase customers demand and can afford both
higher quality merchandise and more competitive pricing on total agreement terms
compared to the typical rent-to-own customer.
The Company's rental purchase transactions differ from sales by home
furnishings retailers in that rental purchase allows the option, but not the
obligation, to purchase merchandise while paying a similar "all-in" agreement
price. Rental purchase allows the customer to have the item serviced free of
charge or replaced at any time during the rental agreement, and allows the
Company to re-rent an item to another customer if the agreement does not go to
term.
The Company's rental purchase operations differ from the rent-to-rent
business. A typical rental purchase customer, while usually lacking the cash or
credit resources to acquire merchandise, desires the option of ownership and may
have the intention to utilize rental purchase to achieve ownership. Accordingly,
in rental purchase transactions, the customer is willing to pay a higher monthly
payment for the ownership option, as
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compared to the rent-to-rent customer. Typically, the Company's rental purchase
customers are more style and brand name conscious than rent-to-rent customers
who regard the merchandise as temporary. Aaron's Rental Purchase stores are
attractively appointed and are typically in or near a shopping center
strategically located near the residences of its target customers, as opposed to
the rent-to-rent store whose typical location is in an office park that services
destination customers from a broad geographical area.
The Rent-To-Rent Industry
The furniture component of the rent-to-rent industry is estimated to be
greater than $600 million in annual rental revenues. The demand for rental
products is believed to be related to the mobility of the population, which
relies upon rented merchandise to fulfill temporary needs. The industry is
highly competitive and consolidating, with only a handful of companies
accounting for a substantial share of the market.
The rent-to-rent industry serves both individual and business customers who
generally have immediate, temporary needs for office or residential merchandise
but who generally do not seek to own the merchandise. Residential merchandise is
rented to individuals seeking to rent merchandise for their own homes and
apartments, apartment complex managers seeking to provide furnished apartments,
and third party companies that provide interim housing for their corporate
clients. Office merchandise is rented by customers ranging from small businesses
and professionals who are in need of office furnishings but need to conserve
capital, to large corporations with temporary or seasonal needs.
In the typical rent-to-rent transaction, the customer agrees to rent one or
more items for a minimum of three months, which may be extended by the customer
on a month-to-month basis. Although many rental agreements give the customer the
option of purchasing the rented item, most customers do not enter into the
transaction with the desire to own the rented merchandise.
GROWTH AND OPERATING STRATEGIES
Aaron Rents is expanding its business through growth strategies that focus
on the opening of additional Company-operated rent-to-rent and rental purchase
stores, and franchised rental purchase stores. In addition, the Company seeks to
enhance profitability through operating strategies which differentiate the
Company from its competitors and improve operating efficiencies. The key
elements of the Company's growth and operating strategies are summarized below.
Growth Strategies
- EXPAND COMPANY-OPERATED RENTAL PURCHASE OPERATIONS IN SELECTED GEOGRAPHIC
MARKETS. The Company currently expects to open 10 to 15 additional
Company-operated Aaron's Rental Purchase stores during 1998, and to open
comparable numbers of stores in each of the next several years. The
Company's strategy is to open rental purchase stores primarily in the
Company's existing geographic markets where it can cluster stores to
realize the benefits of economies of scale in marketing and distribution
and other operating efficiencies.
- EXPAND AARON'S RENTAL PURCHASE FRANCHISE PROGRAM. The Company uses its
franchise program to place Aaron's Rental Purchase stores in selected
markets where the Company has no immediate plans to enter. The Company
believes that its franchise program allows the Company to grow more
quickly and increase its name exposure in new markets with a relatively
low investment of capital by the Company. In addition, the larger number
of systemwide rental purchase stores enables the Company and its
franchisees to realize economies of scale in purchasing, manufacturing
and advertising for its rental purchase stores. Franchise fees and
royalties also represent a growing source of revenues for the Company.
The Company expects that approximately 45 to 50 franchised Aaron's Rental
Purchase stores will open in 1998, and expects a larger number of stores
to open in each of the next several years.
- EXPAND RENT-TO-RENT OPERATIONS. The Company believes that there are
growth opportunities in the rent-to-rent market, particularly in the
business sector. The Company has recently begun opening rent-
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to-rent operations in new markets to better serve its national business
customers and is also expanding its presence in existing markets. The
recent introduction of warehouse-only stores in new markets has allowed
the Company to enter markets at a lower cost. The Company believes that
its rent-to-rent business will continue to provide the Company with cash
flow to finance a significant amount of the planned expansion of the
Aaron's Rental Purchase Division. The Company expects to open five to 10
rent-to-rent stores in 1998 in existing and new markets.
