Aaron's Company Annual Report 2006

FY2006 Annual Report · Aaron's Company

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2006
Annual Report

Aaron Rents, Inc. serves consumers

and businesses through the sale and
lease ownership, rental and retailing
of consumer electronics, residential
and office furniture, household
appliances, computers and accessories

in over 1,350 Company-operated and franchised stores
in the United States and Canada. The Company’s major
operations are the Aaron’s Sales & Lease Ownership
division, the Aaron’s Corporate Furnishings division and
MacTavish Furniture Industries. Aaron Rents is the industry
leader in serving the moderate-income consumer, offering
affordable payment plans, quality merchandise and superior
service. The Company’s strategic focus is on growing the
sales and lease ownership business through the addition of
new Company-operated stores by both internal expansion
and acquisitions, as well as through our successful and
expanding franchise program.

Contents

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

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

The Aaron’s Story . . . . . . . . . . . 4–13

Financial Information . . . . . . . . 14–41

Common Stock Market
Prices and Dividends . . . . . . . . . . . 42

Store Locations . . . . . . . . . . . . . . 43

Board of Directors and Officers . . . . 44

Corporate and Shareholder
Information . . . . . . . . . . . . . . . . . 45

Financial Highlights

(Dollar Amounts in Thousands,
Except Per Share)

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

FINANCIAL POSITION
Total Assets
Rental Merchandise, Net
Credit Facilities
Shareholders’ Equity
Book Value Per Share
Debt to Capitalization
Pretax Profit Margin
Net Profit Margin
Return on Average Equity

Year Ended
December 31,
2006

Year Ended
December 31,
2005

Percentage
Change

$1,326,592
124,710
78,635
1.50
1.47

$1,125,505
92,337
57,993
1.16
1.14

$ 979,606
612,149
129,974
607,015
11.21
17.6%
9.4
5.9
15.1

$ 858,515
550,932
211,873
434,471
8.68
32.8%
8.2
5.2
14.3

17.9%
35.1
35.6
29.3
28.9

14.1%
11.1
(38.7)
39.7
29.1

STORES OPEN AT YEAR END
Sales and Lease Ownership
Sales and Lease Ownership Franchised*
Corporate Furnishings

Total Stores

845
441
59

1,345

748
392
58

1,198

13.0%
12.5
1.7

12.3%

* Sales and Lease Ownership franchised stores are not owned or operated by Aaron Rents, Inc.

Revenues By Year

Net Earnings By Year

$1,500,000

1,200,000

900,000

600,000

300,000

)
s
d
n
a
s
u
o
h
t
n
i
$
(

$80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

2002 2003

2004 2005 2006

2002 2003

2004 2005 2006

To Our Shareholders

We are proud to reflect on our 2006 accomplishments, the
51st year of operations for Aaron Rents. We ended the year
stronger than ever and are poised for continued growth.

For the year, revenues increased 18% to a record $1.327
billion compared to $1.126 billion for the same period of
2005. Net earnings for the year were a record $78.6 million
versus $58.0 million last year, an increase of 36%. Diluted
earnings per share were $1.47 for 2006 compared to $1.14
in 2005.

The Aaron’s Sales & Lease Ownership division continues to
be our primary engine of growth, with a 19% increase in
revenues in 2006. Same store revenues for stores open the
entirety of 2006 and 2005 increased 7.2%.

Fifty-eight of the Aaron’s Sales & Lease Ownership stores
in our system achieved annual revenues in excess of $2
million during the year, the greatest number in our history.
Six stores exceeded $3 million in annual revenues. Since
1999, the year we first began reporting quarterly same
store revenue growth, our same store revenue in the
Aaron’s Sales & Lease Ownership division has increased
at least 5% a quarter, a remarkable achievement of
consistent growth.

In 2006, 78 new Company-operated stores and 75 new
franchised stores were opened in the Aaron’s Sales &
Lease Ownership division. The Company has maintained an
aggressive pace of store openings and added a combined
net of 146 new Company-operated and franchised sales
and lease ownership stores for the year, a 13% increase in
store count over the previous year.

Our franchisees collectively reported revenues of $486
million for 2006, a 16% increase over the prior year.
Note that franchisee revenues are not revenues of Aaron
Rents and are not included in our consolidated financial
statements. During 2006, the Company awarded area devel-
opment agreements for the opening of 73 new franchised
stores, and at year end the pipeline of franchised stores to
be opened over the next few years stood at 233. The pace
of awarding new franchised stores accelerated in the sec-
ond half of 2006, and we expect strong growth in 2007.

We had 531,000 corporate sales and lease ownership
customers and 274,000 franchise customers at the end of
the year, a 15% increase over the year-end 2005 levels.

Our Aaron’s Corporate Furnishings division posted a
revenue increase of 5% for the year and continues to focus
on national accounts and other corporate businesses.

We significantly strengthened our balance sheet in 2006
with an equity offering which raised $84 million in new
capital, allowing us to pay down bank borrowings. We also,
for the third consecutive year, increased our cash dividend
to shareholders.

At December 31, 2006, we had open 828 Company-operated
sales and lease ownership stores, 441 franchised stores,
17 RIMCO stores and 59 corporate furnishings stores, for a
total of 1,345 stores.

We believe Aaron Rents has considerable further growth
potential, both in geographic reach and market share.
Our attractive stores, broad product mix, lower total cost
of ownership, flexible payment methods, and national
advertising bring new as well as existing customers to
our stores. We will use these competitive advantages
to continue our rapid expansion. Our plan is to add 250
stores in 2007, a combination of Company-operated and
franchised stores. The depth of our management team
gives us great confidence in our ability to meet our goals.

We were pleased to elect John C. Portman, Jr., Chairman
and Chief Executive Officer of Portman Holdings, Inc.,
Chairman of AMC, Inc., and Founder and Chairman of
John Portman & Associates to our Board of Directors in
2006. Mr. Portman is a world-renowned architect and
commercial real estate developer. His experience and
insights will serve us well. During 2006, we promoted

D. Chad Strickland to Vice President of Employee Relations.
Chad joined Aaron Rents in 2002 as Senior Legal Counsel.
Elizabeth L. Gibbs joined the Company in 2006 as General
Counsel, having served most recently as a corporate counsel
for a major public retailer.

Aaron Rents has come a long way over the past 51 years
and the future is bright. The Company’s success is due
to the hard work and dedication of our associates, our
franchisees, our business partners, and the support
of our shareholders.

Sincerely,

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

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

he Aaron’s story is one of growth and customer
service. We are proud of making customers’
“dreams come true.” Our Company-operated
and franchised stores currently serve over
800,000 customers, offering a broad range of
furniture, electronics and appliances. We have
increased our total Company-operated and
franchised store count approximately 16% a
year over the last five years, and we plan to add an
additional 250 combined Company-operated and
franchised sales and lease ownership stores in 2007.
Our growth and success
are the result of the out-
standing commitment
and efforts of our
associates, franchisees
and management team.

Building
for Growth

Ken Butler

President, Aaron’s Sales & Lease Ownership Division
Years with Company: 33

Our growth goal of reaching approximately 1,600

stores by the end of 2007 sounds really aggressive,

but we have been working on systems, controls and
procedures that make this growth possible. Plus, we have
broken down the big goal into manageable units. For
example, we have nine operating vice presidents, each of
whom is responsible for opening 15-16 stores during 2007.
This is manageable growth, particularly with our team.

One of the keys to success is our depth of management
down to the regional level. We identify and cultivate
management talent. An ambitious person can make a
career at Aaron’s, and we are now finding that quality
people seek us out. We have worked hard on every aspect
of our business from site selection to store format. Some of
the refinements in our business model have led to a level
of standardization that makes growth somewhat easier.

Another key to success is that we are always adapting.
Over time, we have shifted our locations from dense urban
markets to suburbs and small towns. We recognize that
there are budget-conscious consumers in every market.

We are attracting customers who might not have shopped
our stores 10 years ago, and some of our newer customers
can afford to spend more. We have worked hard to build a
brand image with our signage and storefronts and our more
welcoming interiors.

Historically, Aaron’s provided necessities to its customers
but we now offer a significantly broader array of products
and our customers have responded. Computers and large
televisions are almost considered necessities in many
households, and those products have certainly contributed
to our growth. We have also been experimenting with
offering customers rims and tires through our RIMCO stores.

Store Growth

)
s
e
r
o
t
s

f
o
r
e
b
m
u
n
(

1,500

1,200

900

600

300

2002 2003

2004 2005 2006

national franchisee solicitation advertising is less effective.
We actually visit local markets and meet with chamber of
commerce members and economic development authorities.
We are looking for pillars of the community, people who
really know their towns. The screening criteria are the
same, but the development tactics are different.

There really is not a typical franchisee. We have CPAs,
restaurateurs, managers and retailers within our franchise
group. We are looking for people who have built value in
their organizations and understand the commitment to
growth. Our largest franchisee has 56 stores and is still
opening new units. Fortunately, we are still finding plenty
of qualified franchisees.

Our big new opportunity is conversions. With the con-
solidation in the marketplace over the past few years, it
is harder and harder for small operators to thrive, even
survive. We have had great luck converting some small
chains to franchisees. Robert Briley and Kelly Sayre,
industry leaders in Texas, recently became franchisees,
converting their stores, which resulted in a net gain of
17 franchised stores. We are proud to have these well-
respected operators on our team. Over time, we expect
close to half of our store growth to come from the
franchise system.

Todd Evans

Vice President, Franchising, Aaron’s Sales & Lease
Ownership Division
Years with Company: 16

We have put some extra focus on our franchise sales

effort in order to meet the corporate growth goal.

We now have a development team of six people and are
working hard in secondary and tertiary markets where the

Company Revenues
From Franchising

Company Pretax Profit
From Franchising

)
s
d
n
a
s
u
o
h
t
n
i
$
(

$35,000

30,000

25,000

20,000

15,000

10,000

5,000

)
s
d
n
a
s
u
o
h
t
n
i
$
(

$25,000

20,000

15,000

10,000

5,000

2002 2003

2004 2005 2006

2002 2003

2004 2005 2006

Marc Rogovin

Vice President, Real Estate and Construction,
Aaron Rents, Inc.
Years with Company: 10

Most people don’t know this, but Aaron’s is one of the

largest retail developers in America. We will manage
500 projects this year, including new stores, remodels and
relocations. Our team is already working on locations for
2008 stores.

pre-engineered buildings and mechanical and electrical
systems direct from manufacturers. This is possible because
we have developed a standard freestanding store. We
developed this store format to improve the customer
experience — using a larger footprint, softer color palette,
and new graphics.

Technology has been a major factor in our ability to handle
growth. We have mapped out the entire United States and
can research potential locations online, determine traffic
patterns and identify nearby stores before sending someone
out in the field to scout locations. We also can bid con-

struction projects and distribute project
specifications online. In addition, we stay
on top of every single project through
project management software and digital
photographs of all real estate locations
and construction projects.

With our size, we often get first crack at
prime locations, and many of our people
are getting industry recognition for their
expertise. Our goals are ambitious, but we
have a strong team and are excited about
achieving
our growth
objectives.

The corporate growth goal is ambitious, but we have
a solid group of professionals to meet this goal —
engineers, city planners, architects, construction
managers, real estate managers, property managers
and attorneys. Our staff is located throughout the
country in regional teams, working closely with store
operations. We also have a facilities group that manages
maintenance for our store network. Even though con-
struction costs have been rising over the past few years,
we have been able to control expenses
through our national buying program.
For example, we buy a significant
amount of our construction materials
directly from the manufacturer rather
than having individual contractors buy
materials for specific stores. We pur-
chase signage, carpet, store fixtures,

power and logistical infrastructure to bring those dream
products home to our customers at the lowest possible
cost. Our employees are dedicated to working hand in hand
with our vendors, sourcing over a half a billion dollars in
product each year. Since much of our product comes from
overseas, we are constantly monitoring the most cost-
effective and efficient way to move goods across countries
and oceans. Often, with furniture, for example, logistics
can end up being half the cost of the product.

Forecasting is enormously important. Having the right
product at the right price at the wrong time will fail every
time. To ensure that our timing is right, we give our vendors
complete visibility into our product flow with activity
monitored daily across all of our regions. In areas such
as computers and electronics where the markets shift
constantly, our vendor relationships help keep us informed,
allowing us to adapt quickly to shifts in consumer prefer-
ences and new products. With regard to furniture, being
able to marry the internal manufacturing capacity of our
MacTavish Furniture division with our outside vendors
gives us an edge in a product category where long lead
times can be challenging.

We have 16 fulfillment centers with a fleet of over 100
vehicles that work extremely closely with our stores. All of
our fulfillment centers operate with a software system that

Mitch Paull

Senior Vice President, Merchandising and Logistics,
Aaron’s Sales & Lease Ownership Division
Years with Company: 15

At Aaron’s, our marketing is centered around “making

dreams come true.” This mission is at the

forefront of our thoughts when we go
to market to find products. We strive to
offer the right product at the right price
at the right time. This means that we
source high-quality, brand-name products
from across the globe and use our buying

Company-Operated Sales & Lease
Ownership Store Lease Revenues

Other 4%

Computers
15%

Furniture
33%

Electronics
33%

Appliances
15%

Other 1%

Electronics and Appliances 52%

Furniture 35%

Comp uters 12%

is constantly being upgraded to capture more and more
information to improve our product flow. While freight
costs have increased dramatically over the past few years,
our back-haul revenue, fuel program and vehicle routing
techniques have helped offset much of these increases. All
of our competitive advantages of increased buying power
and more efficient logistics will support continued growth
in the Aaron’s store base.

Mark Rudnick

Vice President, Marketing, Aaron’s Sales & Lease
Ownership Division
Years with Company: 6

All of our corporate marketing efforts are designed to

build the image and brand awareness of Aaron’s on
both the national and local levels while driving traffic to
our stores. In some respects, the marketing function is
getting easier. With the significant growth in our store
base comes a larger marketing budget that allows us to
purchase more national advertising and increase the size
and frequency of our local programs.

We have had an in-house advertising
agency for over five years now. We
know our customers better than anyone,
and the in-house agency allows us to
create targeted advertising campaigns
and sound media investments without
having to pay agency fees.

Direct mail continues to be our core
advertising vehicle. We produce over 20
million circulars monthly. In the last

In 2006, we introduced “Lucky Dog,” the official Aaron’s
mascot. This professionally designed mascot has made
numerous high-profile appearances at stores, races, on
TV and during special in-race features with our national
television partners. We estimate that over 80 million
people were exposed to the Aaron’s brand in 2006
through our NASCAR marketing efforts, a number
that will continue to grow in the future.

Our marketing efforts are focused, targeted and strongly
negotiated to bring the Aaron’s message to the largest
number of potential customers. Our coordinated marketing
efforts are truly setting Aaron’s apart from the competition.

Lee Landers

Vice President, Chief Information Officer,
Aaron Rents, Inc.
Years with Company: 8

Information technology is involved in every part of the

organization — we support every department within

Aaron’s, from manufacturing to the stores. The IT

year, we have
greatly increased
our use of tele-
vision on both
the national and
local levels. Both
corporate and
franchise stores
benefit from
our national
advertising, which
features a highly targeted campaign to attract more of our
core customers. Over the last year, the national advertising
program has greatly expanded to include Univision, BET,
the NBA on TNT, USA and FX in addition to our strong
NASCAR programs.

