Aaron's Company
Annual Report 2000

Plain-text annual report

O p e n i n g D o o r s t o U n l i m i t e d O p p o r t u n i t i e s . . . Aaron Rents, Inc. A n n u a l R e p o r t | 2 0 0 0 Aaron Rents, Inc. is the leading U.S. company engaged in the combined businesses of the rental, lease ownership and specialty retailing of residential and office furniture, consumer electronics, household appliances and accessories, with 554 stores in 42 states and Puerto Rico. The Company is positioned as “America’s Premier Name in Furniture Rental and Lease Ownership.” Its major operations are the Aaron’s Sales & Lease Ownership division (formerly Aaron’s Rental Purchase division), the Rent-to-Rent division, and MacTavish Furniture Industries, which manufactures much of the furniture rented, leased and sold in the Company’s stores. Strategically, the Company is focused on increasing the sales and lease ownership business through the opening of new Company-operated stores, both by internal expansion and acquisitions, and through the growing franchise program, while expanding the rent-to-rent business by respond- ing to new market opportunities. C o n t e n t s Financial Highlights . . . . . . . . . . . . . . . . . . . 1 Letter to Shareholders . . . . . . . . . . . . . . . . . . 2 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 . . . . . . . . . . . 26 Store Locations . . . . . . . . . . . . . . . . . . . . . 27 Board of Directors and Officers . . . . . . . . . . . 28 Corporate and Shareholder Information . . . . . . . . . . . . . . . 28 F i n a n c i a l H i g h l i g h t s 1 (Dollar Amounts in Thousands, Except Per Share) Year Ended December 31, 2000 Year Ended December 31, 1999 Percentage Change O p e r a t i n g R e s u l t s Revenues Earnings Before Taxes Net Earnings Earnings Per Share Earnings Per Share Assuming Dilution F i n a n c i a l P o s i t i o n 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 S t o r e s O p e n Sales & Lease Ownership Sales & Lease Ownership Franchised Rent-to-Rent Total Stores $502,920 43,906 27,261 1.38 $437,359 41,302 25,602 1.28 15.0% 6.3 6.5 7.8 1.37 1.26 8.7 $380,379 267,713 104,769 208,538 10.50 33.4% 8.7 5.4 13.9 263 193 98 554 $318,408 219,831 72,760 183,718 9.22 28.4% 9.4 5.9 14.5 213 155 107 475 19.5% 21.8 44.0 13.5 13.8 23.5% 24.5 (8.4) 16.6% Revenues By Calendar Year Net Earnings By Calendar Year ) s 0 0 0 n i $ ( $30,000 25,000 20,000 15,000 10,000 5,000 0 ’96 ’97 ’98 ’99 ’00 ) s 0 0 0 n i $ ( $600,000 500,000 400,000 300,000 200,000 100,000 0 ’96 ’97 ’98 ’99 ’00 Rent-to-Rent Division Sales & Lease Ownership Division 2 To O u r S h a r e h o l d e r s : The 3,900-plus Aaron Associates are proud to tell you that: ❚ We began the Millennium with another record-breaking year! ❚ We achieved record revenues and earnings for the ninth year in a row. ❚ We crossed the $500 million threshold in revenues, with systemwide revenues, including franchise revenues, increasing to $656 million. ❚ We reached the 500-store milestone, and by year- end we had a total of 554 stores open across the country and Puerto Rico. ❚ We increased our store count in Aaron’s Sales & Lease Ownership, our rental purchase division, by 24%, a record number of store openings. ❚ We made our initial expansion outside the United States with the acquisition of 10 stores in the Commonwealth of Puerto Rico. ❚ We acquired a total of 26 store locations formerly operated by one of the nation’s largest furniture retailers, providing the opportunity to accelerate our store-opening plans in the first two quarters of 2001 by serving a customer base already familiar with those locations. All this and more served as a prelude to the future as we expanded our infrastructure of manufacturing and distribution capabili- ties to gain a larger share of the growing markets for our products and services. And the outlook is very good as indicated in our annual report theme, “Opening Doors to Unlimited Opportunities.” For even though 2000 was our best year ever, we see many more opportunities for growth, and we are positioned to open the doors to the future. Revenues for the year increased 15% to a record $502.9 million compared to $437.4 million for 1999. Systemwide revenues, which include revenues of our franchised stores, increased 20% to $656.1 million. Earnings advanced to a record $27.3 million versus $25.6 million for the previous year. Earnings per share reached $1.38 ($1.37 assuming dilution) compared to $1.28 ($1.26 assuming dilution) for 1999. If new stores opened in the last two years are excluded, revenues and net earnings would have increased in 2000 over 1999 by approximately 11% and 14%, respectively. Our Aaron’s Sales & Lease Ownership division continued its rapid growth, opening 32 Company- operated and 47 franchised stores during the year. In addition, 10 stores were acquired in Puerto Rico, bringing the net new store count to 88 — exceeding the number for the previous two years combined. At the end of 2000, we had a total of 456 Aaron’s Sales & Lease Ownership stores open. Seizing a new growth opportunity, our sales and leasing division entered into a strategic alliance with CompUSA to market personal computers at our stores during the year. Franchised stores open increased 25% to a total of 193 stores, reflecting the success of this program, which enables us to grow at a faster rate than is feasible through internal growth alone. In the past year, we began to see a rising level of profitability from our franchised operations. The outlook is also very favorable with a backlog of 146 franchised stores to be opened in the future. Our nationally recognized franchise program was first in its category in Entrepreneur magazine’s annual ranking and placed in the top 100 fran- chise chains by worldwide sales in Franchise Times’ survey. The rent-to-rent division improved its per- formance, especially in office furniture rentals, and began laying the groundwork for collaborative relationships with manufacturers and competitors to market and distribute office products. This division, our original business, continues to generate cash to help finance new store growth. Our manufacturing division, MacTavish Furniture Industries, produced more than $50 million of furniture and accessories at cost to supply our rapidly expanding number of stores. MacTavish opened a new Texas plant during the year to manufacture office and residential furniture, its 11th facility. We also opened a new distribution center in Baltimore, for a total of six 3 with two others planned for 2001. These are a vital part of the vertical integration that gives the Company competitive advantages. Our Company maintains a strong balance sheet consistent with our longstanding business philosophy, which favors a sustainable rate of growth while avoiding the pitfalls of over- expansion. Our debt to capitalization ratio at year- end was 33%, supporting the costs of our internal growth program, the purchase of the Texas plant and the store and lease acquisitions. To meet the demands created by our record growth, we continued to strengthen our excellent management team. W. Kenneth Butler, President of the Aaron’s Sales & Lease Ownership division, was elected to the Board of Directors; Eduardo Quiñones was promoted to President of the Rent-to-Rent division after serving in regional management for over a decade; William R. Mitchell joined the Company as Vice President, Franchising for Aaron’s Sales & Lease Ownership; and Todd Evans, formerly Vice President, Franchise Development of the Aaron’s Sales & Lease Ownership division, was named Vice President, Business Development. Subsequent to year-end, Mitchell S. Paull was named Senior Vice President. We believe the solid, sustained growth of Aaron Rents will increase investor awareness and build value for shareholders. During the past year we continued our stock repurchase program, buying 327,500 shares of the Company’s stock. This brought to almost two million the number of shares purchased since September 1998 as part of our efforts to increase share value. Events in the broader retailing industry are opening the way for Aaron Rents to improve its position, expand its store base and gain new customers. The opportunities ahead of us are unlimited. We are prepared to seize one opportunity after another to create an even stronger company, dedicated to serving our extremely large market with quality products and services. We are especially proud of our people, the 3,900 associates across the country and in Puerto Rico, who possess the talents, the skills and the commitment to be the best. We look to the future with the anticipation of unlimited opportunities. R. Charles Loudermilk, Sr. Chairman and Chief Executive Officer Robert C. Loudermilk, Jr. President and Chief Operating Officer Aaron’s new lines of personal computers have met strong response from customers. Targeting a larger share of the growing PC market, Aaron’s entered into a strategic alliance with CompUSA, a leading computer manufacturer, to offer two of its most popular models. 