Operating Strategies
- PROVIDE HIGH LEVELS OF CUSTOMER SERVICE AND SATISFACTION. The Company
demonstrates its commitment to superior customer service by providing
large, attractive and conveniently located showrooms, offering a wide
selection of quality merchandise at competitive prices and flexible
acquisition options, and providing customers quick delivery of rented
merchandise, in many cases by same or next day delivery. The Company has
established an employee training program designed to enhance the customer
relations skills of its employees.
- DIFFERENTIATE AARON'S RENTAL PURCHASE CONCEPT. The Company believes that
the success of its rental purchase operations is attributable to its
distinctive approach to the business that sets it apart from its
rent-to-own competitors. The Company has pioneered innovative approaches
to meeting changing customer needs that differ from those of its
competitors -- such as offering 12-month rental purchase agreements which
result in a lower "all-in" price, larger and more attractive store
showrooms, and a wider selection of merchandise. Most rental purchase
customers make their rental payments in person, and the Company uses
these frequent visits to strengthen customer relationships and make
rental purchase customers feel welcome in the Company's stores.
- TARGET RENT-TO-RENT BUSINESS CUSTOMERS. The Company has successfully
operated rent-to-rent stores for over 40 years, using its superior
customer service, prompt delivery and wide selection of rental furniture
to attract a growing number of business customers. The Company believes
that its ability to deliver furniture and equipment to its business
customers quickly and efficiently gives the Company an advantage over
general furniture retailers who often require several weeks to effect
delivery. In addition, the location of a warehouse next to each showroom
permits the store manager to exercise greater control over inventory,
merchandise condition and pickup and deliveries, resulting in more
efficient and consistent service for the customer. The Company has also
recently opened warehouse-only locations in a few selected markets where
the Company is seeking an immediate presence at a lower cost. The
warehouse-only locations rely on outside sale representatives who target
business customers.
- MANAGE FURNITURE REQUIREMENTS THROUGH MANUFACTURING AND
DISTRIBUTION. The Company believes that its furniture manufacturing
capability and distribution center network give it a strategic advantage
over its competitors by enabling the Company to control the quality,
cost, timing, styling, durability and quantity of a substantial portion
of its rental furniture merchandise. This control allows the Company to
offer prompt delivery of rented furniture and provides the Company a
reliable source of rental furniture.
- UTILIZE PROPRIETARY MANAGEMENT INFORMATION SYSTEMS. The Company has
developed proprietary computerized information systems to systematically
pursue cash collections and merchandise returns and to match inventory
with demand. Each of the Company's stores, including franchised rental
purchase stores, is linked by computer directly to corporate
headquarters, which enables headquarters to monitor the performance of
each store on a daily basis. Its separate systems are tailored to meet
the distinct needs of the Company's rent-to-rent and rental purchase
operations.
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OPERATING DIVISIONS
Rental Purchase -- Aaron's Rental Purchase
The Company established its Aaron's Rental Purchase Division in 1987. At
March 31, 1998, there were 183 Company-operated Aaron's Rental Purchase stores
in 16 states and 105 franchised Aaron's Rental Purchase stores in 27 states. The
Company has developed a distinctive concept for its Aaron's Rental Purchase
stores with specific merchandising selection and store layout, pricing and
agreement terms for the customers it seeks to attract. The Company believes that
these features create a store and rental purchase concept that is significantly
different from the operations of most other rent-to-own stores, the Company's
traditional rent-to-rent business, and the operations of home furnishings
retailers who finance merchandise.
The typical Aaron's Rental Purchase store layout consists of a combination
showroom and warehouse of 8,000 to 10,000 square feet, with an average of
approximately 8,700 total square feet. In selecting new locations for Aaron's
Rental Purchase stores, the Company generally looks for sites in well-maintained
strip shopping centers strategically located within ten miles of established
working class neighborhoods and communities with good access. Many of the
Company's stores are placed near existing rent-to-own stores of competitors.
Each rental purchase store maintains at least two trucks and crews for pickups
and deliveries, and generally offers same or next day delivery for addresses
located within 15 miles of the store. The Company emphasizes a broad selection
of brand name products for its electronics and appliance items, and offers
customers a wide selection of furniture, including furniture manufactured by the
Company's MacTavish Furniture Industries Division. Aaron's Rental Purchase
stores also offer computers and jewelry.
Aaron's Rental Purchase stores structure the pricing of merchandise to be
less expensive than similar items offered by other rent-to-own operators, and
substantially equivalent to the "all-in" contract price of similar items offered
by home furnishings retailers who finance merchandise. Over 81% of the Company's
rental purchase agreements have monthly payments as compared to the industry
standard weekly payments, and most monthly agreements are for 12 months compared
to the industry standard of 18 to 24 months. Approximately 37% of Aaron's Rental
Purchase agreements go to term, in contrast to an industry average of less than
25%. The merchandise from the agreements that do not go to term is either
re-rented or sold.