We have also increased our sports marketing efforts and
are now part of high-profile partnerships with the Houston
Rockets, the Dallas Mavericks, the Atlanta Hawks and
Thrashers, as well as the Arena Football League and
numerous college athletic programs.

NASCAR continues to be our largest sports marketing
program. In 2000, Ken Butler saw the potential for an
Aaron’s marketing partnership with
NASCAR. Aaron’s NASCAR marketing
efforts have grown as fast as the
sport’s popularity over the last six
years, expanding from the sponsor-
ship of one race at Atlanta Motor
Speedway in 2000 to a full season
partnership for the #99 Aaron’s
Dream Machine with Michael Waltrip
Racing for the 2007 NASCAR Busch
series. Aaron’s continues to sponsor
the Aaron’s Dream Weekend at
Talladega in the spring of each
year, one of NASCAR’s premier
events, featuring the “Aaron’s 312”
Busch race and the “Aaron’s 499”
Nextel Cup race.

Aaron’s

Efficiency

Department is comprised of network engineering, applica-
tions development, the technology help desk, data security
and a field support team that maintains the equipment in
all of our stores.

A network connects all Aaron’s stores to our data center,
which enables real-time processing and reporting. In the
past, only the store that created a customer agreement
could accept payments on that agreement. Our network
technology makes it possible for a customer to make
payments at any Aaron’s store, and customers appreciate
this flexibility. The network makes it possible for regional
and store managers to balance inventory across our stores
as well. We are also finding that many consumers visit
www.shopaarons.com, a site that generates hundreds of
leads each month.

We are constantly working on applications that enhance
customer service or improve our efficiency. We will open a
brand-new data center in Kennesaw, Georgia, in early 2007.
Growth is always a challenge, but at every decision point,
we ask ourselves if this technology solution can scale to
serve 5,000 stores. We feel confident that we are poised
to handle the growth.

Ed Quiñones

President, Aaron’s Corporate Furnishings Division
Years with Company: 22

The Aaron’s Corporate Furnishings division is the

Company’s original business. Our customers now are

primarily corporations or third-party providers such as
insurance companies. In the past, we had to have stores
wherever we did business. Now we have regional offices
that can serve customers nationwide. We have national
accounts specialists who sell new accounts and service
existing accounts.

Growth

We are almost a logistics business now rather
than a furnishings business, and the challenge is
maintaining a state of readiness to respond to
any challenge. Recently, major storms destroyed
hundreds of homes in central Florida. Within
days, major insurance companies and relief
organizations contacted us to furnish temporary
homes for those displaced. We also furnished
hundreds and hundreds of temporary homes
and offices after Hurricanes Katrina and Rita.
We offer a full line of products from furniture
to electronics to forks and towels. Corporations
use us as a corporate relocation service, an
alternative to extended-stay hotels.

We are often behind the scenes at major events.
We furnish all of the offices and trailers used in
the NFL Super Bowl and certain NASCAR races.

The buying power of Aaron’s is an advantage in our
procurement process, and the Company’s fulfillment centers
give us superior service capability. In addition, the Aaron’s
name and reputation are a major competitive advantage.
Over 50 years later, the original business is solid and
our market share is growing.

Gil Danielson

Executive Vice President, Chief Financial Officer,
Aaron Rents, Inc.
Years with Company: 17

Due to the nature of our business, Aaron Rents

requires capital to grow. A typical new store needs

approximately $600,000 in available cash to fund its first
12 months of operations. The majority of that cash is used
to purchase merchandise to outfit the showroom floor and
to be leased to our customers. Normally, a store will begin
to generate positive cash flow in its second year, and
profitability continues to improve as a store matures.

As long as we continue to open stores and our revenues
grow, we will require additional capital. Over the years, we
have obtained this capital through bank credit facilities,
private debt placements and secondary stock offerings. A
stock offering in 2006 generated $84 million in proceeds
that were used to pay down bank borrowings. With this
stock offering and our strong balance sheet, we are in
the position to adequately fund our expansion for the
foreseeable future. We also have a Company-sponsored
credit facility that has been used for many years by our
franchisees to fund their growth. This financing facility
has been a significant factor in the success of our
franchise system.

We are careful stewards of our assets. The Company has
tight financial controls, and we monitor operations daily.
We are attentive to expenses in all aspects of our business.

within and “grow our own” management. A hard-working
and talented person can become a store manager within a
year or two and continue to advance within the Company.

Aaron’s is a specialty retailer that is unique with few or
no peers. The Company has been very successful for a
long period of time, and that success has been reflected
in our stock price, which has increased, on average, over
18% per year during the last 10 years ending in 2006.
We are listed on the New York Stock Exchange, are part of
the Standard & Poor’s SmallCap 600 and were named by
Forbes Magazine in January 2007 as one of the 400 Best
Big Companies in America. Aaron Rents was founded
over five decades ago with $500 and now has a market
capitalization of close to $1.5 billion. There is no doubt —
we have the financial resources to continue with our
current growth plans.

We have an in-house studio that is used for the production
of “Inside Aaron’s,” which is broadcast to all stores. We use
this production to reach all of our associates with features
on new products, new programs, corporate developments
and other topics of interest.

The tenure of our top management team is unusual in the
current business environment. It is a testimony to both the
culture and to the opportunities within Aaron’s. We call our
NASCAR driving team “the dream team” but that could just
as easily refer to our management team.

Robin Loudermilk

President, Chief Operating Officer, Aaron Rents, Inc.
Years with Company: 25

Our strong corporate culture is a key factor in

the success of the last 50 years and a reason for

confidence in our future. This culture comes from the top,
from our Founder and Chairman, and is seen at every level
throughout the Company. Our rapid growth has offered
attractive career paths for talented associates. We have
invested heavily in training and career development
programs through our “Aaron’s University,” which is also
attended by our franchisees and their employees. Because
of our unique business model, we prefer to promote from

We are especially proud of how our employees give back
to their communities. Through ACORP (Aaron’s Community
Outreach Program), each store can give cash back to their
community once certain operating goals are met. As a
result, Aaron’s has worked with and donated to numerous
youth organizations and community nonprofits throughout
the years. Since each Aaron’s store is community-based, it
is important and appropriate to contribute time and
resources in our home communities. We are especially
proud of how our employees responded to the disaster
relief and recovery efforts in the Gulf Coast region following
Hurricanes Katrina and Rita. Our team worked hard to take
care of customers in the early months and has continued to
work hard to open new stores to service those markets.

We wear the Aaron’s name with pride.

Financial Contents

Selected Financial Information . . . . 15

Management’s Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . 16–24

Consolidated Balance Sheets . . . . . . 25

Consolidated Statements
of Earnings . . . . . . . . . . . . . . . . . . 26

Consolidated Statements of
Shareholders’ Equity . . . . . . . . . . . . 26

Consolidated Statements
of Cash Flows . . . . . . . . . . . . . . . . 27

Notes to Consolidated
Financial Statements . . . . . . . . . 28–39

Management Report
on Internal Control Over
Financial Reporting . . . . . . . . . . . . 40

Reports of Independent
Registered Public
Accounting Firm . . . . . . . . . . . . 40–41

Selected Financial Information

(Dollar Amounts in Thousands,
Except Per Share)

OPERATING RESULTS
Revenues:

Rentals and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Other

Costs and 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

FINANCIAL POSITION
Rental Merchandise, Net
Property, Plant and Equipment, Net
Total Assets
Interest-Bearing Debt
Shareholders’ Equity

AT YEAR END
Stores Open:

Company-Operated
Franchised

Rental Agreements in Effect
Number of Employees

Year Ended
December 31,
2006

Year Ended
December 31,
2005

Year Ended
December 31,
2004

Year Ended
December 31,
2003

Year Ended
December 31,
2002

992,791
62,319
224,489
33,626
13,367
1,326,592

41,262
207,217
579,565
364,109
9,729
1,201,882
124,710
46,075
78,635
1.50
1.47

.057
.057

$
$

$ 612,149
170,294
979,606
129,974
607,015

$ 845,162
58,366
185,622
29,781
6,574
1,125,505

39,054
172,807
507,158
305,630
8,519
1,033,168
92,337
34,344
57,993
1.16
1.14

.054
.054

$
$

$ 550,932
133,759
858,515
211,873
434,471

904
441
773,000
8,400

806
392
697,000
7,600

$694,293
56,259
160,774
25,253
9,901
946,480

39,380
149,207
414,518
253,456
5,413
861,974
84,506
31,890
$ 52,616
1.06
$
1.04

.039
.039

$425,567
111,118
700,288
116,655
375,178

674
357
582,000
6,400

$553,773
68,786
120,355
19,347
4,536
766,797

50,913
111,714
344,884
195,661
5,782
708,954
57,843
21,417
$ 36,426
.74
$
.73

.022
.022

$343,013
99,584
559,884
79,570
320,186

560
287
464,800
5,400

$459,179
72,698
88,969
16,663
3,179
640,688

53,856
82,407
293,346
162,660
4,767
597,036
43,652
16,212
$ 27,440
.58
$
.57

.018
.018

$317,287
87,094
487,468
73,265
280,545

482
232
369,000
4,800

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

OVERVIEW
Aaron Rents, Inc. is a leading specialty retailer of consumer
electronics, computers, residential and office furniture, household
appliances and accessories. Our major operating divisions are the
Aaron’s Sales & Lease Ownership Division, the Aaron’s Corporate
Furnishings Division, and the MacTavish Furniture Industries
Division, which manufactures and supplies nearly one-half of the
furniture and related accessories rented and sold in our stores.
Our sales and lease ownership division represents the fastest
growing segment of our business, accounting for 90%, 89%, and
88% of our total revenues in 2006, 2005, and 2004, respectively.
Aaron Rents has demonstrated strong revenue growth over
the last three years. Total revenues have increased from $946.5
million in 2004 to $1.327 billion in 2006, representing a com-
pound annual growth rate of 18.4%. Total revenues for the year
ended December 31, 2006 were $1.327 billion, an increase of
$201.1 million, or 17.9%, over the prior year.

Most of our growth comes from the opening of new sales
and lease ownership stores and increases in same store revenues
from previously opened stores. We estimate that we will add
approximately 250 stores in 2007, a combination of company-
operated and franchised stores. We opened 78 company-operated
sales and lease ownership stores in 2006. We spend on average
approximately $600,000 in the first year of operation of a new
store, which includes purchases of rental merchandise, invest-
ments in leasehold improvements and financing first year start-up
costs. Our new sales and lease ownership stores typically achieve
revenues of approximately $1.1 million in their third year of
operation. Our comparable stores open more than three years
normally achieve approximately $1.4 million in unit revenues,
which we believe represents a higher unit sales volume than
the typical rent-to-own store. Most of our stores are cash flow
positive in the second year of operations following their opening.
We also use our franchise program to help us expand our sales

and lease ownership concept more quickly and into more areas
than we otherwise would by opening only company-operated
stores. Our franchisees opened 75 stores in 2006. We purchased
28 franchised stores during 2006. Franchise royalties and other
related fees represent a growing source of high margin revenue
for us, accounting for approximately $33.6 million of revenues
in 2006, up from $25.3 million in 2004, representing a com-
pounded annual growth rate of 15.4%.

KEY COMPONENTS OF INCOME
In this management’s discussion and analysis section, we review
the Company’s consolidated results including the five components
of our revenues (rentals and fees, retail sales, non-retail sales,
franchise royalties and fees, and other revenues), costs of sales
and expenses (of which depreciation of rental merchandise is a

significant part). We also review the results of our sales and
lease ownership and corporate furnishings divisions.

REVENUES. We separate our total revenues into five components:
rentals and fees, retail sales, non-retail sales, franchise royalties
and fees, and other revenues. Rentals and fees includes all
revenues derived from rental agreements from our sales and lease
ownership and corporate furnishings stores, including agreements
that result in our customers acquiring ownership at the end of
the term. Retail sales represent sales of both new and rental
return merchandise from our sales and lease ownership and
corporate furnishings stores. Non-retail sales mainly represent
merchandise sales to our sales and lease ownership division
franchisees. Franchise royalties and fees represent fees from the
sale of franchise rights and royalty payments from franchisees,
as well as other related income from our franchised stores.
Other revenues include, at times, income from the sale of equity
investments held in third parties, gains on asset dispositions
and other miscellaneous revenues.

COST OF SALES. We separate our cost of sales into two
components: retail and non-retail. Retail cost of sales represents
the original or depreciated cost of merchandise sold through
our company-operated stores. Non-retail cost of sales primarily
represents the cost of merchandise sold to our franchisees.

DEPRECIATION OF RENTAL MERCHANDISE. Depreciation
of rental merchandise reflects the expense associated with
depreciating merchandise held for rent and rented to customers
by our company-operated sales and lease ownership and cor-
porate furnishings stores.

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION
Rental revenues are recognized in the month they are due
on the accrual basis of accounting. For internal management
reporting purposes, rental revenues from the sales and lease
ownership division are recognized as revenue in the month the
cash is collected. On a monthly basis, we record an accrual for
rental revenues due but not yet received, net of allowances, and
a deferral of revenue for rental payments received prior to the
month due. Our revenue recognition accounting policy matches
the rental revenue with the corresponding costs, mainly depre-
ciation, associated with the rental merchandise. At the years
ended December 31, 2006 and 2005, we had a revenue deferral
representing cash collected in advance of being due or otherwise
earned totaling $24.1 million and $20.3 million, respectively,
and an accrued revenue receivable net of allowance for doubtful
accounts based on historical collection rates of $5.0 million and
$4.8 million, respectively. Revenues from the sale of merchandise
to franchisees are recognized at the time of receipt of the
merchandise by the franchisee and revenues from such sales to
other customers are recognized at the time of shipment.

RENTAL MERCHANDISE
Our sales and lease ownership division depreciates merchandise
over the agreement period, generally 12 to 24 months when
rented, and 36 months when not rented, to 0% salvage value.
Our corporate furnishings division depreciates merchandise over
its estimated useful life, which ranges from six months to 60
months, net of salvage value, which ranges from 0% to 60%.
Sales and lease ownership merchandise is generally depreciated
at a faster rate than our corporate furnishings merchandise.
As sales and lease ownership revenues continue to comprise
an increasing percentage of total revenues, we expect rental
merchandise depreciation to increase at a correspondingly
faster rate.

Our policies require weekly rental merchandise counts by
store managers and write-offs for unsalable, damaged, or missing
merchandise inventories. Full physical inventories are generally
taken at our fulfillment and manufacturing facilities on a
quarterly basis with appropriate provisions made for missing,
damaged and unsalable merchandise. In addition, we monitor
rental merchandise levels and mix by division, store and fulfill-
ment center, as well as the average age of merchandise on hand.
If unsalable rental merchandise cannot be returned to vendors,
its carrying value is adjusted to net realizable value or written
off. All rental merchandise is available for rental and sale.

