Aaron's Company Annual Report 2001

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FY2001 Annual Report · Aaron's Company

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

2001 Annual Report

in the combined businesses of the rental, lease ownership and specialty retailing of residential and office

Aaron Rents, Inc. is the leading U.S. company engaged

furniture, consumer electronics, household appliances and accessories, with 648 stores in 43 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, the Rent-to-Rent division, and MacTavish

Furniture Industries, which manufactures the majority of the furniture rented, leased and sold in the Company’s

stores. The Company’s strategic focus is on increasing its 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 seeking new opportunities for growth of the rent-to-rent business.

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . 18

Consolidated Statements of Shareholders’ Equity . . . . . . . . . . . . . . . . 18

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . 19

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 20

Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Store Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Board of Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Corporate and Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . 29

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)

O P E R AT I N G R E S U LT 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

Year Ended
December 31,
2001

Year Ended
December 31,
2000

Percentage
Change

$546,681
19,855
12,336
0.62

$502,920
43,906
27,261
1.38

0.61

1.37

$397,196
258,932
77,713
219,967
11.01

26.1%
3.6
2.3
5.8

364
209
75

648

$380,379
267,713
104,769
208,538
10.50

33.4%
8.7
5.4
13.9

263
193
98

554

8.7%

(54.8)
(54.7)
(55.1)

(55.5)

4.4%
(3.3)
(25.8)
5.5
4.9

38.4%
8.3
(23.5)

17.0%

R E V E N U E S B Y

C A L E N D A R Y E A R

N E T E A R N I N G S B Y

C A L E N D A R Y E A R

$600,000

$30,000

500,000

400,000

300,000

200,000

100,000

)
s
0
0
0

$
(

25,000

20,000

15,000

10,000

5,000

)
s
0
0
0

$
(

’97 ’98 ’99 ’00 ’01

Rent-to-Rent Stores

Company-Operated Sales
& Lease Ownership Stores

T O O U R S H A R E H O L D E R S :

V I S I O N

Our Company achieved the greatest expansion in its

history in 2001.

During the year a record 117 additional Aaron’s Sales

& Lease Ownership stores came on line, reflecting the strength

of this division. Our year-end total store count was 648 stores,

with an increase of 26% in sales and lease ownership stores for the year.
This positions our Company to make substantial gains in market share and to
increase profitability as new stores mature throughout 2002 and 2003.

Our revenues likewise reached a record high as demand was strong for sales
and lease ownership products and services despite the tragic events of Sept. 11
and the recession that began earlier in the year.

The credit goes to our 4,200 Aaron Associates. They energized our strategic

plan, seized unprecedented opportunities and focused on our mission of pro-
viding high quality products and services to our market, a large sector of
the population.

G R O W T H

The stage was set for record expansion with our decision in late 2000
to acquire a large number of store locations formerly operated by one of the
nation’s leading furniture retailers. By early July of last year we had obtained
82 locations in the most desirable market areas matching our customer base;
and by year-end 2001 we had opened Aaron’s stores in 75 of those locations.
Had we not taken advantage of this unusual opportunity, it would have
required several years longer to reach the current level of stores open.

For the year, our consolidated revenues increased 9% to $546.7 million
compared to $502.9 million for 2000. Systemwide revenues, including franchised
stores, advanced 12% to $735.4 million. Earnings were $12.3 million or $.61
per diluted share, reflecting the start-up of our record expansion in stores and
the effects of the recession on the rent-to-rent division.

Such growth entails substantial costs. Start-up expenses during the year
related to the opening of the record number of stores reduced pre-tax earnings
by approximately $14 million or $.42 per diluted share. In addition, it was
necessary to consolidate and streamline the rent-to-rent division, which
experienced a decline in business due to the economic downturn, resulting

in the Company absorbing $5.6 million of non-cash charges during the third
quarter. Even so, this original division of Aaron Rents produced more than $20
million in cash flow vital to funding the rapid growth of the sales and lease
ownership division.

The Aaron’s Sales & Lease Ownership division had its best year ever, adding
101 Company-operated stores. In addition, 27 franchised stores were opened,
increasing our systemwide sales and lease ownership store count to 573 at
the end of 2001. The Company’s rent-to-rent division had 75 stores at year-
end. Our franchise program continued to expand, providing an important extra
dimension to our growth. Franchised stores currently comprise 36 percent of
sales and lease ownership stores and produce a growing contribution to
earnings. The Aaron’s program, consistently ranked as a leader in franchising
surveys, attracts topflight entrepreneurs desiring to invest in and to build their
own business while helping our Company grow at an even faster rate than it
could by internal growth alone.

Our manufacturing division, MacTavish Furniture Industries, had another

strong year, turning out more than $47 million at cost in furniture for our
increasing number of stores. Construction began on expansion of our large
manufacturing facility in Cairo, Georgia, adding 100,000 square feet to almost
double its capacity. Our seventh regional distribution center was opened in
North Carolina, enhancing our nationwide distribution system. This gives us
competitive advantages and assures same-day or next-day delivery of customer
orders by our stores — a service that is critical in this business.

Another significant development was the completion and opening of

a new lamp manufacturing plant in Tampa, Florida. This facility, along with
the original plant in Los Angeles founded by acclaimed designer Avi Yofan,

supplies lamps, tables and accessories coordinated with our
furniture lines for the growing number of Aaron’s stores
and for independent retailers.

To meet the needs of our strong growth, a two-story
building with over 50,000 square feet of new office space
was completed during the year in the Atlanta suburb of
Kennesaw to accommodate the Company’s financial and
information technology operations.

S T R E N G T H

Even with the record expansion in stores and major construction outlays

in 2001, our Company maintains the financial strength essential to continuing
growth and success. By the end of the year, bank debt was reduced by
approximately $28 million, a 28% decrease from a year earlier. Our balance
sheet is strong with the Company’s debt to capitalization ratio at 26% at
year-end. We believe our Company is in excellent financial condition to meet
our growth plans. The Aaron management team has been further strengthened
with the appointment of Danny Walker, Sr. as Vice President, Internal Security;
and the promotions of Christopher D. Counts to Vice President, West Residential
Region, Rent-to-Rent; and Tristan J. Montanero to Vice President, Central
Operations, Aaron’s Sales & Lease Ownership.

V I S I O N

In the year ahead we will concentrate on increasing revenues and earnings

in all our stores, capitalizing on our much larger store base and the proven
Aaron’s concept of superior service and very competitive pricing. We will
constantly work to improve the products and services for our customers.
And we will grow Aaron’s into the premier, market-dominant company in
our industry, recognized by our customers and peers as the standard bearer
of integrity, honesty and fairness.

The vision of our Company is to be the dominant leader in our market
niche — to be the best at what we do, to give our customers the services, the
products and the respect they are due. This vision empowers our Associates to
set a record pace of growth even in difficult economic times.

The dedication and drive of our Aaron Associates are the keys to achieving

strong growth and reaching new milestones in 2002. We look forward to the
future with strong optimism and faith in both our Company, now in its 47th year,
and in our country, stronger than ever in the 226th year of its independence.

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

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

W I N N I N G

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 W I N N I N G C O N C E P T

Aaron’s Sales & Lease Ownership has created a

winning concept that drives the record-breaking growth of
this division. Aaron’s simply makes shopping and ownership

of merchandise fast, easy and convenient with a low-price guarantee and top brand-named products.