The Aaron's Rental Purchase Division's 11 clearance centers serve primarily
as retail outlets for final sales of rental return merchandise that will not be
rented again, although they also sell some new merchandise. Sales by the
clearance centers, together with sales at the Company's rental purchase stores,
are instrumental in enabling the Company to maximize residual values of
depreciated rental merchandise.
Aaron's Rental Purchase Franchise Program
The Company began franchising Aaron's Rental Purchase stores in selected
markets in 1992, and has continued to attract many franchisees. It is not
anticipated that franchised stores will compete with Company-operated stores, as
franchises are primarily awarded in markets into which the Company has no
presence and no current plans to expand. As of March 31, 1998, 206 franchises
had been sold to 56 franchisees, and 105 franchise stores were open. The Company
believes that its relations with its franchisees are good.
Franchisees are approved on the basis of the applicant's business
background and financial resources. The Company generally seeks franchisees who
will enter into development agreements for several stores, although many
franchisees currently operate a single store. Most franchisees are involved in
the day-to-day operations of the stores.
The Company enters into franchise agreements with its franchisees to govern
the opening and operation of franchised stores. Under the Company's current
agreement, the franchisee is required to pay a franchise fee of $35,000 per
store. Agreements are for a term of 10 years (with one 10-year renewal option)
and require payment to the Company of a royalty of 5% of weekly cash
collections.
The Company assists each franchisee in selecting the proper site for each
store. Because of the importance of location to the Aaron's Rental Purchase
concept, one of the Company's Pre-Opening Directors visits the intended market
and helps guide the franchisee through the selection process. Once a site is
selected,
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the Company helps in designing the floor plan, including the proper layout of
the showroom and warehouse. In addition, the Company provides assistance in
assuring that the design and decor of the showroom is consistent with the
Company's requirements. The Company also leases the exterior signage to the
franchisee, and assists with placing pre-opening advertising, ordering initial
inventory and purchasing delivery vehicles.
The Company has an arrangement with a syndicate of banks to provide
financing to qualifying franchisees to assist with the establishment and
operation of their stores. A primary component of the financing program is an
inventory financing plan which provides franchisees with the capital to purchase
inventory. For established franchisees, the Company has arranged for these
institutions to provide a revolving credit line to allow franchisees the
flexibility to expand. The Company guarantees a portion of amounts outstanding
under the franchisee financing programs.
All franchisees are required to complete a comprehensive training program
and to operate their franchised Aaron's Rental Purchase stores in compliance
with the Company's policies, standards and specifications, including such
matters as decor, rental agreement terms, hours of operation, pricing and
merchandise. Franchisees are not required to purchase their rental merchandise
from the Company, although many do so in order to take advantage of bulk
purchasing discounts and favorable delivery terms. Many also purchase their
rental furniture from the Company's MacTavish Furniture Industries facilities.
The Company conducts a financial audit of its franchise stores every six to
12 months and also conducts regular operational audits, generally visiting each
franchise store almost as often as it visits its Company-owned stores. In
addition, the Company's proprietary management information system links each
store to corporate headquarters. With this system, each night the Company
automatically retrieves detailed financial information regarding the number of
customers served during the day, the revenues received and the status of all
accounts receivable. This information is compiled nightly into a detailed report
of every franchised and Company-operated rental purchase store, which is then
immediately made available to corporate and store management. On a weekly basis,
the system also automatically debits the franchisee's bank account for the 5%
royalty fee, resulting in essentially a 100% collection rate on franchise
royalties.
Rent-to-Rent -- Aaron Rents and Sells Furniture
The Company has been in the rent-to-rent business for over 40 years and is
the second largest furniture rent-to-rent company in the United States. The
rent-to-rent business accounted for approximately 53% of the Company's total
revenues for the fiscal year ended December 31, 1997. The Company rents new and
rental return merchandise to both the individual and the business segments of
the rent-to-rent industry, with a growing focus on rentals of residential and
office furniture to business customers. As of March 31, 1998, the Company
operated 107 rent-to-rent stores in 22 states.
Rental agreements may give the customer the option to purchase the
merchandise rented, though few customers exercise the purchase option. Items
held for rent, whether new or rental return, are also available for purchase and
rental purchase at all rent-to-rent stores.
The Company's typical rent-to-rent store layout consists of a combination
showroom and warehouse comprising about 21,000 square feet. Each residential
showroom features attractive displays of dining-room, living-room and bedroom
furniture in a number of styles, fabrics, materials and colors. Office rental
showrooms feature lines of desks, chairs, conference tables, credenzas, sofas
and accessories. The Company believes that having a warehouse next to each
showroom permits the store manager to exercise greater control over inventory,
merchandise condition and pickup and deliveries, resulting in more efficient and
consistent service for the customer. The Company has also recently opened
warehouse-only locations in a few selected markets where the Company is seeking
an immediate presence at a lower cost. The warehouse-only locations rely on
outside sale representatives who target business customers.