Effective September 30, 2004, we began recording rental

merchandise carrying value adjustments on the allowance
method, which estimates the merchandise losses incurred but not
yet identified by management as of the end of the accounting
period. Previously, we accounted for merchandise inventory
adjustments using the direct write-off method, which recognized
merchandise losses only after they were specifically identified.
This adoption of the allowance method had the effect of
increasing expenses in the third quarter of 2004 for a one-time
adjustment of $2.5 million to establish a rental merchandise
allowance reserve on our balance sheet. We expect rental
merchandise adjustments in the future under this new method
to be materially consistent with the prior years’ adjustments
under the direct write-off method. The 2005 rental merchandise
adjustments include write-offs of merchandise in the third
quarter that resulted from losses associated with Hurricanes
Katrina and Rita. These hurricane related write-offs were $2.8
million, net of insurance proceeds. Rental merchandise adjust-
ments, including the effect of the establishment of the reserve
mentioned above, totaled $20.8 million, $21.8 million, and
$18.0 million during the years ended December 31, 2006, 2005,
and 2004, respectively.

LEASES AND CLOSED STORE RESERVES
The majority of our company-operated stores are operated
from leased facilities under operating lease agreements. The
substantial majority of these leases are for periods that do not
exceed five years. Leasehold improvements related to these leas-
es are generally amortized over periods that do not exceed the
lesser of the lease term or five years. While a majority of our
leases do not require escalating payments, for the leases which
do contain such provisions we record the related lease expense
on a straight-line basis over the lease term. Finally, we do not

generally obtain significant amounts of lease incentives or
allowances from landlords. The total amount of incentives
and allowances received in 2006, 2005, and 2004 totaled
$1.5 million, $1.5 million, and $1.3 million, respectively. Such
amounts are recognized ratably over the lease term.

From time to time, we close or consolidate stores. Our primary
cost associated with closing or consolidating stores is the future
lease payments and related commitments. We record an estimate
of the future obligation related to closed or consolidated stores
based upon the present value of the future lease payments and
related commitments, net of estimated sublease income which we
base upon historical experience. For the years ended December 31,
2006 and 2005, our reserve for closed or consolidated stores was
$693,000 and $1.3 million, respectively. If our estimates related
to sublease income are not correct, our actual liability may be
more or less than the liability recorded at December 31, 2006.

INSURANCE PROGRAMS
Aaron Rents maintains insurance contracts to fund workers
compensation and group health insurance claims. Using actuarial
analysis and projections, we estimate the liabilities associated
with open and incurred but not reported workers compensation
claims. This analysis is based upon an assessment of the likely
outcome or historical experience, net of any stop loss or other
supplementary coverages. We also calculate the projected out-
standing plan liability for our group health insurance program.
Our workers compensation insurance claims and group health
insurance balance was a $656,000 prepaid and a $3.1 million
liability at December 31, 2006 and 2005, respectively.

If we resolve existing workers compensation claims for
amounts that are in excess of our current estimates and within
policy stop loss limits, we will be required to pay additional
amounts beyond those accrued at December 31, 2006.
Additionally, if the actual group health insurance liability exceeds
our projections, we will be required to pay additional amounts
beyond those accrued at December 31, 2006.

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

SAME STORE REVENUES
We refer to changes in same store revenues as a key performance
indicator. For the year ended December 31, 2006, we calculated
the change in this amount by comparing revenues for the
year ended December 31, 2006 to revenues for the year ended
December 31, 2005 for all stores open for the entire 24-month
period ended December 31, 2006, excluding stores that received
rental agreements from other acquired, closed, or merged stores.
For the year ended December 31, 2005 we calculated the change
in this amount by comparing revenues for the year ended
December 31, 2005 to revenues for the year ended December 31,
2004 for all stores open for the entire 24-month period ended
December 31, 2005, excluding stores that received rental
agreements from other acquired, closed, or merged stores.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2006 VERSUS YEAR ENDED
DECEMBER 31, 2005
The following table shows key selected financial data for the
years ended December 31, 2006 and 2005, and the changes in
dollars and as a percentage to 2006 from 2005.

(In Thousands)

REVENUES:
Rentals and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Other

COSTS AND 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

Year Ended
December 31,
2006

Year Ended
December 31,
2005

Increase
in Dollars to 2006
from 2005

% Increase
to 2006
from 2005

$ 992,791
62,319
224,489
33,626
13,367
1,326,592

41,262
207,217
579,565
364,109
9,729
1,201,882
124,710
46,075
78,635

$ 845,162
58,366
185,622
29,781
6,574
1,125,505

39,054
172,807
507,158
305,630
8,519
1,033,168
92,337
34,344
57,993

$147,629
3,953
38,867
3,845
6,793
201,087

2,208
34,410
72,407
58,479
1,210
168,714
32,373
11,731
$ 20,642

17.5%
6.8
20.9
12.9
103.3
17.9

5.7
19.9
14.3
19.1
14.2
16.3
35.1
34.2
35.6%

REVENUES
The 17.9% increase in total revenues, to $1.327 billion in 2006
from $1.126 billion in 2005, was due mainly to a $147.6 million,
or 17.5%, increase in rentals and fees revenues, plus a $38.9
million increase in non-retail sales. The $147.6 million increase
in rentals and fees revenues was attributable to a $142.4 million
increase from our sales and lease ownership division, which had
a 7.2% increase in same store revenues during the 24 month
period ended December 31, 2006 and added 229 company-
operated stores since the beginning of 2005. The growth in our
sales and lease ownership division was augmented by a $5.5
million increase in revenues in our corporate furnishings division.
Additionally, included in other revenues in 2006 was a $7.2
million gain from the sale of the assets of our 12 stores located
in Puerto Rico and three additional stores located in the conti-
nental United States. We received $16.0 million in cash proceeds
and disposed of goodwill of $1.0 million in conjunction with
these sales.

The 6.8% increase in revenues from retail sales, to $62.3
million in 2006 from $58.4 million in 2005, was primarily due
to an increase of $3.7 million in the sales and lease ownership
division as a result of the increased demand and growing store
base described above. Retail sales represents sales of both
new and returned rental merchandise.

The 20.9% increase in non-retail sales (which mainly
represents merchandise sold to our franchisees), to $224.5
million in 2006 from $185.6 million in 2005, was due to
the growth of our franchise operations and our distribution
network. The total number of franchised sales and lease
ownership stores at December 31, 2006 was 441, reflecting
a net addition of 84 stores since the beginning of 2005.

The 12.9% increase in franchise royalties and fees, to $33.6
million in 2006 from $29.8 million in 2005, primarily reflects an
increase in royalty income from franchisees, increasing 17.6%
to $25.4 million in 2006 compared to $21.6 million in 2005.
The increase in royalty income from franchisees was partially
offset by decreased franchise and financing fee revenues.
Revenues increased in this area primarily due to the previously
mentioned growth of franchised stores and an increase in
certain royalty rates.

The 103.3% increase in other revenues, to $13.4 million in
2006 from $6.6 million in 2005, is primarily attributable to a
$7.2 million gain from the sale of the assets of our 12 stores
located in Puerto Rico and three additional stores in the con-
tinental United States. In addition, included in other income
in 2005 is $934,000 of proceeds from business interruption
insurance associated with the operations of hurricane-affected
areas and a $565,000 gain in 2005 on the sale of our holdings
of Rent-Way, Inc. common stock.

With respect to our major operating units, revenues for
our sales and lease ownership division increased 19.5%, to
$1.201 billion for 2006 from $1.005 billion for 2005. This
increase was attributable to the addition of stores and same
store revenue growth described above. The 4.7% increase in
corporate furnishings division revenues, to $123.0 million for
2006 from $117.5 million for 2005, is primarily the result of
improving economic and business conditions.

COST OF SALES
Cost of sales from retail sales increased 5.7% to $41.3 million
in 2006 compared to $39.1 million in 2005, with retail cost of
sales as a percentage of retail sales remaining comparable
between the periods.

Cost of sales from non-retail sales increased 19.9%, to $207.2
million in 2006 from $172.8 million in 2005, and as a percentage
of non-retail sales, decreased slightly to 92.3% from 93.1%.

EXPENSES
Operating expenses in 2006 increased $72.4 million to $579.6
million from $507.2 million in 2005, a 14.3% increase. As a
percentage of total revenues, operating expenses were 43.7%
in 2006 and 45.1% in 2005. Operating expenses decreased
as a percentage of total revenues in 2006 mainly due to the
maturing of new company-operated sales and lease ownership
stores and the 7.2% increase in same store revenues previously
mentioned. Additionally, operating expenses in 2005 included
$2.5 million in expenses, net of $1.9 million of insurance
recoveries, related to losses due to Hurricanes Katrina and Rita.
Depreciation of rental merchandise increased $58.5 million

to $364.1 million in 2006 from $305.6 million during the
comparable period in 2005, a 19.1% increase. As a percentage
of total rentals and fees, depreciation of rental merchandise
increased to 36.7% from 36.2% from year to year. The increase

as a percentage of rentals and fees was primarily due to increased
depreciation expense associated with an increase in 90 day same
as cash sales and the early payout of lease ownership agreements
in our sales and lease ownership division and, to a lesser extent,
a greater percentage of our rentals and fees revenues coming
from our sales and lease ownership division, which depreciates
its rental merchandise at a faster rate than our corporate
furnishings division.

Interest expense increased to $9.7 million in 2006 compared

with $8.5 million in 2005, a 14.2% increase. The increase in
interest expense was primarily due to higher debt levels during
part of 2006 and, to a lesser extent, higher interest rates in
2006. Debt levels at December 31, 2006 decreased significantly
as a result of debt payments made with the proceeds of the
Company’s 2006 stock offering.

Income tax expense increased $11.7 million to $46.1 million

in 2006 compared with $34.3 million in 2005, representing a
34.2% increase. Aaron Rents’ effective tax rate was 36.9% in
2006 compared with 37.2% in 2005.

NET EARNINGS
Net earnings increased $20.6 million to $78.6 million in 2006
compared with $58.0 million in 2005, representing a 35.6%
increase. As a percentage of total revenues, net earnings were
5.9% and 5.2% in 2006 and 2005, respectively. The increase
in net earnings was primarily the result of the maturing of new
company-operated sales and lease ownership stores added over
the past several years, contributing to a 7.2% increase in same
store revenues, and a 12.9% increase in franchise royalties and
fees. Additionally, included in other revenues in 2006 was a $7.2
million gain from the sale of the assets of our 12 stores located
in Puerto Rico and three additional stores in the continental
United States. Also included in the 2005 results are increased
expenses and losses due to Hurricanes Katrina and Rita.

YEAR ENDED DECEMBER 31, 2005 VERSUS YEAR ENDED
DECEMBER 31, 2004
The following table shows key selected financial data for the years ended December 31, 2005 and 2004, and the changes in dollars
and as a percentage to 2005 from 2004.

Year Ended
December 31,
2005

Year Ended
December 31,
2004

Increase/
(Decrease) in Dollars
to 2005 from 2004

% Increase/
(Decrease) to
2005 from 2004

(In Thousands)

REVENUES:
Rentals and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Other

COSTS AND 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

$ 845,162
58,366
185,622
29,781
6,574
1,125,505

39,054
172,807
507,158
305,630
8,519
1,033,168
92,337
34,344
57,993

$694,293
56,259
160,774
25,253
9,901
946,480

39,380
149,207
414,518
253,456
5,413
861,974
84,506
31,890
$ 52,616

$150,869
2,107
24,848
4,528
(3,327)
179,025

(326)
23,600
92,640
52,174
3,106
171,194
7,831
2,454
$ 5,377

21.7%
3.7
15.5
17.9
(33.6)
18.9

(0.8)
15.8
22.3
20.6
57.4
19.9
9.3
7.7
10.2%

REVENUES
The 18.9% increase in total revenues, to $1.126 billion in
2005 from $946.5 million in 2004, is primarily attributable
to continued growth in our sales and lease ownership division,
from both the opening and acquisition of new company-operated
stores and improvement in same store revenues. Revenues for our
sales and lease ownership division, including sales to franchisees,
increased $173.7 million to $1.005 billion in 2005 compared
with $831.1 million in 2004, a 20.9% increase. This increase was
attributable to an 8.3% increase in same store revenues and the
addition of 248 company-operated sales and lease ownership
stores since the beginning of 2004.

The 21.7% increase in rentals and fees revenues, to $845.2
million in 2005 from $694.3 million in 2004, was attributable
to a $143.1 million increase from our sales and lease ownership
division related to the growth in same store revenues and the
increase in the number of stores described above. Rental revenues
in our corporate furnishings division increased $7.7 million, or
10.1%, to $83.7 million in 2005 from $76.0 million in 2004 as
a result of generally improved economic conditions.

The 3.7% increase in revenues from retail sales, to $58.4
million in 2005 from $56.3 million in 2004, was primarily due to
a $1.5 million increase from our corporate furnishings division as
a result of generally improved economic conditions.

The 15.5% increase in non-retail sales in 2005 reflects the
significant growth of our franchise operations. The total number
of franchised stores at December 31, 2005 was 392, reflecting a
net addition of 105 since the beginning of 2004.

Franchise royalties and fees increased to $29.8 million in 2005

from $25.3 million in 2004, a 17.9% improvement. The increase
primarily reflects an increase in royalty income from franchisees,
increasing $3.8 million to $21.6 million in 2005 compared to
$17.8 million in 2004, with increased franchise and financing fee
revenues comprising the majority of the remainder. Revenue
increased in this area primarily due to the previously mentioned
growth of stores and an increase in certain royalty rates.

The 33.6% decrease in other revenues, to $6.6 million in
2005 from $9.9 million in 2004, is primarily attributable to
recognition of a $5.5 million gain in 2004 on the sale of our
holdings of Rainbow Rentals, Inc. common stock in connection
with that company’s merger with Rent-A-Center, Inc., partially
offset by the recognition of a $565,000 gain in 2005 on the sale
of our holdings of Rent-Way, Inc. common stock. In addition,
included in other income in 2005 is $934,000 of proceeds from
business interruption insurance associated with the operations
of hurricane-affected areas.

With respect to our major operating units, revenues for our
sales and lease ownership division increased 20.9%, to $1.005
billion for 2005 from $831.1 million for 2004. This increase
was attributable to the addition of stores and same store
revenue growth described above. The 8.3% increase in corporate
furnishings division revenues, to $117.5 million for 2005 from
$108.5 million for 2004, is primarily the result of economic
and business conditions.

COST OF SALES
Retail cost of sales decreased 0.8%, to $39.1 million in 2005
from $39.4 million in 2004, with retail cost of sales as a per-
centage of retail sales decreasing to 66.9% in 2005 from 70.0%
in 2004, primarily due to higher margins on certain retail sales
in our sales and lease ownership division.

Cost of sales from non-retail sales increased to $172.8 million
in 2005 from $149.2 million in 2004, a 15.8% increase, following
the increase in non-retail sales described above, with the margin
on non-retail sales remaining comparable between the periods.

EXPENSES
Operating expenses increased 22.3% to $507.2 million in 2005
from $414.5 million in 2004. The increase was due primarily to
the growth of our sales and lease ownership division described
above. Operating expenses for the year also included the write-off
of $4.4 million of rental merchandise and property destroyed
or severely damaged by Hurricanes Katrina and Rita, of which
approximately $1.9 million was covered by insurance proceeds.
The net pre-tax expense recorded for the year for these damages
was $2.5 million. As a percentage of revenues, operating expenses
increased to 45.1% in 2005 compared to 43.8% in 2004.

