Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| |
|
|
| þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
| |
|
|
| o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file Number. 1-13941
AARON’S, INC.
(Exact name of registrant as specified in its charter)
| |
|
|
|
GEORGIA
(State or other jurisdiction of
incorporation or organization)
|
|
58-0687630
(I.R.S. Employer
Identification No.) |
| |
|
|
| 309 E. PACES FERRY ROAD, N.E. |
|
|
ATLANTA, GEORGIA
(Address of principal executive offices)
|
|
30305-2377
(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
|
|
Name of each exchange on which registered |
| Common Stock, $.50 Par Value
|
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
| |
|
|
|
|
|
|
|
| Large Accelerated Filer þ
|
|
Accelerated Filer o
|
|
Non-Accelerated Filer o
|
|
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
Aggregate
market value of the voting and non-voting common stock held by non-affiliates of the registrant as
of June 30, 2010, the last business day of the registrant’s most recently completed second fiscal
quarter, based on the closing sale prices of the registrant’s common shares as reported by the New
York Stock Exchange on such date: $1,225,387,962. Subsequent to June
30, 2010, the registrant’s non-voting shares were converted into
voting shares on a one-for-one basis. See Item 12.
The number of shares outstanding of the registrant’s class of common stock, as of
February 24, 2011, was as follows:
| |
|
|
|
|
|
|
SHARES OUTSTANDING AS OF |
| TITLE OF EACH CLASS
|
|
FEBRUARY 24, 2011 |
| |
|
|
|
| |
|
|
| Common Stock, $.50 Par Value
|
|
80,132,070 |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2011 annual meeting of
shareholders are incorporated by reference into Part III of this Form 10-K.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain oral and written statements made by Aaron’s, Inc. about future events and
expectations, including statements in this annual report on Form 10-K, are “forward-looking
statements.” For those statements we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are based on management’s current beliefs, assumptions and expectations regarding our
future economic performance, taking into account the information currently available to management.
Generally, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” and
similar expressions identify forward-looking statements, which generally are not historical in
nature. 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,
market share and statements expressing general optimism about future operating results, are
forward-looking statements. Forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from the company’s historical
experience and the company’s present expectations or projections. Factors that could cause our
actual results to differ materially from any forward-looking statements include changes in general
economic conditions, competition, pricing, customer demand and those factors discussed in Item 1A,
“Risk Factors.” We qualify any forward-looking statements entirely by these cautionary factors.
The above mentioned risk factors are not all-inclusive. Given these uncertainties and that
such statements speak only as of the date made, you should not place undue reliance on
forward-looking statements. We undertake no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future events, changes in
assumptions or otherwise.
3
PART I.
General
Aaron’s, Inc. (“we”, “our”, “us”, “Aaron’s” or the “Company”) is a leading specialty retailer
of consumer electronics, computers, residential furniture, household appliances and accessories.
We engage in the lease ownership, lease and retail sale of a wide variety of products such as
widescreen and LCD televisions, computers, living room, dining room and bedroom furniture, washers,
dryers and refrigerators. We carry well-known brands such as JVC®, Mitsubishi®, Philips®,
Panasonic®, Sony®,
Dell®, Hewlett-Packard®, Simmons®, Frigidaire®,
and Sharp®. Our major operating
divisions are the Aaron’s Sales & Lease Ownership division and the Woodhaven Furniture Industries
division (formerly MacTavish Furniture Industries division), which supplies the majority of the
upholstered furniture and bedding leased and sold in our stores. Our strategic focus is on
expanding our sales and lease ownership business through opening new company-operated stores,
expanding our franchise program, and making selective acquisitions.
As of December 31, 2010, we had 1,813 sales and lease ownership stores, comprised of 1,149
company-operated stores in 30 states and Canada and 664 independently-owned franchised stores in 48
states and Canada. We have added 304 company-operated and 223 franchised sales and lease ownership
stores since the beginning of 2006. Included in the sales and lease ownership store counts above
are 11 company-operated and six franchised RIMCO stores, our wheels, tires and accessories sales
and lease ownership concept. We also have one office furniture store.
During the fourth quarter of 2008 the Company sold substantially all of the assets of its
Aaron’s Corporate Furnishings division, which leased residential furniture, office furniture and
related accessories through 47 company-operated stores in 16 states, to CORT Business Services
Corporation (“CORT”). As a result of the sale, our financial statements have been prepared
reflecting the Aaron’s Corporate Furnishings division as discontinued operations.
We have a history of revenue growth and profitability. Total revenues increased to $1.877
billion in 2010 from $1.228 billion in 2006, representing an 11.2% compound annual growth rate. Our
total net earnings from continuing operations increased to $118.4 million in 2010 from $70.9
million in 2006 representing a 13.7% compound annual growth rate.
Our Chairman, R. Charles Loudermilk, Sr., established Aaron’s in 1955, and we were
incorporated under the laws of Georgia in 1962. Our principal business address is 309 E. Paces
Ferry Road, N.E., Atlanta, Georgia, 30305-2377, and our telephone number is (404) 231-0011.
We own or have rights to various trademarks and trade names used in our business.
Aaron’s Sales & Lease Ownership. Our sales and lease ownership division focuses on providing
durable household goods to lower to middle income consumers who have limited or no access to
traditional credit sources such as bank financing, installment credit or credit cards. Our sales
and lease ownership program enables these customers to obtain quality-of-life enhancing merchandise
that they might otherwise not be able to afford, without incurring additional debt or long-term
obligations.
Our strategic focus is to expand our Aaron’s Sales & Lease Ownership division by opening
company-operated stores, expanding our franchise program and making selective acquisitions. We
franchise our sales and lease ownership stores in select markets where we have no immediate plans
to enter. Our franchise program:
| |
• |
|
provides additional revenues from franchise fees and royalties; |
| |
• |
|
allows us to grow more quickly; |
| |
• |
|
enables us to achieve economies of scale in purchasing, distribution, manufacturing and
advertising for our sales and lease ownership stores; and |
| |
• |
|
increases exposure to our brand. |
4
Aaron’s Office Furniture. After disappointing results in a difficult environment, in June
2010 we announced plans to close all of the then 12 remaining the Aaron’s Office Furniture stores
and focus solely on the Company’s sales and lease ownership business. Since June 2010, we closed
11 of the Aaron’s Office Furniture stores and have one remaining store open to liquidate
merchandise. During 2010 we recorded $9.0 million in charges
related to write-down and cost to dispose of office furniture, estimated future lease liabilities for closed
stores, write-off of leaseholds, severance pay, and other costs
associated with closing the stores
and, closing down the division. We do not anticipate incurring
significant charges in the future related to winding down the division.
Woodhaven Furniture Industries. Aaron’s is the only major furniture lease company in the
United States that manufactures its own furniture. We operate five furniture manufacturing plants
and seven bedding manufacturing facilities. By manufacturing our own specially designed
residential furniture and bedding, we believe we enjoy an advantage over our competitors.
Manufacturing enables us to control the quality, cost, delivery, styling, durability and quantity
of our furniture products.
HomeSmart.
During the second half of 2010, we opened three company-operated
stores under the HomeSmart name. These stores offer weekly payment
lease agreements for products which are similar to those in our sales
and lease ownership stores.
Industry Overview
The Rent-to-Own Industry
The rent-to-own industry offers customers an alternative to traditional methods of obtaining
electronics, computers, home furnishings and appliances. In a typical rent-to-own transaction, the
customer has the option to acquire merchandise over a fixed term, usually 12 to 24 months, normally
by making weekly lease payments. The customer may cancel the agreement at any time by returning the
merchandise to the store, generally with no further lease obligation. If the customer leases the
item to the full term, he obtains ownership of the item, though he can choose to buy it at any
time.
The rent-to-own concept is particularly popular with consumers who cannot pay the full
purchase price for merchandise at once or who lack the credit to qualify under conventional
financing programs. Rent-to-own 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 want to try out a
particular brand or model before buying it.
We believe that the decline in the number of furniture stores and the limited number of
retailers that focus on credit installment sales to lower and middle income consumers has created a
market opportunity for our unique sales and lease ownership concept. The traditional retail
consumer durable goods market is much larger than the lease market, leaving substantial potential
for growth for our sales and lease ownership division. We believe that the segment of the
population targeted by our sales and lease ownership division comprises approximately 50% of all
households in the United States and that the needs of these consumers are generally underserved.
Aaron’s Sales & Lease Ownership versus Traditional Rent-to-Own
We believe that our sales and lease ownership model is unique. By providing customers with the
option either to lease merchandise with the opportunity to obtain ownership or to purchase
merchandise outright, we blend elements of rent-to-own and traditional retailing. We believe our
sales and lease ownership program is a more effective method of retailing our merchandise to lower
to middle income consumers than a typical rent-to-own business or the more traditional method of
credit installment sales.
5
Our sales and lease ownership model is distinctive from a typical rent-to-own business in that
we encourage our customers to obtain ownership of their lease
merchandise. Based upon industry data,
we believe that when merchandise is initially leased our customers
obtain ownership move (over 46%) versus
rent-to-own businesses in general (approximately 25%). We believe our sales and lease ownership
model offers the following unique characteristics versus traditional rent-to-own stores:
| |
• |
|
Lower total cost—our agreement terms typically provide a lower cost of ownership to the
customer. |
| |
• |
|
Wider merchandise selection—we generally offer a larger selection of higher-quality
merchandise. |
| |
• |
|
Larger store layout—our stores are typically 9,000 square feet, nearly twice the size
of typical rent-to-own stores. |
| |
• |
|
Fewer payments— our typical plan offers semi-monthly or monthly payments versus the
industry standard of weekly payments. Our agreements also usually provide for a shorter
term until the customer obtains ownership. |
| |
• |
|
Flexible payment methods—we offer our customers the opportunity to pay by cash, check,
credit card or debit card, compared with the more common cash payment method at typical
rent-to-own stores. We receive approximately 53% of our payment volume (in dollars) from
customers by check, credit card or debit card. We also accept online payments. |
We believe our sales and lease ownership model also has attractive features in common with
traditional retailers. Among these features are store size, merchandise selection and the latest
product offerings, such as “state-of-the-art” electronics and computers. As technology has advanced
and home furnishings and appliances have evolved, we have strived to offer our customers the latest
product developments at affordable prices.
Unlike transactions with most traditional retailers, where the customer is committed to
purchase the merchandise, our sales and lease ownership transactions are not credit installment
contracts, and the customer may elect to terminate the transaction after a short initial lease
period. Our sales and lease ownership stores offer an up-front “cash and carry” purchase option on
most merchandise at prices that are competitive with traditional retailers.
Operating Strategies
Our operating strategies are focused on differentiation from our competitors and improved
efficiencies. We strive to:
| |
• |
|
Differentiate our Aaron’s Sales & Lease Ownership concept — We believe that
the success of our sales and lease ownership operation is attributable to our distinctive
approach to the business that sets us apart from our rent-to-own and credit retail
competitors. We have pioneered innovative approaches to meeting changing customer needs
that differ from our competitors’, such as offering lease ownership agreements which result
in a lower “all-in” price, larger and more attractive store showrooms, a wider selection of
higher-quality merchandise and up-front cash and carry purchase options on select
merchandise at prices that are competitive with traditional retailers. Most sales and lease
ownership customers make their payments in person, and we use these frequent visits to
strengthen customer relationships and make these customers feel welcome in our stores. |
| |
• |
|
Offer high levels of customer service and satisfaction — We foster good
relationships with our customers to attract recurring business and encourage them to lease
merchandise for the full agreement term by providing high levels of service and
satisfaction. We demonstrate our commitment to superior customer service by providing
customers quick delivery of leased merchandise, in many cases by same or next day delivery,
and repair service at no charge to the customer. We have also established an employee
training program called Aaron’s E-University, which is a 60-course curriculum designed to
enhance the customer relations skills of both company-operated and franchised store
managers. |
| |
• |
|
Promote our vendors and the Aaron’s® brand name — Our marketing initiatives
reach the target Aaron’s customer in a variety of ways. We advertise our brand name “Dream
Products” through our “Drive Dreams Home” sponsorship of NASCAR Championship Racing.
Sponsorship of other sporting events, such as professional football, basketball and
baseball, and various college sports, also targets this distinct market. Every month, we
distribute mass mailings of promotional material outlining specific products. Our goal is
to reach households within a specified radius of each store on a consistent basis every
month. Currently, we mail over 26 million flyers each month to consumers in areas served
by our stores. We also utilize national and local television and
radio advertising in our markets and for special promotions
throughout the year. |
6
| |
• |
|
Manage merchandise through our manufacturing and distribution capabilities —
We believe that our manufacturing operations and network of 17 fulfillment centers at
December 31, 2010 give us a strategic advantage over our competitors. Manufacturing
enables us to control the quality, cost, delivery, styling, durability and quantity of a
substantial portion of our furniture merchandise, and provides us a reliable source of
furniture. Our distribution system allows us to deliver merchandise promptly to our stores
in order to meet customer demand quickly and manage inventory levels more effectively. |
| |
• |
|
Utilize proprietary management information systems — We use proprietary
computerized information systems to systematically pursue collections, to manage
merchandise returns and to match inventory with demand. Each of our stores, including
franchised sales and lease ownership stores, is linked by computer directly to our
corporate headquarters, which enables us to monitor the performance of each store on a
daily basis. |
Growth Strategies
We seek to increase our revenues and profitability through the execution of our growth
strategies, which are to:
| |
• |
|
Open additional company-operated sales and lease ownership stores — We plan to
open sales and lease ownership stores in existing and select new geographic markets.
Additional stores help us to realize economies of scale in purchasing, marketing and
distribution. We added a net of 67 company-operated sales and lease ownership stores in
2010. |
| |
• |
|
Increase our sales and lease ownership franchises — We believe that our
franchise program allows us to grow more quickly and increase our brand exposure in new
markets. In addition, the combination of company-operated and franchised stores creates a
larger store base that generally enhances the economies of scale in purchasing,
distribution, manufacturing and advertising for our sales and lease ownership stores.
Franchise fees and royalties represent a growing source of company revenues. |
| |
• |
|
Increase revenues and net earnings from existing sales and lease ownership
stores — We experienced same store revenue growth (revenues earned in stores open for the
entirety of both periods) from our company-operated sales and lease ownership stores of
3.5% in 2010, 8.1% in 2009, and 3.1% in 2008. We calculate same store revenue growth by
comparing revenues from comparable periods for all stores open during the entirety of those
periods, excluding stores that received lease agreements from other acquired, closed or
merged stores. We expect revenues and net earnings of our sales and lease ownership
division to continue to grow as the large number of stores we have opened in the past few
years increase their customer bases. |
| |
• |
|
Seek selective acquisitions in both new and existing sales and lease ownership
markets — We will continue to explore acquisitions of other rent-to-own operations and
select company franchised stores. In 2010, we acquired the lease agreements, merchandise
and assets of 30 sales and lease ownership stores. Eleven of these stores were subsequently
merged with existing locations and five stores were sold to franchisees, resulting in 14
new stores from acquisitions. We will also seek to convert the stores of existing
independent lease operators to Aaron’s Sales & Lease Ownership franchised stores. In 2010,
we sold ten of our sales and lease ownership stores to franchisees and one to a third party
operator. |
Operations
Sales and Lease Ownership
We established our Aaron’s Sales & Lease Ownership operation in 1987. At December 31, 2010, we
had 1,149 company-operated sales and lease ownership stores in 30 states and Canada.
We have developed a distinctive concept for our sales and lease ownership stores with specific
merchandising, store layout, pricing and agreement terms for our target customer market. We believe
that these features create a store and a sales and lease ownership concept significantly different
from the operations of typical rent-to-own stores and corporate furnishings (rent-to-rent) businesses, and the operations of consumer electronics and home
furnishings retailers who finance merchandise.
7
The typical Aaron’s Sales & Lease Ownership store layout is a combination showroom and
warehouse of 8,000 to 10,000 square feet, with an average of approximately 9,000 total square feet.
In selecting locations for new sales and lease ownership stores, we generally look for sites in
well-maintained strip shopping centers with good access, which are strategically located in
established working class neighborhoods and communities. We also build to suit or occupy
stand-alone stores in certain markets. Many of our stores are placed near existing competitors’
stores. Each sales and lease ownership store usually maintains at least two trucks and crews for
pickups and deliveries and generally offers same or next day delivery for addresses located within
approximately ten miles of the store. We emphasize a broad selection of brand name electronics,
computers and appliances, and offer customers a wide selection of furniture, including furniture
manufactured by our Woodhaven Furniture Industries division.
We believe that our sales and lease ownership stores offer lower merchandise prices than
similar items offered by traditional rent-to-own operators, and substantially equivalent to the
“all-in” contract price of similar items offered by retailers who finance merchandise.
Approximately 90% of our sales and lease ownership agreements are monthly and approximately 10% are
semi-monthly as compared to the industry standard of weekly agreements, and our agreements usually
provide for a shorter term leading to customer ownership. Customers can have the item serviced
free of charge or replaced at any time during the lease agreement. We re-lease or sell merchandise
that customers return to us prior to the expiration of their agreements. We also offer, for select
merchandise, an up-front cash and carry purchase option at prices that are competitive with
traditional retailers.
During the latter part of 2004, we opened two experimental stores under the RIMCO name that
lease automobile wheels, tires and rims to customers under sales and lease ownership agreements.
Although the products offered are different, these stores are managed, monitored and operated
similarly to our other sales and lease ownership stores. At December 31, 2010, we had 11
company-operated and six franchised RIMCO stores open.
Sales and Lease Ownership Franchise Program
We began franchising Aaron’s Sales & Lease Ownership stores in select markets in 1992 and have
continued to attract franchisees. Our franchised stores do not compete with company-operated
stores, nor do we anticipate any such competition, as we mainly award franchises in markets where
we have no operations and no current plans to enter. As of December 31, 2010, we had 664 franchised
stores open and area development agreements with franchisees to open 282 stores in the future.
Franchisees are approved on the basis of the applicant’s business background and financial
resources. We generally seek franchisees who will enter into area development agreements for
several stores, although some franchisees currently operate a single store. Most franchisees are
involved in the day-to-day operations of the stores.
We enter into franchise agreements with our franchisees to govern the opening and operation of
franchised stores. Under our current standard agreement, we require the franchisee to pay a
franchise fee from $15,000 to $50,000 per store depending upon market size. Agreements are for a
term of ten years, with one ten-year renewal option, and franchisees are obligated to remit to us
royalty payments of 5% or 6% of the franchisee’s weekly cash collections. The royalty payments
increased from 5% to 6% for most franchise agreements entered into or renewed after December 31,
2002.
We assist each franchisee in selecting the proper site for each store. Because of the
importance of location to the Aaron’s Sales & Lease Ownership concept, one of our pre-opening
directors visits the intended market and helps guide the franchisee through the selection process.
Once a site is selected, we help in designing the floor plan, including the proper layout of the
showroom and warehouse. In addition, we provide assistance in assuring that the design and decor of
the showroom is consistent with our requirements. We also lease the exterior signage to the
franchisee and assist with placing pre-opening advertising, ordering initial inventory and
obtaining delivery vehicles.
We have an arrangement with several banks to provide financing to qualifying franchisees to
assist with establishing and operating their stores. An inventory financing plan to provide
franchisees with the capital to purchase inventory is the primary component of the financing program. For qualified established franchisees, we have
arranged in some cases for these institutions to provide a revolving credit line to allow
franchisees the flexibility to expand. We guarantee amounts outstanding under the franchisee
financing programs.
8
All franchisees are required to complete a comprehensive training program and to operate their
franchised sales and lease ownership stores in compliance with our policies, standards and
specifications, including such matters as decor, lease agreement terms, hours of operation, pricing
and merchandise. Franchisees in general are not required to purchase their lease merchandise from
our fulfillment centers, although most do so in order to take advantage of company sponsored
financing, bulk purchasing discounts and favorable delivery terms.
Our internal audit department conducts operational audits of every company store a minimum of
once per year with additional audits performed due to General Manager turnover, risk assessments,
and failing audits. We also conduct annual financial audits of each franchise and an annual
operational audit of each franchised store. In addition, our proprietary management information
system links each company and franchised store to corporate headquarters.
Furniture Manufacturing
Our Woodhaven Furniture Industries division has manufactured furniture for our stores since
1971. The division has five furniture manufacturing plants and seven bedding manufacturing
facilities totaling approximately 781,000 square feet in the aggregate, that supply the majority of
our upholstered furniture and bedding. We currently have no plans to significantly expand our
capacity.
Our Woodhaven Furniture Industries division manufactures:
| |
• |
|
upholstered living-room furniture, including contemporary sofas, sofa beds, chairs and
modular sofa and ottoman collections in a variety of natural and synthetic fabrics; and |
| |
• |
|
bedding, including standard sizes of mattresses and box springs. |
Woodhaven has designed special features for the furniture it manufactures that we believe
reduce production costs, enhance product durability, and improve the shipping process relative to
furniture purchased from third parties. These features include:
| |
• |
|
standardization of components; |
| |
• |
|
reduction of parts and features susceptible to wear or damage; |
| |
• |
|
durable, soil-resistant fabrics and sturdy frames for longer life and higher residual
value; and |
| |
• |
|
devices that allow sofas to stand on end for easier and more efficient transport. |
Woodhaven also manufactures replacement covers of all styles and fabrics of its upholstered
furniture for use in reconditioning lease return furniture.
The principal raw materials we use in furniture manufacturing are fabric, foam, fiber,
wire-innerspring assemblies, plywood and hardwood. All of these materials are purchased in the open
market from unaffiliated sources. We are not dependent on any single supplier, and none of the raw
materials we use are in short supply.
Marketing and Advertising
In our sales and lease ownership operations, we rely heavily on national and local television
advertising. We advertise nationally on television with a variety of commercials. All of our
television commercials generally feature brand name furniture, electronics, appliances and
computers. Aaron’s has national broadcast partnerships with ESPN/ABC, SPEED Channel, TNT, TBS and
Univision.
We believe we have garnered significant value from our sports marketing initiatives. We
advertise and sponsor motorsports at various levels along with select professional and collegiate
sports, such as NFL, NBA and MLB teams, and SEC and ACC college athletic programs, among others,
whose fan base, match our customer demographic.
Our premier title sponsorship continues to be the Aaron’s Dream Weekend at Talladega
Superspeedway consisting of the Aaron’s 499 NASCAR Sprint Cup Series Race and the Aaron’s 312
NASCAR Nationwide Series Race. Both races are broadcast live on national television and are among
the most watched events on the NASCAR circuit.
9
We continue our sponsorship in 2011 of Michael Waltrip Racing with David Reutimann driving the
Aaron’s #00 Dream Machine for 30 of 36 races in the NASCAR Sprint Cup Series. We expect that team
owner Michael Waltrip will also drive an Aaron’s Dream Machine in select races in 2011.
All of our sports partnerships are integrated directly into advertising, promotional and
marketing initiatives that have proven to significantly enhance the Company’s brand awareness and
customer loyalty.
Paces East Advertising, Aaron’s in-house advertising and promotions department, distributes
over 26 million direct circulars each month which highlight featured merchandise and demonstrate
the cost advantage to consumers of sales and lease ownership over typical rent-to-own transactions.
Store Operations
Management. Our Aaron’s Sales & Lease Ownership division has 12 regional vice presidents who
are primarily responsible for monitoring individual store performance and inventory levels within
their respective regions.
Stores are directly supervised by 122 sales and lease ownership regional managers, and two
RIMCO regional managers. At the individual store level, the store manager is primarily responsible
for overseeing:
| |
• |
|
customer and credit relations; |
| |
• |
|
deliveries and pickups; |
| |
• |
|
warehouse and inventory management; |
| |
• |
|
hiring and terminating store employees; and |
| |
• |
|
certain marketing efforts. |
Store managers are also responsible for inspecting lease return merchandise to determine
whether it should be sold as is, leased again as is, repaired and sold, or reconditioned for
additional lease. A significant portion of the store manager’s compensation is dependent upon store
revenues and profits.
Executive management directs and coordinates:
| |
• |
|
financial planning and control; |
| |
• |
|
marketing and advertising; |
| |
• |
|
new store site selection and construction for company-operated stores; |
| |
• |
|
long range and strategic planning; |
| |
• |
|
enterprise risk management; |
| |
| |
• |
|
organizational issues; and |
Our business philosophy has always emphasized safeguarding of company assets, strict cost
containment and fiscal controls. Executive and store level management monitor expenses to contain
costs. We pay all invoices from Company headquarters in order to enhance fiscal accountability.
