Aarons 2005 Annual Report Download

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Annual Report 2005

Table of contents

  • Page 1
    Annual Report 2005

  • Page 2
    ... sale and lease ownership, rental and retailing of consumer electronics, residential and office furniture, household appliances, computers and accessories with over 1,200 Company-operated and franchised stores in the United States, Puerto Rico and Canada. The Company's major operations are the Aaron...

  • Page 3
    ... Letter to Shareholders ...2 The Aaron's Story ...4 Sales and Lease Ownership ...5 The Franchise System ...7 Corporate Furnishings ...8 Products ...8 Manufacturing ...9 Funding Growth ...10 Marketing ...10 The Aaron's Corporate Culture ...12 Financial Information ...14 Store Locations ...43 Board...

  • Page 4
    ...The Aaron's Corporate Furnishings division increased its revenues 8% to $117.5 million from $108.5 million in 2004, the best performance in a number of years. At the end of 2005, we had 1,198 stores open, of which the Aaron's Sales & Lease Ownership division accounted for 739 Company-operated stores...

  • Page 5
    ...'s 50th year at the National Managers Meeting. We awarded new area development agreements for the opening of 64 new Aaron's Sales & Lease Ownership franchised stores last year. At year end we had 272 franchised stores in the pipeline to be opened over the next few years. During 2005, our furniture...

  • Page 6
    ... per day And in 1955, Charlie Loudermilk was working in Atlanta, helping his mother run a restaurant. With a partner and a $500 loan, Loudermilk bought 300 chairs from an Army surplus store and rented warehouse space and a truck to make deliveries. The Company was named Aaron Rents to guarantee...

  • Page 7
    ...- or next-day delivery, free of charge • No application fees, no balloon payments • No long-term obligation • Flexible payment options (cash, check, credit or debit card) • Lower total cost than rent-to-own competitors • Repair or replacement guarantee The Aaron's Sales & Lease Ownership...

  • Page 8
    ... a regional management structure allows variations in product offerings based on local market characteristics and improved site selection. Execution is critical to success of the sales and lease ownership business, and the Company pays tight attention to inventory management, cost controls and cash...

  • Page 9
    ...year term. Franchisees pay a $50,000 franchise fee for each store opened and a royalty of either 5% or 6% which affords full access to the Company's marketing and promotional programs as well as management training programs through "Aaron's University." Periodic meetings of the franchise association...

  • Page 10
    ... corporate customers, providing temporary rentals related to new business locations and temporary employee postings or relocations. This division rents office furniture including wall panel systems, desks and work stations as well as residential furniture, electronics and appliances out of 58 stores...

  • Page 11
    .... With nine recently opened RIMCO stores, the Company is testing participation in this rapidly growing aftermarket automotive market. n order to maintain a high level of customer service, assure timely deliveries and control the quality of the furniture offered, Aaron Rents opened a 10,000 square...

  • Page 12
    ... tribution channels including television, 1,200 radio, direct mail, 1,000 promotions and sponsorships. The 800 in-house marketing 600 department has developed a port400 folio of marketing 200 tools, such as (number of stores) 0 2001 2002 2003 2004 2005 A Funding Growth B y 1982, the Company was...

  • Page 13
    ... direct mail circulars each month which highlight featured merchandise and illustrate the cost advantage to consumers of sales and lease ownership compared to competitors' rent-to-own programs. A significant portion of the marketing program is based on the "Drive Dreams Home" sponsorship of NASCAR...

  • Page 14
    ... designated by the store's associates. Stores and associates have also been active in Warrick Dunn's Home for the Holidays program, which awards homes to deserving single mothers. Aaron's has furnished homes in communities ranging from Atlanta to Orlando to St. Louis. Over the past seven years...

  • Page 15
    ... in order to meet the spike in demand in the corporate furnishings division as businesses relocated and set up temporary offices. The Company sent teams of associates to the affected areas to facilitate deliveries and store operations. Our corporate culture was, indeed, tested in 2005 and emerged...

