Aaron's Company Annual Report 1997

FY1997 Annual Report · Aaron's Company

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309 E. Paces Ferry Road, N.E.
Atlanta, Georgia 30305-2377
(404) 231-0011

C o r p o r at e I n f o r m at i o n
Corporate Headquarters
309 E. Paces Ferry Rd., N.E.
Atlanta, Georgia 30305-2377
(404) 231-0011
http://www.aaronrents.com

Subsidiary
Aaron Investment Company
10th & Market Streets
Mellon Bank Building
2nd Floor
Wilmington, Delaware 19801
(302) 888-2351

S h a r e h o l d e r I n f o r m at i o n
Annual Shareholders Meeting
The annual meeting of the shareholders of Aaron Rents, Inc.
will be held on Tuesday, May 5, 1998, at 10:00 a.m. E.D.T. at the
First Union Plaza, 999 Peachtree Street, N.E., 28th Floor, Atlanta,
Georgia 30309.

Form 10-K
Shareholders may obtain a copy of the Company’s annual report
on Form 10-K filed with the Securities and Exchange Commission
upon written request, without charge. Such requests should be
sent to the attention of Gilbert L. Danielson, Vice President,
Finance, Chief Financial Officer, Aaron Rents, Inc.,
309 E. Paces Ferry Rd., N.E., Atlanta, Georgia 30305-2377.

Stock Listing

RNT

Aaron Rents Inc.’s Common Stock and Class A
Common Stock are traded on the New York
Stock Exchange under the symbols “RNT” and
“RNT.A,” respectively.

Transfer Agent and Registrar
SunTrust Bank, Atlanta
Atlanta, Georgia

General Counsel
Kilpatrick Stockton LLP
Atlanta, Georgia

America(cid:213)s

Premier
Name

Furniture
Rental

In
Rental

Purchase

A n n u a l

R e

p o r t

1 9 9 7

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Purchase

Aaron Rents, Inc. is a U.S. leader
in furniture rental and rental purchase
with 393 stores in 31 states. Positioned as
“America’s Premier Name in Furniture
Rental and Rental Purchase,” the Company
offers both individual and corporate
customers a wide range of
residential and office furniture,
accessories, consumer electronics,
and household appliances for
rental, rental purchase
and sale. The major
operations are the Rent-to-
Rent division, the Aaron’s
Rental Purchase division, the Aaron Rents’
Convention Furnishings division, and
MacTavish Furniture Industries, which
supplies much of the furniture for the
Company’s rental and rental purchase
stores. Aaron Rents’ strategic focus is on
expanding its higher growth rental purchase
business while also growing its core rent-to-
rent business in selected markets.

America(cid:213)s

Premier
Name in

Furniture
Rental

Rental&

T a b l e o f C o n t e n t s

Financial Highlights . . . . . . . . . . . .1

Letter to Shareholders . . . . . . . . .2

Business Review . . . . . . . . . . . . . . .4

Selected Financial Information . .13

Management’s Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . .14

Consolidated Balance Sheets . . . .16

Consolidated Statements
of Earnings . . . . . . . . . . . . . . . . .17

Consolidated Statements
of Shareholders’ Equity . . . . . . .17

Consolidated Statements
of Cash Flows . . . . . . . . . . . . . . . .18

Notes to Consolidated
Financial Statements . . . . . . . . . .19

Report of Independent
Auditors . . . . . . . . . . . . . . . . . . . .23

Store Locations . . . . . . . . . . . . . .24

Board of Directors
and Officers . . . . . . . . . . . . . . . . .25

Corporate and Shareholder
Information . . . . . . . . . .Back Cover

F i n a n c i a l

H i g h l i g h t s

(Dollar Amounts in Thousands,
Except Per Share)

Year Ended
December 31,
1997

Year Ended
December 31,
1996

Percentage
Change

OPERATING RESULTS
Revenues
Earnings Before Taxes
Net Earnings
Earnings Per Share
Earnings Per Share Assuming Dilution

$310,751
30,237
18,396
0.96
0.94

FINANCIAL POSITION
Total Assets
Rental Merchandise, Net
Interest-Bearing Debt
Shareholders’ Equity
Book Value Per Share
Debt to Capitalization
Pre-Tax Profit Margin
Net Profit Margin
Return on Average Equity

STORES OPEN
Rent-to-Rent
Rental Purchase
Rental Purchase Franchise
Convention Furnishings

Total Stores

$239,382
176,968
76,486
116,455
6.15
39.6%
9.7%
5.9%
16.4%

105
181
101
6

393

$274,245
25,179
15,393
0.81
0.77

$198,103
149,984
55,365
107,335
5.45
34.0%
9.2%
5.6%
15.5%

103
135
61
2

301

13.3%
20.1%
19.5%
18.5%
22.1%

20.8%
18.0%
38.1%
8.5%
12.8%

1.9%
34.1%
65.6%
200.0%

30.6%

Revenues by Calendar Year

Net Earnings by Calendar Year

($ in 000’s)
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0

’93 ’94 ’95 ’96 ’97

Rent-to-Rent

Rental Purchase

($ in 000’s)
$20,000

$15,000

$10,000

$5,000

’93 ’94 ’95 ’96 ’97

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To
O u r
S h a r e h o l d e r s :

What a tremen d ou s year !
Aaron Rents expanded coast to coast and achieved record-breaking growth in all facets of the
business in 1997 — the best year in our Company’s history. Total store count during the year
increased nearly one-third to almost 400 stores, adding strong momentum going forward. We
are now uniquely positioned for growth as “America’s Premier Name in Furniture Rental and
Rental Purchase.”

Record revenu es reach ed $31 0.8 mi lli on compared to $274.2 million last
year, up 13%. Record earnings rose 20% to $18.4 million compared to $15.4 million in the
previous year. Earnings per share were $.96 ($.94 assuming dilution) compared with $.81
($.77 assuming dilution) for 1996. Your Company has now achieved over six consecutive
years of record revenues and earnings.

Aaron Rents expan d ed nati onwi d e du ri ng th e year and achieved
our goal of having at least 100 franchise stores open by year end. We entered five new states
in 1997, opening operations in California, Connecticut, Illinois, Iowa and Pennsylvania,
increasing our state count to 31. The franchise division alone added 40 stores during the year,
a 66% growth in stores open!

A majo r acqu i siti on ad d ed 40 rental pu rchase stores in Texas,
doubling our size in that state — the largest rental purchase market in the United States. In
December, we acquired the assets of RentMart Rent-To-Own, Inc., including its stores in
Dallas, Houston and San Antonio. All less than 18 months old, these stores fit naturally with
the Aaron’s Rental Purchase store model, with bigger stores in more desirable market loca-
tions. The RentMart transaction demonstrated our commitment to acquisitions when
the fit is right.

I n an oth er key acq u i s iti o n , we purchased the assets of Blackhawk
Convention Services, Inc. in December, doubling the size of our convention furnishings
division and extending that service nationwide. Blackhawk operations in the Chicago, New
York and Las Vegas markets, combined with our existing presence in Atlanta, Cincinnati,
Dallas and Orlando, will enable us to serve most of the major convention cities of the United
States. We expect this acquisition will also result in spin-off business to our present and future
rent-to-rent stores.

Our rent-to-rent division posted record revenues and earnings
with steady and profitable growth. We opened two new stores during 1997 and began a
program of expanding this business at a stronger rate. The emphasis for this division in 1998
will be on adding corporate and national accounts while maintaining our superior
relationships with existing customers.

Th e fu rn itu re manu factu ri ng d ivi si on , MacTavish Furniture Industries,
turned in another record year, increasing production to $45 million of furniture at cost, which
was supplied primarily to our stores. We continued to invest in our manufacturing capacity
with an 18,000 square foot plant addition and new equipment.

Strength en i ng ou r management i n 19 97 , Robert C. Loudermilk, Jr., who
had served as Vice President, Real Estate since 1993, was appointed President and Chief
Operating Officer of Aaron Rents after more than a decade of experience in all aspects of
the business. Ronald W. Allen, retired Chairman, President and Chief Executive Officer of
Delta Air Lines, was named to the Aaron Rents’ Board of Directors, adding his insight and
knowledge to our Company.

