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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED COMMISSION FILE NO.
December 31, 2001 0-12385
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)
Registrant's telephone number, including area code: (404) 231-0011
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
Common Stock, $.50 Par Value
Class A Common Stock, $.50 Par Value
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Aggregate market value of the voting and non-voting common stock held by
non-affiliates of the registrant as of March 27, 2002: $334,056,233 See Item 12.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
SHARES OUTSTANDING AS OF
TITLE OF EACH CLASS MARCH 27, 2002
- ------------------------------------ ------------------------
Common Stock, $.50 Par Value 16,195,001
Class A Common Stock, $.50 Par Value 3,731,706
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2001 Annual Report to Shareholders for the year ended
December 31, 2001 are incorporated by reference into Part II of this Form 10-K.
Portions of the registrant's definitive proxy statement for the 2002 annual
meeting of shareholders are incorporated by reference into Part III of this Form
10-K.
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PART I.
ITEM 1. BUSINESS
GENERAL
Aaron Rents, Inc. is a U.S. leader in the sales and lease ownership and
rent-to-rent industries with 648 stores in 43 states and Puerto Rico. The
Company offers both individual and business customers a wide range of
residential and office furniture, accessories, consumer electronics, and
household appliances for lease, rental, and sale. The Company's 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 much of the furniture rented and/or sold in the Company's stores.
Aaron Rents' strategic focus is on expanding its higher growth sales and lease
ownership business while also growing its rent-to-rent business in selected
markets.
At December 31, 2001, Aaron Rents had 439 Company-operated stores and 209
franchised stores in 43 states and Puerto Rico. There were 364 Company-operated
sales and lease ownership stores in its Aaron's Sales & Lease Ownership
division, 209 Aaron's Sales & Lease Ownership franchised stores and 75
rent-to-rent stores in its Aaron Rents' Rent-to-Rent division.
The Aaron's Sales & 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. The Company's sales and lease ownership program allows customers to
obtain merchandise without incurring additional debt or long-term obligations.
Management believes that the segment of the U.S. population which its sales and
lease ownership division targets is large and that the needs of these customers
generally are underserved.
In 1992 the Company began franchising Aaron's Sales & Lease Ownership stores in
selected markets where the Company has no immediate plans to enter. The Company
believes that its franchise program allows the Company to grow more quickly,
increase its name exposure in new markets and achieve economies of scale in
purchasing, manufacturing and advertising for its sales and lease ownership
stores. The Company opened 41, 47 and 27 franchised sales and lease ownership
stores in 1999, 2000 and 2001, respectively.
The Aaron Rents' Rent-to-Rent division is well-positioned to take advantage of
the demand for furniture rental services. Management believes this demand to be
driven by continued growth in employment, the increasing importance of
flexibility and outsourcing to American businesses and the impact of a more
mobile and transitory population. Business customers, which represent an
increasing portion of rental customers, enter into leases for office furniture
to meet seasonal, temporary or start-up needs. Business customers also lease
residential furniture in order to provide furnishings for relocated employees or
those on temporary assignment.
The Company is the only major rental furniture company in the United States that
manufactures its own furniture. By manufacturing its own specially designed
residential and office furniture through its MacTavish Furniture Industries
division, the Company enjoys an advantage over many of its competitors.
Manufacturing enables the Company to control the quality, cost, timing, styling
and quantity of its furniture rental products. The Company operates six
furniture plants, three bedding facilities and two lamp manufacturing
facilities, which supply approximately one half of the furniture and related
accessories rented or sold by the Company.
The Company believes it possesses a valuable brand name in the rental business,
as well as operating characteristics which differentiate it from its
competitors. For instance, the Company's sales and lease ownership concept is
unique in offering 12 to 24 month lease ownership agreements, larger and more
attractive store showrooms and a wider selection of merchandise. In the
rent-to-rent business, the Company believes that its ability to deliver
residential and office furniture and equipment to its customers quickly and
efficiently gives the Company an advantage over furniture retailers who often
require several weeks to effect delivery. By having its own manufacturing
capabilities, an extensive distribution network and sophisticated management
information systems, the Company is well-positioned to meet the distinct needs
of its sales and lease ownership and rent-to-rent customers.
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INDUSTRY OVERVIEW
The Rent-to-Own Industry
According to the Association of Progressive Rental Organizations ("APRO"), the
national trade association representing the rent-to-own industry, there are
approximately 8,000 rent-to-own stores in the United States. 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 18 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. The average rental
period in the industry is about four months, because the majority of customers
do not rent the item to the full term of the agreement. If the customer rents
the item to the full term, he obtains ownership of the item, though he has the
option to purchase it at any time.
