DEFA14A 1 g68129d1defa14a.txt AARON RENTS, INC. 1 SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement [X] Definitive Additional Materials [ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Aaron Rents, Inc. -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: ------------------------------------------------------------------------ (2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------------------ (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------------------------ (4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------------------ (5) Total fee paid: ------------------------------------------------------------------------ [ ] Fee paid previously with preliminary materials: ---------------------------------------------------------------------------- [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ------------------------------------------------------------------------ (2) Form, Schedule or Registration Statement No.: ------------------------------------------------------------------------ (3) Filing Party: ------------------------------------------------------------------------ (4) Date Filed: ------------------------------------------------------------------------ 2 AARON RENTS, INC. 309 E. PACES FERRY ROAD, N.E. ATLANTA, GEORGIA 30305-2377 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 1, 2001 The 2001 Annual Meeting of Shareholders of Aaron Rents, Inc. (the "Company"), will be held on Tuesday, May 1, 2001, at 10:00 a.m., Eastern Time, at the SunTrust Plaza, 4th Floor, 303 Peachtree Street, N.E., Atlanta, Georgia 30303, for the purpose of considering and voting on the following: (1) The election of ten directors to constitute the Board of Directors until the next annual meeting and until their successors are elected and qualified; (2) The approval of the Aaron Rents, Inc. 2001 Stock Option and Incentive Award Plan; (3) The approval of certain stock option awards granted to three of the Company's executive officers; and (4) Such other matters as may properly come before the meeting or any adjournment thereof. Information relating to the above items is set forth in the accompanying Proxy Statement. Only shareholders of record of the Class A Common Stock at the close of business on March 9, 2001 are entitled to vote at the meeting. BY ORDER OF THE BOARD OF DIRECTORS JAMES L. CATES Vice President, Risk Management and Secretary Atlanta, Georgia April 6, 2001 PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY SO THAT YOUR VOTE MAY BE RECORDED AT THE MEETING IF YOU DO NOT ATTEND PERSONALLY. No postage is required if mailed in the United States in the accompanying envelope. 3 AARON RENTS, INC. 309 E. PACES FERRY ROAD, N.E. ATLANTA, GEORGIA 30305-2377 PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 1, 2001 GENERAL INFORMATION The enclosed proxy is being solicited by the Board of Directors of Aaron Rents, Inc. (the "Company") for use at the 2001 annual meeting of shareholders to be held on Tuesday, May 1, 2001 (the "Annual Meeting"), and any adjournment thereof. Each proxy that is properly executed and returned by a shareholder will be voted as specified thereon by the shareholder unless it is revoked. Shareholders are requested to execute the enclosed proxy and return it in the enclosed envelope. If no direction is specified on the proxy as to any matter being acted upon, the shares represented by the proxy will be voted in favor of such matter. Any shareholder giving a proxy has the power to revoke it at any time before it is voted by executing another proxy bearing a later date or by written notification to the Secretary of the Company. Shareholders who are present at the Annual Meeting may revoke their proxy and vote in person. The affirmative vote of a plurality of the holders of shares of the Company's Class A Common Stock present, in person or represented by proxy, at the Annual Meeting will be necessary to elect the nominees for director listed in this Proxy Statement. The affirmative vote of the holders of a majority of the shares of Class A Common Stock present, in person or represented by proxy, at the Annual Meeting will be necessary to approve each of the other proposals presented at the Annual Meeting. The presence, in person or by proxy, of holders of a majority of the outstanding shares of the Company's Class A Common Stock entitled to vote at the Annual Meeting is necessary to constitute a quorum. Abstentions and broker non-votes will be included in determining whether a quorum is present at the Annual Meeting, but will otherwise have no effect on the election of the nominees for director or the approval of any of the other proposals. An automated system administered by the Company's transfer agent will tabulate the votes cast. Only shareholders of record of Class A Common Stock at the close of business on March 9, 2001 are entitled to vote at the Annual Meeting. A list of all shareholders entitled to vote will be available for inspection at the Annual Meeting. As of March 9, 2001, the Company had 3,829,506 shares of Class A Common Stock and 16,041,041 shares of Common Stock outstanding. Each share of Class A Common Stock entitles the holder thereof to one vote for the election of directors and any other matters that may come before the Annual Meeting. The holders of the Common Stock are not entitled to vote with respect to the election of directors or the other proposals described herein or with respect to most other matters presented to the shareholders for a vote. The Company will bear the cost of soliciting proxies, including the charges and expenses of brokerage firms, banks, and others for forwarding solicitation material to beneficial owners of shares of the Company's Class A Common Stock. The principal solicitation is being made by mail; however, additional solicitation may be made by telephone, telegraph, or personal interview by officers of the Company who will not be additionally compensated therefore. It is anticipated that this Proxy Statement and the accompanying proxy will first be mailed to shareholders on April 6, 2001. 4 BENEFICIAL OWNERSHIP OF COMMON STOCK The following table sets forth, as of February 15, 2001 (except as otherwise noted), the beneficial ownership of the Company's Class A Common Stock and Common Stock by (i) each person who owns of record or is known by management to own beneficially 5% or more of the outstanding shares of the Company's Class A Common Stock, (ii) each of the Company's directors, (iii) the Company's Chief Executive Officer and the other executive officers of the Company listed in the Summary Compensation Table below (the "Named Executive Officers"), and (iv) all executive officers and directors of the Company as a group. Except as otherwise indicated, all shares shown in the table below are held with sole voting and investment power. The Percent of Class column represents the percentage that the named person or group would beneficially own if such person or group, and only such person or group, exercised all currently exercisable options to purchase shares of the applicable class of common stock held by him, her, or it.