I beli eve Aaron Rents i s on th e th resh old of the greatest opportunity
for growth in its 43-year history. Our rent-to-rent business performs at a strong and consistent
level and, to answer heightened market demand, we plan to expand this business in both
existing and new markets in 1998. Over the next several years, we expect to enter some 20
new markets with this profitable core business. The pace of this growth will be controlled
and conservative to minimize the normal effects of start-up costs, thereby allowing us to con-
tinue solid profit gains.

Rental pu rchase offers almo st u n limited potential for profitable
expansion. Every town in America should have an Aaron’s Rental Purchase store. Our goal is
to become the supplier of choice to the higher end of the lower-income segment of American
consumers. Aaron’s will be the name in rental purchase. That is our vision. Through our fast-
growing unique franchise program and our Company-operated stores, we plan to reach that
goal within the next decade. In 1998 we expect 50 more franchise stores and 15 Company-
operated stores to be opened, which will result in more than 345 rental purchase stores open
by year end. With this base, and through internal growth alone, we should reach the 700-mark
in total stores open in 2000.

Aaron Rents has th e fi nancial resou rces to execute our ambitious plan
for growth. During the year, we negotiated a new $40 million credit facility to provide fund-
ing to franchisees for growing our franchise program. Our revolving credit facility with four
banks was increased during the year to $90 million. The Company’s foundation is our
conservative fiscal policy and stringent financial controls of our internal and franchise
operations. We are committed to maintaining our strong balance sheet, assuring our ability
to prosper in any economic cycle.

During the year, the Company was named by Forbes Magazine
as one of the 200 best small companies in America. We are proud of this recognition which
sets us apart from others in our industry. Your Company’s stock price excelled in 1997, with
the Common Stock closing at the end of the year at $19.375. At December 31, 1997, the
five-year total return for the Common Stock was 36.9%, a significant achievement.

On March 20, 1998, the Company’s Common Stock and Class A Common Stock
were listed on the New York Stock Exchange under the symbols RNT and RNT.A, respec-
tively. Our move to the New York Stock Exchange should increase the Company’s visibility
in the investment community and expand our potential investor base.

The future of our Company looks stronger now than at any time since its founding
in 1955. It’s exciting to be part of Aaron Rents today!

R. Charles Loudermilk, Sr.
Chairman and Chief Executive Officer

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Aaron Rents, Inc.

America(cid:213)s

Premier
Name in

Furniture
Rental

Rental&

Purchase

Aaron Rents commands
a unique position in the
furniture rental and
rental purchase
industries. The Aaron
Rents’ concept, which
distinguishes it from
competitors, has created
major advantages in
the marketplace and
spurred record growth.
These are the distinctive
features of Aaron
Rents, Inc.:

Th e lea d e r i n eth i ca l b u s i n e s s p racti c e s ,
offering customers first-rate products and service at competitive prices
with full disclosure of terms, backed by the Aaron Rents’ reputation for
integrity established over 43 years of doing business.
Th e combi nati on of two bu si n esses, rent-to-rent
and rental purchase, providing a powerful synergy for success — with the
rent-to-rent business generating cash flow in all economic cycles and rental
purchase, led by franchising, creating the opportunity for rapid growth.
Th e effi ci ency an d co st advantages of vertical
integration — unique within the rental industry. Aaron Rents has its own
furniture manufacturing plants, allowing lower pricing, overnight delivery
and quick change of designs. In addition, Aaron Rents has its own network
of distribution centers, strategically located to support fast delivery
to customers.
Th e targeti ng of the expanding mid-range office furniture
rental market, a niche especially receptive to our competitive pricing, and
representing a growing market for the Company.
Th e creation of our own market niche — the upper end of the
rental purchase market — to whom we offer our unique product. This
niche appreciates our level of customer service, our quality merchandise
offered at the lowest prices in the industry, our larger, more attractive
stores in better locations compared to typical competing stores, and our
agreement structure that enables ownership of merchandise in only 12
months.
Th e development of our rental purchase franchise program, also
unique in the industry, with strong growth resulting from the success of
the Aaron’s Rental Purchase concept in the marketplace.

The Aaron Rents strategy is to grow the rent-to-rent business through
opening new stores in established and new markets, focusing on the
profitable office furniture segment and the growing residential corporate
relocation business; and to expand the faster-growing rental purchase busi-
ness through accelerated franchise store openings primarily in smaller mar-
kets, augmented by additional Company-operated stores in major
markets. The success of this approach has been demonstrated over the
past several years.

Rent-
Rent-

to-
to-

Rent
Rent

Aaron Rents ranks as the second largest
rent-to-rent company in the United States, with 105 stores
commanding 30% of a total market estimated at more
than $600 million. This division, the Company’s original
business founded in 1955, serves a broad spectrum of
people requiring temporary rentals of residential or office
furniture, accessories or appliances for a few weeks or
months. Customers range from individuals to corporate
entities: people who need the temporary use of residential
and office furniture and related merchandise.

Corporate customers comprise a major market segment.

These include large corporations and newly formed businesses, professionals such as accoun-
tants and attorneys, property managers and real estate investors. Their needs may be the
furnishing of new offices or rental of equipment for special projects and seasonal events.
Growing demand is being spurred by the relocation of both temporary and permanent
corporate employees, the growth in white-collar desk jobs, and the generally strong need
for office furniture and equipment rentals.

To Meet national account demand,
Aaron Rents’ Rent-to-Rent Division
opened its first three furniture
warehouse facilities in early 1998.
These corporate service centers
bring greater convenience and cost
savings resulting from lower
overhead at these
centralized facilities.

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Aaron Rents’ stores average 21,000 square feet and carry
a large selection of brand-name merchandise for rental or
sale. As a combined result of the Company’s volume pur-
chasing power and its own manufacturing division,
MacTavish Furniture Industries, Aaron Rents is able to offer
significant price savings to its customers. Next-day delivery is
provided from each store’s on-site warehouse. Clearance cen-
ters sell both rental return and new merchandise. Office fur-
niture accounts for 33% of the rent-to-rent rental revenues,
while residential furniture represents almost 60%.
Electronics and other types of merchandise account for the
remaining 7% of rental revenues.

Early in 1998, the Company opened its first three furni-
ture warehouse facilities in response to demand by national
accounts. These centralized warehouses, strategically located
in Florida, Pennsylvania and
are designed
as corporate service centers. Their lower overhead allows
savings to be passed on to customers. Our national cus-
tomers, already familiar with Aaron’s quality products, enjoy
the convenience and quick response of simply telephoning in
or sending orders via facsimile.

Illinois,

Rental
Rental

Pu rchase
Pu rchase

Rent-to-Rent
Rental Revenues

Residential Furniture — 60%
Office Furniture — 33%
Electronics & Other — 7%

Th e Aaron(cid:213)s Rental Pu rchase division increased by 86
stores, or 44%, to a total of 282 stores at the end of 1997 — opening stores at the rate of one
every four days. In keeping with the vision of founder R. Charles Loudermilk, Sr. for Aaron’s
Rental Purchase to be “the name in rental purchase,” a continued strong rate of expansion is
planned for this year and beyond.

We are uniquely positioned to gain an ever-increasing
share of the $4.1 billion rental purchase market, composed of
an estimated 19.6 million U.S. households with only 25%
currently served by the industry. Aaron’s Rental Purchase
offers larger, more attractive stores averaging 8,500 square
feet compared to typical competing stores with 2,500 to
3,000 square feet. Aaron’s Rental Purchase stores are also
located in more appealing areas with a wider selection of
quality, name-brand furniture, electronics, appliances and other
merchandise. Electronics represent 54% of the rental
purchase rental revenues. Furniture, appliances and other
account for the remaining 30%, 14% and 2%, respectively.

Inviting, colorful Aaron’s Rental
Purchase stores in customer-
friendly locations offer the
advantages of larger showrooms
and a wider selection of top quality
merchandise. The Aaron’s plan of
ownership, after only 12 monthly
payments, is a major reason for
this division’s rapid growth.

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Aaron’s Rental Purchase has created a better way to provide the basic necessities of home
furnishings, and some of the extras of life, to a large, under-served segment of society.
The Company prides itself on its policy of full disclosure. Transactions are effected in a pro-
fessional manner with all terms explained. We educate our clientele on the value they receive.
This honest approach with our customers helps explain our robust repeat business.