We believe that careful attention to the safeguarding of lease merchandise, our most significant
asset, as well as the expense side of our operations, has enabled us to maintain financial
stability and profitability.
Management Information Systems. We use computer-based management information systems to
facilitate cash collections, merchandise returns and inventory monitoring. Through the use of
proprietary software developed in-house, each of our stores is linked by computer directly to
corporate headquarters, which enables us to monitor the performance of each store on a daily basis.
At the store level, the store manager is better able to track merchandise on the showroom floor
and in the warehouse to minimize delivery times, assist with product purchasing, and match customer
needs with available inventory.
10
Lease Agreement Approval, Renewal and Collection. One of the keys to the success of our sales
and lease ownership operation is timely cash collections. Individual store managers track cash
collections and customers are contacted within a few days of their lease payment due dates in order
to encourage customers to keep their agreement current and in force, rather than having to return
the merchandise for non-payment, and to renew their agreements for an additional period. Careful
attention to cash collections is particularly important in sales and lease ownership 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.
We generally perform no formal credit check with respect to sales and lease ownership
customers, other than to verify employment or other reliable sources of income and personal
references supplied by the customer. All of our agreements for merchandise require
payments in advance, and the merchandise normally is repossessed if a payment is significantly in
arrears.
We do not extend credit to sales and lease ownership customers. Net company-wide merchandise
shrinkage as a percentage of combined lease revenues was 2.5% in 2010 and 2.9% in 2009 and 2008.
We believe that our collection and repossession policies comply with applicable legal requirements,
and we discipline any employee that we discover deviating from such policies.
Customer Service. We believe that customer service is one of the most important elements in
the success of our business. Customer satisfaction is critical because the customer typically has
the option of returning the leased merchandise at any time. Our goal is to make our customers feel
positive about Aaron’s and our products from the moment they enter our showrooms. Items are
serviced at no charge to the customer, and free delivery is available in many cases. In order to
increase leasing at existing stores, we foster relationships with existing customers to attract
recurring business, and many new agreements are attributable to repeat customers.
Because of the importance of customer service, we believe that a prerequisite for successful
operations and growth is skilled, effective employees who value our customers and project a genuine
desire to serve customers’ needs. Our Aaron’s Sales & Lease Ownership division has developed one
of the largest training programs in the industry, called Aaron’s University. Aaron’s University is
designed to provide a uniform customer service experience regardless of the store’s location, or
whether it is company-operated or franchised. Standardizing operating procedures throughout our
system is a primary focus of Aaron’s University. Aaron’s national trainers provide live
interactive training via webinars on a daily basis to entry level and management level associates.
The learning program is also complimented with a robust e-learning library with an ongoing
constantly growing curriculum.
In addition to the e-learning program, Aaron’s University has a management development program
that offers facilities-based training for store management-caliber associates. Additionally,
approximately once a month we distribute a DVD entitled “Inside Aaron’s®.” These DVDs are intended
to communicate a wide variety of topics of interest to our store personnel regarding current
company initiatives. Our policy of primarily promoting from within boosts employee retention and underscores our commitment to customer service and other
business philosophies, allowing us to realize greater benefits from our employee training programs.
11
Purchasing and Distribution
Our product mix is determined by store managers in consultation with regional managers and
regional vice presidents, based on an analysis of customer demands.
The following table shows the percentage of sales and lease ownership division revenues for
the year ended December 31, 2010 attributable to different merchandise categories:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Percentage of |
|
|
Percentage of |
|
|
Percentage of |
|
| Merchandise Category |
|
2010 Revenues |
|
|
2009 Revenues |
|
|
2008 Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronics |
|
|
37 |
% |
|
|
37 |
% |
|
|
35 |
% |
Furniture |
|
|
31 |
% |
|
|
30 |
% |
|
|
30 |
% |
Appliances |
|
|
16 |
% |
|
|
15 |
% |
|
|
15 |
% |
Computers |
|
|
13 |
% |
|
|
14 |
% |
|
|
16 |
% |
Other |
|
|
3 |
% |
|
|
4 |
% |
|
|
4 |
% |
We purchase the majority of our merchandise directly from manufacturers, with the balance from
local distributors. One of our largest suppliers is our own Woodhaven Furniture Industries
division, which supplies the majority of the upholstered furniture and bedding we lease or sell.
We have no long-term agreements for the purchase of merchandise.
Sales and lease ownership operations utilize fulfillment centers, which are on average
approximately 94,000 square feet, to control merchandise. All company-operated sales and lease
ownership stores receive merchandise directly from our 17 fulfillment centers, together totaling
approximately 1,778,000 square feet. Most of our continental United States stores are within a
250-mile radius of a fulfillment center, facilitating timely shipment of products to the stores and
fast delivery of orders to customers.
We realize freight savings from truckload discounts and more efficient distribution of
merchandise by using fulfillment centers. We use our own tractor-trailers, local delivery trucks
and various contract carriers to make weekly deliveries to individual stores.
Competition
Aaron’s business is highly competitive. Our largest competitor in the rent-to-own market is
Rent-A-Center, Inc. According to industry sources and our estimates, Aaron’s and Rent-A-Center,
Inc., which are the two largest industry participants, account for approximately 4,900 of the 8,500
rent-to-own stores in the United States and Canada. Our stores compete with other national and
regional rent-to-own businesses, as well as with rental stores that do not offer their customers a
purchase option. With respect to customers desiring to purchase merchandise for cash or on credit,
we also compete with retail stores. Competition is based primarily on store location, product
selection and availability, customer service and lease rates and terms.
Seasonality
Aaron’s revenue mix is moderately seasonal, with the first quarter of each year generally
resulting in higher revenues than any other quarter during the year, primarily due to realizing the
full benefit of business that historically gradually increases in the fourth quarter as a result of
the holiday season, as well as the receipt by our customers in the first quarter of federal income
tax refunds. Generally, our customers will more frequently exercise the early purchase option on
their existing lease agreements or purchase merchandise off the showroom floor during the first
quarter of the year. We expect this trend to continue in future periods. Furthermore, we tend to
experience slower growth in the number of agreements on lease in the third quarter of each year
when compared to the other quarters of the year. We also expect this trend to continue in future
periods unless we significantly change our store base as a result of new store openings or
opportunistic acquisitions and dispositions.
Government Regulation
Our operations are extensively regulated by and subject to the requirements of various federal
and state laws and regulations. In general such laws regulate applications for leases, late fees,
other finance rates, the form of disclosure statements, the substance and sequence of required
disclosures, the content of advertising materials and certain collection procedures. Violations of
certain provisions of these laws may result in penalties ranging from nominal amounts up to and
including forfeiture of fees and other amounts due on leases. We do not anticipate that the
various laws and regulations have had or will have a material adverse effect on our operations. However,
we are unable to predict the nature or effect on our operations or earnings of unknown future
legislation, regulations and judicial decisions or future interpretations of existing and future
legislation or regulations relating to our operations, and there can be no assurance that future
laws, decisions or interpretations will not have a material adverse effect on our operations and
earnings.
12
A summary of certain of the state and federal laws under which we operate follows. This
summary does not purport to be a complete summary of the laws referred to below or of all the laws
regulating our operations.
Currently, 47 states and the District of Columbia specifically regulate rent-to-own
transactions, including states in which we currently operate Aaron’s Sales & Lease Ownership
stores. Most state lease purchase laws require rent-to-own companies to disclose to their 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, and miscellaneous other items. The more restrictive
state lease purchase laws limit the total amount that a customer may be charged for an item, or
regulate the amount of deemed “interest” that rent-to-own companies may charge on rent-to-own
transactions, generally defining “interest” as lease fees paid in excess of the “retail” price of
the goods. Our long-established policy in all states is to disclose the terms of our lease purchase
transactions as a matter of good business ethics and customer service. We believe we are in
material compliance with the various state lease purchase laws in those states where we use a lease
purchase form of agreement. At the present time, no federal law specifically regulates the
rent-to-own industry. Federal legislation to regulate the industry has been proposed from time to
time.
The current economic downturn has renewed legislative attention in the United States, at both
the state and federal levels, on consumer debt transactions in general, which may result in an
increase in legislative regulatory efforts directed at the rent-to-own industry. We cannot predict
whether any such legislation will be enacted and what the impact of such legislation would be on
us. Although we are unable to predict the results of any regulatory initiatives, we do not believe
that existing and currently proposed regulations will have a material adverse impact on our sales
and lease ownership or other operations.
We have introduced a form of consumer lease as an alternative to our typical lease purchase
agreement in a number of states. The consumer lease differs from a lease purchase agreement in
that it has an initial lease term in excess of four months. Generally, state laws that govern the
rent-to-own industry only apply to lease agreements with an initial term of four months or less.
The consumer lease is governed by federal and state laws and regulations other than the state lease
purchase laws. The federal regulations applicable to the consumer lease require certain
disclosures similar to the rent-to-own regulations, but are generally less restrictive as to
pricing and other charges. We believe we are in material compliance with all laws applicable to
our consumer leasing program.
Our sales and lease ownership 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 us
to furnish to prospective franchisees a franchise offering circular containing prescribed
information. A number of states in which we might consider franchising also regulate the sale of
franchises and require registration of the franchise offering circular with state authorities. We
believe we are in material compliance with all applicable franchise laws in those states in which
we do business and with similar laws in Canada.
Employees
At December 31, 2010, Aaron’s had approximately 10,400 employees. None of our employees are
covered by a collective bargaining agreement, and we believe that our relations with our employees
are good.
13
Information on Segments and Geographic Areas
We currently only operate in the United States and Canada. Information on our three reportable
segments—sales and lease ownership, franchise and manufacturing—is set forth in Note K to our
Consolidated Financial Statements. See Item 8 of Part II.
Available Information
We make available free of charge on or through our Internet website our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file such material with, or furnish it to,
the U.S. Securities and Exchange Commission (“SEC”). Our Internet address is
www.aaronsinc.com.
14
Aaron’s business is subject to certain risks and uncertainties, the most significant of which
are set forth below.
Our growth strategy depends considerably on opening new company-operated stores. Our ability to
expand our store base is influenced by factors beyond our control, which may impair our growth
strategy and impede our revenue growth.
Opening new company-operated stores is an important part of our growth strategy. Our ability
to continue opening new stores is affected by, among other things:
| |
• |
|
the substantial outlay of financial resources required to open new stores and initially
operate them, and the availability of capital sources to finance new openings and initial
operation; |
| |
• |
|
difficulties associated with hiring, training and retaining additional skilled
personnel, including store managers; |
| |
• |
|
our ability to identify suitable new store sites and to negotiate acceptable leases for
these sites; |
| |
• |
|
competition in existing and new markets; |
| |
• |
|
consumer demand, tastes and spending patterns in new markets that differ from those in
our existing markets; and |
| |
• |
|
challenges in adapting our distribution and other operational and management systems to
an expanded network of stores. |
If we cannot address these challenges successfully, we may not be able to expand our business
or increase our revenues at the rates we currently contemplate.
If we cannot manage the costs of opening new stores, our profitability may suffer.
Opening large numbers of new stores requires significant start-up expenses, and new stores are
generally not profitable until their second year of operation. Consequently, opening many stores
over a short period can materially decrease our net earnings for a time. This effect is sometimes
called “new store drag.” During 2010, we estimate that start-up expenses for new stores reduced
our net earnings by approximately $13 million or $.15 per diluted share. We cannot be
certain that we will be able to fully recover these significant costs in the future.
We may not be able to attract qualified franchisees, which may slow the growth of our business.
Our growth strategy depends significantly upon our franchisees developing new franchised sales
and lease ownership stores. We generally seek franchisees who meet our stringent business
background and financial criteria, and who are willing to enter into area development agreements
for several stores. A number of factors, however, could inhibit our ability to find qualified
franchisees, including general economic downturns or legislative or litigation developments that
make the rent-to-own industry less attractive to potential franchisees. These developments could
also adversely affect our franchisees’ ability to obtain adequate capital to develop and operate
new stores on time, or at all. Our inability to find qualified franchisees could slow our growth.
Qualified franchisees who conform to our standards and requirements are also important to the
overall success of our business. Our franchisees, however, are independent contractors and not
employees, and consequently we cannot and do not control them to the same extent as our
company-operated stores. Our franchisees may fail in key areas, which could in turn slow our
growth, reduce our franchise revenues or damage our image and reputation.
If we are unable to integrate acquired businesses successfully and realize anticipated economic,
operational and other benefits in a timely manner, our profitability may decrease.
We frequently acquire other sales and lease ownership businesses. We acquired the lease
agreements, merchandise and assets of 30 stores through acquisitions in 2010. If we are unable to
integrate businesses we acquire successfully, we may incur substantial cost and delays in
increasing our customer base. In addition, the failure to integrate acquisitions successfully may
divert management’s attention from Aaron’s existing business. Integration of an acquired business may be more difficult when we acquire a business in an unfamiliar market, or a
business with a different management philosophy or operating style.
15
Our competitors could impede our ability to attract new customers, or cause current customers to
cease doing business with us.
The industries in which we compete are highly competitive. In the sales and lease ownership
market, our competitors include national, regional and local operators of rent-to-own stores and
credit retailers. Our competitors in the sales and lease ownership and traditional retail markets
may have significantly greater financial and operating resources, and greater name recognition in
certain markets, than we have. Greater financial resources may allow our competitors to grow
faster than us, including through acquisitions. This in turn may enable them to enter new markets
before we can, which may decrease our opportunities in those markets. Greater name recognition, or
better public perception of a competitor’s reputation, may help them divert market share away from
us, even in our established markets.
In addition, new competitors may emerge. Current and potential competitors may establish
financial or strategic relationships among themselves or with third parties. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and rapidly acquire
significant market share.
If our independent franchisees fail to meet their debt service payments or other obligations under
outstanding loans guaranteed by us as part of a franchise loan program, amounts that the lenders
participating in the program could require us to pay to satisfy these obligations could have a
material adverse effect on our business and financial condition.
We have guaranteed the borrowings of certain franchisees under a franchise loan program with
several banks with a maximum commitment amount of $200.0 million, and we also guarantee franchisee
borrowings under certain other debt facilities. In the event these franchisees are unable to meet
their debt service payments or otherwise experience an event of default, we would be
unconditionally liable for a portion of the outstanding balance of the franchisees’ debt
obligations, which at December 31, 2010 was $121.0 million. Of this amount, approximately $108.3
million represents franchisee borrowings outstanding under the franchise loan program and
approximately $12.7 million represents franchisee borrowings that we guarantee under other debt
facilities. Although we have had no significant losses associated with the franchisee loan and
guaranty program since its inception, and we believe that any losses associated with any defaults
would be mitigated through recovery of lease merchandise and other assets, we cannot guarantee that
there will be no significant losses in the future or that we will be able to adequately mitigate
any such losses. If we fail to adequately mitigate any such future losses, our business and
financial condition could be materially adversely impacted.
Any loss of the services of our key executives, or our inability to attract and retain qualified
managers, could have a material adverse impact on our operations.
We believe that we have benefited substantially from our current executive leadership and that
the loss of their services at any time in the near future could adversely affect our business and
operations. We also depend on the continued services of the rest of our management team. The loss
of these individuals without adequate replacement could also adversely affect our business.
Although we have employment agreements with the majority of our key executives, they are generally
terminable on short notice and we do not carry key man life insurance on any of our officers.
Additionally, we need a growing number of qualified managers to operate our stores
successfully. The inability to attract and retain qualified individuals, or a significant increase
in the costs to do so, would materially adversely affect our operations.
16
You should not rely solely on our same store revenues as an indication of our future results of
operations because they fluctuate significantly.
Our historical same store revenue growth figures have fluctuated significantly from year to
year. For example, we experienced same store revenue growth of 3.5% in 2010 and 8.1% in 2009. We
calculate same store revenue growth by comparing revenues for comparable periods for all stores
open during the entirety of those periods. Even though we achieved significant same store revenue
growth in the past and consider it a key indicator of historical performance, we may not be able to
increase same store revenues in the future. A number of factors have historically affected, and
will continue to affect, our same store revenues, including:
| |
• |
|
changes in competition; |
| |
• |
|
general economic conditions; |
| |
• |
|
new product introductions; |
| |
• |
|
changes in our merchandise mix; |
| |
• |
|
the opening of new stores; |
| |
• |
|
the impact of our new stores on our existing stores, including potential decreases in
existing stores’ revenues as a result of opening new stores; |
| |
• |
|
timing of promotional events; and |
| |
• |
|
our ability to execute our business strategy effectively. |
Changes in our quarterly and annual same store revenues could cause the price of our common
stock to fluctuate significantly.
Our operations are regulated by and subject to the requirements of various federal and state laws
and regulations. These laws and regulations, as the same may be amended or supplemented or
interpreted by the courts from time to time, could expose us to significant compliance costs or
burdens or force us to change our business practices in a manner that may be materially adverse to
our operations, prospects or financial condition.
Currently 47 states and the District of Columbia specifically regulate rent-to-own
transactions, including states in which we currently operate Aaron’s Sales & Lease Ownership
stores. At the present time, no federal law specifically regulates the rent-to-own industry,
although federal legislation to regulate the industry has been proposed from time to time. Any
adverse changes in existing laws, or the passage of new adverse legislation by states or the
federal government could materially increase both our costs of complying with laws and the risk
that we could be sued or be subject to government sanctions if we are not in compliance. In
addition, new burdensome legislation might force us to change our business model and might reduce
the economic potential of our sales and lease ownership operations.
Most of the states that regulate rent-to-own transactions have enacted disclosure laws which
require rent-to-own companies to disclose to their 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 them and miscellaneous other items. The more restrictive state lease purchase laws
limit the total amount that a customer may be charged for an item, or regulate the amount of deemed
“interest” that rent-to-own companies may charge on rent-to-own transactions, generally defining
“interest” as lease fees paid in excess of the “retail” price of the goods.
The current economic downturn has renewed legislative attention in the United States, at both
the state and federal levels, on consumer debt transactions in general, which may result in an
increase in legislative regulatory efforts directed at the rent-to-own industry. We cannot
guarantee that the federal government or states will not enact additional or different legislation that would be disadvantageous or otherwise materially adverse to us,
nor can we guaranty that Canadian law will not be enacted that would be materially adverse to us.
In addition to the risk of lawsuits related to the laws that regulate rent-to-own and consumer
lease transactions, we could be subject to lawsuits alleging violations of federal and state or
Canadian provincial laws and regulations and consumer tort law, including fraud and consumer
protection laws, because of the consumer-oriented nature of the rent-to-own industry. A large
judgment could adversely affect our financial condition and results of operations. Moreover, an
adverse outcome from a lawsuit, even one against one of our competitors, could result in changes in
the way we and others in the industry do business, possibly leading to significant costs or
decreased revenues or profitability.
17
Continuation or deepening of current economic conditions could result in decreased revenues or
increased costs.
The United States’ and other economies are currently experiencing severe distress, accompanied
by disruptions and contraction in the credit markets and broad unemployment. Although we believe
the economic downturn has resulted in increased business in our sales and lease ownership stores,
as consumers increasingly find it difficult to purchase home furnishings, electronics and
appliances from traditional retailers on store installment credit, it is possible that if the
conditions continue for a significant period of time, or get worse consumers may curtail spending
on all or some of the types of merchandise we offer, in which event our revenues may suffer.
In addition, unemployment may result in increased defaults on lease payments, resulting in
increased merchandise return costs and merchandise losses.
Disruptions in the credit and capital markets may negatively affect our access to capital.
We have historically relied partially on the credit and capital markets to fund our growth,
including through bank loan arrangements and periodic public stock offering and private placements
of debt securities. Beginning in the second half of 2008, the global credit and capital markets
experienced severe disruptions, resulting in increased costs of capital, and unavailability of some
forms of capital. Although the credit and capital markets have improved somewhat, they have not
recovered to their pre-crisis strength. While we believe our sources of capital will be adequate
to fund our operations for the next 24 months, if credit and capital market disruptions continue
for an extended period, or deteriorate further, we may not be able to obtain capital at favorable
costs, and may not be able to obtain some forms of capital at all.
We are subject to laws that regulate franchisor-franchisee relationships. Our ability to develop
new franchised stores and enforce our rights against franchisees may be adversely affected by these
laws, which could impair our growth strategy and cause our franchise revenues to decline.
As a franchisor, we are subject to regulation by the Federal Trade Commission, state laws and
certain Canadian provincial laws regulating the offer and sale of franchises. Because we plan to
expand our business in part by selling more franchises, our failure to obtain or maintain approvals
to sell franchises could significantly impair our growth strategy. In addition, our failure to
comply with franchise regulations could cause us to lose franchise fees and ongoing royalty
revenues. Moreover, state and provincial laws that regulate substantive aspects of our
relationships with franchisees may limit our ability to terminate or otherwise resolve conflicts
with our franchisees.
We are subject to legal proceedings from time to time which seek material damages.
From time to time, we are subject to legal proceedings, including class actions, that seek
material damages. Although we do not presently believe that any of the legal proceedings to which
we are currently a party will ultimately have a material adverse impact upon us, we cannot assure
you that we will not incur material damages in a lawsuit or other proceeding in the future.
Significant final judgments, settlement amounts, amounts needed to post a bond pending an appeal or
defense costs could materially and adversely affect our liquidity and capital resources.
|
|
|
| ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
18
We lease space for most of our store and warehouse operations under operating leases expiring
at various times through 2028. Most of the leases contain renewal options for additional periods
ranging from one to 15 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 our furniture manufacturing
plants, bedding facilities, and fulfillment centers:
| |
|
|
|
|
|
|
|
|
| LOCATION |
|
SEGMENT AND PRIMARY USE |
|
|
SQUARE FT. |
|
| |
Cairo, Georgia |
|
Manufacturing-Furniture Manufacturing |
|
|
300,000 |
|
Cairo, Georgia |
|
Manufacturing-Furniture Manufacturing |
|
|
147,000 |
|
Coolidge, Georgia |
|
Manufacturing-Furniture Manufacturing |
|
|
81,000 |
|
Coolidge, Georgia |
|
Manufacturing-Furniture Manufacturing |
|
|
48,000 |
|
Coolidge, Georgia |
|
Manufacturing-Furniture Manufacturing |
|
|
41,000 |
|
Coolidge, Georgia |
|
Manufacturing-Administration and Showroom |
|
|
10,000 |
|
Lewisburg, Pennsylvania |
|
Manufacturing-Bedding Manufacturing |
|
|
25,000 |
|
Buford, Georgia |
|
Manufacturing-Bedding Manufacturing |
|
|
32,000 |
|
Sugarland, Texas |
|
Manufacturing-Bedding Manufacturing |
|
|
20,000 |
|
Orlando, Florida |
|
Manufacturing-Bedding Manufacturing |
|
|
16,000 |
|
Indianapolis, Indiana |
|
Manufacturing-Bedding Manufacturing |
|
|
24,000 |
|
Kansas City, Kansas |
|
Manufacturing-Bedding Manufacturing |
|
|
12,500 |
|
Phoenix, Arizona |
|
Manufacturing-Bedding Manufacturing |
|
|
24,000 |
|
Auburndale, Florida |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
125,000 |
|
Belcamp, Maryland |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
95,000 |
|
Obetz, Ohio |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
93,000 |
|
Prairie, Texas |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
89,000 |
|
Duluth, Georgia |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
120,000 |
|
Sugarland, Texas |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
137,000 |
|
Winston-Salem, North Carolina |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
83,000 |
|
Blythewood, South Carolina |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
75,000 |
|
LaVergne, Tennessee |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
140,000 |
|
Oklahoma City, Oklahoma |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
87,000 |
|
Phoenix, Arizona |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
112,000 |
|
Magnolia, Mississippi |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
125,000 |
|
Plainfield, Indiana |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
91,000 |
|
Portland, Oregon |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
98,000 |
|
Rancho Cucamonga, California |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
90,000 |
|
Westfield, Massachusetts |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
131,000 |
|
Kansas City, Kansas |
|
Sales & Lease Ownership-Fulfillment Center |
|
|
97,000 |
|
Our executive and administrative offices occupy approximately 36,000 square
feet in an 11-story, 87,000 square-foot office building that we own in Atlanta, Georgia. We lease
most of the remaining space to third parties under leases with remaining terms averaging three
years. We lease a two-story building with over 50,000 square feet in Kennesaw, Georgia and a
one-story building with over 44,000 square feet in Marietta, Georgia for additional administrative
functions. We believe that all of our facilities are well maintained and adequate for their
current and reasonably foreseeable uses.