There’s nothing like it in the marketplace today.
It is a new kind of specialty retailing with lease options, bridging the gap between the older form of rent-to-

own and the traditional approach to credit retailing by the home furnishings industry. Aaron’s is reaching the
broader market composed of lease ownership, credit retail and rental customers.

Aaron’s successfully targets the higher end of this market, which is demonstrated by the fact that approxi-

mately 40 percent of our customers pay by either check or credit card, unlike typical rent-to-own customers.
Aaron’s also has set a standard of monthly payments for lease ownership, a substantial difference versus the
weekly payment system of the rent-to-own industry. As a result, Aaron’s gains higher end accounts and at the
same time reduces the expenses of processing them.

The new concept developed by Aaron’s is now filling a huge void created by the demise of several major

credit furniture retailers, which in the past two years closed approximately 2,000 stores with an estimated
$3.5 billion in annual sales volume. That is the market served by Aaron’s, and to seize such an unprecedented
opportunity, the Company acquired more than 80 store locations from one of the industry’s formerly largest credit
retailers. Most of these locations have been converted into Aaron’s stores and have come on line within the past
year, dramatically expanding our ability to increase market share quickly and add to the Company’s profitability.

Aaron’s customers start with automatic approval, as no credit is needed since the transaction is on a lease-to-

own plan. Yet it requires no long-term obligation, allowing the customer to return the merchandise at any time.
Delivery is the same day of the order or the next day. There is no delivery charge, no application fee and no
balloon payment. Terms are fully disclosed: cash and carry price, monthly payment and total cost under the
lease ownership plan. The payment options include cash, check or credit card.

Aaron’s stores are larger with more appealing designs, usually located in suburban areas with generally higher

income level customers than the traditional rent-to-own business attracts. The size of Aaron’s stores, averaging
9,000 square feet, is three times that of a typical competitor’s store. This provides our customers a far wider
selection of top brand named products as well as the stylish proprietary furniture lines manufactured by
MacTavish Furniture Industries.

The result is strong acceptance by customers each time a new store opens, regardless of whether it is located

in a large city or a smaller one. Demonstrating the immediate popularity of Aaron’s in new markets and the
dominance of its concept is the 21% increase in revenues for the Aaron’s Sales & Lease Ownership division in
2001, an exceptional performance in the retailing industry. Same-store revenues increased 7.7% for the year in
the division.

During 2001 Aaron’s Sales & Lease Ownership stores were added at a rate of almost one every three days —

a total of 101 additional Company-operated stores. At year-end the division had 573 stores across the United
States and in Puerto Rico, a growth rate of 26% in store count. This came on the heels of a 24% increase in
2000 as Aaron’s sharply accelerated its expansion via the acquisition of the large number of store real estate
leases. Many of these locations are in markets where the Company either enjoys a strong presence or has targeted
the market for expansion, thus generating immediate benefits from the favorable demographics of those markets.
Aaron’s reaches its customer base with the innovative “Dream Products” including highly popular big-screen

televisions, stainless steel refrigerators, leather upholstery and leading brands of washers and dryers as well as
professionally designed and coordinated furniture suites produced by the Company’s own manufacturing division
and top national manufacturers.

The marketing program is built around the “Drive Dreams Home” sponsorship of NASCAR championship
racing serving the prime audience for Aaron’s products. Carrying out this theme is the #99 NASCAR Busch Grand
National Dream Machine driven by Michael Waltrip and Kerry Earnhardt. The program, which has generated
extremely strong response, began with Aaron’s title sponsorship of the NASCAR Busch Grand National Car Race
at the Atlanta Motor Speedway. Running under the banner of “Aaron’s 312,” this nationally televised event plays
off the three reasons to shop at Aaron’s: 1) everyone is pre-approved, 2) the low price guarantee, and 3) you can
own it in as little as 12 months.

Other elements of the marketing program include sponsorship of the Atlanta Braves and other sports events.

Aaron’s also effectively uses direct-mail advertising with more than 12 million flyers mailed monthly to homes in
the market areas served by the stores.

Aaron’s has also gained strong acceptance from its customer base for personal computers, a product line
expanded in 2000. In addition, Aaron’s markets Dell and Hewlett Packard products to gain a larger share of
the market.

The Aaron’s concept offers major advantages through the vertical integration of Aaron Rents and its volume
purchasing program, key factors in assuring timely delivery of merchandise to customers. Unique in its industry,
Aaron’s produces much of the furniture for its stores at the 11 facilities of its manufacturing division, MacTavish
Furniture Industries, which provides cost benefits that are passed on to customers. Aaron’s also relies on seven
distribution centers located in key regions of the country, enabling stores to provide same-day or next-day
delivery, which provides a competitive edge.

The Company has also initiated a program to provide a uniform customer experience regardless of the store

location or ownership. Standardizing operational procedures throughout the system is a primary focus of the
Aaron’s University program. To facilitate this effort, Aaron’s has instituted a 13-course curriculum for Company
and franchise managers.

Aaron’s Sales & Lease Ownership offers its “Dream Products” on the Internet at www.shopaarons.com.

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 S Y S T E M W I D E

R E V E N U E G R O W T H

A N D S T O R E C O U N T

$600,000

500,000

400,000

573*

456*

368*

)
s
0
0
0

$
(

300,000

318*

200,000

282*

100,000

’97 ’98 ’99 ’00 ’01

Franchise Revenues

Company-Operated
Revenues

*Number of Stores

S A L E S & L E A S E

O W N E R S H I P

R E N TA L R E V E N U E S

Other 1%

Electronics and Appliances 55%

Furniture 37%

Computers 7%

M I L E S T O N E S

F R A N C H I S I N G : N E W M I L E S T O N E S

Aaron’s Sales & Lease Ownership’s franchise program

reached new milestones last year, enhancing its status as a
leader in franchising.

Total franchised stores exceeded the 200 mark for the first time — reflecting dramatic growth averaging more

than 22 new stores per year since the first franchise was awarded in 1992. Franchised stores at year-end 2001
had risen to 209, doubling the number of only four years ago, and franchises had been awarded for the opening
of 90 additional stores in the future.

Multi-store ownership has been the key to the strong expansion of franchising as a growing number of
entrepreneurial and experienced business professionals have caught the Aaron’s vision to be the supplier of
choice in their market sector. Many franchise principals operate major businesses with groups of 10 to 20 or
more Aaron’s stores located in virtually all areas of the country.

Business management experience and know-how are the hallmarks of today’s franchise principals. Their

number includes former executives in such varied businesses as banking, broadcasting, restaurant chains,
and manufacturing.

Aaron’s principals who experience strong and profitable growth with their first Aaron’s stores often acquire
additional franchise territories. This provides the benefits of common marketing programs as well as economies of
scale and other operational synergies to improve profitability. Another major advantage is the Aaron’s financing
program for franchising to assist in expansion planning. Franchise principals also benefit from the Company’s
nationwide volume purchasing plan, which reduces the cost of products and provides advantages in competitive
pricing to customers.

The Aaron’s support program for franchise principals includes the full range of services needed, from start-up

to ongoing profitable operations. First, the franchise owner has the benefits of the Company’s proven business
success in creating a business plan. Then the resources of Aaron’s are brought to bear on site selection for new
stores; and in market analysis that includes the strength of competitors and indicates what will be effective in
reaching the customer base. The program provides franchise principals with initial and ongoing training in the
management and operation of Aaron’s stores as well as the necessary computer software and assistance in
advertising and publicity to reach the market area of each store.

