Aarons 1997 Annual Report Download - page 13

Note J: Quarterly Financial
Information (Unaudited)
(In Thousands First Second Third Fourth
Except Per Share) Quarter Quarter Quarter Quarter
Year ended December 31, 1997
Revenues $76,480 $77,465 $76,238 $80,568
Gross Profit 43,574 44,236 43,996 45,559
Earnings Before Taxes 7,080 7,608 7,883 7,666
Net Earnings 4,312 4,633 4,805 4,646
Earnings Per Share $ .22 $ .24 $ .25 $ .25
Earnings Per Share
Assuming Dilution .22 .24 .25 .24
Year ended December 31, 1996
Revenues $64,693 $67,610 $71,224 $70,718
Gross Profit 38,873 39,980 41,273 39,259
Earnings Before Taxes 6,791 6,375 6,198 5,815
Net Earnings 4,159 3,914 3,787 3,533
Earnings Per Share $ .22 $ .21 $ .20 $ .18
Earnings Per Share
Assuming Dilution .21 .20 .19 .18
Note K: Franchising of Aaron’s
Rental Purchase Stores
The Company franchises Aaron’s Rental Purchase stores. As
of December 31, 1997 and December 31, 1996, 186 and 155
franchises had been awarded, respectively. Franchisees pay a
non-refundable initial franchise fee of $35,000 and an ongo-
ing royalty of 5% of cash receipts. The Company recognizes
this income as earned and includes it in Other Revenues in
the Consolidated Statements of Earnings. The Company has
guaranteed certain lease and debt obligations (primarily
extending through 1999) of some of the franchisees amount-
ing to $127,000 and $8,131,000, respectively, at December
31, 1997. The Company receives a guarantee and servicing
fee based on such franchisees’ outstanding debt obligations
which it recognizes as income over the guarantee and servic-
ing period. The Company has recourse rights to the leased
property and to the assets securing the debt obligations. As a
result, the Company does not expect to incur any significant
losses under these guarantees.
Note L: Acquisitions
In December 1997, the Company acquired substantially all
of the assets of RentMart Rent-To-Own, Inc., a wholly-
owned subsidiary of the Associates Capital Corporation, for
$18,012,000 in cash. The excess cost over the fair market
value of tangible assets acquired was approximately
$4,300,000.
In December 1997, the Company acquired substantially all of
the assets of Blackhawk Convention Services, Inc. for
$3,500,000 in cash. The excess cost over the fair market value
of tangible assets acquired was approximately $2,700,000.
Report of Independent Auditors
To the Board of Directors and Shareholders of
Aaron Rents, Inc.:
We have audited the accompanying consolidated balance
sheets of Aaron Rents, Inc. and Subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements
of earnings, shareholders’ equity and cash flows for the years
ended December 31, 1997 and 1996, and the nine months
ended December 31, 1995. These financial statements are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial state-
ment presentation. We believe that our audits provide a rea-
sonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated finan-
cial position of Aaron Rents, Inc. and Subsidiaries as of
December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for the years ended
December 31, 1997 and 1996, and the nine months ended
December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note A to the Consolidated Financial
Statements, in 1996, the Company changed its method of
accounting for depreciation of rental purchase merchandise.
Atlanta, Georgia
March 23, 1998
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Both acquisitions were accounted for under the purchase
method and, accordingly, the results of operations of the
acquired businesses are included in the Company’s results of
operations from their dates of acquisition. The effect of these
acquisitions on the 1997 consolidated financial statements
was not significant.
Note M: Proposed Stock Offering
On or about March 31, 1998, the Company intends to file a
registration statement for the sale by the Company of
2,100,000 shares of Common Stock. The proceeds of the
offering, if consummated, would be used to reduce indebt-
edness and for general business purposes, including opening
additional rent-to-rent and rental purchase stores and
expanding manufacturing and distribution capacity.
Note H: Shareholders’ Equity
During 1996, the Company declared a 100% stock dividend
on its Common Stock and Class A Common Stock. Each
stockholder received one share of Common Stock for each
share of Common Stock and Class A Common Stock held.
All share and per share amounts have been restated to reflect
the 100% stock dividend. Common stock is non-voting.
At December 31, 1997, the Company held a total of
2,583,296 common shares in its treasury, and is authorized
by the Board of Directors to acquire up to an additional
208,090 shares.
The Company has 1,000,000 shares of preferred stock
authorized. The shares are issuable in series with terms for
each series fixed by the Board and such issuance is subject to
approval by the Board of Directors. No preferred shares have
been issued.
Note I: Stock Options
The Company has stock option plans under which options
to purchase shares of the Company’s Common Stock are
granted to certain key employees. Under the plans, options
granted become exercisable after a period of two or three
years and unexercised options lapse five or ten years after the
date of the grant. O ptions are subject to forfeiture upon ter-
mination of service. Under the plans, 2,000,500 of the
Company shares are reserved for issuance at December 31,
1997.The weighted-average fair value of options granted was
$8.58 in 1997 and $4.99 in 1996.
Pro forma information regarding net earnings and earnings
per share is required by FAS 123, and has been determined
as if the Company has accounted for its employee stock
options granted in 1997 and 1996 under the fair value
method of that Statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free inter-
est rates of 5.88% and 6.72%; a dividend yield of .25% and
.4%; volatility factor of the expected market price of the
Company’s common stock of .39 and .335; and a weighted-
average expected life of the option of 8 years.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjec-
tive assumptions including the expected stock price vola-
tility. Because the Company’s employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assump-
tions can materially affect the fair value estimate, in manage-
ment’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options’ vest-
ing period. The Company’s pro forma information follows (in
thousands except for earnings per share information):
Year Ended Year Ended
December 31, December 31,
1997 1996
Pro forma net earnings $17,508 $14,825
Pro forma earnings per share .91 .78
Pro forma earnings per share
assuming dilution .89 .74
Because Statement 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will
not be fully reflected until future years.
The table below summarizes option activity for the periods
indicated in the Company’s stock option plans.
Weighted
Average
Exercise
(In Thousands, Except Price Per Share) Options Price
Outstanding at April 1, 1995 1,294 $ 4.54
Exercised (24) 3.00
Forfeited (22) 6.68
Outstanding at December 31, 1995 1,248 4.54
Granted 780 9.88
Exercised (701) 3.00
Forfeited (8) 9.68
Outstanding at December 31, 1996 1,319 8.48
Granted 322 15.95
Exercised (47) 5.28
Forfeited (9) 10.83
Outstanding at December 31, 1997 1,585 $10.07
Exercisable at December 31, 1997 501 $ 6.62
Exercise prices for options outstanding as of December 31,
1997 ranged from $4.88 to $16.50. The weighted-average
remaining contractual life of those options is 6.58 years.
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