5 A a r o n ’s S a l e s & L e a s e O w n e r s h i p A c c e l e r a t i n g G r o w t h Aaron’s Sales & Lease Ownership division is accelerating its expansion across the nation, opening stores at the rate of about one every four days in 2000 — propelled by the highly successful “Dream Products” marketing and sponsorship of nascar championship racing. A major development late in the year opened the door to faster than expected store openings in 2001 when the Company acquired nearly 30 store locations formerly operated by one of the nation’s major furniture retailers. The number of Aaron’s Sales & Lease Ownership stores increased during the year from 368 to 456, a net gain of 88 stores and a 24% increase, including both Company-operated and franchised stores and 10 stores acquired in Puerto Rico. The record increase in store count confirms the appeal of the Aaron’s concept for providing quality merchandise at competitive prices to a large market of consumers which neither conventional retailers nor rent-to-own stores serve adequately. Aaron’s niche is the higher end of the market comprising an estimated 30% of the households in the United States. The market reached by Aaron’s is a combination of rental, lease ownership and retail credit customers. Driving Aaron’s rapid expansion is its “Dream Products” program. This targets the high end of the market with “dream” products such as large-screen televisions, home theater systems, leather upholstery, stainless steel refrigerators and top name brand washers and dryers. Aaron’s Sales & Lease Ownership expanded its relationship with nascar, which reaches the prime audience for Aaron’s products. The initial step was the title sponsorship of the nascar Busch Grand National Car Race at the Atlanta Motor Speedway — the nationally televised “Aaron’s 312,” named for Aaron’s three ways to obtain merchandise and its unique 12-month plan. The next step was a limited sponsorship for driver Michael Waltrip’s #99 Aaron’s Dream Machine in the Busch Grand National Series. The final step was a sponsorship for driver Johnny Benson’s #10 Aaron’s Dream Machine for the last half of the 2000 nascar Winston Cup Series. The market response to the nascar promotions has been tremendous. Sponsorship of Atlanta Braves games and other sports events also reach this market. Aaron’s moved up its timetable for store openings with the acquisition of 26 store locations in an auction of facilities formerly operated by a large national furniture retailer. The most strategically advantageous locations were selected in markets where the Company already had a strong presence, which is expected to result in an extremely high level of synergy between existing stores and acquired stores. The customer base of the acquired stores closely fits the Aaron’s customer profile. In the first move outside the U.S. mainland, Aaron’s acquired a privately owned chain of 10 rental purchase stores in Puerto Rico. The island commonwealth offers the opportunity for immediate expansion, and the Company plans to open at least five more stores beginning this year. Aaron’s has targeted a larger share of the growing market for personal computers, entering into a strategic alliance with CompUSA, a leading computer manufacturer. Aaron’s stores last year began selling two of the most popular PCs made by CompUSA and a more powerful Hewlett Packard model. The new lines met strong response from consumers in the rental purchase market, confirming the demand for personal computers in this sector. The strategic alliance brings two important competitive advantages. First, Aaron’s Sales & Lease Ownership buys directly from the manufacturer, reducing costs; and second, the Company utilizes the volume purchasing power of its strategic partner to lower costs on the Hewlett Packard personal computer. The result is lower pricing for Aaron’s customers. A two-year, in-home warranty is provided by Aaron’s, while CompUSA offers technical support and customer service. The move into the personal computer market required Aaron’s to redesign the interiors of its stores to expand the Aaron’s Sales & Lease Ownership Systemwide Revenue Growth And Store Count 456* 368* 318* $500,000 400,000 300,000 200,000 282* 198* 100,000 0 ) s 0 0 0 n i $ ( ’96 ’97 ’98 ’99 ’00 Franchise Revenues Company-Operated Revenues *Number of Stores Sales & Lease Ownership Rental Revenues Furniture 35% Computers 6% Other 2% Appliances & Electronics 57% 6 space for displaying personal computers. This has heightened customer appeal in the already attractive Aaron’s stores, which are large and inviting, generally in suburban areas with more upscale customers than are typical of competing rental purchase stores. With an average 9,000 square feet, an Aaron’s store is more than three times the size of conventional competitors. Consequently, Aaron’s customers enjoy a much greater selection of leading brand name merchandise plus the Company’s own lines of furniture and accessories. All of these advantages are combined with the Aaron’s 12-month ownership plan to create a powerful, winning formula unmatched in the marketplace. Customers can acquire merchandise from Aaron’s with 12 monthly payments versus the typical 18 to 36 months of weekly payments at most competing stores. Aaron’s also provides automatic pre-approval and the guaranteed lowest price. Customers have the right to return merchandise at any time. Flexible payment options include cash, check or credit card. Vertical integration of Aaron’s operations together with volume purchasing are key factors in timely delivery of high quality merchandise to the market. First, the Company’s furniture manufacturing division, MacTavish Furniture Industries, supplies much of the furniture to the stores at a cost advantage, allowing very competitive pricing to the customers. Second, the expanding distribution system of Aaron Rents, with six large centers located across the country, ensures the same-day or next-day delivery of merchan- dise to the customers, a critical success factor in our market. Aaron’s Sales & Lease Ownership features its Dream Products and pricing on the Internet at www.shopaarons.com. F r a n c h i s i n g N a t i o n w i d e E x p a n s i o n Aaron’s Sales & Lease Ownership franchise owners are opening new stores and new territories at a record pace, reflecting the strong demand for the Aaron’s concept throughout the country. In 2000 franchise owners acquired franchises for 78 new stores, and at year-end an additional 146 stores were in the pipeline for future opening. During the year 47 new franchised stores were opened; nine were acquired by the Company bringing the year-end total to 193 franchised stores, a store increase of 25% over 1999. Aaron’s opened franchised stores in three new states, Maine, North Dakota and Nebraska. Including the franchised stores, the Company had a total of 456 sales and lease ownership stores in 42 states and Puerto Rico. The record-setting growth is driven by multi-store franchise owners. Eighteen franchise owners acquired the 78 franchises awarded last year, including one who signed up for 19 new stores. $50,000 Quarterly Revenues Of Franchised Stores 40,000 ) s 0 0 0 n i $ ( 30,000 20,000 10,000 193* 186* 166*179* 155* 142* 138*136* 136* 121* 116* 106* 101* 86* 76* 71* 61* 54* 38* 45* 28* 31* 36* 24* 26* 18* 21* 15* 6* 6* 13* 8* 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1993 1994 1995 1996 1997 1998 1999 2000 *Number of Franchise Stores Aaron’s stores, much larger than a conventional competitor’s, give customers a far greater selection of leading brand name merchandise plus the Company’s own lines of furniture and accessories. Aaron’s offers a wide range of designer-inspired furniture for residen- tial rental customers. The Company continues as the leader in La-Z-Boy furniture rentals and also carries many other major brands of merchandise. 