Franchise principals are encouraged to participate in the policies of the Aaron’s program, to contribute their

counsel and insights, and to benefit from an exchange of ideas. This is done through the Aaron’s Franchise
Association and the Aaron’s Management Team, comprised of both franchise principals and representatives of
the Company, benefiting both them and the Company.

The Aaron’s leadership in franchising is confirmed through the annual surveys of franchise programs. For
years, Aaron’s has placed at or near the top in its category of appliance and furniture rentals by Entrepreneur
magazine. The program also has ranked in the top 100 franchise chains by worldwide sales in the Franchise
Times. To win the coveted upper-tier ratings, Aaron’s must meet high standards of financial performance based

on growth of revenues, franchise fees, and the Company’s proprietary products and services. In addition, Aaron’s
is judged on the performance and strength of its management, the relationship with franchise owners, and the
opportunities available for the growth of franchised stores.

Q U A R T E R LY R E V E N U E S O F F R A N C H I S E D S T O R E S

$60,000

50,000

40,000

)
s
0
0
0

$
(

30,000

20,000

10,000

194*

209*

201*199*

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*

13*

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 Q1 Q2 Q3 Q4

1993 1994 1995 1996 1997 1998 1999 2000 2001

s
e
r
o
t
S

f
o
r
e
b
m
u
N
*

C H A L L E N G E S

R E N T- T O - R E N T:
M E E T I N G C H A L L E N G E S

The rent-to-rent division of Aaron Rents has faced many

changes in its markets over the 47 years since its founding
as the Company’s original line of business. In every situa-
tion, the division has met the challenge of adapting to

the needs of the times and has continued to generate cash flow indispensable to the Company’s growth.

Known for the high quality of its products and services, the division accounts for a significant portion of

the temporary furniture rental market in the United States and ranks as the second largest business in the
industry. Aaron provides stylish, brand named furniture and the Company’s own lines produced by MacTavish
Furniture Industries.

Traditionally, the rent-to-rent division has served residential and business customers with temporary rental
needs — from students to military personnel, entrepreneurs starting new businesses, as well as major corporations.
Aaron Rents takes pride in providing high quality products for each individual customer and, for corporate clients,
assuring that people’s needs are given priority in furnishings for the office and other environments.

Flexibility is the rule at Aaron with customers given the options of renting, purchasing or lease ownership. In

addition to in-office consultation and an array of new products, Aaron’s customers also have the benefit of the
value of purchasing previously rented furniture.

R E N T- T O - R E N T

R E N TA L R E V E N U E S

Aaron has long been among the leaders in rentals of La-Z-Boy furniture and other popular brands of con-
sumer products for residential customers. These include big-screen televisions and personal computers as well
as living room, dining room and bedroom furnishings and accessories. Quality, style and selection are always
priorities. To provide complete one-stop shopping, Aaron offers special housewares and linen rental programs.
The reputation of Aaron as a leader in quality products and services has
been built over nearly a half century, customer by customer, order by order. A
key factor in this reputation is the commitment to first-rate service, including
next day delivery of in-stock merchandise; the replacement without charge of
any furniture that the customer considers to be unsatisfactory regardless of
the reason; and the right to return furniture with full refund during the first
week after delivery. Aaron stores also offer very competitive prices as a result
of the cost advantages of the Company’s own manufacturing resources and
on-premises warehousing.

Electronics and Appliances 7%

Responding to the economic changes, the rent-to-rent division has taken

steps to consolidate operations and reduce expenses while focusing on
marketing opportunities and positioning to benefit from improving trends
in the economy in the future.

Residential Furniture 60%

Office Furniture 33%

1 0

V I S I O N G I V I N G

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

The Aaron’s spirit of giving was never more evident
than in 2001 and it only grew stronger after the
tragic events of Sept. 11, this generation’s “date
which will live in infamy.”

During the year Aaron Associates continued to give of their time and talents as volunteers in many worthy
causes, while Aaron’s Community Outreach Program (ACORP) made substantial contributions to communities
served by the Company’s stores, based on their reaching performance goals. Through this program, a store
qualifies for $500 each month to be donated to local charities selected by the store’s Associates.

Recipients of the Aaron’s donations included a wide range of organizations from the Boys and Girls Club

to Make A Wish Foundation, the Muscular Dystrophy Association and Toys For Tots.

ACORP gave increasing emphasis to volunteer efforts that varied from Little League to Fire Prevention
Day. Many Associates took part in building a Habitat for Humanity home in Fort Worth, Texas, the fifth house
constructed by Aaron’s volunteers since they began participating in this program to help provide affordable
housing to people in need. Aaron’s Associates also donated store products in the form of a housewarming gift
to the new home’s owners.

In addition to the local gifts, Aaron’s contributed to the Sept. 11 Fund for assistance to the families of victims
of the terrorist attacks in New York, Washington and Pennsylvania. Over the past three years, ACORP has donated
more than $900,000 to Aaron’s communities and deserving charities, giving tangible expression of the spirit of
giving of Aaron’s Associates.

1 1

B U I L D I N G

M A C TAV 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 :
B U I L D I N G F O R T H E F U T U R E

Building for the future is the mission of the Company’s

manufacturing arm, MacTavish Furniture Industries, which
supplies the constantly growing needs of Aaron’s stores
across the United States and in Puerto Rico.

MacTavish provides a unique advantage in the Aaron Rents plan for growth by producing full lines of
furniture, accessories and bedding at 11 facilities in four states. Supporting this manufacturing capability is an
expanding network of distribution centers, a dedicated service system for our stores unmatched by any com-
petitor. This combination enables Aaron’s stores to provide same-day or next-day delivery of orders, the key to
success in the rental, sales and lease ownership business.

During the past year MacTavish produced more than $47 million in furniture, accessories and bedding at cost,

ranking this division among the top furniture manufacturers in the United States. MacTavish lines are not only
designed to accord with contemporary market trends but also are made to be functional and durable, qualities
demanded by the long-established high standards of the Company and required for multiple rentals.

Three major construction projects initiated in 2001 to enhance both production and distribution included
the expansion of a manufacturing facility, the opening of a new distribution center and completion of a new
designer lamp factory.

MacTavish began an addition of 100,000 square feet to its manufacturing and warehousing facility in Cairo,

Georgia. Completion of the project in Spring 2002 will increase the size of the facility to 250,000 square feet,
a key part of the production and supply chain for Aaron’s stores.

The Company’s seventh regional distribution center was completed in Winston-Salem, North Carolina,
another link in the national network. Most Aaron’s stores are now within a 250-mile radius of a distribution
center, assuring timely shipment of supplies to the stores and fast delivery of orders to customers.

Another significant project was the completion of a new lamp manufacturing plant in Tampa, Florida. The

new facility and the original plant in Los Angeles produce designer lamps, tables and accessories exclusively
designed for Aaron and coordinated with the MacTavish furniture lines for our stores, another distinct advantage
held by Aaron Rents. The new plant provides still another major benefit by sharply reducing costs of shipping
lamps and related products to stores in the eastern United States, which previously depended on the Los
Angeles facility.

