Aarons 10-Q 2005 Q3 Quarterly report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of l934

September 30, 2005	1-13941
For Quarter Ended	Commission File No.

AARON RENTS, INC.

(Exact name of registrant as

specified in its charter)

Georgia	58-0687630
(State or other jurisdiction of	(I. R. S. Employer
incorporation or organization)	Identification No.)
309 E. Paces Ferry Road, N.E.
Atlanta, Georgia	30305-2377
(Address of principal executive offices)	(Zip Code)

(404) 231-0011
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)

     Indicate by check mark whether registrant (l) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ
Noo

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yesþ
Noo

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso
Noþ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Shares Outstanding as of
Title of Each Class	November 4, 2005
Common Stock, $.50 Par Value	41,547,141
Class A Common Stock, $.50 Par Value	8,396,233

AARON RENTS, INC.

INDEX

 EX-10.(KK) FIRST OMNIBUS AMENDMENT

 EX-10.(LL) FIRST AMENDMENT TO LOAN FACILITY AGREEMENT

 EX-10.(MM) SECOND AMENDMENT TO LOAN FACILITY AGREEMENT

 EX-15 LETTER RE:UNAUDITED INTERIM FINANCIAL INFORMATION

 EX-31.(A) SECTION 302 CERTIFICATION OF THE CEO

 EX-31.(B) SECTION 302 CERTIFICATION OF THE CFO

 EX-32.(A) SECTION 906 CERTIFICATION OF THE CEO

 EX-32.(B) SECTION 906 CERTIFICATION OF THE CFO

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

AARON RENTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	September,			December 31,
	2005			2004
	(In Thousands, Except Share Data)
ASSETS:
Cash	$	6,753		$	5,865
Accounts Receivable (net of allowances of $3,111 in 2005 and $1,963 in 2004)		43,623			32,736
Rental Merchandise		728,263			639,192
Less: Accumulated Depreciation		(251,331	)		(213,625	)
		476,932			425,567
Property, Plant and Equipment, Net		133,899			111,118
Goodwill and Other Intangibles, Net		97,241			74,874
Prepaid Expenses and Other Assets		27,882			50,128
Total Assets	$	786,330		$	700,288
LIABILITIES & SHAREHOLDERS’ EQUITY:
Accounts Payable and Accrued Expenses	$	97,376		$	93,565
Dividends Payable		698			647
Deferred Income Taxes Payable		74,584			95,173
Customer Deposits and Advance Payments		19,223			19,070
Credit Facilities		175,042			116,655
Total Liabilities		366,923			325,110
Commitments & Contingencies
Shareholders’ Equity
Common Stock, Par Value $.50 Per Share; Authorized: 50,000,000 Shares; Shares Issued: 44,989,602 at September 30, 2005 and December 31, 2004		22,495			22,495
Class A Common Stock, Par Value $.50 Per Share; Authorized: 25,000,000 Shares; Shares Issued: 12,063,856 at September 30, 2005 and December 31, 2004		6,032			6,032
Additional Paid-in Capital		92,338			91,032
Retained Earnings		335,469			294,077
Accumulated Other Comprehensive Loss		(64	)		(539	)
		456,270			413,097
Less: Treasury Shares at Cost,
Common Stock, 3,453,888 Shares at September 30, 2005 and 3,625,230 Shares at December 31, 2004		(20,959	)		(22,015	)
Class A Common Stock, 3,667,623 Shares at September 30, 2005 and December 31, 2004		(15,904	)		(15,904	)
Total Shareholders’ Equity		419,407			375,178
Total Liabilities & Shareholders’ Equity	$	786,330		$	700,288

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

AARON RENTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
	(In Thousands, Except Share Data)
REVENUES:
Rentals and Fees	$	210,951	$	173,721	$	626,722	$	516,318
Retail Sales		14,442		13,651		43,799		42,700
Non-Retail Sales		43,709		36,831		131,492		118,602
Franchise Royalties and Fees		7,548		6,568		21,876		18,094
Other		2,017		877		5,464		8,713
		278,667		231,648		829,353		704,427
COSTS AND EXPENSES:
Retail Cost of Sales		9,449		9,785		29,077		30,158
Non-Retail Cost of Sales		40,639		34,253		122,361		110,268
Operating Expenses		136,003		104,864		377,236		307,615
Depreciation of Rental Merchandise		76,727		63,845		226,231		189,377
Interest		2,343		1,350		5,680		3,824
		265,161		214,097		760,585		641,242
EARNINGS BEFORE INCOME TAXES		13,506		17,551		68,768		63,185
INCOME TAXES		4,663		6,904		25,383		24,336
NET EARNINGS	$	8,843	$	10,647	$	43,385	$	38,849
COMMON STOCK AND CLASS A COMMON STOCK EARNINGS PER SHARE:
Basic	$	.18	$	.21	$	.87	$	.78
Assuming Dilution		.17		.21		.85		.77
CASH DIVIDENDS DECLARED PER SHARE:
Common Stock	$	.014	$	.013	$	.040	$	.026
Class A Common Stock		.014		.013		.040		.026
COMMON STOCK AND CLASS A COMMON STOCK WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		49,861		49,711		49,807		49,557
Assuming Dilution		50,844		50,681		50,786		50,500

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

AARON RENTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2005			2004
	(In Thousands)
OPERATING ACTIVITIES:
Net Earnings	$	43,385		$	38,849
Depreciation and Amortization		246,268			207,214
Additions to Rental Merchandise		(435,551	)		(403,039	)
Book Value of Rental Merchandise Sold or Disposed		169,284			159,882
Change in Deferred Income Taxes		(20,589	)		14,644
Gain on Sale of Marketable Securities		(565	)		(5,481	)
Loss / (Gain) on Sale of Property, Plant, and Equipment		114			(429	)
Change in Income Tax Receivable, Included in Prepaid Expenses and Other Assets		20,023			—
Change in Accounts Payable and Accrued Expenses		4,262			(2,330	)
Change in Accounts Receivable		(10,887	)		(1,683	)
Other Changes, Net		(4,109	)		4,243
Cash Provided by Operating Activities		11,635			11,870
INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment		(43,473	)		(27,550	)
Contracts and Other Assets Acquired		(35,485	)		(24,228	)
Proceeds from Sale of Marketable Securities		6,993			7,592
Investment in Marketable Securities		—			(6,436	)
Proceeds from Sale of Property, Plant, and Equipment		3,294			6,162
Cash Used by Investing Activities		(68,671	)		(44,460	)
FINANCING ACTIVITIES:
Proceeds from sale of senior notes		60,000			—
Proceeds from Credit Facilities		314,110			237,688
Repayments on Credit Facilities		(315,723	)		(208,461	)
Dividends Paid		(1,942	)		(1,397	)
Issuance of Stock Under Stock Option Plans		1,479			4,542
Cash Provided by Financing Activities		57,924			32,372
Increase (Decrease) in Cash		888			(218	)
Cash at Beginning of Period		5,865			4,687
Cash at End of Period	$	6,753		$	4,469