9 The nationally ranked franchise program attracts experienced businesspeople and entrepreneurs who acquire multi-store franchise territories. A growing number of Aaron’s franchise partners now own or have acquired rights to open from 10 to 20 or more stores in cities from coast to coast. Expansion of franchised stores into the Midwest came in the past year with a major franchisee committing to a total of 29 stores in the Chicago area, while another owner plans a total of 18 stores in California. Also in Los Angeles a third franchise owner plans to open nine stores within the next three years. Typical of the stature of Aaron’s franchise owners are those who signed on during 2000. They include the vice president of a major bank and former auto service franchise owner, a former auto dealer, a director of franchise development for a chain of restaurants, and a former owner of several franchised restaurants. It is the current owners of Aaron’s franchises who are driving the rapid expansion of the franchise program. These owners are able to achieve greater efficiency through economies of scale and thereby increase their long-term profitability. They also have the benefits of the Aaron’s franchise financing program which provides support for the faster rate of store openings by franchise owners. Vital support for franchise owners is provided by the Company. The broad range of franchise services starts with assistance in the development of a successful business plan, based on years of experience and know-how. Guidance is given in such critical steps as the selection of store locations and analysis of the market competition that the franchise owner will face. Training in the management and operation of Aaron’s stores is provided by the franchise support center. Assistance with advertising and publicity are also part of the support program. Proof of the strength and standing of the Aaron’s franchising program is its consistent high ranking in national surveys of franchisors. Aaron’s ranked 81st in Franchise Times Top 200 franchise chains by worldwide sales last year, also placed in the Top 200 of Success magazine, and currently ranks number one in the appliance and furniture rentals category of Entrepreneur magazine. To gain these rankings, a company must pass an extensive evaluation of financial performance including revenues, franchise fees and proprietary goods and services; the management of the company, its rate of growth and stability; the relationship between franchisor and franchisee; and the opportunities for growth available to the franchise owner. Aaron’s franchise owners also have input into the policies covering their operations through the Aaron’s Franchise Association. Franchise owners join with Company representatives as members of the Aaron’s Management Team to provide leadership for the franchise program, to discuss the direction of the division and to bring about improvements for the benefit of both the franchise owners and the Company. Franchise owner Jimmy Day of DPR Investments, LLC, who added three more stores last year for a total of 15 in the Southwest, serves as President of Aaron’s Franchise Association. In the words of this successful business owner: “The Aaron concept provides a valuable service to customers, and it offers an outstanding business opportunity in franchising.” R e n t - To - R e n t T a r g e t i n g P r o f i t a b l e M a r k e t s Atradition of excellence stands behind the nearly half-century of success achieved by the rent- to-rent division of Aaron Rents, which provides a foundation for the Company’s growth. The rent-to-rent division constitutes the second largest business in the furniture rental industry with approximately 30% of the estimated $600 million domestic market. Just under 100 rent-to-rent stores throughout the country provide residential and office furniture for the temporary needs of individuals and corporations. Building on its strong reputation, the residential division’s growth strategy is to place a renewed focus on the more profitable individual rental customer, while continuing to maintain and develop new corporate business. The office division’s growth strategy is to become a major national force in the much larger office furniture market, comprised of two major segments — corporate offices with projected sales of $11.5 billion next year and the small office/home office (soho) sector with $10 billion projected sales. It is small to medium-size businesses that are driving the growth of the U.S. economy as many Fortune 500 companies are downsizing. The home office/telecommuting market is growing rapidly with an estimated 41 million Americans now working at home. To gain share of the office furniture market, Aaron’s began laying the groundwork for collaborative relationships with manufacturers to market and distribute office products nationally. The concept is to utilize existing Aaron Rents stores while developing quick ship programs with the nation’s largest and 10 best name brand office furniture manufacturers, and to source the best third-party delivery firms. Aaron’s is focusing on providing exemplary customer service and the fastest delivery time of name brand quality, fully assembled furniture in America with this pledge: “The furniture you want when you want it.” The rent-to-rent division’s strategy also plays off its reputation and strength as a market pioneer and leader in the furniture rental business for 46 years. From stylish, name-brand furnishings to the proprietary designs of Aaron’s own manufacturing division, MacTavish Furniture Industries, a wide range of designer- inspired furniture is offered to both residential and business customers. Aaron also provides special events furniture, office panel work stations, housewares, appliances and electronics. Free in-office consultation and assistance with space planning are also part of the services Rent-to-Rent Rental Revenues Residential Furniture–59% Office Furniture–34% Electronics & Appliances –7% available to business clientele, who have a choice of rental, purchase or lease purchase. For individual customers, electronics such as large-screen televisions and the new line of computers are gaining in popularity, while Aaron continues as the leader in La-Z-Boy furniture rentals and provides a large selection of other major brands of merchandise. Repeat business is a key to the rent-to-rent business, indicating the importance of high quality service as well as merchandise. From its inception, Aaron Rents has been known for fast and efficient customer service. This begins with guaranteed next-day furniture delivery on merchandise in stock on orders placed before 3 p.m. Aaron also guarantees replacement at no cost of any item of furniture not considered satisfactory for any reason. Customers have a further guaran- tee that furniture may be returned within the first week for any reason with full refund. As the Company’s original business enters its 46th year, Aaron Rents continues to build its reputation for quality, style and selection, for commitment to and respect for all customers — the doors to new opportunities for growth. M a c Ta v i s h F u r n i t u r e I n d u s t r i e s a n d D i s t r i b u t i o n C e n t e r s G r o w i n g S t r a t e g i c a l l y N a t i o n w i d e MacTavish Furniture Industries, the manufacturing division of Aaron Rents, had another banner year in 2000, producing most of the furniture for the Company’s rapidly increasing number of stores. This division, combined with the growing nationwide network of Aaron Rents distribution centers and fleet of delivery trucks, provides a vertical integration unique in the industry and affords major competitive advantages. The capabilities of manufacturing and distribution set Aaron Rents apart, insuring the supply of furni- ture needed to meet the demands of stores and the same-day or next-day delivery of merchandise required by rental customers. No competitor can match this synergistic model that assures the Company of quality control, cost savings and inventory control. MacTavish’s production last year exceeded $50 million of furniture, accessories and bedding at cost, maintaining its standing as one of the major furniture manufacturers in the United States. During the year, the division opened its 11th production facility, located near Houston, providing fast delivery of furniture to the expanding number of stores in the Western region of the country. MacTavish also imple- mented a barcode inventory management system for raw materials and finished goods, resulting in greater accuracy, improved forecasting and just-in-time inventory management for raw materials. Computer-aided design and computer-controlled cutting techniques are utilized in the MacTavish plants in creating furniture styles in demand by consumers. MacTavish is known for the quality and appeal of its designer-inspired products, which are always both fashionable and functional, adhering to the strict standards of furniture built to be rented multiple times. To meet the demand for coordinated rooms, exclusive lines of accessories designed by the well-known designer Avi Yofan are produced by MacTavish. These accessories, including lamps and tables, magnify the customer appeal of furniture groupings in our stores. Aaron’s provides free in-office consultation and assistance with space planning as part of the services available to business clientele, who have a choice of rental, purchase or lease purchase. Small office/home office customers comprise a growing target market. 