Aarons 2003 Annual Report Download - page 22

depreciating sales and lease ownership merchandise
as soon as it was delivered to our stores from our distribu-
tion centers. This change in accounting method increased net
earnings by approximately $3 million, or $.09 per diluted
common share in 2002.
As a percentage of total revenues, interest expense
decreased to 0.7% in 2002 from 1.1% in 2001. The decrease
in interest expense as a percentage of total revenues was
primarily due to lower debt levels in 2002.
Income tax expense increased due to increased pretax
earnings. Aaron Rents’ effective tax rate was 37.1% in 2002
compared with 37.9% in 2001, primarily due to lower
nondeductible expenses.
NET EARNINGS
As a percentage of total revenues, net earnings were
4.3% in 2002 and 2.3% in 2001. The increase in net earn-
ings was primarily due to the non-cash charges of $5.6
million incurred in the third quarter of 2001 along with the
maturing 100 Company-operated sales and lease ownership
stores added in 2001 and a 13% increase in same store
revenue growth, coupled with the change in our rental
merchandise depreciation method and the non-amortization
of goodwill. In addition, the Company experienced higher
than usual operating expenses in 2001 associated with the
addition of 100 Company-operated stores.
Balance Sheet
Cash. Our cash balance remained virtually unchanged
with balances of $95,000 and $96,000 at December 31,
2003 and 2002, 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 Payable. The increase of $4.8
million in deferred income taxes payable at December 31,
2003 from December 31, 2002 is primarily the result of
March 2002 tax law changes, effective September 2001, that
allow additional accelerated depreciation of rental merchan-
dise for tax purposes. Additional tax law changes effective
May 2003 increased the allowable acceleration and extended
the life of the March 2002 changes to December 31, 2004.
Accounts Payable and Accrued Expenses. The increase of
$19.7 million in accounts payable and accrued expenses
relates primarily to accrued operating expenses relating to the
growth of the Company’s sales and lease ownership division.
Credit Facilities. The increase in credit facilities of $6.3
million to December 31, 2003 from December 31, 2002 is
primarily the result of increased borrowing on our working
capital line of credit to fund expansion of our sales and lease
ownership division.
Goodwill and Other Intangibles. The increase of $29.5
million to December 31, 2003 from December 31, 2002 is
the result of a series of acquisitions of sales and lease owner-
ship businesses during 2003. The aggregate purchase price
for these asset acquisitions totaled approximately $45.0
million, and the principal tangible assets acquired consisted
of rental merchandise and certain fixtures and equipment.
Liquidity and Capital
Resources
GENERAL
Cash flows from operating activities for the years ended
December 31, 2003 and 2002 were $67.0 million and $10.1
million, respectively. Our cash flows include profits on the
sale of rental return merchandise. Our primary capital
requirements consist of buying rental merchandise for both
20
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 major capital requirement. These capital requirements
historically have been financed through:
• cash flow from operations
• bank credit
• trade credit with vendors
• proceeds from the sale of rental return merchandise
• private debt
• stock offerings
At December 31, 2003, $13.9 million was outstanding
under our revolving credit agreement. The increase in
borrowings is primarily attributable to cash invested in
new store growth throughout 2003. From time to time,
we use interest rate swap agreements as part of our overall
long-term financing program. We also have $50 million in
aggregate principal amount of 6.88% senior unsecured notes
due August 2009 currently outstanding, principal repayments
for which are first required in 2005.
Our revolving credit agreement, senior unsecured notes,
the construction and lease facility, and the franchisee loan
program discussed below contain financial covenants which,
among other things, forbid us from exceeding certain debt
to equity levels and require us to maintain minimum fixed
charge coverage ratios. If we fail to comply with these
covenants, we will be in default under these commitments,
and all amounts would become due immediately. We were in
compliance with all these covenants at December 31, 2003.
We purchase our common shares in the market from time
to time as authorized by our Board of Directors. As of
December 31, 2003, our Board of Directors has authorized
us to purchase up to an additional 1,780,335 common shares.
At our annual shareholders meeting in May 2003, our
shareholders authorized an increase in the authorized number
of shares of Common Stock by 25 million shares for a total
of 50 million shares. The purpose of increasing the number
of shares of authorized Common Stock is to give the Com-
pany greater flexibility in connection with its capital structure,
possible future financing requirements, potential acquisitions,
employee compensation, and other corporate matters,
including stock splits like the 3-for-2 split described below.
We have a consistent history of paying dividends, having
paid dividends for 17 consecutive years. A $.013 per share
dividend on Common Stock and Class A Common Stock
was paid in January 2003 and July 2003. In addition, our
Board of Directors declared a 3-for-2 stock split, effected
in the form of a 50% stock dividend, which was distributed
to shareholders in August 2003, for a total fiscal year cash
outlay of $924,000. Subject to sufficient operating profits,
to any future capital needs, and to other contingencies, we
currently expect to continue our policy of paying dividends.
We currently hold 474,500 shares, or 8%, of the outstand-
ing common stock of Rainbow Rentals Inc., a NASDAQ-
listed rental company that has entered into an agreement to
be acquired by Rent-A-Center, Inc. for a purchase price of
$16.00 per share. We had acquired these shares in three
separate transactions in September 2002 and January 2003,
and held the shares for investment purposes. If the sale is
consummated in the second quarter of 2004 as announced
by those parties, we would receive cash proceeds of approxi-
mately $7.6 million and recognize approximately a $5.5
million gain. We are not, however, a party to the agreement
between Rainbow Rentals and Rent-A-Center, and the
closing of that transaction is subject to all of the closing
conditions of that agreement.
We believe that our expected cash flows from operations,
existing credit facilities and vendor credit will be sufficient
to fund our capital and liquidity needs for at least the next
24 months.