The rent-to-own industry is a growing segment of the retail industry that offers
an alternative to traditional methods of acquiring furniture, electronics and
appliances. The rent-to-own concept is particularly popular with consumers who
are unable to pay for merchandise in cash 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 desire to try out a particular brand or model
before purchasing it. Historically, electronic goods have been the dominant
product category rented and sold in the industry although furniture items are
growing in popularity.
The Company believes its sales and lease ownership concept differs significantly
from the typical rent-to-own program. Compared to typical rent-to-own stores,
Aaron's Sales & Lease Ownership stores offer shorter agreement terms which are
payable on a monthly basis and have generally lower total payments to acquire
merchandise. Aaron's Sales & Lease Ownership stores offer a larger selection of
merchandise in general and of furniture merchandise in particular, and have a
larger and more visually appealing store layout. The Company believes that its
sales and lease ownership customers demand both higher quality merchandise and
more competitive pricing on total agreement terms compared to the typical
rent-to-own customer.
The Company's sales and lease ownership transactions differ from sales by home
furnishings retailers in that sales and lease ownership allows the option, but
not the obligation, to purchase merchandise while paying a similar "all-in"
agreement price. Sales and lease ownership allows the customer to have the item
serviced free of charge or replaced at any time during the rental agreement, and
allows the Company to re-rent an item to another customer if the agreement does
not go to term.
The Company's sales and lease ownership operations differ from the rent-to-rent
business. A typical sales and lease ownership customer, while usually lacking
the cash or credit resources to acquire merchandise, desires the option of
ownership and may have the intention to utilize sales and lease ownership to
achieve ownership. Accordingly, in sales and lease ownership transactions, the
customer is willing to pay a higher monthly payment for the ownership option, as
compared to the rent-to-rent customer. Typically, the Company's sales and lease
ownership customers are more style and brand name conscious than rent-to-rent
customers who regard the merchandise as temporary. Aaron's Sales & Lease
Ownership stores are attractively appointed and are typically in or near a
shopping center strategically located near the residences of its target
customers, as opposed to the rent-to-rent store whose typical location is in an
office park that services destination customers from a broad geographical area.
The Rent-to-Rent Industry
The furniture component of the rent-to-rent industry is estimated to be 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 consolidating, 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 individuals seeking to rent merchandise for their own homes and
apartments, apartment complex managers seeking to provide furnished apartments,
and third party companies that provide interim housing for their corporate
clients. Office merchandise is rented by
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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 DIVISIONS
Sales and Lease Ownership - Aaron's Sales & Lease Ownership
The Company established its Aaron's Sales & Lease Ownership division in 1987. At
December 31, 2001, there were 364 Company-operated Aaron's Sales & Lease
Ownership stores in 26 states and 209 franchised Aaron's Sales & Lease Ownership
stores in 37 states. The Company has developed a distinctive concept for its
Aaron's Sales & Lease Ownership stores with specific merchandising selection and
store layout, pricing and agreement terms for the customers it seeks to attract.
The Company believes that these features create a store and sales and lease
ownership concept that is significantly different from the operations of most
other rent-to-own stores, the Company's 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
Aaron's Sales & Lease Ownership stores, the Company generally looks 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 the Company's stores are placed near existing stores of competitors. 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. The Company emphasizes a broad
selection of brand name products for its electronics and appliance items, and
offers customers a wide selection of furniture, including furniture manufactured
by the Company's MacTavish Furniture Industries division. Aaron's Sales & Lease
Ownership stores also offer computers and jewelry.
Aaron's Sales & Lease Ownership stores structure the pricing of merchandise to
be less expensive 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 82% of the
Company's sales and lease ownership agreements have monthly payments as compared
to the industry standard weekly payments, and most monthly agreements are for 12
to 24 months compared to the industry standard of 18 to 24 months of weekly
payments. Approximately 39% of Aaron's Sales & Lease Ownership agreements go to
term in which the customer obtains ownership of the merchandise in contrast to
an industry average of less than 25%. The merchandise from the agreements that
do not go to term is either re-rented or sold.
Aaron's Sales & Lease Ownership Franchise Program
The Company began franchising Aaron's Sales & Lease Ownership stores in selected
markets in 1992, and has continued to attract many franchisees. It is not
anticipated that franchised stores will compete with Company-operated stores, as
franchises are primarily awarded in markets into which the Company has no
presence and no current plans to expand. As of December 31, 2001, 299 franchises
had been sold to 67 franchisees, and 209 franchise stores were open. The Company
believes that its relations with its franchisees are good.
Franchisees are approved on the basis of the applicant's business background and
financial resources. The Company generally seeks 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.