Customers include white-collar professionals, blue-collar workers, young couples and
retirees. Attracting the higher end of this generally lower-income market, the Aaron’s Rental
Purchase concept stands alone. Aaron’s Rental Purchase offers the
lowest
possible prices with its centerpiece 12-month ownership plan. This unique plan allows a
customer to own merchandise after only 12 monthly payments, a sharp contrast to the
industry norm of 18 to 24 months of weekly payments. Aaron’s has effectively reinvented the
basis of competition in the industry with an entirely new retailing concept, creating a bridge
to the larger retail market as well as the rental purchase market.

On most products, the Aaron’s Rental Purchase price is very competitive with the total
price of comparable products at a conventional credit retailer after the retailer adds interest
and service charges. In addition, Aaron’s Rental Purchase customers avoid debt and credit
with no obligation beyond the current rental payment due, and they have the privilege of
returning merchandise at any time.

Company-operated rental purchase stores increased by 46 in 1997 to 181 stores open at
year end. Included in the increase were 40 stores from the Company’s first major acquisition
in recent years. Aaron Rents acquired the assets of RentMart Rent-To-Own, Inc. with its
stores in Dallas, Houston and San Antonio, Texas, and more than doubled the number of
Aaron’s Rental Purchase outlets in that state. The RentMart stores provided an excellent
fit with the Aaron’s Rental Purchase model with larger and more attractive showrooms in
more appealing locations and a wider selection of top quality merchandise. At the time of
acquisition, all of the RentMart stores were less than 18 months old and had demonstrated a
rapid rate of growth.

Aaron’s Rental Purchase
Systemwide Revenue
Growth and Store Count

282*

196*

142*

118*

82*

’93 ’94 ’95 ’96 ’97

($ in 000’s)
$200,000
$150,000
$100,000
$50,000

Company-Operated Revenues

Franchise Revenues

*Number of Stores

Rental Purchase
Rental Revenues

Electronics — 54%
Furniture — 30%
Appliances — 14%
Other — 2%

Rental
Rental
Pu rchase
Pu rchase
Franch i se
Franch i se

Aaro n (cid:213) s Rental P u rchas e Fran ch i s e s are multi-
plying rapidly with stores opening at the rate of one every nine days in 1997. Multi-store
franchises are the predominant factor behind the growth and succeeded in pushing the fran-
chise division beyond the 100-store level late last year. This base of stores is expected to begin
generating a more significant profit contribution and provide momentum for continuing growth.
A total of 40 franchise stores were added during the year, including our first store in
California, which gave Aaron’s Rental Purchase a presence in all major regions of the coun-
try. Plans call for the opening of 50 additional stores in 1998, most of which are already sold
and in the pipeline, which will result in over 150 franchise stores by the close of the year.

Aaron’s Rental Purchase is a recognized leader in franchising, based on the Company’s
relationship with franchise owners and its financial performance, the growth opportunities
for franchise stores, and the strength and stability of corporate man-
agement. This track record is attracting experienced business people
to acquire Aaron’s Rental Purchase franchises. Typically, a franchise
owner has significant ownership or operational experience in the
including video outlets, fast food stores,
rental or retail setting,
furniture and appliance stores and automobile dealerships.

The nationally recognized Aaron’s
Rental Purchase franchise program
attracts business people with the
experience and financial capacity
to acquire and operate profitable
multi-store franchises. These own-
ers are generating momentum for
continuing strong growth.

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Quarterly Revenues
of Franchise Stores

($ in 000’s)
$20,000

$15,000

$10,000

$5,000

101*

86*

76*

71*

61*

54*

45*

38*

36*

31*

28*

26*

24*

21*

18*

15*

14*

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
1992 1993 1994

1996

1995

1997

*Number of Stores Open

Aaron’s Rental Purchase provides substantial support to
franchise owners. From helping create an effective business
plan to shopping the competition in the area, the Company
is there to assist with site selection, training, publicity, financ-
ing, purchasing discounts and advertising. All aspects of oper-
ating a profitable rental purchase business are covered in a
comprehensive training course for the franchise owner. After
the opening of the store, ongoing training and support are
provided by our field consultants. Full data on sales and oper-
ational controls are supplied to franchise owners via the
Aaron’s Customer Tracking System (ACTS).

A major advantage for the Aaron’s Rental Purchase
franchise owner is the Company’s volume purchasing plan
that passes on price benefits to the store, allowing more
competitive prices to the consumer — a key success factor of
the Aaron’s concept. The franchise owner receives further
cost benefits by obtaining furniture supplied by the
Company’s own manufacturing division.

To enhance the growth rate of the franchise effort, a new
financing program was developed in 1997 and implemented
in early 1998, increasing cap-
ital available to franchisees
for new store openings. The
$40 million financing facility
with four major banks pro-
vides inventory financing for
new franchise owners. It also
offers long-term inventory
and working capital funds for
multi-store and experienced
franchisees.

Ranked among the top
franchises nationally,
the
Aaron’s Rental Purchase
franchise program is growing
at a rapid rate.

1 0

Conventi on
Conventi on

Fu rn i sh i ngs
Fu rn i sh i ngs

1 1

Aaron Rents doubled the size of its Convention Furnishings division and
expanded its reach nationwide with the acquisition of the assets of Blackhawk Convention
Services, Inc. last year. This acquisition enables the division to service any city in the United
States through offices located in most of the major convention markets, opening new oppor-
tunities in a growing industry.

Blackhawk’s three locations in the Chicago, New York and Las

Vegas markets were added to the existing Aaron Rents’
Convention Furnishings locations in Atlanta, Cincinnati,
Orlando and Dallas. The acquisition provided our initial
penetration of the Chicago market and paved the way for
the Company’s rent-to-rent business to open a store in
the area in early 1998.

The Aaron Rents’ Convention
Furnishings division provides for
the temporary needs of a wide range
of meetings, from trade shows to
major events like the Super Bowl
and national political conventions.

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MacTavish
MacTavish
Furniture
Furniture
Industries
Industries

1 2

Reco rd growth was achieved again as
MacTavish Furniture Industries produced $45 million of
merchandise at cost. This Aaron Rents’ division manufac-
tured 49% of the furniture rented or sold by the Company’s
rent-to-rent and rental purchase stores.

MacTavish ranks among the largest furniture manufactur-
ers in the United States, with a reputation for high-quality,
durable and stylish furniture for both residential and office
uses. Made especially for rental, MacTavish furniture incor-
porates unique features especially valuable for the rental
industry, including reinforced frames, highly resilient foam
and heavy-duty springs.

The growing demands of the ever-increasing

number of stores, both Company-operated and
franchise, required a facility expansion at
MacTavish last year. Currently, the Company
manufactures furniture at five plants and pro-
duces bedding at four facilities — a part of the
vertical integration that makes Aaron Rents
unique in the industry.

S e l e c t e d

F i n a n c i a l I n f o r m at i o n

Twelve

Nine

Distribution
Distribution
Centers
Centers

Th e company continues to expand its distri-
bution system, another unique feature of Aaron Rents and
a key competitive advantage. These distribution centers, with a
combined warehouse space of 367,000 square feet, enable
Aaron Rents to guarantee quick delivery to customers and
support the continuing growth of the business. Merchandise
is warehoused in five distribution centers that are strategi-
cally located across the United States. A new facility to
serve the northern United States and a 200,000 square foot
national distribution center in southern Georgia are slated to

open in 1998.

