Aarons 2002 Annual Report Download - page 18

16
Year Ended December 31, 2001 Versus Year Ended
December 31, 2000
REVENUES
Total revenues for 2001 increased $43.8 million to $546.7
million compared with $502.9 million in 2000, an 8.7% increase.
The increase was due mainly to a $43.5 million, or 12.1%, increase
in rentals and fees revenues, plus a $714,000 increase in non-retail
sales. The increase in rentals and fees revenues was attributable
to a $62.7 million increase from our sales and lease ownership
division, which added 101 Company-operated stores in 2001,
offset by a $19.2 million decrease in our rent-to-rent division.
Revenues from retail sales decreased $1.9 million to $60.5
million in 2001 from $62.4 million for the prior year, a 3.1%
decrease. Non-retail sales, which primarily represent merchandise
sold to our franchisees, increased 1.1% to $66.2 million compared
with $65.5 million for 2000. The increased sales were due to the
growth of our franchise operations.
Other revenues for 2001 increased $1.5 million to $16.6 million
compared with $15.1 million in 2000, a 9.8% increase. This
increase was attributable to franchise fee and royalty income
increasing $1.2 million, or 10%, to $13.6 million compared with
$12.4 million in 2000, reflecting the net addition of 16 new fran-
chised stores in 2001 and improved operating revenues at mature
franchised stores.
With respect to our major operating units, revenues for our
sales and lease ownership division increased $67.5 million to
$380.4 million in 2001 compared with $312.9 million in 2000, a
21.6% increase. This increase was attributable to the sales and
lease ownership division adding 101 stores in 2001 combined with
same store revenue growth of 7.7% in 2001. Rent-to-rent division
revenues in 2001 decreased 14.2% to $150 million from $174.9
million in 2000. The decrease in rent-to-rent division revenues is
primarily the result of our decision to close, merge, or sell 23
under-performing stores in 2001.
COST OF SALES
Cost of sales from retail sales decreased $169,000 to $44 million
in 2001 compared with $44.2 million in 2000, and as a percentage
of sales, increased to 72.7% from 70.7% primarily due to product
mix. Cost of sales from non-retail sales increased $1 million to
$62 million in 2001 from $61 million in 2000, and as a percentage
of sales, increased to 93.6% from 93.1%. The decreased margins
on non-retail sales were primarily the result of slightly lower
margins on certain products sold to franchisees.
EXPENSES
Operating expenses in 2001 increased $49.1 million to
$276.7 million from $227.6 million in 2000, a 21.6% increase. As
a percentage of total revenues, operating expenses were 50.6%
in 2001 and 45.3% in 2000. Operating expenses increased as a
percentage of total revenues primarily due to the costs associated
with the acquisition and accelerated start-up costs of sales and
lease ownership locations formerly operated by one of the nation’s
largest furniture retailers along with other new store openings. In
addition, we recorded non-cash charges of $5.6 million related to
the future real estate lease obligations of closed rent-to-rent stores
and the write down of inventory and other assets within our rent-
to-rent division.
Depreciation of rental merchandise increased $17.2 million
to $137.9 million in 2001 from $120.7 million in 2000, a 14.3%
increase. As a percentage of total rentals and fees, rental mer-
chandise depreciation increased to 34.2% from 33.5%. This
increase as a percentage of rentals and fees was mainly because
a greater percentage of our rentals and fees revenues are coming
from our sales and lease ownership division, which depreciates its
rental merchandise at a faster rate than our rent-to-rent division.
Interest expense increased 11.3% to $6.3 million in 2001
compared with $5.6 million in 2000. As a percentage of total
revenues, interest expense was 1.1% in both years.
Income tax expense decreased $9.1 million to $7.5 million in
2001 compared with $16.6 million in 2000, a 54.8% decline. Aaron
Rents’ effective tax rate was 37.9% in both 2001 and 2000.
NET EARNINGS
Net earnings decreased $14.9 million to $12.3 million for 2001
compared with $27.3 million for 2000, a 54.8% decrease. As a
percentage of total revenues, net earnings were 2.3% in 2001 and
5.4% in 2000. The decrease in net earnings was mainly the result
of start-up expenses associated with the 101 new store openings,
as compared with 32 stores opened in the prior year, and non-cash
charges associated with our rent-to-rent division.
BALANCE SHEET
Cash.
The Company’s cash balance remained virtually
unchanged with a balance of $96,000 and $93,000 at December 31,
2002 and 2001, respectively. The consistency of the cash balance is
the result of the Company being a net borrower with all excess
cash being used to pay down debt balances.
Deferred Income Taxes. The increase of $29.6 million in
deferred income taxes from December 31, 2001 to December 31,
2002 is primarily the result of March 2002 tax law changes,
effective September 2001, that allow accelerated depreciation
of rental merchandise for tax purposes.
Bank Debt. The reduction in bank debt of $65.1 million from
December 31, 2001 to December 31, 2002 is primarily the result
of the Company’s private placement of $50 million of senior
unsecured notes in August 2002 coupled with a June 2002 public
offering of 1.725 million newly-issued shares of Common Stock
for net proceeds of $34.1 million.
Other Debt. The increase of $60.6 million in other debt from
December 31, 2001 to December 31, 2002 is primarily the result
of the Company’s private placement of $50 million of senior unse-
cured notes in August 2002 and $11.7 million of debt related to
capital leases associated with the sale and lease back of real estate.
Additional Paid-In Capital. The increase of $33.7 million in
additional paid in capital from December 31, 2001 to December
31, 2002 is primarily the result of the Company’s June 2002 public
offering of 1.725 million newly-issued shares of Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Cash flows from operations for the year ended December 31,
2002 and 2001 were $221.7 and $189.4 million, respectively. Our
cash flows include profits on the sale of rental return merchandise.
Our primary capital requirements consist of buying rental mer-
chandise for both Company-operated sales and lease ownership
and rent-to-rent stores. As Aaron Rents continues to grow, the
need for additional rental merchandise will continue to be our