The Company enters into franchise agreements with its franchisees to govern the
opening and operation of franchised stores. Under the Company's current
agreement, the franchisee is required 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 payment to the Company of a royalty of 5% of weekly cash
collections.
The Company assists 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 the Company's Pre-Opening Directors visits the intended market
and helps guide the franchisee through the selection process. Once a site is
selected, the Company helps in designing the floor plan, including the proper
layout of the showroom and warehouse. In addition, the Company provides
assistance in assuring that the design and decor of the
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showroom is consistent with the Company's requirements. The Company also leases
the exterior signage to the franchisee, and assists with placing pre-opening
advertising, ordering initial inventory and obtaining delivery vehicles.
The Company has an arrangement with a syndicate of banks to provide financing to
qualifying franchisees to assist with the establishment and operation of their
stores. A primary component of the financing program is an inventory financing
plan which provides franchisees with the capital to purchase inventory. For
qualified established franchisees, the Company has arranged for these
institutions to provide a revolving credit line to allow franchisees the
flexibility to expand. The Company guarantees 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 Aaron's Sales & Lease Ownership stores in compliance
with the Company's 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 the Company, although most do so in order to take advantage of
bulk purchasing discounts and favorable delivery terms. Many also purchase their
rental furniture from the Company's MacTavish Furniture Industries facilities.
The Company conducts a financial audit of its franchise stores every six to 12
months and also conducts regular operational audits, generally visiting each
franchise store almost as often as it visits its Company-operated stores. In
addition, the Company's proprietary management information system links each
store to corporate headquarters.
Rent-to-Rent - Aaron Rents and Sells Furniture
The Company has been in the rent-to-rent business for over 40 years and is the
second largest furniture rent-to-rent company in the United States. The core
rent-to-rent business accounted for approximately 27% of the Company's total
revenues for the year ended December 31, 2001. The Company rents new and rental
return merchandise to both the individual and the business segments of the
rent-to-rent industry, with a growing focus on rentals of residential and office
furniture to business customers. As of December 31, 2001, the Company operated
75 rent-to-rent stores in 16 states.
The Company's 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. The Company believes that having a warehouse next to each
showroom permits the store manager 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. The Company
believes that its ability to obtain and deliver office furniture and equipment
to its customers quickly and efficiently gives the Company an advantage over
general office furniture retailers who often require several weeks to effect
delivery.
The Company generally sells rental return merchandise at its stores at or above
its book value (cost less depreciation) plus selling expenses, a price which is
usually considerably 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, the Company has 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
The Company believes that its manufacturing capability gives it a strategic
advantage over its competitors by enabling the Company to control the quality,
cost, timing, styling, durability and quantity of its furniture rental products.
As the only major furniture rental company that manufactures its own furniture,
the Company believes its 611,000 square feet of manufacturing facilities provide
it 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. The Company's MacTavish Furniture
Industries division has manufactured furniture for the Company's stores since
1971. The division has six furniture manufacturing plants, three bedding
manufacturing facilities and two lamp manufacturing facilities which supply
approximately one half of the furniture and accessories rented or sold by
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the Company. The Company's manufacturing plants have the capacity to meet the
Company's needs for the foreseeable future. The Company also manufactures lamps
for selected national retailers.
MacTavish Furniture Industries manufactures 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), bedding
(including standard sizes of mattresses and box springs), and office furniture
(including desks, credenzas, conference tables, bookcases and chairs). MacTavish
has designed special features for the furniture it manufactures which make its
furniture less expensive to produce, more durable and better equipped for
frequent transportation than furniture purchased from third parties. These
features include standardization of components; reduction of parts and features
susceptible to wear or damage; more resilient foam; durable, soil-resistant
fabrics and sturdy frames for longer life and higher residual value; and 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 used by MacTavish 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 the Company. The Company is not dependent on any single supplier, and none
of the raw materials are in short supply.
STORE OPERATIONS
Management
The 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.
The Company's rent-to-rent stores are 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 customer and credit relations,
deliveries and pickups, warehouse and inventory management, and 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 at the Company's headquarters directs and coordinates
purchasing, financial planning and control, manufacturing, employee training,
and new store site selection for the Company-operated stores. The Company's
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. The Company's business philosophy has always emphasized
strict cost containment and fiscal controls. Executive and store level
management monitor expenses vigilantly to contain costs. All invoices are paid
out of the Company's headquarters in order to enhance fiscal accountability. The
Company believes that its careful attention to the expense side of its
operations has enabled it to maintain financial stability and profitability.