The 20.6% increase in depreciation of rental merchandise,
to $305.6 million in 2005 from $253.5 million in 2004, was
driven by the growth of our sales and lease ownership division
described above. As a percentage of total rentals and fees,
depreciation of rental merchandise decreased slightly to 36.2%
in 2005 from 36.5% in 2004.

Interest expense increased 57.4% to $8.5 million in 2005

from $5.4 million in 2004, primarily as a result of higher
debt levels, which increased by 82.6% at December 31, 2005,
compared to December 31, 2004, coupled with increasing
rates on our revolving credit facility, partially offset by a shift
of our borrowings to a new private placement financing in
2005 which had lower rates.

The reduction in the effective tax rate to 37.2% in 2005
compared to 37.7% in 2004 is due to lower state income taxes,
including adjustments resulting from favorable state income
allocations in connection with the Company’s filing of its 2004
tax return. The tax provision reflects the year-to-date effect of
such adjustments.

NET EARNINGS
Net earnings increased to $58.0 million in 2005 from $52.6
million in 2004, a 10.2% improvement. The increase was primarily
due to the maturation of new company-operated sales and lease
ownership stores added over the past several years contributing
to an 8.3% increase in same store revenues, and a 17.9%
increase in franchise fees, royalty income, and other related
franchise income. As a percentage of total revenues, net earnings
decreased to 5.2% in 2005 from 5.6% in 2004 primarily related
to increased expenses in 2005 and merchandise losses due to
Hurricanes Katrina and Rita, as well as a $3.4 million after-tax
gain in 2004 on the sale of Rainbow Rentals, Inc. common stock.

BALANCE SHEET
CASH. The Company’s cash balance increased to $8.8 million
at December 31, 2006 from $7.0 million at December 31, 2005.
Fluctuations in our cash balances are the result of timing differ-
ences between when our stores deposit cash and when that cash
is available for application against borrowings outstanding under
our revolving credit facility. For additional information, refer to
the “Liquidity and Capital Resources” section below.

RENTAL MERCHANDISE. The increase of $61.2 million in rental
merchandise, net of accumulated depreciation, to $612.1 million
at December 31, 2006 from $550.9 million at December 31,
2005, is primarily the result of a net increase of 98 company-
operated stores since December 31, 2005 and the continued
revenue growth of existing company-operated stores.

PROPERTY, PLANT AND EQUIPMENT. The increase of $36.5
million in property, plant and equipment, net of accumulated
depreciation, to $170.3 million at December 31, 2006 from
$133.8 million at December 31, 2005, is primarily the result
of a net increase of 98 company-operated stores since December
31, 2005.

GOODWILL AND OTHER INTANGIBLES. The $14.4 million
increase in goodwill and other intangibles, to $115.4 million
on December 31, 2006 from $101.1 million on December 31,
2005, is the result of a series of acquisitions of sales and lease
ownership businesses, net of amortization of certain finite-life
intangible assets. The aggregate purchase price for these asset
acquisitions totaled $32.4 million, with the principal tangible
assets acquired consisting of rental merchandise and certain
fixtures and equipment. Additionally, during 2006 we sold the
assets of 12 stores located in Puerto Rico and reduced goodwill
by $1.0 million in conjunction with this sale.

PREPAID EXPENSES AND OTHER ASSETS. Prepaid expenses
and other assets increased $6.5 million to $29.4 million at
December 31, 2006 from $23.0 million at December 31, 2005
primarily as a result of an increase in prepaid workers
compensation insurance.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES. The increase
of $8.2 million in accounts payable and accrued expenses, to
$121.0 million at December 31, 2006 from $112.8 million at
December 31, 2005, is primarily the result of an increase in
current income taxes payable.

DEFERRED INCOME TAXES PAYABLE. The increase of $18.5
million in deferred income taxes payable to $93.7 million at
December 31, 2006 from $75.2 million at December 31, 2005
is primarily the result of accelerated rental merchandise
depreciation deductions for tax purposes.

CREDIT FACILITIES AND SENIOR NOTES. The $81.9 million
decrease in the amounts we owe under our credit facilities to
$130.0 million on December 31, 2006 from $211.9 million on
December 31, 2005, reflects net payments under our revolving

credit facility during 2006 with cash generated from operations
and our 2006 stock offering. Additionally, we made a $10.0
million repayment on our senior unsecured notes in the third
quarter of 2006.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL
Cash flows generated from and (used by) operating activities
for the years ended December 31, 2006 and 2005 were $75.0
million and $(6.5) million, respectively. Our primary capital
requirements consist of buying rental merchandise for both
sales and lease ownership and corporate furnishings stores. As
Aaron Rents continues to grow, the need for additional rental
merchandise will continue to be our major capital requirement.
Other capital requirements include purchases of property, plant
and equipment and expenditures for acquisitions. These capital
requirements historically have been financed through:

• cash flow from operations;
• bank credit;
• trade credit with vendors;
• proceeds from the sale of rental return merchandise;
• private debt offerings; and
• stock offerings.

In May 2006, we completed an underwritten public offering

of 3.45 million newly-issued shares of our common stock for
net proceeds, after the underwriting discount and expenses, of
approximately $84.0 million. We used the proceeds to repay
borrowings under our revolving credit facility. The Company’s
Chairman, Chief Executive Officer and controlling shareholder
sold an additional 1,150,000 shares in the offering.

At December 31, 2006, $15.6 million was outstanding under

our revolving credit agreement. The credit facilities balance
decreased by $81.9 million in 2006 primarily as a result of net
payments made under our credit facility during the period with
cash generated from operations and proceeds from the stock
offering in the second quarter of 2006. We renegotiated our
revolving credit agreement on February 27, 2006, extending
the life of the agreement until May 28, 2008 and increasing the
total available credit to $140.0 million. We have $30.0 million
currently outstanding in aggregate principal amount of 6.88%
senior unsecured notes due August 2009, the first principal
repayments for which were due and paid in 2005 in the
aggregate amount of $10.0 million, with annual $10.0 million
repayments due until August 2009. Additionally, we have
$60.0 million currently outstanding in aggregate principal
amount of 5.03% senior unsecured notes due July 2012,
principal repayments for which are first required in 2008.

Our revolving credit agreement, senior unsecured notes, and
the former construction and lease facility and franchisee loan
program discussed below, contain financial covenants which,
among other things, forbid us from exceeding certain debt to
equity levels and require us to maintain minimum fixed charge
coverage ratios. If we fail to comply with these covenants, we

will be in default under these agreements, and all amounts would
become due immediately. We were in compliance with all of these
covenants at December 31, 2006.

On February 27, 2007, we amended the franchise loan facility
and guaranty to increase the maximum commitment amount from
$115.0 million to $125.0 million.

We purchase our common shares in the market from time to
time as authorized by our board of directors. As of December 31,
2006, Aaron Rents was authorized by its board of directors to
purchase up to an additional 2,670,502 common shares under
previously approved resolutions.

We have a consistent history of paying dividends, having paid

dividends for 20 consecutive years. A $.013 per share dividend
on Common Stock and Class A Common Stock was paid in January
2005, April 2005, and July 2005. Our board of directors increased
the dividend for the third quarter of 2005 to $.014 per share
from the previous quarterly dividend of $.013 per share. The
payment for the third quarter of 2005 was distributed in October
2005 for a total fiscal year cash outlay of $2.6 million. A $.014
per share dividend on Common Stock and Class A Common Stock
was paid in January 2006, April 2006, July 2006, and October
2006 for a total cash outlay of $2.9 million in 2006. Our board
of directors increased the dividend 7.1% for the fourth quarter of
2006 on November 7, 2006 to $.015 per share from the previous
quarterly dividend of $.014 per share. The payment for the fourth
quarter was paid in January 2007. Total cash outlay for dividends
was $2.9 million and $2.6 million for the years ended December
31, 2006 and 2005, respectively. Subject to sufficient operating
profits, any future capital needs and other contingencies, we
currently expect to continue our policy of paying dividends.

If we achieve our expected level of growth in our operations,

we anticipate we will supplement our expected cash flows from
operations, existing credit facilities, vendor credit, and proceeds
from the sale of rental return merchandise by expanding our
existing credit facilities, by securing additional debt financing,
or by seeking other sources of capital to ensure we will be able
to fund our capital and liquidity needs for at least the next 24
months. We believe we can secure these additional sources of
capital in the ordinary course of business.

COMMITMENTS
CONSTRUCTION AND LEASE FACILITY. On October 31, 2006,
our $25 million construction and lease facility expired. On
October 30, 2006, we purchased the 21 properties financed by
this facility for approximately $25.3 million, retained ownership
of eight properties and entered into sale-leaseback transactions
for the remaining 13 properties with an unrelated third party.
No gain or loss was recognized on this transaction.

INCOME TAXES. During 2006, we made $14.3 million in income
tax payments. During 2007, we anticipate that we will make
cash payments for income taxes approximating $40 million. The
Company has benefited in the past from the additional first-year
or “bonus” depreciation allowance under U.S. federal income tax
law, which generally allowed us to accelerate the depreciation on
rental merchandise we acquired after September 10, 2001 and
placed in service prior to January 1, 2005. The Company is
currently receiving benefits from bonus depreciation related
to its operations in the Gulf Opportunities Zone. We anticipate
having to make increased future tax payments on our income as
a result of expected profitability and the reversal of the acceler-
ated depreciation deductions that were taken in prior periods.

LEASES. We lease warehouse and retail store space for sub-
stantially all of our operations under operating leases expiring
at various times through 2021. Most of the leases contain
renewal options for additional periods ranging from one to 15
years or provide for options to purchase the related property
at predetermined purchase prices that do not represent bargain
purchase options. We also lease transportation and computer
equipment under operating leases expiring during the next five
years. We expect that most leases will be renewed or replaced
by other leases in the normal course of business.

We have 22 capital leases, 21 of which are with a limited
liability company (“LLC”) whose managers and owners are 14
Aaron Rents’ executive officers and its controlling shareholder,
with no individual, including the controlling shareholder, owning
more than 10.53% of the LLC. Eleven of these related party leases
relate to properties purchased from Aaron Rents in October and
November 2004 by the LLC for a total purchase price of $6.8
million. This LLC is leasing back these properties to Aaron Rents
for a 15-year term, with a five-year renewal at Aaron Rents’
option, at an aggregate annual rental of $883,000. Another ten
of these related party leases relate to properties purchased from
Aaron Rents in December 2002 by the LLC for a total purchase
price of approximately $5.0 million. This LLC is leasing back
these properties to Aaron Rents for a 15-year term at an
aggregate annual rental of $572,000.

During 2006, a property sold by Aaron Rents to a second LLC
controlled by the Company’s major shareholder for $6.3 million
in April 2002 and leased back to Aaron Rents for a 15-year term
at an annual rental of $681,000 was sold to an unrelated third
party. We entered into a new capital lease with the unrelated
third party. No gain or loss was recognized on this transaction.
We finance a portion of our store expansion through sale-

leaseback transactions. The properties are sold at net book
value and the resulting leases qualify and are accounted for as
operating leases. We do not have any retained or contingent

interests in the stores nor do we provide any guarantees, other
than a corporate level guarantee of lease payments, in connec-
tion with the sale-leasebacks. The operating leases that resulted
from these transactions are included in the table below.

FRANCHISE LOAN GUARANTY. We have guaranteed the borrow-
ings of certain independent franchisees under a franchise loan
program with several banks and we also guarantee franchisee
borrowings under certain other debt facilities. At December 31,
2006, the portion that the Company might be obligated to repay
in the event franchisees defaulted was $111.6 million. Of this
amount, approximately $81.3 million represents franchisee
borrowings outstanding under the franchisee loan program and
approximately $30.3 million represents franchisee borrowings

that we guarantee under other debt facilities. However, due to
franchisee borrowing limits, we believe any losses associated
with any defaults would be mitigated through recovery of rental
merchandise and other assets. Since its inception in 1994, we
have had no significant losses associated with the franchisee
loan and guaranty program. The Company believes the likelihood
of any significant amounts being funded in connection with
these commitments to be remote.

We have no long-term commitments to purchase merchandise.

See Note F to the Consolidated Financial Statements for further
information. The following table shows our approximate con-
tractual obligations, including interest, and commitments to
make future payments as of December 31, 2006:

(In Thousands)

Credit Facilities, Excluding Capital Leases

Capital Leases

Operating Leases

Total Contractual Cash Obligations

Total

$109,856

20,118

269,916

$399,890

Period Less
Than 1 Year

Period 2–3
Years

Period 4–5
Years

Period Over
5 Years

$ 10,923

$ 59,623

984

73,970

2,272

99,716

$ 85,877

$161,611

$24,009

2,697

40,811

$67,517

$15,301

14,165

55,419

$84,885

The following table shows the Company’s approximate commercial commitments as of December 31, 2006:

(In Thousands)

Total

Period Less
Than 1 Year

Guaranteed Borrowings of Franchisees

$111,587

Period 2–3
Years

$ —

Period 4–5
Years

$ —

Period Over
5 Years

$ —

Purchase orders or contracts for the purchase of rental
merchandise and other goods and services are not included
in the table above. We are not able to determine the aggregate
amount of such purchase orders that represent contractual
obligations, as purchase orders may represent authorizations
to purchase rather than binding agreements. Our purchase orders
are based on our current distribution needs and are fulfilled by
our vendors within short time horizons. We do not have signifi-
cant agreements for the purchase of rental merchandise or other
goods specifying minimum quantities or set prices that exceed
our expected requirements for three months.

MARKET RISK
From time-to-time, we manage our exposure to changes in
short-term interest rates, particularly to reduce the impact on
floating-rate borrowings, by entering into interest rate swap
agreements. These swap agreements involve the receipt of
amounts by us when floating rates exceed the fixed rates and
the payment of amounts by us to the counterparties when fixed
rates exceed the floating rates in the agreements over their term.
We accrue the differential we may pay or receive as interest rates
change, and recognize it as an adjustment to the floating rate
interest expense related to our debt. The counterparties to these
contracts are high credit quality commercial banks, which we
believe largely minimize the risk of counterparty default.
At December 31, 2006 and 2005 we did not have any

swap agreements.

We do not use any market risk sensitive instruments to hedge

commodity, foreign currency, or risks other than interest rate
risk, and hold no market risk sensitive instruments for trading
or speculative purposes.

RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board
(“FASB”) issued FASB Interpretation 48, Accounting for Income
Tax Uncertainties (“FIN 48”). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial
statements as “more-likely-than-not” to be sustained by the
taxing authority. The recently issued literature also provides
guidance on the derecognition, measurement and classification
of income tax uncertainties, along with any related interest and
penalties. FIN 48 also includes guidance concerning accounting
for income tax uncertainties in interim periods and increases
the level of disclosures associated with any recorded income
tax uncertainties. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The differences between the amounts
recognized in the statements of financial position prior to the
adoption of FIN 48 and the amounts reported after adoption
will be accounted for as a cumulative-effect adjustment recorded
to the beginning balance of retained earnings. We are currently
evaluating the impact of FIN 48 on our financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value

Measurements (“SFAS 157”). SFAS 157 establishes a framework
for measuring the fair value of assets and liabilities which is
intended to provide increased consistency in how fair value
determinations are made under various existing accounting
standards which permit, or in some cases require, estimates
of fair value market value. SFAS 157 also expands financial
statement disclosure requirements about the use of fair value
measurements, including the effect of such measures on earnings.
SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods
within those years. We are currently evaluating the impact of
this Statement on our financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair

Value Option for Financial Assets and Financial Liabilities —
Including an Amendment of SFAS No. 115 (“SFAS 159”). SFAS
159 permits an entity to choose to measure many financial
instruments and certain other items at fair value. SFAS 159
is effective for financial statements issued for fiscal years
beginning after November 15, 2007. We are currently evaluating
the impact of this Statement on our financial statements.