19
|
|
|
| ITEM 3. |
|
LEGAL PROCEEDINGS |
From time to time, we are party to various legal proceedings arising in the ordinary course of
business. We do not presently believe that any of the legal proceedings to
which we are currently a party will ultimately have a material
adverse impact upon our business,
financial position or results of operations. We are currently a party to the proceeding described
below:
In Kunstmann et al v. Aaron Rents, Inc. originally filed with the United States District
Court, Northern District of Alabama (the “court”), on October 29, 2008, plaintiffs
alleged that the Company improperly classified store general managers as exempt from the overtime
provisions of the Fair Labor Standards Act. Plaintiffs seek to recover unpaid overtime
compensation and other damages for all similarly situated general managers nationwide for the
period January 25, 2007 to present. After initially denying plaintiffs’ class certification motion
in April 2009, the court ruled to conditionally certify a plaintiff class in early 2010. The
current class includes 237 individuals, which may decrease as discovery continues. The discovery
phase of the litigation will be completed by March 1, 2011. Those individuals who affirmatively
opt to join the class may be required to travel at their own expense to Alabama for discovery
purposes and/or trial. The court’s class certification ruling is procedural only and does not
address the merits of the plaintiffs’ claims.
We
believe we have meritorious defenses to the claims described above, and intend to
vigorously defend against the claim. However, this proceeding is still developing, and
due to inherent uncertainty in litigation and similar adversarial proceedings, there can be no
guarantee that we will ultimately be successful in this proceeding, or in others to which
we are currently a party. Substantial losses from legal proceedings could have a material adverse
impact upon our business, financial position and results of operations.
20
PART II
|
|
|
| ITEM 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES |
Market Information, Holders and Dividends
On December 7, 2010, at a special meeting of the shareholders of the Company, the shareholders
approved a proposal to amend and restate the Company’s Amended and Restated Articles of
Incorporation to: (i) reclassify each outstanding share of Common Stock, par value $0.50 per share
(the “Nonvoting Common Stock”) into one share of Class A Common Stock (the “Class A Common Stock”)
and to rename the Class A Common Stock as Common Stock (the “Common Stock”), (ii) eliminate certain
obsolete provisions relating to the Company’s prior dual-class common stock structure, and (iii)
amend the number of authorized shares to be 225,000,000 total shares of Common Stock (the aggregate
of the number of authorized shares of Nonvoting Common Stock and Class A Common Stock prior to the
approval of the Amended and Restated Articles of Incorporation). Following receipt of shareholder
approval at the special meeting, the Amended and Restated Articles of Incorporation were filed with
the Secretary of State of the State of Georgia and are now effective.
As a result of the reclassification of shares of Nonvoting Common Stock into shares of Class A
Common Stock and the other changes described above and effected by the Amended and Restated
Articles of Incorporation, shares of the combined class now titled Common Stock have one vote per
share on all matters submitted to the Company’s shareholders, including the election of directors.
The former Nonvoting Common Stock did not entitle the holders thereof to any vote except as
otherwise provided in the Company’s Articles of Incorporation or required by law. In addition,
holders of the combined class of Common Stock will all vote as a single class of stock on any
matters subject to a shareholder vote. Holders of the former Class A Common Stock and the Nonvoting
Common Stock were previously entitled to separate class voting rights in certain circumstances as
required by law, and those class voting rights were eliminated with the share reclassification.
The holders of the combined class of Common Stock are entitled to receive dividends and other
distributions in cash, stock or property of the Company as and when declared by the Board of
Directors of the Company out of legally available funds. Prior to the reclassification, the
Company’s Amended and Restated Articles of Incorporation permitted the payment of a cash dividend
on the Nonvoting Common Stock without paying any dividend on the Class A Common Stock or the
payment of a cash dividend on the Nonvoting Common Stock that was up to 50% higher than any
dividend paid on the Class A Common Stock. Cash dividends could not be paid on the Class A Common
Stock unless equal or higher dividends were paid on the Nonvoting Common Stock.
The conversion had no other impact on the economic equity interests of holders of Common
Stock, including with regards to liquidation rights or redemption, regardless of whether holders
previously held shares of Nonvoting Common Stock or Class A Common Stock.
Effective December 13, 2010, all shares of the Common Stock began trading as a single class on
the New York Stock Exchange under the ticker symbol “AAN.” As a result of the conversion, trading
of the Nonvoting Common Stock under the ticker symbol “AAN” was suspended before the opening of the
New York Stock Exchange on December 13, 2010. The CUSIP number of the Common Stock is the same as
the prior Class A Common Stock, 002535300.
The number of shareholders of record of the Company’s Common Stock at February 24, 2011 was
282. The closing price for the Common Stock at February 23, 2011 was $23.18.
21
The following table shows the range of high and low closing prices per share for the Nonvoting
Common Stock and Class A Common Stock (now known as the Common Stock) and the quarterly cash
dividends declared per share for the periods indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Cash |
|
| |
|
|
|
|
|
|
|
|
|
Dividends |
|
| Common Stock |
|
High |
|
|
Low |
|
|
Per Share |
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter (December 13, 2010 — December 31, 2010)(1) |
|
$ |
20.67 |
|
|
$ |
19.73 |
|
|
$ |
.013 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Cash |
|
| |
|
|
|
|
|
|
|
|
|
Dividends |
|
| Former Nonvoting Common Stock |
|
High |
|
|
Low |
|
|
Per Share |
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter(2) |
|
$ |
22.47 |
|
|
$ |
18.25 |
|
|
$ |
.012 |
|
Second Quarter(2) |
|
|
24.32 |
|
|
|
17.05 |
|
|
|
.012 |
|
Third Quarter |
|
|
18.62 |
|
|
|
16.16 |
|
|
|
.012 |
|
Fourth Quarter (October 1, 2010 — December 10, 2010)(1) |
|
|
22.53 |
|
|
|
16.92 |
|
|
|
NA |
|
| |
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter(2) |
|
$ |
18.67 |
|
|
$ |
13.91 |
|
|
$ |
.011 |
|
Second Quarter(2) |
|
|
23.47 |
|
|
|
17.17 |
|
|
|
.011 |
|
Third Quarter(2) |
|
|
21.35 |
|
|
|
16.55 |
|
|
|
.011 |
|
Fourth Quarter(2) |
|
|
19.68 |
|
|
|
16.40 |
|
|
|
.012 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Cash |
|
| |
|
|
|
|
|
|
|
|
|
Dividends |
|
| Former Class A Common Stock |
|
High |
|
|
Low |
|
|
Per Share |
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter(2) |
|
$ |
18.10 |
|
|
$ |
14.60 |
|
|
$ |
.012 |
|
Second Quarter(2) |
|
|
19.85 |
|
|
|
13.55 |
|
|
|
.012 |
|
Third Quarter |
|
|
18.40 |
|
|
|
13.00 |
|
|
|
.012 |
|
Fourth Quarter (October 1, 2010 — December 10, 2010)(1) |
|
|
21.03 |
|
|
|
16.81 |
|
|
|
NA |
|
| |
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter(2) |
|
$ |
15.60 |
|
|
$ |
10.50 |
|
|
$ |
.011 |
|
Second Quarter(2) |
|
|
20.30 |
|
|
|
14.83 |
|
|
|
.011 |
|
Third Quarter(2) |
|
|
16.73 |
|
|
|
13.38 |
|
|
|
.011 |
|
Fourth Quarter(2) |
|
|
15.77 |
|
|
|
9.56 |
|
|
|
.012 |
|
| |
|
|
| (1) |
|
Effective December 13, 2010 shares of the former Nonvoting Common Stock were converted
into shares of Class A Common Stock and the Class A Common Stock was renamed Common Stock. |
| |
| (2) |
|
Shares have been adjusted for the effect of the 3-for-2 partial stock split distributed
on April 15, 2010 and effective April 16, 2010. |
Subject to our ongoing ability to generate sufficient income, any future capital needs
and other contingencies, we expect to continue our policy of paying dividends. Under our revolving
credit agreement, we may pay cash dividends in any year only if the dividends do not exceed 50% of
our consolidated net earnings for the prior fiscal year plus the excess, if any, of the cash
dividend limitation applicable to the prior year over the dividend actually paid in the prior year.
22
Issuer Purchases of Equity Securities
The Company repurchased 1,478,805 shares of former Nonvoting Common Stock and no shares of Class A
Common Stock during 2010. As of December 31, 2010, 4,401,815 Common Stock shares remained
available for repurchase under the purchase authority approved by the Company’s Board of Directors
and publicly announced from time-to-time.
The following table provides information regarding our former Nonvoting Common Stock
repurchases under our publicly-announced purchase authority. All repurchases were made on the open
market.
Issuer Purchases of Equity Securities
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number (or |
|
| |
|
|
|
|
|
|
|
|
|
(c) Total Number |
|
|
Approximate |
|
| |
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Dollar Value) of |
|
| |
|
(a) Total Number |
|
|
|
|
|
|
Purchased as |
|
|
Shares that May |
|
| |
|
of Nonvoting |
|
|
|
|
|
|
Part of Publicly |
|
|
Yet Be Purchased |
|
| |
|
Common Stock |
|
|
(b) Average Price |
|
|
Announced Plans |
|
|
Under the Plans |
|
| Period |
|
Purchased |
|
|
Paid Per Share |
|
|
or Programs |
|
|
or Programs |
|
October 1 through October 31, 2010 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,401,815 |
|
November 1 through November 30, 2010 |
|
|
445,717 |
|
|
|
19.82 |
|
|
|
445,717 |
|
|
|
4,956,098 |
|
December 1 through December 31, 2010 |
|
|
554,283 |
|
|
|
20.07 |
|
|
|
554,283 |
|
|
|
4,401,815 |
|
QTD Total |
|
|
1,000,000 |
|
|
|
19.96 |
|
|
|
1,000,000 |
|
|
|
|
|
YTD Total |
|
|
1,478,805 |
|
|
|
18.97 |
|
|
|
1,478,805 |
|
|
|
|
|
Information concerning the Company’s equity compensation plans is set forth in Item 12 of
Part III of this Annual Report on Form 10-K.
23
|
|
|
| ITEM 6. |
|
SELECTED FINANCIAL DATA |
The following table sets forth certain selected consolidated financial data of Aaron’s, Inc. which
have been derived from the Consolidated Financial Statements of the Company for each of the five
years in the period ended December 31, 2010. Amounts have been restated to reflect the Aaron’s
Corporate Furnishings division as discontinued operations. See Note N to our Consolidated Financial
Statements in Item 8 of Part II for a discussion of the sale of our Aaron’s Corporate Furnishings
division. This historical information may not be indicative of the Company’s future performance.
The information set forth below should be read in conjunction with Management’s Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements
and the notes thereto.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
| (Dollar Amounts in Thousands, |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| Except Per Share Data) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
OPERATING RESULTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Revenues and Fees |
|
$ |
1,402,053 |
|
|
$ |
1,310,709 |
|
|
$ |
1,178,719 |
|
|
$ |
1,045,804 |
|
|
$ |
915,872 |
|
Retail Sales |
|
|
40,556 |
|
|
|
43,394 |
|
|
|
43,187 |
|
|
|
34,591 |
|
|
|
40,102 |
|
Non-Retail Sales |
|
|
362,273 |
|
|
|
327,999 |
|
|
|
309,326 |
|
|
|
261,584 |
|
|
|
224,489 |
|
Franchise Royalties and Fees |
|
|
59,112 |
|
|
|
52,941 |
|
|
|
45,025 |
|
|
|
38,803 |
|
|
|
33,626 |
|
Other |
|
|
12,853 |
|
|
|
17,744 |
|
|
|
16,351 |
|
|
|
14,157 |
|
|
|
14,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,876,847 |
|
|
|
1,752,787 |
|
|
|
1,592,608 |
|
|
|
1,394,939 |
|
|
|
1,228,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Cost of Sales |
|
|
23,013 |
|
|
|
25,730 |
|
|
|
26,379 |
|
|
|
21,201 |
|
|
|
25,207 |
|
Non-Retail Cost of Sales |
|
|
330,918 |
|
|
|
299,727 |
|
|
|
283,358 |
|
|
|
239,755 |
|
|
|
207,217 |
|
Operating Expenses |
|
|
824,929 |
|
|
|
771,634 |
|
|
|
705,566 |
|
|
|
617,106 |
|
|
|
525,980 |
|
Depreciation of Lease Merchandise |
|
|
504,105 |
|
|
|
474,958 |
|
|
|
429,907 |
|
|
|
391,538 |
|
|
|
349,218 |
|
Interest |
|
|
3,096 |
|
|
|
4,299 |
|
|
|
7,818 |
|
|
|
7,587 |
|
|
|
8,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,686,061 |
|
|
|
1,576,348 |
|
|
|
1,453,028 |
|
|
|
1,277,187 |
|
|
|
1,116,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings From Continuing Operations Before Income Taxes |
|
|
190,786 |
|
|
|
176,439 |
|
|
|
139,580 |
|
|
|
117,752 |
|
|
|
112,258 |
|
Income Taxes |
|
|
72,410 |
|
|
|
63,561 |
|
|
|
53,811 |
|
|
|
44,327 |
|
|
|
41,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings From Continuing Operations |
|
|
118,376 |
|
|
|
112,878 |
|
|
|
85,769 |
|
|
|
73,425 |
|
|
|
70,903 |
|
(Loss) Earnings From Discontinued Operations, Net of Tax |
|
|
— |
|
|
|
(277 |
) |
|
|
4,420 |
|
|
|
6,850 |
|
|
|
7,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings |
|
$ |
118,376 |
|
|
$ |
112,601 |
|
|
$ |
90,189 |
|
|
$ |
80,275 |
|
|
$ |
78,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share From Continuing Operations |
|
$ |
1.46 |
|
|
$ |
1.39 |
|
|
$ |
1.07 |
|
|
$ |
0.90 |
|
|
$ |
0.90 |
|
Earnings Per Share From Continuing Operations Assuming Dilution |
|
|
1.44 |
|
|
|
1.38 |
|
|
|
1.06 |
|
|
|
0.89 |
|
|
|
0.89 |
|
Earnings Per Share From Discontinued Operations |
|
|
.00 |
|
|
|
.00 |
|
|
|
.06 |
|
|
|
.08 |
|
|
|
.10 |
|
(Loss) Earnings Per Share From Discontinued Operations
Assuming Dilution |
|
|
.00 |
|
|
|
(.01 |
) |
|
|
.05 |
|
|
|
.08 |
|
|
|
.10 |
|
Dividends Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
.049 |
|
|
|
.046 |
|
|
|
.043 |
|
|
|
.041 |
|
|
|
.038 |
|
Class A Common Stock |
|
|
.049 |
|
|
|
.046 |
|
|
|
.043 |
|
|
|
.041 |
|
|
|
.038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL POSITION
(Dollar Amounts in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Merchandise, Net |
|
$ |
814,484 |
|
|
$ |
682,402 |
|
|
$ |
681,086 |
|
|
$ |
558,322 |
|
|
$ |
550,205 |
|
Property, Plant and Equipment, Net |
|
|
204,912 |
|
|
|
215,183 |
|
|
|
209,452 |
|
|
|
228,275 |
|
|
|
152,032 |
|
Total Assets |
|
|
1,502,072 |
|
|
|
1,321,456 |
|
|
|
1,233,270 |
|
|
|
1,113,176 |
|
|
|
979,606 |
|
Credit Facilities |
|
|
41,790 |
|
|
|
55,044 |
|
|
|
114,817 |
|
|
|
185,832 |
|
|
|
129,974 |
|
Shareholders’ Equity |
|
|
979,417 |
|
|
|
887,260 |
|
|
|
761,544 |
|
|
|
673,380 |
|
|
|
607,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT YEAR END |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores Open: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-Operated |
|
|
1,150 |
|
|
|
1,097 |
|
|
|
1,053 |
|
|
|
1,030 |
|
|
|
857 |
|
Franchised |
|
|
664 |
|
|
|
597 |
|
|
|
504 |
|
|
|
484 |
|
|
|
441 |
|
Lease Agreements in Effect |
|
|
1,325,000 |
|
|
|
1,171,000 |
|
|
|
1,017,000 |
|
|
|
820,000 |
|
|
|
734,000 |
|
Number of Employees |
|
|
10,400 |
|
|
|
10,000 |
|
|
|
9,600 |
|
|
|
9,100 |
|
|
|
7,900 |
|
Shares
have been adjusted for the effect of the 3-for-2 partial stock split
distributed on April 16, 2010.
24
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
Overview
Aaron’s, Inc. is a leading specialty retailer of consumer electronics, computers, residential
furniture, household appliances and accessories. Our major operating divisions are the Aaron’s
Sales & Lease Ownership Division and the Woodhaven Furniture Industries Division, which
manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in
our stores.
Aaron’s has demonstrated strong revenue growth over the last three years. Total revenues have
increased from $1.593 billion in 2008 to $1.877 billion in 2010, representing a compound annual
growth rate of 8.5%. Total revenues for the year ended December 31, 2010
increased $124.1 million, or 7.1%, over the prior year.
The majority of our growth comes from the opening of new sales and lease ownership stores and
increases in same store revenues from previously opened stores. We added a net of 67
company-operated sales and lease ownership stores in 2010. We spend on average approximately
$600,000 to $700,000 in the first year of operation of a new store, which includes purchases of
lease merchandise, investments in leasehold improvements and financing first year start-up costs.
Our new sales and lease ownership stores typically achieve revenues of approximately $1.1 million
in their third year of operation. Our comparable stores open more than three years normally
achieve approximately $1.4 million in unit revenues, which we believe represents a higher unit
revenue volume than the typical rent-to-own store. Most of our stores are cash flow positive in
the second year of operations following their opening.
We also use our franchise program to help us expand our sales and lease ownership concept more
quickly and into more areas than we otherwise would by opening only company-operated stores. Our
franchisees added a net of 67 stores in 2010. We purchased 12 franchised stores during 2010.
Franchise royalties and other related fees represent a growing source of high margin revenue for
us, accounting for $59.1 million of revenues in 2010, up from $45.0 million in 2008, representing a
compounded annual growth rate of 14.6%.
Aaron’s Office Furniture Closure. In November 2008, the Company completed the sale of
substantially all of the assets and the transfer of certain liabilities of its legacy residential
rent-to-rent business, Aaron’s Corporate Furnishings division, to CORT Business Services
Corporation. When the Company sold its rent-to-rent business, it decided to keep the then 13
Aaron’s Office Furniture stores, a rent-to-rent concept aimed at the office market. However, after
disappointing results in a difficult environment, in June 2010 the Company announced its plans to
close all of the then 12 remaining the Aaron’s Office Furniture stores and focus solely on the
Company’s Sales & Lease Ownership business. Since June 2010, the Company has closed 11 of its
Aaron’s Office Furniture stores and has one remaining store open to liquidate merchandise. As a
result, the Company recorded $9.0 million in 2010 related to the write-down and cost to dispose of
office furniture, estimated future lease liabilities for closed stores, write-off of leaseholds,
severance pay, and other costs associated with closing the stores and winding down the division. We
do not anticipate incurring significant charges in the future related to winding down of the
division.
Stock Split. On March 23, 2010, we announced a 3-for-2 stock split effected in the form of a 50%
stock dividend on both Nonvoting Common Stock and Class A Common Stock. New shares were
distributed on April 15, 2010 to shareholders of record as of the close of business on April 1,
2010. All share and per share information has been restated for all periods presented to reflect
this stock split.
Same Store Revenues. We believe the changes in same store revenues are a key performance
indicator. The change in same store revenues is calculated by comparing revenues for the year to
revenues for the prior year for all stores open for the entire 24-month period, excluding stores
that received lease agreements from other acquired, closed or merged stores.
25
Key Components of Income
In this management’s discussion and analysis section, we review the Company’s consolidated results
including the five components of our revenues, costs of sales and expenses, of which depreciation
of lease merchandise is a significant part.
Revenues. We separate our total revenues into five components: lease revenues and fees, retail
sales, non-retail sales, franchise royalties and fees, and other revenues. Lease revenues and fees
include all revenues derived from lease agreements from our stores, including agreements that
result in our customers acquiring ownership at the end of the term. Retail sales represent sales
of both new and lease return merchandise from our stores. Non-retail sales mainly represent new
merchandise sales to our sales and lease ownership division franchisees. Franchise royalties and
fees represent fees from the sale of franchise rights and royalty payments from franchisees, as
well as other related income from our franchised stores. Other revenues include, at times, income
from gains on asset dispositions and other miscellaneous revenues.
Cost of Sales. We separate our cost of sales into two components: retail and non-retail. Retail
cost of sales represents the original or depreciated cost of merchandise sold through our
company-operated stores. Non-retail cost of sales primarily represents the cost of merchandise
sold to our franchisees.
Operating Expenses. Operating expenses include personnel costs, selling costs, occupancy costs,
and delivery, among other expenses.
Depreciation of Lease Merchandise. Depreciation of lease merchandise reflects the expense
associated with depreciating merchandise held for lease and leased to customers by our stores.
Critical Accounting Policies
Revenue Recognition. Lease revenues are recognized in the month they are due on the accrual basis
of accounting. For internal management reporting purposes, lease revenues from the sales and lease
ownership division are recognized as revenue in the month the cash is collected. On a monthly
basis, we record an accrual for lease revenues due but not yet received, net of allowances, and a
deferral of revenue for lease payments received prior to the month due. Our revenue recognition
accounting policy matches the lease revenue with the corresponding costs, mainly depreciation,
associated with the lease merchandise. At December 31, 2010 and 2009, we had a revenue deferral
representing cash collected in advance of being due or otherwise earned totaling $39.5 million and
$37.4 million, respectively, and accrued revenue receivable, net of allowance for doubtful
accounts, based on historical collection rates of $4.9 million and $5.3 million, respectively.
Revenues from the sale of merchandise to franchisees are recognized at the time of receipt of the
merchandise by the franchisee and revenues from such sales to other customers are recognized at the
time of shipment.
Lease Merchandise. Our sales and lease ownership division depreciates merchandise over the
applicable agreement period, generally 12 to 24 months when leased, and 36 months when not leased,
to 0% salvage value. Our office furniture stores depreciate merchandise over its estimated useful
life, which ranges from 24 months to 48 months, net of salvage value, which ranges from 0% to 30%.
Sales and lease ownership merchandise is generally depreciated at a faster rate than our office
furniture merchandise. Our policies require weekly lease merchandise counts by store managers and
write-offs for unsalable, damaged, or missing merchandise inventories. Full physical inventories
are generally taken at our fulfillment and manufacturing facilities two to four times a year with
appropriate provisions made for missing, damaged and unsalable merchandise. In addition, we
monitor lease merchandise levels and mix by division, store and fulfillment center, as well as the
average age of merchandise on hand. If unsalable lease merchandise cannot be returned to vendors,
its carrying value is adjusted to net realizable value or written off. All lease merchandise is
available for lease and sale, excluding merchandise determined to be missing, damaged or unsalable.
We record lease merchandise carrying value adjustments on the allowance method, which estimates the
merchandise losses incurred but not yet identified by management as of the end of the accounting
period. Lease merchandise adjustments totaled $46.5 million, $38.3 million, and $34.5 million for
the years ended December 31, 2010, 2009, and 2008, respectively. The current year includes a write
down of $4.7 million related to the closure of the Aaron’s Office Furniture division.
26
Leases
and Closed Store Reserves. The majority of our Company-operated stores are operated from
leased facilities under operating lease agreements. The majority of these leases are for periods
that do not exceed five years. Leasehold improvements related to these leases are generally
amortized over periods that do not exceed the lesser of the lease term or five years. While a majority of our leases do not require escalating payments, for the leases
which do contain such provisions we record the related lease expense on a straight-line basis over
the lease term. We do not generally obtain significant amounts of lease incentives or
allowances from landlords.
From time to time, we close or consolidate stores. Our primary cost associated with closing or
consolidating stores is the future lease payments and related commitments. We record an estimate
of the future obligation related to closed or consolidated stores based upon the present value of
the future lease payments and related commitments, net of estimated sublease income which we base
upon historical experience. For the years ended December 31, 2010 and 2009, our reserve for closed
or consolidated stores was $6.4 million and $2.3 million,
respectively, and the increase was primarily the result of
the closure of the Aaron’s Office Furniture stores. If our estimates related to sublease income
are not correct, our actual liability may be more or less than the liability recorded at December
31, 2010.