Management Information Systems
The Company utilizes computer-based management information systems to facilitate
cash collections, merchandise returns and inventory monitoring. Through the use
of proprietary software developed by the Company, each of the Company's stores
is linked by computer directly to corporate headquarters, which enables
headquarters to monitor the performance of each store on a daily basis. A
different system is 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 inventory 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 the Company's Aaron's Sales & Lease Ownership
operations is its ability to achieve timely cash collections. Individual store
managers utilize the Company's 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
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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. The Company generally performs 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 the Company's agreements for residential and office merchandise
require payments in advance, and the merchandise normally is picked up 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 2.7%, 2.1%, and 1.9% for the years ended
December 31, 2001, 2000 and 1999. The Company does not extend credit to sales
and lease ownership customers. For the same periods, net merchandise shrinkage
for the Company as a percentage of combined rental revenues was 2.5%, 2.5% and
2.2%, respectively. The Company believes that its collection and repossession
policies comply with applicable legal requirements, and the Company disciplines
any employee that it discovers deviating from such policies.
Customer Service
The Company believes that customer service is one of the most important elements
in the success of its 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. The Company's goal is to make its
customers feel positive about the Company and its products from the moment they
enter the Company's 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, the Company fosters 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, the Company believes that a
prerequisite for successful operations and growth is skilled, effective
employees who value the Company's customers and project a genuine desire to
serve the customers' needs. The Aaron's Sales & Lease Ownership division has
nine training facilities where store managers and employees cover all areas of
the Company's operations, with a heavy emphasis on customer service. The
rent-to-rent division's sales and management training programs have similar
training conducted at the Company's Atlanta headquarters. The Company's policy
of promoting from within aids in employee retention and commitment to the
Company's customer service and other business philosophies, which also allows
the Company to realize greater benefits from its employee training programs.
PURCHASING AND DISTRIBUTION
The Company's product mix is determined by store managers in consultation with
the regional managers and regional vice presidents, based on an analysis of
customer demands. In the Company's rent-to-rent division, furniture is the
primary merchandise category, accounting for approximately 93% of rent-to-rent
rental revenues for the year ended December 31, 2001. In the Aaron's Sales &
Lease Ownership division, electronics and appliances, furniture, computers and
other accounted for approximately 55%, 37%, 7%, and 1%, respectively, of sales
and lease ownership revenues for the year ended December 31, 2001. With approval
from the applicable operating management, store managers send their orders to
the sales and lease ownership or rent-to-rent purchasing department at
headquarters. The applicable purchasing department reviews all purchase orders
to determine whether merchandise needs may be satisfied out of existing
inventory at other stores before contacting vendors. If inventory is available
at other stores, the purchasing department arranges for inventory shipments
between stores. Virtually all merchandise for the Company's stores is purchased
by the Company's seven buyers, five of whom are solely responsible for sales and
lease ownership merchandise.
The Company purchases the majority of its merchandise directly from
manufacturers, with the balance from local distributors. The Company's largest
supplier is its MacTavish Furniture Industries manufacturing division, which
supplies approximately one half of the furniture rented or sold by the Company.
The Company has no long-term agreements for the purchase of merchandise and
believes that its relationships with suppliers are excellent.
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 inventory. All sales and lease ownership stores
order directly from the Company's seven distribution centers located in
Auburndale, Florida; Dallas and Sugarland, Texas; Duluth, Georgia; Columbus,
Ohio; Baltimore, Maryland and Winston-Salem, North Carolina with several other
distribution centers planned to be opened in other regions of the United States
in 2002. Sales and lease ownership stores typically have smaller warehouses with
less inventory storage space than the Company's rent-to-rent stores. Vendors
ship directly to the distribution centers.
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Distribution centers result in freight savings from truckload discounts and a
more efficient distribution of merchandise. The Company utilizes its
tractor-trailers, local delivery trucks, and various contract carriers to make
weekly deliveries to individual stores.
MARKETING AND ADVERTISING
In its sales and leasing operations, the Company relies heavily on national and
local television advertising, direct mail and direct delivery of promotional
materials. The Company focuses its television advertising on its highly
successful "Dream Products" program. This program targets "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 the Company established a relationship with NASCAR, which
reaches a prime audience in its demographic. The initial relationship was the
title sponsorship of the NASCAR Busch Grand National Car Race at the Atlanta
Motor Speedway- the nationally televised "Aaron's 312", named for Aaron's three
ways to obtain merchandise and its unique 12-month plan. Aaron's 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 will 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. 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, the Company also utilizes local
television and radio advertising.