(Dollar Amounts in Thousands
Except Per Share)

O p e r a t i n g R e s u l t s
Systemwide Revenues (1)
Revenues:

Rentals & Fees
Sales
Other

Costs & Expenses:
Cost of Sales
Operating Expenses
Depreciation of

Rental Merchandise

Interest

Earnings Before
Income Taxes

Income Taxes
Net Earnings
Earnings Per Share
Earnings Per Share

Assuming Dilution
Dividends Per Share:

Common
Class A

Financial Position
Rental Merchandise, Net
Property, Plant &
Equipment, Net

Total Assets
Interest-Bearing Debt
Shareholders’ Equity

A t Ye a r E n d
Stores Open:

Year Ended

Year Ended Months Ended Months Ended Months Ended
December 31, December 31, December 31, December 31, December 31,
1994 (unaudited)
1995 (unaudited)

1997

1996

1995

Year Ended
March 31,
1995

Year Ended
March 31,
1994

$364,306

$306,200

$256,500

$192,953

$177,773

$241,286

$189,781

231,207
73,223
6,321
310,751

55,914
149,728

71,151
3,721
280,514

208,463
61,527
4,255
274,245

46,168
135,012

64,437
3,449
249,066

182,311
52,999
2,465
237,775

38,274
119,590

55,408
3,172
216,444

30,237
11,841
$ 18,396
.96
$

25,179
9,786
$ 15,393
.81
$

21,331
8,113
$ 13,218
.68
$

.94

.04
.04

.77

.04
.04

.66

.05
.02

137,098
39,218
1,908
178,224

28,350
90,027

41,612
2,323
162,312

15,912
6,032
9,880
.51

.49

.05
.02

$
$

127,995
39,875
1,471
169,341

28,772
85,464

39,912
2,185
156,333

13,008
5,021
7,987
.42

.40

.05
.02

$
$

173,208
53,655
2,029
228,892

38,696
115,028

53,708
3,033
210,465

18,427
7,102
$ 11,325
.59
$

.58

.045
.025

130,962
53,139
1,083
185,184

38,879
91,927

37,310
2,063
170,179

15,005
6,209
8,796
.52

.51

.04
.03

$
$

$176,968

$149,984

$122,311

$119,781

$121,356

$113,599

39,757
239,382
76,486
116,455

33,267
198,103
55,365
107,335

23,492
158,645
37,479
91,094

23,532
155,914
46,894
81,418

24,181
157,527
43,159
84,951

18,819
144,917
53,123
59,830

High-quality furniture is the
hallmark of MacTavish Furniture
Industries, known nationally for its
craftsmanship. MacTavish furniture
is not only well designed and stylish,
but is designed to meet the tough
demands of the rental industry.

Company-Operated
Franchise

292
101
Rental Agreements in Effect 219,800
3,100
Number of Employees

240
61
179,600
2,550

212
36
158,900
2,160

203
24
152,100
2,150

203
26
156,600
2,200

200
15
126,700
2,100

(1) Systemwide revenues include rental revenues of franchise Aaron’s Rental Purchase stores.

AR layout Final.wpc 4/24/98 8:24 AM Page 17

Management(cid:213)s Discu ssion and
Analysis of Financial Condition
and Resu lts of Operations

Change i n Fi scal Year En d

During 1995, the Company changed its fiscal year end from
March 31 to December 31, which resulted in a nine-month
fiscal year ended December 31, 1995. The decision to change
the fiscal year end was made for more convenience in both
internal and external communications. To aid comparative
analysis, the Company has elected to present the results of
operations for the twelve months ended December 31, 1995
(unaudited), along with the years ended December 31, 1997
and December 31, 1996.

Resu lts o f O perati ons

Year Ended December 31, 1997 versus Year Ended
December 31, 1996

Total revenues for 1997 increased $36.5 million (13.3%) to
$310.8 million compared to $274.2 million in 1996 due pri-
marily to a $22.7 million (10.9%) increase in rentals and fees
revenues, plus an $11.7 million (19.0%) increase in sales. Of
this increase in rentals and fees revenues, $19.2 million
(84.4%) was attributable to the Aaron’s Rental Purchase
division. Rentals and fees revenues from the Company’s rent-
to-rent operations increased $3.5 million (3.3%) during the
same period.

Revenues from retail sales increased $5.8 million (11.1%)
to $58.6 million in 1997, from $52.8 million for the same
period last year. This increase was due to increased sales of
both new and rental return furniture in the rent-to-rent
division. Non-retail sales, which primarily represent mer-
chandise sold to Aaron’s Rental Purchase franchisees,
increased $5.9 million (66.7%) to $14.6 million compared to
$8.8 million for the same period last year. The increased sales
are due to the growth of the franchise operations.

Other revenues for 1997 increased $2.1 million (48.6%) to
$6.3 million compared to $4.3 million in 1996. This increase
was attributable to franchise fee and royalty income increas-
ing $2.1 million (70.8%) to $5.0 million compared to $2.9
million last year, reflecting the addition of 40 new franchise
stores in 1997 and improved operating revenues at mature
franchise stores.

Cost of sales from retail sales increased $4.4 million (11.7%)
to $42.3 million compared to $37.8 million, and as a per-
centage of sales, increased slightly to 72.1% from 71.7%
primarily due to product mix. Cost of sales from non-retail
sales increased $5.3 million (64.1%) to $13.7 million from
$8.3 million, and as a percentage of sales, decreased to 93.4%
from 94.9%. The decrease in 1997 in cost of sales as a per-
centage of sales is due to slightly higher margins on sales
through the Company’s distribution centers.

Operating expenses increased $14.7 million (10.9%) to
$149.7 million from $135.0 million. As a percentage of total
revenues, operating expenses were 48.2% in 1997 and 49.2%
in 1996. Operating expenses declined as a percentage of total
revenues between years due to the spreading of expenses
over higher revenues.

Depreciation of rental merchandise increased $6.7 million
(10.4%) to $71.2 million, from $64.4 million, and as a percent-
age of total rentals and fees, decreased to 30.8% from 30.9%.

Interest expense increased $272,000 (7.9%) to $3.7 million
compared to $3.4 million. As a percentage of total revenues,
interest expense was 1.2% in 1997 compared to 1.3% in
1996. The slight decrease in interest expense as a percentage
of revenues was due to the effect of lower debt levels as a
percentage of revenues throughout the year being offset by
slightly higher interest rates.

Income tax expense increased $2.1 million (21.0%) to $11.8
million compared to $9.8 million. The Company’s effective
tax rate was 39.2% in 1997 compared to 38.9% in 1996, pri-
marily due to higher state income taxes.

As a result, net earnings increased $3.0 million (19.5%) to
$18.4 million for 1997 compared to $15.4 million for the
same period in 1996. As a percentage of total revenues, net
earnings were 5.9% in 1997 and 5.6% in 1996.

Year Ended December 31, 1996 verses Twelve Months
Ended December 31, 1995 (unaudited)

Total revenues for 1996 increased $36.5 million (15.3%) to
$274.2 million compared to $237.8 million in 1995 due pri-
marily to a $26.2 million (14.3%) increase in rentals and fees
revenues, plus an $8.5 million (16.1%) increase in sales. Of
this increase in rentals and fees revenues, $16.6 million
(19.6%) was attributable to the Aaron’s Rental Purchase
division. Rentals and fees revenues from the Company’s rent-
to-rent operations increased $9.5 million (9.8%) during the
same period.

The Company has financed its growth through a revolving
credit agreement with several banks, trade credit and inter-
nally generated funds. The revolving credit agreement provides
for unsecured borrowings up to $90.0 million which includes
a $6.0 million credit line to fund daily working capital
requirements. At December 31, 1997, an aggregate of $75.9
million was outstanding under this facility, bearing interest at
an average fixed rate of 6.57%. The Company uses interest
rate swap agreements as part of its overall long-term financing
program. At December 31, 1997, the Company had swap
agreements with notional principal amounts of $40.0 million
which effectively fixed the interest rates on an equal amount
of the Company’s revolving credit agreement at 6.93%.

The Company believes that the expected cash flows from
operations, proceeds from the sale of rental return merchan-
dise, bank borrowings and vendor credit, together with the
proceeds of a proposed stock offering (see Note M in the
Notes to Consolidated Financial Statements), will be sufficient
to fund the Company’s capital and liquidity needs for at least
the next 24 months.

In February 1997, the Company’s Board of Directors autho-
rized the repurchase of up to 1,000,000 shares of the
Company’s Common Stock and Class A Common Stock.
During 1997, 795,000 shares were purchased at an aggregate
cost of $8.9 million.

The Company has paid dividends for eleven consecutive years.
A $.02 per share dividend on Common Stock and on ClassA
Common Stock was paid in January 1997 and July 1997, for a
total fiscal year cash outlay of $761,000. The Company cur-
rently expects to continue its policy of paying dividends.

