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Aaron's Inc – ‘424B4’ on 6/6/02

On:  Thursday, 6/6/02, at 5:57pm ET   ·   As of:  6/7/02   ·   Accession #:  912057-2-23320   ·   File #:  333-88392

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/07/02  Aaron’s Inc                       424B4       6/06/02    1:618K                                   Merrill Corp/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Prospectus                                          HTML    596K 

Filed Pursuant to Rule 424(b)(4)
(SEC File No. 333-88392)

PROSPECTUS

2,000,000 Shares

Aaron Rents, Inc.

Common Stock

        This is a public offering of 2,000,000 shares of common stock of Aaron Rents, Inc. We are selling 1,500,000 shares and the selling shareholder named in this prospectus is selling 500,000 shares. We will not receive any of the proceeds from the sale of the shares by the selling shareholder. Our common stock is listed on the New York Stock Exchange under the symbol RNT. On June 5, 2002, the last reported sales price of our common stock on the New York Stock Exchange was $22.75 per share.

        Holders of our common stock have no voting rights except as provided in our articles of incorporation or as required by Georgia law. Only the holders of shares of our Class A common stock, which neither we nor the selling shareholder are offering, vote for the election of directors and on most other matters.

        First Union Securities, Inc., one of the underwriters, is acting under the trade name Wachovia Securities.

        The underwriters have been granted a 30-day option to purchase up to an additional 225,000 shares of our common stock from us and 75,000 shares from the selling shareholder to cover over-allotments at the public offering price, less the underwriting discounts and commissions.

        Investing in our common stock involves risks. See "Risk Factors" beginning on page 6 of this prospectus

        The shares will be ready for delivery on or about June 11, 2002.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Wachovia Securities

SunTrust Robinson Humphrey

BB&T Capital Markets

The date of this Prospectus is June 5, 2002.

[INSIDE FRONT COVER HAS A MAP OF THE UNITED STATES AND PUERTO RICO INDICATING STORE LOCATIONS AND PHOTOGRAPHS OF STORES AND MERCHANDISE]

TABLE OF CONTENTS

        You should rely only on the information contained or incorporated by reference in this prospectus. None of Aaron Rents, the selling shareholder or the underwriters have authorized anyone to provide you with information different from that contained or incorporated by reference in this prospectus. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus, and you should assume the information contained in any document incorporated by reference in this prospectus is accurate only as of the date of that document. Our business, financial condition, results of operations and prospects may have changed since those dates. This prospectus is not an offer to sell or the solicitation of an offer to buy our common stock in any circumstances or jurisdiction where the offer or sale is not permitted.

PROSPECTUS SUMMARY

        This summary contains basic information about us and this offering. Because it is a summary, it does not contain all the information that you should consider before investing. You should read the entire prospectus carefully, including the section entitled "Risk Factors" and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

Aaron Rents, Inc.

        We are a leading U.S. company engaged in the combined businesses of the rental, lease ownership and specialty retailing of residential and office furniture, consumer electronics, household appliances and accessories, with 653 systemwide stores as of March 31, 2002. Our major operating divisions are the Aaron's Sales & Lease Ownership division, the Aaron Rents' Rent-to-Rent division, and the MacTavish Furniture Industries division, which supplies nearly one-half of the furniture and related accessories rented and sold in our stores.

        Our strategic focus is on expanding our higher growth sales and lease ownership business through opening new company-operated stores and expanding our franchise program. Our sales and lease ownership division accounted for 72% of our total 2001 revenues of $546.7 million and 78% of our total revenues of $156.7 million for the first quarter of 2002. Revenues generated from our sales and lease ownership division increased from $261.6 million for 1999 to $394.8 million for 2001, representing a 23% compound annual growth rate. Revenues earned by our sales and lease ownership franchisees increased from $115.7 million in 1999 to $198.6 million in 2001, a 31% compound annual growth rate.

        At March 31, 2002, we had 579 sales and lease ownership stores, including 368 company-operated and 211 franchised stores, in 43 states and Puerto Rico. We have added 261 sales and lease ownership stores systemwide since 1998.

        Aaron's Sales & Lease Ownership.    We believe that our sales and lease ownership model is unique. By providing customers with the option either to purchase merchandise or to lease merchandise with the opportunity to obtain ownership, we blend elements of rent-to-own and traditional retailing. We enable cash or credit-constrained customers to obtain quality-of-life enhancing merchandise that they otherwise might not be able to afford without incurring additional debt or long-term obligations. In addition to these core customers, our concept is also popular with consumers who have only a temporary need for the merchandise or want to try out a particular brand or model before buying it. We believe our sales and lease ownership program is a more effective method of retailing our merchandise to lower to middle income consumers than a typical rent-to-own business or the more traditional method of credit installment sales.

        Our sales and lease ownership model is distinctive from a typical rent-to-own business in that we encourage our customers to obtain ownership of their rental merchandise. More of the initial renters of our merchandise obtain ownership versus rent-to-own businesses in general. We believe our sales and lease ownership model offers the following unique characteristics:

•

Flexible payment methods—we offer our customers the opportunity to pay by cash, credit card or check, compared with the more common cash payment method at rent-to-own stores. Approximately 40% of our customers pay by check or credit card.

•

Fewer payments—our typical plan offers monthly payments versus an industry standard of weekly payments. Our agreements also usually provide for a shorter term until the customer obtains ownership.

•

Lower total cost—our agreement terms typically provide a lower cost of ownership to the customer.

•

Wider merchandise selection—we generally offer a larger selection of higher-quality merchandise.

•

Larger store layout—our stores are typically 9,000 square feet, nearly twice the size of typical rent-to-own stores.

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        Our sales and lease ownership model also has attractive features in common with traditional retailers. We offer an up-front "cash and carry" purchase option on selected merchandise at prices that are competitive with traditional retailers. Our merchandise selection and store size are more typical of traditional retailers. However, unlike most traditional retailers, our sales and lease ownership transactions are not credit installment contracts.

        We have added 186 company-operated sales and lease ownership stores since 1998, including approximately 80 store locations in 2000 and early 2001 acquired from a national credit-driven furniture retailer. Although the start-up costs associated with opening this large number of stores has reduced our net earnings in the short term, we believe the opportunity to increase our revenues and profitability over time has been enhanced by the addition of these stores as they reach maturity.

        We franchise our sales and lease ownership stores in selected markets where we have no immediate plans to enter. This strategy allows us to grow more quickly, increase our brand exposure, and achieve economies of scale. It also provides us new revenues from franchise fees and royalties. We have added 75 franchised sales and lease ownership stores since 1998.

        Aaron Rents' Rent-to-Rent.    Our rent-to-rent division rents new and rental return merchandise to individuals and businesses, with a focus on renting residential and office furniture to business customers. We have been in the rent-to-rent business for over 47 years and are the second largest furniture rent-to-rent company in the United States. Our rent-to-rent division is an important source of net earnings and cash flow. At March 31, 2002, we had 74 rent-to-rent stores in 16 states.

        MacTavish Furniture Industries.    For more than 30 years, our manufacturing division has produced our own specially designed residential and office furniture. We are the only major rental furniture company in the United States that manufactures its own furniture. We believe our manufacturing capabilities give us an advantage over many of our competitors by enabling us to control the quality, cost, styling and quantity of our furniture rental products.

Our Industry

        The rent-to-own industry is a growing segment of the retail industry that offers an alternative to traditional methods of obtaining furniture, electronics and appliances. According to industry sources, there are approximately 8,000 rent-to-own stores in the United States. Annual industry-wide revenues are believed to be approximately $5.3 billion.

        We believe that the decline in the number of furniture stores that focus on credit installment sales to lower to middle income consumers has created a market opportunity for us to offer our unique sales and lease ownership concept. In addition, the traditional retail consumer durable goods market is much larger than the rental market, leaving substantial potential for growth for our sales and lease ownership division. We believe that the segment of the population targeted by our sales and lease ownership division comprise up to approximately 43% of all households in the United States and that the needs of consumers in that segment generally are underserved.

        The furniture component of the rent-to-rent industry is greater than $600 million in annual rental revenues. The demand for rental products is related to the mobility of the population, especially corporate employees, who rely upon rented merchandise to fulfill temporary needs. The industry is highly competitive and has consolidated with only a handful of companies accounting for a substantial share of the market.

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Our Operating Strategies

        We seek to enhance profitability through operating strategies which differentiate us from our competitors and improve efficiencies by striving to:

•

Differentiate Aaron's Sales & Lease Ownership concept—our innovative approaches to meeting changing customer needs differ from our competitors. We offer lease ownership agreements which result in a lower "all-in" price, larger and more attractive store showrooms, a wider and higher-quality selection of merchandise, and up-front cash and carry purchase options on selected merchandise at prices that are competitive with traditional retailers.

•

Offer high levels of customer service and satisfaction—we foster relationships with our customers to attract recurring business by providing quick delivery and free repair of rented merchandise, and by customer service-oriented employee training through our Aaron's University program.

•

Promote our brand name—our marketing programs target the prime customer base for our products, such as our "Dream Products" merchandise which we advertise through our "Drive Dreams Home" sponsorship of NASCAR championship racing. We also market our business through sponsorship of other sporting events, radio commercials and direct mail advertising, with 12 million flyers mailed monthly to areas served by our stores.

•

Capitalize on our existing rent-to-rent business—our rent-to-rent division is an important source of cash flow for the development of our higher-growth sales and lease ownership operations.

•

Manage merchandise through our manufacturing and distribution capabilities—we believe our manufacturing operations and seven distribution centers give us a strategic advantage over our competitors.

•

Utilize proprietary management information systems—we use our proprietary management information systems to systematically pursue collections and merchandise returns and to match inventory with demand.

Our Growth Strategies

        We seek to increase our revenues and profitability through our growth strategies. Our growth strategies are to:

•

Open additional company-operated sales and lease ownership stores—we plan to open additional sales and lease ownership stores in selected geographic markets to realize the benefits of economies of scale in marketing and distribution and other operating efficiencies.

•

Increase revenues and net earnings from existing sales and lease ownership stores—we experienced same store sales growth of 7.4% in 2000, 7.7% in 2001 and 7.4% for the first quarter of 2002. We expect revenues and net earnings to continue to grow as a large number of stores opened in the past few years mature.