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

AARON RENTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2005

(Unaudited)

Note A — Basis of Presentation

The consolidated financial statements include the accounts of Aaron Rents, Inc. (the “Company”) and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The consolidated balance sheet as of September 30, 2005 and the consolidated statements of earnings and the consolidated statements of cash flows for the quarters and nine-month periods ended September 30, 2005 and 2004, are unaudited. The preparation of interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Management does not believe these estimates or assumptions will change significantly in the future absent unsurfaced or unforeseen events. Generally, actual experience has been consistent with management’s prior estimates and assumptions; however, actual results could differ from those estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. We suggest you read these financial statements in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2004. The results of operations for the quarter ended September 30, 2005 are not necessarily indicative of operating results for the full year.

Certain reclassifications have been made to the prior periods to conform to the current period presentation.

Accounting Policies and Estimates

See Note A to the consolidated financial statements in the 2004 Annual Report on Form 10-K.

Cash

In the consolidated balance sheet as of September 30, 2004 and consolidated statement of cash flows for the nine months ended September 30, 2004, checks outstanding were classified as a reduction to cash. Because the financial institutions with checks outstanding and those with deposits on hand did not and do not have legal rights of offset, we have reclassified checks outstanding in certain zero balance bank accounts to accounts payable at September 30, 2005 and for all consolidated balance sheets and consolidated statements of cash flows presented. This reclassification has the effect of increasing both cash and accounts payable and accrued expenses by $4.3 million on the consolidated balance sheet as of September 30, 2004 and the change in accounts payable and accrued expenses by $0.3 million on the consolidated statement of cash flows for the nine months ended September 30, 2004.

Rental Merchandise

See Note A to the consolidated financial statements in the 2004 Annual Report on Form 10-K. Rental merchandise adjustments for the three-month periods ended September 30 were $8.9 million in 2005 and $7.8 million in 2004. Rental merchandise adjustments for the nine-month periods ended September 30 were $17.0 million in 2005 and $14.8 million in 2004. These charges are recorded as a component of operating expenses. Effective September 30, 2004 we began recording rental merchandise adjustments on the allowance method, which estimates merchandise losses incurred but not yet identified by management as of the end of the accounting period. We expect periodic rental merchandise adjustments under this new method to be materially consistent with the prior year’s adjustments under the formerly utilized direct write-off method, pursuant to which merchandise losses were only recognized after they were specifically identified.

Goodwill and Other Intangibles

During the nine months ended September 30, 2005, the Company recorded $21.6 million in goodwill, $2.0 million in customer relationship intangibles, and $0.3 million in acquired franchise development rights in connection with a series of acquisitions of sales and lease ownership businesses. Customer relationship intangibles are amortized on a straight-line basis over their estimated useful lives of two years. Amortization expense approximated $518,000 and $411,000 for the three-month periods ended September 30, 2005 and 2004, respectively. Amortization expense approximated $1.5 million and $1.1 million for the nine-month periods ended September 30, 2005 and 2004, respectively. The aggregate purchase price for these asset acquisitions totaled approximately $35.5 million, with the principal tangible assets acquired consisting of rental merchandise and certain fixtures and equipment. These purchase price allocations are tentative and preliminary; we anticipate finalizing them prior to December 31, 2005. The results of operations of the acquired businesses are included in the Company’s results of operations from the dates of acquisition and are not significant.

Stock Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employeesand related Interpretations in accounting for its employee stock options and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock Based Compensation. The Company grants stock options for a fixed number of shares to employees primarily with an exercise price equal to the fair value of the shares at the date of grant and, accordingly, recognizes no compensation expense for these stock option grants. The Company has granted stock options for a fixed number of shares to certain key executives with an exercise price below the fair value of the shares at the date of grant. Compensation expense for these grants is recognized over the three-year vesting period of the options for the difference between the exercise price and the fair value of a share of Common Stock on the date of grant multiplied by the number of options granted.

For purposes of pro forma disclosures under SFAS 123 as amended by SFAS No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement 123, the estimated fair value of the options is amortized to expense over the options’ vesting period. The following table illustrates the effect on net earnings and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In Thousands, Except Share Data)	2005			2004			2005			2004
Net Earnings before effect of Key Executive grants	$	8,975		$	10,731		$	43,782		$	38,965
Expense effect of Key Executive grants recognized		(132	)		(84	)		(397	)		(116	)
Net Earnings as Reported		8,843			10,647			43,385			38,849
Stock-based Employee Compensation Cost, Net of Tax — Pro Forma		(532	)		(386	)		(1,545	)		(1,202	)
Pro Forma Net Earnings	$	8,311		$	10,261		$	41,840		$	37,647
Basic Earnings Per Share — As Reported	$	.18		$	.21		$	.87		$	.78
Basic Earnings Per Share — Pro Forma	$	.17		$	.21		$	.84		$	.76
Diluted Earnings Per Share — As Reported	$	.17		$	.21		$	.85		$	.77
Diluted Earnings Per share — Pro Forma	$	.16		$	.20		$	.83		$	.75

For periods beginning after December 31, 2005, the Company will account for all employee stock options under the fair value method. See Note E.