Insurance Programs. Aaron’s maintains insurance contracts to fund workers compensation, vehicle
liability, general liability and group health insurance claims. Using actuarial analysis and
projections, we estimate the liabilities associated with open and incurred but not reported workers
compensation, vehicle liability and general liability claims. This analysis is based upon an
assessment of the likely outcome or historical experience, net of any stop loss or other
supplementary coverage. We also calculate the projected outstanding plan liability for our group
health insurance program using historical claims runoff data. Our gross liability for workers compensation insurance
claims, vehicle liability, general liability and group health insurance was $27.6 million and $22.5
million at December 31, 2010 and 2009, respectively. In addition, we have prefunding balances on
deposit with the insurance carriers of $23.8 million and $19.8 million at December 31, 2010 and
2009, respectively.
If we resolve insurance claims for amounts that are in excess of our current estimates and within
policy stop loss limits, we will be required to pay additional amounts beyond those accrued at
December 31, 2010. The assumptions and conditions described above reflect management’s best
assumptions and estimates, but these items involve inherent uncertainties as described above, which
may or may not be controllable by management. As a result, the accounting for such items could
result in different amounts if management used different assumptions or if different conditions
occur in future periods.
Income Taxes. The calculation of our income tax expense requires significant judgment and the use
of estimates. We periodically assess tax positions based on current tax developments, including
enacted statutory, judicial and regulatory guidance. In analyzing our overall tax position,
consideration is given to the amount and timing of recognizing income tax liabilities and benefits.
In applying the tax and accounting guidance to the facts and circumstances, income tax balances are
adjusted appropriately through the income tax provision. Reserves for income tax uncertainties are
maintained at levels we believe are adequate to absorb probable payments. Actual amounts paid, if
any, could differ significantly from these estimates.
We use the liability method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax
assets when we expect the amount of tax benefit to be realized is less than the carrying value of
the deferred tax asset.
27
Results of Operations
Year Ended December 31, 2010 Versus Year Ended December 31, 2009
The Aaron’s Corporate Furnishings division is reflected as a discontinued operation for all periods
presented. The following table shows key selected financial data for the years ended December 31,
2010 and 2009, and the changes in dollars and as a percentage to 2010 from 2009.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
% Increase/ |
|
| |
|
|
|
|
|
|
|
|
|
(Decrease) in |
|
|
(Decrease) to |
|
| |
|
Year Ended December 31, |
|
|
Dollars to 2010 |
|
|
2010 from |
|
| (In Thousands) |
|
2010 |
|
|
2009 |
|
|
from 2009 |
|
|
2009 |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Revenues and Fees |
|
$ |
1,402,053 |
|
|
$ |
1,310,709 |
|
|
$ |
91,344 |
|
|
|
7.0 |
% |
Retail Sales |
|
|
40,556 |
|
|
|
43,394 |
|
|
|
(2,838 |
) |
|
|
(6.5 |
) |
Non-Retail Sales |
|
|
362,273 |
|
|
|
327,999 |
|
|
|
34,274 |
|
|
|
10.4 |
|
Franchise Royalties and Fees |
|
|
59,112 |
|
|
|
52,941 |
|
|
|
6,171 |
|
|
|
11.7 |
|
Other |
|
|
12,853 |
|
|
|
17,744 |
|
|
|
(4,891 |
) |
|
|
(27.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,876,847 |
|
|
|
1,752,787 |
|
|
|
124,060 |
|
|
|
7.1 |
|
COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Cost of Sales |
|
|
23,013 |
|
|
|
25,730 |
|
|
|
(2,717 |
) |
|
|
(10.6 |
) |
Non-Retail Cost of Sales |
|
|
330,918 |
|
|
|
299,727 |
|
|
|
31,191 |
|
|
|
10.4 |
|
Operating Expenses |
|
|
824,929 |
|
|
|
771,634 |
|
|
|
53,295 |
|
|
|
6.9 |
|
Depreciation of Lease Merchandise |
|
|
504,105 |
|
|
|
474,958 |
|
|
|
29,147 |
|
|
|
6.1 |
|
Interest |
|
|
3,096 |
|
|
|
4,299 |
|
|
|
(1,203 |
) |
|
|
(28.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,686,061 |
|
|
|
1,576,348 |
|
|
|
109,713 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES |
|
|
190,786 |
|
|
|
176,439 |
|
|
|
14,347 |
|
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES |
|
|
72,410 |
|
|
|
63,561 |
|
|
|
8,849 |
|
|
|
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS FROM CONTINUING
OPERATIONS |
|
|
118,376 |
|
|
|
112,878 |
|
|
|
5,498 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) EARNINGS FROM DISCONTINUED
OPERATIONS, NET OF TAX |
|
|
— |
|
|
|
(277 |
) |
|
|
277 |
|
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS |
|
$ |
118,376 |
|
|
$ |
112,601 |
|
|
$ |
5,775 |
|
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The 7.1% increase in total revenues, to $1.877 billion in 2010 from $1.753 billion in 2009, was due
mainly to a $91.3 million, or 7.0%, increase in lease revenues and fees revenues, plus a $34.3
million, or 10.4%, increase in non-retail sales. The $91.3 million increase in lease revenues and
fees revenues was attributable to our sales and lease ownership division, which had a 4.4% increase
in same store revenues during the 24 month period ended December 31, 2010 and added a net 112
company-operated stores since the beginning of 2009.
The 6.5% decrease in revenues from retail sales, to $40.6 million in 2010 from $43.4 million in the
comparable period in 2009, was due to decreased demand and closure of the majority of the Aaron’s
Office Furniture stores in 2010.
28
The 10.4% increase in non-retail sales (which mainly represents merchandise sold to our
franchisees), to $362.3 million in 2010 from $328.0 million in 2009, was due to the growth of our
franchise operations and our distribution network. The total number of franchised sales and lease
ownership stores at December 31, 2010 was 664, reflecting a net addition of 160 stores since the
beginning of 2009.
The 11.7% increase in franchise royalties and fees, to $59.1 million in 2010 from $52.9 million in
2009, primarily reflects an increase in royalty income from franchisees, increasing 13.2% to $47.9
million in 2010 compared to $42.3 million in 2009. The increase is due primarily to the growth in
the number of franchised stores and same store growth in the revenues of existing franchised
stores.
Other revenues decreased 27.6% to $12.9 million in 2010 from $17.7 million in 2009. Included in
other revenues in 2010 is a $1.9 million gain from the sales of the assets of 11 stores. Included
in other revenues in 2009 is a $7.8 million gain on the sales of the assets of 39 stores.
Cost of Sales
Retail cost of sales decreased 10.6% to $23.0 million in 2010 compared to $25.7 million in 2009,
and as a percentage of retail sales, decreased to 56.7% in 2010 from 59.3% in 2009 primarily as a
result of decline in the volume of lower margin office furniture retail sales associated with the
closure of 14 Aaron’s Office Furniture stores.
Non-retail cost of sales increased 10.4%, to $330.9 million in 2010, from $299.7 million for the
comparable period in 2009, and as a percentage of non-retail sales, decreased slightly to 91.3% in
2010 from 91.4% in 2009.
Expenses
Operating expenses in 2010 increased $53.3 million to $824.9 million from $771.6 million in 2009, a
6.9% increase. As a percentage of total revenues, operating expenses were 44.0% for both the year
ended December 31, 2010, and 2009.
We began ceasing the operations of the Aaron’s Office Furniture division in June of 2010. We
closed 14 of its Aaron’s Office Furniture stores during 2010 and had one remaining store open to
liquidate merchandise. As a result, we recorded $3.3 million in closed store reserves, $4.7
million in lease merchandise write-downs and other miscellaneous expenses in 2010, totaling $9.0
million in operating expenses, related to the closures. In 2009 we recorded a $2.2 million pre-tax
charge to operating expenses relating to the write-down of certain lease merchandise and the
impairment of long-lived assets associated with Aaron’s Office Furniture stores.
Depreciation of lease merchandise increased $29.1 million to $504.1 million in 2010 from $475.0
million during the comparable period in 2009, a 6.1% increase. As a percentage of total lease
revenues and fees, depreciation of lease merchandise decreased slightly to 36.0% from 36.2% a year
ago.
Interest expense decreased to $3.1 million in 2010 compared with $4.3 million in 2009, a 28.0%
decrease. The decrease in interest expense was due to lower debt levels during 2010.
Income tax expense increased $8.8 million to $72.4 million in 2010, compared with $63.6 million in
2009, representing a 13.9% increase. Our effective tax rate increased to 38.0% in 2010 from 36.0%
in 2009 primarily related to the favorable impact of a $2.3 million reversal of previously recorded
liabilities for uncertain tax positions due to expiration of statute of limitations in 2009.
Net Earnings from Continuing Operations
Net earnings from continuing operations increased $5.5 million to $118.4 million in 2010 compared
with $112.9 million in 2009, representing a 4.9% increase. As a percentage of total revenues, net
earnings from continuing operations were 6.3% and 6.4% in 2010 and 2009, respectively. The
increase in net earnings from continuing operations was primarily the result of the maturing of new company-operated sales and lease ownership stores added over the
past several years, contributing to a 4.4% increase in same store revenues, and an 11.7% increase
in franchise royalties and fees.
29
Year Ended December 31, 2009 Versus Year Ended December 31, 2008
The Aaron’s Corporate Furnishings division is reflected as a discontinued operation for all periods
presented. The following table shows key selected financial data for the years ended December 31,
2009 and 2008, and the changes in dollars and as a percentage to 2009 from 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
(Decrease) in |
|
|
% Increase/ |
|
| |
|
Year Ended December 31, |
|
|
Dollars to 2009 |
|
|
(Decrease) to |
|
| (In Thousands) |
|
2009 |
|
|
2008 |
|
|
from 2008 |
|
|
2009 from 2008 |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Revenues and Fees |
|
$ |
1,310,709 |
|
|
$ |
1,178,719 |
|
|
$ |
131,990 |
|
|
|
11.2 |
% |
Retail Sales |
|
|
43,394 |
|
|
|
43,187 |
|
|
|
207 |
|
|
|
0.5 |
|
Non-Retail Sales |
|
|
327,999 |
|
|
|
309,326 |
|
|
|
18,673 |
|
|
|
6.0 |
|
Franchise Royalties and Fees |
|
|
52,941 |
|
|
|
45,025 |
|
|
|
7,916 |
|
|
|
17.6 |
|
Other |
|
|
17,744 |
|
|
|
16,351 |
|
|
|
1,393 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,752,787 |
|
|
|
1,592,608 |
|
|
|
160,179 |
|
|
|
10.1 |
|
COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Cost of Sales |
|
|
25,730 |
|
|
|
26,379 |
|
|
|
(649 |
) |
|
|
(2.5 |
) |
Non-Retail Cost of Sales |
|
|
299,727 |
|
|
|
283,358 |
|
|
|
16,369 |
|
|
|
5.8 |
|
Operating Expenses |
|
|
771,634 |
|
|
|
705,566 |
|
|
|
66,068 |
|
|
|
9.4 |
|
Depreciation of Lease Merchandise |
|
|
474,958 |
|
|
|
429,907 |
|
|
|
45,051 |
|
|
|
10.5 |
|
Interest |
|
|
4,299 |
|
|
|
7,818 |
|
|
|
(3,519 |
) |
|
|
(45.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,576,348 |
|
|
|
1,453,028 |
|
|
|
123,320 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES |
|
|
176,439 |
|
|
|
139,580 |
|
|
|
36,589 |
|
|
|
26.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES |
|
|
63,561 |
|
|
|
53,811 |
|
|
|
9,750 |
|
|
|
18.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS FROM CONTINUING
OPERATIONS |
|
|
112,878 |
|
|
|
85,769 |
|
|
|
27,109 |
|
|
|
31.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS FROM DISCONTINUED
OPERATIONS, NET OF TAX |
|
|
(277 |
) |
|
|
4,420 |
|
|
|
(4,697 |
) |
|
|
(106.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS |
|
$ |
112,601 |
|
|
$ |
90,189 |
|
|
$ |
22,412 |
|
|
|
24.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The 10.1% increase in total revenues, to $1.753 billion in 2009 from $1.593 billion in 2008, was
due mainly to a $132.0 million, or 11.2%, increase in lease revenues and fees, plus an $18.7
million, or 6.0%, increase in non-retail sales. The $132.0 million increase in lease revenues and
fees revenues was attributable to our sales and lease ownership division, which had a 8.1% increase
in same store revenues during the 24 month period ended December 31, 2009 and added a net 68
company-operated stores since the beginning of 2008.
The 6.0% increase in non-retail sales (which mainly represents merchandise sold to our
franchisees), to $328.0 million in 2009 from $309.3 million in 2008, was due to the growth of our
franchise operations and our distribution network. The total number of franchised sales and lease
ownership stores at December 31, 2009 was 597, reflecting a net addition of 113 stores since the
beginning of 2008.
The 17.6% increase in franchise royalties and fees, to $52.9 million in 2009 from $45.0 million in
2008, primarily reflects an increase in royalty income from franchisees, increasing 15.9% to $42.3
million in 2009 compared to $36.5 million in 2008. The increase is due primarily to the growth in
the number of franchised stores and same store growth in the revenues of existing stores.
30
Other revenues increased 8.5% to $17.7 million in 2009 from $16.4 million in 2008. Included in
other revenues in 2009 is a $7.8 million gain from the sales of the assets of 39 stores. Included
in other revenues in 2008 is an $8.5 million gain on the sales of the assets of 41 stores.
Cost of Sales
Cost of sales from retail sales decreased 2.5% to $25.7 million in 2009 compared to $26.4 million
in 2008, with retail cost of sales as a percentage of retail sales decreasing to 59.3% from
61.1% in 2008 as a result of improved pricing and lower product cost.
Cost of sales from non-retail sales increased 5.8%, to $299.7 million in 2009 from $283.4 million
in 2008, and as a percentage of non-retail sales, was consistent at 91.4% in 2009 and 91.6% in
2008.
Expenses
Operating expenses in 2009 increased $66.1 million to $771.6 million from $705.6 million in 2008, a
9.4% increase. As a percentage of total revenues, operating expenses were 44.0% for the year ended
December 31, 2009, and 44.3% for the comparable period in 2008.
Depreciation of lease merchandise increased $45.1 million to $475.0 million in 2009 from $429.9
million during the comparable period in 2008, a 10.5% increase. As a percentage of total lease
revenues and fees, depreciation of lease merchandise decreased to 36.2% from 36.5% a year ago,
primarily due to product mix and lower product cost from favorable purchasing trends.
Interest expense decreased to $4.3 million in 2009 compared with $7.8 million in 2008, a 45.0%
decrease. The decrease in interest expense was due to lower debt levels during 2009.
Income tax expense increased $9.8 million to $63.6 million in 2009, compared with $53.8 million in
2008, representing an 18.1% increase. Our effective tax rate decreased to 36.0% in 2009 from 38.6%
in 2008 primarily related to the favorable impact of a $2.3 million reversal of previously recorded
liabilities for uncertain tax positions due to expiration of statute of limitations.
Net Earnings from Continuing Operations
Net earnings from continuing operations increased $27.1 million to $112.9 million in 2009 compared
with $85.8 million in 2008, representing a 31.6% increase. As a percentage of total revenues, net
earnings from continuing operations were 6.4% and 5.4% in 2009 and 2008, respectively. The
increase in net earnings from continuing operations was primarily the result of the maturing of new
company-operated sales and lease ownership stores added over the past several years, contributing
to an 8.1% increase in same store revenues, and a 17.6% increase in franchise royalties and fees.
Discontinued Operations
Loss from discontinued operations (which represents the loss from the former Aaron’s Corporate
Furnishings division), net of tax, was $277,000 in 2009, compared to net earnings of $4.4 million
in 2008. Included in the 2008 results is a $1.2 million pre-tax gain on the sale of substantially
all of the assets of the Aaron’s Corporate Furnishings division to CORT Business Services
Corporation in the fourth quarter of 2008.
Balance Sheet
Cash and Cash Equivalents. The Company’s cash balance decreased to $72.0 million at December 31,
2010 from $109.7 million at December 31, 2009. The decrease in our cash balance is due to cash
flow generated from operations, less cash used by investing and financing activities of $37.7 million. For additional information,
refer to the “Liquidity and Capital Resources” section below.
Lease Merchandise, Net. The increase of $132.1 million in lease merchandise, net of accumulated
depreciation, to $814.5 million at December 31, 2010 from $682.4 million at December 31, 2009, is
primarily the result of continued revenue growth of new and existing company-operated stores,
partially offset by lower product costs.
31
Property, Plant and Equipment, Net. The decrease of $10.3 million in property, plant and
equipment, net of accumulated depreciation, to $204.9 million at December 31, 2010 from $215.2
million at December 31, 2009, is primarily the result of sale-leaseback transactions completed
since December 31, 2009. In addition the Company recorded an impairment charge of $3.0 million in
2009 related to various properties and land parcels which have been reclassified as held for
sale in all periods presented.
Goodwill, Net. The $8.0 million increase in goodwill, to $202.4 million on December 31, 2010 from
$194.4 million on December 31, 2009, is the result of a series of acquisitions of sales and lease
ownership businesses. During 2010, the Company acquired a total of 30 stores. The aggregate
purchase price for these asset acquisitions totaled $17.9 million, with the principal tangible
assets acquired consisting of lease merchandise and certain fixtures and equipment.
Prepaid Expenses and Other Assets. Prepaid expenses and other assets increased $86.9 million
to $122.9 million at December 31, 2010 from $36.1 million at December 31, 2009, primarily as a
result of an increase in prepaid income taxes.
Accounts Payable and Accrued Expenses. The increase of $35.9 million in accounts payable and
accrued expenses, to $213.1 million at December 31, 2010 from $177.3 million at December 31, 2009,
is primarily the result of fluctuations in the timing of payments and greater purchases of lease
merchandise.
Deferred Income Taxes Payable. The increase of $63.8 million in deferred income taxes payable to
$227.5 million at December 31, 2010 from $163.7 million at December 31, 2009 is primarily the
result of bonus lease merchandise depreciation deductions for tax purposes included in the Small
Business Jobs Act of 2010 and the Tax Relief, Unemployment Insurance Reauthorization, and Job
Creation Act of 2010.
Credit Facilities. The $13.3 million decrease in the amounts we owe under our credit facilities to
$41.8 million on December 31, 2010 from $55.0 million on December 31, 2009, primarily reflects net
payments in 2010 on our senior unsecured notes.
Liquidity and Capital Resources
General
Cash flows from continuing operations for the year ended December 31, 2010 and 2009 were $49.3
million and $193.7 million, respectively. The decrease in cash flows from operating activities is
primarily related to higher 2010 tax payments and greater purchases of lease merchandise.
Purchases of sales and lease ownership stores had a positive impact on operating cash flows in each
period presented. The positive impact on operating cash flows from purchasing stores occurs as the
result of lease merchandise, other assets and intangibles acquired in these purchases being treated
as an investing cash outflow. As such, the operating cash flows attributable to the newly
purchased stores usually have an initial positive effect on operating cash flows that may not be
indicative of the extent of their contributions in future periods. The amount of lease merchandise
purchased in acquisitions and shown under investing activities was $6.5 million in 2010, $9.5
million in 2009 and $28.5 million in 2008. Sales of sales and lease ownership stores are an
additional source of investing cash flows in each period presented. Proceeds from such sales were
$8.0 million in 2010, $32.0 million in 2009 and $22.7 million in 2008. The amount of lease
merchandise sold in these sales and shown under investing activities was $4.5 million in 2010,
$16.3 million in 2009 and $11.7 million in 2008. In addition, in 2008 the proceeds from the sale
of the Aaron’s Corporate Furnishings division shown under investing activities were $76.4 million.
Our cash flows include profits on the sale of lease return merchandise. Our primary capital
requirements consist of buying lease merchandise for sales and lease ownership stores. As we
continue to grow, the need for additional lease merchandise will remain our major capital
requirement. Other capital requirements include purchases of property, plant and equipment and
expenditures for acquisitions. These capital requirements historically have been financed through:
| |
• |
|
cash flow from operations; |
| |
• |
|
trade credit with vendors; |
| |
• |
|
proceeds from the sale of lease return merchandise; |
| |
• |
|
private debt offerings; and |
32
At December 31, 2010, there was no outstanding balance under our revolving credit agreement. The
credit facilities balance decreased by $13.3 million in 2010 primarily as a result of net payments
made on our senior unsecured notes during the period. Our revolving credit facility expires May
23, 2013 and the total available credit on the facility is $140.0 million.
We have $24.0 million currently outstanding in aggregate principal amount of 5.03% senior unsecured
notes due July 2012, principal repayments of which were made in 2008, 2009 and 2010, and are due in
equal $12.0 million annual installments until maturity.
Our revolving credit agreement and senior unsecured notes, and our franchisee loan program
discussed below, contain certain financial covenants. These covenants include requirements that we
maintain ratios of: (1) EBITDA plus lease expense to fixed charges of no less than 2:1; (2) total
debt to EBITDA of no greater than 3:1; and (3) total debt to total capitalization of no greater
than 0.6:1. “EBITDA” in each case, means consolidated net income before interest and tax expense,
depreciation (other than lease merchandise depreciation) and amortization expense, and other
non-cash charges. The Company is also required to maintain a minimum amount of shareholders’
equity. See the full text of the covenants themselves in our credit and guarantee agreements,
which we have filed as exhibits to our Securities and Exchange Commission reports, for the details
of these covenants and other terms. If we fail to comply with these covenants, we will be in
default under these agreements, and all amounts would become due immediately. We were in
compliance with all of these covenants at December 31, 2010 and believe that we will continue to be
in compliance in the future.
We purchase our stock in the market from time to time as authorized by our board of directors. We
repurchased 1,478,805 shares of Nonvoting Common Stock and no shares of Class A Common Stock during
2010 and have authority to purchase 4,401,815 additional shares. We
repurchased $28.0 million of our stock in 2010.
We have a consistent history of paying dividends, having paid dividends for 23 consecutive years.
A $.0113 per share dividend on Nonvoting Common Stock and Class A Common Stock was paid in January
2009, April 2009, July 2009, and October 2009. Our board of directors increased the dividend 6.2%
for the fourth quarter of 2009 on November 4, 2009 to $.012 per share and was paid in December
2009. A $.012 per share dividend on Nonvoting Common Stock and Class A Common Stock was paid in
April 2010, July 2010 and November 2010. Our board of directors increased the dividend 8.3% for
the fourth quarter of 2010 to $.013 per share and the fourth quarter dividend was paid in January
2011. Subject to sufficient operating profits, any future capital needs and other contingencies,
we currently expect to continue our policy of paying dividends.
If we achieve our expected level of growth in our operations, we anticipate we will supplement our
expected cash flows from operations, existing credit facilities, vendor credit and proceeds from
the sale of lease return merchandise by expanding our existing credit facilities, by securing
additional debt financing, or by seeking other sources of capital to ensure we will be able to fund
our capital and liquidity needs for at least the next 24 months. We believe we can secure these
additional sources of capital in the ordinary course of business. However, if the credit and
capital markets experience disruptions like those that began in the second half of 2008, we may not
be able to obtain access to capital at as favorable costs as we have historically been able to, and
some forms of capital may not be available at all.
Commitments
Income Taxes. During the twelve months ended
December 31, 2010, we made $94.8 million in income
tax payments. Within the next twelve months, we anticipate that we will make cash payments for
state income taxes of approximately $9.0 million. The Small Business Jobs Act of 2010 was enacted
after we paid our third quarter estimated federal tax. In December, the Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010 was enacted. As a result of the bonus
depreciation provisions in these acts we have paid more than our anticipated 2010 federal tax
liability. We filed for a refund of overpaid federal tax of approximately $81.0 million in January
2011 and received that refund in February 2011.
33
The Economic Stimulus Act of 2008, the American Recovery and Reinvestment Act of 2009, and the
Small Business Jobs Act of 2010 provided for accelerated depreciation by allowing a bonus
first-year depreciation deduction of 50% of the adjusted basis of qualified property, such as our
lease merchandise, placed in service during those years. The Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 allowed for deduction of 100% of the adjusted basis
of qualified property for assets placed in service after September 8, 2010 and before December 31,
2011. Accordingly, our cash flow benefited from having a lower cash tax obligation which, in turn,
provided additional cash flow from operations. Because of our sales and lease ownership model
where Aaron’s remains the owner of merchandise on lease, we benefit more from bonus depreciation,
relatively, than traditional furniture, electronics and appliance retailers. In future years we
anticipate having to make increased tax payments on our earnings as a result of expected
profitability and the reversal of the accelerated depreciation deductions that were taken in 2010
and prior periods. We estimate that at December 31, 2010 the remaining tax deferral associated
with the acts described above is approximately $150.0 million,
of which approximately 76% will
reverse in 2011 and most of the remainder will reverse between 2012
and 2013.