1 2

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

(Dollar Amounts in Thousands,
Except Per Share)

Year Ended
December 31,
2001

Year Ended
December 31,
2000

Year Ended
December 31,
1999

Year Ended
December 31,
1998

Year Ended
December 31,
1997

O P E R AT I N G R E S U LT S
Systemwide Revenues1
Revenues:

Rentals & Fees
Retail Sales
Non-Retail Sales
Other

Costs & Expenses:

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
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

AT Y E A R E N D
Stores Open:

$735,389

$656,096

$547,255

$464,175

$364,306

403,385
60,481
66,212
16,603
546,681

43,987
61,999
276,682

137,900
6,258
526,826

19,855
7,519
$ 12,336
.62
$

.61

.04
.04

$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
$

$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
$

$289,272
62,576
18,985
8,826
379,659

44,386
17,631
189,719

89,171
3,561
344,468

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

42,264
13,650
149,728

71,151
3,721
280,514

35,191
13,707
$ 21,484
1.06
$

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

1.37

1.26

1.04

.04
.04

.94

.04
.04

$258,932

$267,713

$219,831

$194,163

$176,968

77,282
397,196
77,713
219,967

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

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

291
136
227,400
3,400

292
101
219,800
3,100

Company-Operated
Franchised

439
209
Rental Agreements in Effect 314,600
4,200
Number of Employees

1Systemwide revenues include revenues of franchised Aaron’s Sales & Lease Ownership stores.

1 3

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 LY 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 LT S O F O P E R AT I O N S

Year Ended December 31, 2001 versus Year Ended
December 31, 2000

Total revenues for 2001 increased $43.8 million (8.7%)
to $546.7 million compared to $502.9 million in 2000 due
primarily to a $43.5 million (12.1%) increase in rentals and fees
revenues, plus a $714,000 (1.1%) increase in non-retail sales.
Of this increase in the rentals and fees revenues, $62.7 million
was attributed to the Aaron’s Sales & Lease Ownership division
which added 101 Company-operated stores in 2001, offset by
a $19.2 million decrease in the Company’s rent-to-rent division.
Revenues from retail sales decreased $1.9 million (3.1%)

to $60.5 million in 2001, from $62.4 million for the same
period last year. Non-retail sales, which primarily represent
merchandise sold to Aaron’s Sales & Lease Ownership fran-
chisees, increased $714,000 (1.1%) to $66.2 million compared
to $65.5 million for the same period last year. The increased
sales are due to the growth of the franchise operations.

Other revenues for 2001 increased $1.5 million (9.8%) to
$16.6 million compared to $15.1 million in 2000. This increase
was attributable to franchise fee and royalty income increasing
$1.2 million (10.0%) to $13.6 million compared to $12.4 mil-
lion last year, reflecting the net addition of 16 new (including
3 acquired) franchised stores in 2001 and improved operating
revenues at mature franchised stores.

Cost of sales from retail sales decreased $169,000 (.4%) to
$44.0 million compared to $44.2 million, and as a percentage
of sales, increased to 72.7% from 70.7% primarily due to
product mix. Cost of sales from non-retail sales increased
$1.0 million (1.6%) to $62.0 million from $61.0 million, and
as a percentage of sales, increased to 93.6% from 93.1%.
The decreased margins on non-retail sales was primarily the
result of slightly lower margins on certain products sold
to franchisees.

Operating expenses increased $49.1 million (21.6%) to
$276.7 million from $227.6 million. As a percentage of total
revenues, operating expenses were 50.6% in 2001 and 45.3%
in 2000. Operating expenses increased as a percentage of total
revenues between years primarily due to the costs associated
with the acquisition and accelerated start-up costs of sales
and lease ownership locations formerly operated by one of
the nation’s largest furniture retailers along with other new
store openings. In addition, the Company recorded non-cash
charges of $5.6 million related to the future real estate lease
obligations of closed rent-to-rent stores and the write down
of inventory and other assets within the rent-to-rent division.
Depreciation of rental merchandise increased $17.2 million

(14.3%) to $137.9 million, from $120.7 million, and as a
percentage of total rentals and fees increased to 34.2% from
33.5% in 2000. 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 depreciates its rental merchandise
at a faster rate than the rent-to-rent division.

Interest expense increased $633,000 (11.3%) to $6.3
million compared to $5.6 million. As a percentage of total
revenues, interest expense was 1.1% in 2001 and 2000.

The Company manages its exposure to changes in short-

term interest rates, particularly to reduce the impact on its
floating-rate term notes, 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 level of floating-
rate debt fixed by swap agreements was $60 million at
December 31, 2001 and the Company does not expect a
significant change in this amount in 2002. Accordingly, the
Company does not believe it has material exposure of poten-
tial, near-term losses in future earnings, and/or cash flows from
reasonably possible near-term changes in market rates.

Income tax expense decreased $9.1 million (54.8%) to $7.5
million compared to $16.6 million. The Company’s effective tax
rate was 37.9% in both 2001 and 2000.

As a result, net earnings decreased $14.9 million (54.8%) to
$12.3 million for 2001 compared to $27.3 million for the same
period in 2000. As a percentage of total revenues, net earnings
were 2.3% in 2001 and 5.4% in 2000. The decrease in net
earnings is primarily the result of start-up expenses associated
with the 101 new store openings, as compared to just 32
stores opened in the prior year, and non-cash charges asso-
ciated with the rent-to-rent division.

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 the Aaron’s Sales & Lease
Ownership 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 merchan-
dise 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 percent-
age 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

1 4

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 depreciates 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.

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 expenses 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.

L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S

Cash flows from operations for the years ended December

31, 2001 and 2000 were $189.4 million and $166.2 million,
respectively. Such cash flows include profits on the sale of
rental return merchandise. In 2001, the Company extended
its payment terms with vendors as a source of additional cash
flows. 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 dated March
30, 2001 provides for unsecured borrowings up to $110.0
million which includes an $8.0 million credit line to fund daily
working capital requirements. The facility expires on March 30,
2004. At December 31, 2001, an aggregate of $72.4 million
was outstanding under this facility, bearing interest at a
weighted average variable rate of 3.2%. The Company uses
interest rate swap agreements as part of its overall long-term
financing program. At December 31, 2001, the Company
had swap agreements with notional principal amounts of $60
million which effectively fixed the interest rates on an equal
amount of the Company’s debt under the revolving credit
agreement at 7.2%. The fair value of interest rate swap
agreements was a liability of approximately $3.1 million at
December 31, 2001.

1 5

On October 31, 2001, the Company renewed its $25
million construction and lease facility. From 1996 to 1999,
properties acquired by the lessor were purchased or constructed
and then leased to the Company under operating lease agree-
ments. The total amount advanced and outstanding under this
facility at December 31, 2001 was approximately $24.7 million.
Since the resulting leases are operating leases, no debt obliga-
tion is recorded on the Company’s balance sheet. This con-
struction and lease facility expires in 2006. Lease payments
fluctuate based upon current interest rates and are generally
based upon LIBOR plus 1.35%. The lease facility contains
residual value guarantee and default guarantee provisions.
Although management believes the likelihood of funding to be
remote, the maximum guarantee obligation under the residual
value and default guarantee provisions upon termination is
approximately $20.9 million and $24.7 million, respectively, at
December 31, 2001.

The Company’s revolving credit agreement, the construction

and lease facility, and the franchise loan program discussed
below (collectively “the facilities”) contain financial covenants
which, among other things, require the Company to not
exceed certain debt to equity levels and to maintain a
minimum fixed charge coverage ratio as defined under
the facilities. Failure to maintain these required covenants
would constitute an event of default under the credit facilities,
and all amounts would become due immediately. The Company
was in compliance with all such covenants at December 31,
2001. The Company anticipates it will be in compliance with
such covenants in the future, or will be able to obtain waivers
in the event of non-compliance.