Income Taxes

The Company has in the past benefited from the additional first-year or “bonus” depreciation allowance under U.S. federal income tax law, which generally allowed the Company to accelerate the depreciation on rental merchandise it acquired after September 10, 2001 and placed in service prior to January 1, 2005. It is anticipated that the

expiration of this temporary accelerated depreciation allowance, combined with the Company’s profitability, will contribute to the Company having to make future tax payments on its income. During the third quarter of 2005, income tax expense decreased due to lower state income taxes as well as adjustments resulting from favorable state income allocations in connection with the Company’s filing of its 2004 tax return this quarter. The third quarter tax provision reflects the year to date effect of such adjustments.

Note B – Credit Facilities

See Note D to the consolidated financial statements in the 2004 Annual Report on Form 10-K.

During the third quarter of 2005, the Company entered into a note purchase agreement with a consortium of insurance companies. Pursuant to this agreement, the Company and its two subsidiaries as co-obligors issued $60 million in senior unsecured notes to the purchasers in a private placement. The notes bear interest at a rate of 5.03% per year and mature on July 27, 2012. Interest only payments are due quarterly for the first two years, followed by annual $12 million principal repayments plus interest for the five years thereafter, beginning on July 27, 2008. The Company used the proceeds from this financing to replace shorter-term borrowings under the Company’s revolving credit agreement.

There were no significant changes in the nature of the Company’s capital leases with related parties during the third quarter of 2005. The Company was in compliance with all restrictive covenants contained in its credit facilities.

Note C – Comprehensive Income

Comprehensive income is comprised of the net earnings of the Company, the change in the fair value of interest rate swap agreements, net of income taxes, and the changes in unrealized gains or losses on available-for-sale securities, net of income taxes, as summarized below:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In Thousands)	2005		2004			2005		2004
Net Earnings	$	8,843	$	10,647		$	43,385	$	38,849
Other comprehensive income:
Derivative instruments, net of taxes		—		124			215		508
Unrealized gain on marketable securities, net of taxes		—		(767	)		82		1,611
Recognition of unrealized gain on marketable securities, net of taxes		—					178		(3,350	)
Total other comprehensive income		—		(643	)		475		(1,231	)
Comprehensive Income	$	8,843	$	10,004		$	43,860	$	37,618

Note D – Segment Information

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In Thousands)	2005			2004			2005			2004
Revenues From External Customers:
Sales & Lease Ownership	$	241,070		$	196,932		$	713,088		$	595,183
Rent-to-Rent		28,739			27,012			87,435			80,647
Franchise		7,627			6,606			22,119			18,168
Other		1,090			224			4,174			8,298
Manufacturing		21,391			15,409			66,366			50,123
Elimination of Intersegment Revenues		(21,292	)		(15,619	)		(66,149	)		(50,521	)
Cash to Accrual Adjustments		42			1,084			2,320			2,529
Total Revenues from External Customers	$	278,667		$	231,648		$	829,353		$	704,427
Earnings Before Income Taxes:
Sales & Lease Ownership	$	7,456		$	10,407		$	44,636		$	41,019
Rent-to-Rent		1,537			1,757			7,824			6,218
Franchise		5,702			4,630			16,343			12,901
Other		(2,030	)		494			(1,374	)		2,656
Manufacturing		394			(1,167	)		1,589			(218	)
Earnings Before Income Taxes for Reportable Segments		13,059			16,121			69,018			62,576
Elimination of Intersegment (Profit) Loss		(358	)		1,148			(1,445	)		209
Cash to Accrual and Other Adjustments		805			282			1,195			400
Total Earnings Before Income Taxes	$	13,506		$	17,551		$	68,768		$	63,185

Earnings before income taxes for each reportable segment are generally determined in accordance with accounting principles generally accepted in the United States with the following adjustments:

• A predetermined amount of approximately 2.3% of each reportable segment’s revenues is charged to the reportable segment as an allocation of corporate overhead.

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

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

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

• Sales and lease ownership rental merchandise write-offs are recorded using the direct write-off method for management reporting purposes. For financial reporting purposes the allowance method is used and is reflected as part of Cash to Accrual and Other Adjustments.

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

• Sales and lease ownership revenues are reported on a cash basis for management reporting purposes.

Revenues in the “Other” category are primarily from leasing space to unrelated third parties in our corporate headquarters building and revenues from several minor unrelated activities. The pre-tax items in the “Other” category are the net result of the profits and losses from leasing a portion of the corporate headquarters and several minor unrelated activities, and the portion of corporate overhead not allocated to the reportable segments for management purposes.

Note E – Adoption of New Accounting Principles

In November 2004 the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151,Inventory Costs — An Amendment of ARB No. 43, Chapter4. SFAS 151 amends Accounting Research Bulletin No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current period charges. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for the Company beginning January 1, 2006, though early application is permitted. Management is currently assessing the impact of SFAS 151, but does not expect the impact to be material.

In December 2004 the FASB issued SFAS No. 123 (revised 2004),Share-based Payment. SFAS 123R amends SFAS 123 to require adoption of the fair value method of accounting for employee stock options. In April 2005, the SEC extended the adoption date of SFAS 123R to January 1, 2006 for calendar-year companies. The transition guidance in SFAS 123R specifies that compensation expense for options granted prior to the effective date be recognized over the remaining vesting period of those options, and that compensation expense for options granted subsequent to the effective date be recognized over the vesting period of those options. We anticipate recognizing compensation expense of approximately $2.9 million and $1.3 million, or $.04 and $.02 per diluted share, for the years ended December 31, 2006 and 2007, respectively, in connection with stock option grants made prior to September 30, 2005.

In May 2005 the FASB issued SFAS No. 154,Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 replaces APB Opinion No. 20,Accounting Changesand SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and error corrections occurring in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 is not anticipated to have a material effect on the Company’s financial position or results of operations.

Note F – Commitments

The Company leases warehouse and retail store space for substantially all of its operations under operating leases expiring at various times through 2019. We also lease certain properties under capital leases with certain related parties that are more fully described in Note D to the consolidated financial statements in the 2004 Annual Report on Form 10-K. Most of the leases contain renewal options for additional periods ranging from one to 15 years or provide for options to purchase the related property at predetermined purchase prices that do not represent bargain purchase options. We also lease transportation and computer equipment under operating leases expiring during the next five years. We expect that most leases will be renewed or replaced by other leases in the normal course of business.