Year 20 0 0

The Year 2000 issue arises from the widespread use of com-
puter programs that rely on two-digit date codes to perform
computations or decision-making functions. The Company’s
significant computer programs, including financial, account-
ing, store operating and point-of-sale software, have recently
been or are in the process of being updated. The upgrading
and rewriting of the Company’s software is being done to
gain further strategic advantages over competitors and is not
the result of any anticipated Year 2000 issues. However, as
part of the Company’s continuing process to update systems,
management has required that vendor-purchased and inter-
nally developed software be Year 2000 compliant. Therefore,
based on recent and continuing strategic enhancement of the
Company’s software, management does not expect any
material impact to the Company’s business, operations or
financial condition as a result of Year 2000 issues.

Revenues from retail sales increased $5.6 million (11.8%) to
$52.8 million in 1996, from $47.2 million for the same peri-
od last year. This increase was due to increased sales of both
new and rental return furniture in the rent-to-rent division.
Non-retail sales, which primarily represent merchandise sold
to Aaron’s Rental Purchase franchisees, increased $3.0 mil-
lion (51.0%) to $8.8 million compared to $5.8 million for
the same period last year. The increased sales are due to the
growth of the franchise operations.

Other revenues increased $1.5 million (105.4%) to $2.9 mil-
lion compared to $1.4 million last year. This increase was due
to adding 25 new franchise stores in 1996 as well as older
franchise stores gaining in revenues.

Cost of sales from retail sales increased $4.8 million (14.5%)
to $37.8 million compared to $33.1 million, and as a per-
centage of sales, increased slightly to 71.7% from 70.1%
primarily due to product mix. Cost of sales from non-retail
sales increased $3.1 million (59.5%) to $8.3 million from
$5.2 million, and as a percentage of sales, increased to 94.9%
from 89.8%. The increase in cost of sales as a percentage of
sales is due to a larger percentage of franchise sales in
1996, which are at lower margins than other miscellaneous
wholesale sales.

Operating expenses increased $15.4 million (12.9%) to
$135.0 million from $119.6 million. As a percentage of total
revenues, operating expenses were 49.2% in 1996 and 50.3%
in 1995. Operating expenses declined as a percentage of total
revenues between years due to the spreading of expenses
over higher revenues.

Depreciation of rental merchandise increased $9.0 million
(16.3%) to $64.4 million and, as a percentage of total rentals
and fees, increased to 30.9% from 30.4%. This increase is pri-
marily due to a change in the rental merchandise mix during
the year.

Interest expense increased $277,000 (8.7%) to $3.4 million
compared to $3.2 million. As a percentage of total revenues,
interest is unchanged at 1.3% due to stability in interest rates
during 1996.

Income tax expense increased $1.7 million (20.6%) to $9.8
million compared to $8.1 million. The Company’s effective
tax rate was 38.9% in 1996 versus 38.0% for the same peri-
od in 1995.

As a result, net earnings increased $2.2 million (16.5%) to
$15.4 million for 1996 compared to $13.2 million for the
same period in 1995. As a percentage of total revenues, net
earnings were 5.6% in both 1996 and 1995.

Liqu i dity and Capital Resou rces

Cash flows from operations for the years ended December
31, 1997 and 1996 was $105.3 million and $89.5 million,
respectively. Such cash flows include profits on the sale of
rental return merchandise. The Company’s primary capital
requirements consist of acquiring rental merchandise for
both rent-to-rent and Company-operated Aaron’s Rental
Purchase stores. As the Company continues to grow, the need
for additional rental merchandise will continue to be the
Company’s major capital requirement. These capital require-
ments historically have been financed through bank credit,
cash flow from operations, trade credit and proceeds from
the sale of rental return merchandise.

AR layout Final.wpc 4/24/98 8:24 AM Page 19

Conso li dated

Balance Sh eets

(In Thousands, Except Share Data)

A s s e t s
Cash
Accounts Receivable
Rental Merchandise
Less: Accumulated Depreciation

Property, Plant & Equipment, Net
Prepaid Expenses & Other Assets
Total Assets

1 6

L i a b i l i t i e s & S h a r e h o l d e r s ’ E q u i t y

Accounts Payable & Accrued Expenses
Dividends Payable
Deferred Income Taxes Payable
Customer Deposits & Advance Payments
Bank Debt
Other Debt

Total Liabilities

Commitments & Contingencies
Shareholders’ Equity

Common Stock, Par Value $.50 Per Share;

Authorized: 25,000,000 Shares;
Shares Issued: 16,170,987

Common Stock, Class A, Par Value $.50 Per Share;

Authorized: 25,000,000 Shares;
Shares Issued: 5,361,761
Additional Paid-In Capital
Retained Earnings

Less: Treasury Shares at Cost,

Common Stock, 1,058,041 Shares

at December 31, 1997 and 415,941 Shares
at December 31, 1996

Class A Common Stock, 1,525,255 Shares

at December 31, 1997 and 1,418,855 Shares
at December 31, 1996
Total Shareholders’ Equity

Total Liabilities & Shareholders’ Equity

December 31,
1997

December 31,
1996

96
11,794
246,498
(69,530)
176,968
39,757
10,767
$239,382

$ 31,071
379
6,687
8,304
75,904
582
122,927

84
10,491
210,516
(60,532)
149,984
33,267
4,277
$198,103

$ 24,999
382
2,882
7,140
55,125
240
90,768

8,085

2,681
15,484
113,864
140,114

2,681
15,445
96,226
122,437

(9,523)

(2,315)

(14,136)
116,455
$239,382

(12,787)
107,335
$198,103

The accompanying notes are an integral part of the Consolidated Financial Statements.

Consoli dated Statements o f Earn i ngs

(In Thousands,
Except Per Share)

R e v e n u e s

Rentals and Fees
Retail Sales
Non-Retail Sales
Other

C o s t s & E x p e n s e s
Retail Cost of Sales
Non-Retail Cost of Sales
Operating Expenses
Depreciation of Rental Merchandise
Interest

Earnings Before Income Taxes
Income Taxes
Net Earnings
Earnings Per Share
Earnings Per Share Assuming Dilution

Year Ended
December 31,
1997

Year Ended

Nine Months
Ended

December 31, December 31,

1996

1995

$231,207
58,602
14,621
6,321
310,751

42,264
13,650
149,728
71,151
3,721
280,514
30,237
11,841
$ 18,396
.96
$
.94

$208,463
52,757
8,770
4,255
274,245

37,848
8,320
135,012
64,437
3,449
249,066
25,179
9,786
$ 15,393
.81
$
.77

$137,098
35,537
3,681
1,908
178,224

24,983
3,367
90,027
41,612
2,323
162,312
15,912
6,032
9,880
.51
.49

$
$

Consoli dated Statements of Sharehold ers(cid:213) Equ ity

1 7

(In Thousands)

Balance, March 31, 1995

Reacquired Shares
Dividends
Reissued Shares
Net Earnings

Treasury Stock

Common Stock

Amount

Common

Class A

Additional
Paid-In
Capital

Retained
Earnings

(2,179)
(194)

$(13,578)
(3,134)

$ 3,318

$ 2,681

$ 15,314

$ 77,216

Balance, December 31, 1995

(2,360)

(16,640)

Stock Dividend
Reacquired Shares
Dividends
Reissued Shares
Net Earnings

Balance, December 31, 1996

Reacquired Shares
Dividends
Reissued Shares
Net Earnings

(164)

(2,889)

689

4,427

(1,835)
(795)

(15,102)
(8,918)

361

3,318
4,767

2,681

15,370

8,085

2,681

15,445

96,226

(758)

18,396

Balance, December 31, 1997

(2,583)

$ (23,659)

$ 8,085

$ 2,681

$15,484

$113,864

The accompanying notes are an integral part of the Consolidated Financial Statements.