•

Award additional sales and lease ownership franchises—we seek qualified franchisees to grow our sales and lease ownership business more quickly and increase our brand exposure.

        Our Chairman and Chief Executive Officer, R. Charles Loudermilk, Sr., established Aaron Rents in 1955, and we were incorporated under the laws of Georgia in 1962. Our principal business address is 309 E. Paces Ferry Road, Atlanta, Georgia, 30305-2377 and our telephone number is (404) 231-0011.

        We own or have rights to various trademarks and trade names used in our business. This prospectus also includes trademarks, service marks and trade names owned by other companies.

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The Offering

        The table above is based on the number of our common shares outstanding on May 14, 2002, and excludes 1,213,650 shares of common stock issuable upon exercise of stock options outstanding under our stock option plan on May 14, 2002 of which options for 664,400 shares were currently exercisable.

        Holders of our common stock have no voting rights except as provided in our articles of incorporation or as required by Georgia law. Only the holders of our Class A stock, which neither we nor the selling shareholder are offering by this prospectus, vote for the election of directors and on most other matters. See "Description of Capital Stock."

        When we refer to our common shares in this prospectus, we are referring to both our common stock and our Class A stock.

        Except as otherwise indicated or required by the context, references to we, our, us, Aaron Rents or the company refer to Aaron Rents, Inc. and its subsidiaries and predecessors. Except as otherwise indicated, all information in this prospectus assumes no exercise of the underwriters' over-allotment option.

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Summary Financial Data

        The following table shows our summary financial and operating data which you should read together with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and accompanying notes and the other financial and other data included elsewhere or incorporated by reference in this prospectus.

        Systemwide revenues include the revenues of both our company-operated and franchised stores, but exclude royalties we receive from franchisees. Our consolidated financial statements appearing elsewhere in this prospectus exclude franchised store revenues and include royalties and fees received from our franchisees. The as-adjusted balance sheet data give effect to this offering as if it occurred on March 31, 2002 and the application of the net proceeds thereof as described in "Use of Proceeds."

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RISK FACTORS

        You should carefully consider the following risk factors, as well as other information in this prospectus and in the documents we incorporate by reference, before investing in our common stock. The risks and uncertainties described below are not the only ones we face. The risks set forth below are in addition to risks that apply to most businesses, which could also seriously harm our business.

        If any of these risks actually occur, our business, financial condition or results of operations could be materially adversely affected. This could cause the trading price of our common stock to decline, and you could lose all or part of your investment.

Our growth strategy depends on opening new company-operated stores. Our ability to expand our store base is influenced by factors beyond our control, which may impair our growth strategy and impede our revenue growth.

        Opening new company-operated stores is an important part of our growth strategy. Our ability to continue opening new stores depends, among other things, upon our ability to:

•

finance the opening and operating of new stores



•

locate new stores at reasonable rental rates



•

hire and train management and personnel to staff the new stores

        If we cannot address these challenges successfully, we may not be able to expand our business at the rate we currently contemplate, or increase our revenues.

If we cannot manage the costs of opening new stores, our profitability may be hurt.

        During 2001, we opened a total of 101 additional company-operated stores. These new openings include most of the approximately 80 locations we acquired in 2000 and early 2001 formerly operated by one of the nation's largest furniture retailers. Opening large numbers of new stores requires significant start-up expenses, and new stores are often not profitable until their second year of operation. Consequently, opening many stores over a short period can materially decrease our net earnings for a time—this effect is sometimes called "new store drag." During 2001, we estimate that start-up expenses for new stores reduced our pre-tax earnings by approximately $14 million, or $.42 per diluted share. We cannot be certain that we will be able to fully recover these significant costs.

Our competitors could impede our ability to attract new customers, or attract current customers away from us.

        Our businesses are highly competitive. In the sales and lease ownership market, our competitors include national, regional and local operators of rent-to-own stores and credit retailers. We compete in the rent-to-rent market with national and local companies and, to a lesser extent, with apartment owners who purchase furniture for rental to tenants. Some of our competitors have significantly greater financial and operating resources, and in certain markets, greater name recognition, than us. Greater financial resources may allow our competitors to grow faster than us, including through acquisitions. This in turn may allow them to enter new markets before we can, which may decrease our opportunities in those markets. Greater name recognition, or better public perception of a competitor's reputation, may help them attract market share away from us, even in our established markets.

Because our rent-to-rent division is dependent on business customers, slowdowns in corporate spending may decrease our revenues.

        Our rent-to-rent division depends on business customers for a significant percentage of its rental revenues. Because businesses are likely to curb spending during economic downturns, the revenues of

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our rent-to-rent business may be adversely affected during these periods. Revenues from our rent-to-rent division decreased 14% in 2001 compared with 2000 revenues, and 23% in the first quarter of 2002 compared with the first quarter of 2001. We cannot assure you that revenues from our rent-to-rent division will increase in the future.

We may not be able to attract qualified franchisees, which may slow the growth of our business.

        Our growth strategy is partially dependent upon our franchisees developing new franchised sales and lease ownership stores. We generally seek franchisees who meet our stringent business background and financial criteria, and who are willing to enter into development agreements for several stores. A number of factors, however, could inhibit our ability to find qualified franchisees, including general economic downturns, or legislative or litigation developments that make the rent-to-own industry less attractive to potential franchisees. These developments could also adversely affect our franchisees' ability to obtain adequate capital to develop and operate new stores on time, or at all. Our inability to find qualified franchisees could slow our growth.

        Qualified franchisees who can conform to our standards and requirements are also important to the overall success of our business. Our franchisees, however, are independent contractors and not employees, and consequently we cannot control them to the same extent as our company-operated stores. Our franchisees may fail in key areas, which could in turn slow our growth, reduce our franchise revenues and systemwide revenues, or damage our image and reputation.

We are subject to laws that regulate franchisor-franchisee relationships. Our ability to develop new franchised stores and enforce our rights against franchisees may be adversely affected by these laws, which could impair our growth strategy and cause our franchise revenues to decline.

        As a franchisor, we are subject to both regulation by the Federal Trade Commission and state laws regulating the offer and sale of franchises. Because we plan to expand our business partly by selling more franchises, our failure to obtain or maintain approvals to sell franchises could significantly impede our growth strategy. In addition, our failure to comply with franchise regulations could cause us to lose franchise fee and ongoing royalty revenues. Moreover, state laws that regulate substantive aspects of our relationships with franchisees may limit our ability to terminate or otherwise resolve conflicts with our franchisees.

Our sales and lease ownership operations are subject to considerable government regulation. Adverse changes in these laws could expose us to significant compliance costs or burdens or expose us to material litigation, which could leave us liable for a significant judgment or force us to change our business.

        We believe that 47 states specifically regulate rent-to-own transactions, including states in which we currently operate Aaron's Sales & Lease Ownership stores. At the present time, no federal law specifically regulates the rent-to-own industry, although federal legislation has been proposed from time to time to regulate the industry. Any adverse changes in these laws, or the passage of new adverse legislation by the states or the federal government, could materially increase both our costs of complying with laws and the risk that we could be sued or be subject to government sanctions if we are not in compliance. In addition, new burdensome legislation might force us to change our business model, and might render our sales and lease ownership operations a less desirable business to engage in.

        Most of the states that regulate rent-to-own transactions have enacted disclosure laws which require rent-to-own companies to disclose to their customers the total number of payments, total amount and timing of all payments to acquire ownership of any item, any other charges that may be imposed by them and miscellaneous other items. The most restrictive states limit the total amount that

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a customer may be charged for an item to twice the "retail" price for the item, or regulate the amount of "interest" that rent-to-own companies may charge on rent-to-own transactions, generally defining "interest" as rental fees paid in excess of the "retail" price of the goods. We cannot guarantee that the federal government or states will not enact additional or different legislation that would be disadvantageous to us.

        In addition to the risk of lawsuits related to the disclosure laws that regulate rent-to-own transactions, we could be subject to lawsuits alleging violations of state laws and regulations and consumer tort law, including fraud and consumer protection laws because of the consumer-oriented nature of the rent-to-own industry and the currently applicable laws. A large judgment could adversely affect our financial condition and results of operations. Moreover, an adverse outcome from a lawsuit—even one against one of our competitors instead of against us—could result in changes in the way we and others in the industry do business, which may involve significant costs or decreased revenues or profitability.

Our Chairman and Chief Executive Officer owns a controlling interest in our stock. He may vote his shares in ways with which you may disagree.

        R. Charles Loudermilk, Sr., our founder, Chairman of the Board and Chief Executive Officer, owns or controls over 60% of our voting Class A stock, and will continue to do so after this offering. As a result, Mr. Loudermilk will continue to be able to elect all our directors and effectively control Aaron Rents through his voting power. He may vote his shares in ways with which you may disagree, and this voting concentration may discourage, delay or prevent a change in control or acquisition of Aaron Rents, even one that you believe is beneficial to you as a shareholder. Also, future sales by Mr. Loudermilk of a substantial number of common shares could adversely affect the trading price of our shares.

Any loss of the services of our key executives, or our inability to attract and retain qualified managers, could have a material adverse impact on our operations.

        We believe that we have benefited substantially from Mr. Loudermilk's leadership, and that the loss of his services at anytime in the near future could hurt our business and operations. We are also dependent on the continued services of the rest of our management team, including our key executives. The loss of these individuals without adequate replacement could also injure our business. Although we have employment agreements with some of our key executives, they are generally terminable on short notice and we do not carry key man life insurance on any of our officers.

        Additionally, we need a growing number of qualified managers to operate our stores successfully. If we are unable to attract and retain qualified individuals or our costs to do so increase significantly, our operations would be materially adversely affected.

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FORWARD-LOOKING STATEMENTS

        This prospectus contains statements about future events and expectations which are characterized as forward-looking statements. For those statements we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management's beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to them. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to differ materially from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. The words believe, may, will, should, anticipate, estimate, expect, intend, objective, seek, strive or similar words, or the negatives of these words, identify forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform those statements to actual results.

        Factors that could cause our actual results to differ materially from any forward-looking statements include changes in general economic conditions, competition, pricing, customer demand and those factors discussed in "Risk Factors" beginning on page 6, and in other sections of this prospectus. We qualify any forward-looking statement entirely by these cautionary factors. You should also consider the cautionary statements contained in the reports we have filed with the Securities and Exchange Commission.