The Company has guaranteed the borrowings of certain independent franchisees under a franchise loan program with several banks. In the event these franchisees are unable to meet their debt service payments or otherwise experience an event of default, the Company would be unconditionally liable for 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. At September 30, 2005, the portion that the Company might be obligated to repay in the event franchisees defaulted was approximately $108.8 million. However, due to franchisee borrowing limits, management believes any losses associated with any defaults would be mitigated through recovery of rental merchandise as well as the associated rental agreements and other assets. Since its inception in 1994, the Company has had no losses associated with the franchisee loan and guaranty program.

The Company has no long-term commitments to purchase merchandise. See Note F to the consolidated financial statements in the 2004 Annual Report on Form 10-K for further information.

Note G – Related Party Transactions

The Company leases certain properties under capital leases with certain related parties that are more fully described in Note D to the consolidated financial statements in the 2004 Annual Report on Form 10-K.

As part of its marketing program, the Company sponsors professional driver Michael Waltrip’s Aaron’s Dream Machine in the NASCAR Busch Series. In 2005, the Company began sponsoring a driver development program implemented by Mr. Waltrip’s company. The two drivers participating in the driver development program for 2005 are both the sons of the president of the Company’s sales and lease ownership division. The portion of the Company’s sponsorship of Michael Waltrip attributable to the driver development program is approximately $890,000 for 2005.

Note H – Effects of Hurricanes Katrina and Rita

During the third quarter of 2005, the Company recorded $3.9 million in estimated losses of merchandise in customers’ homes and in stores that was either destroyed or severely damaged by Hurricanes Katrina and Rita, of which $1.1 million is expected to be covered by insurance proceeds. Additionally, the Company recorded $0.7 million in other income related to expected proceeds from business interruption insurance associated with the operations of hurricane-affected stores.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Aaron Rents, Inc.

We have reviewed the consolidated balance sheet of Aaron Rents, Inc. and subsidiaries as of September 30, 2005, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2005 and 2004, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2005 and 2004. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Aaron Rents, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended not presented herein, and in our report dated March 7, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Atlanta, Georgia
November 4, 2005

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Information: Except for historical information contained herein, the matters set forth in thisForm 10-Q are forward-looking statements. Forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from any such statements, including risks and uncertainties associated with our growth strategy, competition, trends in corporate spending, our franchise program, government regulation and the other risks and uncertainties discussed under the caption “Certain Factors Affecting Forward-Looking Statements” in Part I, Item 1 -“Business” in the Company’s Annual Report on Form 10-K for the Year Ended December 31, 2004 filed with the Securities and Exchange Commission and in the Company’s other public filings.

The following discussion should be read in conjunction with the consolidated financial statements as of and for the three months and nine months ended September 30, 2005, including the notes to those statements, appearing elsewhere in this report. We also suggest that this management’s discussion and analysis be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.

Overview

Aaron Rents, Inc. is a leading U.S. company engaged in the combined businesses of the rental, lease ownership and specialty retailing of consumer electronics, residential and office furniture, household appliances and accessories. 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 manufactures and supplies nearly one-half of the furniture and related accessories rented and sold in our stores. Our sales and lease ownership division accounted for 89% of our total revenues in the third quarter and the first nine months of 2005 compared with 88% in each of the comparable periods in 2004.

In this management’s discussion and analysis section we review the results of our sales and lease ownership and rent-to-rent divisions, as well as the five components of our revenues: rentals and fees, retail sales, non-retail sales, franchise royalties and fees and other revenues. Rentals and fees includes all revenues derived from rental agreements from our sales and lease ownership and 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 represent merchandise sales to our franchisees from our sales and lease ownership division. Franchise royalties and fees represent fees from sale of franchise rights and royalty payments from franchisees as well as other related income from our franchised stores. Other revenues represents other miscellaneous revenues ancillary to our core operations, including the gain on the sale of investments.

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

Results of Operations

Three months ended September 30, 2005 versus three months ended September 30, 2004

The following table shows key selected financial data for the quarters ended September 30, 2005 and 2004, and the changes in dollars and as a percentage to 2005 from 2004:

	Three Months		Three Months		Dollar Increase/			% Increase/
	Ended		Ended		(Decrease) to			(Decrease) to
(In Thousands)	September 30, 2005		September 30, 2004		2005 from 2004			2005 from 2004
REVENUES:
Rentals and Fees	$	210,951	$	173,721	$	37,230			21.4	%
Retail Sales		14,442		13,651		791			5.8
Non-Retail Sales		43,709		36,831		6,878			18.7
Franchise Royalties and Fees		7,548		6,568		980			14.9
Other		2,017		877		1,140			130.0
		278,667		231,648		47,019			20.3
COSTS AND EXPENSES:
Retail Cost of Sales		9,449		9,785		(336	)		(3.4	)
Non-Retail Cost of Sales		40,639		34,253		6,386			18.6
Operating Expenses		136,003		104,864		31,139			29.7
Depreciation of Rental Merchandise		76,727		63,845		12,882			20.2
Interest		2,343		1,350		993			73.6
		265,161		214,097		51,064			23.9
EARNINGS BEFORE INCOME TAXES		13,506		17,551		(4,045	)		(23.0	)
INCOME TAXES		4,663		6,904		(2,241	)		(32.5	)
NET EARNINGS	$	8,843	$	10,647	$	(1,804	)		(16.9	)%

Revenues

The 20.3% increase in total revenues in the third quarter of 2005 over the same period in 2004 is primarily attributable to continued growth in our sales and lease ownership division in which revenues increased 21.9%. Total revenues for our sales and lease ownership division increased $44.8 million to $249.2 million in the third quarter of 2005 compared to $204.3 million in the third quarter of 2004. This increase was attributable to an 8.4% increase in same store revenues and the net addition of 122 Company-operated stores since the end of the third quarter of 2004. The total number of Company-owned stores at September 30, 2005 was 766.

The 21.4% increase in rentals and fees revenues is attributable to a $35.4 million increase from our sales and lease ownership division related to growth in same store revenues and the increase in the number of stores described above.