12 Keeping pace with the fast-track store expansion, Aaron Rents opened its sixth distribution center last year in Baltimore with the seventh center scheduled for opening in the first quarter of 2001 in North Carolina. These centers in key locations across the country are part of the Company’s long-term strategy to maintain its competitive advantage in its markets through the efficiencies and cost benefits, control of design, quality and inventory — all of which translates into lower prices and prompt delivery of mer- chandise to customers. Aaron’s distribution centers enable the Company to purchase products in large quantities, resulting in major competitive advantages. Vendors give priority to Aaron’s in filling and shipping orders. Volume buying also commands substantial cost savings, and the benefit is passed on to the stores, both Company- operated and franchised. The stores, in turn, provide pricing incentives to customers. In addition, the capacity of the distribution system enables Aaron’s to take advantage of special offers by vendors at extremely favorable prices. Aaron’s stores rely on the distribution centers for quick replenishment of inventory, avoiding the problem of overstocking and better managing inventory flow. The distribution centers typically deliver twice a week to stores within a 150-mile radius and once a week to stores beyond that distance. Even on out-of-stock items, a store can process the customer’s order and provide the merchandise, rather than lose the order, by virtue of the quick delivery from a distribution center — a strategic capability unmatched by any competitor. Another major advantage for the stores is less warehouse space being needed at store facilities, permitting larger showrooms, displaying more merchandise and increasing rentals and sales. The distribution centers provide the base for the Company’s highly effective strategic partnerships with vendors. The Partners in Profit program provides millions of dollars from name brand vendors for cooperative advertising. When the advertising brings customers into the stores, the advertised products from major manufacturers and vendors are in the showrooms and warehouses, backed by the unique advantage of quickly available stock in the distribution centers. The Partners in Profit program creates good relationships with the suppliers who realize substantial sales of their products. The Company ranks as one of the leading wholesale buyers of large-screen televisions, and its total purchases from key vendors and major manufacturers in the Partners in Profit program increased by 42% from 1999 to 2000, reflecting the growing importance of Aaron Rents in its markets — opening new doors of opportunity. A a r o n ’s C o m m u n i t y O u t r e a c h P r o g r a m G i v i n g B a c k T o O u r C o m m u n i t i e s Giving back to the community is a priority of the people of Aaron Rents. They give of their time and talents in volunteer efforts, supporting the financial donations made through Aaron’s Community Outreach Program (acorp). In only two years, acorp has returned more than $700,000 to communities served by the Company’s stores meeting performance goals and qualifying for $500 each month to be donated by store associates to local charities. Acorp supports organizations such as the Make A Wish Foundation and Habitat for Humanity, which receive donations from Aaron Rents, while the stores give to local chapters and affiliates. Associates at many stores work together to support educational and after-school programs in their communities. Acorp provides assistance to Samaritan House/CAFÉ 458, an Atlanta shelter for the homeless and those needing a fresh start, with a wide range of free services from alcohol and substance abuse support groups to a free clothing closet and a full-service restaurant where meals are served by volunteers. Also receiving help is the Toys for Tots program to which acorp gave approximately $20,000 in toy donations in 2000. The third Habitat for Humanity house sponsored by acorp was part of the Jimmy Carter Work Project 2000 “Blitz Build,” which ended substandard housing in Sumter County, Georgia — said to be the first county in the world to end poverty-level housing. acorp Volunteers helped build the house, an experience that left the Aaron’s associates feeling they were beneficiaries too. The spirit of acorp was expressed by Bill Tuccio of Aaron’s Sales & Lease Ownership Florida Region: “How many people have fun and help someone at the same time? That’s what it’s all about, and that’s what makes us feel good.” 13 S e l e c t e d F i n a n c i a l I n f o r m a t i o n (Dollar Amounts in Thousands Except Per Share) O p e r a t i n g R e s u l t s Systemwide Revenues1 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 F i n a n c i a l P o s i t i o n Rental Merchandise, Net Property, Plant & Equipment, Net Total Assets Interest-Bearing Debt Shareholders’ Equity A t Y e a r E n d Stores Open: Company-Operated Franchised Rental Agreements in Effect Number of Employees Year Ended Year Ended Year Ended December 31, December 31, December 31, 1999 1998 2000 Year Ended December 31, 1997 Year Ended December 31, 1996 $656,096 $547,255 $464,175 $364,306 $306,200 $359,880 127,915 15,125 502,920 105,152 227,587 120,650 5,625 459,014 43,906 16,645 $ 27,261 1.38 $ 1.37 .04 .04 $ $318,154 107,690 11,515 437,359 87,705 201,923 102,324 4,105 396,057 41,302 15,700 $ 25,602 1.28 $ 1.26 .04 .04 $ $289,272 81,561 8,826 379,659 62,017 189,719 89,171 3,561 344,468 35,191 13,707 $ 21,484 1.06 $ 1.04 .04 .04 $ $231,207 73,223 6,321 310,751 55,914 149,728 71,151 3,721 280,514 30,237 11,841 $ 18,396 .96 $ .94 .04 .04 $ $208,463 61,527 4,255 274,245 46,168 135,012 64,437 3,449 249,066 25,179 9,786 $ 15,393 .81 $ .77 .04 .04 $ $267,713 $219,831 $194,163 $176,968 $149,984 63,174 380,379 104,769 208,538 361 193 281,000 3,900 55,918 318,408 72,760 183,718 320 155 254,000 3,600 50,113 272,174 51,727 168,871 291 136 227,400 3,400 39,757 239,382 76,486 116,455 292 101 219,800 3,100 33,267 198,103 55,365 107,335 240 61 179,600 2,550 1Systemwide revenues include rental revenues of franchised Aaron’s Sales & Lease Ownership stores. 14 M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s o f F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s Results of Operations Year Ended December 31, 2000 versus Year Ended December 31, 1999 Total revenues for 2000 increased $65.6 million (15.0%) to $502.9 million compared to $437.4 million in 1999 due primarily to a $41.7 million (13.1%) increase in rentals and fees revenues, plus a $20.1 million (44.3%) increase in non-retail sales. Of this increase in rentals and fees revenues, $37.7 million was attributable to Aaron’s Sales & Lease Ownership, the Company’s rental purchase division. Rentals and fees revenues from the Company’s rent-to-rent operations increased $4.0 million during the same period. Revenues from retail sales increased $121,000 (.2%) to $62.4 million in 2000, from $62.3 million for the same period last year. Non-retail sales, which primarily represent merchandise sold to Aaron’s Sales & Lease Ownership franchisees, increased $20.1 million (44.3%) to $65.5 million compared to $45.4 million for the same period last year. The increased sales are due to the growth of the franchise operations. Other revenues for 2000 increased $3.6 million (31.4%) to $15.1 million compared to $11.5 million in 1999. This increase was attributable to franchise fee and royalty income increasing $3.3 million (36.3%) to $12.4 million compared to $9.1 million last year, reflecting the net addition of 38 new franchised stores in 2000 and improved operating revenues at mature franchised stores. Cost of sales from retail sales decreased $1.1 million (2.4%) to $44.2 million compared to $45.3 million, and as a percentage of sales, decreased to 70.7% from 72.6% primarily due to product mix. Cost of sales from non-retail sales increased $18.5 million (43.7%) to $61.0 million from $42.5 million, and as a percentage of sales, decreased to 93.1% from 93.5%. The increased margins on non-retail sales was primarily the result of slightly higher margins on certain products sold to franchisees. Operating expenses increased $25.7 million (12.7%) to $227.6 million from $201.9 million. As a percentage of total revenues, operating expenses were 45.3% in 2000 and 46.2% in 1999. Operating expenses decreased as a percentage of total revenues between years primarily due to increased revenues in the Aaron’s Sales & Lease Ownership division. Depreciation of rental merchandise increased $18.3 million (17.9%) to $120.7 million, from $102.3 million, and as a percentage of total rentals and fees increased to 33.5% from 32.2% in 1999. The increase as a percentage of rentals and fees is primarily due to a greater percentage of the Company’s rentals and fees coming from the Aaron’s Sales & Lease Ownership division which depre- ciates its rental merchandise at a faster rate than the rent-to-rent division. Interest expense increased $1.5 million (37.0%) to $5.6 million compared to $4.1 million. As a percentage of total revenues, interest expense was 1.1% in 2000 compared to .9% in 1999. The increase