  • Page 16
    ... Statements of Shareholders' Equity ...26 Consolidated Statements of Cash Flows ...27 Notes to Consolidated Financial Statements ...28 Management Report on Internal Control Over Financial Reporting ...39 Reports of Independent Registered Public Accounting Firm ...40 Common Stock Market Prices and...

  • Page 17
    ... 31, 2005 Year Ended December 31, 2004 Year Ended December 31, 2003 Year Ended December 31, 2002 Year Ended December 31, 2001 (Dollar Amounts in Thousands, Except Per Share) OPERATING RESULTS Revenues: Rentals and Fees Retail Sales Non-Retail Sales Franchise Royalties and Fees Other Costs and...

  • Page 18
    ...merchandise held for rent and rented to customers by our Company-operated sales and lease ownership and corporate furnishings stores. Critical Accounting Policies Revenue Recognition Rental revenues are recognized in the month they are due on the accrual basis of accounting. For internal management...

  • Page 19
    ... of Financial Condition and Results of Operations Rental Merchandise Our sales and lease ownership division depreciates merchandise over the agreement period, generally 12 to 24 months when rented, and 36 months when not rented, to 0% salvage value. Our corporate furnishings division depreciates...

  • Page 20
    ... same store revenues and the increase in the number of stores described above. Rental revenues in our corporate furnishings division increased $7.7 million, or 10.1%, to $83.7 million in 2005 from $76.0 million in 2004 as a result of generally improved economic conditions. Revenues from retail sales...

  • Page 21
    ...2004 from 2003. Year Ended December 31, 2004 Year Ended December 31, 2003 Increase/ (Decrease) in Dollars to 2004 from 2003 % Increase/ (Decrease) to 2004 from 2003 (In Thousands) REVENUES: Rentals and Fees Retail Sales Non-Retail Sales Franchise Royalties and Fees Other COSTS AND EXPENSES: $694...

  • Page 22
    ... on the sale of our holdings of Rainbow Rentals, Inc. common stock in connection with that company's merger with Rent-A-Center, Inc. As explained in our discussion of critical accounting policies above, effective September 30, 2004, we began recording rental merchandise carrying value adjustments...

  • Page 23
    ... in a private placement. The Company used the proceeds from this financing to replace shorter-term borrowings under the Company's revolving credit agreement. • proceeds from the sale of rental return merchandise • private debt • stock offerings At December 31, 2005, $81.3 million was...

  • Page 24
    ... by one of the LLCs for a total purchase price of $6.8 million. This LLC is leasing back these properties to Aaron Rents for a 15-year term, with a five-year renewal at the Company's option, at an aggregate annual rental of $883,000. Another eleven of these related party leases relate to properties...

  • Page 25
    ...do not have significant agreements for the purchase of rental merchandise or other goods specifying minimum quantities or set prices that exceed our expected requirements for three months. Market Risk From time-to-time, we manage our exposure to changes in short-term interest rates, particularly to...

  • Page 26
    ... Securities and Exchange Commission. All statements which address operating performance, events, or developments that we expect or anticipate will occur in the future - including growth in store openings, franchises awarded, and market share, and statements expressing general optimism about future...

  • Page 27
    Consolidated Balance Sheets (In Thousands, Except Share Data) December 31, 2005 December 31, 2004 ASSETS Cash Accounts Receivable (net of allowances of $2,742 in 2005 and $1,963 in 2004) Rental Merchandise Less: Accumulated Depreciation Property, Plant and Equipment, Net Goodwill and Other ...

  • Page 28
    Consolidated Statements of Earnings (In Thousands, Except Per Share) Year Ended December 31, 2005 Year Ended December 31, 2004 Year Ended December 31, 2003 REVENUES Rentals and Fees Retail Sales Non-Retail Sales Franchise Royalties and Fees Other COSTS AND EXPENSES $ 845,162 58,366 185,622 29,...

  • Page 29
    ... Additions to Rental Merchandise Book Value of Rental Merchandise Sold or Disposed Deferred Income Taxes Gain on Marketable Securities Loss (Gain) on Sale of Property, Plant and Equipment Change in Income Taxes Receivable, Included in Prepaid Expenses and Other Assets Change in Accounts Payable and...