Leases. We lease warehouse and retail store space for most of our operations under operating
leases expiring at various times through 2028. Most of the leases contain renewal options for
additional periods ranging from one to 15 years or provide for options to purchase the related
property at predetermined purchase prices that do not represent bargain purchase options. We also
lease transportation and computer equipment under operating leases expiring during the next five
years. We expect that most leases will be renewed or replaced by other leases in the normal course
of business. Approximate future minimum rental payments required under operating leases that have
initial or remaining non-cancelable terms in excess of one year as of December 31, 2010, are shown
in the below table under “Contractual Obligations and Commitments.”
We have 20 capital leases, 19 of which are with a limited liability company (“LLC”) whose managers
and owners are 11 officers of the company of which there are eight executive officers, with no
individual, owning more than 13.33% of the LLC. Nine of these related party leases relate to
properties purchased from us in October and November of 2004 by the LLC for a total purchase price
of $6.8 million. The LLC is leasing back these properties to us for a 15-year term, with a
five-year renewal at our option, at an aggregate annual lease amount of $716,000. Another ten of
these related party leases relate to properties purchased from us in December 2002 by the LLC for a
total purchase price of approximately $5.0 million. The LLC is leasing back these properties to us
for a 15-year term at an aggregate annual lease of $556,000. We do not currently plan to enter
into any similar related party lease transactions in the future.
We finance a portion of our store expansion through sale-leaseback transactions. The properties are
generally sold at net book value and the resulting leases qualify and are accounted for as
operating leases. We do not have any retained or contingent interests in the stores nor do we
provide any guarantees, other than a corporate level guarantee of lease payments, in connection
with the sale-leasebacks. The operating leases that resulted from these transactions are included
in the table below.
Franchise Loan Guaranty. We have guaranteed the borrowings of certain independent franchisees
under a franchise loan program with several banks and we also guarantee franchisee borrowings under
certain other debt facilities. The guaranty was amended on June 18, 2010 to increase the maximum
commitment amount under the facility from $175.0 million to $200.0 million, provide for the ability
to extend loans to franchisees that operate stores located in Canada (other than in the Province of
Quebec), increase the maximum available amount of swing loans from $20.0 million to $25.0 million,
reduce our interest obligations with respect to franchisees that operate stores located in the U.S.
and establish our interest obligations with respect to franchisees that operate stores located in
Canada. At December 31, 2010, the portion that we might be obligated to repay in the event
franchisees defaulted was $121.0 million. Of this amount, approximately $108.3 million represents
franchise borrowings outstanding under the franchisee loan program and approximately $12.7 million
represents franchisee borrowings that we guarantee under other debt facilities. However, due to
franchisee borrowing limits, we believe any losses associated with any defaults would be mitigated through recovery of lease merchandise and other assets. Since its inception in 1994, we have had
no significant losses associated with the franchise loan and guaranty program. We believe the
likelihood of any significant amounts being funded in connection with these commitments to be
remote. We receive guarantee fees based on such franchisees’ outstanding debt obligations, which
it recognizes as the guarantee obligation is satisfied.
34
We have no long-term commitments to purchase merchandise. See Note F to the Consolidated
Financial Statements for further information. The following table shows our approximate
contractual obligations, including interest, and commitments to make future payments as of December
31, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contractual Obligations and Commitments |
|
|
|
|
|
Period Less |
|
|
Period 1-3 |
|
|
Period 3-5 |
|
|
Period Over |
|
| (In Thousands) |
|
Total |
|
|
Than 1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facilities, Excluding Capital Leases |
|
$ |
27,303 |
|
|
$ |
12,002 |
|
|
$ |
12,000 |
|
|
$ |
3,301 |
|
|
$ |
— |
|
Capital Leases |
|
|
14,487 |
|
|
|
1,337 |
|
|
|
2,708 |
|
|
|
3,287 |
|
|
|
7,155 |
|
Operating Leases |
|
|
537,918 |
|
|
|
96,305 |
|
|
|
151,784 |
|
|
|
98,324 |
|
|
|
191,505 |
|
Purchase Obligations |
|
|
47,542 |
|
|
|
31,619 |
|
|
|
15,728 |
|
|
|
195 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations |
|
$ |
627,250 |
|
|
$ |
141,263 |
|
|
$ |
182,220 |
|
|
$ |
105,107 |
|
|
$ |
198,660 |
|
The following table shows the Company’s approximate commercial commitments as of December 31, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amounts |
|
|
Period Less |
|
|
Period 1-3 |
|
|
Period 3-5 |
|
|
Period Over |
|
| (In Thousands) |
|
Committed |
|
|
Than 1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed Borrowings of Franchisees |
|
$ |
121,014 |
|
|
$ |
119,937 |
|
|
$ |
1,077 |
|
|
$ |
— |
|
|
$ |
— |
|
Purchase obligations are primarily related to certain advertising and marketing programs. Purchase
orders or contracts for the purchase of lease merchandise and other goods and services are not
included in the tables above. We are not able to determine the aggregate amount of such purchase
orders that represent contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. Our purchase orders are based on our current distribution
needs and are fulfilled by our vendors within short time horizons. We do not have significant
agreements for the purchase of lease merchandise or other goods specifying minimum quantities or
set prices that exceed our expected requirements for three months.
Deferred
income tax liabilities as of December 31, 2010 were
approximately $227.5 million. This
amount is not included in the total contractual obligations table because we believe this
presentation would not be meaningful. Deferred income tax liabilities are calculated based on
temporary differences between the tax basis of assets and liabilities and their respective book
basis, which will result in taxable amounts in future years when the liabilities are settled at
their reported financial statement amounts. The results of these calculations do not have a direct
connection with the amount of cash taxes to be paid in any future periods. As a result, scheduling
deferred income tax liabilities as payments due by period could be misleading, because this
scheduling would not relate to liquidity needs.
Recent Accounting Pronouncements
We are not aware of any recent accounting pronouncements that will materially impact the Company’s
consolidated financial statements in future periods.
35
|
|
|
| ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As of December 31, 2010, we had $24.0 million of senior unsecured notes outstanding at a fixed rate
of 5.03%. We had no balance outstanding under our revolving credit agreement indexed to the LIBOR
(“London Interbank Offer Rate”) or the prime rate, which exposes us to the risk of increased
interest costs if interest rates rise. Based on our overall interest rate exposure at December 31,
2010, a hypothetical 1.0% increase or decrease in interest rates would not be material.
We do not use any significant market risk sensitive instruments to hedge commodity, foreign currency, or other
risks, and hold no market risk sensitive instruments for trading or speculative purposes.
36
|
|
|
| ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
The Board of Directors of Aaron’s, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Aaron’s, Inc. and subsidiaries as
of December 31, 2010 and 2009, and the related consolidated statements of earnings, shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2010. 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 the standards of the Public Company Accounting Oversight
Board (United States). 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 statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Aaron’s, Inc. and subsidiaries at December 31,
2010 and 2009, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2010, 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), Aaron’s, Inc. and subsidiaries’ internal control over financial reporting as
of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 25, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 25, 2011
37
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
The Board of Directors of Aaron’s, Inc. and subsidiaries
We have audited Aaron’s, Inc. and subsidiaries’ internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Aaron’s, Inc. and subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Aaron’s, Inc. and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Aaron’s, Inc. and subsidiaries as of
December 31, 2010 and 2009 and the related consolidated statements of earnings, shareholders’
equity and cash flows for each of the three years in the period ended December 31, 2010 of Aaron’s,
Inc. and subsidiaries and our report dated February 25, 2011 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 25, 2011
38
Management Report on Internal Control over Financial Reporting
Management of Aaron’s, Inc. and subsidiaries (the “Company”) is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate. Internal control over financial
reporting cannot provide absolute assurance of achieving financial reporting objectives because of
its inherent limitations. Internal control over financial reporting is a process that involves
human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the financial reporting
process. Therefore, it 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, 2010. In making this assessment, the Company’s management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
Based on its assessment, management believes that, as of December 31, 2010, the Company’s internal
control over financial reporting was effective based on those criteria.
The Company’s internal control over financial reporting as of December 31, 2010 has been audited by
Ernst & Young LLP, an independent registered public accounting firm, as stated in their report
dated February 25, 2011, which expresses an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2010.
39
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
(In Thousands, Except Share Data) |
|
ASSETS: |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
72,022 |
|
|
$ |
109,685 |
|
Accounts Receivable (net of allowances of $4,544 in 2010 and $4,157 in 2009) |
|
|
69,662 |
|
|
|
66,095 |
|
Lease Merchandise |
|
|
1,280,457 |
|
|
|
1,122,954 |
|
Less: Accumulated Depreciation |
|
|
(465,973 |
) |
|
|
(440,552 |
) |
|
|
|
|
|
|
|
|
|
|
814,484 |
|
|
|
682,402 |
|
Property, Plant and Equipment, Net |
|
|
204,912 |
|
|
|
215,183 |
|
Goodwill, Net |
|
|
202,379 |
|
|
|
194,376 |
|
Other Intangibles, Net |
|
|
3,832 |
|
|
|
5,200 |
|
Prepaid Expenses and Other Assets |
|
|
122,932 |
|
|
|
36,082 |
|
Assets Held for Sale |
|
|
11,849 |
|
|
|
12,433 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,502,072 |
|
|
$ |
1,321,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & SHAREHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
Accounts Payable and Accrued Expenses |
|
$ |
213,139 |
|
|
$ |
177,284 |
|
Deferred Income Taxes Payable |
|
|
227,513 |
|
|
|
163,670 |
|
Customer Deposits and Advance Payments |
|
|
40,213 |
|
|
|
38,198 |
|
Credit Facilities |
|
|
41,790 |
|
|
|
55,044 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
522,655 |
|
|
|
434,196 |
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity: |
|
|
|
|
|
|
|
|
Common Stock, Par Value $.50 Per Share; Authorized: 225,000,000 and
125,000,000 Shares at December 31, 2010 and 2009, respectively; Shares
Issued: 90,752,123 at December 31, 2010 and 2009, respectively |
|
|
45,376 |
|
|
|
45,378 |
|
Additional Paid-in Capital |
|
|
201,752 |
|
|
|
196,669 |
|
Retained Earnings |
|
|
809,084 |
|
|
|
694,689 |
|
Accumulated Other Comprehensive Income (Loss) |
|
|
846 |
|
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
1,057,058 |
|
|
|
936,635 |
|
|
|
|
|
|
|
|
|
|
Less: Treasury Shares at Cost, |
|
|
|
|
|
|
|
|
Common Stock, 10,664,728 and 9,397,997 Shares at December 31, 2010 and
2009, respectively |
|
|
(77,641 |
) |
|
|
(49,375 |
) |
|
|
|
|
|
|
|
Total Shareholders’ Equity |
|
|
979,417 |
|
|
|
887,260 |
|
|
|
|
|
|
|
|
Total Liabilities & Shareholders’ Equity |
|
$ |
1,502,072 |
|
|
$ |
1,321,456 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
40
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
| |
|
(In Thousands, Except Per Share) |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Lease Revenues and Fees |
|
$ |
1,402,053 |
|
|
$ |
1,310,709 |
|
|
$ |
1,178,719 |
|
Retail Sales |
|
|
40,556 |
|
|
|
43,394 |
|
|
|
43,187 |
|
Non-Retail Sales |
|
|
362,273 |
|
|
|
327,999 |
|
|
|
309,326 |
|
Franchise Royalties and Fees |
|
|
59,112 |
|
|
|
52,941 |
|
|
|
45,025 |
|
Other |
|
|
12,853 |
|
|
|
17,744 |
|
|
|
16,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,876,847 |
|
|
|
1,752,787 |
|
|
|
1,592,608 |
|
COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Retail Cost of Sales |
|
|
23,013 |
|
|
|
25,730 |
|
|
|
26,379 |
|
Non-Retail Cost of Sales |
|
|
330,918 |
|
|
|
299,727 |
|
|
|
283,358 |
|
Operating Expenses |
|
|
824,929 |
|
|
|
771,634 |
|
|
|
705,566 |
|
Depreciation of Lease Merchandise |
|
|
504,105 |
|
|
|
474,958 |
|
|
|
429,907 |
|
Interest |
|
|
3,096 |
|
|
|
4,299 |
|
|
|
7,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,686,061 |
|
|
|
1,576,348 |
|
|
|
1,453,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES |
|
|
190,786 |
|
|
|
176,439 |
|
|
|
139,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES |
|
|
72,410 |
|
|
|
63,561 |
|
|
|
53,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS FROM CONTINUING
OPERATIONS |
|
|
118,376 |
|
|
|
112,878 |
|
|
|
85,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) EARNINGS FROM DISCONTINUED
OPERATIONS, NET OF TAX |
|
|
— |
|
|
|
(277 |
) |
|
|
4,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS |
|
$ |
118,376 |
|
|
$ |
112,601 |
|
|
$ |
90,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE FROM
CONTINUING OPERATIONS |
|
$ |
1.46 |
|
|
$ |
1.39 |
|
|
$ |
1.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE FROM CONTINUING
OPERATIONS ASSUMING DILUTION |
|
$ |
1.44 |
|
|
$ |
1.38 |
|
|
$ |
1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE FROM
DISCONTINUED OPERATIONS |
|
$ |
.00 |
|
|
$ |
.00 |
|
|
$ |
.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) EARNINGS PER SHARE FROM
DISCONTINUED OPERATIONS ASSUMING
DILUTION |
|
$ |
.00 |
|
|
$ |
(.01 |
) |
|
$ |
.05 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
41
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (Loss) Income |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
| |
|
Treasury Stock |
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Currency |
|
|
Marketable |
|
| (In Thousands, Except Per Share) |
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Income |
|
|
Translation |
|
|
Securities |
|
Balance, January 1, 2008 |
|
|
(10,344 |
) |
|
$ |
(44,474 |
) |
|
$ |
45,378 |
|
|
$ |
173,449 |
|
|
$ |
499,109 |
|
|
|
|
|
|
$ |
6 |
|
|
$ |
(88 |
) |
Dividends, $.043 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,471 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissued Shares |
|
|
646 |
|
|
|
4,598 |
|
|
|
|
|
|
|
3,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchased Shares |
|
|
(582 |
) |
|
|
(7,529 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings From Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,769 |
|
|
$ |
85,769 |
|
|
|
|
|
|
|
|
|
Net Earnings From Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,420 |
|
|
|
4,420 |
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,365 |
) |
|
|
(1,365 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
(10,280 |
) |
|
|
(47,405 |
) |
|
|
45,378 |
|
|
|
179,191 |
|
|
|
585,827 |
|
|
|
|
|
|
|
(1,359 |
) |
|
|
(88 |
) |
Dividends, $.046 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,739 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of Common Stock for Class A Common Stock |
|
|
(144 |
) |
|
|
(9,073 |
) |
|
|
|
|
|
|
9,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissued Shares |
|
|
1,026 |
|
|
|
7,103 |
|
|
|
|
|
|
|
4,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings From Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,878 |
|
|
|
112,878 |
|
|
|
|
|
|
|
|
|
Loss From Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(277 |
) |
|
|
(277 |
) |
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,346 |
|
|
|
1,346 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
|
(9,398 |
) |
|
|
(49,375 |
) |
|
|
45,378 |
|
|
|
196,669 |
|
|
|
694,689 |
|
|
|
|
|
|
|
(13 |
) |
|
|
(88 |
) |
Dividends, $.049 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissued Shares |
|
|
212 |
|
|
|
743 |
|
|
|
|
|
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchased Shares |
|
|
(1,479 |
) |
|
|
(29,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Recombination |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,376 |
|
|
|
118,376 |
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation Adjustment, net of Income Taxes of $356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
947 |
|
|
|
591 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
119,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 |
|
|
(10,665 |
) |
|
$ |
(77,641 |
) |
|
$ |
45,376 |
|
|
$ |
201,752 |
|
|
$ |
809,084 |
|
|
|
|
|
|
$ |
578 |
|
|
$ |
(88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
42
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
| |
|
(In Thousands) |
|
CONTINUING OPERATIONS: |
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
70,703 |
|
Net Earnings from Continuing Operations |
|
$ |
118,376 |
|
|
$ |
112,878 |
|
|
$ |
85,769 |
|
Depreciation of Lease Merchandise |
|
|
504,105 |
|
|
|
474,958 |
|
|
|
429,907 |
|
Other Depreciation and Amortization |
|
|
45,427 |
|
|
|
44,413 |
|
|
|
41,486 |
|
Additions to Lease Merchandise |
|
|
(1,034,474 |
) |
|
|
(847,094 |
) |
|
|
(865,881 |
) |
Book Value of Lease Merchandise Sold or Disposed |
|
|
400,304 |
|
|
|
363,975 |
|
|
|
330,032 |
|
Change in Deferred Income Taxes |
|
|
63,843 |
|
|
|
15,032 |
|
|
|
66,345 |
|
Loss on Sale of Property, Plant, and Equipment |
|
|
2,441 |
|
|
|
1,136 |
|
|
|
1,725 |
|
Gain on Asset Dispositions |
|
|
(1,917 |
) |
|
|
(7,826 |
) |
|
|
(8,490 |
) |
Change in Income Tax Receivable |
|
|
(82,378 |
) |
|
|
28,443 |
|
|
|
(28,443 |
) |
Change in Accounts Payable and Accrued Expenses |
|
|
35,321 |
|
|
|
2,014 |
|
|
|
35,384 |
|
Change in Accounts Receivable |
|
|
(3,567 |
) |
|
|
(6,582 |
) |
|
|
(13,219 |
) |
Excess Tax Benefits From Stock-Based Compensation |
|
|
(321 |
) |
|
|
(3,909 |
) |
|
|
(1,767 |
) |
Change in Other Assets |
|
|
(4,943 |
) |
|
|
3,356 |
|
|
|
(941 |
) |
Change in Customer Deposits |
|
|
2,015 |
|
|
|
4,763 |
|
|
|
4,845 |
|
Stock-Based Compensation |
|
|
4,759 |
|
|
|
3,696 |
|
|
|
1,421 |
|
Other Changes, Net |
|
|
270 |
|
|
|
4,441 |
|
|
|
1,078 |
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by Operating Activities |
|
|
49,261 |
|
|
|
193,694 |
|
|
|
79,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to Property, Plant and Equipment |
|
|
(87,636 |
) |
|
|
(83,140 |
) |
|
|
(74,924 |
) |
Acquisitions of Businesses and Contracts |
|
|
(17,891 |
) |
|
|
(25,202 |
) |
|
|
(80,935 |
) |
Proceeds from Dispositions of Businesses and Contracts |
|
|
8,025 |
|
|
|
32,042 |
|
|
|
99,152 |
|
Proceeds from Sale of Property, Plant, and Equipment |
|
|
53,399 |
|
|
|
37,533 |
|
|
|
54,546 |
|
|
|
|
|
|
|
|
|
|
|
Cash Used by Investing Activities |
|
|
(44,103 |
) |
|
|
(38,767 |
) |
|
|
(2,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Credit Facilities |
|
|
2,429 |
|
|
|
57,383 |
|
|
|
536,469 |
|
Repayments on Credit Facilities |
|
|
(15,683 |
) |
|
|
(117,156 |
) |
|
|
(607,484 |
) |
Dividends Paid |
|
|
(2,929 |
) |
|
|
(4,649 |
) |
|
|
(3,430 |
) |
Excess Tax Benefits From Stock-Based Compensation |
|
|
321 |
|
|
|
3,909 |
|
|
|
1,767 |
|
Acquisition of Treasury Stock |
|
|
(28,046 |
) |
|
|
— |
|
|
|
(7,529 |
) |
Issuance of Stock Under Stock Option Plans |
|
|
1,087 |
|
|
|
8,172 |
|
|
|
6,476 |
|
|
|
|
|
|
|
|
|
|
|
Cash Used by Financing Activities |
|
|
(42,821 |
) |
|
|
(52,341 |
) |
|
|
(73,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities |
|
|
— |
|
|
|
(277 |
) |
|
|
(3,512 |
) |
Investing Activities |
|
|
— |
|
|
|
— |
|
|
|
2,739 |
|
|
|
|
|
|
|
|
|
|
|
Cash Used by Discontinued Operations |
|
|
— |
|
|
|
(277 |
) |
|
|
(773 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) Increase in Cash and Cash Equivalents |
|
|
(37,663 |
) |
|
|
102,309 |
|
|
|
2,586 |
|
Cash and Cash Equivalents at Beginning of Year |
|
|
109,685 |
|
|
|
7,376 |
|
|
|
4,790 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year |
|
$ |
72,022 |
|
|
$ |
109,685 |
|
|
$ |
7,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid During the Year: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
3,203 |
|
|
$ |
4,591 |
|
|
$ |
8,869 |
|
Income Taxes |
|
|
94,793 |
|
|
|
15,286 |
|
|
|
29,186 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
43
Note A: Summary of Significant Accounting Policies
As of December 31, 2010 and 2009, and for the Years Ended December 31, 2010, 2009 and 2008.
Basis of Presentation — The consolidated financial statements include the accounts of Aaron’s, Inc.
and its wholly owned subsidiaries (the “Company”). All significant intercompany accounts and
transactions have been eliminated. The preparation of the Company’s consolidated financial
statements in conformity with United States generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ from those estimates. Generally,
actual experience has been consistent with management’s prior estimates and assumptions. Management
does not believe these estimates or assumptions will change significantly in the future absent
unsurfaced or unforeseen events.
On December 7, 2010, at a special meeting of the Company’s shareholders approved a proposal to
amend and restate the Company’s Amended and Restated Articles of Incorporation to: (i) convert
each outstanding share of Common Stock, par value $0.50 per share (the “Nonvoting Common Stock”)
into one share of Class A Common Stock (the “Class A Common Stock”) and to rename the Class A
Common Stock as Common Stock (the “Common Stock”), (ii) eliminate certain obsolete provisions
relating to the Company’s prior dual-class common stock structure, and (iii) amend the number of
authorized shares to be 225,000,000 total shares of Common Stock (the aggregate of the number of
authorized shares of Nonvoting Common Stock and Class A Common Stock prior to the approval of the
Amended and Restated Articles of Incorporation). Following receipt of shareholder approval at the
special meeting, the Amended and Restated Articles of Incorporation were filed with the Secretary
of State of the State of Georgia and are now effective.
As a result of the reclassification of shares of Nonvoting Common Stock into shares of Class A
Common Stock and the other changes described above and effected by the Amended and Restated
Articles of Incorporation, shares of the combined class now titled Common Stock have one vote per
share on all matters submitted to the Company’s shareholders, including the election of directors.
The former Nonvoting Common Stock did not entitle the holders thereof to any vote except as
otherwise provided in the Company’s Articles of Incorporation or required by law. In addition,
holders of the combined class now titled Common Stock will all vote as a single class of stock on
any matters subject to a shareholder vote. Holders of the former Class A Common Stock and the
Nonvoting Common Stock were previously entitled to separate class voting rights in certain
circumstances as required by law, and those class voting rights were eliminated with the share
reclassification.
The holders of Common Stock are entitled to receive dividends and other distributions in cash,
stock or property of the Company as and when declared by the Board of Directors of the Company out
of legally available funds. Prior to the conversion, the Company’s Articles of Incorporation
permitted the payment of a cash dividend on the Nonvoting Common Stock without paying any dividend
on the Class A Common Stock or the payment of a cash dividend on the Nonvoting Common Stock that
was up to 50% higher than any dividend paid on the Class A Common Stock. Cash dividends could not
be paid on the Class A Common Stock unless equal or higher dividends were paid on the Nonvoting
Common Stock.
The conversion had no other impact on the economic equity interests of holders of Common Stock,
including with regards to liquidation rights or redemption, regardless of whether holders
previously held shares of Nonvoting Common Stock or Class A Common Stock.
On March 23, 2010, the Company announced a 3-for-2 stock split effected in the form of a 50% stock
dividend on both Nonvoting Common Stock and Class A Common Stock. New shares were distributed on
April 15, 2010 to shareholders of record as of the close of business on April 1, 2010. All share
and per share information has been restated for all periods presented to reflect this stock split.
During the fourth quarter of 2008, the Company sold substantially all of the assets of its Aaron’s
Corporate Furnishings division. As a result of the sale, the Company’s financial statements have
been prepared reflecting the Aaron’s Corporate Furnishings division as discontinued operations. See
Note N for a discussion of the sale of the Aaron’s Corporate Furnishings division.