in interest expense as a percentage of revenues was due to increased interest rates along with higher daily average debt levels. The Company manages its exposure to changes in short-term interest rates, particularly to reduce the impact on its floating-rate revolving credit facility, by entering into interest rate swap agreements. The counterparties to these contracts are high credit quality commercial banks. Consequently, credit risk, which is inherent in all swaps, has been minimized to a large extent. Interest expense is adjusted for the differential to be paid or received as interest rates change. The effect of such adjustments on interest expense has not been significant. The level of floating-rate debt fixed by swap agreements was $40.0 million during the year and the Company does not expect a significant change in this amount in 2001. Accordingly, the Company does not believe it has material exposure of potential near-term losses in future earnings, and/or cash flows from reasonably possible near-term changes in market rates. Income tax expense increased $945,000 (6.0%) to $16.6 million compared to $15.7 million. The Company’s effective tax rate was 37.9% in 2000 compared to 38.0% in 1999. As a result, net earnings increased $1.7 million (6.5%) to $27.3 million for 2000 compared to $25.6 million for the same period in 1999. As a percentage of total revenues, net earnings were 5.4% in 2000 and 5.9% in 1999. The decrease in net earnings as a percentage of total revenues is the result of startup losses associated with the increased rate at which the Company opened new Aaron’s Sales & Lease Ownership stores with 32 stores opened in 2000 compared to 17 in 1999. Year Ended December 31, 1999 versus Year Ended December 31, 1998 Total revenues for 1999 increased $57.7 million (15.2%) to $437.4 million compared to $379.7 million in 1998 due primarily to a $28.9 million (10.0%) increase in rentals and fees revenues, plus a $26.4 million (139.1%) increase in non-retail sales. Of this increase in rentals and fees revenues, $32.7 million was attributable to the Aaron’s Sales & Lease Ownership division. Rentals and fees from the Company’s rent-to-rent operations increased $2.0 million excluding $5.8 million of rentals and fees from the Company’s convention furnishings division, which was sold in the fourth quarter of 1998. Revenues from retail sales decreased $280,000 (.4%) to $62.3 million in 1999 from $62.6 million for the same period in 1998. The decrease was the result of new sales in the rent-to-rent division decreasing and the discon- tinued sale of prepaid cellular air time in the rental purchase division. Non-retail sales, which primarily represent merchandise sold to Aaron’s Sales & Lease Ownership franchisees, increased $26.4 million (139.1%) to $45.4 million compared to $19.0 million for the same period in 1998. The increased sales are due to the growth of the franchise operations coupled with the addition of a new distribution center. 15 Other revenues for 1999 increased $2.7 million (30.5%) Liquidity and Capital Resources to $11.5 million compared to $8.8 million in 1998. This increase was attributable to franchise fee and royalty income increasing $1.8 million (25.3%) to $9.1 million compared to $7.3 million in 1998, reflecting the net addition of 19 new franchised stores in 1999 and increasing operating revenues at mature franchised stores. Cost of sales from retail sales increased $868,000 (2.0%) to $45.3 million compared to $44.4 million, and as a percentage of sales, increased slightly to 72.6% from 70.9% primarily due to product mix. Cost of sales from non-retail sales increased $24.8 million (140.8%) to $42.5 million from $17.6 million, and as a percentage of sales, increased to 93.5% from 92.9%. The reduced margins on non-retail sales was primarily the result of lower margins on certain products sold to franchisees. Operating expenses increased $12.2 million (6.4%) to $201.9 million from $189.7 million. As a percentage of total revenues, operating expenses were 46.2% in 1999 and 50.0% in 1998. Operating expenses decreased as a percentage of total revenues between years primarily due to increased revenues in the Aaron’s Sales & Lease Ownership division and the sale of the Company’s convention furnish- ings division which had higher operating expenses than traditional rent-to-rent and rental purchase operations. Depreciation of rental merchandise increased $13.2 million (14.8%) to $102.3 million, from $89.2 million, and as a percentage of total rentals and fees, was 32.2% compared to 30.8% in 1998. The increase as a percentage of rentals and fees is primarily due to a greater percentage of the Company’s rentals and fees coming from the Aaron’s Sales & Lease Ownership division which depre- ciates its rental merchandise at a faster rate than the rent-to-rent division. Interest expense increased $544,000 (15.3%) to $4.1 million compared to $3.6 million. As a percentage of total revenues, interest expense remained unchanged at 0.9%. Income tax expense increased $2.0 million (14.5%) to $15.7 million compared to $13.7 million. The Company’s effective tax rate was 38.0% in 1999 compared to 39.0% in 1998. As a result, net earnings increased $4.1 million (19.2%) to $25.6 million for 1999 compared to $21.5 million for the same period in 1998. As a percentage of total revenues, net earnings were 5.9% in 1999 and 5.7% in 1998. Cash flows from operations for the years ended December 31, 2000 and 1999 were $166.2 million and $140.3 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 Sales & Lease Ownership 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 requirements historically have been financed through bank credit, cash flow from operations, trade credit, proceeds from the sale of rental return merchandise and stock offerings. The Company has financed its growth through a revolving credit agreement with several banks, trade credit and internally 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, 2000, an aggregate of $90.0 million was outstanding under this facility, bearing interest at a weighted average variable rate of 7.04%. The Company uses interest rate swap agreements as part of its overall long-term financing program. At December 31, 2000, 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%. In 2000, the Company entered into a credit agreement with two banks providing for unsecured borrowings up to $10,000,000. At December 31, 2000 and aggregate of $10,000,000 bearing interest at libor plus 1.00% was out- standing under the agreement. The debt matures in 2001. In addition, the Company issued $4,200,000 of industrial development corporation revenue bonds. The average weighted borrowing rate on these bonds in 2000 was 4.55%. No principal payments are due on the bonds until maturity in 2015. On April 28, 1998, the Company issued through a public offering 2.1 million shares of Common Stock. The net proceeds to the Company after deducting underwriting discounts and offering expenses were $40.0 million. The proceeds were used to reduce bank debt. The Company believes that the expected cash flows from operations, proceeds from the sale of rental return merchandise, bank borrowings and vendor credit will be sufficient to fund the Company’s capital and liquidity needs for at least the next 24 months. During 2000, 327,500 shares of the Company’s stock were purchased at an aggregate cost of $4.6 million and the Company was authorized to purchase an additional 1,284,690 shares at December 31, 2000. The Company has paid dividends for fourteen con- secutive years. A $.02 per share dividend on Common Stock and on Class A Common Stock was paid in January 2000 and July 2000, for a total fiscal year cash outlay of $792,000. The Company currently expects to continue its policy of paying dividends. 