  • Page 30
    ... residential and office furniture, consumer electronics, appliances, computers, and other merchandise throughout the U.S., Puerto Rico, and Canada. The Company manufactures furniture principally for its corporate furnishings and sales and lease ownership operations. CASH - In balance sheet and...

  • Page 31
    ... prior to the month due are recorded as deferred rental revenue. Until all payments are received under sales and lease ownership agreements, the Company maintains ownership of the rental merchandise. Revenues from the sale of merchandise to franchisees are recognized at the time of receipt by...

  • Page 32
    ... time to time the Company closes or consolidates stores. The charges related to the closing or consolidating of these stores primarily consist of reserving the net present value of future minimum payments under the stores' real estate leases. As of both December 31, 2005 and 2004, accounts payable...

  • Page 33
    ... of signage at the termination of these leases. The Company adopted FIN 47 for the year ended December 31, 2005. The impact of adoption was not material. Note B: Earnings Per Share Earnings per share is computed by dividing net income by the weighted average number of Common and Class A Common...

  • Page 34
    ... first two years, followed by annual $12 million principal repayments plus interest for the five years thereafter, beginning on July 27, 2008. The Company used the proceeds from this financing to replace shorter-term borrowings under the Company's revolving credit agreement. The new note purchase...

  • Page 35
    ...): Federal State Deferred Income Tax (Benefit) Expense: Federal State $50,064 4,541 54,605 ($7,720) (309) (8,029) $16,506 1,415 17,921 Note F: Commitments The Company leases warehouse and retail store space for substantially all of its operations under operating leases expiring at various times...

  • Page 36
    ... does management expect to incur any, significant losses under these guarantees. Rental expense was $59.9 million in 2005, $50.3 million in 2004, and $44.1 million in 2003. The Company maintains a 401(k) savings plan for all full-time employees with at least one year of service with the Company and...

  • Page 37
    ... to the sale of rental merchandise to franchisees. Franchise agreement fee revenue was $3.0 million, $3.3 million, and $2.2 million and royalty revenues $21.6 million, $17.8 million, and $14.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. Deferred franchise and area...

  • Page 38
    ...and lease ownership locations to an existing franchisee and sold one of its corporate furnishings stores. The effect of these sales on the consolidated financial statements was not significant. Note J: Acquisitions and Dispositions During 2005, the Company acquired the rental contracts, merchandise...

  • Page 39
    ...service different customer profiles using distinct payment arrangements. The reportable segments are each managed separately because of differences in both customer base and infrastructure. Revenues From External Customers: Sales and Lease Ownership $ 975,026 Corporate Furnishings 117,476 Franchise...

  • Page 40
    ... capital leases with certain related parties that are more fully described in Note D above. As part of its marketing program, the Company sponsors professional driver Michael Waltrip's Aaron's Dream Machine in the NASCAR Busch Series. In 2005, as part of this marketing program, the Company began...

  • Page 41
    ... is possible to design into the process safeguards to reduce, though not eliminate, the risk. The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2005. In making this assessment, the Company's management used the criteria...

  • Page 42
    ... cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Aaron Rents...

  • Page 43
    ... standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Aaron Rents, Inc. as of December 31, 2005 and 2004, and the related consolidated statement of earnings, shareholders' equity, and cash flows for each of the three years in the period ended...

  • Page 44
    ... table shows the range of high and low prices per share for the Common Stock and Class A Common Stock and the cash dividends declared per share for the periods indicated. The Company's Common Stock and Class A Common Stock are listed on the New York Stock Exchange under the symbols "RNT" and...

  • Page 45
    Locations in the United States, Puerto Rico, and Canada

  • Page 46
    ... Corporate and Shareholder Information Corporate Headquarters 309 E. Paces Ferry Rd., N.E. Atlanta, Georgia 30305-2377 (404) 231-0011 http://www.aaronrents.com Subsidiaries Aaron Investment Company 4005 Kennett Pike Greenville, Delaware 19807 (302) 888-2351 Aaron Rents, Inc. Puerto Rico Avenue...

  • Page 47

  • Page 48
    309 E. Paces Ferry Rd., N.E. Atlanta, Georgia 30305-2377 (404) 231-0011 www.aaronrents.com 46