Revenues from retail sales increased 5.8% due to a $0.7 million increase in our sales and lease ownership division. Retail sales represent sales of both new and rental return merchandise.

The 18.7% increase in non-retail sales in the third quarter of 2005 reflects the significant growth in our franchise operations. The total number of franchised stores at September 30, 2005 was 383, reflecting a net addition of 40 stores since the end of the third quarter of 2004.

The 14.9% increase in franchise royalties and fees primarily reflects an increase in royalty income from franchisees, increasing $0.8 million to $5.3 million in the third quarter of 2005 compared to $4.5 million in the third quarter of 2004, with increased franchise and financing fee revenues comprising the majority of the remainder. This

franchisee related revenue growth reflects the net addition of 40 franchised stores since the end of the third quarter 2004 and improving operating revenues driven by increased rental volume at maturing franchised stores. Our franchisees had revenues of $102.7 million during the third quarter of 2005, a 15% increase over the comparable prior year period. Revenues of franchisees, however, are not revenues of Aaron Rents, Inc.

The 130.0% increase in other revenues is primarily attributable to the recognition of a $0.7 million gain related to expected proceeds from business interruption insurance associated with the operations of stores affected by Hurricanes Katrina and Rita in the third quarter of 2005.

Cost of Sales

Retail cost of sales decreased 3.4%, with retail cost of sales as a percentage of retail sales decreasing to 65.4% from 71.7%, due primarily to higher margins on certain retail sales in our sales and lease ownership division.

Cost of sales from non-retail sales increased 18.6%, following the increase in non-retail sales described above, with the margin on non-retail sales remaining comparable between the third quarters of 2005 and 2004.

Expenses

The 29.7% increase in operating expenses is a result of the growth of our sales and lease ownership division described above, coupled with $2.8 million in expenses, net of $1.1 million of expected insurance recoveries, related to estimated losses due to Hurricanes Katrina and Rita. As a percentage of total revenues, operating expenses increased to 48.8% for the third quarter of 2005 compared to 45.3% for the third quarter of 2004.

The 20.2% increase in depreciation of rental merchandise was the result of the growth of our sales and lease ownership division described above. Depreciation of rental merchandise as a percentage of rentals and fees revenue decreased to 36.4% for the third quarter of 2005 from 36.8% for the third quarter of 2004, resulting from improved rental margins in the sales and lease ownership division.

The 73.6% increase in interest expense is primarily a result of higher debt levels in the third quarter of 2005 compared to the third quarter of 2004.

The reduction in the effective tax rate to 34.5% in 2005 compared to 39.3% in 2004 is due to lower state income taxes as well as adjustments resulting from favorable state income allocations in connection with the Company’s filing of its 2004 tax return this quarter. The third quarter tax provision reflects the year to date effect of such adjustments.

Net Earnings

The 16.9% decrease in net earnings in the third quarter of 2005 is primarily due to increased expenses during the third quarter of 2005 related to estimated losses due to Hurricanes Katrina and Rita, higher operating expenses and slightly lower margins on rentals, partially offset by the maturation of new Company-operated sales and lease ownership stores added over the past several years contributing to a 8.4% increase in same store revenues, and a 14.9% increase in franchise fees, royalty income, and other related franchise income. As a percentage of total revenues, net earnings decreased to 3.2% for the third quarter of 2005 from 4.6% for the third quarter of 2004 primarily related to increased expenses during the third quarter of 2005 and estimated losses due to Hurricanes Katrina and Rita.

Nine months ended September 30, 2005 versus nine months ended September 30, 2004

The following table shows key selected financial data for the nine month periods ended September 30, 2005 and 2004, and the changes in dollars and as a percentage to 2005 from 2004:

					Dollar Increase/			% Increase/
	Nine Months Ended		Nine Months Ended		(Decrease) to			(Decrease) to
(In Thousands)	September 30, 2005		September 30, 2004		2005 from 2004			2005 from 2004
REVENUES:
Rentals and Fees	$	626,722	$	516,318	$	110,404			21.4	%
Retail Sales		43,799		42,700		1,099			2.6
Non-Retail Sales		131,492		118,602		12,890			10.9
Franchise Royalties and Fees		21,876		18,094		3,782			20.9
Other		5,464		8,713		(3,249	)		(37.3	)
		829,353		704,427		124,926			17.7
COSTS AND EXPENSES:
Retail Cost of Sales		29,077		30,158		(1,081	)		(3.6	)
Non-Retail Cost of Sales		122,361		110,268		12,093			11.0
Operating Expenses		377,236		307,615		69,621			22.6
Depreciation of Rental Merchandise		226,231		189,377		36,854			19.5
Interest		5,680		3,824		1,856			48.5
		760,585		641,242		119,343			18.6
EARNINGS BEFORE INCOME TAXES		68,768		63,185		5,583			8.8
INCOME TAXES		25,383		24,336		1,047			4.3
NET EARNINGS	$	43,385	$	38,849	$	4,536			11.7	%

Revenues

The 17.7% increase in total revenues during the first nine months of 2005 over the same period in 2004 is primarily attributable to continued growth in our sales and lease ownership division in which revenues increased 19.8%. Total revenues for our sales and lease ownership division increased $122.1 million to $739.3 million in the nine months ended September 30, 2005 compared to $617.2 million in the nine months ended September 30, 2004. This increase was attributable to a 9.0% increase in same store revenues and the net addition of 122 Company-operated stores since the end of the third quarter of 2004.

The 21.4% increase in rentals and fees revenues is attributable to a $105.7 million increase from our sales and lease ownership division related to growth in same store revenues and the increase in the number of stores described above.

Revenues from retail sales increased 2.6% due to a $2.3 million increase in our rent-to-rent division primarily related to improving economic conditions. The increase in retail sales revenue in the rent-to-rent division was partially offset by a $1.2 million decrease in such revenues in our sales and lease ownership division, which reflects a decreased focus on retail sales in certain stores and the impact of the introduction of an alternative shorter-term lease, which we believe replaced many retail sales.

The 10.9% increase in non-retail sales in the first nine months of 2005 reflects the significant growth of our franchise operations.