16 C o n s o l i d a t e d B a l a n c e S h e e t s (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 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: 18,270,987 Class A Common Stock, 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, 2,230,446 Shares at December 31, 2000 & 2,177,956 Shares at December 31, 1999 Class A Common Stock, 1,532,255 Shares Total Shareholders’ Equity Total Liabilities & Shareholders’ Equity December 31, 2000 December 31, 1999 $ 95 23,637 381,930 (114,217) 267,713 63,174 25,760 $380,379 $ 34,693 399 20,986 10,994 100,000 4,769 171,841 $ 99 21,030 316,294 (96,463) 219,831 55,918 21,530 $318,408 $ 36,941 399 14,410 10,180 72,225 535 134,690 9,135 9,135 2,681 53,662 185,782 251,260 2,681 54,181 159,313 225,310 (28,486) (14,236) 208,538 $380,379 (27,356) (14,236) 183,718 $318,408 The accompanying notes are an integral part of the Consolidated Financial Statements. C o n s o l i d a t e d S t a t e m e n t s o f E a r n i n g s 17 (In Thousands, Except Per Share) R e v e n u e s Rentals & 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, 2000 Year Ended Year Ended December 31, December 31, 1999 1998 $359,880 62,417 65,498 15,125 502,920 44,156 60,996 227,587 120,650 5,625 459,014 43,906 16,645 $ 27,261 1.38 $ 1.37 $318,154 62,296 45,394 11,515 437,359 45,254 42,451 201,923 102,324 4,105 396,057 41,302 15,700 $ 25,602 1.28 $ 1.26 $289,272 62,576 18,985 8,826 379,659 44,386 17,631 189,719 89,171 3,561 344,468 35,191 13,707 $ 21,484 1.06 $ 1.04 The accompanying notes are an integral part of the Consolidated Financial Statements. C o n s o l i d a t e d S t a t e m e n t s o f S h a r e h o l d e r s ’ E q u i t y (In Thousands) Treasury Stock Common Stock Shares Amount Common Class A $8,085 1,050 $2,681 Additional Paid-In Capital $15,484 38,908 (108) (2,583) ($23,659) (736) (10,560) 235 2,479 (3,084) (860) (31,740) (12,673) Balance, December 31, 1997 Stock Offering Reacquired Shares Dividends Reissued Shares Net Earnings Balance, December 31, 1998 Reacquired Shares Dividends Reissued Shares Net Earnings Balance, December 31, 1999 Reacquired Shares Dividends Reissued Shares Net Earnings 9,135 2,681 54,284 234 2,821 (103) (3,710) (328) (41,592) (4,625) 9,135 2,681 54,181 275 3,495 (519) Retained Earnings $113,864 (837) 21,484 134,511 (800) 25,602 159,313 (792) 27,261 Balance, December 31, 2000 (3,763) ($42,722) $9,135 $2,681 $53,662 $185,782 The accompanying notes are an integral part of the Consolidated Financial Statements. 18 (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 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 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 Proceeds from Common Stock Offering Increase (Decrease) in Other Debt Dividends Paid Acquisition of Treasury Stock Issuance of Stock under Stock Option Plans Cash Provided by Financing Activities (Decrease) Increase in Cash Cash at Beginning of Year Cash at End of Year Cash Paid During the Year: Interest Income Taxes C o n s o l i d a t e d S t a t e m e n t s o f C a s h F l o w s Year Ended December 31, 2000 Year Ended December 31, 1999 Year Ended December 31, 1998 $ 27,261 133,109 6,576 $ 25,602 112,746 6,599 $ 21,484 98,090 1,124 3,109 (4,432) 1,253 120,628 (22,209) 3,521 (174,496) 69,018 (1,841) (126,007) 157,622 (183,115) 39,958 734 (801) (10,560) 1,540 5,378 (1) 96 95 $ (2,248) (2,607) 4,074 166,165 (23,761) 7,326 (279,580) 115,601 (14,273) (194,687) 3,480 (4,804) (3,330) 140,293 (21,030) 5,833 (218,933) 95,840 (11,393) (149,683) 198,403 (170,628) 180,213 (158,399) (781) (816) (12,673) 1,850 9,394 4 95 99 4,234 (792) (4,625) 1,926 28,518 (4) 99 95 5,674 5,762 $ $ $ $ 4,025 15,289 $ 4,082 10,004 The accompanying notes are an integral part of the Consolidated Financial Statements. 19 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s As of December 31, 2000 and 1999, and for the Years Ended December 31, 2000, 1999 and 1998. Note A: Summary of Significant Accounting Policies Basis of Presentation — The consolidated financial statements include the accounts of Aaron Rents, 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 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. Line of Business — The Company is engaged in the business of renting and selling residential and office furniture, consumer electronics, appliances and other merchandise throughout the U.S. and Puerto Rico. The Company manufactures furniture principally for its rental and sales operations. Rental Merchandise consists primarily of residential and office furniture, consumer electronics, appliances and other merchandise and is recorded at cost. The sales & lease ownership division depreciates merchan- dise over the agreement period, generally 12 months, when on rent, and 36 months, when not on rent, to a 0% salvage value. This method is similar to a method referred to as the income forecasting method in the rental purchase industry. The rent-to-rent division depreciates merchandise over its estimated useful life which ranges from 6 months to 60 months, net of its salvage value which ranges from 0% to 60%. All rental merchandise is available for rental and sale. 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 1 to 5 years for other depreciable property and equipment. Gains and losses related to dispositions and retirements are expensed as incurred. Maintenance and repairs are also expensed as incurred; renewals and betterments are capitalized. Deferred Income Taxes are provided for 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 rental merchandise for tax purposes. Cost of Sales includes the net book value of merchandise sold, primarily using specific identification in the sales & lease ownership division and first-in, first-out in the rent-to-rent division. It is not prac- ticable to allocate operating expenses between selling and rental operations. Shipping and Handling Costs — Shipping and handling costs are classified as operating expenses in the accompanying consolidated statements of operations and totaled approximately $17,397,000 in 2000, $15,129,000 in 1999 and $13,458,000 in 1998. Advertising — The Company expenses advertising costs as incurred. Such costs aggregated $11,937,000 in 2000, $12,496,000 in 1999, and $11,523,000 in 1998. Stock Based Compensation — The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees 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. Income tax benefits resulting from stock option exercises credited to additional paid-in capital totaled approximately $540,000, $867,000 and $830,000, in 2000, 1999 and 1998, respectively. Excess Costs over Net Assets Acquired — Goodwill is amortized 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 impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. Measurement of an impairment loss is based on the estimated fair value of the asset. Fair Value of Financial Instruments — The carrying amounts reflected in the consolidated balance sheets for cash, accounts receivable, bank and other debt approximate their respective fair values. Revenue Recognition — Rental revenues are recognized as revenue in the month they are due. Rental payments received prior to the month due are recorded as deferred rental revenue. Revenues from the sale of residential and office furniture and other merchandise are recognized at the time of shipment. 20 New Accounting Pronouncements — In June 1998, the FASB issued Statement No.133, Accounting for Derivative Instruments and Hedging Activities (Statement 133). The statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. The Company adopted Statement 133 on January 1, 2001. The cumulative effect of this adoption had no significant effect on the Company’s financial position or results of operations. Note B: Earnings Per Share Earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year which were 19,825,000 shares in 2000, 20,062,000 shares in 1999, and 20,312,000 in 1998. 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 142,000 in 2000, 273,000 in 1999 and 421,000 in 1998, respectively. Note C: Property, Plant & Equipment (In Thousands) Land Buildings & Improvements Leasehold Improvements & Signs Fixtures & Equipment Construction in Progress Less: Accumulated Depreciation & Amortization December 31, December 31, 2000 1999 $ 8,977 28,681 34,128 25,786 2,051 99,623 (36,449) $ 63,174 $ 8,837 25,612 31,294 24,622 1,043 91,408 (35,490) $ 55,918 Note D: 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, 2000 and 1999, an aggregate of $90,000,000 (bearing interest at 7.04%) and $72,225,000 (bearing interest at 6.88%), respectively, was outstanding under this agreement. 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 7.07% in 2000, 5.94% in 1999 and 6.41% in 1998. The effects of interest rate swaps on the weighted average interest rate were not material. The Company has entered into interest rate swap agreements that effectively fix the interest rate on $20,000,000 of borrowings 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 agree- ments. The differential 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 $804,000 at December 31, 2000. The revolving credit agreement may be terminated on ninety 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 21 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 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 additional borrowings and requires the maintenance of certain financial ratios. At December 31, 2000, $61,640,000 of retained earnings were available for dividend payments and stock repurchases under the debt restrictions. In September 2000, the Company entered into a credit agreement with two banks providing for unsecured borrowings up to $10,000,000. At December 31, 2000 an aggregate of $10,000,000 bearing interest at libor plus 1.00% was outstanding under the agreement. The debt matures in 2001. Other Debt — Other debt at December 31, 2000 of $4,769,000 is primarily comprised of $4,200,000 of industrial development corporation revenue bonds. The average weighted borrowing rate on these bonds in 2000 was 4.55%. No principal payments are due on the bonds until maturity in 2015. (In Thousands) Current Income Tax Expense: Federal State Deferred Income Tax Expense: Federal State Note E: Income Taxes Year Ended December 31, 2000 Year Ended Year Ended December 31, December 31, 1999 1998 $9,461 608 10,069 5,520 1,056 6,576 $16,645 $8,020 1,081 9,101 5,989 610 6,599 $15,700 $11,422 1,161 12,583 949 175 1,124 $13,707 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, 2000 December 31, 1999 $25,770 1,531 27,301 1,324 3,179 1,812 6,315 $20,986 $19,345 577 19,922 961 2,858 1,693 5,512 $14,410 The Company’s effective tax rate differs from the federal income tax statutory rate as follows: Statutory Rate Increases in Taxes Resulting From: State Income Taxes, Net of Federal Income Tax Benefit Other, Net Effective Tax Rate Year Ended December 31, 2000 35.0% Year Ended Year Ended December 31, December 31, 1999 35.0% 1998 35.0% 2.5 0.4 37.9% 2.7 0.3 38.0% 2.4 1.6 39.0% 22 Note F: Commitments The Company leases warehouse and retail store space for substantially all of its operations under operating leases expiring at various times through 2013. 