Each rent-to-rent store generally offers next day delivery for addresses
located within 50 miles of the store, and maintains at least one truck and a
crew for pickups and deliveries. The Company believes that its ability to obtain
and deliver office furniture and equipment to its customers quickly and
efficiently gives the
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Company an advantage over general office furniture retailers who often require
several weeks to effect delivery.
The Aaron Rents' Rent-to-Rent Division's four clearance stores serve
primarily as retail outlets for final sales of rental return merchandise that
will not be rented again, though they also sell new merchandise. Sales by the
clearance stores, together with sales at the clearance centers located in most
of the Company's rent-to-rent stores, are instrumental in enabling the Company
to maximize residual values of depreciated rental merchandise.
The Company generally sells rental return merchandise at or above its book
value (cost less depreciation) plus selling expenses, a price which is usually
considerably lower than the price for comparable new merchandise. Most
merchandise held for sale in clearance stores may also be acquired through a
rental purchase option. Because new merchandise is sold at the same location as
rental return merchandise, the Company has the opportunity to sell both new and
rental return merchandise to customers who may have been attracted to the store
by the advertising and price appeal of rental return merchandise. The ability to
sell new and rental return merchandise at the same location allows for more
efficient use of facilities and personnel and minimizes overhead.
Aaron Rents' Convention Furnishings
The Aaron Rents' Convention Furnishings Division specializes in supplying
conventions and events of various sizes with furniture (such as tables, chairs,
desks and sofas) on a temporary basis. The division primarily serves various
national and local vendors that organize events at large convention centers. The
division also serves various smaller events on a regular basis with the
assistance of its rent-to-rent stores which have served smaller events for more
than 20 years. Convention rentals are characterized by very short terms
(generally one week) and significantly higher rental rates due to the
labor-intensive nature of the business.
The Company's convention furnishings stores are generally located near the
Company's existing distribution or warehouse facilities to enable the Company to
respond quickly and efficiently to the division's needs. The division also
benefits from the ability to sell its used furnishings through the Company's
clearance centers, which allows the division to keep its inventory refreshed.
In December 1997, the Company acquired the assets of Blackhawk Convention
Services, Inc., including three locations in Chicago, New York and Las Vegas. An
additional location was added in Dallas in the first quarter of 1998. As of
March 31, 1998, the Company had seven convention furnishings store locations.
FURNITURE MANUFACTURING
The Company believes that its manufacturing capability gives it a strategic
advantage over its competitors by enabling the Company to control the quality,
cost, timing, styling, durability and quantity of its furniture rental products.
As the only major furniture rental company that manufactures its own furniture,
the Company believes its 391,000 square feet of manufacturing facilities provide
it more flexibility in scheduling production runs and in meeting inventory needs
than rental companies that do not manufacture their own furniture and are
dependent upon third party suppliers. The Company's MacTavish Furniture
Industries Division has manufactured furniture for the Company's rental stores
since 1971. The division has five manufacturing plants and four bedding
manufacturing facilities which supply 50% of the Company's rent-to-rent
furniture and bedding needs and 46% of Company-operated rental purchase stores'
furniture and bedding needs. Overall, approximately 49% of the furniture rented
or sold by the Company is manufactured by MacTavish Furniture Industries. The
Company's manufacturing plants have the capacity to meet the Company's needs for
such furniture for the foreseeable future. The Company also does limited
manufacturing of residential furniture for several unaffiliated furniture
retailers.
MacTavish Furniture Industries manufactures upholstered living-room
furniture (including contemporary sofas, sofabeds, chairs and modular sofa and
ottoman collections in a variety of natural and synthetic fabrics and leathers),
bedding (including standard sizes of mattresses and box springs), office
furniture (including desks, credenzas, conference tables, bookcases and chairs),
and bedroom furniture (including
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bedroom sets, headboards, dressers, mirrors, chests and night tables). The
Company has designed special features for the furniture it manufactures which
make its furniture more durable and better equipped for frequent transportation
than furniture purchased from third parties. These features include knock-down
construction of upholstered furniture products for easy replacement of worn or
damaged parts at lower cost; standardization of components; reduction of parts
and features susceptible to wear or damage; more resilient foam; durable,
soil-resistant fabrics and sturdy frames for longer life and higher residual
value; and collapsible box springs and devices which allow sofas to stand on end
for easier and more efficient transport. The Company has patent applications
pending for certain of these features. The Company also manufactures replacement
covers of all styles and fabrics of its upholstered furniture for use in
reconditioning rental return furniture.