The 20.9% increase in franchise royalties and fees primarily reflects an increase in royalty income from franchisees, increasing $3.2 million to $16.0 million in the first nine months of 2005 compared to $12.8 million over the same period in 2004, with increased franchise and financing fee revenues comprising the majority of the remainder. This franchisee related revenue growth reflects the net addition of 40 franchised stores since the end of the third quarter 2004 and improving operating revenues driven by increased rental volume at maturing franchised stores. Our franchisees had revenues of $312.3 million during the first nine months of 2005, a 19.4% increase over the comparable prior year period. Revenues of franchisees, however, are not revenues of Aaron Rents, Inc.

The 37.3% decrease in other revenues is primarily attributable to the recognition of a $5.5 million gain on the sale of shares of Rainbow Rentals, Inc. common stock in the second quarter of 2004, partially offset by a $0.6 million gain on the sale of shares of Rent-Way, Inc. common stock in the second quarter of 2005 and the recognition of a $0.7 million gain related to expected proceeds from business interruption insurance associated with the operations of stores affected by Hurricanes Katrina and Rita.

Cost of Sales

Retail cost of sales decreased 3.6%, with retail cost of sales as a percentage of retail sales decreasing to 66.4% from 70.6%, due primarily to higher margins on certain retail sales in our sales and lease ownership division.

Cost of sales from non-retail sales increased 11.0%, following the increase in non-retail sales described above, with the margin on non-retail sales remaining comparable between the first nine months of 2005 and 2004.

Expenses

The 22.6% increase in operating expenses is a result of the growth of our sales and lease ownership division described above, coupled with $2.8 million in expenses, net of $1.1 million of expected insurance recoveries, related to estimated losses due to Hurricanes Katrina and Rita. As a percentage of total revenues, operating expenses increased to 45.5% in the first nine months of 2005 compared to 43.7% during the comparable prior year period.

The 19.5% increase in depreciation of rental merchandise was the result of the growth of our sales and lease ownership division described above. Depreciation of rental merchandise as a percentage of rentals and fees revenue decreased to 36.1% in the first nine months of 2005 from 36.7% in comparable prior year period, resulting primarily from improved rental margins in the sales and lease ownership division.

The 48.5% increase in interest expense is primarily a result of higher debt levels in the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004.

The reduction in the effective tax rate to 36.9% is due to lower state income taxes as well as adjustments resulting from favorable state income allocations in connection with the Company’s filing of its 2004 tax return in the third quarter of 2005.

Net Earnings

The 11.7% increase in net earnings to $43.4 million for the nine month period ended September 30, 2005 from $38.8 million in the comparable period of 2004 is primarily due to the maturation of new Company-operated sales and lease ownership stores added over the past several years contributing to an 9.0% increase in same store revenues, and a 20.9% increase in franchise fees, royalty income, and other related franchise income. As a percentage of total revenues, net earnings decreased to 5.2% for the first nine months of 2005 from 5.5% for the comparable 2004 period primarily related to increased expenses during the third quarter of 2005 and estimated losses due to Hurricanes Katrina and Rita.

Balance Sheet

Cash.The Company’s cash balance increased to $6.8 million at September 30, 2005 from $5.9 million at December 31, 2004. The increase between periods is the result of normal fluctuations in the Company’s cash balances that are the result of timing differences between when our retail stores deposit cash and when that cash is available for application against the Company’s outstanding revolving credit facility.

Rental Merchandise.The $51.3 million increase in rental merchandise, net of accumulated depreciation, to $476.9 million on September 30, 2005 from $425.6 million on December 31, 2004, is primarily the result of a net increase of 91 Company-operated sales and lease ownership stores and two additional fulfillment centers since December 31, 2004.

Goodwill and Other Intangibles.The $22.3 million increase in goodwill and other intangibles, to $97.2 million on September 30, 2005 from $74.9 million on December 31, 2004, is the result of a series of acquisitions of sales and lease ownership businesses, net of amortization of certain finite-life intangible assets. The aggregate purchase price for these asset acquisitions totaled approximately $35.5 million, with the principal tangible assets acquired consisting of rental merchandise and certain fixtures and equipment.

Prepaid Expenses and Other Assets.The $22.2 million decrease in prepaid expenses and other assets, to $27.9 million on September 30, 2005 from $50.1 million on December 31, 2004, is in part the result of the collection during the year of $15.2 million in federal income tax refunds that were receivable at December 31, 2004 and the sale of shares of Rent-Way, Inc. common stock with a carrying value of $6.1 million in the second quarter of 2005.

Credit Facilities. The $58.4 million increase in the amounts we owe under our credit facilities to $175.0 million at September 30, 2005 from $116.7 million at last fiscal year end reflects net borrowings under our revolving credit facility during the first nine months of 2005 primarily to fund purchases of rental merchandise, acquisitions, real estate, tax payments and working capital.

Liquidity and Capital Resources

General

Cash flows from operations for the nine months ended September 30, 2005 and 2004 were $11.6 million and $11.9 million, respectively. The decrease in cash flows from operations is primarily attributable to income tax payments, partially offset by the receipt of a $15.2 million federal income tax refund. Our cash flows include profits on the sale of rental return merchandise. Our primary capital requirements consist of buying rental merchandise for both sales and lease ownership and rent-to-rent 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:

• cash flow from operations

• bank credit

• trade credit with vendors

• proceeds from the sale of rental return merchandise

• private debt offerings

• stock offerings

At September 30, 2005, $54.4 million was outstanding under the Company’s revolving credit agreement. The Company’s credit facilities balance increased by approximately $58.4 million in the first nine months of 2005. The increase in borrowings is primarily attributable to cash borrowed for acquisitions, purchases of rental merchandise, tax payments and working capital. We renegotiated our revolving credit agreement on May 28, 2004, extending the life of the agreement until May 28, 2007 and increasing the total available credit to $87 million. We also have $40 million in aggregate principal amount of 6.88% senior unsecured notes due August 2009 currently outstanding. Pursuant to the terms of the notes, the Company made a principal repayment of $10 million in the third quarter of 2005; similar principal repayments are due each year until maturity. See Note D to the consolidated financial statements appearing in the Company’s 2004 Annual Report on Form 10-K for further information.