Consolidated Balance Sheets

(In Thousands, Except Share Data)

ASSETS
Cash

Accounts Receivable (net of allowances of $3,037

in 2006 and $2,742 in 2005)

Rental Merchandise

Less: Accumulated Depreciation

Property, Plant and Equipment, Net

Goodwill and Other Intangibles, Net

Prepaid Expenses and Other Assets

Total Assets

LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts Payable and Accrued Expenses

Dividends Payable

Deferred Income Taxes Payable

Customer Deposits and Advance Payments

Credit Facilities

Total Liabilities

Commitments and Contingencies

Shareholders’ Equity:

Common Stock, Par Value $.50 Per Share; Authorized:
100,000,000 Shares; Shares Issued: 48,439,602 and
44,989,602 at December 31, 2006 and 2005, respectively

Class A Common Stock, Par Value $.50 Per Share;
Authorized: 25,000,000 Shares; Shares Issued:
12,063,856 at December 31, 2006 and 2005

Additional Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive Loss

Less: Treasury Shares at Cost,

Common Stock, 2,696,781 and 3,358,521 Shares at

December 31, 2006 and 2005, respectively

Class A Common Stock, 3,667,623 Shares at

December 31, 2006 and 2005

Total Shareholders’ Equity

Total Liabilities and Shareholders’ Equity

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

December 31,
2006

December 31,
2005

$ 8,807

6,973

43,495

925,534

(313,385)

612,149

170,294

115,436

29,425

$979,606

42,812

811,335

(260,403)

550,932

133,759

101,085

22,954

$858,515

$121,018

$112,817

811

93,687

27,101

129,974

372,591

699

75,197

23,458

211,873

424,044

24,220

22,495

6,032

183,966

424,991

—

639,209

6,032

92,852

349,377

(14)

470,742

(16,290)

(20,367)

(15,904)

607,015

$979,606

(15,904)

434,471

$858,515

Consolidated Statements of Earnings

(In Thousands, Except Per Share)

REVENUES
Rentals and Fees
Retail Sales
Non-Retail Sales
Franchise Royalties and Fees
Other

COSTS AND 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

Year Ended
December 31,
2006

Year Ended
December 31,
2005

Year Ended
December 31,
2004

$ 992,791
62,319
224,489
33,626
13,367
1,326,592

41,262
207,217
579,565
364,109
9,729
1,201,882
124,710
46,075
78,635
1.50
1.47

$
$

$ 845,162
58,366
185,622
29,781
6,574
1,125,505

39,054
172,807
507,158
305,630
8,519
1,033,168
92,337
34,344
57,993
1.16
1.14

$
$

$694,293
56,259
160,774
25,253
9,901
946,480

39,380
149,207
414,518
253,456
5,413
861,974
84,506
31,890
$ 52,616
1.06
$
1.04

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

Consolidated Statements of Shareholders’ Equity

(In Thousands, Except Per Share)

BALANCE, JANUARY 1, 2004
Dividends, $.039 per share
Stock Dividend
Reissued Shares
Net Earnings
Change in Fair Value of Financial

Instruments, Net of Income Taxes of $119

BALANCE, DECEMBER 31, 2004
Dividends, $.054 per share
Reissued Shares
Net Earnings
Change in Fair Value of Financial

Instruments, Net of Income Taxes of $284

BALANCE, DECEMBER 31, 2005
Dividends, $.057 per share
Stock-Based Compensation
Reissued Shares
Stock Offering
Net Earnings
Change in Fair Value of Financial

Instruments, Net of Income Taxes of $8

Treasury Stock

Amount

Common Stock

Common

Class A

Additional
Paid-In
Capital

(7,891)

($40,061) $14,997

$4,021

$ 88,305

598

2,142

7,498

2,011

(80)
2,807

(7,293)

(37,919)

22,495

6,032

91,032

267

1,648

1,820

(7,026)

(36,271)

22,495

6,032

92,852

662

4,077

1,725

3,671
5,169
82,274

Retained
Earnings

$252,924
(1,954)
(9,509)

52,616

294,077
(2,693)

57,993

349,377
(3,021)

78,635

Accumulated Other
Comprehensive
(Loss) Income

Derivatives
Designated Marketable
Securities
As Hedges

($ 941)

941

662

(1,201)

(279)

(260)

279

—

246

(14)

BALANCE, DECEMBER 31, 2006

(6,364)

($32,194) $24,220

$6,032

$183,966

$424,991

$ — $ —

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

Consolidated Statements of Cash Flows

(In Thousands)

OPERATING ACTIVITIES:
Net Earnings

Depreciation and Amortization

Additions to Rental Merchandise

Book Value of Rental Merchandise Sold or Disposed

Change in Deferred Income Taxes

Gain on Marketable Securities

Loss on Sale of Property, Plant and Equipment

Gain on Asset Dispositions

Change in Income Tax Receivable,

Prepaid Expenses and Other Assets

Change in Accounts Payable and Accrued Expenses

Change in Accounts Receivable

Excess Tax Benefits from Stock-Based Compensation

Other Changes, Net

Cash Provided by (Used by) Operating Activities

INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment

Contracts and Other Assets Acquired

Proceeds from Sale of Marketable Securities

Investment in Marketable Securities

Proceeds from Asset Dispositions

Proceeds from Sale of Property, Plant and Equipment

Cash Used by Investing Activities

FINANCING ACTIVITIES:
Proceeds from Sale of Senior Notes

Proceeds from Credit Facilities

Repayments on Credit Facilities

Proceeds from Stock Offering

Dividends Paid

Excess Tax Benefits from Stock-Based Compensation

Issuance of Stock Under Stock Option Plans

Cash Provided by Financing Activities

Increase in Cash

Cash at Beginning of Year

Cash at End of Year

Cash Paid During the Year:

Interest

Income Taxes

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

Year Ended
December 31,
2006

Year Ended
December 31,
2005

Year Ended
December 31,
2004

78,635

$ 57,993

$ 52,616

395,581

(681,716)

263,092

18,490

—

128

(7,246)

(805)

8,381

(683)

(3,855)

4,959

74,961

(95,482)

(32,397)

—

16,005

31,281

(80,593)

—

302,587

(384,814)

83,999

(2,909)

3,855

4,748

7,466

1,834

6,973

8,807

333,131

(647,657)

233,861

(20,261)

(579)

148

—

18,553

17,025

(10,076)

—

11,375

(6,487)

(61,449)

(47,907)

6,993

—

1,182

14,000

277,187

(528,255)

206,589

39,919

(5,481)

—

(20,023)

4,118

(1,858)

—

9,842

34,738

(37,723)

(40,822)

7,592

(6,436)

2,325

4,760

(87,181)

(70,304)

60,000

450,854

(415,636)

—

(2,641)

—

2,199

94,776

1,108

5,865

6,973

—

287,307

(250,222)

—

(2,042)

—

1,701

36,744

1,178

4,687

5,865

10,000

14,273

8,395

51,228

5,361

16,783

Notes to Consolidated Financial Statements

NOTE A: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

AS OF DECEMBER 31, 2006 AND 2005, AND FOR THE YEARS
ENDED DECEMBER 31, 2006, 2005 AND 2004.

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 preparation
of the Company’s consolidated financial statements in conformity
with United States generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those
estimates. Generally, actual experience has been consistent with
management’s prior estimates and assumptions. Management
does not believe these estimates or assumptions will change sig-
nificantly in the future absent unsurfaced or unforeseen events.
In May 2006, the Company completed an underwritten public
offering of 3.45 million newly-issued shares of common stock for
net proceeds, after the underwriting discount and expenses, of
approximately $84.0 million. The Company used the proceeds
to repay borrowings under the revolving credit facility. The
Company’s Chairman, Chief Executive Officer and controlling
shareholder sold an additional 1,150,000 shares in the offering.
On July 12, 2004, the Company announced a 3-for-2 stock

split effected in the form of a 50% stock dividend on both
Common Stock and Class A Common Stock. New shares were
distributed on August 16, 2004 to shareholders of record as
of the close of business on August 2, 2004. All share and per
share information has been restated for all periods presented
to reflect this stock dividend.

Certain reclassifications have been made to the prior periods
to conform to the current period presentation. In previous years
certain franchise other income was included in other income and
has been reclassified to franchise royalties and fees.

LINE OF BUSINESS — The Company is engaged in the business
of renting and selling residential and office furniture, consumer
electronics, appliances, computers, and other merchandise
throughout the U.S. and Canada. The Company manufactures
furniture principally for its sales and lease ownership and
corporate furnishings operations.

RENTAL MERCHANDISE — The Company’s rental merchandise
consists primarily of residential and office furniture, consumer
electronics, appliances, computers, and other merchandise and
is recorded at cost. The sales and lease ownership division
depreciates merchandise over the rental agreement period,
generally 12 to 24 months when on rent and 36 months when
not on rent, to a 0% salvage value. The corporate furnishings
division depreciates merchandise over its estimated useful life,

which ranges from six months to 60 months, net of its salvage
value, which ranges from 0% to 60% of historical cost. The
Company’s policies require weekly rental merchandise counts by
store managers, which include write-offs for unsalable, damaged,
or missing merchandise inventories. Full physical inventories are
generally taken at the fulfillment and manufacturing facilities
on a quarterly basis, and appropriate provisions are made for
missing, damaged and unsalable merchandise. In addition, the
Company monitors rental merchandise levels and mix by division,
store, and fulfillment center, as well as the average age of
merchandise on hand. If unsalable rental merchandise cannot
be returned to vendors, it is adjusted to its net realizable
value or written off.

All rental merchandise is available for rental or sale. On a

monthly basis, all damaged, lost or unsalable merchandise
identified is written off. Effective September 30, 2004, the
Company began recording rental merchandise adjustments on
the allowance method. In connection with the adoption of this
method, a one-time adjustment of $2.5 million was recorded
to establish a rental merchandise allowance reserve. Rental
merchandise adjustments in the future under this new method
are expected to be materially consistent with the prior year’s
adjustments under the direct-write off method. The 2005 rental
merchandise adjustments include write-offs of merchandise in the
third quarter that resulted from losses associated with Hurricanes
Katrina and Rita. These hurricane related write-offs were $2.8
million, net of insurance proceeds. Rental merchandise write-offs,
including the effect of the establishment of the reserve men-
tioned above, totaled $20.8 million, $21.8 million, and $18.0
million during the years ended December 31, 2006, 2005, and
2004, respectively, and are included in operating expenses in
the accompanying consolidated statements of earnings.

PROPERTY, PLANT AND EQUIPMENT — The Company records
property, plant, and equipment at cost. Depreciation and
amortization are computed on a straight-line basis over the
estimated useful lives of the respective assets, which are from
eight to 40 years for buildings and improvements and from
one to five years for other depreciable property and equipment.
Gains and losses related to dispositions and retirements are
recognized as incurred. Maintenance and repairs are also
expensed as incurred; renewals and betterments are capitalized.
Depreciation expense, included in operating expenses in the
accompanying consolidated statements of earnings, for property,
plant, and equipment was $29.1 million, $25.6 million, and
$22.2 million during the years ended December 31, 2006,
2005, and 2004, respectively.

GOODWILL AND OTHER INTANGIBLES — Goodwill represents
the excess of the purchase price paid over the fair value of
the net tangible and identifiable intangible assets acquired in
connection with business acquisitions. The Company accounts

for goodwill and other intangible assets in accordance with
Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets (SFAS No. 142). SFAS No. 142
requires that entities assess the fair value of the net assets
underlying all acquisition-related goodwill on a reporting unit
basis. When the fair value is less than the related carrying value,
entities are required to reduce the carrying value of goodwill. The
approach to evaluating the recoverability of goodwill as outlined
in SFAS No. 142 requires the use of valuation techniques using
estimates and assumptions about projected future operating
results and other variables. The Company has elected to perform
this annual evaluation on September 30. More frequent evalua-
tions will be completed if indicators of impairment become
evident. The impairment approach required by SFAS No. 142
may have the effect of increasing the volatility of the Company’s
earnings if goodwill impairment occurs at a future date. Other
intangibles represent the value of customer relationships
acquired in connection with business acquisitions as well as
acquired franchise development rights, recorded at fair value as
determined by the Company. As of December 31, 2006 and 2005,
the net intangibles other than goodwill were $3.4 million and
$3.6 million, respectively. The customer relationship intangible
is amortized on a straight-line basis over a two-year useful life
while acquired franchise development rights are amortized over
the unexpired life of the franchisee’s ten year area development
agreement. Amortization expense on intangibles, included in
operating expenses in the accompanying consolidated statements
of earnings, was $2.4 million, $2.0 million, and $1.6 million
during the years ended December 31, 2006, 2005, and
2004, respectively.

IMPAIRMENT — The Company assesses its long-lived assets other
than goodwill for impairment whenever facts and circumstances
indicate that the carrying amount may not be fully recoverable.
To analyze recoverability, the Company projects undiscounted net
future cash flows over the remaining life of such assets. If these
projected cash flows were less than the carrying amount, an
impairment would be recognized, resulting in a write-down of
assets with a corresponding charge to earnings. Impairment
losses, if any, are measured based upon the difference between
the carrying amount and the fair value of the assets.

INVESTMENTS IN MARKETABLE SECURITIES — At times, the
Company holds certain marketable equity securities and has
designated these securities as available-for-sale. The fair value
of these securities was $59,000 as of December 31, 2005. This
amount is included in prepaid expenses and other assets in the
accompanying consolidated balance sheet. In May of 2004,
the Company sold its holdings in Rainbow Rentals, Inc. with a
cost basis of $2.1 million for cash proceeds of $7.6 million in
connection with Rent-A-Center, Inc.’s acquisition of Rainbow
Rentals, Inc. The Company recognized an after-tax gain of
$3.4 million on this transaction. In May and June of 2005, the
Company sold its holdings in Rent-Way, Inc. with a cost basis
of $6.4 million for cash proceeds of $7.0 million. The Company
recognized an after-tax gain of $355,000 on this transaction. In
connection with this gain recognition, $355,000 and $3.4 million

was transferred from unrealized gains within accumulated other
comprehensive income to net income on the accompanying
Consolidated Statements of Earnings for the years ended
December 31, 2005 and 2004, respectively.

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.

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 accompanying consolidated balance sheets,
was $346,000 at December 31, 2004, based upon quotes from
financial institutions. At December 31, 2004 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. At December 31, 2006 and 2005 the
Company did not have any swap agreements.