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USE OF PROCEEDS

        Aaron Rents is offering for sale 1,500,000 shares of common stock by this prospectus. Based on the offering price of $21.00 per share, we estimate that our net proceeds from the sale of these shares will be approximately $29.6 million after deducting the underwriting discounts and estimated offering expenses. Our estimated net proceeds will be approximately $34.1 million if the underwriters exercise their option to purchase an additional 225,000 shares from us to cover over-allotments.

        We will not receive any proceeds from the sale of 500,000 shares of common stock by the selling shareholder or any proceeds from the underwriters' option to purchase an additional 75,000 shares from the selling shareholder to cover over-allotments.

        We expect to use our net proceeds to repay approximately $28.4 million of borrowings outstanding under our revolving credit agreement. In addition, we may incur an estimated non-recurring pre-tax expense of $1.3 million to terminate interest rate swap agreements that we use to manage our exposure to changes in short-term interest rates. Depending on changes in interest rates in the near term, this amount may increase or decrease prior to any swap termination. The fixed interest rate associated with the swaps that we might terminate would be 7.75%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk" for more information about our interest rate swap agreements. We will use any remainder of the net proceeds for general corporate purposes, including working capital needs.

        Our revolving credit agreement with several banks allows us to borrow up to $110 million. This revolving credit agreement includes an $8 million credit line to fund our daily working capital requirements. The interest rate under our revolving credit agreement is currently the lower of the lender's prime rate or the London Inter-Bank Offer Rate, or LIBOR, plus 1.50%. As of March 31, 2002, approximately $50.3 million was outstanding under our revolving credit agreement, bearing interest at a weighted average variable rate of 3.1%. As of June 4, 2002, approximately $57.0 million was outstanding under this agreement. Our revolving credit agreement expires on March 30, 2004.

        Pending application of the net proceeds as described above, we will invest the net proceeds in short-term, interest-bearing investment grade or government securities.

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PRICE RANGE OF COMMON STOCK AND DIVIDENDS

        Our common stock is listed on the New York Stock Exchange under the symbol "RNT." The following table sets forth for the periods indicated the high and low sales prices for our common stock as reported on the New York Stock Exchange composite tape, rounded to the nearest penny:

        On June 5, 2002, the last sale price of the common stock as reported by the New York Stock Exchange was $22.75 per share. As of May 14, 2002, there were 276 holders of record of the common stock. We believe Aaron Rents has in excess of 2,800 beneficial holders of the common stock.

        Subject to our continuing to earn sufficient income, to any future capital needs and to other contingencies, we currently expect to continue our policy of paying dividends.

        Our articles of incorporation provide that no cash dividends may be paid on our Class A stock unless equal or higher dividends are paid on the common stock. Under our revolving credit agreement, we may pay cash dividends in any fiscal year only if the dividends do not exceed 50% of our consolidated net income for the prior fiscal year plus the excess, if any, of the cash dividend limitation applicable to the prior year over the dividends actually paid in the prior year.

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CAPITALIZATION

        The following table shows, as of March 31, 2002, our capitalization, both actual and as adjusted. The adjustment gives effect to:

•

The sale of 1,500,000 shares of common stock by us in this offering at the offering price of $21.00 per share



•

The application of a portion of the estimated net proceeds from that sale, after deducting underwriting discounts and estimated offering expenses, for the repayment of bank debt and for the possible payment of an estimated $1.3 million in swap termination fees as described in "Use of Proceeds"

        You should read the following capitalization data in conjunction with "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and accompanying notes and the other financial data included elsewhere or incorporated by reference in this prospectus.

(1)

Includes approximately $50.3 million outstanding under our revolving credit agreement as of March 31, 2002. As of June 4, 2002, approximately $57.0 million was outstanding under this agreement.

        The table above excludes 1,213,650 shares of common stock issuable upon exercise of stock options outstanding under our stock option plan on May 14, 2002 of which options for 664,400 shares were currently exercisable.

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SELECTED FINANCIAL DATA

        The following table shows selected financial and operating data for Aaron Rents. The selected historical statement of operations data for each of the years ended, and the selected historical balance sheet data as of December 31, 1997, 1998, 1999, 2000 and 2001 are derived from our audited consolidated financial statements some of which are included in this prospectus. The consolidated financial statements for the five fiscal years ended December 31, 2001 have been audited by Ernst & Young LLP, independent auditors.

        The selected historical statement of operations data for the three months ended, and the selected historical balance sheet data as of March 31, 2001 and 2002 are derived from our unaudited consolidated financial statements, which are included in this prospectus except for the historical balance sheet as of March 31, 2001 which is not included in this prospectus. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present the data for those periods fairly. Operating results for interim periods are not necessarily indicative of results for a full fiscal year.

        Systemwide revenues include the revenues of both our company-operated and franchised stores, but exclude royalties we receive from franchisees. Our consolidated financial statements appearing elsewhere in this prospectus exclude franchised store revenues and include royalties and fees received from our franchisees. You should read the following selected financial data in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and accompanying notes and the other financial data included elsewhere or incorporated by reference in this prospectus.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the accompanying notes included elsewhere and incorporated by reference in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in those forward-looking statements as a result of certain factors, including, but not limited to, those described under "Risk Factors" and in other portions of this prospectus.

General

        Aaron Rents has grown significantly in the past three years. Total revenues have increased from $437.4 million for 1999 to $546.7 million for 2001, representing an 11.8% compound annual growth rate in our revenues. This increase was driven by a significant increase in revenues generated from our sales and lease ownership division, which increased from $261.6 million for 1999 to $394.8 million for 2001, representing a 22.8% compound annual growth rate. Revenue growth in our company-operated sales and lease ownership stores is the result of same store revenue growth of 7.4% in 2000 and 7.7% in 2001, combined with revenues from newly opened stores. During the same period, rent-to-rent revenues decreased from $177.1 million to $151.9 million. Aaron Rents has recorded 41 consecutive quarters of increased revenues.

        Our Aaron's Sales & Lease Ownership franchise program has also experienced significant growth over the past three years. Revenues earned by our franchisees increased from $115.7 million in 1999 to $198.6 million in 2001, representing a 31.0% compound annual growth rate in revenues. This growth in our franchise program has translated into increases in our non-retail sales, which mainly represents merchandise sales to our franchisees from our sales and lease ownership division. Non-retail sales increased from $45.4 million in 1999 to $66.2 million in 2001, a 20.8% compound annual growth rate. Franchisee growth has also increased our franchise royalty and fee income from $9.1 million in 1999 to $13.9 million in 2001.

        Our primary growth vehicle has been our distinctive sales and lease ownership concept that appeals predominantly to the middle and upper income segment of the rent-to-own market and the lower to middle income segment credit retail customer. We have grown this business primarily through the opening of new company-operated stores and the development of a franchise program. We increased the number of our company-operated sales and lease ownership stores from 213 at December 31, 1999 to 364 at the end of 2001, representing a compound annual growth rate of 30.7%. During that period, we also increased the number of our franchised sales and lease ownership stores from 155 to 209, a 16.1% compound annual growth rate. The systemwide increase from 475 sales and lease ownership stores at year-end 1999 to 648 stores by the end of 2001 represents a compound annual growth rate of 16.8%. We operated 74 rent-to-rent stores at March 31, 2002, a net decrease of 33 stores since December 31, 1999.

        We are the only major rental furniture company in the United States that manufactures its own furniture. Through our MacTavish Furniture Industries division, we produced more than $47 million of products in 2001, valued at cost. We believe our ability to produce and distribute our own furniture is a competitive advantage.

        Although we have grown our business primarily through the opening of new stores, in 2001 we took advantage of a unique opportunity by acquiring approximately 80 store locations formerly operated by one of the nation's largest furniture retailers. Although we have made few major acquisitions, we will consider selective acquisitions in the future as opportunities become available.

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Key Components of Income

        Revenues.    Our total revenues comprise four categories: rentals and fees, retail sales, non-retail sales and other revenues. Rentals and fees includes all revenues derived from rental agreements from our sales and lease ownership and rent-to-rent stores, including agreements that result in our customers acquiring ownership at the end of the term. Retail sales represents sales of both new and rental return merchandise. Non-retail sales mainly represents merchandise sales to our franchisees from our sales and lease ownership division. Other revenues represents franchise fee and royalty income from our franchise stores, 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 depreciated cost of merchandise sold through our company-operated stores. Non-retail cost of sales mainly represents the cost of merchandise sold to our franchisees.

        Depreciation of Rental Merchandise.    This item reflects the expense associated with depreciating merchandise held for rent and rented to customers by our company-operated sales and lease ownership and rent-to-rent 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, 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 depreciation—associated with the rental merchandise. At the years ended December 31, 2001 and 2000, Aaron Rents had a net revenue deferral representing cash collected in advance of being due or otherwise earned totaling approximately $5.7 million and $4.3 million, respectively. Revenues from the sale of residential and office furniture and other merchandise are recognized at the time of shipment.

        Rental Merchandise Depreciation.    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 zero percent salvage value. Prior to 2002, we depreciated sales and lease ownership merchandise as soon as it was delivered to our stores from our distribution centers. In the first quarter of 2002, we began depreciating this merchandise upon the earlier to occur of its initial lease to a customer or twelve months after it is acquired from the vendor. Nevertheless, sales and lease ownership merchandise is generally depreciated at a faster rate than our rent-to-rent 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 rent-to-rent division depreciates merchandise over its estimated useful life which ranges from 6 months to 60 months, net of its salvage value which ranges from zero to 60%.

        All rental merchandise is available for rental and sale. On a monthly basis, we write off damaged, lost or unsellable merchandise as identified. These write-offs totaled approximately $10.0 million, $8.9 million and $6.7 million during the years ended December 31, 2001, 2000 and 1999, respectively.

        Closed Store Reserves.    From time to time, Aaron Rents closes or consolidates retail stores. We record an estimate of the future obligation related to closed stores based upon the present value of the future lease payments and related commitments, net of estimated sublease income which we base upon historical experience. At the years ended December 31, 2001 and 2000, our reserve for closed stores was $3.4 million and $350,000, respectively, with the increase primarily related to rent-to-rent stores closed during 2001. If our estimates related to sublease income are not correct, our actual liability may be more or less than the liability recorded at December 31, 2001.