(732)
1
9,880

86,365
(4,767)

(765)

15,393

AR layout Final.wpc 4/24/98 8:24 AM Page 21

Conso li dated

Statements o f Cash Flows

Notes to Conso li dated

Fi nancial Statements

Year Ended
December 31,
1997

Year Ended Months Ended
December 31, December 31,

1996

1995

Nine

(In Thousands)

O p e r a t i n g A c t i v i t i e s

Net Earnings
Depreciation & Amortization
Deferred Income Taxes
Change in Accounts Payable &

Accrued Expenses

Change in Accounts Receivable
Other Changes, Net
Cash Provided by Operating Activities

I n v e s t i n g A c t i v i t i e s

$ 18,396
77,487
3,805

$ 15,393
70,693
(899)

5,103
(1,083)
1,587
105,295

$ 9,880
45,798
(345)

242
255
(711)
55,119

(5,476)
1,979
(72,926)
30,892
(533)
(46,064)

51,933
(56,845)
(768)
(367)
(3,134)
129
(9,052)
3
95
98

5,695
(2,339)
982
89,525

(17,534)
1,823
(137,023)
48,352
(3,891)
(108,273)

85,299
(67,434)
21
(765)
(2,889)
4,502
18,734
(14)
98
84

1 8

Additions to Property, Plant & Equipment
Book Value of Property Retired or Sold
Additions to Rental Merchandise
Book Value of Rental Merchandise Sold
Contracts & Other Assets Acquired
Cash Used by Investing Activities

(15,165)
6,531
(145,262)
58,436
(21,665)
(117,125)

F i n a n c i n g A c t i v i t i e s

Proceeds from Revolving Credit Agreement
Repayments on Revolving Credit Agreement
Increase (Decrease) in Other Debt
Dividends Paid
Acquisition of Treasury Stock
Issuance of Stock Under Stock Option Plan
Cash Provided (Used) by Financing Activities
Increase (Decrease) in Cash
Cash at Beginning of Year
Cash at End of Year

118,545
(97,766)
342
(761)
(8,918)
400
11,842
12
84
96

Cash Paid During the Year:

Interest
Income Taxes

3,713
6,989

The accompanying notes are an integral part of the Consolidated Financial Statements.

3,384
7,531

$ 2,642
7,677

At December 31, 1997 and 1996, and for the Years Ended
December 31, 1997 and 1996, and the Nine Months Ended
December 31, 1995.

Note A: Summary o f Si gn i ficant
Accou nti ng Po li ci es

Principles of Consolidation — The consolidated financial
statements include the accounts of Aaron Rents, Inc. and its
wholly-owned subsidiary, Aaron Investment Company (the
Company). All significant intercompany accounts and trans-
actions have been eliminated. The preparation of the
Company’s consolidated financial statements in conformity
with generally accepted accounting principles requires man-
agement to make estimates and assumptions that affect the
amounts reported in these financial statements and accompa-
nying notes. Actual results could differ from those estimates.

Line of Business — The Company is engaged in the business
of renting and selling residential and office furniture and other
merchandise throughout the U.S. The Company manufac-
tures furniture principally for its rental and sales operations.

Rental Merchandise consists primarily of residential and
office furniture, consumer electronics and other merchandise
and is recorded at cost. Prior to January 1, 1996, depreciation
was provided using the straight-line method over the esti-
mated useful life of the merchandise, principally from 1 to 5
years, after allowing for a salvage value of 5% to 60%.
Effective January 1, 1996, the Company prospectively
changed its depreciation method on merchandise in the
rental purchase division acquired after December 31, 1995,
from generally 14 months straight-line with a 5% salvage
value to a method that depreciates the merchandise over the
agreement period, generally 12 months, when on rent, and
36 months, when not on rent, to a 0% salvage value. This new
method is similar to a method referred to as the income fore-
casting method in the rental purchase industry. The
Company adopted the new method because management
believes that it provides a more systematic and rational allo-
cation of the cost of rental purchase merchandise over its
useful life. The effect for the year ended December 31, 1996
of the change in the depreciation method on merchandise
purchased after December 31, 1995 was to decrease net
income by approximately $850,000 ($.04 per share). In
addition, based on an analysis of the average composite life of
the division’s rental purchase merchandise on rent or on
hand at December 31, 1995, the Company extended the
depreciable lives of that merchandise from generally 14
months to 18 months, and made other refinements to depre-
ciation rates on rental and rental purchase merchandise. The
effect of such change in depreciable lives and other refine-
ments was to increase net income for the year ended

December 31, 1996 by approximately $709,000 ($.04 per
share). The Company recognizes rental revenues over the
rental period and recognizes all costs of servicing and main-
taining merchandise on rent as incurred.

Property, Plant and Equipment are recorded at cost.
Depreciation and amortization are computed on a straight-
line basis over the estimated useful lives of the respective
assets, which are from 8 to 27 years for buildings and
improvements and from 2 to 5 years for other depreciable
property and equipment. Gains and losses related to disposi-
tions and retirements are included in income. Maintenance
and repairs are charged to income as incurred; renewals and
betterments are capitalized. The Company adopted
Statement of Financial Accounting Standards No. 121,
“Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of” (SFAS 121), in the first
quarter of 1996. The effect of the adoption was not material.

Deferred Income Taxes are provided for temporary differ-
ences between the amounts of assets and liabilities for finan-
cial and tax reporting purposes. Such temporary differences
arise principally from the use of accelerated depreciation
methods on rental merchandise for tax purposes.

Cost of Sales includes the depreciated cost of rental return
residential and office merchandise sold and the cost of new
residential and office merchandise sold. It is not practicable
to allocate operating expenses between selling and rental
operations.

Advertising — The Company expenses advertising costs as
incurred. Such costs aggregated $9,530,000 in 1997,
$10,422,000 in 1996, and $6,258,000 for the nine months
ended December 31, 1995.

Stock Based Compensation — The Company has elected to
follow Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees”(APB 25) and
related Interpretations in accounting for its employee stock
options and adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123,
“Accounting for Stock Based Compensation” (FAS 123). The
Company grants stock options for a fixed number of shares
to employees with an exercise price equal to the fair value of
the shares at the date of grant and, accordingly, recognizes no
compensation expense for the stock option grants.

Excess Costs over Net Assets Acquired — Goodwill is amor-
tized on a straight-line basis over a period of twenty years.
Long-lived assets,
including goodwill, are periodically
reviewed for impairment based on an assessment of future
operations. The Company records impairment losses on long-
lived assets used in operations when indicators of impair-
ment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets’
carrying amount.

AR layout Final.wpc 4/24/98 8:25 AM Page 23

Impact of Recently Issued Accounting Standard — In June
1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131,
“Disclosures about Segments of an Enterprise and Related
Information” (FAS 131), which is effective for 1998. FAS
131 establishes standards for the way that public companies
report information about operating segments in annual finan-
cial statements and requires that those companies report
selected information about operating segments in interim
financial reports. It also establishes standards for related
disclosures about products and services, geographic areas,
and major customers. The Company will adopt the new
requirements in its annual financial statements in 1998.
Management has not completed its analysis of the effect of
FAS 131 on its reported segments.

497,000 and 885,000 in 1997 and 1996, respectively, and
576,000 shares in the nine months ended December 31, 1995.

Note D: Property, Plant & Equ i pment

(In Thousands)

Land
Buildings & Improvements
Leasehold Improvements & Signs
Fixtures & Equipment
Construction in Progress

December 31,
1997

December 31,
1996

4,643
17,698
19,243
19,402
3,380
64,366

3,662
15,787
16,068
15,738
2,726
53,981

(24,609)
$ 39,757

(20,714)
$ 33,267

Note B: Change i n Fi scal Year En d

Less: Accumulated Depreciation

& Amortization

Results of operations (condensed) for the nine-month peri-
ods ended December 31, 1995 and December 31, 1994 are
shown below:

(In Thousands, Except
Per Share Amounts)

Revenues
Cost of Sales
Operating and Other Expenses
Depreciation of Rental Merchandise
Earnings Before Income Taxes
Income Taxes
Net Earnings
Earnings Per Share
Earnings Per Share
Assuming Dilution

Nine Months Ended

December 31,
1995

December 31,
1994
(unaudited)

$178,224
28,350
92,350
41,612
15,912
6,032
9,880
.51

$
$

$169,341
28,772
87,649
39,912
13,008
5,021
$ 7,987
.42
$

.49

.40

Note C: Earn i ngs Per Share

During 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, “Earnings per Share”, (FAS
128). FAS 128 replaced the calculation of primary and fully
diluted earnings per share with earnings per share and
earnings per share assuming dilution. Earnings per share is
computed by dividing net income by the weighted average
number of common shares outstanding during the year
which were 19,165,000 shares in 1997, 19,099,000 shares in
1996, and 19,461,000 shares in the nine months ended
December 31, 1995. The computation of earnings per share
assuming dilution includes the dilutive effect of stock
options. Such stock options had the effect of increasing the
weighted average shares outstanding assuming dilution by

Note E: Debt

Bank Debt — The Company has a revolving credit agreement
with four banks providing for unsecured borrowings up to
$90,000,000, which includes a $6,000,000 credit line to
fund daily working capital requirements. Amounts borrowed
bear interest at the lower of the lender’s prime rate, LIBOR
plus .50%, or the rate at which certificates of deposit are
offered in the secondary market plus .625%. The pricing
under the working capital line is based upon overnight bank
borrowing rates. At December 31, 1997 and 1996, an aggre-
gate of $75,904,000 (bearing interest of 6.57%) and
$55,125,000, respectively, was outstanding under this agree-
ment. The Company pays a .22% commitment fee on unused
balances. The weighted average interest rate on borrowings
under the revolving credit agreement (before giving effect to
interest rate swaps) was 6.29% in 1997, 6.17% in 1996 and
6.99% for the nine months ended December 31, 1995. The
effect of interest rate swaps on the weighted average interest
rate was not material.