The Company markets its rent-to-rent operations through its outside sales staff
to the local apartment communities, calling on their leasing agents, resident
managers, and property managers. This group heavily influences the individual
referral business as well as the corporate relocation professionals. The Company
also markets to interim housing providers that offer temporary housing to
corporations that relocate personnel around the country. The Company has a
regional and national marketing staff that focuses on this growing segment of
the rent-to-rent industry. The Company also relies 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) to reach its customers and believes such advertising
increases the Company's name recognition.
COMPETITION
The Company's businesses are highly competitive. The Company competes 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. The Company
believes that CORT Business Services Corporation is its most significant
rent-to-rent competitor. The Company also competes in the rent-to-own and credit
retail markets. The Company's two largest competitors in the rent-to-own market
are Rent-A-Center, Inc. and Rent-Way, Inc.
Although definitive industry statistics are not available, management believes
that the Company is one of the largest furniture rental companies in the United
States. Management also believes that it generally has a favorable competitive
position in that industry because of its manufacturing capabilities, prompt
delivery, competitive pricing, name recognition and commitment to customer
service.
EMPLOYEES
At December 31, 2001, the Company had approximately 4,200 employees. None of the
Company's employees are covered by a collective bargaining agreement, and the
Company believes that its relations with its employees are good.
CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS
Certain written and oral statements made by our Company may constitute
"forward-looking statements" as defined under the Private Securities Litigation
Reform Act of 1995, including statements made in this report and other filings
with the Securities and Exchange Commission. Generally, the words "anticipate,"
"believe," "expect," "intend", "estimate," "project," "will," and similar
expressions identify forward-looking statements, which generally are not
historical in nature. All statements which address operating performance, events
or developments that we expect or anticipate will occur in the future -
including growth in store openings and franchises awarded, market share, and
statements expressing general optimism about future operating results - are
forward-looking statements. Forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from the Company's historical experience and the Company's present expectations
or projections. As and when made, management
7
believes that these forward-looking statements are reasonable. However, caution
should be taken not to place undue reliance on any such forward-looking
statements since such statements speak only as of the date when made. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. For a discussion of such risks and uncertainties see
"Certain Factors Affecting Forward-Looking Statements" in the Company's Annual
Report on Form 10-K for fiscal 2001, filed with the Securities and Exchange
Commission, which discussion is incorporated herein by this reference.
Risks Associated with Expansion Strategy
An important part of the Company's growth strategy is the opening of new stores.
The Company's ability to continue opening new stores will depend, among other
things, upon its ability to hire management and personnel to staff the new
stores, and to find suitable sites at reasonable rental rates to locate new
stores. From time to time the Company also expects to pursue opportunistic
acquisitions of sales and lease ownership and rent-to-rent operations. There can
be no assurance that future acquisitions will be consummated on acceptable terms
or that any acquired companies will be successfully integrated. While the
Company believes that the market for its stores is underserved and offers
attractive expansion opportunities, it does not know if consumer preferences
will remain unchanged, or the extent to which its competitors may seek to serve
the market.
Significant Competition
The Company's businesses are highly competitive. The Company competes 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. In the sales
and lease ownership market, the Company's competitors include national, regional
and local operators of rent-to-own stores and credit retailers. Some of these
competitors may have significantly greater financial and operating resources,
and in certain markets, greater name recognition, than the Company.
Risks Associated with Significant Government Regulation
The Company believes that 46 states specifically regulate rent-to-own and sales
and lease ownership transactions, including states in which the Company
currently operates Aaron's Sales & Lease Ownership stores. Most of these states
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 the Company and miscellaneous other items. The most restrictive states limit
the total amount that 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. The
Company's long-established policy in all states is to fully disclose the terms
of its sales and lease ownership transactions as a matter of good business
ethics and customer service. At the present time, no federal law specifically
regulates the rent-to-own industry.
Federal legislation has been proposed from time to time to regulate the
industry. Management cannot predict whether any such legislation will be enacted
and what the impact of such legislation would be. Although the Company is unable
to predict the results of these or any additional regulatory initiatives, the
Company does not believe that the existing and previously proposed regulations
would have a material adverse impact on the Company's sales and lease ownership
or other operations.
The Company's Aaron's Sales & Lease Ownership franchise program is subject to
Federal Trade Commission ("FTC") regulation and various state laws regulating
the offer and sale of franchises. Several state laws also regulate substantive
aspects of the franchisor-franchisee relationship. The FTC requires the Company
to furnish to prospective franchisees a franchise offering circular containing
prescribed information. A number of states in which the Company might consider
franchising also regulate the sale of franchises and require registration of the
franchise offering circular with state authorities. The Company believes it is
in material compliance with all applicable franchise laws.