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        Insurance Programs.    Aaron Rents maintains insurance contracts for paying of 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 outstanding plan liability for our group health insurance program.

        Our liability for workers compensation insurance claims and group health insurance was approximately $3.3 million and $3.5 million, respectively, at the years ended December 31, 2001 and 2000.

        If we resolve existing workers compensation claims for amounts which 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, 2001. Additionally, if the actual group health insurance liability exceeds our projection, we will be required to pay additional amounts beyond those accrued at December 31, 2001.

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

Results of Operations

        The following table sets forth, for the periods indicated, certain income statement data as a percentage of rentals and fees, retail and non-retail sales or total revenues.

Three months ended March 31, 2002 compared with three months ended March 31, 2001

        Revenues.    Total revenues for the first quarter of 2002 increased $15.2 million to $156.7 million compared with $141.4 million in the comparable period in 2001, a 10.8% increase. The increase was due mainly to a $10.4 million, or 10.2%, increase in rentals and fees revenues, plus a $4.5 million increase in non-retail sales. The increase in rentals and fees revenues was attributable to a $17.6 million increase from our sales and lease ownership division, which had a 7.4% increase in same store revenue during the quarter and added 101 company-operated stores in 2001. The growth in our sales and lease ownership division was offset by a $7.1 million decrease in our rent-to-rent division.

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        Revenues from retail sales decreased $261,000 to $17.0 million in the first quarter of 2002 from $17.3 million for the same period last year due to an increase of $3.1 million in the sales and lease ownership division offset by a decrease of $3.3 million in our rent-to-rent division. Non-retail sales, which primarily represent merchandise sold to our franchisees, increased 25.2% to $22.5 million in the first quarter of 2002 from $17.9 million for the first quarter of 2001. The increased sales were due to the growth of our franchise operations.

        Other revenues for the three months ended March 31, 2002 increased $556,000 to $4.7 million compared with $4.1 million for the comparable period in 2001, a 13.5% increase. This increase was attributable to franchise fee and royalty income increasing $485,000, or 14.2%, to $3.9 million compared with $3.4 million in the first quarter of last year, reflecting the net addition of 17 new franchised stores since the end of the first quarter 2001 and improved operating revenues at mature franchised stores.

        With respect to our major operating units, revenues for our sales and lease ownership division increased $25.5 million to $123.3 million in the first quarter of 2002 compared with $97.8 million for the comparable period in 2001, a 26.1% increase. This increase was attributable to the sales and lease ownership division opening 86 stores since the end of the first quarter 2001 combined with same store revenue growth of 7.4% in the first quarter of 2002. Rent-to-rent division revenues for the three months ended March 31, 2002 decreased 23.5% to $33.4 million from $43.6 million for the comparable period in 2001. The decrease in rent-to-rent division revenues is primarily the result of our decision to close, merge or sell 24 under-performing stores since the end of the first quarter 2001, as well as a decline in same store revenues.

        Cost of Sales.    Cost of sales from retail sales decreased $156,000, or 1.3%, to $12.4 million in the first quarter of 2002 compared to $12.2 million for the comparable period in 2001, and as a percentage of sales, increased to 72.7% from 70.7%. The increase in retail cost of sales as a percentage of sales was primarily because of increased sales in our sales and lease ownership division which are at lower margins than our rent-to-rent division. Cost of sales from non-retail sales increased $4.1 million to $20.8 million in the first quarter of 2002 from $16.7 million in the first quarter of 2001, and as a percentage of sales, decreased to 92.7% from 93.2%. The increased margins on non-retail sales were primarily the result of slightly higher margins on certain products sold to franchisees.

        Expenses.    Operating expenses in the first quarter of 2002 increased $6.6 million to $73.1 million from $66.6 million for the comparable period in 2001, a 9.9% increase. As a percentage of total revenues, operating expenses were 46.7% for the three months ended March 31, 2002 and 47.1% for the comparable period in 2001. Operating expenses decreased as a percentage of total revenues mainly because of the costs incurred in the first quarter of 2001 associated with the acquisition of numerous store locations formerly operated by one of the nation's largest furniture retailers along with other new store openings. In addition, we discontinued amortizing goodwill in connection with the adoption of a new accounting standard. This adoption had the effect of eliminating amortization expense of $220,000 for the first quarter of 2002 as compared with the same period in 2001, which resulted in an increase in net earnings of $137,000 or $.01 diluted earnings per share.

        Depreciation of rental merchandise increased $7.2 million to $39.7 million in the first quarter of 2002 from $32.5 million during the comparable period in 2001, a 22.2% increase. As a percentage of total rentals and fees, depreciation of rental merchandise increased to 35.3% from 31.8% from quarter to quarter. The increase as a percentage of rentals and fees was primarily because a greater percentage of our rentals and fees revenues are coming from our sales and lease ownership division, which depreciates its rental merchandise at a faster rate than our rent-to-rent division.

        In the first quarter of 2002, we began depreciating sales and lease ownership merchandise upon the earlier to occur of its initial lease to a customer or twelve months after it is acquired from the vendor. Previously, we depreciated sales and lease ownership merchandise as soon as it was delivered

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to our stores from our distribution centers. This change in accounting method increased net earnings by approximately $504,000, or $.02 per diluted common share, during the quarter.

        Interest expense decreased $462,000 to $1.2 million in the first quarter of 2002 compared with $1.6 million in 2001, a 28.4% decline. As a percentage of total revenues, interest expense decreased to 0.7% in 2002 compared with 1.2% in 2001. The decrease in interest expense as a percentage of total revenues was primarily due to lower debt levels in the first quarter of 2002.

        Income tax expense decreased $937,000 to $3.5 million in the first quarter of 2002 compared with $4.5 million in 2001, representing a 20.9% decrease. Aaron Rents' effective tax rate was 37.4% in 2002 compared with 37.9% in 2001.

        Net Earnings.    Net earnings decreased $1.4 million to $5.9 million for the first quarter of 2002 compared with $7.3 million for the same period last year representing a 19.2% decrease. As a percentage of total revenues, net earnings were 3.8% in 2002 and 5.2% in 2001. The decrease in net earnings was primarily the result of start-up expenses associated with the addition of 86 sales and lease ownership stores during the twelve months ended March 31, 2002 compared to 56 store additions during the same period ended March 31, 2001, offset somewhat by the change in our rental merchandise depreciation method and the non-amortization of goodwill.

Year ended December 31, 2001 compared with year ended December 31, 2000

        Revenues.    Total revenues for 2001 increased $43.8 million to $546.7 million compared with $502.9 million in 2000, an 8.7% increase. The increase was due mainly to a $43.5 million, or 12.1%, increase in rentals and fees revenues, plus a $714,000 increase in non-retail sales. The increase in rentals and fees revenues was attributable to a $62.7 million increase from our sales and lease ownership division, which added 101 company-operated stores in 2001, offset by a $19.2 million decrease in our rent-to-rent division.

        Revenues from retail sales decreased $1.9 million to $60.5 million in 2001 from $62.4 million for the prior year, a 3.1% decrease. Non-retail sales, which primarily represent merchandise sold to our franchisees, increased 1.1% to $66.2 million compared with $65.5 million for 2000. The increased sales were due to the growth of our franchise operations.

        Other revenues for 2001 increased $1.5 million to $16.6 million compared with $15.1 million in 2000, a 9.8% increase. This increase was attributable to franchise fee and royalty income increasing $1.2 million, or 10.0%, to $13.6 million compared with $12.4 million in 2000, reflecting the net addition of 16 new franchised stores in 2001 and improved operating revenues at mature franchised stores.

        With respect to our major operating units, revenues for our sales and lease ownership division increased $67.5 million to $380.4 million in 2001 compared with $312.9 million in 2000, a 21.6% increase. This increase was attributable to the sales and lease ownership division opening 101 stores in 2001 combined with same store revenue growth of 7.7% in 2001. Rent-to-rent division revenues in 2001 decreased 14.2% to $150.0 million from $174.9 million in 2000. The decrease in rent-to-rent division revenues is primarily the result of our decision to close, merge or sell 23 under-performing stores in 2001.

        Cost of Sales.    Cost of sales from retail sales decreased $169,000 to $44.0 million in 2001 compared with $44.2 million in 2000, and as a percentage of sales, increased to 72.7% from 70.7% primarily due to product mix. Cost of sales from non-retail sales increased $1.0 million to $62.0 million in 2001 from $61.0 million in 2000, and as a percentage of sales, increased to 93.6% from 93.1%. The decreased margins on non-retail sales were primarily the result of slightly lower margins on certain products sold to franchisees.

        Expenses.    Operating expenses in 2001 increased $49.1 million to $276.7 million from $227.6 million in 2000, a 21.6% increase. As a percentage of total revenues, operating expenses were 50.6% in 2001 and 45.3% in 2000. Operating expenses increased as a percentage of total revenues

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primarily due to the costs associated with the acquisition and accelerated start-up costs of sales and lease ownership locations formerly operated by one of the nation's largest furniture retailers along with other new store openings. In addition, we recorded non-cash charges of $5.6 million related to the future real estate lease obligations of closed rent-to-rent stores and the write down of inventory and other assets within our rent-to-rent division.

        Depreciation of rental merchandise increased $17.2 million to $137.9 million in 2001 from $120.7 million in 2000, a 14.3% increase. As a percentage of total rentals and fees, rental merchandise depreciation increased to 34.2% from 33.5%. This increase as a percentage of rentals and fees was mainly because a greater percentage of our rentals and fees revenues are coming from our sales and lease ownership division, which depreciates its rental merchandise at a faster rate than our rent-to-rent division.

        Interest expense increased 11.3% to $6.3 million in 2001 compared with $5.6 million in 2000. As a percentage of total revenues, interest expense was 1.1% in both years.

        Income tax expense decreased $9.1 million to $7.5 million in 2001 compared with $16.6 million in 2000, a 54.8% decline. Aaron Rents' effective tax rate was 37.9% in both 2001 and 2000.

        Net Earnings.    Net earnings decreased $14.9 million to $12.3 million for 2001 compared with $27.3 million for 2000, a 54.8% decrease. As a percentage of total revenues, net earnings were 2.3% in 2001 and 5.4% in 2000. The decrease in net earnings was mainly the result of start-up expenses associated with the 101 new store openings, as compared with 32 stores opened in the prior year, and non-cash charges associated with our rent-to-rent division.