The principal raw materials used in manufacturing are fabric, foam,
wire-innerspring assemblies, cotton liners and hardwoods. All of these materials
are purchased in the open market from sources not affiliated with the Company.
The Company is not dependent on any single supplier, and none of the raw
materials are in short supply. The Company generally maintains a three or four
week inventory of such materials.
STORE OPERATIONS
Management
The Company's rent-to-rent stores are managed by the President of the
division and are organized geographically into five regions, each supervised by
a vice president who is primarily responsible for monitoring individual store
performance and inventory levels within the respective regions. The Aaron's
Rental Purchase Division is managed separately by the President of the division,
who has five regional managers performing similar responsibilities.
Stores are directly supervised by 18 rent-to-rent regional managers and 30
rental purchase district managers. At the individual store level, the store
manager is responsible for customer and credit relations, deliveries and
pickups, warehouse and inventory management, and certain marketing efforts.
Store managers are also responsible for inspecting rental return furniture to
determine whether it should be sold as is, rented again as is, repaired and
sold, or reconditioned for additional rental. A significant portion of the store
manager's compensation is dependent upon store revenues and profits.
Executive management at the Company's headquarters directs and coordinates
purchasing, financial planning and control, manufacturing, employee training,
and new store site selection for the Company-operated stores. The Company's
internal audit department conducts periodic audits of every store, including
audits of Company-operated rental purchase stores several times each year, and
semi-annual audits of rent-to-rent stores and franchised rental purchase stores.
The Company's business philosophy has always emphasized strict cost containment
and fiscal controls. Executive and store level management monitor expenses
vigilantly to contain costs. All invoices are paid out of the Company's
headquarters in order to enhance fiscal accountability. The Company believes
that its careful attention to the expense side of its operations has enabled it
to maintain financial stability and profitability.
Management Information Systems
The Company utilizes computer-based management information systems to
facilitate cash collections, merchandise returns and inventory monitoring.
Through the use of proprietary software developed by the Company, each of the
Company's stores is linked by computer directly to corporate headquarters, which
enables headquarters to monitor the performance of each store on a daily basis.
A different system is used to run the rent-to-rent and rental purchase
operations due to the significant differences in the businesses. At the store
level, the store manager is better able to track inventory on the showroom floor
and in the warehouse to minimize delivery times, assist with product purchasing
and match customer needs with available inventory.
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Rental Agreement Approval, Renewal and Collection
One of the keys to the success of the Company's Aaron's Rental Purchase
operations is its ability to achieve timely cash collections. Individual store
managers utilize the Company's computerized information system on a daily basis
to track cash collections. They contact customers within a few days of when
their rental payments are due in order to encourage customers to keep their
agreement current and in force (rather than having to return the merchandise for
non-payment of rent) and to renew their agreements for an additional rental
period. Careful attention to cash collections is particularly important in the
rental purchase operations, where the customer typically has the option to
cancel the agreement at any time and each payment is considered a renewal of the
agreement rather than a collection of a receivable.
Each rent-to-rent store performs a credit check on most of its residential
and business customers. The Company generally performs no formal credit check
with respect to rental purchase customers other than to verify employment or
other reliable sources of income and personal references supplied by the
customer. All of the Company's rental agreements for residential and office
merchandise require rental payments in advance, and the merchandise normally is
picked up if a payment is significantly in arrears.
Net bad debt losses from rent-to-rent rentals as a percentage of
rent-to-rent rental revenues were approximately 1.9%, 2.6%, and 3.0% for the
fiscal years ended December 31, 1997 and 1996, and for the nine months ended
December 31, 1995. The Company does not extend credit to rental purchase
customers. For the same periods, net merchandise shrinkage for both divisions as
a percentage of combined rental revenues was 2.3%, 2.5% and 3.0%, respectively.
The Company believes that its collection and repossession policies comply with
applicable legal requirements, and the Company disciplines any employee that it
discovers deviating from such policies.
Customer Service
The Company believes that customer service is one of the most important
elements in the success of its rent-to-rent and rental purchase businesses.
Customer satisfaction is critical because the customer usually has the option of
returning the rented merchandise at any time. The Company's goal is to make its
customers feel positive about the Company and its products from the moment they
enter the Company's showrooms. Rented items are serviced at no charge to the
customer, and quick, free delivery is available in many cases. In order to
increase rentals at existing stores, the Company fosters relationships with
existing customers to attract recurring business, and many new rental and rental
purchase agreements are attributable to repeat customers.