At December 31, 2006 and 2005, the fair market value of
fixed rate long-term debt was $88.9 million and $113.9 million,
respectively, based on quoted prices for similar instruments.

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.
Until all payments are received under sales and lease ownership
agreements, the Company maintains ownership of the rental mer-
chandise. Revenues from the sale of merchandise to franchisees
are recognized at the time of receipt of the merchandise by
the franchisee, and revenues from such sales to other customers
are recognized at the time of shipment, at which time title and
risk of ownership are transferred to the customer. Please refer
to Note I for discussion of recognition of other franchise
related revenues.

COST OF SALES — Included in cost of sales is 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
corporate furnishings division. It is not practicable to allocate
operating expenses between selling and rental operations.

SHIPPING AND HANDLING COSTS — The Company classifies
shipping and handling costs as operating expenses in the
accompanying consolidated statements of earnings and these
costs totaled $45.0 million in 2006, $40.5 million in 2005, and
$31.1 million in 2004.

ADVERTISING — The Company expenses advertising costs as
incurred. Advertising costs are recorded as expense the first
time an advertisement appears. Such costs aggregated to $28.3
million in 2006, $27.1 million in 2005, and $22.4 million in
2004. In addition, certain advertising expenses were offset by
cooperative advertising consideration received from vendors,
substantially all of which represents reimbursement of specific,

Notes to Consolidated Financial Statements

The Company has in the past granted stock options for a fixed

Basic — as reported

identifiable, and incremental costs incurred in selling those ven-
dors’ products. The prepaid advertising asset was $2.0 million
and $3.4 million at December 31, 2006 and 2005, respectively.

STOCK-BASED COMPENSATION — The Company has stock-based
employee compensation plans, which are more fully described in
Note H below. Prior to January 1, 2006, the Company accounted
for awards granted under those plans following the recognition
and measurement principles of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Effective January 1, 2006, the Company
adopted the fair value recognition provisions of the Financial
Accounting Standards Board’s (“FASB”) Statement of Financial
Accounting Standards (“SFAS”) No. 123(R), Share-Based Payments
(“SFAS 123R”), using the modified prospective application
method. Under this transition method, compensation expense
recognized in the year ended December 31, 2006 includes the
applicable amounts of compensation expense of all stock-based
payments granted prior to, but not yet vested, as of January 1,
2006, based on the grant-date fair value estimated in accordance
with the original provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (“SFAS 123”), and previously
presented in the pro forma footnote disclosures.

number of shares to employees primarily with an exercise price
equal to the fair value of the shares at the date of grant and,
accordingly, recognized no compensation expense for these stock
option grants. The Company did not grant any stock options in
2006. The Company also has granted stock options for a fixed
number of shares to certain key executives with an exercise price
below the fair value of the shares at the date of grant (“Key
Executive grants”). Compensation expense for Key Executive
grants is recognized over the three-year vesting period of the
options for the difference between the exercise price and the fair
value of a share of Common Stock on the date of grant times the
number of options granted. Income tax benefits resulting from
stock option exercises credited to additional paid-in capital
totaled $5.2 million, $1.9 million, and $3.2 million in 2006,
2005, and 2004, respectively.

The Company amended the Key Executive grants in 2006 and
raised the exercise price of each of the stock options to the fair
market value of the common stock on the original grant date,
adjusted for a 3-for-2 stock dividend that occurred on August 2,
2004 in the case of those stock options with an original grant
date that preceded the stock dividend date. The amendment
also provides that, in order to compensate the grantees for
the increase in the exercise price of the stock options, the
full original discounted amount will be paid in cash on the
applicable 2007 vesting date.

Under the modified prospective application method, results for

prior periods have not been restated to reflect the effects of
implementing SFAS 123R. For purposes of pro forma disclosures
under SFAS 123 as amended by SFAS No. 148, Accounting for Stock-
Based Compensation — Transition and Disclosure — an amendment
of FASB Statement 123, the estimated fair value of the options
is amortized to expense over the options’ vesting period. The
following table illustrates the effect on net earnings and earnings
per share if the fair value based method had been applied to all
outstanding and unvested awards for the following periods:

(In Thousands, Except Per Share)

Net Earnings before effect
of Key Executive grants

Expense effect of Key
Executive grants recognized

Net earnings as reported

Stock-based Employee Compensation
Cost, Net of Tax — Pro Forma

Pro forma net earnings

Earnings per share:

Basic — pro forma

Diluted — as reported

Diluted — pro forma

Year Ended
December 31,
2005

Year Ended
December 31,
2004

$58,522

$52,854

(529)

57,993

(1,996)

$55,997

$ 1.16

$ 1.12

$ 1.14

$ 1.10

(238)

52,616

(1,687)

$50,929

$ 1.06

$ 1.03

$ 1.04

$ 1.01

INSURANCE RESERVES — Estimated insurance reserves are
accrued primarily for group health and workers compensation
benefits provided to the Company’s employees. Estimates for
these insurance reserves are made based on actual reported but
unpaid claims and actuarial analyses of the projected claims run
off for both reported and incurred but not reported claims.

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 portion
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 and the
derivative instrument. The Company records amounts to be
received or paid as a result of interest swap agreements as an
adjustment to interest expense. Generally, the Company’s interest
rate swaps are designated as cash flow hedges. The Company
does not enter into derivatives for speculative or trading
purposes. At December 31, 2006 and 2005 the Company
did not have any swap agreements.

COMPREHENSIVE INCOME — For the years ended December 31,
2006, 2005 and 2004, comprehensive income totaled $78.6
million, $58.0 million, and $52.1 million, respectively.

NEW ACCOUNTING PRONOUNCEMENTS — In July 2006, the
FASB issued FASB Interpretation 48, Accounting for Income
Tax Uncertainties (“FIN 48”). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial
statements as “more-likely-than-not” to be sustained by the
taxing authority. The recently issued literature also provides
guidance on the derecognition, measurement and classification
of income tax uncertainties, along with any related interest and
penalties. FIN 48 also includes guidance concerning accounting
for income tax uncertainties in interim periods and increases
the level of disclosures associated with any recorded income tax
uncertainties. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The differences between the amounts recog-
nized in the statements of financial position prior to the adoption
of FIN 48 and the amounts reported after adoption will be
accounted for as a cumulative-effect adjustment recorded to the
beginning balance of retained earnings. The Company is currently
evaluating the impact of FIN 48 on its financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value

Measurements (“SFAS 157”). SFAS 157 establishes a framework
for measuring the fair value of assets and liabilities which is
intended to provide increased consistency in how fair value
determinations are made under various existing accounting
standards which permit, or in some cases require, estimates
of fair value market value. SFAS 157 also expands financial
statement disclosure requirements about the use of fair value
measurements, including the effect of such measures on earnings.
SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods
within those years. The Company is currently evaluating the
impact of this Statement on its financial statements.

In February 2007, the FASB issues SFAS No. 159, The Fair

Value Option for Financial Assets and Financial Liabilities —
Including an Amendment of SFAS No. 115 (“SFAS 159”). SFAS
159 permits an entity to choose to measure many financial
instruments and certain other items at fair value. SFAS is effec-
tive for financial statements issued for fiscal years beginning
after November 15, 2007. The Company is currently evaluating
the impact of this Statement on its financial statements.

NOTE B: EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the
weighted average number of Common Stock and Class A Common
Stock outstanding during the year, which were approximately
52,545,000 shares in 2006, 49,846,000 shares in 2005, and
49,602,000 shares in 2004. The computation of earnings per
share assuming dilution includes the dilutive effect of stock
options and awards. Such stock options and awards had the
effect of increasing the weighted average shares outstanding
assuming dilution by approximately 832,000 in 2006,
959,000 in 2005, and 973,000 in 2004.

NOTE C: PROPERTY, PLANT AND EQUIPMENT
Following is a summary of the Company’s property, plant, and
equipment at December 31:

(In Thousands)

Land

2006

2005

$ 26,195

$ 15,934

Buildings and Improvements

Leasehold Improvements and Signs

Fixtures and Equipment

Assets Under Capital Lease:

with Related Parties

with Unrelated Parties

Construction in Progress

57,373

79,543

54,148

9,534

10,564

10,719

46,805

72,842

45,343

15,734

1,475

6,449

Less: Accumulated Depreciation

and Amortization

248,076

204,582

(77,782)

(70,823)

$170,294

$133,759

NOTE D: CREDIT FACILITIES
Following is a summary of the Company’s credit facilities
at December 31:

(In Thousands)

Bank Debt

Senior Unsecured Notes

Capital Lease Obligation:

with Related Parties

with Unrelated Parties

Other Debt

2006

2005

$ 15,612

$ 91,336

90,000

100,000

10,095

10,022

4,245

16,141

1,066

3,330

$129,974

$211,873

BANK DEBT — The Company has a revolving credit agreement
with several banks providing for unsecured borrowings up to
$140.0 million. Amounts borrowed bear interest at the lower
of the lender’s prime rate or LIBOR plus 87.5 basis points. The
pricing under the working capital line is based upon overnight
bank borrowing rates. At December 31, 2006 and 2005,
respectively, an aggregate of $15.6 million (bearing interest
at 6.22%) and $81.3 million (bearing interest at 5.35%) was
outstanding under the revolving credit agreement. The Company
pays a .20% commitment fee on unused balances. The weighted
average interest rate on borrowings under the revolving credit
agreement (before giving effect to interest rate swaps in 2004)
was 5.97% in 2006, 4.42% in 2005, and 2.72% in 2004. The
revolving credit agreement expires May 28, 2008.

The revolving credit agreement contains financial covenants
which, among other things, forbid the Company from exceeding
certain debt to equity levels and require the maintenance of
minimum fixed charge coverage ratios. If the Company fails to
comply with these covenants, the Company will be in default

Notes to Consolidated Financial Statements

under these agreements, and all amounts would become
due immediately. The Company was in compliance with all of
these covenants at December 31, 2006. At December 31, 2006,
$96.5 million of retained earnings was available for dividend
payments and stock repurchases under the debt restrictions,
and the Company was in compliance with all covenants.

On December 18, 2005 the Company entered into an $18.0
million demand note as a means of temporary financing and
at December 31, 2005 $10.0 million was outstanding at a rate
of LIBOR plus 100 basis points.

SENIOR UNSECURED NOTES — On August 14, 2002, the
Company sold $50.0 million in aggregate principal amount of
senior unsecured notes in a private placement to a consortium
of insurance companies. The unsecured notes bear interest at a
rate of 6.88% per year and mature August 13, 2009. Quarterly
interest only payments at an annual rate of 6.88% are due for
the first two years followed by annual $10,000,000 principal
repayments plus interest for the five years thereafter. The notes
were amended in July 2005 as a result of entry into a note
purchase agreement for an additional $60.0 million in senior
unsecured notes to the purchasers in a private placement. The
agreement was amended for the purpose of permitting the new
issuance of the notes and amending the negative covenants in
the revolving credit agreement.

On July 27, 2005, the Company entered into a note purchase
agreement with a consortium of insurance companies. Pursuant
to this agreement, the Company and its two subsidiaries as
co-obligors issued $60.0 million in senior unsecured notes to
the purchasers in a private placement. The notes bear interest at
a rate of 5.03% per year and mature on July 27, 2012. Interest
only payments are due quarterly for the first two years, followed
by annual $12 million principal repayments plus interest for the
five years thereafter. The $50.0 million note purchase agreement,
of which $30.0 million is outstanding as of December 31, 2006,
contains financial maintenance covenants, negative covenants
regarding the Company’s other indebtedness, its guarantees and
investments, and other customary covenants substantially similar
to the covenants in the Company’s note purchase agreement,
revolving credit facility, and its former construction and lease
facility, as modified by the amendments described herein.

CAPITAL LEASES WITH RELATED PARTIES — In October and
November 2004, the Company sold eleven properties, including
leasehold improvements, to a limited liability company (“LLC”)

controlled by a group of Company executives, including the
Company’s Chairman, Chief Executive Officer, and controlling
shareholder. The LLC obtained borrowings collateralized by the
land and buildings totaling $6.8 million. The Company occupies
the land and buildings collateralizing the borrowings under a
15-year term lease, with a five-year renewal at the Company’s
option, at an aggregate annual rental of $883,000. The transac-
tion has been accounted for as a financing in the accompanying
consolidated financial statements. The rate of interest implicit
in the leases is approximately 9.7%. Accordingly, the land and
buildings, associated depreciation expense, and lease obligations
are recorded in the Company’s consolidated financial statements.
No gain or loss was recognized in this transaction.

In December 2002, the Company sold ten properties, including
leasehold improvements, to the LLC. The LLC obtained borrowings
collateralized by the land and buildings totaling $5.0 million.
The Company occupies the land and buildings collateralizing the
borrowings under a 15-year term lease at an aggregate annual
rental of approximately $572,000. The transaction has been
accounted for as a financing in the accompanying consolidated
financial statements. The rate of interest implicit in the leases
is approximately 11.1%. Accordingly, the land and buildings,
associated depreciation expense, and lease obligations are
recorded in the Company’s consolidated financial statements.
No gain or loss was recognized in this transaction.

During 2006, a property sold by Aaron Rents to a second LLC
controlled by the Company’s major shareholder for $6.3 million
in April 2002 and leased back to Aaron Rents for a 15-year
term at an annual rental of $681,000 was sold to an unrelated
third party. The Company entered into a new capital lease with
the unrelated third party. No gain or loss was recognized on
this transaction.

LEASES — The Company finances a portion of store expansion
through sale-leaseback transactions. The properties are sold at
net book value and the resulting leases qualify and are accounted
for as operating leases. The Company does not have any retained
or contingent interests in the stores nor does the Company
provide any guarantees, other than a corporate level guarantee
of lease payments, in connection with the sale-leasebacks.

OTHER DEBT — Other debt at December 31, 2006 and 2005
includes $3.3 million of industrial development corporation
revenue bonds. The average weighted borrowing rate on these
bonds in 2006 was 3.60%. No principal payments are due on
the bonds until maturity in 2015.

Future maturities under the Company’s credit facilities

are as follows:

(In Thousands)

2007

2008

2009

2010

2011

Thereafter

$11,907

38,716

23,178

13,274

13,433

29,466

NOTE E: INCOME TAXES
Following is a summary of the Company’s income tax expense
for the years ended December 31:

(In Thousands)

2006

2005

2004

Current Income Tax
Expense (Benefit):

Federal

State

Deferred Income

Tax (Benefit) Expense:

Federal

State

$25,453

$50,064

$ (7,720)

2,132

4,541

(309)

27,585

54,605

(8,029)

16,524

(17,751)

35,967

1,966

(2,510)

3,952

18,490

(20,261)

39,919

$46,075

$34,344

$31,890

Significant components of the Company’s deferred income tax

liabilities and assets at December 31 are as follows:

(In Thousands)

2006

2005

Deferred Tax Liabilities:

Rental Merchandise and

Property, Plant and Equipment

$ 99,813

Other, Net

Total Deferred Tax Liabilities

Deferred Tax Assets:

Accrued Liabilities

Advance Payments

Other, Net

Total Deferred Tax Assets

10,273

110,086

5,053

8,959

2,387

16,399

Less Deferred Tax Valuation Allowance

—

Net Deferred Tax Assets

Net Deferred Tax Liabilities

16,399

$ 93,687

$81,388

6,543

87,931

4,915

7,556

3,256

15,727

(2,993)

12,734

$75,197

The Company’s effective tax rate differs from the statutory
U.S. Federal income tax rate for the years ended December 31
as follows:

Statutory Rate

35.0%

2006

2005

2004

Increases in U.S. Federal Taxes

Resulting From:

State Income Taxes, Net of

Federal Income Tax Benefit

Other, Net

Effective Tax Rate

2.1

(.2)

2.2

—

2.8

(.1)

36.9%

37.2%

37.7%

NOTE F: COMMITMENTS
The Company leases warehouse and retail store space for
substantially all of its operations under operating leases expiring
at various times through 2021. The Company also leases certain
properties under capital leases that are more fully described in
Note D. Most of the leases contain renewal options for additional
periods ranging from one to 15 years or provide for options to
purchase the related property at predetermined purchase prices
that do not represent bargain purchase options. In addition,
certain properties occupied under operating leases contain
normal purchase options. The Company also leases transportation
and computer equipment under operating leases expiring during
the next five years. Management expects that most leases will
be renewed or replaced by other leases in the normal course
of business.