The Company has entered into interest rate swap agreements
that effectively fix the interest rate on $20,000,000 of bor-
rowings under the revolving credit agreement at an average
rate of 7.0% until November 2003 and an additional
$20,000,000 at an average rate of 6.85% until June 2005.
These swap agreements involve the receipt of amounts when
the floating rates exceed the fixed rates and the payment of
amounts when the fixed rates exceed the floating rates in
such agreements over the life of the agreements. The differ-
ential to be paid or received is accrued as interest rates
change and is recognized as an adjustment to the floating rate
interest expense related to the debt. The related amount
payable to or receivable from counterparties is included in
accrued liabilities or other assets. Unrealized losses under the
swap agreements aggregated $926,000 at December 31,
1997. The fair value of the Company’s bank debt approxi-
mates its carrying value.

The revolving credit agreement may be terminated on nine-
ty days’ notice by the Company or six months’ notice by the
lenders. The debt is payable in 60 monthly installments
following the termination date if terminated by the lenders.

The agreement requires that the Company not permit its
consolidated net worth as of the last day of any fiscal quarter
to be less than the sum of (a) $105,000,000 plus (b) 50% of
the Company’s consolidated net income (but not loss) for
the period beginning July 1, 1997 and ending on the last day
of such fiscal quarter. It also places other restrictions on addi-
tional borrowings and requires the maintenance of certain
financial ratios. At December 31, 1997, $6.7 million of
retained earnings was available for dividend payments and
stock repurchases under the debt restrictions.

Other Debt — Other debt of $582,000 at December 31,
1997 and $240,000 at December 31, 1996 primarily repre-
sents an insurance premium financing agreement bearing
interest at 6.22%. Other debt matures in 1998.

Note F: I ncome Taxes

(In Thousands)

Current Income
Tax Expense:

Federal
State

Deferred Income

Tax Expense (Benefit):

Federal
State

Year Ended

Year Ended
December 31, December 31, December 31,
1996

1997

1995

Nine Months
Ended

$ 7,375
661
8,036

$ 9,503
1,182
10,685

$5,577
800
6,377

3,287
518
3,805
$11,841

(889)
(10)
(899)
$ 9,786

(302)
(43)
(345)
$6,032

Significant components of the Company’s deferred income
tax liabilities and assets are as follows:

(In Thousands)

Deferred Tax Liabilities:

Rental Merchandise and

Property, Plant & Equipment

Other, Net

Total Deferred Tax Liabilities
Deferred Tax Assets:

Accrued Liabilities
Advance Payments
Other, Net

Total Deferred Tax Assets
Net Deferred Tax Liabilities

December 31, December 31,

1997

1996

$ 9,265
1,244
10,509

1,015
2,276
531
3,822
$ 6,687

$5,486
1,141
6,627

892
2,150
703
3,745
$2,882

The Company’s effective tax rate differs from the federal
income tax statutory rate as follows:

Year Ended

Year Ended
December 31, December 31, December 31,
1996

1997

1995

Nine
Months
Ended

Statutory Rate

35.0%

Increases in Taxes Resulting
From State Income Taxes,
Net of Federal Income
Tax Benefit

Other, Net

2.5
1.7

3.0%
.9%

3.2%
(.3)

Effective Tax Rate

39.2%

38.9%

37.9%

Note G: Commitments

The Company leases warehouse and retail store space for
substantially all of its operations under operating leases
expiring at various times through 2007. Most of the leases
contain renewal options for additional periods ranging from
1 to 15 years or provide for options to purchase the related
property at predetermined purchase prices which do not
represent bargain purchase options. The Company also leas-
es transportation equipment under operating leases expiring
during the next 3 years. Management expects that most leas-
es will be renewed or replaced by other leases in the normal
course of business.

Future minimum rental payments,
including guaranteed
residual values, required under operating leases that have ini-
tial or remaining non-cancelable terms in excess of one year
as of December 31, 1997, are as follows: $20,838,000 in 1998;
$16,819,000 in 1999; $12,444,000 in 2000; $19,319,000 in
2001; $4,164,000 in 2002; and $4,457,000 thereafter.

Rental expense was $22,146,000 in 1997, $17,886,000 in
1996 and $11,513,000 for the nine months ended December
31, 1995.

The Company leases five buildings from certain officers of
the Company under leases expiring through 1998 for
annual rentals aggregating $383,000.

The Company maintains a 401(k) savings plan for all full-
time employees with at least one year of service with the
Company 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 $357,000 in 1997, $308,000 in 1996 and
$162,000 for the nine months ended December 31, 1995.

2 1

AR layout Final.wpc 4/24/98 8:25 AM Page 25

Note H: Shareh old ers(cid:213) Equ ity

During 1996, the Company declared a 100% stock dividend
on its Common Stock and Class A Common Stock. Each
stockholder received one share of Common Stock for each
share of Common Stock and Class A Common Stock held.
All share and per share amounts have been restated to reflect
the 100% stock dividend. Common stock is non-voting.

At December 31, 1997, the Company held a total of
2,583,296 common shares in its treasury, and is authorized
by the Board of Directors to acquire up to an additional
208,090 shares.

The Company has 1,000,000 shares of preferred stock
authorized. The shares are issuable in series with terms for
each series fixed by the Board and such issuance is subject to
approval by the Board of Directors. No preferred shares have
been issued.

Note I: Sto ck O pti ons

The Company has stock option plans under which options
to purchase shares of the Company’s Common Stock are
granted to certain key employees. Under the plans, options
granted become exercisable after a period of two or three
years and unexercised options lapse five or ten years after the
date of the grant. Options are subject to forfeiture upon ter-
mination of service. Under the plans, 2,000,500 of the
Company shares are reserved for issuance at December 31,
1997. The weighted-average fair value of options granted was
$8.58 in 1997 and $4.99 in 1996.

Pro forma information regarding net earnings and earnings
per share is required by FAS 123, and has been determined
as if the Company has accounted for its employee stock
options granted in 1997 and 1996 under the fair value
method of that Statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free inter-
est rates of 5.88% and 6.72%; a dividend yield of .25% and
.4%; volatility factor of the expected market price of the
Company’s common stock of .39 and .335; and a weighted-
average expected life of the option of 8 years.

The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjec-
tive assumptions including the expected stock price vola-
tility. Because the Company’s employee stock options have

characteristics significantly different from those of traded
options, and because changes in the subjective input assump-
tions can materially affect the fair value estimate, in manage-
ment’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.

For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options’ vest-
ing period. The Company’s pro forma information follows (in
thousands except for earnings per share information):

Pro forma net earnings
Pro forma earnings per share
Pro forma earnings per share

assuming dilution

Year Ended

Year Ended
December 31, December 31,

1997

$17,508
.91

1996

$14,825
.78

.89

.74

Because Statement 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will
not be fully reflected until future years.

The table below summarizes option activity for the periods
indicated in the Company’s stock option plans.

(In Thousands, Except Price Per Share)

Options

Outstanding at April 1, 1995

Exercised
Forfeited

Outstanding at December 31, 1995

Granted
Exercised
Forfeited

Outstanding at December 31, 1996

Granted
Exercised
Forfeited

Outstanding at December 31, 1997

Exercisable at December 31, 1997

1,294
(24)
(22)

1,248
780
(701)
(8)

1,319
322
(47)
(9)

1,585

501

Weighted
Average
Exercise
Price

$ 4.54
3.00
6.68

4.54
9.88
3.00
9.68

8.48
15.95
5.28
10.83

$10.07

$ 6.62

Exercise prices for options outstanding as of December 31,
1997 ranged from $4.88 to $16.50. The weighted-average
remaining contractual life of those options is 6.58 years.