Because of the importance of customer service, the Company believes that a
prerequisite for successful operations and growth is skilled, effective
employees who value the Company's customers and project a genuine desire to
serve the customers' needs. The Company has a comprehensive employee training
program at its Atlanta headquarters for all rent-to-rent store managers and
employees covering all areas of the Company's operations, with a heavy emphasis
on customer service. Additionally, four field trainers are based out of the
regional offices. Store managers and employees in the Aaron's Rental Purchase
stores have similar training primarily on site by the division's training staff
and regional managers. The Company's policy of promoting from within aids in
employee retention and commitment to the Company's customer service and other
business philosophies, which also allows the Company to realize greater benefits
from its employee training programs.
PURCHASING AND DISTRIBUTION
The Company's product mix is determined by store managers in consultation
with the regional managers and regional vice presidents, based on an analysis of
customer demands. In the Company's rent-to-rent division, furniture is the
primary merchandise category, accounting for approximately 93% of rent-to-rent
rental revenues for the year ended December 31, 1997. In the Aaron's Rental
Purchase Division, electronics, furniture, appliances other accounted for
approximately 54%, 30%, 14% and 2%, respectively, of rental purchase rental
revenues for the year ended December 31, 1997. With approval from the applicable
operating management, store managers send their orders to the rental purchase or
rent-to-rent purchasing department at headquarters. The applicable purchasing
department reviews all purchase orders to determine whether
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merchandise needs may be satisfied out of existing inventory at other stores
before contacting vendors. If inventory is available at other stores, the
purchasing department arranges for inventory shipments between stores. Virtually
all merchandise for the Company's stores is purchased by the Company's six
buyers, three of whom are solely responsible for rental purchase merchandise.
The Company purchases the majority of its merchandise directly from
manufacturers, with the balance from local distributors. The Company's largest
supplier is its MacTavish Furniture Industries manufacturing division, which
supplies approximately 49% of the furniture rented or sold by the Company. The
Company has no long-term agreements for the purchase of merchandise and believes
that its relationships with suppliers are excellent.
Both rent-to-rent and rental purchase operations utilize distribution
centers to control inventory. Rent-to-rent stores in geographic proximity to the
Company's rent-to-rent distribution facility in Richmond, Virginia order
merchandise directly from the distribution center. The remaining rent-to-rent
stores receive merchandise directly from vendors who ship to the stores'
attached warehouses. All rental purchase stores order directly from the
Company's four rental purchase distribution centers located in Auburndale,
Florida; Dallas and Houston, Texas; and Duluth, Georgia. Rental purchase stores
typically have smaller warehouses with less inventory storage space than the
Company's rent-to-rent stores. Vendors ship directly to the distribution
centers.
Distribution centers result in freight savings from truckload discounts and
a more efficient distribution of merchandise. The Company utilizes its nine
tractor trailers, its local delivery trucks, and various contract carriers to
make weekly deliveries to individual stores. The Company recently began
construction of a 200,000 square foot furniture distribution facility in Cairo,
Georgia, which is located near the Company's furniture manufacturing plants in
Coolidge, Georgia and Quincy, Florida.
MARKETING AND ADVERTISING
In its rental purchase operations, the Company relies heavily on store
traffic, direct mail and television advertising to reach its target markets.
Rental purchase stores are located within neighborhood communities, and will
typically distribute mass mailings of promotional material every two weeks, with
the goal of reaching every known household within a specified radius of each
store at least 12 times per year. In addition, delivery personnel are trained to
leave promotional material at the door of each residence within five doors of
the delivery destination. In concentrated geographic markets, and for special
promotions, the Company also utilizes local television and radio advertising for
special promotions.
The Company markets its rent-to-rent operations through its outside sales
staff for personal contact with apartment complex managers for the residential
market as well as the decision maker for the office market. It also relies on
the use of brochures, newspapers, radio, television, direct mail, trade
publications, yellow pages and over the Internet (http://www.aaronrents.com) to
reach its residential and office rental and sales customers. The Company
believes that such advertising benefits its residential and office rental and
sales operations because of increased awareness of rental and purchase options
along with name recognition.
COMPETITION
The Company's businesses are highly competitive. The Company competes in
the rent-to-rent market with national and local companies and, to a lesser
extent, with apartment owners who purchase furniture for rental to tenants. The
Company believes that CORT Business Services Corporation and Globe Business
Resources, Inc. are its most significant rent-to-rent competitors. In the
rent-to-own market, the Company competes with several larger companies with
substantially greater financial resources than the Company. The Company believes
that the largest rent-to-own companies include Rent-A-Center (a division of
Thorn plc), Renters Choice, Inc., Alrenco, Inc., and Rent-Way, Inc.
Although definitive industry statistics are not available, management
believes that the Company is one of the largest furniture rental companies in
the United States. Management also believes that it generally has a
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favorable competitive position in that industry because of its manufacturing
capabilities, prompt delivery, competitive pricing, name recognition and
commitment to customer service.