The Company leases warehouse and retail store space
for substantially all of its operations under operating leases
expiring at various times through 2015. Most of the leases
contain renewal options for additional periods 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
leases transportation 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
required under operating leases that have initial or remaining
non-cancelable terms in excess of one year as of December 31,
2001, are as follows: $30.0 million in 2002; $24.5 million in
2003, $18.8 million in 2004; $12.4 million in 2005; $7.6
million in 2006; and $8.8 million thereafter.

The Company has guaranteed the borrowings of certain
independent franchisees under a franchise loan program with
a bank. In the event these franchisees are unable to meet their
debt service payments or otherwise experience an event of
default, the Company would be unconditionally liable for
the outstanding balance of the franchisee’s debt obligations
($30.6 million as of December 31, 2001), which would be due
in full within 90 days of the event of default. However, due to
franchisee borrowing limits, the Company believes any losses
associated with such a default would be substantially mitigated
through the recovery of rental merchandise and other assets.
The Company has had no significant losses associated with
the franchisee loan and guaranty program.

correct, the Company’s actual liability may be more or less
than the liability recorded at December 31, 2001.

Company Insurance Programs: The Company maintains
insurance contracts for the payment of workers compensation
and group health insurance claims. Using actuarial analysis
and projections, the Company estimates annually the liabilities
associated with open and incurred but not reported workers
compensation claims. This analysis is based upon an assess-
ment of the likely outcome or historical experience, net of
any stop loss or other supplementary coverages. The Company
also calculates on an annual basis, the projected outstanding
plan liability for the group health insurance program.

The Company’s liability for workers compensation insurance

claims and group health insurance was approximately $3.3
million and $3.5 million, respectively at December 31, 2001
and 2000.

If the Company resolves existing workers compensation
claims for amounts which are in excess of the Company’s
current estimates and within policy stop loss limits, the
Company will be required to pay additional amounts beyond
those accrued at December 31, 2001. Additionally, if the actual
group health insurance liability develops in excess of the annual
projection, the Company will be required to pay additional
amounts beyond those accrued at December 31, 2001.

The assumptions and conditions described above reflect
management’s best assumptions and estimates, but these items
involve inherent uncertainties as described above, which may
or may not be controllable by management. As a result, the
accounting for such items could result in different amounts if
management used different assumptions or if different condi-
tions occur in future periods.

For further information concerning accounting policies, refer

to Note A of our Consolidated Financial Statements.

F O RWA R D L O O K I N G S TAT E M E N T S

Certain written and oral statements made by our Company
may constitute “forward-looking statements” as defined under
the Private Securities Litigation Reform Act of 1995, including
statements made in this report and other filings with the
Securities and Exchange Commission. All statements which
address operating performance, events or developments that
we expect or anticipate will occur in the future — including
growth in store openings and franchises awarded, market
share, and statements expressing general optimism about
future operating results — are forward-looking statements.
Forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially.
The Company undertakes no obligation to publicly update
or revise any forward-looking statements. For a discussion
of such risks and uncertainties see “Certain Factors Affecting
Forward-Looking Statements” in the Company’s Annual
Report on Form 10-K for fiscal 2001, filed with the Securities
and Exchange Commission, which discussion is incorporated
herein by this reference.

The Company believes that the expected cash flows from
operations, proceeds from the sale of rental return merchan-
dise, bank borrowings and vendor credit will be sufficient to
fund the Company’s capital and liquidity needs for at least
the next 24 months.

As of December 31, 2001 the Board of Directors had

authorized the Company to purchase an additional 1,284,190
shares of Company stock.

The Company has paid dividends for fifteen consecutive

years. A $.02 per share dividend on Common Stock and
on Class A Common Stock was paid in January 2001 and
July 2001, for a total fiscal year cash outlay of $797,000.
The Company currently expects to continue its policy of
paying dividends.

C R I T I C A L A C C O U N T I N G P O L I C I E S

Revenue Recognition: Rental revenues are recognized in the

month they are due on the accrual basis of accounting. For
internal management reporting purposes, rental revenues in
the sales and lease ownership division are recognized as rev-
enue in the month the cash is collected. On a monthly basis,
the Company records an accrual for rental revenues due, but
not yet received, and a deferral of revenue for rental payments
received prior to the month due. The Company’s revenue
recognition accounting policy matches the rental revenue
with the corresponding costs (primarily depreciation) associated
with the rental merchandise. At December 31, 2001 and 2000,
the Company had a net revenue deferral representing cash
collected in advance of being due or otherwise earned totaling
approximately $5.7 million and $4.3 million, respectively.
Revenues from the sale of residential and office furniture and
other merchandise are recognized at the time of shipment.

Rental Merchandise Depreciation: The sales and lease own-

ership division depreciates merchandise over the agreement
period, generally 12 to 24 months, when on rent, and 36
months, when not on rent, to a 0% salvage value, with the
exception of merchandise in distribution centers which is not
depreciated during the initial months in the distribution center.
As sales and lease ownership revenues continue to constitute
an increasing percentage of total revenues, the Company
would expect rental merchandise depreciation to increase at
a correspondingly faster rate. The rent-to-rent division depre-
ciates 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. On a monthly basis, the Company writes
off damaged, lost or unsalable merchandise as identified. Such
write-offs totaled approximately $10.0 million, $8.9 million
and $6.7 million during the years ended December 31, 2001,
2000 and 1999, respectively.

Closed Store Reserves: From time to time, the Company
closes or consolidates retail stores. The Company records an
estimate of the future obligation related to closed stores based
upon the present value of the future lease payments and related
commitments, net of estimated sublease income. Sublease
income is based upon historical experience. At December 31,
2001 and 2000, the Company’s reserve for closed stores was
$3.4 million and $350,000, respectively, with the increase
primarily related to rent-to-rent stores closed during 2001. If
the Company’s estimates related to sublease income are not

1 6

C O N S O L I D AT 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
Goodwill, 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
Accumulated Other Comprehensive Loss

Year Ended
December 31,
2001

93
25,411
392,532
(133,600)
258,932
77,282
22,096
13,382
$397,196

$ 65,344
399
20,963
12,810
72,397
5,316
177,229

Year Ended
December 31,
2000

95
23,637
381,930
(114,217)
267,713
63,174
17,672
8,088
$380,379

$ 34,693
399
20,986
10,994
100,000
4,769
171,841

9,135

2,681
53,846
197,321
(1,954)
261,029

2,681
53,662
185,782

251,260

(28,486)

(14,236)
208,538
$380,379

Less: Treasury Shares at Cost,

Common Stock, 2,130,421 Shares at December 31, 2001

& 2,230,446 Shares at December 31, 2000

(26,826)

Class A Common Stock, 1,532,255 Shares

at December 31, 2001 & December 31, 2000
Total Shareholders’ Equity

Total Liabilities & Shareholders’ Equity

(14,236)
219,967
$397,196

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

1 7

C O N S O L I D AT E D
S TAT E M E N T S
O F E A R N I N G S

(In Thousands, Except Per Share)

Year Ended
December 31,
2001

Year Ended
December 31,
2000

Year Ended
December 31,
1999

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

$403,385
60,481
66,212
16,603
546,681

43,987
61,999
276,682
137,900
6,258
526,826

19,855
7,519
$ 12,336
.62
$
.61

$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

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

C O N S O L I D AT E D
S TAT 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, Except Per Share)

BALANCE, DECEMBER 31, 1998
Reacquired Shares
Dividends, $.04 per share
Reissued Shares
Net Earnings

BALANCE, DECEMBER 31, 1999
Reacquired Shares
Dividends, $.04 per share
Reissued Shares
Net Earnings