Note J: Quarterly Fi nancial
I n fo rmation (U nau d ited)

(In Thousands
Except Per Share)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Year ended December 31, 1997
Revenues
Gross Profit
Earnings Before Taxes
Net Earnings
Earnings Per Share
Earnings Per Share

$76,480
43,574
7,080
4,312
.22

$77,465
44,236
7,608
4,633
.24

$76,238
43,996
7,883
4,805
.25

$80,568
45,559
7,666
4,646
.25

Assuming Dilution

.22

.24

.25

.24

Year ended December 31, 1996
Revenues
Gross Profit
Earnings Before Taxes
Net Earnings
Earnings Per Share
Earnings Per Share

$64,693
38,873
6,791
4,159
.22

$67,610
39,980
6,375
3,914
.21

$71,224
41,273
6,198
3,787
.20

$70,718
39,259
5,815
3,533
.18

Assuming Dilution

.21

.20

.19

.18

Note K: Franch i si ng o f Aaron(cid:213)s
Rental Pu rchase Stores

The Company franchises Aaron’s Rental Purchase stores. As
of December 31, 1997 and December 31, 1996, 186 and 155
franchises had been awarded, respectively. Franchisees pay a
non-refundable initial franchise fee of $35,000 and an ongo-
ing royalty of 5% of cash receipts. The Company recognizes
this income as earned and includes it in Other Revenues in
the Consolidated Statements of Earnings. The Company has
guaranteed certain lease and debt obligations (primarily
extending through 1999) of some of the franchisees amount-
ing to $127,000 and $8,131,000, respectively, at December
31, 1997. The Company receives a guarantee and servicing
fee based on such franchisees’ outstanding debt obligations
which it recognizes as income over the guarantee and servic-
ing period. The Company has recourse rights to the leased
property and to the assets securing the debt obligations. As a
result, the Company does not expect to incur any significant
losses under these guarantees.

Note L: Acqu i siti ons

In December 1997, the Company acquired substantially all
of the assets of RentMart Rent-To-Own, Inc., a wholly-
owned subsidiary of the Associates Capital Corporation, for
$18,012,000 in cash. The excess cost over the fair market
value of tangible assets acquired was approximately
$4,300,000.

In December 1997, the Company acquired substantially all of
the assets of Blackhawk Convention Services, Inc. for
$3,500,000 in cash. The excess cost over the fair market value
of tangible assets acquired was approximately $2,700,000.

Both acquisitions were accounted for under the purchase
method and, accordingly, the results of operations of the
acquired businesses are included in the Company’s results of
operations from their dates of acquisition. The effect of these
acquisitions on the 1997 consolidated financial statements
was not significant.

Note M: Propo sed Sto ck Offeri ng

On or about March 31, 1998, the Company intends to file a
registration statement for the sale by the Company of
2,100,000 shares of Common Stock. The proceeds of the
offering, if consummated, would be used to reduce indebt-
edness and for general business purposes, including opening
additional rent-to-rent and rental purchase stores and
expanding manufacturing and distribution capacity.

Repo rt o f I n d epen d ent Au d itors

To the Board of Directors and Shareholders of
Aaron Rents, Inc.:

We have audited the accompanying consolidated balance
sheets of Aaron Rents, Inc. and Subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements
of earnings, shareholders’ equity and cash flows for the years
ended December 31, 1997 and 1996, and the nine months
ended December 31, 1995. These financial statements are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial state-
ment presentation. We believe that our audits provide a rea-
sonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated finan-
cial position of Aaron Rents, Inc. and Subsidiaries as of
December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for the years ended
December 31, 1997 and 1996, and the nine months ended
December 31, 1995, in conformity with generally accepted
accounting principles.

As discussed in Note A to the Consolidated Financial
Statements, in 1996, the Company changed its method of
accounting for depreciation of rental purchase merchandise.

Atlanta, Georgia
March 23, 1998

AR layout Final.wpc 4/24/98 8:25 AM Page 27

Common Sto ck Market Pri ces
& Divi d en d s

On March 20, 1998, the Company’s Common Stock and
Class A Common Stock were listed on the New York Stock
Exchange under the symbols “RNT” and “RNT.A,” respectively.
Previously, the Company’s Common Stock and Class A
Common Stock were traded on The NASDAQ Stock Market
under the symbols “ARON” and “ARONA,” respectively.

The approximate number of shareholders of the Company’s
Common Stock and Class A Common Stock at March 23,
1998, was 4,500. The following table shows, for the periods
indicated, the range of high and low prices per share for the
Common Stock and Class A Common Stock as reported by
NASDAQ, and the cash dividends declared per share.

The closing price for the Common Stock and Class A
Common Stock on March 23, 1998, was $23.438 and
$22.625, respectively. The Company currently expects to
continue its policy of paying dividends.

Common Stock

High

Low

December 31, 1997
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

December 31, 1996
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Class A
Common Stock

December 31, 1997
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

December 31, 1996
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

$12.875
13.375
18.250
20.250

$10.375
15.000
14.250
14.625

$10.063
10.375
12.750
15.500

$ 9.000
9.688
11.000
10.750

High

Low

$14.000
13.750
18.000
18.500

$11.250
16.000
16.250
15.750

$ 9.750
10.000
11.938
14.500

$ 8.875
10.750
12.750
12.625

Cash
Dividends
Per Share

.02

Cash
Dividends
Per Share

.02

B oard of Di recto rs

R. Charles Loudermilk, Sr.
Chief Executive Officer,
Chairman of the Board
Aaron Rents, Inc.

Ronald W. Allen
Retired Chairman,
President and Chief
Executive Officer
Delta Air Lines

Leo Benatar (1), (2)
Sr. Partner and
Associate Consultant
A.T. Kearney

Gilbert L. Danielson
Vice President, Finance,
Chief Financial Officer
Aaron Rents, Inc.

Earl Dolive (1)
Vice Chairman of the
Board, Emeritus
Genuine Parts
Company

S t o r e a n d F a c i l i t y L o c at i o n s

J. Rex Fuqua
Vice Chairman,
Fuqua Enterprises, Inc.

Keith C. Groen
Vice President, Legal,
and Secretary
Aaron Rents, Inc.

Ingrid Saunders Jones (2)
Vice President,
Corporate
External Affairs
The Coca-Cola
Company

Robert C. Loudermilk, Jr.
President, Chief
Operating Officer
Aaron Rents, Inc.

Officers

R. Charles Loudermilk, Sr.
Chairman of the Board,
Chief Executive Officer

Robert C. Loudermilk, Jr.
President, Chief Operating Officer

Gilbert L. Danielson
Vice President, Finance,
Chief Financial Officer

William K. Butler, Jr.
President, Aaron’s Rental
Purchase Division

Brian E. Stahl
President, Aaron Rents’
Rent-to-Rent Division

William J. Sammons
President, Aaron Rents’
Convention Furnishings Division

Keith C. Groen
Vice President,
Legal, and Secretary

D. Bruce Cox
Vice President,
Mid Atlantic Region

Bennett E. Creasman
Vice President, South Region

Lyle M. Digby
Vice President, Western Region

Richard L. Levine
Vice President,
Purchasing and Distribution

Michael J. Malone
Vice President, Aaron Rents’
Convention Furnishings Division

Daniel J. Nold
Vice President, Midwest Region

Mitchell S. Paull
Vice President, Treasurer

Eduardo Quiñones
Vice President, Florida Region

Lt. Gen. M. Collier Ross (1)
U.S. Army (retired)

R. K. Sehgal
Vice Chairman and
Chief Executive Officer
H. J. Russell and
Company

James L. Cates
Vice President, Risk Management

Robert P. Sinclair, Jr.
Corporate Controller

(1) Member of Audit Committee
(2) Member of Stock Option Committee

At December 31, 1997
Rent-to-Rent
Company-Operated Rental Purchase
Franchised Rental Purchase
Convention Furnishings

Total Stores

105
181
101
6

393

Manufacturing & Distribution Centers 14