Certain reclassifications have been made to the prior periods to conform to the current period
presentation. In all periods presented, Aaron’s Office Furniture was reclassified from the Sales
and Lease Ownership Segment to the Other Segment. Refer to Note K for the segment disclosure.
Certain assets have been reclassified as held for sale in all periods presented.
44
Line of Business — The Company is engaged in the business of leasing and selling residential
furniture, consumer electronics, appliances, computers, and other merchandise throughout the U.S.
and Canada. The Company’s entire production of furniture and bedding is shipped to Aaron’s stores.
Lease Merchandise — The Company’s lease merchandise consists primarily of residential furniture,
consumer electronics, appliances, computers, and other merchandise and is recorded at cost, which
includes overhead from production facilities, shipping costs and warehousing costs. The sales and
lease ownership division depreciates merchandise over the lease agreement period, generally 12 to
24 months when on lease and 36 months when not on lease, to a 0% salvage value. Our office
furniture stores depreciate merchandise over its estimated useful life, which ranges from 24 months
to 48 months, net of salvage value, which ranges from 0% to 30%. The Company’s policies require
weekly lease merchandise counts by store managers, which include write-offs for unsalable, damaged,
or missing merchandise inventories. Full physical inventories are generally taken at the
fulfillment and manufacturing facilities two to four times a year, and appropriate provisions are
made for missing, damaged and unsalable merchandise. In addition, the Company monitors lease
merchandise levels and mix by division, store, and fulfillment center, as well as the average age
of merchandise on hand. If unsalable lease merchandise cannot be returned to vendors, it is
adjusted to its net realizable value or written off.
All lease merchandise is available for lease or sale. On a monthly basis, all damaged, lost or
unsalable merchandise identified is written off. The Company records lease merchandise adjustments
on the allowance method. Lease merchandise write-offs totaled $46.5 million, $38.3 million and
$34.5 million during the years ended December 31, 2010, 2009 and 2008, respectively, and are
included in operating expenses in the accompanying consolidated statements of earnings. The
current year includes a write down of $4.7 million related to the closure of the Aaron’s Office
Furniture division.
Disposal Activities — The Company began ceasing the operations of the Aaron’s Office Furniture
division in June of 2010. The Company closed 14 of its Aaron’s Office Furniture stores during 2010
and had one remaining store open to liquidate merchandise. As a
result, the Company recorded $3.3 million
in closed store reserves, $4.7 million in lease merchandise write-downs and other miscellaneous
expenses in 2010, totaling $9.0 million in operating expenses, related to the closures. The
charges were recorded within operating expenses on the consolidated statement of earnings and are
included in the Other segment category.
Cash and Cash Equivalents — The Company classifies as cash highly liquid investments with
maturity dates of less than three months when purchased.
Accounts Receivable — The Company maintains an allowance for doubtful accounts. The reserve for
returns is calculated based on the historical collection experience associated with lease
receivables. The Company’s policy is to write off lease receivables that are 60 days or more past
due.
The following is a summary of the Company’s allowance for doubtful accounts as of December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In Thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
| |
Beginning Balance |
|
$ |
4,157 |
|
|
$ |
4,040 |
|
|
$ |
4,014 |
|
Accounts written off |
|
|
(23,601 |
) |
|
|
(20,352 |
) |
|
|
(18,876 |
) |
Provision |
|
|
23,988 |
|
|
|
20,469 |
|
|
|
18,902 |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
4,544 |
|
|
$ |
4,157 |
|
|
$ |
4,040 |
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment — The Company records property, plant and equipment at cost.
Depreciation and amortization are computed on a straight-line basis over the estimated useful lives
of the respective assets, which are from eight to 40 years for buildings and improvements and from
one to five years for other depreciable property and equipment. Gains and losses related to
dispositions and retirements are recognized as incurred. Maintenance and repairs are also expensed
as incurred; renewals and betterments are capitalized. Depreciation expense, included in operating
expenses in the accompanying consolidated statements of earnings, for property, plant and equipment
was $41.4 million, $40.7 million and $38.4 million during the years ended December 31, 2010, 2009
and 2008, respectively.
Assets Held for Sale — Certain properties, primarily consisting of parcels of land, met the held
for sale classification criteria at December 31, 2010. After adjustment to fair value, the $11.8
million and $12.4 million carrying value of these properties has been classified as assets held for
sale in the consolidated balance sheets as of December 31, 2010 and 2009, respectively. The Company estimated the fair values of these properties using the
market values for similar properties and these are considered Level 2 assets as defined in FASB ASC
Topic 820, “Fair Value Measurements.”
45
Goodwill and Other Intangibles — Goodwill represents the excess of the purchase price paid over the
fair value of the net tangible and identifiable intangible assets acquired in connection with
business acquisitions. The Company has elected to perform its annual impairment evaluation as of
September 30. Based on the evaluation, there was no impairment as of September 30, 2010. More
frequent evaluations are completed if indicators of impairment become evident. Other intangibles
represent the value of customer relationships acquired in connection with business acquisitions,
acquired franchise development rights and non-compete agreements, recorded at fair value as
determined by the Company. As of December 31, 2010 and 2009, the net intangibles other than
goodwill were $3.8 million and $5.2 million, respectively. The customer relationship intangible is
amortized on a straight-line basis over a two-year useful life. Acquired franchise development
rights are amortized over the unexpired life of the franchisee’s ten year area development
agreement. The non-compete intangible is amortized on a straight-line basis over a three-year
useful life. Amortization expense of intangibles, included in operating expenses in the
accompanying consolidated statements of earnings, was $3.1 million, $3.8 million and $3.0 million
during the years ended December 31, 2010, 2009 and 2008, respectively.
The following is a summary of the Company’s goodwill in its sales and lease ownership segment at
December 31:
| |
|
|
|
|
|
|
|
|
| (In Thousands) |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Beginning Balance |
|
$ |
194,376 |
|
|
$ |
185,965 |
|
Additions |
|
|
9,239 |
|
|
|
12,947 |
|
Disposals |
|
|
(1,236 |
) |
|
|
(4,536 |
) |
|
|
|
|
|
|
|
Ending Balance |
|
$ |
202,379 |
|
|
$ |
194,376 |
|
|
|
|
|
|
|
|
Impairment — The Company assesses its long-lived assets other than goodwill for impairment
whenever facts and circumstances indicate that the carrying amount may not be fully recoverable.
When it is determined that the carrying value of the assets are not recoverable, the Company
compares the carrying value of the assets to their fair value as estimated using discounted
expected future cash flows, market values or replacement values for similar assets. The amount by
which the carrying value exceeds the fair value of the asset is recognized as an impairment loss.
The Company also recorded an impairment charge of $879,000 and $3.0 million within operating
expenses in 2010 and 2009, respectively, both of which related primarily to the impairment of
various land outparcels and buildings included in our sales and lease ownership segment that the
Company decided not to utilize for future expansion. The assets held for sale are Level 2 assets
and the charges were recorded within operating expenses on the consolidated statement of earnings
and are included in the Other segment category. In 2008, the Company recorded an impairment charge
of $838,000 within operating expenses which related primarily to the impairment of leasehold
improvements in several of its RIMCO stores included in our sales and lease ownership segment. The
RIMCO leasehold improvements are Level 2 assets.
The Company performed an impairment analysis on the Aaron’s Office Furniture long-lived assets in
the third quarter of 2009 due to continuing negative performance. As a result, the Company
recorded an impairment charge of $1.3 million in 2009 within operating expenses related primarily
to the impairment of leasehold improvements in the Aaron’s Office Furniture stores. The Aaron’s
Office Furniture long-lived assets are Level 2 assets. In addition, the Company recorded an
$865,000 write-down to certain office furniture lease merchandise in 2009 within operating
expenses. The impairment charge and inventory write-down are included in the other segment and are
Level 2 assets.
Derivative Financial Instruments — The Company utilizes derivative financial instruments to
mitigate its exposure to certain market risks associated with its ongoing operations. The primary
risk it seeks to manage through the use of derivative financial instruments is commodity price
risk, including the risk of increases in the market price of diesel fuel used in the Company’s
delivery vehicles. All derivative financial instruments are recorded at fair value on the
consolidated balance sheets. The Company does not use derivative financial instruments for trading
or speculative purposes. The Company is exposed to counterparty credit risk on all its derivative
financial instruments. The counterparties to these contracts are high credit quality commercial
banks, which the Company believes largely minimize the risk of counterparty default. The fair values of the Company’s fuel hedges as of
December 31, 2010 and 2009 and the changes in their fair values in 2010 and 2009 were immaterial.
46
Fair Value of Financial Instruments — The fair values of the Company’s cash and cash equivalents,
accounts receivable and accounts payable approximate their carrying amounts due to their short-term
nature.
Deferred Income Taxes — Deferred income taxes represent primarily temporary differences between
the amounts of assets and liabilities for financial and tax reporting purposes. Such temporary
differences arise principally from the use of accelerated depreciation methods on lease merchandise
for tax purposes.
Revenue Recognition — Lease revenues are recognized as revenue in the month they are due. Lease
payments received prior to the month due are recorded as deferred lease revenue. Until all
payments are received under sales and lease ownership agreements, the Company maintains ownership
of the lease merchandise. Revenues from the sale of merchandise to franchisees are recognized at
the time of receipt of the merchandise by the franchisee, and revenues from such sales to other
customers are recognized at the time of shipment, at which time title and risk of ownership are
transferred to the customer. Refer to Note I for discussion of recognition of other
franchise-related revenues. The Company presents sales net of sales taxes.
Cost of Sales — Included in cost of sales is the net book value of merchandise sold, primarily
using specific identification. It is not practicable to allocate operating expenses between
selling and lease operations.
Shipping and Handling Costs — The Company classifies shipping and handling costs as operating
expenses in the accompanying consolidated statements of earnings, and these costs totaled $60.6
million in 2010, $55.0 million in 2009 and $55.1 million in 2008.
Advertising — The Company expenses advertising costs as incurred. Advertising costs are recorded as
expenses the first time an advertisement appears. Such costs aggregated to $31.7 million in 2010,
$31.0 million in 2009 and $28.5 million in 2008. These advertising expenses are shown net of
cooperative advertising considerations received from vendors, substantially all of which represents
reimbursement of specific, identifiable and incremental costs incurred in selling those vendors’
products. The amount of cooperative advertising consideration netted against advertising expense
was $27.2 million in 2010, $23.4 million in 2009 and $24.7 million in 2008. The prepaid
advertising asset was $3.2 million and $2.6 million at December 31, 2010 and 2009, respectively.
Stock-Based Compensation — The Company has stock-based employee compensation plans, which are more
fully described in Note H below. The Company estimates the fair value for the options granted on
the grant date using a Black-Scholes option-pricing model and accounts for stock-based compensation
under the fair value recognition provisions codified in FASB ASC Topic 718, “Compensation — Stock
Compensation” (“ASC 718”).
Insurance Reserves — Estimated insurance reserves are accrued primarily for group health and
workers compensation benefits provided to the Company’s employees. Estimates for these insurance
reserves are made based on actual reported but unpaid claims and actuarial analyses of the
projected claims run off for both reported and incurred but not reported claims.
Comprehensive Income — For the years ended December 31, 2010, 2009 and 2008, comprehensive income
totaled $119.3 million, $113.9 million and $88.8 million, respectively.
Foreign Currency Translation — Assets and liabilities denominated in a foreign currency are
translated into U.S. dollars at the current rate of exchange on the last day of the reporting
period. Revenues and expenses are generally translated at a daily exchange rate and equity
transactions are translated using the actual rate on the day of the transaction.
Note B: Earnings Per Share
Earnings per share is computed by dividing net earnings by the weighted average number of shares of
Common Stock outstanding during the year for the year ended December 31, 2010 and Nonvoting Common
Stock and Class A Common Stock outstanding during the year for the years ended December 31, 2009
and 2008, which were approximately 81,194,000 shares in 2010, 81,138,000 shares in 2009, and
80,114,000 shares in 2008. The computation of earnings per share assuming dilution includes the
dilutive effect of stock options and awards. Such stock options and awards had the effect of
increasing the weighted average shares outstanding assuming dilution by approximately 745,000 in 2010, 663,000 in 2009, and 1,025,000 in 2008.
47
Anti-dilutive stock options excluded from the computation of earnings per share assuming dilution were 314,000, 470,000 and 2.0 million in 2010, 2009 and 2008, respectively.
The Company has issued restricted stock awards under its stock incentive plan whereby shares vest
upon satisfaction of certain performance and vesting conditions and all performance conditions were met at December 31, 2010. The effect of restricted
stock increased weighted average shares outstanding by 163,000 in 2010, 150,000 in 2009 and 146,000
in 2008.
Anti-dilutive shares excluded from the computation of earnings per share assuming dilution were 275,000, 45,000 and 61,000 in 2010, 2009, and 2008, respectively.
Note C: Property, Plant and Equipment
Following is a summary of the Company’s property, plant, and equipment at December 31:
| |
|
|
|
|
|
|
|
|
| (In Thousands) |
|
2010 |
|
|
2009 |
|
Land |
|
$ |
25,067 |
|
|
$ |
34,739 |
|
Buildings and Improvements |
|
|
74,216 |
|
|
|
96,571 |
|
Leasehold Improvements and Signs |
|
|
100,031 |
|
|
|
84,097 |
|
Fixtures and Equipment |
|
|
109,458 |
|
|
|
90,625 |
|
Assets Under Capital Leases: |
|
|
|
|
|
|
|
|
with Related Parties |
|
|
8,501 |
|
|
|
8,501 |
|
with Unrelated Parties |
|
|
10,564 |
|
|
|
10,564 |
|
Construction in Progress |
|
|
9,485 |
|
|
|
11,900 |
|
|
|
|
|
|
|
|
|
|
|
337,322 |
|
|
|
336,997 |
|
Less: Accumulated Depreciation and Amortization |
|
|
(132,410 |
) |
|
|
(121,814 |
) |
|
|
|
|
|
|
|
|
|
$ |
204,912 |
|
|
$ |
215,183 |
|
|
|
|
|
|
|
|
Amortization expense on assets recorded under capital leases is included in operating expenses and
was $1.9 million, $1.2 million and $1.2 million in 2010, 2009 and 2008, respectively. Capital leases consist of
buildings and improvements.
Note D: Credit Facilities
Following is a summary of the Company’s credit facilities at December 31:
| |
|
|
|
|
|
|
|
|
| (In Thousands) |
|
2010 |
|
|
2009 |
|
Senior Unsecured Notes |
|
$ |
24,000 |
|
|
$ |
36,000 |
|
Capital Lease Obligation: |
|
|
|
|
|
|
|
|
with Related Parties |
|
|
7,279 |
|
|
|
7,775 |
|
with Unrelated Parties |
|
|
7,208 |
|
|
|
7,959 |
|
Other Debt |
|
|
3,303 |
|
|
|
3,310 |
|
|
|
|
|
|
|
|
|
|
$ |
41,790 |
|
|
$ |
55,044 |
|
|
|
|
|
|
|
|
Bank Debt — The Company has a revolving credit agreement with several banks providing for unsecured
borrowings up to $140.0 million. Amounts borrowed bear interest at the lower of the lender’s prime
rate or LIBOR plus 87.5 basis points. The pricing under a working capital line is based upon
overnight bank borrowing rates. At December 31, 2010 and 2009, there was a zero
balance under the Company’s revolving credit agreement. The Company pays a .20% commitment fee on
unused balances. The weighted average interest rate on borrowings under the revolving credit
agreement was 0.97% in 2010, 1.23% in 2009 and 3.66% in 2008. The revolving credit agreement
expires May 23, 2013.
The revolving credit agreement contains financial covenants which, among other things, prohibit the
Company from exceeding certain debt to equity levels and require the maintenance of minimum fixed
charge coverage ratios. If the Company fails to comply with these covenants, the Company will be
in default under these agreements, and all amounts could become due immediately. At December 31,
2010, $199.8 million of retained earnings was available for dividend payments and stock repurchases
under the debt restrictions, and the Company was in compliance with all covenants.
48
Senior Unsecured Notes — On July 27, 2005, the Company sold $60.0 million in aggregate principal
amount of senior unsecured notes in a private placement to a consortium of insurance companies.
The notes bear interest at a rate of 5.03% per year and mature on July 27, 2012. Interest only
payments were due quarterly for the first two years, followed by annual $12.0 million principal
repayments plus interest for the five years thereafter. The related note purchase agreement
contains financial maintenance covenants, negative covenants regarding the Company’s other
indebtedness, its guarantees and investments and other customary covenants substantially similar to
the covenants in the Company’s, revolving credit facility. At December 31, 2010 there was $24.0
million outstanding under the July 2005 senior unsecured notes.
At December 31, 2010, the fair value of fixed rate long-term debt approximated its carrying value.
The fair value of debt is estimated using valuation techniques that consider risk-free borrowing
rates and credit risk.
Capital Leases with Related Parties — In October and November 2004, the Company sold eleven
properties, including leasehold improvements, to a limited liability company (“LLC”) controlled by
a group of Company executives, including the Company’s Chairman. The LLC obtained borrowings
collateralized by the land and buildings totaling $6.8 million. The Company occupies the land and
buildings collateralizing the borrowings under a 15-year term lease, with a five-year renewal at
the Company’s option, at an aggregate annual rental of $716,000. The transaction has been
accounted for as a financing in the accompanying consolidated financial statements. The rate of
interest implicit in the leases is approximately 9.7%. Accordingly, the land and buildings,
associated depreciation expense and lease obligations are recorded in the Company’s consolidated
financial statements. No gain or loss was recognized in this transaction.
In December 2002, the Company sold ten properties, including leasehold improvements, to the LLC.
The LLC obtained borrowings collateralized by the land and buildings totaling $5.0 million. The
Company occupies the land and buildings collateralizing the borrowings under a 15-year term lease
at an aggregate annual rental of approximately $556,000. The transaction has been accounted for as
a financing in the accompanying consolidated financial statements. The rate of interest implicit
in the leases is approximately 11.1%. Accordingly, the land and buildings, associated depreciation
expense and lease obligations are recorded in the Company’s consolidated financial statements. No
gain or loss was recognized in this transaction.
Sale-leasebacks — The Company finances a portion of store expansion through sale-leaseback
transactions. The properties are generally sold at net book value and the resulting leases qualify
and are accounted for as operating leases. The Company does not have any retained or contingent
interests in the stores nor does the Company provide any guarantees, other than a corporate level
guarantee of lease payments, in connection with the sale-leasebacks.
Other Debt — Other debt at
December 31, 2010 and 2009 includes $3.3 million of industrial development corporation revenue
bonds. The weighted-average borrowing rate on these bonds in 2010 was 0.48%. No principal
payments are due on the bonds until maturity in 2015.
Future maturities under the Company’s long-term debt and capital lease obligations are as follows:
| |
|
|
|
|
| (In Thousands) |
|
|
|
|
2011 |
|
$ |
13,339 |
|
2012 |
|
|
13,285 |
|
2013 |
|
|
1,423 |
|
2014 |
|
|
1,549 |
|
2015 |
|
|
5,039 |
|
Thereafter |
|
|
7,155 |
|
|
|
|
|
|
|
$ |
41,790 |
|
|
|
|
|
49
Note E: Income Taxes
Following is a summary of the Company’s income tax expense for the years ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In Thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Current Income Tax Expense (Benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
40,697 |
|
|
$ |
(26,324 |
) |
State |
|
|
8,932 |
|
|
|
7,832 |
|
|
|
5,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,932 |
|
|
|
48,529 |
|
|
|
(21,262 |
) |
Deferred Income Tax Expense (Benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
64,679 |
|
|
|
15,169 |
|
|
|
73,375 |
|
State |
|
|
(1,201 |
) |
|
|
(137 |
) |
|
|
1,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,478 |
|
|
|
15,032 |
|
|
|
75,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
72,410 |
|
|
$ |
63,561 |
|
|
$ |
53,811 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the Company had a federal net operating loss (“NOL”) carryforward of
approximately $18.0 million available to offset future taxable income. The NOL expires in 2030 and
its utilization is subject to applicable annual limitations for U.S. federal and U.S. state tax
purposes, including Section 382 of the Internal Revenue Code of 1986, as amended. The Company
intends to carryforward the NOL to offset future taxable income and does not anticipate that its
utilization will be impacted by the applicable limitations.
As a
result of the bonus depreciation provisions in the 2010 tax acts the
Company has paid more than our anticipated 2010 federal tax
liability. The 2010 acts provided an estimated tax deferral of
approximately $127 million. The Company filed for a refund of
overpaid federal tax of approximately $81.0 million in January 2011 and received that refund in February 2011.
Significant components of the Company’s deferred income tax liabilities and assets at December 31
are as follows:
| |
|
|
|
|
|
|
|
|
| (In Thousands) |
|
2010 |
|
|
2009 |
|
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
|
Lease Merchandise and Property, Plant and Equipment |
|
$ |
248,775 |
|
|
$ |
175,293 |
|
Other, Net |
|
|
24,777 |
|
|
|
19,449 |
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities |
|
|
273,552 |
|
|
|
194,742 |
|
Deferred Tax Assets: |
|
|
|
|
|
|
|
|
Accrued Liabilities |
|
|
15,859 |
|
|
|
10,848 |
|
Advance Payments |
|
|
15,231 |
|
|
|
14,242 |
|
Federal Net Operating Loss |
|
|
6,423 |
|
|
|
— |
|
Other, Net |
|
|
9,386 |
|
|
|
6,436 |
|
|
|
|
|
|
|
|
Total Deferred Tax Assets |
|
|
46,899 |
|
|
|
31,526 |
|
Less Valuation Allowance |
|
|
(860 |
) |
|
|
(454 |
) |
|
|
|
|
|
|
|
Net Deferred Tax Liabilities |
|
$ |
227,513 |
|
|
$ |
163,670 |
|
|
|
|
|
|
|
|
The Company’s effective tax rate differs from the statutory U.S. Federal income tax rate for the
years ended December 31 as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Statutory Rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increases in U.S. Federal Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Resulting From: |
|
|
|
|
|
|
|
|
|
|
|
|
State Income Taxes, Net of Federal Income Tax Benefit |
|
|
2.7 |
|
|
|
2.8 |
|
|
|
3.1 |
|
Other, Net |
|
|
0.3 |
|
|
|
(1.8 |
) |
|
|
.4 |
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate |
|
|
38.0 |
% |
|
|
36.0 |
% |
|
|
38.5 |
% |
|
|
|
|
|
|
|
|
|
|
The Company files a federal consolidated income tax return in the United States and the separate
legal entities file in various states and foreign jurisdictions. With few exceptions, the Company
is no longer subject to federal, state and local tax examinations by tax authorities for years
before 2007. The decrease in the effective rate in 2009 was due to the favorable impact of a $2.3
million reversal of previously recorded liabilities for uncertain tax positions.
50
The following table summarizes the activity related to the Company’s uncertain tax positions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In Thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at January 1, |
|
$ |
1,342 |
|
|
$ |
3,110 |
|
|
$ |
3,482 |
|
Additions based on tax positions related to the current year |
|
|
149 |
|
|
|
172 |
|
|
|
119 |
|
Additions for tax positions of prior years |
|
|
18 |
|
|
|
523 |
|
|
|
559 |
|
Prior year reductions |
|
|
(26 |
) |
|
|
(46 |
) |
|
|
(349 |
) |
Statute expirations |
|
|
(63 |
) |
|
|
(2,231 |
) |
|
|
(176 |
) |
Settlements |
|
|
(105 |
) |
|
|
(186 |
) |
|
|
(525 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
1,315 |
|
|
$ |
1,342 |
|
|
$ |
3,110 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and 2009, the amount of uncertain tax benefits that, if recognized,
would affect the effective tax rate is $1.3 million, for both years, including interest and
penalties. During the years ended December 31, 2010, 2009 and 2008, the Company recognized
interest and penalties of $35,000, $276,000, and $435,000, respectively. The Company had $332,000
and $349,000 of accrued interest and penalties at December 31, 2010 and 2009, respectively. The
Company recognizes potential interest and penalties related to uncertain tax benefits as a
component of income tax expense.
Note F: Commitments and Contingencies
The Company leases warehouse and retail store space for most of its operations under operating
leases expiring at various times through 2028. The Company also leases certain properties under
capital leases that are more fully described in Note D. Most of the leases contain renewal options
for additional periods ranging from one to 15 years or provide for options to purchase the related
property at predetermined purchase prices that do not represent bargain purchase options. In
addition, certain properties occupied under operating leases contain normal purchase options.