BALANCE, DECEMBER 31, 2000
Dividends, $.04 per share
Reissued Shares
Net Earnings
Unrealized Loss on Financial Instruments,

Net of Income Taxes of $1,191

Treasury Stock

Common Stock

Amount

Common

Class A

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other Comprehensive
Loss

(3,084)
(860)

($31,740)
(12,673)

$9,135

$2,681

$54,284

$134,511

234

2,821

(103)

(800)

25,602

(3,710)
(328)

(41,592)
(4,625)

9,135

2,681

54,181

159,313

275

3,495

(519)

(3,763)

(42,722)

9,135

2,681

53,662

100

1,660

184

(792)

27,261

185,782
(797)

12,336

($1,954)

BALANCE, DECEMBER 31, 2001

(3,663)

($41,062)

$9,135

$2,681

$53,846

$197,321

($1,954)

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

1 8

C O N S O L I D AT E D
S TAT E M E N T S O F
C A S H F L O W S

(In Thousands)

O P E R AT 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
Increase (Decrease) in Other Debt
Dividends Paid
Acquisition of Treasury Stock
Issuance of Stock under Stock Option Plans
Cash (Used) 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

Year Ended
December 31,
2001

Year Ended
December 31,
2000

Year Ended
December 31,
1999

$ 12,336
153,548
1,168

27,320
(1,657)
(3,357)
189,358

(34,785)
6,605
(237,912)
115,527
(12,125)
(162,690)

161,672
(189,275)
547
(797)

1,183
(26,670)
(2)
95
93

$ 6,183
3,544

$ 27,261
133,109
6,576

$ 25,602
112,746
6,599

(2,248)
(2,607)
4,074
166,165

(23,761)
7,326
(279,580)
115,601
(14,273)
(194,687)

198,403
(170,628)
4,234
(792)
(4,625)
1,926
28,518
(4)
99
95

5,674
5,762

3,480
(4,804)
(3,330)
140,293

(21,030)
5,833
(218,933)
95,840
(11,393)
(149,683)

180,213
(158,399)
(781)
(816)
(12,673)
1,850
9,394
4
95
99

4,025
15,289

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

1 9

N O T E S T O C O N S O L I D AT E D
F I N A N C I A L S TAT E M E N T S

NOTE A:

S U M M A RY O F S I G N I F I C A N T
A C C O U N T I N G P O L I C I E S

As of December 31, 2001 and 2000, and for the Years
Ended December 31, 2001, 2000 and 1999.

Basis of Presentation — The consolidated financial state-
ments include the accounts of Aaron Rents, Inc. and its wholly-
owned subsidiaries (the Company). All significant intercompany
accounts and transactions have been eliminated. The prepara-
tion of the Company’s consolidated financial statements in con-
formity with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the amounts reported in these financial statements and accom-
panying 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 rent-to-rent and sales and lease ownership
operations.

Rental Merchandise consists primarily of residential and
office furniture, consumer electronics, appliances and other
merchandise and is recorded at cost. The sales and lease own-
ership division depreciates merchandise over the agreement
period, generally 12 to 24 months, when on rent, and 36
months, when not on rent, to a 0% salvage value. 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. Depre-
ciation and amortization are computed on a straight-line basis
over the estimated useful lives of the respective assets, which
are from 8 to 40 years for buildings and improvements and
from 1 to 5 years for other depreciable property and equip-
ment. 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 and lease
ownership division and first-in, first-out in the rent-to-rent
division. It is not practicable 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 approxi-
mately $18,965,000 in 2001, $17,397,000 in 2000, and
$15,129,000 in 1999.

Advertising — The Company expenses advertising costs
as incurred. Such costs aggregated $14,204,000 in 2001,
$11,937,000 in 2000, and $12,496,000 in 1999.

Stock Based Compensation — The Company has elected

to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related

2 0

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 $288,000, $540,000, and $867,000, in
2001, 2000, and 1999, 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. Accumulated amortization
at December 31, 2001 and 2000 was $2,607,000 and
$1,498,000, respectively. (See Recently Issued Accounting
Pronouncements.)

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. The fair value of the liability for interest rate swap
agreements, included in accounts payable and accrued expenses
in the consolidated balance sheet, was approximately $3,145,000
at December 31, 2001, based upon quotes from financial insti-
tutions. At December 31, 2001 and 2000, the carrying amount
for variable rate debt approximates fair market value since the
interest rates on these instruments are reset periodically to
current market rates.

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. The Company maintains ownership of the
rental merchandise until all payments are received under
sales and lease ownership agreements. Revenues from the sale
of residential and office furniture and other merchandise are
recognized at the time of shipment.

Derivative Instruments and Hedging Activities — From
time to time, the Company uses interest rate swap agreements
to synthetically manage the interest rate characteristics of a por-
tion of its outstanding debt and to limit the Company’s exposure
to rising interest rates. The Company designates at inception that
interest rate swap agreements hedge risks associated with future
variable interest payments and monitors each swap agreement
to determine if it remains an effective hedge. The effectiveness
of the derivative as a hedge is based on a high correlation
between changes in the value of the underlying hedged item.
The ineffectiveness related to the Company’s derivative transac-
tions is not material. The Company records amounts to be
received or paid as a result of interest swap agreements as an
adjustment to interest expense. All of the Company’s interest
rate swaps are designated as cash flow hedges. In the event of
early termination or redesignation of interest rate swap agree-
ments, any resulting gain or loss would be deferred and amor-
tized as an adjustment to interest expense of the related debt
instrument over the remaining term of the original contract life
of the agreement. In the event of early extinguishment of a
designated debt obligation, any realized or unrealized gain
or loss from the associated swap would be recognized in

income at the time of extinguishment. The Company does not enter into derivatives for spec-
ulative or trading purposes.

Comprehensive Income — Comprehensive income totaled $10,382,000, $27,261,000,

and $25,602,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
New Accounting Pronouncements — On January 1, 2001, the Company adopted

Statements of Financial Accounting Standards Nos. 133, 137, and 138 (collectively SFAS 133),
pertaining to the accounting for derivative instruments and hedging activities. SFAS 133 requires
the Company to recognize all derivative instruments in the balance sheet at fair value. Upon
adoption of SFAS 133, the Company recorded a charge to other comprehensive income of
$497,000, net of income taxes, resulting from a cumulative effect of a change in accounting
principle. Any subsequent gains or losses arising from these swaps have also been deferred in
shareholders’ equity as a component of accumulated other comprehensive loss. These deferred
gains and losses are recognized in the Company’s Consolidated Statements of Earnings in the
period in which the related interest payments being hedged are recognized in expense. No
significant amounts were reclassified from accumulated other comprehensive loss to earnings
during 2001.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial

Accounting Standards No. 141, Business Combinations. This statement eliminates the pooling
of interests method of accounting for all business combinations initiated after June 30, 2001,
and addresses the initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. The Company had no significant business combinations
after June 30, 2001.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. This statement changes the accounting for goodwill
from an amortization method to an impairment only approach. Application of the non-
amortization provisions of this statement is expected to result in an increase in net income of
approximately $752,000 ($.04 per diluted share) in 2002. During fiscal 2002, the Company
will perform impairment tests for goodwill as required by this statement. If the results of these
tests indicate any impairment of goodwill, the Company will record such amount as a cumula-
tive effect of a change in accounting principle as of January 1, 2002. The Company does not
anticipate any impairment will be recorded upon adoption.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144
(SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets. This statement
supercedes Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company
will adopt SFAS 144 as of January 1, 2002, but does not believe the statement will have a
material effect on its consolidated financial statements.