Future minimum rental payments required under operating
leases that have initial or remaining non-cancelable terms in
excess of one year as of December 31, 2006, are as follows:
$74.0 million in 2007; $58.4 million in 2008; $41.3 million in
2009; $25.7 million in 2010; $15.2 million in 2011; and $55.4
million thereafter.

The Company has guaranteed certain debt obligations of
some of the franchisees amounting to $111.6 million and $100.6
million at December 31, 2006 and 2005, respectively. Of this
amount, approximately $81.3 million represents franchise
borrowings outstanding under the franchise loan program and
approximately $30.3 million represents franchise borrowings
under other debt facilities at December 31, 2006. The Company
receives guarantee fees based on such franchisees’ outstanding
debt obligations, which it recognizes as the guarantee obligation
is satisfied. The Company has recourse rights to the assets
securing the debt obligations. As a result, the Company has
never incurred any, nor does management expect to incur any,
significant losses under these guarantees. See Note N for
subsequent event disclosures.

Rental expense was $72.0 million in 2006, $59.9 million in

2005, and $50.3 million in 2004.

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

Notes to Consolidated Financial Statements

employees to contribute up to 10% of their annual compensation
with 50% matching by the Company on the first 4% of compen-
sation. The Company’s expense related to the plan was $791,000
in 2006, $676,000 in 2005, and $506,000 in 2004.

NOTE G: SHAREHOLDERS’ EQUITY
The Company held 6,364,404 common shares in its treasury
and was authorized to purchase an additional 2,670,502 shares
at December 31, 2006. The Company’s articles of incorporation
provide that no cash dividends may be paid on the Class A
Common Stock unless equal or higher dividends are paid on
the Common Stock.

If the number of the Class A Common Stock (voting) falls
below 10% of the total number of outstanding shares of the
Company, the Common Stock (non-voting) automatically converts
into Class A Common Stock. The Common Stock may convert
to Class A Common Stock in certain other limited situations
whereby a national securities exchange rule might cause the
Board of Directors to issue a resolution requiring such conversion.
Management considers the likelihood of any conversion to be
remote at the present time.

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

NOTE H: STOCK OPTIONS
Prior to January 1, 2006, the Company accounted for stock
awards granted following the recognition and measurement
principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related inter-
pretations. Effective January 1, 2006, the Company adopted
the fair value recognition provisions of SFAS 123R, using the
modified prospective application method. Under this transition
method, compensation expense recognized in the year ended
December 31, 2006 includes the applicable amounts of com-
pensation expense of all stock-based payments granted prior
to, but not yet vested, as of January 1, 2006, based on
the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”), and previously presented in the
pro forma footnote disclosures.

The Company estimates the fair value for the options granted
on the grant date using a Black-Scholes option-pricing model.
The expected volatility is based on the historical volatility of the
Company’s Common Stock over the most recent period generally
commensurate with the expected estimated life of each respec-
tive grant. The expected lives of options are based on the
Company’s historical share option exercise experience. Forfeiture

assumptions are based on the Company’s historical forfeiture
experience. The Company believes that the historical experience
method is the best estimate of future exercise and forfeiture
patterns currently available. The risk-free interest rates are
determined using the implied yield currently available for zero-
coupon U.S. government issues with a remaining term equal to
the expected life of the options. The expected dividend yields
are based on the approved annual dividend rate in effect and
current market price of the underlying Common Stock at the time
of grant. No assumption for a future dividend rate increase has
been included unless there is an approved plan to increase the
dividend in the near term.

For the pro forma information regarding net income and

earnings per share, the Company recognizes compensation
expense over the explicit service period up to the date of
actual retirement. Upon adoption of SFAS 123R, the Company
is required to recognize compensation expense over a period to
the date the employee first becomes eligible for retirement for
awards granted or modified after the adoption of SFAS 123R.
The results of operations for the year ended December 31,
2006 include $3.5 million in compensation expense related to
unvested grants as of January 1, 2006. At December 31, 2006,
there was $1.8 million of total unrecognized compensation
expense related to non-vested stock options which is expected
to be recognized over a period of 1.75 years. SFAS 123R requires
that the benefits of tax deductions in excess of recognized
compensation expense be reported as financing cash flows,
rather than as operating cash flow as required under prior
guidance. Excess tax benefits of $3.9 million were accordingly
included in cash provided by financing activities for the year
ended December 31, 2006. The related net tax benefit from the
exercise of stock options in the year ended December 31, 2006
was $4.7 million.

Under the Company’s stock option plans, options granted
to date become exercisable after a period of three years and
unexercised options lapse ten years after the date of the grant.
Options are subject to forfeiture upon termination of service.
Under the plans, 712,000 of the Company’s shares are reserved
for future grants at December 31, 2006. The weighted average
fair value of options granted was $8.09 and $5.18 in 2005
and 2004, respectively. The fair value for these options was
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions
for 2005 and 2004, respectively: risk-free interest rates of 3.86%
and 3.16%; a dividend yield of .25% and .28%; a volatility factor
of the expected market price of the Company’s Common Stock of
.43 and .43; weighted average assumptions of forfeiture rates of
5.85% and 9.87%; and weighted average expected lives of the
option of five and four years. The aggregate intrinsic value of
options exercised was $12.7 million, $3.7 million, and $8.6

million in 2006, 2005, and 2004, respectively. The total fair
value of options vested was $4.9 million, $1.2 million, and
$675,000 in 2006, 2005, and 2004, respectively. The
Company did not grant any stock options in 2006.

Shares of restricted stock may be granted to employees and

directors and typically vest over approximately three years.
Restricted stock grants may be subject to one or more objective

The following table summarizes information about stock

options outstanding at December 31, 2006:

employment, performance or other forfeiture conditions as
established at the time of grant. Any shares of restricted stock
that are forfeited will again become available for issuance.
Compensation cost for restricted stock is equal to the fair
market value of the shares at the date of the award and is
amortized to compensation expense over the vesting period.
Total compensation expense related to restricted stock was
$277,000 in 2006.

The following table summarizes information about restricted

stock activity:

(In Thousands)

Outstanding at January 1, 2006

Granted

Vested

Forfeited

Outstanding at December 31, 2006

242

Restricted Weighted Average

Stock

—

244

—

(2)

Grant Price

—

25.40

—

25.40

Range of
Exercise Prices

$ 4.38 – 10.00

10.01 – 15.00

15.01 – 20.00

20.01 – 24.94

$ 4.38 – 24.9

Options Outstanding

Weighted Average

Options Exercisable

Number Outstanding
December 31, 2006

Remaining Contractual Weighted Average Number Exercisable
Exercise price December 31, 2006

Life (in years)

Weighted Average
Exercise Price

1,039,511

376,750

203,250

704,396

2,323,907

3.63

6.72

7.11

7.80

5.70

$ 6.93

14.37

17.37

22.24

$13.69

1,039,511

376,750

83,250

2,000

1,501,511

The table below summarizes option activity for the periods

indicated in the Company’s stock option plans:

Outstanding at January 1, 2006

Granted

Exercised

Forfeited

Outstanding at December 31, 2006

Exercisable at December 31, 2006

Options
(In Thousands)

3,026

—

(660)

(42)

2,324

1,502

Weighted
Average

$11.73

—

6.76

19.32

13.69

$ 9.28

Weighted Average
Remaining
Contractual Term

Aggregate
Intrinsic Value
(In Thousands)

$46,726

—

(12,743)

(809)

31,811

$13,936

5.70 years

4.57 years

The weighted average fair value of unvested options was

$7.83 as of January 1, 2006 and $9.65 as of December 31, 2006.
The weighted average fair value of options that vested during
2006 was $7.23.

$ 6.93

14.37

15.35

21.84

$ 9.28

Weighted
Average
Fair Value

$4.01

—

2.22

8.19

6.58

$4.89

Notes to Consolidated Financial Statements

NOTE I: FRANCHISING OF AARON’S SALES AND
LEASE OWNERSHIP STORES
The Company franchises Aaron’s Sales and Lease Ownership
stores. As of December 31, 2006 and 2005, 674 and 664 fran-
chises had been granted, respectively. Franchisees typically pay
a non-refundable initial franchise fee from $15,000 to $50,000
depending upon market size and an ongoing royalty of either
5% or 6% of gross revenues. Franchise fees and area develop-
ment fees are generated from the sale of rights to develop, own
and operate Aaron’s Sales and Lease Ownership stores. These fees
are recognized as income when substantially all of the Company’s
obligations per location are satisfied, generally at the date of the
store opening. Franchise fees and area development fees received
before the substantial completion of the Company’s obligations
are deferred. Substantially all of the amounts reported as non-
retail sales and non-retail cost of sales in the accompanying
consolidated statements of earnings relate to the sale of rental
merchandise to franchisees.

Franchise agreement fee revenue was $3.1 million, $3.0 million,

and $3.3 million and royalty revenue was $25.4 million, $21.6
million, and $17.8 million for the years ended December 31,
2006, 2005 and 2004, respectively. Deferred franchise and area
development agreement fees, included in customer deposits and
advance payments in the accompanying consolidated balance
sheets, was $4.3 million and $5.2 million as of December 31,
2006 and 2005, respectively.

Franchised Aaron’s Sales and Lease Ownership store activity is

summarized as follows:

Franchised stores open at

January 1,

Opened

Added through acquisition

Purchased from the Company

Purchased by the Company

Closed

Franchised stores open at

December 31,

2006

2005

2004

392

(28)

(1)

357

(35)

(1)

287

(19)

(2)

441

392

357

Company-operated Aaron’s Sales and Lease Ownership store

activity is summarized as follows:

Company-operated stores open

at January 1,

Opened

Added through acquisition

Closed, sold or merged

Company-operated stores open

at December 31,

2006

2005

2004

748

(21)

616

(6)

500

(13)

845

748

616

In 2006, the Company acquired the rental contracts, mer-
chandise, and other related assets of 40 stores, including 28
franchised stores, and merged certain acquired stores into
existing stores, resulting in a net gain of 37 stores. In 2005, the
Company acquired the rental contracts, merchandise, and other
related assets of 96 stores, including 35 franchised stores, and
merged certain acquired stores into existing stores, resulting in a
net gain of 56 stores. In 2004, the Company acquired the rental
contracts, merchandise, and other related assets of 85 stores,
including 19 franchised stores, and merged certain acquired
stores into existing stores, resulting in a net gain of 61 stores.

NOTE J: ACQUISITIONS AND DISPOSITIONS
During 2006, the Company acquired the rental contracts,
merchandise, and other related assets of 40 sales and lease
ownership stores for an aggregate purchase price of $32.4
million. Fair value of acquired tangible assets included $13.3
million for rental merchandise, $1.5 million for fixed assets,
and $154,000 for other assets. Fair value of liabilities assumed
approximated $65,000. The excess cost over the fair value of the
assets and liabilities acquired in 2006, representing goodwill was
$15.5 million. The fair value of acquired separately identifiable
intangible assets included $1.4 million for customer lists and
$885,000 for acquired franchise development rights. The estimated
amortization of these customer lists and acquired franchise
development rights in future years approximates $857,000,
$582,000, $115,000, $112,000, and $106,000 for 2007, 2008,
2009, 2010, and 2011, respectively. The purchase price allocations
for certain acquisitions during December 2006 are preliminary
pending finalization of the Company’s assessment of the fair
values of tangible assets acquired.

During 2005, the Company acquired the rental contracts,
merchandise, and other related assets of 96 sales and lease
ownership stores for an aggregate purchase price of $46.6 mil-
lion. Fair value of acquired tangible assets included $16.8 million
for rental merchandise, $1.5 million for fixed assets, and $1.4
million for other assets. Fair value of liabilities assumed

approximated $.4 million. The excess cost over the fair value
of the assets and liabilities acquired in 2005, representing
goodwill was $24.7 million. The fair value of acquired separately
identifiable intangible assets included $2.6 million for customer
lists and $.4 million for acquired franchise development rights.
The estimated amortization of these customer lists and acquired
franchise development rights in future years approximates $1.8
million, $912,000, $82,000, $60,000, and $52,000 for 2006,
2007, 2008, 2009, and 2010, respectively.

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 2006,
2005 and 2004 consolidated financial statements was
not significant.

The Company sold three, five, and two of its sales and lease

ownership locations to franchisees in 2006, 2005, and 2004,
respectively. The effect of these sales on the consolidated finan-
cial statements was not significant. The Company also sold the
assets of 12 of its sales and lease ownership locations in Puerto
Rico to an unrelated third party in the second quarter of 2006.
The Company received $16.0 million in cash proceeds, recognized
a $7.2 million gain, and disposed of goodwill of $1.0 million in
conjunction with the 2006 sales.

NOTE K: SEGMENTS

DESCRIPTION OF PRODUCTS AND SERVICES OF
REPORTABLE SEGMENTS
Aaron Rents, Inc. has four reportable segments: sales and lease
ownership, corporate furnishings (formerly known as rent-to-
rent), franchise, and manufacturing. The sales and lease owner-
ship division offers electronics, residential furniture, appliances,
and computers to consumers primarily on a monthly payment
basis with no credit requirements. The corporate furnishings divi-
sion 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 franchisees
of its sales and lease ownership concept. The manufacturing
division manufactures upholstered furniture, office furniture,
lamps and accessories, and bedding predominantly for use
by the other divisions.

Earnings before income taxes for each reportable segment are

generally determined in accordance with accounting principles
generally accepted in the United States with the following
adjustments:

• A predetermined amount of each reportable segment’s revenues

is charged to the reportable segment as an allocation of
corporate overhead. This allocation was approximately 2.3%
in 2006, 2005, and 2004.

• Accruals related to store closures are not recorded on the
reportable segments’ financial statements, but are rather
maintained and controlled by corporate headquarters.

• The capitalization and amortization of manufacturing variances
are recorded on the consolidated financial statements as part
of Cash to Accrual and Other Adjustments and are not allocated
to the segment that holds the related rental merchandise.

• Advertising expense in the sales and lease ownership division
is estimated at the beginning of each year and then allocated
to the division ratably over time for management reporting
purposes. For financial reporting purposes, advertising expense
is recognized when the related advertising activities occur. The
difference between these two methods is reflected as part of
the Cash to Accrual and Other Adjustments line below.