Control by and Dependence Upon Principal Shareholder
R. Charles Loudermilk, Sr., the Company's Chief Executive Officer and Chairman
of the Board, owns or controls over 60% of the Company's voting Class A Common
Stock and approximately 12% of the non-voting Common Stock outstanding. As a
result, Mr. Loudermilk will continue to be able to elect all the directors of,
and otherwise effectively control, the Company. The Company
8
believes that it has benefited substantially from Mr. Loudermilk's leadership
and that if it were to lose his services at anytime in the near future such loss
could have an adverse effect on the Company's business and operations.
ITEM 2. PROPERTIES
The Company leases space for substantially all of its store and warehouse
operations under operating leases expiring at various times through 2015. Most
of the leases contain renewal options for additional periods ranging from one to
fifteen years at rental rates generally adjusted on the basis of the consumer
price index or other factors.
The following table sets forth certain information regarding the Company's
furniture manufacturing plants, bedding facilities, lamp manufacturing
facilities and distribution centers:
LOCATION PRIMARY USE SQUARE FT.
-------- ----------- ------------
Cairo, Georgia.......... Furniture Manufacturing 200,000
Coolidge, Georgia....... Furniture Manufacturing 77,000
Coolidge, Georgia....... Furniture Manufacturing 43,000
Coolidge, Georgia....... Furniture Manufacturing 41,000
Quincy, Florida......... Furniture Manufacturing 80,000
Sugarland, Texas........ Furniture Manufacturing 10,000
Sun Valley, California.. Lamp and Accessory
Manufacturing 52,000
Tampa, Florida Lamp and Accessory
Manufacturing 50,000
Buford, Georgia......... Bedding Facility 32,000
Sugarland, Texas........ Bedding Facility 10,000
Orlando, Florida........ Bedding Facility 16,000
Auburndale, Florida..... Sales & Lease Ownership
Distribution Center 85,000
Baltimore, Maryland..... Sales & Lease Ownership
Distribution Center 99,000
Columbus, Ohio.......... Sales & Lease Ownership
Distribution Center 99,000
Dallas, Texas........... Sales & Lease Ownership
Distribution Center 92,000
Duluth, Georgia......... Sales & Lease Ownership
Distribution Center 67,000
Sugarland, Texas........ Sales & Lease Ownership
Distribution Center 129,000
Winston/Salem, North Sales & Lease Ownership
Carolina ............... Distribution Center 87,500
The Company's executive and administrative offices occupy approximately 40,000
square feet in an 11-story, 87,000 square-foot office building that the Company
owns in Atlanta. The Company leases most of the remaining space to third parties
under leases with remaining terms averaging three years. To meet the needs of
the Company's strong growth, a two story building with over 50,000 square feet
of new office space was completed during the year in the Atlanta suburb of
Kennesaw to accommodate the Company's financial and information technology
operations. All of the Company's facilities are well maintained and adequate for
their current and reasonably foreseeable uses.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings the result of
which it believes could have a material adverse impact upon its business,
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) The information presented under the caption "Common Stock Market Prices &
Dividends" on page 28 of the Company's Annual Report to Shareholders for the
year ended December 31, 2001 is incorporated herein by reference. The market
quotations stated herein reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
(b) As of March 15, 2002, there were 278 holders of record of the Common Stock
and 131 holders of record of the Class A Common Stock.
(c) The information presented under "Note D - Debt" on pages 21 and 22 of the
Company's Annual Report to Shareholders for the year ended December 31, 2001 is
incorporated herein by reference. During the year ended December 31, 2001, the
Company paid two semi-annual cash dividends. No assurance can be provided that
such dividends will continue.
ITEM 6. SELECTED FINANCIAL DATA
The information presented under the caption "Selected Financial Information" on
page 13 of the Company's Annual Report to Shareholders for the year ended
December 31, 2001 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information presented under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 14 through
16 of the Company's Annual Report to Shareholders for the year ended December
31, 2001 is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 14 through
16 and presented under "Note D - Debt" on pages 21 and 22 of the Company's
Annual Report to Shareholders for the year ended December 31, 2001 is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information presented under the captions "Consolidated Balance Sheets,"
"Consolidated Statements of Earnings," "Consolidated Statements of Shareholders'
Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated
Financial Statements," and "Report of Independent Auditors" on pages 17 through
27 of the Company's Annual Report to Shareholders for the year ended December
31, 2001 is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's definitive Proxy Statement, which the
Company will file with the Securities and Exchange Commission no later than 120
days after December 31, 2001, with respect to the identity, background and
Section 16 filings of directors and executive officers of the Company, is
incorporated herein by reference to this item.