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 predeter- mined purchase prices which do not represent bargain purchase options. The Company also leases trans- portation equipment under operating leases expiring during the next 3 years. Management expects that most leases 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 initial or remaining non-cancelable terms in excess of one year as of December 31, 2000, are as follows: $28,238,000 in 2001; $19,892,000 in 2002; $14,388,000 in 2003; $10,558,000 in 2004; $9,252,000 in 2005; and $6,404,000 thereafter. Rental expense was $30,659,000 in 2000; $28,851,000 in 1999; and $25,563,000 in 1998. The Company leases one building from an officer of the Company under a lease expiring in 2008 for annual rentals aggregating $212,700. 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 $427,000 in 2000; $447,000 in 1999; and $415,000 in 1998. Note G: Shareholders’ Equity In February 1999, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s Common Stock and/or Class A Common Stock. During 2000, 327,500 shares of the Company’s common shares were purchased at an aggregate cost of $4,625,000 and the Company was authorized to purchase an additional 1,284,690 at December 31, 2000. At December 31, 2000, the Company held a total of 3,762,701 common shares in its treasury. On April 28, 1998, the Company issued, through a public offering, 2,100,000 shares of Common Stock. The net proceeds to the Company after deducting underwriting discounts and offering expenses were $39,958,000. The net proceeds were used to reduce indebtedness and for general business purposes. 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 H: Stock Options The Company has stock option plans under which options to purchase shares of the Company’s Common Stock are granted to certain key employees. Under the plans, options granted become exercisable after a period of two or three years and unexercised options lapse five or ten years after the date of the grant. Options are subject to forfeiture upon termination of service. Under the plans, 1,425,000 of the Company shares are reserved for issuance at December 31, 2000. The weighted average fair value of options granted was $8.11 in 2000, $9.55 in 1999 and $9.26 in 1998. Pro forma information regarding net earnings and earnings per share is required by FAS 123, and has been determined as if the Company had accounted for its employee stock options granted in 2000, 1999 and 1998 under the fair value method. 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 2000, 1999 and 1998, respectively: risk-free interest rates of 6.47%, 6.36% and 5.36%, a dividend yield of .28%, .23% and .26%; a volatility factor of the expected market price of the Company’s Common Stock of .45, .42 and .43; 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 subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 23 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows: (In Thousands Except Per Share) Pro Forma Net Earnings Pro Forma Earnings Per Share Pro Forma Earnings Per Share Assuming Dilution Years Ended December 31, 1999 1998 2000 $25,910 1.31 $24,424 1.22 $20,076 .99 1.30 1.20 .97 The table below summarizes option activity for the periods indicated in the Company’s stock option plans. (In Thousands Except Per Share) Outstanding at December 31, 1997 Granted Exercised Forfeited Outstanding at December 31, 1998 Granted Exercised Forfeited Outstanding at December 31, 1999 Granted Exercised Forfeited Outstanding at December 31, 2000 Exercisable at December 31, 2000 Weighted Average Exercise Price $10.07 16.73 6.53 15.47 10.92 16.74 7.91 16.33 12.17 13.73 8.22 16.18 13.02 $11.38 Options 1,585 133 (235) (101) 1,382 230 (233) (77) 1,302 405 (235) (95) 1,377 726 The following table summarizes information about stock options outstanding at December 31, 2000. Options Outstanding Options Exercisable Range of Exercise Prices December 31, 2000 Number Outstanding Weighted Average Weighted Average Exercise Price Remaining Contractual Life Number Exercisable December 31, 2000 Weighted Average Exercise Price $ 9.87 – $10.00 10.01 – 15.00 15.01 – 20.25 $ 9.87 – $20.25 544,500 449,500 383,250 1,377,250 5.27 years 9.18 years 8.16 years 7.19 years $ 9.88 13.49 16.94 $13.02 544,500 $ 9.88 182,000 726,500 15.94 $11.38 24 Note I: Franchising of Aaron’s Sales & Lease Ownership Stores The Company franchises Aaron’s Sales & Lease Ownership stores. As of December 31, 2000 and December 31, 1999, 339 and 277 franchises had been awarded, respectively. Franchisees pay a non- refundable initial franchise fee of $35,000 and an ongoing royalty of 5% of cash receipts. Franchise fees and area development franchise fees are generated from the sale of rights to develop, own and operate Aaron’s Sales & Lease Ownership stores. These fees are recognized 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 received prior to the substantial completion of the Company’s obligations are deferred. The Company includes this income in Other Revenues in the Consolidated Statement of Earnings. The Company has guaranteed certain debt obligations of some of the franchisees amounting to $39,127,000 at December 31, 2000. The Company receives a guarantee and servicing fee based on such franchisees’ outstanding debt obligations which it recognizes as income as earned. The Company has recourse rights to the assets securing the debt obligations. As a result, the Company does not expect to incur any significant losses under these guarantees. Note J: Acquisitions and Dispositions During 1998, the Company acquired five rental purchase stores from a franchisee and acquired a lamp designer and manufacturer, Lamps Forever, Inc. The aggregate purchase price of these 1998 acquisitions was not significant. In 1999, the Company acquired 18 rental purchase stores with an aggregate purchase price of $10,252,000. The excess cost over the fair market value of tangible assets acquired was approxi- mately $5,985,000. Also in 1999, the Company acquired two rent-to-rent stores. The aggregate purchase price of these 1999 acquisitions was not significant. During 2000, the Company acquired 20 rental purchase stores including nine stores purchased from franchisees and 10 stores located in Puerto Rico. The aggregate purchase price of these 2000 acquisitions was $14,273,000 and the excess cost over the fair market value of tangible assets acquired was approximately $7,150,000. These 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 2000, 1999 and 1998 consolidated financial statements was not significant. In October 1998, the Company sold substantially all of the assets of its convention furnishings division. In 2000, the Company sold four of its rent-to-rent stores and an additional four in 1999. 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 Rents, Inc. has four reportable segments: sales & lease ownership, rent-to-rent, franchise and manufacturing. The sales & lease ownership division offers electronics, residential furniture and appliances to consumers primarily on a monthly payment basis with no credit requirements. The rent- to-rent division rents and sells residential and office furniture to businesses and consumers who meet certain minimum credit requirements. The Company’s franchise operation sells and supports franchises of its sales & lease ownership concept. The manufacturing division manufactures upholstery, office furniture, lamps and accessories, and bedding predominantly for use by the other divisions. The principal source of revenue in the “Other” category was the Company’s convention furnishings division which was sold during 1998. 