Leasehold improvements related to these leases are generally amortized over periods that do not
exceed the lesser of the lease term or five years. While a majority of leases do not require
escalating payments, for the leases which do contain such provisions the Company records the
related lease expense on a straight-line basis over the lease term. The Company also leases
transportation and computer equipment under operating leases expiring during the next five years.
Management expects that most leases will be renewed or replaced by other leases in the normal
course of business.
Future minimum lease payments required under operating leases that have initial or remaining
non-cancelable terms in excess of one year as of December 31, 2010, are as follows:
| |
|
|
|
|
| (In Thousands) |
|
|
|
2011 |
|
$ |
96,305 |
|
2012 |
|
|
83,334 |
|
2013 |
|
|
68,450 |
|
2014 |
|
|
55,833 |
|
2015 |
|
|
42,490 |
|
Thereafter |
|
|
191,506 |
|
|
|
|
|
|
|
$ |
537,918 |
|
|
|
|
|
The Company has guaranteed certain debt obligations of some of the franchisees amounting to $121.0
million and $128.8 million at December 31, 2010 and 2009, respectively. Of this amount,
approximately $108.3 million represents franchise borrowings outstanding under the franchise loan
program and approximately $12.7 million represents franchise borrowings under other debt facilities
at December 31, 2010. The Company receives guarantee fees based on such franchisees’ outstanding
debt obligations, which it recognizes as the guarantee obligation is satisfied. The Company has
recourse rights to the assets securing the debt obligations, which consist primarily of lease
merchandise inventory and fixed assets. As a result, the Company has never incurred any, nor does
management expect to incur any, significant losses under these guarantees. The guaranty was
amended on June 18, 2010 to increase the maximum commitment amount under the facility from $175.0
million to $200.0 million, provide for the ability to extend loans to franchisees that operate
stores located in Canada (other than in the Province of Quebec), increase the maximum available
amount of swing loans from $20.0 million to $25.0 million, reduce the Company’s interest
obligations with respect to franchisees that operate stores located in the U.S. and establish the
Company’s interest obligations with respect to franchisees that operate stores located in Canada.
Rental expense was $96.1 million in 2010, $88.1 million in 2009, and $81.8 million in 2008. As of
December 31, 2010 the total amount of sublease income expected to be received was $22.1 million.
At December 31, 2010, the Company had non-cancelable commitments primarily related to certain
advertising and marketing programs of $47.5 million. Payments under these commitments are
scheduled to be $31.5 million in 2011, $13.6 million in 2012, $2.2 million in 2013 and $195,000 in
2014.
51
The Company maintains a 401(k) savings plan for all its full-time employees with at least one year
of service and who meet certain eligibility requirements. The plan allows employees to contribute
up to 10% of their annual compensation with 50% matching by the Company on the first 4% of
compensation. The Company’s expense related to the plan was $841,000 in 2010, $844,000 in 2009,
and $775,000 in 2008.
The Company is a party to various claims and legal proceedings arising in the ordinary course of
business. Management regularly assesses the Company’s insurance deductibles, analyzes litigation
information with the Company’s attorneys and evaluates its loss experience. The Company also
enters into various contracts in the normal course of business that may subject it to risk of
financial loss if counterparties fail to perform their contractual obligations.
The Company does not currently believe its exposure to loss under any claims is probable, nor can
the Company estimate a range of amounts of loss that are reasonably possible. Notwithstanding the
foregoing, the Company is currently a party to the following proceeding:
In Kunstmann et al v. Aaron Rents, Inc. originally filed with the United States District Court,
Northern District of Alabama (the “court”) on October 28, 2008, plaintiffs alleged that the Company
improperly classified store general managers as exempt from the overtime provisions of the Fair
Labor Standards Act. Plaintiffs seek to recover unpaid overtime compensation and other damages for
all similarly situated general managers nationwide for the period January 25, 2007 to present.
After initially denying class plaintiffs’ class certification motion in April 2009, the court ruled to
conditionally certify a plaintiff class in early 2010. The current includes 237 individuals, which
may decrease as discovery continues. Those individuals who affirmatively opt to join the class may
be required to travel at their own expense to Alabama for discovery purposes and/or trial. The
court’s class certification ruling is procedural only and does not address the merits of the
plaintiffs’ claims.
The Company believes it has meritorious defenses to the claim described above, and intends to
vigorously defend itself against the litigation. However, this proceeding is still developing, and
due to inherent uncertainty in litigation and similar adversarial proceedings, there can be no
guarantee that the Company will ultimately be successful in this proceeding, or in others to which
it is currently a party. Substantial losses from this proceeding could have a material adverse
impact upon the Company’s business, financial position or results of operations. In addition, the
Company’s requirement to record or disclose potential losses under generally accepted accounting
principles could change in the near term depending upon changes in facts and circumstances. The
Company believes it has recorded an adequate reserve for contingencies at December 31, 2010.
Note G: Shareholders’ Equity
The Company held 10,664,728 shares in its treasury and was authorized to purchase an additional
4,401,815 shares at December 31, 2010. The Company repurchased 1,478,805 shares of its Nonvoting
Common Stock on the open market in 2010. The Company did not repurchase any shares of its capital
stock in 2009. The Company repurchased 387,545 shares of its Nonvoting Common Stock in 2008.
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. As of December 31, 2010, no preferred shares have been issued.
Note H: Stock Options and Restricted Stock
The Company’s outstanding stock options are exercisable for its Common Stock. The Company
estimates the fair value for the options on the grant date using a Black-Scholes option-pricing
model. The expected volatility is based on the historical volatility of the Company’s Common Stock
over the most recent period generally commensurate with the expected estimated life of each
respective grant. The expected lives of options are based on the Company’s historical option
exercise experience. Forfeiture assumptions are based on the Company’s historical forfeiture
experience. The Company believes that the historical experience method is the best estimate of
future exercise and forfeiture patterns currently available. The risk-free interest rates are
determined using the implied yield currently available for zero-coupon U.S. government issues with
a remaining term equal to the expected life of the options. The expected dividend yields are based
on the approved annual dividend rate in effect and current market price of the underlying Common
Stock at the time of grant. No assumption for a future dividend rate increase has been included
unless there is an approved plan to increase the dividend in the near term. Shares are issued from
the Company’s treasury shares upon share option exercises.
52
The results of operations for the year ended December 31, 2010, 2009 and 2008 include $3.2 million,
$2.4 million and $1.4 million, respectively, in compensation expense related to unvested grants.
At December 31, 2010, there was $5.0 million of total unrecognized compensation expense related to
non-vested stock options which is expected to be recognized over a period of 4.2 years. Excess tax
benefits of $321,000, $3.9 million and $1.8 million are included in cash provided by financing
activities for the year ended December 31, 2010 and 2009, respectively. The Company recognizes
compensation cost for awards with graded vesting on a straight-line basis over the requisite
service period for each separately vesting portion of the award.
Under the Company’s stock option plans, options granted to date become exercisable after a period
of two to five years and unexercised options lapse ten years after the date of the grant. Options
are subject to forfeiture upon termination of service. The aggregate number of shares of common
stock that may be issued or transferred under the incentive stock awards plan is 14,966,112 at
December 31, 2010.
The Company granted 347,000 and 1,524,000 stock options during 2010 and 2008, respectively. The
Company did not grant any stock options in 2009. The weighted average fair value of options
granted was $10.31 in 2010 and $5.75 in 2008. 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 2010 and 2008, respectively: risk-free interest rate 3.59% and 3.47%; a dividend
yield of .25% and .25%; a volatility factor of the expected market price of the Company’s Common
Stock of .41 and .38; weighted average assumptions of forfeiture rate of 3.89% and 11.77%; and
weighted average expected life of the option of nine and five years. The aggregate intrinsic value
of options exercised was $848,000 million, $13.1 million and $6.4 million in 2010, 2009 and 2008,
respectively. The total fair value of options vested was $3.2 million and $1.0 million in 2010 and
2008, respectively.
Income tax benefits resulting from stock option exercises credited to additional paid-in capital
totaled $1.4 million, $4.8 million, and $3.2 million, in 2010, 2009 and 2008, respectively.
The following table summarizes information about stock options outstanding at December 31, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
| |
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
| Range of Exercise |
|
|
|
|
Number Outstanding |
|
|
Remaining Contractual |
|
|
Weighted Average |
|
|
Number Exercisable |
|
|
Weighted Average |
|
| Prices |
|
|
|
|
December 31, 2010 |
|
|
Life (in years) |
|
|
Exercise Price |
|
|
December 31, 2010 |
|
|
Exercise Price |
|
| $3.81–10.00 |
|
|
|
|
|
477,382 |
|
|
|
2.60 |
|
|
$ |
8.75 |
|
|
|
477,382 |
|
|
$ |
8.75 |
|
| 10.01–15.00 |
|
|
|
|
|
2,551,458 |
|
|
|
6.29 |
|
|
|
13.95 |
|
|
|
1,228,458 |
|
|
|
13.79 |
|
| 15.01–19.92 |
|
|
|
|
|
345,458 |
|
|
|
8.71 |
|
|
|
19.61 |
|
|
|
31,958 |
|
|
|
16.61 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3.81–19.92 |
|
|
|
|
|
3,374,298 |
|
|
|
6.01 |
|
|
$ |
13.80 |
|
|
|
1,737,798 |
|
|
$ |
12.46 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes option activity for the periods indicated in the Company’s stock option
plans:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
Weighted |
|
| |
|
Options |
|
|
Weighted Average |
|
|
Remaining |
|
|
Intrinsic Value |
|
|
Average Fair |
|
| |
|
(In Thousands) |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
(in Thousands) |
|
|
Value |
|
Outstanding at January 1, 2010 |
|
|
3,246 |
|
|
$ |
13.09 |
|
|
|
|
|
|
$ |
23,689 |
|
|
$ |
5.77 |
|
Granted |
|
|
347 |
|
|
|
19.92 |
|
|
|
|
|
|
|
163 |
|
|
|
10.31 |
|
Exercised |
|
|
(110 |
) |
|
|
11.24 |
|
|
|
|
|
|
|
(848 |
) |
|
|
4.30 |
|
Forfeited |
|
|
(109 |
) |
|
|
14.92 |
|
|
|
|
|
|
|
(598 |
) |
|
|
6.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
3,374 |
|
|
|
13.80 |
|
|
6.01 years |
|
|
$ |
22,245 |
|
|
$ |
6.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010 |
|
|
1,738 |
|
|
|
12.46 |
|
|
4.09 years |
|
|
$ |
13,785 |
|
|
$ |
5.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of unvested options was $6.66, $6.08 and $6.08 as of December 31,
2010, 2009 and 2008, respectively. The weighted average fair value of options that vested during
2010, 2009 and 2008 was $5.87, $5.35 and $4.36, respectively.
The Company granted 300,000 restricted stock unit awards in 2010. The Company did not grant any
restricted stock awards in 2009 nor 2008. Shares of restricted stock or restricted stock units may
be granted to employees and directors and typically vest over approximately three to four year
periods. Restricted stock grants may be subject to one or more objective employment, performance
or other forfeiture conditions as established at the time of grant. Any shares of restricted stock
that are forfeited may again become available for issuance. Compensation cost for restricted stock is equal to the fair market value of the shares at the date of the award and is
amortized to compensation expense over the vesting period. Total compensation expense related to
restricted stock was $1.5 million, $1.3 million and $1.5 million in 2010, 2009 and 2008,
respectively.
53
The following table summarizes information about restricted stock activity:
| |
|
|
|
|
|
|
|
|
| |
|
Restricted Stock |
|
|
Weighted Average |
|
| |
|
(In Thousands) |
|
|
Grant Price |
|
Outstanding at January 1, 2010 |
|
|
293 |
|
|
|
18.84 |
|
Granted |
|
|
300 |
|
|
|
16.20 |
|
Vested |
|
|
(147 |
) |
|
|
18.84 |
|
Forfeited |
|
|
(8 |
) |
|
|
18.84 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
438 |
|
|
|
17.01 |
|
|
|
|
|
|
|
|
|
Note I: Franchising of Aaron’s Sales and Lease Ownership Stores
The Company franchises Aaron’s Sales & Lease Ownership stores. As of December 31, 2010 and 2009,
946 and 866 franchises had been granted, respectively. Franchisees typically pay a non-refundable
initial franchise fee from $15,000 to $50,000 depending upon market size and an ongoing royalty of
either 5% or 6% of gross revenues. Franchise fees and area development fees are generated from the
sale of rights to develop, own and operate Aaron’s Sales & Lease Ownership stores. These fees are
recognized as income when substantially all of the Company’s obligations per location are
satisfied, generally at the date of the store opening. Franchise fees and area development fees
are received before the substantial completion of the Company’s obligations and deferred.
Substantially all of the amounts reported as non-retail sales and non-retail cost of sales in the
accompanying consolidated statements of earnings relate to the sale of lease merchandise to
franchisees.
Franchise agreement fee revenue was $3.0 million, $3.8 million and $3.2 million and royalty
revenue was $47.9 million, $42.3 million and $36.5 million for the years ended December 31, 2010,
2009 and 2008, respectively. Deferred franchise and area development agreement fees, included in
customer deposits and advance payments in the accompanying consolidated balance sheets, were $5.5
and $5.3 million at December 31, 2010 and 2009, respectively.
Franchised Aaron’s Sales & Lease Ownership store activity is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (Unaudited) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Franchised stores open at January 1, |
|
|
597 |
|
|
|
504 |
|
|
|
484 |
|
Opened |
|
|
62 |
|
|
|
84 |
|
|
|
56 |
|
Added through acquisition |
|
|
10 |
|
|
|
— |
|
|
|
12 |
|
Purchased from the Company |
|
|
10 |
|
|
|
37 |
|
|
|
27 |
|
Purchased by the Company |
|
|
(12 |
) |
|
|
(19 |
) |
|
|
(66 |
) |
Closed, sold or merged |
|
|
(3 |
) |
|
|
(9 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
Franchised stores open at December 31, |
|
|
664 |
|
|
|
597 |
|
|
|
504 |
|
|
|
|
|
|
|
|
|
|
|
Company-operated Aaron’s Sales & Lease Ownership store activity is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (Unaudited) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Company-operated stores open at January 1, |
|
|
1,082 |
|
|
|
1,037 |
|
|
|
1,014 |
|
Opened |
|
|
89 |
|
|
|
85 |
|
|
|
54 |
|
Added through acquisition |
|
|
14 |
|
|
|
19 |
|
|
|
66 |
|
Closed, sold or merged |
|
|
(36 |
) |
|
|
(59 |
) |
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
|
Company-operated stores open at December 31, |
|
|
1,149 |
|
|
|
1,082 |
|
|
|
1,037 |
|
|
|
|
|
|
|
|
|
|
|
In 2010, the Company acquired the lease contracts, merchandise and other related assets of 30
stores, including 12 franchised stores, and merged certain acquired stores into existing stores,
resulting in a net gain of 14 stores. In 2009, the Company acquired the lease contracts,
merchandise and other related assets of 44 stores, including 19 franchised stores, and merged
certain acquired stores into existing stores, resulting in a net gain of 29 stores. In 2008, the Company acquired the lease contracts, merchandise and other related assets of 95 stores,
including 66 franchised stores, and merged certain acquired stores into existing stores, resulting
in a net gain of 68 stores.
54
Note J: Acquisitions and Dispositions
During 2010, the Company acquired the lease contracts, merchandise and other related assets of a
net of 14 sales and lease ownership stores for an aggregate purchase price of $17.9 million.
Consideration transferred consisted primarily of cash. Fair value of acquired tangible assets
included $6.5 million for lease merchandise, $333,000 for fixed assets and $34,000 for other
assets. The excess cost over the fair value of the assets and liabilities acquired in 2010,
representing goodwill, was $9.2 million. The fair value of acquired separately identifiable
intangible assets included $748,000 for customer lists, $541,000 for non-compete intangibles and
$496,000 for acquired franchise development rights.
During 2009, the Company acquired the lease contracts, merchandise and other related assets of a
net of 29 sales and lease ownership stores for an aggregate purchase price of $25.2 million.
Consideration transferred consisted primarily of cash. Fair value of acquired tangible assets
included $9.5 million for lease merchandise, $712,000 for fixed assets and $28,000 for other
assets. The excess cost over the fair value of the assets and liabilities acquired in 2010,
representing goodwill, was $12.0 million. The fair value of acquired separately identifiable
intangible assets included $1.1 million for customer lists, $695,000 for non-compete intangibles
and $477,000 for acquired franchise development rights.
During 2008, the Company acquired the lease contracts, merchandise and related assets of a net of
68 sales and lease ownership stores for an aggregate purchase price of $79.8 million.
Consideration transferred consisted primarily of cash. Fair value of acquired tangible assets
included $28.5 million for lease merchandise, $2.1 million for fixed assets, and $66,000 for other
assets. The excess cost over the fair value of the assets and liabilities acquired in 2008,
representing goodwill, was $44.1 million. The fair value of acquired separately identifiable
intangible assets included $4.3 million for customer lists and $1.9 million for acquired franchise
development rights.
Acquisitions have been accounted for as purchases, and 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 2010, 2009 and 2008 consolidated financial statements was
not significant.
The estimated amortization of customer lists, reacquired franchise development rights and
non-compete intangibles in future years approximates $636,000,
$432,000, $148,000, $64,000 and
$63,000 for 2011, 2012, 2013, 2014 and 2015, respectively.
The following is a summary of the Company’s intangible assets by category:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In Thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Customer Relationship Intangible, Gross |
|
$ |
748 |
|
|
$ |
1,677 |
|
|
$ |
4,250 |
|
Accumulated Amortization on Customer
Relationship Intangible |
|
|
(205 |
) |
|
|
(469 |
) |
|
|
(699 |
) |
Non-Compete Intangible, Gross |
|
|
496 |
|
|
|
477 |
|
|
|
1,931 |
|
Accumulated Amortization on Non-Compete
Intangible |
|
|
(52 |
) |
|
|
(109 |
) |
|
|
(139 |
) |
Reacquired Franchise Intangible, Gross |
|
|
541 |
|
|
|
861 |
|
|
|
— |
|
Accumulated Amortization on Re-acquired
Franchise Rights |
|
|
(109 |
) |
|
|
(191 |
) |
|
|
— |
|
The Company sells sales and lease ownership stores to franchisees and third party operators during
the course of the year. The Company sold 11, 37 and 27 of its sales and lease ownership locations
in 2010, 2009 and 2008, respectively. The effect of these sales on the consolidated financial
statements was not significant.
Note K: Segments
Description of Products and Services of Reportable Segments
Aaron’s, Inc. has three reportable segments: sales and lease ownership, franchise and
manufacturing. During 2008, the Company sold its corporate furnishings division. The sales and
lease ownership division offers electronics, residential furniture, appliances and computers to
consumers primarily on a monthly payment basis with no credit requirements. The Company’s franchise operation sells and supports franchisees of its sales and
lease ownership concept. The manufacturing division manufactures upholstered furniture and bedding
predominantly for use by Company-operated and franchised stores. The Company has elected to
aggregate certain operating segments.
55
Earnings before income taxes for each reportable segment are generally determined in accordance
with accounting principles generally accepted in the United States with the following adjustments:
| |
• |
|
Sales and lease ownership revenues are reported on the cash basis for management
reporting purposes. |
| |
• |
|
A predetermined amount of each reportable segment’s revenues is charged to the
reportable segment as an allocation of corporate overhead. This allocation was
approximately 2% in 2010, 2009 and 2008. |
| |
• |
|
Accruals related to store closures are not recorded on the reportable segments’
financial statements, but are rather maintained and controlled by corporate headquarters. |
| |
• |
|
The capitalization and amortization of manufacturing variances are recorded on the
consolidated financial statements as part of Cash to Accrual and Other Adjustments and
are not allocated to the segment that holds the related lease merchandise. |
| |
• |
|
Advertising expense in the sales and lease ownership division is estimated at the
beginning of each year and then allocated to the division ratably over time for
management reporting purposes. For financial reporting purposes, advertising expense is
recognized when the related advertising activities occur. The difference between these
two methods is reflected as part of the Cash to Accrual and Other Adjustments line below. |
| |
• |
|
Sales and lease ownership lease merchandise write-offs are recorded using the direct
write-off method for management reporting purposes and using the allowance method for
financial reporting purposes. The difference between these two methods is reflected as
part of the Cash to Accrual and Other Adjustments line below. |
| |
• |
|
Interest on borrowings is estimated at the beginning of each year. Interest is then
allocated to operating segments based on relative total assets. |
Revenues in the “Other” category are primarily revenues of the Aaron’s Office Furniture division,
from leasing space to unrelated third parties in the corporate headquarters building and revenues
from several minor unrelated activities. The pre-tax losses in the “Other” category are the net
result of the activity mentioned above, net of the portion of corporate overhead not allocated to
the reportable segments for management purposes.
Measurement of Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources based on revenue growth and pre-tax
profit or loss from operations. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies except that the sales and lease
ownership division revenues and certain other items are presented on a cash basis. Intersegment
sales are completed at internally negotiated amounts. Since the intersegment profit and loss
affect inventory valuation, depreciation and cost of goods sold are adjusted when intersegment
profit is eliminated in consolidation.
Factors Used by Management to Identify the Reportable Segments
The Company’s reportable segments are based on the operations of the Company that the chief
operating decision maker regularly reviews to analyze performance and allocate resources among
business units of the Company.
As discussed in Note N, the Company sold substantially all of the assets of the Aaron’s Corporate
Furnishings division during the fourth quarter of 2008. For financial reporting purposes, this
division has been classified as a discontinued operation and is not included in our segment
information as shown below.
56
Information on segments and a reconciliation to earnings before income taxes from continuing
operations are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| (In Thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues From External Customers: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership |
|
$ |
1,803,778 |
|
|
$ |
1,685,841 |
|
|
$ |
1,526,405 |
|
Franchise |
|
|
59,112 |
|
|
|
52,941 |
|
|
|
45,025 |
|
Other |
|
|
16,514 |
|
|
|
19,320 |
|
|
|
25,781 |
|
Manufacturing |
|
|
79,115 |
|
|
|
72,473 |
|
|
|
68,720 |
|
|
|
|
|
|
|
|
|
|
|
Revenues of Reportable Segments |
|
|
1,958,519 |
|
|
|
1,830,575 |
|
|
|
1,665,931 |
|
Elimination of Intersegment Revenues |
|
|
(80,109 |
) |
|
|
(73,184 |
) |
|
|
(69,314 |
) |
Cash to Accrual Adjustments |
|
|
(1,563 |
) |
|
|
(4,604 |
) |
|
|
(4,009 |
) |
|
|
|
|
|
|
|
|
|
|
Total Revenues from External Customers from Continuing
Operations |
|
$ |
1,876,847 |
|
|
$ |
1,752,787 |
|
|
$ |
1,592,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership |
|
$ |
159,417 |
|
|
$ |
147,261 |
|
|
$ |
113,513 |
|
Franchise |
|
|
45,935 |
|
|
|
39,335 |
|
|
|
32,933 |
|
Other |
|
|
(8,165 |
) |
|
|
(5,676 |
) |
|
|
(60 |
) |
Manufacturing |
|
|
3,216 |
|
|
|
3,329 |
|
|
|
1,350 |
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes for Reportable Segments |
|
|
200,403 |
|
|
|
184,249 |
|
|
|
147,736 |
|
Elimination of Intersegment Profit |
|
|
(3,218 |
) |
|
|
(3,341 |
) |
|
|
(1,332 |
) |
Cash to Accrual and Other Adjustments |
|
|
(6,399 |
) |
|
|
(4,469 |
) |
|
|
(6,824 |
) |
|
|
|
|
|
|
|
|
|
|
Total Earnings from Continuing Operations Before Income Taxes |
|
$ |
190,786 |
|
|
$ |
176,439 |
|
|
$ |
139,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership |
|
$ |
1,248,785 |
|
|
$ |
1,110,675 |
|
|
$ |
1,019,338 |
|
Franchise |
|
|
55,789 |
|
|
|
51,245 |
|
|
|
39,831 |
|
Other |
|
|
189,198 |
|
|
|
144,024 |
|
|
|
152,934 |
|
Manufacturing |
|
|
14,723 |
|
|
|
15,512 |
|
|
|
21,167 |
|
|
|
|
|
|
|
|
|
|
|
Total Assets from Continuing Operations |
|
$ |
1,508,495 |
|
|
$ |
1,321,456 |
|
|
$ |
1,233,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership |
|
$ |
539,669 |
|
|
$ |
508,218 |
|
|
$ |
461,182 |
|
Franchise |
|
|
41 |
|
|
|
192 |
|
|
|
350 |
|
Other |
|
|
6,864 |
|
|
|
9,073 |
|
|
|
8,016 |
|
Manufacturing |
|
|
2,958 |
|
|
|
1,888 |
|
|
|
1,845 |
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation and Amortization from Continuing Operations |
|
$ |
549,532 |
|
|
$ |
519,371 |
|
|
$ |
471,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership |
|
$ |
2,937 |
|
|
$ |
4,030 |
|
|
$ |
7,621 |
|
Franchise |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
144 |
|
|
|
254 |
|
|
|
182 |
|
Manufacturing |
|
|
15 |
|
|
|
15 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense from Continuing Operations |
|
$ |
3,096 |
|
|
$ |
4,299 |
|
|
$ |
7,818 |
|
|
|
|
|
|
|
|
|
|
|
| |
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership |
|
$ |
275 |
|
|
$ |
275 |
|
|
$ |
275 |
|
Franchise |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
679 |
|
|
|
706 |
|
|
|
734 |
|
Manufacturing |
|
|
904 |
|
|
|
239 |
|
|
|
239 |
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures from Continuing Operations |
|
$ |
1,858 |
|
|
$ |
1,220 |
|
|
$ |
1,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues From Canadian Operations (included in totals above): |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership |
|
$ |
4,470 |
|
|
$ |
3,781 |
|
|
$ |
8,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets From Canadian Operations (included in totals above): |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Lease Ownership |
|
$ |
15,093 |
|
|
$ |
6,469 |
|
|
$ |
7,985 |
|
57
Note L — Related Party Transactions
The Company leases certain properties under capital
leases with certain related parties that are more fully described in Note D above.