• Sales and lease ownership rental merchandise write-offs are
recorded using the direct write-off method for management
reporting purposes and using the allowance method for
financial reporting purposes. The difference between these
two methods is reflected as part of the Cash to Accrual and
Other Adjustments line below.

• Interest on borrowings is estimated at the beginning of each
year. Interest is then allocated to operating segments based
on relative total assets.

• Sales and lease ownership revenues are reported on the

cash basis for management reporting purposes.

Revenues in the “Other” category are primarily from leasing
space to unrelated third parties in the corporate headquarters
building and revenues from several minor unrelated activities.
The pre-tax losses in the “Other” category are the net result of
the activity mentioned above, net of the portion of corporate
overhead not allocated to the reportable segments for man-
agement purposes, and the $565,000 and $5.5 million gains
recognized on the sale of marketable securities in 2005 and
2004, respectively.

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.

Notes to Consolidated Financial Statements

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

(In Thousands)

REVENUES FROM EXTERNAL CUSTOMERS:

Sales and Lease Ownership

Corporate Furnishings

Franchise

Other

Manufacturing

Elimination of Intersegment Revenues

Cash to Accrual Adjustments

Total Revenues from External Customers

EARNINGS BEFORE INCOME TAXES:

Sales and Lease Ownership

Corporate Furnishings

Franchise

Other

Manufacturing

Earnings Before Income Taxes for Reportable Segments

Elimination of Intersegment (Profit) Loss

Cash to Accrual and Other Adjustments

Total Earnings Before Income Taxes

ASSETS:

Sales and Lease Ownership

Corporate Furnishings

Franchise

Other

Manufacturing

Total Assets

DEPRECIATION AND AMORTIZATION:

Sales and Lease Ownership

Corporate Furnishings

Franchise

Other

Manufacturing

Year Ended
December 31,
2006

Year Ended
December 31,
2005

Year Ended
December 31,
2004

$1,167,073

$ 975,026

122,965

33,626

5,791

78,458

(78,221)

(3,100)

117,476

29,781

5,411

83,803

(83,509)

(2,483)

$804,723

108,453

25,253

10,185

70,440

(70,884)

(1,690)

$1,326,592

$1,125,505

$946,480

97,611

63,317

$ 56,578

12,824

23,949

(5,808)

(1,740)

126,836

1,777

(3,903)

10,802

22,143

(585)

1,280

96,957

(1,103)

(3,517)

8,842

18,374

2,118

(175)

85,737

178

(1,409)

$ 124,710

92,337

$ 84,506

$ 779,278

$ 669,376

$524,492

111,134

25,619

30,999

32,576

91,536

26,902

46,355

24,346

83,478

23,495

50,452

18,371

$ 979,606

$ 858,515

$700,288

$ 370,004

$ 309,022

22,229

561

1,454

1,333

20,376

924

1,373

1,436

$255,606

19,213

722

711

935

Total Depreciation and Amortization

$ 395,581

$ 333,131

$277,187

INTEREST EXPENSE:

Sales and Lease Ownership

Corporate Furnishings

Franchise

Other

Total Interest Expense

8,234

1,400

7,326

1,382

(282)

5,197

1,044

(924)

9,729

8,519

5,413

NOTE L: RELATED PARTY TRANSACTIONS
The Company leases certain properties under capital leases
with certain related parties that are more fully described in
Note D above.

As part of its extensive marketing program, the Company has

sponsored professional driver Michael Waltrip’s Aaron’s Dream
Machine in the NASCAR Busch Series. The sons of the president
of the Company’s sales and lease ownership division were paid
by Mr. Waltrip’s company as drivers and raced in 2006 Aaron’s
sponsored cars full time in the USAR Hooters Pro Cup Series.
The amount paid in 2006 by the Company for the sponsorship
of Michael Waltrip attributable to the USAR Hooters Pro Cup
Series was $983,000, adjusted by credits in the amount of
$434,000 for changes from the 2005 racing season. Motor
sports sponsorships and promotions have been an integral part
of the Company’s marketing programs for a number of years.

NOTE M: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(In Thousands, Except Per Share)

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

YEAR ENDED DECEMBER 31, 2006

Revenues

Gross Profit*

Earnings Before Taxes

Net Earnings

Earnings Per Share

Earnings Per Share Assuming Dilution

YEAR ENDED DECEMBER 31, 2005

Revenues

Gross Profit*

Earnings Before Taxes

Net Earnings

Earnings Per Share

Earnings Per Share Assuming Dilution

$347,287

171,965

34,631

21,561

.43

.42

$279,348

142,260

29,618

18,422

.37

.36

$321,727

163,588

31,690

20,650

.40

.39

$271,338

139,797

25,644

16,120

.32

$317,709

162,839

27,625

17,383

.32

$278,667

142,287

13,506

8,843

.18

.17

$339,869

168,619

30,764

19,041

.35

$296,152

147,315

23,569

14,608

.29

* Gross profit is the sum of rentals and fees, retail sales, and non-retail sales less retail cost of sales, non-retail cost of sales, and depreciation of rental merchandise.

NOTE N: SUBSEQUENT EVENT (UNAUDITED)
On February 27, 2007, the Company amended the franchise loan
facility and guaranty to increase the maximum commitment
amount from $115.0 million to $125.0 million.

Management Report on Internal Control
Over Financial Reporting

Management of Aaron Rents, Inc. (the “Company”) is responsible
for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of com-
pliance with the policies or procedures may deteriorate. Internal
control over financial reporting cannot provide absolute assur-
ance of achieving financial reporting objectives because of its
inherent limitations. Internal control over financial reporting
is a process that involves human diligence and compliance and
is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can
be circumvented by collusion or improper management override.
Because of such limitations, there is a risk that material mis-
statements may not be prevented or detected on a timely basis

by internal control over financial reporting. However, these
inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process safe-
guards to reduce, though not eliminate, the risk.

The Company’s management assessed the effectiveness of
the Company’s internal control over financial reporting as of
December 31, 2006. In making this assessment, the Company’s
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework.

Based on our assessment, management believes that, as
of December 31, 2006, the Company’s internal control over
financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm

has issued an audit report on our assessment of the Company’s
internal control over financial reporting. This report appears on
the following page.

February 27, 2007

Report of Independent Registered Public Accounting Firm

THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
AARON RENTS, INC.
We have audited the accompanying consolidated balance sheets
of Aaron Rents, Inc. and Subsidiaries as of December 31, 2006
and 2005, and the related consolidated statements of earnings,
shareholders’ equity, and cash flows for each of the three years
in the period ended December 31, 2006. These financial state-
ments are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial state-
ments 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 esti-
mates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits pro-
vide a reasonable basis for our opinion.

position of Aaron Rents, Inc. and Subsidiaries at December 31,
2006 and 2005, and the consolidated results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.

As discussed in Note A and H in the consolidated financial

statements, in 2006 the Company changed its method of
accounting for share-based compensation as required by
Statement of Financial Accounting Standard No. 123(R),
Share Based Payments.

We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the effectiveness of Aaron Rents, Inc.’s internal control over
financial reporting as of December 31, 2006, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 27, 2007 expressed
an unqualified opinion thereon.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial

Atlanta, Georgia
February 27, 2007

Report of Independent Registered Public Accounting Firm

THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
AARON RENTS, INC.
We have audited management’s assessment, included in the
accompanying Management Report on Internal Control Over
Financial Reporting that Aaron Rents, Inc. maintained effective
internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Aaron Rents, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on manage-
ment’s assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on
our audit.

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating manage-
ment’s assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and disposi-

tions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expendi-
tures of the company are being made only in accordance with
authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on
the financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inade-
quate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Aaron Rents,
Inc. maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material respects,
based on the COSO criteria. Also, in our opinion, Aaron Rents,
Inc. maintained, in all material respects, effective internal
control over financial reporting as December 31, 2006, based
on the COSO criteria.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Aaron Rents, Inc. as of December
31, 2005 and 2006, and the related consolidated statement of
earnings, shareholders equity, and cash flows for each of the
three years in the period ended December 31, 2006 of Aaron
Rents, Inc. and our report dated February 27, 2007 expressed an
unqualified opinion thereon.

Atlanta, Georgia
February 27, 2007

Common Stock Market Prices and Dividends

The following table shows the range of high and low prices per
share for the Common Stock and Class A Common Stock and
the cash dividends declared per share for the periods indicated.
The Company’s Common Stock and Class A Common Stock are
listed on the New York Stock Exchange under the symbols “RNT”
and “RNTA,” respectively.

The number of shareholders of record of the Company’s
Common Stock and Class A Common Stock at February 22,
2007 was 300 and 108, respectively. The closing prices for the
Common Stock and Class A Common Stock at February 22,
2007 were $28.15 and $25.01, respectively.

Subject to our ongoing ability to generate sufficient income,

any future capital needs and other contingencies, we expect
to continue our policy of paying dividends. Our articles of
incorporation provide that no cash dividends may be paid on
our Class A Common Stock unless equal or higher dividends are
paid on the Common Stock. Under our revolving credit agree-
ment, we may pay cash dividends in any fiscal year only if the
dividends do not exceed 50% of our consolidated net earnings
for the prior fiscal year plus the excess, if any, of the cash
dividend limitation applicable to the prior year over the
dividend actually paid in the prior year.

Common Stock

High

Low

Cash
Dividends
Per Share

Class A Common Stock

High

Low

DECEMBER 31, 2006

Cash
Dividends
Per Share

$ 28.08

$ 20.82

$ .014

First Quarter

$ 25.60

$ 19.20

$ .014

29.99

27.57

29.29

24.82

22.17

21.80

.014

.015

Second Quarter

Third Quarter

Fourth Quarter

26.25

24.83

26.38

23.00

20.25

.014

.015

DECEMBER 31, 2005

$ 25.15

$ 19.20

$ .013

First Quarter

$ 22.20

$ 17.20

$ .013

25.29

25.73

23.00

17.38

19.62

18.90

.013

.014

Second Quarter

Third Quarter

Fourth Quarter

22.75

23.60

20.30

15.55

19.30

17.50

.013

.014

The line graph to the left and the table below compare, for
the last five fiscal years of the Company, the yearly percentage
change in the cumulative total shareholder return (assuming
reinvestment of dividends) on the Company’s Common Stock
with that of the S&P SmallCap 600 Index and a Peer Group.
For 2006, the Peer Group consisted of Rent-A-Center, Inc. The
stock price performance shown is not necessarily indicative of
future price performance.

12/01

12/02

12/03

12/04

12/05

12/06

Aaron Rents, Inc. 100.00 134.46 185.89 346.92 293.26 401.28

S&P SmallCap 600 100.00

85.37 118.48 145.32 156.48 180.14

Peer Group

100.00 148.79 223.41 197.35 140.45 219.76

DECEMBER 31, 2006

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

DECEMBER 31, 2005

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Locations in the United States and Canada

Company Stores

Franchise Stores

845

441

Corporate Furnishings Stores 59

Fulfillment Centers

MacTavish Manufacturing

Board of Directors

Officers

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

Ronald W. Allen (1)
Retired Chairman of the Board,
President and Chief Executive
Officer, Delta Air Lines, Inc.

Leo Benatar (2)
Principal, Benatar & Associates

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

David L. Kolb (1)
Retired Chairman and Chief
Executive Officer, Mohawk
Industries, Inc.

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

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

Gilbert L. Danielson*
Executive Vice President,
Chief Financial Officer

James L. Cates*
Senior Group Vice President,
Corporate Secretary

Elizabeth L. Gibbs*
Vice President, General Counsel

B. Lee Landers, Jr.*
Vice President, Chief
Information Officer

Michael W. Jarnagin
Vice President, Manufacturing

James C. Johnson
Vice President, Internal Audit

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

Marc S. Rogovin*
Vice President, Real Estate
and Construction

John C. Portman, Jr.,
Chairman of the Board and Chief
Executive Officer, Portman Holdings,
LLC; Chairman, AMC, Inc.; and
Chairman, John Portman &
Associates

Ray M. Robinson (2)
President Emeritus, East Lake Golf
Club and Vice Chairman, East Lake
Community Foundation

John Schuerholz
Executive Vice President and General
Manager, The Atlanta Braves

Robert P. Sinclair, Jr.*
Vice President, Corporate Controller

D. Chad Strickland
Vice President, Employee Relations

Danny Walker, Sr.
Vice President, Internal Security

Aaron’s Corporate
Furnishings Division
Eduardo Quiñones*
President

Christopher D. Counts
Vice President, Western Region

Philip J. Karl
Vice President, Southeast Region

Donald P. Lange
Vice President, Marketing and
Advertising

(1) Member of Audit Committee
(2) Member of Compensation Committee

* Executive Officer

Aaron’s Sales & Lease
Ownership Division
William K. Butler, Jr.*
President

K. Todd Evans*
Vice President, Franchising

Mitchell S. Paull*
Senior Vice President,
Merchandising and Logistics

Gregory G. Bellof
Vice President, Mid-Atlantic
Operations

David A. Boggan
Vice President, Mississippi
Valley Operations

David L. Buck
Vice President, Southwestern
Operations

Todd G. Coppedge
Vice President, Midwest Operations

Paul A. Doize
Vice President, Controller

Joseph N. Fedorchak
Vice President, Eastern Operations

Bert L. Hanson
Vice President, Mid-American
Operations

Michael B. Hickey
Vice President, Management
Development

Kevin J. Hrvatin
Vice President, Western Operations

Steven A. Michaels
Vice President, Franchise Finance

Tristan J. Montanero
Vice President, Central Operations

Michael P. Ryan
Vice President, Northern Operations

Mark A. Rudnick
Vice President, Marketing

Corporate and Shareholder Information

Corporate Headquarters

Annual Shareholders Meeting

Stock Listing

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

Subsidiaries

Aaron Investment Company
4005 Kennett Pike
Greenville, Delaware 19807
(302) 888-2351

Aaron Rents Canada, ULC
309 E. Paces Ferry Rd., N.E.
Atlanta, Georgia 30305-2377
(404) 231-0011

The annual meeting of the share-
holders of Aaron Rents, Inc. will
be held on Tuesday, May 8, 2007,
at 10:00 a.m. EDT on the
4th Floor, SunTrust Plaza,
303 Peachtree Street,
Atlanta, Georgia 30303

Transfer Agent and Registrar
SunTrust Bank, Atlanta
Atlanta, Georgia

General Counsel
Kilpatrick Stockton LLP
Atlanta, Georgia

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.

The certifications of our Chief
Executive Officer and Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002, which
address, among other things, the
content of our Annual Report on
Form 10-K, appear as exhibits to
the Form 10-K.

R N T

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

Pursuant to the requirements of the
New York Stock Exchange, in 2006
our Chief Executive Officer certified
to the NYSE that he was not aware
of any violation by Aaron Rents, Inc.
of the NYSE’s corporate governance
listing standards.

Forward-Looking Statements

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 in the Company’s 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, franchises awarded,
and 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
“Risk Factors” in Item 1A of the
Company’s Annual Report on Form
10-K filed with the Securities and
Exchange Commission.

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