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 & lease ownership division revenues and certain other items are presented on a cash basis. Intersegment sales are completed at internally negotiated amounts ensuring competitiveness with outside vendors. Since the intersegment profit and loss affect inventory valuation, depreciation and cost of goods sold are adjusted when interseg- ment profit is eliminated in consolidation. Factors Used by Management to Identify the Reportable Segments Aaron Rents, Inc.’s reportable segments are business units that service different customer profiles using distinct payment arrangements. The reportable segments are each managed separately because of differ- ences in both customer base and infrastructure. N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s Information on segments and a reconciliation to earnings before income taxes are as follows: 25 Years Ended December 31, 1999 1998 2000 (In Thousands) Revenues From External Customers: Sales & Lease Ownership Rent-to-Rent Franchise Other Manufacturing Elimination of Intersegment Revenues Cash to Accrual Adjustments Total Revenues From External Customers Earnings Before Income Taxes: Sales & Lease Ownership Rent-to-Rent Franchise Other Manufacturing Earnings Before Income Taxes For Reportable Segments Elimination of Intersegment Profit Cash to Accrual Adjustments Other Allocations & Adjustments Total Earnings Before Income Taxes Assets: Sales & Lease Ownership Rent-to-Rent Franchise Other Manufacturing Total Assets Depreciation & Amortization: Sales & Lease Ownership Rent-to-Rent Franchise Other Manufacturing Total Depreciation & Amortization Interest Expense: Sales & Lease Ownership Rent-to-Rent Franchise Other Manufacturing Elimination of Intersegment Allocations Total Interest Expense $312,921 174,918 12,621 4,057 54,340 (54,807) (1,130) $502,920 $ 19,527 16,346 7,484 (943) 728 43,142 (441) (804) 2,009 $ 43,906 $205,043 128,163 12,961 17,485 16,727 $380,379 $ 97,139 34,557 412 354 647 $133,109 $ 2,750 2,496 144 235 $252,284 173,579 9,079 1,551 54,550 (53,941) 257 $437,359 $ 20,630 14,369 5,042 (1,072) 717 39,686 (357) 855 1,118 $ 41,302 $139,177 138,349 10,755 16,097 14,030 $318,408 $ 78,385 32,946 347 492 576 $112,746 $ 1,702 2,317 117 (31) $193,283 173,657 7,209 5,470 52,628 (52,067) (521) $379,659 $ 11,668 19,565 3,607 (744) 1,068 35,164 (901) (344) 1,272 $ 35,191 $103,930 138,734 5,415 9,286 14,809 $272,174 $ 67,401 29,327 276 562 524 $ 98,090 $ 2,826 1,698 48 (1,011) 406 (406) 3,561 $ 5,625 $ 4,105 $ 26 Note L: Quarterly Financial Information (Unaudited) (In Thousands Except Per Share) First Quarter Second Quarter Third Quarter Fourth Quarter Y e a r E n d e d D e c e m b e r 3 1 , 2 0 0 0 Revenues Gross Profit Earnings Before Taxes Net Earnings Earnings Per Share Earnings Per Share Assuming Dilution Y e a r E n d e d D e c e m b e r 3 1 , 1 9 9 9 Revenues Gross Profit Earnings Before Taxes Net Earnings Earnings Per Share Earnings Per Share Assuming Dilution $125,372 65,660 11,741 7,278 .37 .36 $ $104,303 57,706 10,779 6,679 .33 .33 $ $121,910 64,357 11,177 6,929 .35 .35 $ $107,364 59,246 10,615 6,575 .33 .32 $ $124,850 64,818 10,799 6,706 .34 .34 $ $109,379 59,340 9,860 6,108 .30 .30 $ $130,788 67,158 10,189 6,348 .32 .32 $ $116,313 59,523 10,048 6,240 .32 .31 $ Report of Independent Auditors To the Board of Directors and Shareholders of Aaron Rents, Inc.: We have audited the accompanying consolidated balance sheets of Aaron Rents, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of earnings, shareholders’ equity and cash flows for the years ended December 31, 2000, 1999 and 1998. 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 auditing standards generally accepted in the 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 Rents, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years ended December 31, 2000, 1999 and 1998, in conformity with accounting principles generally accepted in the United States. Atlanta, Georgia February 19, 2001 C o m m o n S t o c k M a r k e t P r i c e s & D i v i d e n d s 27 Common Stock High Low D e c e m b e r 3 1 , 2 0 0 0 First Quarter Second Quarter Third Quarter Fourth Quarter D e c e m b e r 3 1 , 1 9 9 9 First Quarter Second Quarter Third Quarter Fourth Quarter $17.89 14.96 15.48 18.00 $17.00 22.25 22.00 20.00 $13.46 11.45 12.61 11.74 $12.88 15.06 16.50 15.25 Class A Common Stock High Low D e c e m b e r 3 1 , 2 0 0 0 First Quarter Second Quarter Third Quarter Fourth Quarter D e c e m b e r 3 1 , 1 9 9 9 First Quarter Second Quarter Third Quarter Fourth Quarter $18.58 17.08 16.10 15.92 $15.50 18.00 18.56 20.00 $16.46 14.59 15.35 13.44 $11.63 11.88 14.75 14.75 Cash Dividends Per Share .02 .02 .02 .02 Cash Dividends Per Share .02 .02 .02 .02 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 and the cash dividends declared per share. The Company’s Common Stock and Class A Common Stock are listed on the New York Stock Exchange under the symbols “rnt” and “rnt.a,” respectively. The approximate number of shareholders of the Company’s Common Stock and Class A Common Stock at March 15, 2001, was 4,000. The closing price for the Common Stock and Class A Common Stock on March 15, 2001, was $15.65 and $15.35, respectively. S t o r e L o c a t i o n M a p A t D e c e m b e r 3 1 , 2 0 0 0 Company-Operated Sales & Lease Ownership Franchised Sales & Lease Ownership Rent-to-Rent Total Stores Manufacturing & Distribution Centers 263 193 __98 554 17 28 Board of Directors R. Charles Loudermilk, Sr. Chairman of the Board, Chief Executive Officer, Aaron Rents, Inc. Ronald W. Allen Retired Chairman, President and Chief Executive Officer of Delta Air Lines Officers R. Charles Loudermilk, Sr. Chairman of the Board, Chief Executive Officer, Aaron Rents, Inc. Robert C. Loudermilk, Jr. President, Chief Operating Officer, Aaron Rents, Inc. Gilbert L. Danielson Executive Vice President, Chief Financial Officer, Aaron Rents, Inc. William K. Butler, Jr. President, Aaron’s Sales & Lease Ownership Division Eduardo Quiñones President, Aaron Rents’ Rent-to-Rent Division James L. Cates Vice President, Risk Management and Secretary, Aaron Rents, Inc. B. Lee Landers, Jr. Vice President, Chief Information Officer, Aaron Rents, Inc. Leo Benatar (1), (2) Sr. Partner and Associate Consultant, A.T. Kearney William K. Butler, Jr. President, Aaron’s Sales & Lease Ownership Division Gilbert L. Danielson Executive Vice President, Chief Financial Officer, Aaron Rents, Inc. Earl Dolive (1) Vice Chairman of the Board, Emeritus, Genuine Parts Company J. Rex Fuqua Vice Chairman, Fuqua Enterprises, 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. Lt. Gen. M. Collier Ross (1) U.S. Army (retired) Mitchell S. Paull Senior Vice President, Aaron Rents, Inc. David M. Rhodus Vice President, General Counsel, Aaron Rents, Inc. Robert P. Sinclair, Jr. Vice President, Corporate Controller, Aaron Rents, Inc. James D. Almond Vice President, Franchise Operations, Aaron’s Sales & Lease Ownership Division Ronald Benedit Vice President, Florida Office Region David L. Buck Vice President, Western Operations, Aaron’s Sales & Lease Ownership Division D. Bruce Cox Vice President, Northeast Residential Region Bennett E. Creasman Senior Vice President, Mid- Atlantic Office Region David M. Deignan Vice President, Marketing and Merchandising, Aaron’s Sales & Lease Ownership Division K. Todd Evans Vice President, Business Development, Aaron Rents, Inc. Joseph N. Fedorchak Vice President, Eastern Operations, Aaron’s Sales & Lease Ownership Division Phil J. Karl Vice President, Southeast Residential Region Michael B. Hickey Vice President, Management Development, Aaron’s Sales & Lease Ownership Division James C. Johnson Vice President, Internal Audit, Aaron Rents, Inc. Richard L. Levine Vice President, Purchasing, Aaron Rents, Inc. William R. Mitchell Vice President, Franchising, Aaron’s Sales & Lease Ownership Division Sandra W. Richards Vice President, West Residential Region Marc S. Rogovin Vice President, Real Estate and Construction, Aaron Rents, Inc. Wayne Walter Vice President, Western Office Region Corporate and Shareholder Information Annual Shareholders Meeting The annual meeting of the shareholders of Aaron Rents, Inc. will be held on Tuesday, May 1, 2001, at 10:00 a.m. E.D.T. on the 4th Floor, SunTrust Plaza, 303 Peachtree Street, Atlanta, Georgia 30303. 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, Executive Vice President, 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 Corporate Headquarters 309 E. Paces Ferry Rd., N.E. Atlanta, Georgia 30305-2377 (404) 231-0011 http://www.aaronrents.com Subsidiaries Aaron Investment Company 10th & Market Streets Mellon Bank Building 2nd Floor Wilmington, Delaware 19801 (302) 888-2351 Aaron Rents, Inc. Puerto Rico Calle Barbosa #376, 2nd Floor Hato Rey, Puerto Rico 00926 (787) 294-0905 (1) Member of Audit Committee (2) Member of Stock Option Committee Aaron Rents, Inc. 309 E. Paces Ferry Rd., N.E. Atlanta, Georgia 30305-2377 (404) 231-0011 www.aaronrents.com 

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