GOVERNMENT REGULATION
The Company believes that 48 states specifically regulate rent-to-own
transactions, including states in which the Company currently operates Aaron's
Rental Purchase stores. Most of these states have enacted disclosure laws which
require rent-to-own companies to disclose to its customers the total number of
payments, total amount and timing of all payments to acquire ownership of any
item, any other charges that may be imposed by the Company and miscellaneous
other items. The most restrictive states limit the total amount that a customer
may be charged for an item to twice the "retail" price for the item, or regulate
the amount of "interest" that rent-to-own companies may charge on rent-to-own
transactions, generally defining "interest" as rental fees paid in excess of the
"retail" price of the goods. The Company's long-established policy in all states
is to disclose the terms of its rental purchase transactions as a matter of good
business ethics and customer service.
At the present time, no federal law specifically regulates the rent-to-own
industry. Federal legislation has been proposed from time to time to regulate
the industry. Management cannot predict whether any such legislation will be
enacted and what the impact of such legislation would be. Although the Company
is unable to predict the results of these or any additional regulatory
initiatives, the Company does not believe that the existing and proposed
regulations will have a material adverse impact on the Company's rental purchase
or other operations.
The Company's Aaron's Rental Purchase franchise program is subject to
Federal Trade Commission ("FTC") regulation and various state laws regulating
the offer and sale of franchises. Several state laws also regulate substantive
aspects of the franchisor-franchisee relationship. The FTC requires the Company
to furnish to prospective franchisees a franchise offering circular containing
prescribed information. A number of states in which the Company might consider
franchising also regulate the sale of franchises and require registration of the
franchise offering circular with state authorities. The Company believes it is
in material compliance with all applicable franchise laws.
EMPLOYEES
At March 31, 1998, the Company had approximately 3,100 employees. None of
the Company's employees are covered by a collective bargaining agreement, and
the Company believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company leases space for substantially all of its store and warehouse
operations under operating leases expiring at various times through June, 2007.
Most of the leases contain renewal options for additional periods ranging from
one to fifteen years at rental rates generally adjusted on the basis of the
consumer price index or other factors.
The following table sets forth certain information regarding the Company's
furniture manufacturing plants, bedding facilities and distribution centers:
LOCATION PRIMARY USE SQUARE FT.
- -------- ----------- ----------
Coolidge, Georgia................... Furniture Manufacturing 77,000
Coolidge, Georgia................... Furniture Manufacturing 43,000
Coolidge, Georgia................... Furniture Manufacturing 38,000
Quincy, Florida..................... Furniture Manufacturing 80,000
Quincy, Florida..................... Furniture Manufacturing 91,000
Duluth, Georgia..................... Bedding Facility 30,000
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LOCATION PRIMARY USE SQUARE FT.
- -------- ----------- ----------
Coolidge, Georgia................... Bedding Facility 3,000
Houston, Texas...................... Bedding Facility 13,000
Orlando, Florida.................... Bedding Facility 15,800
Richmond, Virginia.................. Rent-to-Rent Distribution Center 98,000
Auburndale, Florida................. Rental Purchase Distribution Center 40,000
Dallas, Texas....................... Rental Purchase Distribution Center 92,000
Duluth, Georgia..................... Rental Purchase Distribution Center 67,000
Houston, Texas...................... Rental Purchase Distribution Center 70,000
The Company's executive and administrative offices occupy approximately
49,000 square feet in an 11-story, 80,000 square-foot office building that the
Company owns in Atlanta. The Company leases most of the remaining space to third
parties under leases with remaining terms averaging 2- 1/2 years. All of the
Company's facilities are well maintained and adequate for their current and
reasonably foreseeable uses.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings the result of
which it believes could have a material adverse impact upon its business,
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) The information presented under the caption "Common Stock Market Prices
& Dividends" on page 24 of the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1997 is incorporated herein by reference. The
market quotations stated herein reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
(b) As of March 27, 1998, there were 861 holders of record of the Common
Stock and 171 holders of record of the Class A Common Stock.
(c) The information presented under "Note 5 -- Debt" on page 20 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1997 is incorporated herein by reference. During the fiscal year ended December
31, 1997, the Company paid two semi-annual cash dividends. No assurance can be
provided that such dividends will continue.
ITEM 6. SELECTED FINANCIAL DATA
The information presented under the caption "Selected Financial
Information" on page 13 of the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1997 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information presented under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operation" on pages 14 through 15
of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997 is incorporated herein by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information presented under the captions "Consolidated Balance Sheets,"
"Consolidated Statements of Earnings," "Consolidated Statements of Shareholders'
Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated
Financial Statements," and "Report of Independent Auditors" on pages 16 through
23 of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997 is incorporated herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1997, with respect to the identity, background
and Section 16 filings of directors and executive officers of the Company, is
incorporated herein by reference to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1997, with respect to executive compensation,
is incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1997, with respect to the ownership of common
stock by certain beneficial owners and management, is incorporated herein by
reference to this item.