10
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's definitive Proxy Statement, which the
Company will file with the Securities and Exchange Commission no later than 120
days after December 31, 2001, with respect to executive compensation, is
incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's definitive Proxy Statement, which the
Company will file with the Securities and Exchange Commission no later than 120
days after December 31, 2001, with respect to the ownership of common stock by
certain beneficial owners and management, is incorporated herein by reference to
this item.
For purposes of determining the aggregate market value of the Company's voting
and non-voting common stock held by non-affiliates, shares held by all directors
and officers of the Company have been excluded. The exclusion of such shares is
not intended to, and shall not, constitute a determination as to which person or
entities may be "affiliates" of the Company as defined by the Securities and
Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's definitive Proxy Statement, which the
Company will file with the Securities and Exchange Commission no later than 120
days after December 31, 2001, with respect to certain relationships and related
transactions, is incorporated herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements and notes thereto of Aaron Rents, Inc. and
Subsidiaries, and the related Report of Independent Auditors are incorporated in
Item 8 by reference from the Company's Annual Report to Shareholders for the
year ended December 31, 2001.
REFERENCE PAGE
ANNUAL
REPORT
TO SHAREHOLDERS
---------------
Consolidated Balance Sheets - December 31, 2001 and 2000................................ 17
Consolidated Statements of Earnings - Years ended December 31, 2001, 2000 and 1999...... 18
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2001, 2000 and 18
1999....................................................................................
Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999.... 19
Notes to Consolidated Financial Statements.............................................. 20-27
Report of Independent Auditors.......................................................... 27
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are inapplicable or the
required information is included in the financial statements or notes thereto.
11
3. EXHIBITS
EXHIBIT DESCRIPTION OF EXHIBIT
NO.
3(a) Amended and Restated Articles of Incorporation of the Company, filed as
Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 (the "March 31, 1996 10-Q"), which exhibit
is by this reference incorporated herein.
3(b) Amended and Restated By-laws of the Company, filed as Exhibit 3(b) to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997, which exhibit is by this reference incorporated herein.
4 See Exhibits 3 (a) through 3 (b).
10(a) Aaron Rents, Inc. 1996 Stock Option and Incentive Award Plan, filed as
Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 (the "March 31, 1998 10-Q"), which exhibit
is incorporated by this reference.*
10(b) Aaron Rents, Inc. Employees Retirement Plan and Trust, filed as Exhibit
4(a) to the Company's Registration Statement on Form S-8, file number
33-62538, filed with the Commission on May 12, 1993, which exhibit is
by this reference incorporated herein.*
10(c) Aaron Rents, Inc. 1990 Stock Option Plan, filed as Exhibit 4(a) to the
Company's Registration Statement on Form S-8, file number 33-62536,
filed with the Commission on May 12, 1993, which exhibit is by this
reference incorporated herein.*
10(d) Second Amended and Restated Revolving Credit and Term Loan Agreement,
dated January 6, 1995, filed as Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1994
(the "December 31, 1994 10-Q"), which exhibit is by this reference
incorporated herein.
10(e) Third Amendment to Second Amended and Restated Revolving Credit and
Term Loan Agreement, dated September 30, 1996, filed as Exhibit 10 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, which exhibit is by reference incorporated herein.
10(f) Fifth Amendment to Second Amended and Restated Revolving Credit and
Term Loan Agreement, dated December 17, 1997, filed as Exhibit 10(a) to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997 (the "1997 10-K"), which exhibit is incorporated by this
reference.
10(g) Letter Agreements dated December 30, 1997 between SunTrust Bank,
Atlanta and the Company, and letter agreements dated December 30, 1997
between First Chicago NBD and the Company regarding Interest Rate Swap
Transactions, filed as Exhibit 10(b) to the Company's 1997 10-K, which
exhibit is incorporated by this reference.
10(h) Loan Facility Agreement and Guaranty by and among Aaron Rents, Inc.,
SunTrust Bank, Atlanta, as Servicer and each of the Participants Party
Hereto, Dated January 20, 1998, filed as Exhibit 10(a) to the Company's
March 31, 1998 10-Q, which exhibit is incorporated by this reference.
10(i) Amendment No. 1 to Loan Facility Agreement and Guaranty dated as of
March 13, 1998, filed as Exhibit 10(b) to the Company's March 31, 1998
10-Q, which exhibit is incorporated by this reference.
10(j) Amended and Restated Loan Facility Agreement and Guaranty and related
Servicing Agreement dated as of November 3, 1999, filed as Exhibit
10(j) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (the "1999" 10-K"), which exhibit is incorporated by
this reference.
10(k) Amended and Restated Loan Facility Agreement and Guaranty dated as of
June 20, 2000, filed as Exhibit 10(k) to the Company's December 31,
2000 10-K, which exhibit is incorporated by this reference.