Year ended December 31, 2000 compared with year ended December 31, 1999

        Revenues.    Total revenues for 2000 increased $65.6 million to $502.9 million compared with $437.4 million in 1999, a 15.0% increase. This increase was due mainly to a $41.7 million, or 13.1%, increase in rentals and fees revenues, plus a $20.1 million increase in non-retail sales. Our sales and lease ownership division was responsible for $37.7 million of this increase in rentals and fees revenues. Rentals and fees revenues from Aaron Rents' rent-to-rent operations increased $4.0 million during the same period.

        Revenues from retail sales increased $121,000 to $62.4 million in 2000 from $62.3 million for 1999. Non-retail sales, which primarily represent merchandise sold to our franchisees, increased 44.3% to $65.5 million compared with $45.4 million for the prior year. The increased sales were due to the growth of our franchise operations.

        Other revenues for 2000 increased $3.6 million to $15.1 million compared with $11.5 million in 1999, a 31.4% increase. This increase was attributable to franchise fee and royalty income increasing $3.3 million, or 36.3%, to $12.4 million compared with $9.1 million last year, reflecting the net addition of 38 new franchised stores in 2000 and improved operating revenues at mature franchised stores.

        With respect to our major operating units, revenues for our sales and lease ownership division increased $60.6 million to $312.9 million in 2000 compared with $252.3 million in 1999, a 24.0% increase. This increase was attributable to the sales and lease ownership division increasing the number of company-operated stores by 50 in 2000 combined with a same store revenue increase of 7.4% and a $19.4 million increase in sales of merchandise to our franchisees. Rent-to-rent division revenues in 2000 increased $1.3 million, or .8%, to $174.9 million compared with $173.6 million in the prior year. This small increase in rent-to-rent division revenues is the result of an increase of 7.4% in same store revenues in 2000 offset by our decision to close, merge or sell 9 stores in 2000.

        Cost of Sales.    Cost of sales from retail sales decreased $1.1 million to $44.2 million in 2000 compared with $45.3 million in 1999, a 2.4% decrease. As a percentage of sales, cost of sales from retail sales decreased to 70.7% from 72.6% mainly because of product mix. Cost of sales from non-retail sales increased $18.5 million, or 43.7%, to $61.0 million in 2000 from $42.5 million in 1999,

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and as a percentage of sales, decreased to 93.1% from 93.5%. The increased margins on non-retail sales were mainly the result of slightly higher margins on certain products sold to franchisees.

        Expenses.    Operating expenses increased $25.7 million to $227.6 million in 2000 from $201.9 million in 1999, a 12.7% increase. As a percentage of total revenues, operating expenses were 45.3% in 2000 and 46.2% in 1999. Operating expenses decreased as a percentage of total revenues between years primarily due to increased revenues in our sales and lease ownership division.

        Depreciation of rental merchandise increased $18.3 million to $120.7 million in 2000 from $102.3 million in 1999, a 17.9% increase. As a percentage of total rentals and fees, rental merchandise depreciation increased to 33.5% from 32.2%. The increase as a percentage of rentals and fees was primarily because a greater percentage of our rentals and fees revenues are coming from our sales and lease ownership division, which depreciates its rental merchandise at a faster rate than our rent-to-rent division.

        Interest expense increased $1.5 million to $5.6 million in 2000 compared with $4.1 million in 1999, a 37.0% increase. As a percentage of total revenues, interest expense was 1.1% in 2000 and .9% in 1999. The increase in interest expense as a percentage of revenues was because of increased interest rates along with higher daily average debt levels.

        Income tax expense increased $945,000, or 6.0%, to $16.6 million in 2000 compared with $15.7 million in 1999. Aaron Rents' effective tax rate was 37.9% in 2000 and 38.0% in 1999.

        Net Earnings.    Net earnings increased $1.7 million to $27.3 million for 2000 compared with $25.6 million for 1999, a 6.5% increase. As a percentage of total revenues, net earnings were 5.4% in 2000 and 5.9% in 1999. The decrease in net earnings as a percentage of total revenues is the result of start-up expenses associated with the increased rate at which we opened new Aaron's Sales & Lease Ownership stores, with 32 stores opened in 2000 compared with 17 in 1999.

Liquidity and Capital Resources

General

        Cash flows from operations for the three months ended March 31, 2002 and the years ended December 31, 2001 and 2000 were $69.4 million, $189.4 million and $166.2 million, respectively. Our cash flows include profits on the sale of rental return merchandise. In 2001, Aaron Rents extended its payment terms with vendors to obtain additional cash flows. Our primary capital requirements consist of buying rental merchandise for both rent-to-rent and company-operated sale and lease ownership stores. As Aaron Rents continues to grow, the need for additional rental merchandise will continue to be our major capital requirement. These capital requirements historically have been financed through:

•

bank credit


•

cash flow from operations


•

trade credit with vendors


•

proceeds from the sale of rental return merchandise


•

stock offerings

        Aaron Rents has financed its growth through a revolving credit agreement with several banks, trade credit with vendors and internally generated funds. Our revolving credit agreement dated March 30, 2001 provides for unsecured borrowings up to $110.0 million, including an $8.0 million credit line to fund daily working capital requirements. The interest rate under our revolving credit agreement is currently the lower of the lender's prime rate or LIBOR plus 1.50%. The agreement expires on March 30, 2004. At March 31, 2002, an aggregate of $50.3 million was outstanding under this facility, bearing interest at a weighted average variable rate of 3.1%. We intend to pay off $28.4 million of this debt with proceeds from the offering. We use interest rate swap agreements as part of our overall long-term financing program, as described below under "Market Risk."

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        Aaron Rents' revolving credit agreement, and the construction and lease facility and the franchise 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, then we will be in default under our loans, and all amounts would become due immediately. Aaron Rents was complying with, or had obtained waivers of, all these covenants at March 31, 2002.

        As of March 31, 2002, Aaron Rents was authorized by its board of directors to purchase up to 1,186,890 common shares.

        Aaron Rents has paid dividends for fifteen consecutive years. A $.02 per share dividend on our common stock and Class A stock was paid in January 2001 and July 2001, for a total fiscal year cash outlay of $797,000. We paid a $.02 per share dividend on our common shares in January 2002 for a cash outlay during the first quarter of $399,000, and subsequent to March 31, 2002, our board declared a $.02 per share dividend payable in the third quarter of 2002. Subject to our continuing to earn sufficient income, to any future capital needs and to other contingencies, we currently expect to continue our policy of paying dividends.

        We believe that the proceeds from this offering, our expected cash flows from operations, proceeds from the sale of rental return merchandise, bank borrowings and vendor credit will be sufficient to fund our capital and liquidity needs for at least the next 24 months.

Commitments

        Construction and Lease Facility.    On October 31, 2001, we renewed our $25 million construction and lease facility. From 1996 to 1999, we arranged for a bank holding company to purchase or construct properties identified by us pursuant to this facility, and we subsequently leased these properties from the company under lease agreements. The total amount advanced and outstanding under this facility at March 31, 2002 was approximately $24.7 million. Since the resulting leases are accounted for as operating leases, we do not record any debt obligation on our balance sheet. This construction and lease facility expires in 2006. Lease payments fluctuate based upon current interest rates and are currently based upon LIBOR plus 1.60%. The lease facility contains residual value guarantee and default guarantee provisions. Although we believe the likelihood of funding to be remote, the maximum guarantee obligation under the residual value and default guarantee provisions upon termination are approximately $20.9 million and $24.7 million, respectively, at March 31, 2002.

        Leases.    Aaron Rents leases warehouse and retail store space for substantially all of its operations under operating leases expiring at various times through 2015. Most of the leases contain renewal options for additional periods ranging from 1 to 15 years or provide for options to purchase the related property at predetermined purchase prices, which do not represent bargain purchase options. We also lease transportation equipment under operating leases expiring during the next 3 years. We expect that most leases will be renewed or replaced by other leases in the normal course of business. Approximate future minimum rental payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 2001, including leases under our construction and lease facility described above, are as follows: $30.0 million in 2002; $24.5 million in 2003; $18.8 million in 2004; $12.4 million in 2005; $7.6 million in 2006; and $8.8 million thereafter.

        Franchise Guaranty.    Aaron Rents has guaranteed the borrowings of certain independent franchisees under a franchise loan program with a bank. In the event these franchisees are unable to meet their debt service payments or otherwise experience an event of default, we would be unconditionally liable for a portion of the outstanding balance of the franchisee's debt obligations, which would be due in full within 90 days of the event of default. On March 31, 2002, the maximum amount which we might be obligated to repay in the event our franchisees defaulted was approximately $48.8 million. However, due to franchisee borrowing limits, we believe any losses associated with any

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defaults would be mitigated through recovery of rental merchandise and other assets. Aaron Rents has had no losses associated with the franchisee loan and guaranty program.

        We have no long-term commitments to purchase merchandise. See Note F to our audited consolidated financial statements for further information.

Market Risk

        Aaron Rents manages its exposure to changes in short-term interest rates, particularly to reduce the impact on our floating-rate debt, 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 minimizes the risk of counterparty default to a large extent.

        At March 31, 2002, we had swap agreements with total notional principal amounts of $40 million which effectively fixed the interest rates on an equal amount of our debt under our revolving credit agreement at an average rate of 7.0%, as follows: $20 million at an average rate of 6.15% until May 2003; $20 million at an average rate of 7.75% until November 2003. In March 2002, we reassigned interest rate swap agreements with a notional amount of $20 million as a cash flow hedge of the variable payment obligations under our construction and lease facility described above.

        The fair value of interest rate swap agreements was a liability of approximately $2.4 million at March 31, 2002 and is included in accounts payable and accrued expenses in the March 31, 2002 balance sheet, with a corresponding charge to accumulated other comprehensive income, net of income taxes. After we complete this offering, we may incur an estimated non-recurring pre-tax expense of $1.3 million related to undesignated interest rate swap agreements. Depending on changes in interest rates in the near term, this amount may increase or decrease prior to any swap termination. The fixed interest rate associated with the swaps that we might terminate would be 7.75%.

        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 of any kind for trading or speculative purposes.