Earnings per share is computed by dividing net income by the weighted average number

of common shares outstanding during the year which were 19,928,000 shares in 2001,
19,825,000 shares in 2000, and 20,062,000 in 1999. 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 214,000 in 2001, 142,000 in 2000, and 273,000 in 1999, respectively.

(In Thousands)

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

Less: Accumulated Depreciation & Amortization

December 31,
2001

December 31,
2000

$ 10,504
37,570
38,214
28,357
1,788
116,433
(39,151)
$ 77,282

$ 8,977
28,681
34,128
25,786
2,051
99,623
(36,449)
$ 63,174

Bank Debt — The Company has a revolving credit agreement dated March 30, 2001 with

several banks providing for unsecured borrowings up to $110,000,000, which includes an
$8,000,000 credit line to fund daily working capital requirements. Amounts borrowed bear
interest at the lower of the lender’s prime rate or LIBOR plus 1.25%. The pricing under the
working capital line is based upon overnight bank borrowing rates. At December 31, 2001 and

2 1

NOTE B:

E A R N I N G S P E R S H A R E

NOTE C:

P R O P E RT Y, P L A N T &
E Q U I P M E N T

NOTE D:

D E B T

2000, an aggregate of $72,397,000 (bearing interest at 3.21%) and $90,000,000 (bearing
interest at 7.04%) was outstanding under the current and prior revolving credit agreements,
respectively. The Company pays a .25% 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 5.77% in 2001, 7.07% in 2000 and 5.94% in 1999. The revolving
credit agreement expires March 30, 2004. 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 matured in 2001.

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 aver-
age rate of 6.15% until May 2003, $10,000,000 at an average rate of 7.96% until November
2003, $10,000,000 at an average rate of 7.75% until November 2003, and an additional
$20,000,000 at an average rate of 7.6% 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 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 fair value of the liability of interest rate swap agreements included in accounts payable
& accrued expenses in the consolidated balance sheet was approximately $3,145,000 at
December 31, 2001.

The revolving credit agreement contains certain covenants which require 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) $187,625,000 plus (b) 50% of the Company’s consolidated net income (but
not loss) for the period beginning January 1, 2001 and ending on the last day of such fiscal
quarter. It also places other restrictions on additional borrowings and requires the mainte-
nance of certain financial ratios. At December 31, 2001, $26,124,000 of retained earnings
were available for dividend payments and stock repurchases under the debt restrictions, and
the Company was in compliance with all covenants.

Other Debt — Other debt at December 31, 2001 of $5,316,000 is primarily comprised of

$4,200,000 of industrial development corporation revenue bonds. The average weighted
borrowing rate on these bonds in 2001 was 2.87%. No principal payments are due on the
bonds until maturity in 2015.

NOTE E:

I N C O M E TA X E S

(In Thousands)

Current Income Tax Expense:
Federal
State

Deferred Income Tax Expense:
Federal
State

Year Ended
December 31,
2001

Year Ended
December 31,
2000

Year Ended
December 31,
1999

$6,239
112
6,351

953
215
1,168
$7,519

$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

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

2 2

December 31,
2001

December 31,
2000

$28,852
1,376
30,228

2,702
3,512
3,051
9,265
$20,963

$25,770
1,531
27,301

1,324
3,179
1,812
6,315
$20,986

NOTE F:

C O M M I T M E N T S

NOTE G:

S H A R E H O L D E R S ’
E Q U I T Y

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,
2001

Year Ended
December 31,
2000

Year Ended
December 31,
1999

35.0%

1.1
1.8
37.9%

2.5
0.4
37.9%

2.7
0.3
38.0%

The Company leases warehouse and retail store space for substantially all of its operations

under operating leases expiring at various times through 2015. 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. In addition, certain properties occupied under operating leases
contain normal purchase options. The Company also has a $25,000,000 construction and
lease facility. Properties acquired by the lessor are purchased or constructed and then leased
to the Company under operating lease agreements. The total amount advanced and out-
standing under this facility at December 31, 2001 was approximately $24,700,000. Since
the resulting leases are operating leases, no debt obligation is recorded on the Company’s
balance sheet. The Company also leases transportation 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 required under operating leases that have initial or
remaining non-cancelable terms in excess of one year as of December 31, 2001, are as
follows: $29,998,000 in 2002; $24,451,000 in 2003; $18,849,000 in 2004; $12,442,000
in 2005; $7,643,000 in 2006; and $8,845,000 thereafter. Certain operating leases expiring
in 2006 contain residual value guarantee provisions and other guarantees in the event of a
default. Although the likelihood of funding under these guarantees is considered by the
Company to be remote, the maximum amount the Company may be liable for under such
guarantees is approximately $24,700,000.

Rental expense was $36,506,000 in 2001, $30,659,000 in 2000; and $28,851,000 in 1999.
The Company leases one building from a partnership of which an officer of the Company

is a partner 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 $436,000 in 2001; $427,000 in 2000; and $447,000 in 1999.

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
2001, 10,000 shares of the Company’s common shares were transferred back into treasury at
an aggregate cost of $128,000 and the Company was authorized to purchase an additional
1,284,690 at December 31, 2001. At December 31, 2001, the Company held a total of
3,662,676 common shares in its treasury.

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.

2 3

NOTE H:

S T O C K O P T I O N S

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 termina-
tion of service. Under the plans, 1,915,000 of the Company shares are reserved for issuance
at December 31, 2001. The weighted average fair value of options granted was $9.68 in
2001, $8.11 in 2000, and $9.55 in 1999.

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 2001, 2000, and 1999 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 follow-
ing weighted average assumptions for 2001, 2000, and 1999, respectively: risk-free interest
rates of 6.05%, 6.47%, and 6.36%, a dividend yield of .24%, .28%, and .23%; a volatility
factor of the expected market price of the Company’s Common Stock of .45, .45, and .42;
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.

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

2001

Years Ended December 31,
2000

1999

$11,074
.56

$25,910
1.31

$24,424
1.22

.55

1.30

1.20

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

stock option plans.

Weighted
Average
Exercise
Price

$10.92
16.74
7.91
16.33
12.17
13.73
8.22
16.18
13.02
16.30
10.77
16.44
13.29
$11.68

Options

1,382
230
(233)
(77)
1,302
405
(235)
(95)
1,377
133
(110)
(99)
1,301
639

(In Thousands Except Per Share)

Outstanding at December 31, 1998

Granted
Exercised
Forfeited

Outstanding at December 31, 1999

Granted
Exercised
Forfeited

Outstanding at December 31, 2000

Granted
Exercised
Forfeited

Outstanding at December 31, 2001
Exercisable at December 31, 2001

2 4

The following table summarizes information about stock options outstanding at December

31, 2001.

Range of Exercise Prices

$ 9.87 – $10.00
10.01 – 15.00
15.01 – 20.25
$ 9.87 – $20.25

Options Outstanding

Options Exercisable

Number
Outstanding
December 31, 2001

Weighted Average
Remaining
Contractual
Life

450,800
429,000
421,050
1,300,850

4.27 years
8.42 years
7.57 years
6.66 years

Weighted
Average
Exercise
Price

$ 9.88
13.41
16.81
$13.29

Number
Exercisable
December 31, 2001

450,800
500
187,300
638,600

Weighted
Average
Exercise
Price

$ 9.88
14.75
16.03
$11.68

The Company franchises Aaron’s Sales & Lease Ownership stores. As of December 31,
2001 and 2000, 299 and 339 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 amount-
ing to $30,609,000 at December 31, 2001. 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.