12
10(l) Loan Facility Agreement and Guaranty by and among Aaron Rents, Inc. and
SouthTrust Bank dated August 31, 2000, filed as Exhibit 10(l) to the
Company's December 31, 2000 10-K, which exhibit is incorporated by this
reference.
10(m) Loan Agreement between Fort Bend County Industrial Development
Corporation and Aaron Rents, Inc. relating to the Industrial
Development Revenue Bonds (Aaron Rents, Inc. Project), Series 2000
dated October 1, 2000, filed as Exhibit 10(m) to the Company's December
31, 2000 10-K, which exhibit is incorporated by this reference.
10(n) Letter of Credit and Reimbursement Agreement between Aaron Rents, Inc.
and First Union National Bank dated as of October 1, 2000, filed as
Exhibit 10(n) to the Company's December 31, 2000 10-K, which is
incorporated by this reference.
10(o) Term Loan Agreement among Aaron Rents, Inc. Puerto Rico as borrower,
Aaron Rents, Inc. as Guarantor and SunTrust Bank as Administrative
Agent dated November 21, 2000, filed as Exhibit 10(o) to the Company's
December 31, 2000 10-K, which exhibit is incorporated by this
reference.
10(p) Revolving Credit Agreement among Aaron Rents, Inc. as borrower, Aaron
Rents, Inc. Puerto Rico as co-borrower and SunTrust Bank as
Administrative Agent dated March 30, 2001 filed as Exhibit 10(a) to the
Company's March 31, 2001 10-Q, which is incorporated by this reference
10(q) Loan Facility Agreement and Guaranty by and among Aaron Rents, Inc. and
SunTrust Bank and each of the Participants Party Hereto dated March 30,
2001 filed as Exhibit 10(b) to the Company's March 30, 2001 10-Q, which
is incorporated by this reference.
10(r) Aaron Rents, Inc. 2001 Stock Option and Incentive Award Plan, filed as
Exhibit 4(a) to the Company's Registration Statement on Form S-8, file
number 333-76026, filed with the Commission on December 28, 2001
which exhibit is by this reference incorporated herein.*
10(s) Amended and Restated Master Agreement by and among Aaron Rents, Inc.,
SunTrust Bank and SouthTrust Bank, dated October 31, 2001 filed as part
of this Annual Report on Form 10-K
13 Portions of the Aaron Rents, Inc. Annual Report to Shareholders for the
year ended December 31, 2001. With the exception of information
expressly incorporated herein by direct reference thereto, the Annual
Report to Shareholders for the year ended December 31, 2001 is not
deemed to be filed as part of this Annual Report on Form 10-K.
21 Subsidiaries of the Registrant, filed as part of this Annual Report on
Form 10-K.
23 Consent of Ernst & Young LLP
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to item 14 (c) of this report.
(b) Reports on Form 8-K - none
(c) Exhibits listed in item 14 (a) (3) are included elsewhere in this Report.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 1st day of
April, 2002.
AARON RENTS, INC.
By: /s/ GILBERT L. DANIELSON
--------------------------
Gilbert L. Danielson
Executive Vice President
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 1st day of April, 2002.
SIGNATURE TITLE
--------- -----
/s/ R. CHARLES LOUDERMILK, SR.
- -------------------------------------- Chief Executive Officer (Principal
R. Charles Loudermilk, Sr. Executive Officer) and Chairman
of the Board of Directors)
/s/ ROBERT C. LOUDERMILK, JR.
- -------------------------------------- President, Chief Operating Officer
Robert C. Loudermilk, Jr. and Director
/s/ GILBERT L. DANIELSON
- -------------------------------------- Executive Vice President, Chief
Gilbert L. Danielson Financial Officer and Director
(Principal Financial Officer)
/s/ ROBERT P. SINCLAIR, JR.
- -------------------------------------- Vice President, Corporate
Robert P. Sinclair, Jr. Controller (Principal Accounting
Officer)
/s/ WILLIAM K. BUTLER
- -------------------------------------- President, Aaron Sales & Lease
William K. Butler Ownership and Director
/s/ RONALD W. ALLEN Director
- --------------------------------------
Ronald W. Allen
/s/ LEO BENATAR Director
- --------------------------------------
Leo Benatar
/s/ EARL DOLIVE Director
- --------------------------------------
Earl Dolive
/s/ J.REX FUQUA Director
- --------------------------------------
J. Rex Fuqua
/s/ INGRID SAUNDERS JONES Director
- -------------------------------------
Ingrid Saunders Jones
/s/ LTG. M. COLLIER ROSS USA (RET.) Director
- -------------------------------------
LTG M. Collier Ross USA (Ret.)
14