Recent Accounting Pronouncements

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

        Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Intangible Assets. We performed step one of the required transitional impairment test under SFAS 142 using a combination of the market value and comparable transaction approaches to business enterprise valuation. We concluded that the enterprise fair values of our reporting units were greater than the carrying value, and accordingly, no further impairment analysis was considered necessary. We also adopted the non-amortization provisions of SFAS 142, which resulted in an increase in net earnings of $137,000 or $.01 diluted earnings per share for the three-month period ended March 31, 2002.

        In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. We adopted SFAS 144 as of January 1, 2002, and the statement has not had a material effect on our consolidated financial statements.

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BUSINESS

General

        Aaron Rents, Inc. is a leading U.S. company engaged in the combined businesses of the rental, lease ownership and specialty retailing of residential and office furniture, consumer electronics, household appliances and accessories, with 653 systemwide stores in 43 states and Puerto Rico as of March 31, 2002. Our major operating divisions are the Aaron's Sales & Lease Ownership division, the Aaron Rents' Rent-to-Rent division, and the MacTavish Furniture Industries division, which supplies nearly one-half of the furniture and related accessories rented and sold in our stores. Our strategic focus is on expanding our higher growth sales and lease ownership business, through opening new company-operated stores and expanding our franchise program.

        At March 31, 2002, we had 579 sales and lease ownership stores, including 368 company-operated and 211 franchised stores in 43 states and Puerto Rico. There were 74 rent-to-rent stores in our rent-to-rent division in 16 states at March 31, 2002. Revenues from our sales and lease ownership division (which includes franchise revenues) accounted for 72% of our total revenues in 2001 and 78% of total revenues for the first quarter of 2002.

        An overview of our three divisions follows.

        Aaron's Sales & Lease Ownership.    Our sales and lease ownership division focuses on providing durable household goods to lower to middle income consumers with limited or no access to traditional credit sources such as bank financing, installment credit or credit cards. Our sales and lease ownership program enables these customers to obtain quality-of-life enhancing merchandise that they might otherwise not be able to afford without incurring additional debt or long-term obligations.

        We franchise our sales and lease ownership stores in selected markets where we have no immediate plans to enter. We believe that our franchise program:

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allows us to grow more quickly

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achieves economies of scale in purchasing, manufacturing and advertising for our sales and lease ownership stores

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increases exposure to our brand

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provides us new revenues from franchise fees and royalties

        We have added 186 company-operated and 75 franchised sales and lease ownership stores since 1998. We estimate that we will open at least 10 company-operated and approximately 20 franchised sales and lease ownership stores in 2002.

        Aaron Rents' Rent-to-Rent.    Our rent-to-rent division rents new and rental return merchandise to individuals and businesses, with a focus on renting residential and office furniture to business customers. We have been in the rent-to-rent business for over 47 years and are the second largest furniture rent-to-rent company in the United States. The rent-to-rent business experienced a decline in 2001 due to a weak economy and reduced corporate spending. In response, we closed 23 rent-to-rent stores in 2001 and took other steps to improve this division's profitability. Our rent-to-rent division remains an important source of net earnings and cash flow to us.

        Business customers, which represent an increasing portion of rental customers, enter into rental agreements for office furniture to meet seasonal, temporary or start-up needs. Business customers also rent residential furniture in order to provide furnishings for relocated employees or those on temporary assignment.

        MacTavish Furniture Industries.    Aaron Rents is the only major furniture rental company in the United States that manufactures its own furniture. By manufacturing our own specially designed residential and office furniture through our MacTavish Furniture Industries division, we believe we

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enjoy an advantage over many of our competitors. Manufacturing enables us to control the quality, cost, timing, styling and quantity of our furniture rental products. We operate six furniture plants, three bedding facilities and two lamp manufacturing facilities, which supply nearly one-half of the furniture and related accessories we rent or sell.

Industry Overview

The Rent-to-Own Industry

        The rent-to-own industry is a growing segment of the retail industry that offers an alternative to traditional methods of obtaining furniture, electronics and appliances. According to industry sources, there are approximately 8,000 rent-to-own stores in the United States. Annual industry-wide revenues are believed to be approximately $5.3 billion.

        In a typical rent-to-own transaction, the customer has the option to acquire merchandise over a fixed term, usually 12 to 24 months, by making weekly rental payments. The customer may cancel the agreement at any time by returning the merchandise to the store, with no further rental obligation. If the customer rents the item to the full term, he obtains ownership of the item, though he can choose to buy it at any time.

        The rent-to-own concept is particularly popular with consumers who cannot pay the full purchase price for merchandise at once or who lack the credit to qualify under conventional financing programs. It is also popular with consumers who, despite good credit, do not wish to incur additional debt, have only a temporary need for the merchandise or want to try out a particular brand or model before buying it.

The Rent-to-Rent Industry

        The furniture component of the rent-to-rent industry is greater than $600 million in annual rental revenues. The demand for rental products is believed to be related to the mobility of the population, which relies upon rented merchandise to fulfill temporary needs. The industry is highly competitive and has consolidated, with only a handful of companies accounting for a substantial share of the market.

        The rent-to-rent industry serves both individual and business customers who generally have immediate, temporary needs for office or residential merchandise but who generally do not seek to own the merchandise. Residential merchandise is rented to:

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individuals seeking to rent merchandise for their own homes and apartments


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apartment complex managers seeking to provide furnished apartments


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third party companies that provide interim housing for their corporate clients

        Office merchandise is rented by customers ranging from small businesses and professionals who are in need of office furnishings but need to conserve capital, to large corporations with temporary or seasonal needs.

        In the typical rent-to-rent transaction, the customer agrees to rent one or more items for a minimum of three months, which may be extended by the customer on a month-to-month basis. Although many rental agreements give the customer the option of purchasing the rented item, most customers do not enter into the transaction with the desire to own the rented merchandise.

Operating Strategies

        Aaron Rents seeks to enhance profitability through operating strategies which differentiate us from our competitors and improve efficiencies by striving to:

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Differentiate Aaron's Sales & Lease Ownership concept.  We believe that the success of our sales and lease ownership operation is attributable to our distinctive approach to the business that sets

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us apart from our rent-to-own and credit retail competitors. We have pioneered innovative approaches to meeting changing customer needs that differ from our competitors'—such as offering lease ownership agreements which result in a lower "all-in" price, larger and more attractive store showrooms, a wider selection of higher-quality merchandise and up-front cash and carry purchase options on selected merchandise at prices that are competitive with traditional retailers. Most sales and lease ownership customers make their payments in person, and we use these frequent visits to strengthen customer relationships and make sales and lease ownership customers feel welcome in our stores.

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Offer high levels of customer service and satisfaction.  We foster relationships with our customers to attract recurring business and encourage them to rent merchandise for the full agreement term by providing high levels of service and satisfaction. Aaron Rents demonstrates its commitment to superior customer service by providing customers quick delivery of rented merchandise, in many cases by same or next day delivery, and repair service at no charge to the customer. We have also established an employee training program designed to enhance the customer relations skills of our employees which we call Aaron's University, and a 13-course curriculum for both company-operated and franchised store managers.



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Promote our brand name.  Our marketing programs target the prime customer base for our products, such as our "Dream Products" merchandise which we advertise through our "Drive Dreams Home" sponsorship of NASCAR championship racing. Sponsorship of other sporting events also reach this market. We typically distribute mass mailings of promotional material every two weeks, with the goal of reaching households within a specified radius of each store at least 24 times per year—or about 12 million flyers mailed monthly nationwide. In concentrated geographic markets, and for special promotions, we also utilize local television and radio advertising.



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Capitalize on our existing rent-to-rent business.  We strive to increase revenues in our existing rent-to-rent stores, particularly in the business sector, while managing that division's costs and expenses to make best use of its net earnings and cash flow for the development of our higher-growth operations. We believe that our ability to deliver furniture and equipment to our business customers quickly and efficiently gives us an advantage over general furniture retailers who often require several weeks to effect delivery. In addition, we locate warehouses next to each showroom, permitting store managers to exercise greater control over inventory, merchandise condition and pickup and deliveries. This results in more efficient and consistent service for the customer. The rent-to-rent business experienced a decline in 2001 due to a weak economy and reduced corporate spending. Nevertheless, we believe that our rent-to-rent business will continue to provide us with cash flow to finance a portion of the planned expansion of the sales and lease ownership division. In addition, we believe that as the economy rebounds there may be growth opportunities in the rent-to-rent market, particularly in the business sector.



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Manage merchandise through our manufacturing and distribution capabilities.  We believe that our furniture manufacturing operations and network of seven distribution centers give us a strategic advantage over our competitors. Manufacturing enables us to control the quality, cost, styling, durability and quantity of a substantial portion of our rental furniture merchandise, and provides us a reliable source of rental furniture. In 2002, we completed an expansion of our large manufacturing facility in Cairo, Georgia, adding 100,000 square feet to almost double its capacity and opened a new lamp manufacturing plant in Tampa, Florida. Our distribution system allows us to deliver merchandise promptly to our stores and manage inventory levels more efficiently. During 2001, we opened our seventh regional distribution center in North Carolina, enhancing our nationwide distribution system, and we plan to open three other distribution centers in 2002.



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Utilize proprietary management information systems.  We have developed proprietary computerized information systems to systematically pursue collections and merchandise returns and to match

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inventory with demand. Each of our stores, including franchised sales and lease ownership stores, is linked by computer directly to our corporate headquarters, which enables us to monitor the performance of each store on a daily basis. Our separate systems are tailored to meet the distinct needs of our sales and lease ownership and rent-to-rent operations.

Growth Strategies

        We seek to increase our revenues and profitability through our growth strategies. Our growth strategies are to:

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Open additional company-operated sales and lease ownership stores.  Our strategy is to open sales and lease ownership stores in existing and selected new geographic markets where we can cluster stores to realize the benefits of economies of scale in marketing and distribution and other operating efficiencies. In accordance with this strategy we acquired at the end of 2000 and in early 2001 approximately 80 store locations formerly operated by one of the nation's largest furniture retailers, providing us the opportunity to significantly accelerate store opening plans in 2001. These newly acquired locations allowed us to open stores in the most desirable market areas matching our customer base.



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Increase revenues and net earnings from existing sales and lease ownership stores.  We experienced same store sales growth of 7.4% in 2000, 7.7% in 2001 and 7.4% for the first quarter of 2002. We expect revenues and net earnings to continue to grow as a large number of stores opened in the past few years mature.