In 2009, the
Company sponsored the son of its Chief Operating Officer as a driver for the Robert Richardson
Racing team in the NASCAR Nationwide Series at a cost of $1.6 million. The Company also paid
$22,000 for team decals, apparel and driver travel to corporate promotional events. The
sponsorship agreement expired at the end of the year and was not renewed. Motor sports promotions
and sponsorships are an integral part of the Company’s marketing programs.
In the second quarter
of 2009, the Company entered into an agreement with R. Charles Loudermilk, Sr., Chairman of the
Board of Directors of the Company, to exchange 750,000 of Mr. Loudermilk, Sr.’s shares of the
Company’s voting Class A Common Stock for 624,503 shares of its Nonvoting Common Stock having
approximately the same fair market value, based on a 30 trading day average.
Note M: Quarterly Financial Information (Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In Thousands, Except Per Share) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
Year Ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
495,269 |
|
|
$ |
444,999 |
|
|
$ |
452,150 |
|
|
$ |
484,429 |
|
Gross Profit * |
|
|
239,827 |
|
|
|
215,725 |
|
|
|
217,994 |
|
|
|
226,822 |
|
Earnings Before Taxes From Continuing
Operations |
|
|
59,562 |
|
|
|
39,329 |
|
|
|
42,085 |
|
|
|
49,810 |
|
Net Earnings |
|
|
36,975 |
|
|
|
24,435 |
|
|
|
26,179 |
|
|
|
30,787 |
|
Earnings Per Share |
|
|
.45 |
|
|
|
.30 |
|
|
|
.32 |
|
|
|
.38 |
|
Earnings Per Share Assuming Dilution |
|
|
.45 |
|
|
|
.30 |
|
|
|
.32 |
|
|
|
.38 |
|
| |
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
473,950 |
|
|
$ |
417,310 |
|
|
$ |
415,259 |
|
|
$ |
446,268 |
|
Gross Profit * |
|
|
226,571 |
|
|
|
206,191 |
|
|
|
203,254 |
|
|
|
207,323 |
|
Earnings Before Taxes From Continuing
Operations |
|
|
57,236 |
|
|
|
44,350 |
|
|
|
34,999 |
|
|
|
39,854 |
|
Net Earnings From Continuing Operations |
|
|
35,360 |
|
|
|
27,826 |
|
|
|
24,655 |
|
|
|
25,037 |
|
(Loss) Earnings From Discontinued
Operations, Net of Tax |
|
|
(209 |
) |
|
|
(76 |
) |
|
|
(19 |
) |
|
|
27 |
|
Earnings Per Share |
|
|
.44 |
|
|
|
.34 |
|
|
|
.30 |
|
|
|
.31 |
|
Earnings Per Share Assuming Dilution |
|
|
.43 |
|
|
|
.34 |
|
|
|
.30 |
|
|
|
.31 |
|
| |
|
|
| * |
|
Gross profit is the sum of lease revenues and fees, retail sales, and non-retail sales less
retail cost of sales, non-retail cost of sales, depreciation of lease merchandise and write-offs of
lease merchandise. |
58
Note N: Discontinued Operations
On September 12, 2008, the Company entered into
an agreement with CORT Business Services Corporation to sell substantially all of the assets of its
Aaron’s Corporate Furnishings division and to transfer certain of the Aaron’s Corporate Furnishings
division’s liabilities to CORT. The Aaron’s Corporate Furnishings division, which operated at 47
stores, primarily engaged in the business of leasing and selling residential furniture,
electronics, appliances, housewares and accessories. The Company consummated the sale of the
Aaron’s Corporate Furnishings division in the fourth quarter of 2008.
The consideration for the
assets consisted of $72 million in cash plus payments for certain accounts receivable of the
Aaron’s Corporate Furnishings division, subject to certain adjustments, including for differences
in the amount of the Aaron’s Corporate Furnishings division’s inventory at closing and in the
monthly rent potential of the division’s merchandise on lease at closing as compared to certain
benchmark ranges set forth in the purchase agreement. The assets transferred include all of the
Aaron’s Corporate Furnishings division’s lease contracts with customers and certain other
contracts, certain inventory and accounts receivable and store leases or subleases for 27
locations. CORT assumed performance obligations under transferred lease and certain other
contracts and customer deposits. The Company retained other liabilities of the Aaron’s Corporate
Furnishings division, including its accounts payable and accrued expenses. Included in the 2008
results is a $1.2 million pre-tax gain on the sale of the Aaron’s Corporate Furnishings division in
the fourth quarter of 2008.
Summarized operating results for the Aaron’s Corporate Furnishings
division for the years ended December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In Thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
83,359 |
|
(Loss) Earnings Before Income Taxes |
|
|
— |
|
|
|
(447 |
) |
|
|
7,162 |
|
(Loss) Earnings From Discontinued
Operations, Net of Tax |
|
|
— |
|
|
|
(277 |
) |
|
|
4,420 |
|
Note O: Deferred Compensation Plan
Effective July 1, 2009, the Company implemented the
Aaron’s, Inc. Deferred Compensation Plan (the “Plan”) an unfunded, nonqualified deferred
compensation plan for a select group of management, highly compensated employees and non-employee
directors. On a pre-tax basis, eligible employees can defer receipt of up to 75% of their base
compensation and up to 100% of their incentive pay compensation, and eligible non-employee
directors can defer receipt of up to 100% of both their cash and stock director fees. In addition,
the Company may elect to make restoration matching contributions on behalf of eligible employees to
compensate for certain limitations on the amount of matching contributions an employee can receive
under the Company’s tax-qualified 401(k) plan.
Compensation deferred under the Plan is credited to
each participant’s deferral account and a deferred compensation liability is recorded in accounts
payable and accrued expenses in the consolidated balance sheets. The deferred compensation plan
liability was approximately $3.5 million and $713,000 as of December 31, 2010 and 2009,
respectively. Liabilities under the Plan are recorded at amounts due to participants, based on the
fair value of participants’ selected investments. The Company has established a Rabbi Trust to
fund obligations under the Plan with Company-owned life insurance. The obligations are unsecured
general obligations of the Company and the participants have no right, interest or claim in the
assets of the Company, except as unsecured general creditors. The cash surrender value of these
policies totaled $3.5 million and $772,000 as of December 31, 2010 and 2009, respectively, and is
included in prepaid expenses and other assets in the consolidated balance sheets.
Deferred
compensation expense charged to operations for the Company’s matching contributions totaled
$231,000 and $130,000 in 2010 and 2009, respectively. No benefits have been paid as of December 31,
2010.
59
|
|
|
| ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
|
| ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
An evaluation of Aaron’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, was carried out by management, with the participation of the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), as of the end of the period covered by
this Annual Report on Form 10-K. Based on management’s evaluation, the CEO and CFO concluded that
the Company’s disclosure controls and procedures were effective as of December 31, 2010 to provide
reasonable assurance that the objectives of disclosure controls and procedures are met.
Reports of Management and Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Management has assessed, and the Company’s independent registered public accounting firm, Ernst &
Young LLP, has audited, the Company’s internal control over financial reporting as of December 31,
2010. The unqualified reports of management and Ernst & Young LLP thereon are included in Item 8
of this Annual Report on Form 10-K and are incorporated by reference herein.
Internal Control Over Financial Reporting
There were no changes in Aaron’s internal control over financial reporting, as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934, during the Company’s fourth fiscal quarter of
2010 that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
|
|
|
| ITEM 9B. |
|
OTHER INFORMATION |
None.
60
PART III
|
|
|
| ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE |
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, 2010,
with respect to: the identity, background and Section 16 filings of directors and executive
officers of the Company; the Audit Committee of the Board of Directors and the Committee’s “audit
committee financial expert”; the Company’s procedures by which security holders may recommend
nominees to the Board of Directors; and the Company’s code of ethics applicable to its chief
executive, financial, and accounting officers 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, 2010,
with respect to director and executive compensation, the Compensation Committee of the Board of
Directors and the Compensation Committee Report, is incorporated herein by reference in response to
this item.
|
|
|
| ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
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, 2010,
with respect to the ownership of common stock by certain beneficial owners and management, and with
respect to the Company’s compensation plans under which our equity securities are authorized for
issuance, is incorporated herein by reference to this item.
For purposes of determining the aggregate market value of the Company’s common stock held by
non-affiliates, shares held by all directors and executive 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 persons or entities may be “affiliates” of the Company as defined by the
Securities and Exchange Commission.
|
|
|
| ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
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, 2010,
with respect to related party transactions and director independence, is incorporated herein by
reference in response to this item.
|
|
|
| ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information contained under the heading “Audit Matters” 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, 2010, is incorporated herein by reference in response to this item.
61
PART IV
|
|
|
| ITEM 15. |
|
EXHIBITS, FINANCIAL STATEMENTS and SCHEDULES |
a) 1. FINANCIAL STATEMENTS
The following financial statements and notes thereto of Aaron’s, Inc. and Subsidiaries, and
the related Reports of Independent Registered Public Accounting Firm are set forth in Item 8 and
Item 9A.
2. FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting regulations of the SEC
have been omitted because they are not applicable or the required information is included in the
financial statements or notes thereto.
3. EXHIBITS
| |
|
|
|
|
| EXHIBIT |
|
|
| NO. |
|
DESCRIPTION OF EXHIBIT |
| |
2.1 |
|
|
Asset Purchase Agreement between CORT Business Services Corporation as Buyer and
the Company as Seller dated as of September 12, 2008, filed as Exhibit 2.1 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2008, which exhibit is by this reference incorporated herein. |
| |
|
|
|
|
| |
3.1 |
|
|
Amended and Restated Articles of Incorporation of the Company, filed as Exhibit
3.1 to the Company’s Registration Statement, as amended, on Form 8-A/A,
Commission File No. 001-13941, filed with the Commission on December 10, 2010,
which exhibit is by this reference incorporated herein. |
| |
|
|
|
|
| |
3.2 |
|
|
Amended and Restated By-laws of the Company, filed as Exhibit 3.2 to the
Company’s Registration Statement, as amended, on Form 8-A/A, Commission File No.
001-13941, filed with the Commission on December 10, 2010, which exhibit is by
this reference incorporated herein. |
| |
|
|
|
|
| |
4 |
|
|
See Exhibits 3.1 through 3.2. |
| |
|
|
|
|
| |
10.1 |
|
|
The Company’s Employees Retirement Plan and Trust, filed as Exhibit 4(a) to the
Company’s Registration Statement on Form S-8, Commission File No. 33-62538,
filed with the Commission on May 12, 1993, which exhibit is by this reference
incorporated herein. * |
| |
|
|
|
|
| |
10.2 |
|
|
Loan Agreement between Fort Bend County Industrial Development Corporation and
the Company relating to the Industrial Development Revenue Bonds (Aaron Rents,
Inc. Project), Series 2000 dated October 1, 2000, filed as Exhibit 10(m) to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (the
“2000 10-K”), which exhibit is by this reference incorporated herein. |
62
| |
|
|
|
|
| EXHIBIT |
|
|
| NO. |
|
DESCRIPTION OF EXHIBIT |
| |
10.3 |
|
|
Letter of Credit and Reimbursement Agreement between the Company and First Union
National Bank dated as of October 1, 2000, filed as Exhibit 10(n) to the 2000
10-K, which exhibit is by this reference incorporated herein. |
| |
|
|
|
|
| |
10.4 |
|
|
The Company’s 2001 Stock Option and Incentive Award Plan, filed as Exhibit 4(a)
to the Company’s Registration Statement on Form S-8, Commission File No.
333-76026, filed with the Commission on December 28, 2001, which exhibit is by
this reference incorporated herein. * |
| |
|
|
|
|
| |
10.5 |
|
|
Amended and Restated Master Agreement by and among the Company, SunTrust Bank
and SouthTrust Bank, dated as of October 31, 2001, filed as Exhibit 10(s) to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2001, which
exhibit is by this reference incorporated herein. |
| |
|
|
|
|
| |
10.6 |
|
|
Amendment Number One to the Servicing Agreement by and between the Company and
SunTrust Bank dated as of April 30, 2003, filed as Exhibit 10(w) to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003,
which exhibit is by this reference incorporated herein. |
| |
|
|
|
|
| |
10.7 |
|
|
First Amendment to the Company’s 2001 Stock Option and Incentive Award Plan,
filed as Exhibit 4(b) to the Company’s Registration Statement on Form S-8,
Commission File No. 333-123426, filed with the Commission on March 18, 2005,
which exhibit is by this reference incorporated herein. * |
| |
|
|
|
|
| |
10.8 |
|
|
Note Purchase Agreement between the Company and certain other obligors and the
purchasers dated as of July 27, 2005 and Form of Senior Note, filed as Exhibit
10(ee) to the Company’s Current Report on Form 8-K, filed with the Commission on
August 2, 2005 (the “8/2/05 8-K”), which exhibit is by this reference
incorporated herein. |
| |
|
|
|
|
| |
10.9 |
|
|
First Amendment dated as of July 27, 2005 to Amended and Restated Master
Agreement and Amended and Restated Lease Agreement dated as of October 31, 2001,
as amended, among the Company as lessee, SunTrust Banks, Inc. as lessor,
Wachovia Bank, National Association, as lender, and SunTrust Bank as lease
participant and agent, filed as Exhibit 10(jj) to the 8/2/05 8-K, which exhibit
is by this reference incorporated herein. |
| |
|
|
|
|
| |
10.10 |
|
|
First Omnibus Amendment dated as of August 21, 2002, but effective as of October
31, 2001 to the Amended and Restated Master Agreement and Amended and Restated
Lease Agreement dated as of October 31, 2001, as amended, among the Company as
lessee, SunTrust Banks, Inc. as lessor, Wachovia Bank, National Association, as
lender, and SunTrust Bank as lease participant and agent filed as Exhibit 10(kk)
to the Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2005, which exhibit is by this reference incorporated herein. |
| |
|
|
|
|
| |
10.11 |
|
|
Consent Agreement made and entered into as of April 7, 2006 by and among the
Company as sponsor, SunTrust Bank and each of the other lending institutions
party thereto as participants, and SunTrust Bank as servicer to form one or more
Canadian Subsidiaries in one or more Canadian provinces, filed as Exhibit (pp)
to the Company’s Quarterly Report on Form 10-Q for its quarter ended June 30,
2006 (the “6/30/06 10-Q”), which exhibit is incorporated by this reference. |
| |
|
|
|
|
| |
10.12 |
|
|
Consent Agreement made and entered into as of April 7, 2006 by and among the
Company and certain co-borrowers, the several banks and other financial
institutions from time to time party thereto and SunTrust Bank as administrative
agent to form one or more Canadian Subsidiaries in one or more Canadian
provinces, filed as Exhibit (qq) to the 6/30/06 10-Q, which exhibit is by this
reference incorporated herein. |
63
| |
|
|
|
|
| EXHIBIT |
|
|
| NO. |
|
DESCRIPTION OF EXHIBIT |
| |
10.13 |
|
|
Amendment to Option and Award Agreement under the Company’s 2001 Stock Option
and Incentive Award Plan, filed as Exhibit 10(pp) to the Company’s Current
Report on Form 8-K, filed with the Commission on December 22, 2006, which
exhibit is by this reference incorporated herein. * |
| |
|
|
|
|
| |
10.14 |
|
|
Revolving Credit Agreement, dated as of May 23, 2008, among the Company, as
borrower, the lenders from time to time party thereto, and SunTrust Bank, as
administrative agent, filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K, filed with the Commission on May 30, 2008 (the “5/30/08 8-K”), which
exhibit is by this reference incorporated herein. |
| |
|
|
|
|
| |
10.15 |
|
|
Subsidiary Guaranty Agreement, dated as of May 23, 2008, between Aaron
Investment Company and SunTrust Bank, as administrative agent, filed as Exhibit
10.2 to the 5/30/08 8-K, which exhibit is by this reference incorporated herein. |
| |
|
|
|
|
| |
10.16 |
|
|
Amended and Restated Loan Facility Agreement and Guaranty by and among the
Company as sponsor, SunTrust Bank, as servicer, and each of the other financial
institutions party thereto as participants, dated as of May 23, 2008, filed as
Exhibit 10.3 to the 5/30/08 8-K, which exhibit is by this reference incorporated
herein. |
| |
|
|
|
|
| |
10.17 |
|
|
Amended and Restated Guaranty Agreement, dated as of May 23, 2008, among Aaron
Investment Company and SunTrust Bank, as servicer, filed as Exhibit 10.4 to the
5/30/08 8-K, which exhibit is by this reference incorporated herein. |
| |
|
|
|
|
| |
10.18 |
|
|
First Amendment, dated as of November 4, 2008, to Note Purchase Agreement
between the Company and certain other obligors and the purchasers dated as of
July 27, 2005, filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K, filed with the Commission on November 10, 2008, which exhibit is by this
reference incorporated herein. |
| |
|
|
|
|
| |
10.19 |
|
|
The Company’s Amended and Restated 2001 Stock Option and Incentive Award Plan
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with
the Commission on April 10, 2009, which exhibit is by this reference
incorporated herein. * |
| |
|
|
|
|
| |
10.20 |
|
|
Form of Share Exchange Agreement, among the Company and R. Charles Loudermilk,
Sr., Chairman of the Board of Directors of the Company, filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K, filed with the Commission on May 15,
2009, which exhibit is by this reference incorporated herein. |
| |
|
|
|
|
| |
10.21 |
|
|
First Amendment to the Amended and Restated Loan Facility Agreement and Guaranty
by and among the Company as sponsor, SunTrust Bank, as servicer, and each of the
other financial institutions party thereto as participants, dated as of May 22,
2009, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed
with the Commission on May 29, 2009, which exhibit is by this reference
incorporated herein. |
| |
|
|
|
|
| |
10.22 |
|
|
Second Amendment to Servicing Agreement, by and among the Company, as sponsor,
SunTrust Bank, as servicer, dated as of May 22, 2009, filed as Exhibit 10.2 to
the Company’s Current Report on Form 8-K, filed with the Commission on May 29,
2009, which exhibit is by this reference incorporated. |
| |
|
|
|
|
| |
10.23 |
|
|
The Company’s Deferred Compensation Plan Master Plan Document filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on
June 12, 2009, which exhibit is by this reference incorporated herein. * |
64
| |
|
|
|
|
| EXHIBIT |
|
|
| NO. |
|
DESCRIPTION OF EXHIBIT |
| |
10.24 |
|
|
Form of Aaron’s, Inc. Performance-Based Vesting Restricted Stock Award Agreement
under the 2001 Stock Option and Incentive Award Plan filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K, filed with the Commission on June 12,
2009, which exhibit is by this reference incorporated herein. * |
| |
|
|
|
|
| |
10.25 |
|
|
Second Amended and Restated Loan Facility Agreement and Guaranty with SunTrust
Bank, as servicer, and the other participants listed therein, attached hereto as
Exhibit 10.1, to the Company’s Current Report on Form 8-K, filed with the
Commission on June 18, 2010, which exhibit is by this reference incorporated
herein. |
| |
|
|
|
|
| |
10.26 |
|
|
The Company’s Employees Retirement Plan and Trust, as amended and restated,
filed as Exhibit 99.3 to the Company’s Registration Statement on Form S-8,
Commission File No. 333-17113, filed with the Commission on December 10, 2010,
which exhibit is by this reference incorporated herein.* |
| |
|
|
|
|
| |
10.27 |
|
|
Narrative Description of Amendment to 2001 Stock Option and Incentive Award
Plan, as Amended and Restated, filed as Exhibit 99.2 to the Company’s
Registration Statement on Form S-8, Commission File No. 333-17113, filed with
the Commission on December 10, 2010, which exhibit is by this reference
incorporated herein.* |
| |
|
|
|
|
| |
21 |
|
|
Subsidiaries of the Registrant, filed as part of this Annual Report on Form 10-K. |
| |
|
|
|
|
| |
23 |
|
|
Consent of Independent Registered Public Accounting Firm |
| |
|
|
|
|
| |
31.1 |
|
|
Certification of Chief Executive Officer, pursuant to Rules 13a-14(a)/15d-14(a). |
| |
|
|
|
|
| |
31.2 |
|
|
Certification of Chief Financial Officer, pursuant to Rules 13a-14(a)/15d-14(a). |
| |
|
|
|
|
| |
32.3 |
|
|
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
|
|
| |
32.4 |
|
|
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
|
|
| |
101 |
|
|
The following financial information from Aaron’s, Inc. Annual Report on Form
10-K for the year ended December 31, 2010, formatted in XBRL (eXtensible
Business Reporting Language): (i) Consolidated Balance Sheets as of December
31, 2010 and December 31, 2009, (ii) Consolidated Statements of Earnings for
the years ended December 31, 2010, 2009 and 2008, (iii) Consolidated Statements
of Cash Flows for the years ended December 31, 2010, 2009 and 2008, (iv)
Consolidated Statements of Shareholder’s Equity for the years ended December 31,
2010, 2009 and 2008 and (v) the Notes to Consolidated Financial Statements. |
| |
|
|
| * |
|
Management contract or compensatory plan or arrangement |
(b) EXHIBITS
The exhibits listed in Item 15(a)(3) are included elsewhere in this Report.
(c) FINANCIAL STATEMENTS AND SCHEDULES
The financial statements listed in Item 15(a)(1) are included in Item 8 in this Report.
65
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 25th day of February 2011.
| |
|
|
|
|
| |
AARON’S, INC.
|
|
| |
By: |
/s/ GILBERT L. DANIELSON
|
|
| |
|
Gilbert L. Danielson |
|
| |
|
Executive Vice President, Chief Financial Officer |
|
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 25th day of February 2011.
| |
|
|
| SIGNATURE |
|
TITLE |
|
|
|
/s/ R. CHARLES LOUDERMILK, SR.
|
|
|
R. Charles Loudermilk, Sr.
|
|
Chairman of the Board of Directors |
|
|
|
/s/ ROBERT C. LOUDERMILK, JR.
|
|
Chief Executive Officer (Principal Executive Officer), |
Robert C. Loudermilk, Jr.
|
|
President and Director |
|
|
|
|
|
Executive Vice President, Chief Financial Officer and |
Gilbert L. Danielson
|
|
Director (Principal Financial Officer) |
|
|
|
/s/ ROBERT P. SINCLAIR, JR.
|
|
Vice President, Corporate Controller |
Robert P. Sinclair, Jr.
|
|
(Principal Accounting Officer) |
|
|
|
/s/ WILLIAM K. BUTLER, JR.
|
|
|
William K. Butler, Jr.
|
|
Chief Operating Officer and Director |
66
| |
|
|
| SIGNATURE |
|
TITLE |
|
|
|
|
|
|
Ronald W. Allen
|
|
Director |
|
|
|
|
|
|
Leo Benatar
|
|
Director |
|
|
|
|
|
|
David L. Kolb
|
|
Director |
|
|
|
|
|
|
John C. Portman
|
|
Director |
|
|
|
|
|
|
Ray M. Robinson
|
|
Director |
|
|
|
|
|
|
John Schuerholz
|
|
Director |
67