In 1999, the Company acquired 18 sales and lease ownership stores with an aggregate
purchase price of $10,252,000. The excess cost over the fair market value of tangible assets
acquired was approximately $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 sales and lease ownership 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. During 2001, the Company
acquired 23 sales & lease ownership stores including 13 stores purchased from franchisees.
The aggregate purchase price of these 2001 acquisitions was $10,423,000 and the excess
cost over the fair market value of tangible assets acquired was approximately $4,553,000.
Also, in 2001 the Company acquired two rent-to-rent stores. The aggregate purchase price
of these 2001 rent-to-rent acquisitions was not significant.

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 2001,
2000 and 1999 consolidated financial statements was not significant.

In 2001, the Company sold three of its sales and lease ownership stores to existing fran-
chisees and sold five of its rent-to-rent stores. 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.

Description of Products and Services of Reportable Segments

Aaron Rents, Inc. has four reportable segments: sales and lease ownership, rent-to-rent,
franchise and manufacturing. The sales and lease ownership division offers electronics, resi-
dential 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 and lease ownership concept. The

2 5

NOTE I:

F R A N C H I S I N G O F
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
S T O R E S

NOTE J:

A C Q U I S I T I O N S A N D
D I S P O S I T I O N S

NOTE K:

S E G M E N T S

manufacturing division manufactures upholstery, office furniture, lamps and accessories, and
bedding predominantly for use by the other divisions.

Measurement of Segment Profit or Loss and Segment Assets

The Company evaluates performance and allocates resources based on revenue growth
and pre-tax profit or loss from operations. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting policies except
that the sales and lease ownership division revenues and certain other items are presented on
a cash basis. Intersegment sales are completed at internally negotiated amounts ensuring
competitiveness with outside vendors. Since the intersegment profit and loss affect inventory
valuation, depreciation and cost of goods sold are adjusted when intersegment profit is
eliminated in consolidation.

Factors Used by Management to Identify the Reportable Segments

The Company’s reportable segments are business units that service different customer
profiles using distinct payment arrangements. The reportable segments are each managed
separately because of differences in both customer base and infrastructure.

Information on segments and a reconciliation to earnings before income taxes are as follows:

(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

Total Interest Expense

2 6

2001

Years Ended December 31,
2000

1999

$380,404
150,002
13,913
4,243
47,035
(47,801)
(1,115)
$546,681

$ 11,314
9,152
9,212
(3,244)
(587)
25,847
(1,449)
(1,151)
(3,392)
$ 19,855

$241,245
107,882
13,991
17,533
16,545
$397,196

$121,953
29,736
444
690
725
$153,548

$ 4,620
3,010
119
(1,491)
$ 6,258

$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
$ 5,625

$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)
$ 4,105

NOTE L:

Q U A RT E R LY F I N A N C I A L
I N F O R M AT I O N
( U N A U D I T E D )

R E P O RT O F
I N D E P E N D E N T
A U D I T O R S

(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 1
Revenues
Gross Profit
Earnings Before Taxes
Net Earnings
Earnings Per Share
Earnings Per Share Assuming Dilution

$141,417
75,857
11,802
7,329
.37
.37

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

$125,372
65,660
11,741
7,278
.37
.36

$132,763
71,442
7,998
4,967
.25
.25

$121,910
64,357
11,177
6,929
.35
.35

$132,516
70,034
(3,158)
(1,961)
(.10)
(.10)

$124,850
64,818
10,799
6,706
.34
.34

$139,985
68,859
3,213
2,001
.10
.10

$130,788
67,158
10,189
6,348
.32
.32

In the third quarter of 2001, the Company recorded non-cash charges totaling
approximately $5.6 million, before income taxes, related to certain store closings and
related exit costs.

T O T H E B O A R D O F D I R E C T O R S A N D S H A R E H O L D E R S O F A A R O N R E N T S , I N C . :
We have audited the accompanying consolidated balance sheets of Aaron Rents, Inc. and
Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of
earnings, shareholders’ equity and cash flows for the years ended December 31, 2001, 2000
and 1999. 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 reason-
able 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 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, 2001 and 2000, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.

Atlanta, Georgia
February 21, 2002

2 7

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

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,
2002, was 2,800. The closing price for the Common Stock
and Class A Common Stock on March 15, 2002, was $20.48
and $18.50, respectively.

Common Stock

High

Low

D E C E M B E R 3 1 , 2 0 0 1
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

D E C E M B E R 3 1 , 2 0 0 0
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

$17.50
19.50
18.97
18.20

$17.89
14.96
15.48
18.00

$13.55
15.10
14.90
15.00

$13.46
11.45
12.61
11.74

Class A Common Stock

High

Low

D E C E M B E R 3 1 , 2 0 0 1
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

D E C E M B E R 3 1 , 2 0 0 0
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

$15.90
16.50
16.35
15.25

$18.58
17.08
16.10
15.92

$12.13
15.72
13.75
12.50

$16.46
14.59
15.35
13.44

Cash
Dividends
Per Share

.02

Cash
Dividends
Per Share

.02

U N I T E D S TAT E S A N D P U E R T O R I C O S T O R E L O C AT I O N S

AT D E C E M B E R 3 1 , 2 0 0 1
Company-Operated Sales & Lease Ownership 364
209
Franchised Sales & Lease Ownership
__75
Rent-to-Rent
648
Total Stores
18
Manufacturing & Distribution Centers

2 8

B O A R D O F D I R E C T O R S

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

O F F I C E R S

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.

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)

B. Lee Landers, Jr.
Vice President, Chief
Information Officer, Aaron
Rents, Inc.
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.
Ronald Benedit
Vice President, Office Region,
Aaron Rents’ Rent-to-Rent
Division
David L. Buck
Vice President, Western
Operations, Aaron’s Sales &
Lease Ownership Division

Christopher D. Counts
Vice President, West
Residential Region, Aaron
Rents’ Rent-to-Rent Division
David M. Deignan
Vice President, Marketing
and Merchandising, Aaron’s
Sales & Lease Ownership
Division
K. Todd Evans
Vice President, Franchising,
Aaron’s Sales & Lease
Ownership Division
Joseph N. Fedorchak
Vice President, Eastern
Operations, Aaron’s Sales &
Lease Ownership Division
Michael B. Hickey
Vice President, Management
Development, Aaron’s Sales
& Lease Ownership Division

James C. Johnson
Vice President, Internal
Audit, Aaron Rents, Inc.
Phil J. Karl
Vice President, Southeast
Residential Region, Aaron
Rents’ Rent-to-Rent Division
Tristan J. Montanero
Vice President, Central
Operations, Aaron’s Sales
& Lease Ownership Division
Marc S. Rogovin
Vice President, Real Estate
and Construction, Aaron
Rents, Inc.
Danny Walker
Vice President, Internal
Security, Aaron Rents, Inc.

C O R P O R A T E A N D S H A R E H O L D E R I N F O R M A T I O N

Annual Shareholders
Meeting
The annual meeting of the
shareholders of Aaron Rents,
Inc. will be held on Tuesday,
May 7, 2002, at 10:00 a.m.
E.D.T. on the 4th Floor,
SunTrust Plaza, 303
Peachtree Street, Atlanta,
Georgia 30303.

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

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

R N T

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

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