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Award additional sales and lease ownership franchises.  We believe that our franchise program allows us to grow more quickly and increase our brand exposure in new markets. In addition, the larger number of systemwide sales and lease ownership stores enables us and our franchisees to realize economies of scale in purchasing, manufacturing and advertising for our sales and lease ownership stores. Franchise fees and royalties also represent a growing source of company revenues.

Operating Divisions

Sales and Lease Ownership

        We established our Aaron's Sales & Lease Ownership division in 1987. At March 31, 2002, we had 368 company-operated sales and lease ownership stores in 26 states and Puerto Rico and 211 franchised sales and lease ownership stores in 37 states. We acquired approximately 80 store locations in 2000 and early 2001 from a national credit-driven furniture retailer, which increased our store count considerably. We acquired the locations mostly through the assumption of leases and through some real estate purchases. Although the start-up costs associated with opening this large number of stores reduced our earnings in the short term, we believe the opportunity to increase our sales and profitability over time has been enhanced by the addition of these stores as they reach maturity.

        We believe that the decline in the number of furniture stores that focus on credit installment sales to lower to middle income consumers has created a market opportunity for us to offer our unique sales and lease ownership concept. The traditional retail consumer durable goods market is much larger than the rental market, leaving substantial potential for growth for our sales and lease ownership division. We believe that the segment of the population targeted by our sales and lease ownership division comprises up to approximately 43% of all households in the United States and that the needs of consumers in that segment generally are underserved.

        We have developed a distinctive concept for our sales and lease ownership stores with specific merchandising selection and store layout, pricing and agreement terms for the customers we want to attract. We believe that these features create a store and sales and lease ownership concept that is

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significantly different from the operations of rent-to-own stores, our traditional rent-to-rent business, and the operations of home furnishings retailers who finance merchandise.

        The typical Aaron's Sales & Lease Ownership store layout consists of a combination showroom and warehouse of 8,000 to 10,000 square feet, with an average of approximately 9,000 total square feet. In selecting new locations for sales and lease ownership stores, we generally look for sites in well-maintained strip shopping centers strategically located within ten miles of established working class neighborhoods and communities with good access. Many of our stores are placed near existing competitors' stores. Each sales and lease ownership store usually maintains at least two trucks and crews for pickups and deliveries, and generally offers same or next day delivery for addresses located within 15 miles of the store. We emphasize a broad selection of brand name products for our electronics and appliance items, and offer customers a wide selection of furniture, including furniture manufactured by our MacTavish Furniture Industries division. Our sales and lease ownership stores also offer computers and jewelry.

        We believe that our sales and lease ownership stores offer lower merchandise prices than similar items offered by rent-to-own operators, and substantially equivalent to the "all-in" contract price of similar items offered by home furnishings retailers who finance merchandise. Approximately 80% of our sales and lease ownership agreements are monthly as compared to the industry standard of weekly agreements, and our agreements also usually provide for a shorter term until the customer obtains ownership. Customers can have the item serviced free of charge or replaced at any time during the rental agreement. Merchandise from the agreements that do not go to term is either re-rented or sold. We also offer, for selected merchandise, an up-front cash and carry purchase option at prices that are competitive with traditional retailers.

Sales and Lease Ownership Franchise Program

        We began franchising Aaron's Sales & Lease Ownership stores in selected markets in 1992, and have continued to attract franchisees. We do not anticipate that franchised stores will compete with company-operated stores, as we mainly award franchises in markets where we are not present and have no current plans to expand. As of March 31, 2002, we have 211 franchise stores open and development agreements with franchisees to open over 90 stores in the future. We believe that our relations with our franchisees are good.

        Franchisees are approved on the basis of the applicant's business background and financial resources. We generally seek franchisees who will enter into development agreements for several stores, although many franchisees currently operate a single store. Most franchisees are involved in the day-to-day operations of the stores.

        We enter into franchise agreements with our franchisees to govern the opening and operation of franchised stores. Under our current standard agreement, we require the franchisee to pay a franchise fee of $35,000 per store. Agreements are for a term of 10 years, with one 10-year renewal option, and require royalty payments to us of 5% of the franchisee's weekly cash collections.

        We assist each franchisee in selecting the proper site for each store. Because of the importance of location to the Aaron's Sales & Lease Ownership concept, one of our pre-opening directors visits the intended market and helps guide the franchisee through the selection process. Once a site is selected, we help in designing the floor plan, including the proper layout of the showroom and warehouse. In addition, we provide assistance in assuring that the design and decor of the showroom is consistent with our requirements. We also lease the exterior signage to the franchisee, and assist with placing pre-opening advertising, ordering initial inventory and obtaining delivery vehicles.

        We have an arrangement with a syndicate of banks to provide financing to qualifying franchisees to assist with establishing and operating their stores. An inventory financing plan to provide franchisees with the capital to purchase inventory is a primary component of the financing program. For qualified

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established franchisees, we have arranged for these institutions to provide a revolving credit line to allow franchisees the flexibility to expand. We guarantee a portion of amounts outstanding under the franchisee financing programs.

        All franchisees are required to complete a comprehensive training program and to operate their franchised sales and lease ownership stores in compliance with our policies, standards and specifications, including such matters as decor, rental agreement terms, hours of operation, pricing and merchandise. Franchisees in general are not required to purchase their rental merchandise from us, although most do so in order to take advantage of bulk purchasing discounts and favorable delivery terms. Many franchisees also purchase their rental furniture from our MacTavish Furniture Industries division.

        We conduct a financial audit of our franchise stores every six to 12 months and also conduct regular operational audits—generally visiting each franchise store almost as often as we visit our company-operated stores. In addition, our proprietary management information system links each franchised store to corporate headquarters.

Rent-to-Rent

        We have been in the rent-to-rent business for over 47 years and are the second largest furniture rent-to-rent company in the United States. Our rent-to-rent business accounted for approximately 27% of total revenues for 2001 and 21% for the three months ended March 31, 2002. We rent new and rental return merchandise to both individuals and businesses, with a growing focus on renting residential and office furniture to business customers. As of March 31, 2002, we operated 74 rent-to-rent stores in 16 states.

        Our typical rent-to-rent store layout consists of a combination showroom and warehouse comprising about 19,000 square feet. Each residential showroom features attractive displays of dining-room, living-room and bedroom furniture in a number of styles, fabrics, materials and colors. Office rental showrooms feature lines of desks, chairs, conference tables, credenzas, sofas and accessories. We believe that locating a warehouse next to each showroom permits store managers to exercise greater control over inventory, merchandise condition and pickup and deliveries, resulting in more efficient and consistent service for the customer.

        Items held for rent, whether new or rental return, are available for purchase and lease purchase at all rent-to-rent stores. Each rent-to-rent store generally offers next day delivery for addresses located within 50 miles of the store, and maintains at least one truck and a crew for pickups and deliveries. We believe that our ability to obtain and deliver furniture and equipment to customers quickly and efficiently gives us an advantage over general furniture retailers who often require several weeks to effect delivery.

        We generally sell rental return merchandise at stores at or above its book value, or cost less depreciation, plus selling expenses—a price which is usually lower than the price for comparable new merchandise. Most merchandise held for sale in stores may also be acquired through a lease purchase option. Because new merchandise is sold at the same location as rental return merchandise, we have the opportunity to sell both new and rental return merchandise to customers who may have been attracted to the store by the advertising and price appeal of rental return merchandise. The ability to sell new and rental return merchandise at the same location allows for more efficient use of facilities and personnel and minimizes overhead.

Furniture Manufacturing

        We believe that our manufacturing capability gives us a strategic advantage over our competitors by enabling us to control the quality, cost, timing, styling, durability and quantity of our furniture rental products. As the only major furniture rental company that manufactures its own furniture, we believe

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that our 711,000 square feet of manufacturing facilities provide us more flexibility in scheduling production runs and in meeting inventory needs than rental companies that do not manufacture their own furniture and are dependent upon third party suppliers.

        Our MacTavish Furniture Industries division has manufactured furniture for our stores since 1971. The division has six furniture manufacturing plants, three bedding manufacturing facilities and two lamp manufacturing facilities which supply nearly one-half of the furniture and accessories we rent or sell. We believe our manufacturing plants have the capacity to meet our needs for the foreseeable future.

        Our MacTavish division manufactures:

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upholstered living-room furniture, including contemporary sofas, sofabeds, chairs and modular sofa and ottoman collections in a variety of natural and synthetic fabrics and leathers



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bedding, including standard sizes of mattresses and box springs



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office furniture, including desks, credenzas, conference tables, bookcases and chairs



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designer lamps, tables and accessories, which we also manufacture for selected national retailers

        MacTavish has designed special features for the furniture it manufactures which we believe make its furniture less expensive to produce, more durable and better equipped for frequent transportation than furniture purchased from third parties. These features include:

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standardization of components



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reduction of parts and features susceptible to wear or damage



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more resilient foam



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durable, soil-resistant fabrics and sturdy frames for longer life and higher residual value



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devices which allow sofas to stand on end for easier and more efficient transport

        MacTavish also manufactures replacement covers of all styles and fabrics of its upholstered furniture for use in reconditioning rental return furniture.

        The principal raw materials we use in furniture manufacturing are fabric, foam, fiber, wire-innerspring assemblies, plywoods and hardwoods. All of these materials are purchased in the open market from sources not affiliated with us. We are not dependent on any single supplier, and none of the raw materials are in short supply.

Marketing and Advertising

        In our sales and lease ownership operations, we rely heavily on national and local television advertising, direct mail and direct delivery of promotional materials. We focus our television advertising on our successful "Dream Products" program. This program features "dream" products such as big screen televisions, home theater systems, leather upholstery, stainless steel refrigerators and top brand name washers and dryers. To help promote the Dream Products program we established a relationship with NASCAR, which reaches a prime audience in our targeted demographic. Our initial relationship was as title sponsorship of the NASCAR Busch Grand National Car Race at the Atlanta Motor Speedway—the nationally televised "Aaron's 312," named for Aaron's three reasons to obtain merchandise and its unique 12-month plan. We also established a limited sponsorship of driver Michael Waltrip's #99 Aaron's Dream Machine in the Busch Grand National Series. Sponsorship of other sporting events also reach this market.