During the third quarter of 2005, the Company entered into a note purchase agreement with a consortium of insurance companies. Pursuant to this agreement, the Company and its two subsidiaries as co-obligors issued $60 million in senior unsecured notes to the purchasers in a private placement. The notes bear interest at a fixed rate of 5.03% per year and mature on July 27, 2012. Interest only payments are due quarterly for the first two years, followed by annual $12 million principal repayments plus interest for the five years thereafter, beginning on July 27, 2008. The Company used the proceeds from this financing to replace shorter-term borrowings under the Company’s revolving credit agreement and to meet the capital needs required to fund acquisitions, purchases of rental merchandise, tax payments and working capital.

Aaron Rents’ revolving credit agreement and senior unsecured notes, and the construction and lease facility and franchisee loan program discussed below, contain financial covenants which, among other things, forbid us from exceeding certain debt to equity levels and require us to maintain minimum fixed charge coverage ratios. These agreements also contain negative covenants regarding the Company’s other indebtedness, its guarantees and investments and other customary covenants, some of which were amended in July 2005 in connection with the note issuance described above in order to make them less restrictive. If we fail to comply with these covenants, we will be in default under these commitments, and all amounts would become due immediately. We were in compliance with all these covenants at September 30, 2005 and anticipate remaining in compliance for the foreseeable future.

As of September 30, 2005 Aaron Rents was authorized by its Board of Directors to purchase up to an additional 2,670,502 common shares.

We have a consistent history of paying dividends, having paid dividends for 18 consecutive years. A $.013 per share dividend on Common Stock and Class A Common Stock was paid in January 2004 and July 2004. In addition, in July 2004 our Board of Directors declared a 3-for-2 stock split, effected in the form of a 50% stock dividend, which was distributed to shareholders in August 2004. In August 2004 the Board of Directors announced an increase in the frequency of the $.013 per share cash dividends on both Common Stock and Class A Common Stock from a semi-annual to a quarterly basis. The payment for the third quarter of 2004 was distributed in October 2004 for a total fiscal year cash outlay of $2.0 million. The payment for the fourth quarter of 2004 was paid in January 2005. The payment for the first quarter 2005 was paid in April 2005 and the payment for the second quarter was paid in July 2005 for a total cash outlay of $1.9 million in 2005. Our Board of Directors announced the dividend for the third quarter of 2005 on August 4, 2005 increasing the quarterly dividend to $0.014 per share from the previous quarterly dividend of $0.013 per share, an increase of 7.7%. Subject to sufficient operating profits, to any future capital needs and to other contingencies, we currently expect to continue our policy of paying dividends.

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

Commitments

Construction and Lease Facility. We maintain a $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 bank holding company under operating lease agreements. The total amount advanced and outstanding under this facility at September 30, 2005 was approximately $24.5 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 generally based upon LIBOR plus 110 basis points. The lease facility contains residual value guarantee and default guarantee provisions that would require us to make payments to the lessor if the underlying properties are worth less at termination of the facility than specified values in the agreement. 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 $24.5 million, respectively, at September 30, 2005.

Income Taxes.During the first nine months of 2005, we made approximately $37 million in income tax payments. Within the next three months, we anticipate that we will make cash payments for 2005 income taxes approximating $16 million. The Company has in the past benefited from the additional first-year or “bonus” depreciation allowance under U.S. federal income tax law, which generally allowed the Company to accelerate the depreciation on rental merchandise it acquired after September 10, 2001 and placed in service prior to January 1, 2005. The Company anticipates having to make future tax payments on its income as a result of expected profitability and the taxes that are now due on accelerated or “bonus” depreciation deductions that were taken in prior periods.

Leases. Aaron Rents leases warehouse and retail store space for substantially all of its operations under operating leases expiring at various times through 2019. Most of the leases contain renewal options for additional periods ranging from one to 15 years or provide for options to purchase the related property at predetermined purchase prices that do not represent bargain purchase options. We also lease transportation and computer equipment under operating leases expiring during the next five years. We expect that most leases will be renewed or replaced by other leases in the normal course of business. Approximate future minimum rental payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of September 30, 2005, including leases under our construction and lease facility described above, are shown in the table under “Contractual Obligations and Commitments” below.

The Company at times obtains ownership of store locations when it constructs free standing properties or when it acquires competitors’ locations. The Company has historically sold and leased back properties it has owned from time to time. The Company presently owns more than 40 various properties at a net book value in excess of $25 million, which it anticipates selling and leasing back in future periods.

We have 24 capital leases, 22 of which are with a limited liability company (“LLC”) whose managers and owners are fourteen Aaron Rents’ executive officers and its controlling shareholder, with no individual, including the controlling shareholder, owning more than 10.53% of the LLC. Eleven of these related party leases relate to properties purchased from Aaron Rents in October and November 2004 by this LLC for a total purchase price of approximately $6.8 million. This LLC is leasing back these properties to Aaron Rents for a 15-year term, with a five-year renewal at Aaron Rents’ option, at an aggregate annual rental of approximately $883,000. Another eleven of these related party leases relate to properties purchased from Aaron Rents in December 2002 by the same LLC for a total purchase price of approximately $5.0 million. This LLC is leasing back these properties to Aaron Rents for a 15-year term at an aggregate annual rental of approximately $702,000.

The other related party capital lease relates to a property sold by Aaron Rents to a second LLC owned solely by Aaron Rents’ chairman, chief executive officer and controlling shareholder and by its president and chief operating officer, for $6.3 million in April 2002 and leased back to Aaron Rents for a 15-year term at an annual rental of approximately $681,000.

The Company does not currently plan to enter into any similar related party transactions in the future. See Note D to the Consolidated Financial Statements in the 2004 Annual Report on Form 10-K.

Franchisee Loan Guaranty.We have guaranteed the borrowings of certain independent franchisees under a franchise loan program with several banks. At September 30, 2005, the portion that the Company might be obligated to repay in the event franchisees defaulted was approximately $108.8 million. However, due to franchisee borrowing limits, we believe any losses associated with any defaults would be mitigated through recovery of rental merchandise and other assets. Since its inception in 1994, we have had no losses associated with the franchisee loan and guaranty program. The Company believes the likelihood of any significant amounts being funded in connection with these commitments to be remote.