For purposes of determining the aggregate market value of the Company's
voting stock held by non-affiliates, shares held by all directors and officers
of the Company have been excluded. The exclusion of such shares is not intended
to, and shall not, constitute a determination as to which person or entities may
be "affiliates" of the Company as defined by the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's definitive Proxy Statement,
which the Company will file with the Securities and Exchange Commission no later
than 120 days after December 31, 1997, with respect to certain relationships and
related transactions, is incorporated herein by reference in response to this
item.
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PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements and notes thereto of Aaron Rents, Inc.
and Subsidiaries, and the related Report of Independent Auditors are
incorporated in Item 8 by reference from the Company's Annual Report to
Shareholders for the Year ended December 31, 1997.
REFERENCE PAGE
ANNUAL
REPORT
TO SHAREHOLDERS
----------------
Consolidated Balance Sheets -- December 31, 1997 and 1996... 16
Consolidated Statements of Earnings -- Year ended December
31, 1997, Year ended December 31, 1996, and Nine Months
ended December 31, 1995................................... 17
Consolidated Statements of Shareholders' Equity -- Year
ended December 31, 1997, Year ended December 31, 1996 and
Nine Months ended December 31, 1995....................... 17
Consolidated Statements of Cash Flows -- Year ended December
31, 1997, Year ended December 31, 1996, and Nine Months
ended December 31, 1995................................... 18
Notes to Consolidated Financial Statements.................. 19-23
Report of Independent Auditors.............................. 23
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are inapplicable or the
required information is included in the financial statements or notes thereto.
3. EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3(a) Amended and Restated Articles of Incorporation of the
Company, filed as Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996
(the "March 31, 1996 10-Q") which exhibit is by this
reference incorporated herein.
3(b) By-laws of the Company.
4 See Exhibits 3 (a) through 3 (b).
10(a) Fifth Amendment to Second Amended and Restated Revolving
Credit and Term Loan Agreement, dated December 17, 1997.
10(b) Letter Agreements dated December 30, 1997 between SunTrust
Bank, Atlanta and the Company, and letter agreements dated
December 30, 1997 between First Chicago NBD and the Company
regarding Interest Rate Swap Transactions.
13 Aaron Rents, Inc. Annual Report to Shareholders for the
fiscal year ended December 31,1997. With the exception of
information expressly incorporated herein by direct
reference thereto, the Annual Report to Shareholders for the
fiscal year ended December 31, 1997 is not deemed to be
filed as a part of this Annual Report on Form 10-K.
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EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP
27 Financial Data Schedule (for SEC use only)
- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to item 14 (c) of this report.
(b) Reports on Form 8-K-none
(c) Exhibits listed in item 14 (a) (3) are included elsewhere in this
Report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 31st day of
March, 1998.
AARON RENTS, INC.
By: /s/ GILBERT L. DANIELSON
------------------------------------
Gilbert L. Danielson
Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 31st day of March, 1998.
SIGNATURE TITLE
--------- -----
/s/ R. CHARLES LOUDERMILK, SR. Chief Executive Officer (Principal
- ----------------------------------------------------------- Executive Officer) and Chairman of the
R. Charles Loudermilk, Sr. Board of Directors)
/s/ ROBERT C. LOUDERMILK, JR. President, Chief Operating Officer and
- ----------------------------------------------------------- Director
Robert C. Loudermilk, Jr.
/s/ GILBERT L. DANIELSON Vice President, Finance, Chief Financial
- ----------------------------------------------------------- Officer and Director, (Principal
Gilbert L. Danielson Financial Officer)
/s/ ROBERT P. SINCLAIR, JR. Controller (Principal Accounting Officer)
- -----------------------------------------------------------
Robert P. Sinclair, Jr.
/s/ RONALD W. ALLEN Director
- -----------------------------------------------------------
Ronald W. Allen
/s/ LEO BENATAR Director
- -----------------------------------------------------------
Leo Benatar
/s/ EARL DOLIVE Director
- -----------------------------------------------------------
Earl Dolive
/s/ REX FUQUA Director
- -----------------------------------------------------------
J. Rex Fuqua
/s/ KEITH C. GROEN Vice President, Legal Secretary and
- ----------------------------------------------------------- Director
Keith C. Groen
/s/ INGRID SAUNDERS JONES Director
- -----------------------------------------------------------
Ingrid Saunders Jones
/s/ LTG. M. COLLIER ROSS USA (RET.) Director
- -----------------------------------------------------------
LTG M. Collier Ross USA (Ret.)
/s/ R. K. SEHGAL Director
- -----------------------------------------------------------
R. K. Sehgal
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