        Sales and lease ownership stores are located within neighborhood communities, and typically distribute mass mailings of promotional material every two weeks, with the goal of reaching households within a specified radius of each store at least 24 times per year—or about 12 million flyers mailed

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monthly nationwide. In addition, delivery personnel are trained to leave promotional material at the door of each residence within five doors of the delivery destination. In concentrated geographic markets, and for special promotions, we also utilize local television and radio advertising.

        We market our rent-to-rent operations through outside sales staff to local apartment communities, calling on leasing agents, resident managers, and property managers. This group heavily influences individual referral business as well as corporate relocation professionals. We also market to interim housing providers that offer temporary housing to corporations that relocate personnel around the country. We have regional and national marketing staff that focuses on this growing segment of the rent-to-rent industry. We also rely on the use of brochures, newspapers, radio, television, direct mail, trade publications, yellow pages, and the internet (http://www.aaronrentsfurniture.com; www.aaronrents.com; www.shopaarons.com, which information is not incorporated in this prospectus) to reach customers. We believe this advertising increases Aaron Rents' brand recognition.

Store Operations

Management

        Our Aaron's Sales & Lease Ownership division has twelve regional managers supervised by three vice presidents who are primarily responsible for monitoring individual store performance and inventory levels within the respective regions. Our rent-to-rent division is organized geographically into two residential and one office region, each supervised by a vice president. Presidents manage the sales and lease ownership and rent-to-rent divisions.

        Stores are directly supervised by 64 sales and lease ownership district/city managers and eight rent-to-rent regional managers. At the individual store level, the store manager is responsible for:

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customer and credit relations



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deliveries and pickups



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warehouse and inventory management



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certain marketing efforts

        Store managers are also responsible for inspecting rental return furniture to determine whether it should be sold as is, rented again as is, repaired and sold, or reconditioned for additional rental. A significant portion of the store manager's compensation is dependent upon store revenues and profits.

        Executive management directs and coordinates:

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purchasing



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financial planning and control



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manufacturing



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employee training



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new store site selection and construction for the company-operated stores

        Our internal audit department conducts periodic audits of every store, including audits of company-operated sales and lease ownership stores several times each year, and semi-annual audits of rent-to-rent stores and franchised sales and lease ownership stores. Our business philosophy has always emphasized strict cost containment and fiscal controls. Executive and store level management monitor expenses to contain costs. We pay all invoices from company headquarters in order to enhance fiscal accountability. We believe that careful attention to the expense side of our operations has enabled us to maintain financial stability and profitability.

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Management Information Systems

        We use computer-based management information systems to facilitate cash collections, merchandise returns and inventory monitoring. Through the use of proprietary software we have developed, each of our stores is linked by computer directly to corporate headquarters, which enables us to monitor the performance of each store on a daily basis. Different systems are used to run the sales and lease ownership and rent-to-rent operations due to the significant differences in the businesses. At the store level, the store manager is better able to track merchandise on the showroom floor and in the warehouse to minimize delivery times, assist with product purchasing and match customer needs with available inventory.

Rental Agreement Approval, Renewal and Collection

        One of the keys to the success of our sales and lease ownership operation is our ability to achieve timely cash collections. Individual store managers use our computerized information system on a daily basis to track cash collections. They contact customers within a few days of when their lease payments are due in order to encourage customers to keep their agreement current and in force, rather than having to return the merchandise for non-payment, and to renew their agreements for an additional period. Careful attention to cash collections is particularly important in the sales and lease ownership operations, where the customer typically has the option to cancel the agreement at any time and each payment is considered a renewal of the agreement rather than a collection of a receivable.

        Each rent-to-rent store performs a credit check on most of its residential and business customers. We generally perform no formal credit check with respect to sales and lease ownership customers other than to verify employment or other reliable sources of income and personal references supplied by the customer. All of our agreements for residential and office merchandise require payments in advance, and the merchandise normally is repossessed if a payment is significantly in arrears.

        Net bad debt losses from rent-to-rent rentals as a percentage of rent-to-rent rental revenues were approximately 1.4%, 2.7%, 2.1%, and 1.9% for the three months ended March 31, 2002 and the years ended December 31, 2001, 2000 and 1999, respectively. We do not extend credit to sales and lease ownership customers. For the same periods, net merchandise shrinkage as a percentage of combined rental revenues was 2.3%, 2.5%, 2.5% and 2.2%, respectively. We believe that our collection and repossession policies comply with applicable legal requirements, and we discipline any employee that we discover deviating from such policies.

Customer Service

        We believe that customer service is one of the most important elements in the success of our sales and lease ownership and rent-to-rent businesses. Customer satisfaction is critical because the customer usually has the option of returning the rented merchandise at any time. Our goal is to make our customers feel positive about Aaron Rents and its products from the moment they enter our showrooms. Items are serviced at no charge to the customer, and quick, free delivery is available in many cases. In order to increase rentals at existing stores, we foster relationships with existing customers to attract recurring business, and many new rental and lease ownership agreements are attributable to repeat customers.

        Because of the importance of customer service, we believe that a prerequisite for successful operations and growth is skilled, effective employees who value our customers and project a genuine desire to serve customers needs. Our Aaron's Sales & Lease Ownership division has nine training facilities where store managers and employees cover all areas of our operations, with a heavy emphasis on customer service. We also initiated a training program we call Aaron's University designed to provide a uniform customer service experience regardless of the store location or whether company-operated or franchised. Standardizing operating procedures throughout our system is a primary focus of Aaron's University. We have also instituted a 13-course curriculum for sales and lease ownership

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managers. The rent-to-rent division's sales and management training programs have similar training conducted at our Atlanta headquarters. Our policy of promoting from within aids in employee retention and commitment to customer service and other business philosophies, which also allows us to realize greater benefits from our employee training programs.

Purchasing and Distribution

        Our product mix is determined by store managers in consultation with regional managers and regional vice presidents, based on an analysis of customer demands. In our rent-to-rent division, furniture is the primary merchandise category, accounting for approximately 93% of rent-to-rent revenues for the year ended December 31, 2001.

        The following table shows the percentage of sales and lease ownership division revenues from fiscal 2001 attributable to different merchandise categories:

        We purchase the majority of our merchandise directly from manufacturers, with the balance from local distributors. Our largest supplier is our own MacTavish Furniture Industries division, which supplies nearly one-half of the furniture we rent or sell. We have no long-term agreements for the purchase of merchandise and believe that our relationships with suppliers are good.

        Rent-to-rent stores receive merchandise directly from vendors who ship to the stores' attached warehouses. Sales and lease ownership operations utilize distribution centers to control merchandise. All company-operated sales and lease ownership stores receive orders directly from our seven distribution centers located in Auburndale, Florida; Dallas and Sugarland, Texas; Duluth, Georgia; Columbus, Ohio; Baltimore, Maryland and Winston-Salem, North Carolina. We plan to open three other distribution centers in 2002. Most of our stores are within a 250-mile radius of a distribution center, assuring timely shipment of supplies to the stores and fast delivery of orders to customers.

        Sales and lease ownership stores typically have smaller warehouses with less merchandise storage space than our rent-to-rent stores. Vendors ship directly to the distribution centers.

        We realize freight savings from truckload discounts and more efficient distribution of merchandise by using distribution centers. We use our own tractor-trailers, local delivery trucks, and various contract carriers to make weekly deliveries to individual stores.

Legal Proceedings

        We have an action pending against us in Escambia County, Florida alleging technical violations of the Florida consumer collections practices act and related claims, seeking certification as a class action and alleging statutory damages of $500 per violation. In March 2002, the court awarded us summary judgment on the merits of the case and denied certification of the class. The case remains on appeal, and a second action filed on behalf of the same putative class has been stayed pending the outcome of that appeal. We believe the summary judgment will be upheld on appeal and that we will not incur any material liability in connection with these claims; however, given the novelty of the action and the uncertainty of consumer class actions, there can be no assurance that such will be the case.

        From time to time, we are party to various other legal proceedings arising in the ordinary course of business.

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MANAGEMENT

Executive Officers and Directors

        The following table sets forth our directors and executive officers, their ages and positions:

*

Member of the stock option committee

+

Member of the audit committee

        Mr. Loudermilk, Sr. has served as Chairman of the board and Chief Executive Officer of Aaron Rents since our incorporation in 1962. From 1962 to 1997, he was also President of Aaron Rents. He has been a director of America's Mart Corporation, a company in the wholesale trade and retail industry, owner and manager of the Atlanta Merchandise Mart, a wholesale market, since 1996. He is one of the founders and Chairman of the board of The Buckhead Community Bank, and formerly the Chairman of the board of directors of the Metropolitan Atlanta Rapid Transit Authority.

        Mr. Loudermilk, Jr., has served as a director of Aaron Rents since 1983, and as President and Chief Operating Officer since 1997. From 1993 to 1997, he was Vice President, Real Estate of Aaron Rents. From 1992 to 1993, he was a self-employed real estate investor. From 1990 to 1991, Mr. Loudermilk, Jr., was Executive Vice President of Ball Stalker Co., then a subsidiary of Aaron Rents.

        Mr. Danielson has served as Vice President, Finance and Chief Financial Officer and director of Aaron Rents since 1990. He was named Executive Vice President in 1998. He has also served as a director of Abrams Industries, Inc., a company engaged in commercial construction, real estate investment and development, and energy management, since 2000.

        Mr. Butler joined Aaron Rents in 1974 as a Store Manager. He served as Vice President of the Aaron's Rental Purchase Division from 1986 to 1995 and currently is President of that Division, now known as the Aaron's Sales & Lease Ownership Division. Mr. Butler has served as a director of Aaron Rents since 2000.

        Mr. Cates has served as Director of Risk Management since 1990, Vice President since 1994, and Secretary of Aaron Rents since 1999.

        Mr. Quinones joined Aaron Rents in 1985 as a Store Manager. He served as Vice President of the Rent-to-Rent Division from 1989 until becoming President of that Division in 2000.

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        Mr. Rhodus has served as Vice President, General Counsel since 1999. He was a senior attorney for Alumax, Inc., an aluminum products manufacturing company, from 1998 to 1999 and Vice President and General Counsel for Atlantax Systems, Inc., a business tax services company, from 1993 to 1998.