Contractual Obligations and Commitments.The following table shows the Company’s approximate contractual obligations and commitments to make future payments as of September 30, 2005:

			Period Less		Period 2-3		Period 4-5		Period Over
(In Thousands)	Total		Than 1 Year		Years		Years		5 Years
Credit Facilities, Excluding Capital Leases	$	157,684	$	10,004	$	86,363	$	34,012	$	27,305
Capital Leases		17,358		629		1,594		2,046		13,089
Operating Leases		186,705		46,714		78,480		33,758		27,753
Total Contractual Cash Obligations	$	361,747	$	57,347	$	166,437	$	69,816	$	68,147

The following table shows the Company’s approximate commercial commitments as of September 30, 2005:

	Total
	Amounts		Period Less		Period 1-3		Period 4-5		Period Over
(In Thousands)	Committed		Than 1 Year		Years		Years		5 Years
Guaranteed Borrowings of Franchisees	$	108,780	$	108,780	$	—	$	—	$	—
Residual Value Guarantee Under Operating Leases		20,858		—		20,858		—		—
Total Commercial Commitments	$	129,638	$	108,780	$	20,858	$	—	$	—

Market Risk

Occasionally, we manage our exposure to changes in short-term interest rates, particularly to reduce the impact on our variable payment construction and lease facility and floating-rate borrowings, by entering into interest rate swap agreements.

At September 30, 2005, we did not have any swap agreements.

We do not use any market risk sensitive instruments to hedge commodity, foreign currency or risks other than interest rate risk, and hold no market risk sensitive instruments for trading or speculative purposes.

New Accounting Pronouncements

See Note E to the Consolidated Financial Statements contained in Part I, Item I of this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

The information called for by this item is provided under Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and Part I, Item 2 of this Quarterly Report above.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

An evaluation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, was carried out by management, with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as of the end of the period covered by this Quarterly Report on Form 10-Q.

No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures, however, are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met.

Based on management’s evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the date of the evaluation to provide reasonable assurance that the objectives of disclosure controls and procedures are met.

Internal Control Over Financial Reporting.

There were no changes in Aaron Rents’ internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, during the Company’s third quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 6. EXHIBITS:

The following exhibits are furnished herewith:

10(ee)	Note Purchase Agreement between Aaron Rents, Inc. and certain other obligors and the purchasers dated as of July 27, 2005 and Form of Senior Note (incorporated by referenced from Exhibit 10(ee) to the Company’s Current Report on Form 8-K, Commission File No. 1-19341, filed with the Commission on August 2, 2005 (the “8/2/05 Form 8-K”).
10(ff)	First Amendment and Waiver Agreement made as of May 28, 2004 to Note Purchase Agreement between Aaron Rents, Inc. and certain other obligors and the purchasers dated as of August 15, 2002 (incorporated by reference from Exhibit 10(ff) to the 8/2/05 Form 8-K).
10(gg)	Second Amendment made as of July 27, 2005 to Note Purchase Agreement between Aaron Rents, Inc. and certain other obligors and the purchasers dated as of August 15, 2002 (incorporated by reference from Exhibit 10(gg) to the 8/2/05 Form 8-K).
10(hh)	First Amendment made and entered into as of July 27, 2005 to Revolving Credit Agreement dated as of May 28, 2004 by and among Aaron Rents, Inc. and certain co-borrowers, the several banks and other financial institutions from time to time party thereto and SunTrust Bank as administrative agent (incorporated by reference from Exhibit 10(hh) to the 8/2/05 Form 8-K).
10(ii)	Third Amendment made and entered into as of July 27, 2005 to Loan Facility Agreement and Guaranty dated as of May 28, 2004 by and among Aaron Rents, Inc. as sponsor, SunTrust Bank and each of the other lending institutions party thereto as participants, and SunTrust Bank as servicer (incorporated by reference from Exhibit 10(ii) to the 8/2/05 Form 8-K).
10(jj)	First Amendment dated as of July 27, 2005 to Amended and Restated Master Agreement and Amended and Restated Lease Agreement dated as October 31, 2001, as amended, among Aaron Rents, Inc. as lessee, SunTrust Banks, Inc. as lessor, Wachovia Bank, National Association, as lender, and SunTrust Bank as lease participant and agent (incorporated by reference from Exhibit 10(jj) to the 8/2/05 Form 8-K).
10(kk)	First Omnibus Amendment dated as of August 21, 2002, but effective as of October 31, 2001 to the Amended and Restated Master Agreement and Amended and Restated Lease Agreement dated as October 31, 2001, as amended, among Aaron Rents, Inc. as lessee, SunTrust Banks, Inc. as lessor, Wachovia Bank, National Association, as lender, and SunTrust Bank as lease participant and agent.
10(ll)	First Amendment made and entered into as of September 27, 2004 to Loan Facility Agreement and Guaranty dated as of May 28, 2004 by and among Aaron Rents, Inc. as sponsor, SunTrust Bank and each of the other lending institutions party thereto as participants, and SunTrust Bank as servicer.
10(mm)	Second Amendment made and entered into as of May 27, 2005 to Loan Facility Agreement and Guaranty dated as of May 28, 2004 by and among Aaron Rents, Inc. as sponsor, SunTrust Bank and each of the other lending institutions party thereto as participants, and SunTrust Bank as servicer.
15	Letter Re: Unaudited Interim Financial Information.

31(a)	Certification of Chief Executive Officer, pursuant to Rules 13a-14(a)/15d-14(a).
31(b)	Certification of Chief Financial Officer, pursuant to Rules 13a-14(a)/15d-14(a).
32(a)	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AARON RENTS, INC.
		(Registrant)
Date – November 8, 2005	By:	/s/ Gilbert L. DanielsonGilbert L. Danielson
		Executive Vice President,
		Chief Financial Officer
Date – November 8, 2005		/s/ Robert P. Sinclair, Jr.Robert P. Sinclair, Jr.
		Vice President,
		Corporate Controller