AMOUNT AND NATURE TITLE OF CLASS OF BENEFICIAL BENEFICIAL OWNER OF COMMON STOCK OWNERSHIP(1) PERCENT OF CLASS(1) ---------------- --------------- ----------------- -------------------- R. Charles Loudermilk, Sr............... Class A 2,381,612 62.19% 309 E. Paces Ferry Road Common 2,454,880(2) 15.30% Atlanta, Georgia Gabelli Funds, Inc...................... Class A 423,500(3) 11.06% One Corporate Center Common --(4) Rye, New York Reich & Tang Asset Mgt. L.P............. Class A 260,500(5) 6.80% 600 Fifth Avenue Common --(4) New York, New York Gilbert L. Danielson.................... Class A 2,000 * Common 193,540(6) 1.20% J. Rex Fuqua............................ Common 15,000 * Earl Dolive............................. Class A 86,374 2.26% Common 117,942 * Robert C. Loudermilk, Jr................ Class A 1,500(7) * Common 594,840(8) 3.70% Ronald W. Allen......................... Class A 5,000 * Leo Benatar............................. Class A 2,500 * Common 2,500 * Ingrid Saunders Jones................... Class A 100 * M. Collier Ross......................... Common 1,000 * William K. Butler, Jr................... Common 80,987(9) * Eduardo Quinones........................ Common 23,007(10) * All executive officers and directors as a group.................. Class A 2,479,086(7) 64.74% (a total of 15 persons) Common 3,530,051(11) 22.01%
--------------- * Less than 1% (1) Amounts shown do not reflect that the Common Stock is convertible, on a share for share basis, into shares of Class A Common Stock (i) by resolution of the Board of Directors if, as a result of the existence of the Class A Common Stock, either class is excluded from listing on The New York Stock Exchange or any national securities exchange on which the Common Stock is then listed and (ii) automatically should the outstanding shares of Class A Common Stock fall below 10% of the aggregate outstanding shares of both classes. 2 5 (2) Includes currently exercisable options to purchase 245,000 shares of Common Stock and 4,973 shares of Common Stock held by Mr. Loudermilk, Sr.'s spouse. (3) As reported on Schedule 13G filed with the Securities and Exchange Commission on October 12, 2000 by Gabelli Funds, Inc. (4) Gabelli Funds, Inc. and Reich & Tang Asset Management are not required to disclose their holdings of non-voting Common Stock. (5) As reflected in an amended Schedule 13G filed with the Securities and Exchange Commission as of December 31, 2000. (6) Includes currently exercisable options to purchase 110,000 shares of Common Stock and 700 shares of Common Stock held by Mr. Danielson's spouse. (7) Includes 1,500 shares of Class A Common Stock held by certain trusts for the benefit of Mr. Loudermilk, Jr.'s children, of which Mr. Loudermilk, Jr. serves as trustee. (8) Includes currently exercisable options to purchase 70,000 shares of Common Stock, 69,327 shares of Common Stock held by certain trusts for the benefit of Mr. Loudermilk, Jr.'s children, of which Mr. Loudermilk, Jr. serves as trustee, and 16,223 shares of Common Stock held by Mr. Loudermilk, Jr.'s spouse. (9) Includes currently exercisable options to purchase 70,000 shares of Common Stock. (10) Includes currently exercisable options to purchase 22,000 shares of Common Stock. (11) Includes currently exercisable options to purchase 551,000 shares of Common Stock. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than 10% of either class of the Company's common stock, to file with the Securities and Exchange Commission certain reports of beneficial ownership of the Company's common stock. Based solely on copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that all applicable Section 16(a) filing requirements were complied with by its directors, officers, and 10% shareholders during the year ended December 31, 2000, except that William K. Butler, Jr. inadvertently was late in filing two reports and R. Charles Loudermilk, Sr. inadvertently failed to report a gift of shares of Common Stock that occurred in December 2000. ELECTION OF DIRECTORS (ITEM 1) The Company's Bylaws provide for the Board of Directors to be comprised of eleven members. The Board recommends the election of the ten nominees listed below to constitute the entire Board, who will hold office until the next annual meeting of shareholders and until their successors are elected and qualified. If, at the time of the Annual Meeting, any of such nominees should be unable to serve, the persons named in the proxy will vote for such substitutes or will vote to reduce the number of directors for the ensuing year, as management recommends, but in no event will the proxy be voted for more than ten nominees. Management has no reason to believe any substitute nominee or reduction in the number of directors for the ensuing year will be required. The Board has not named an eleventh nominee for director, which will result in one vacancy on the Board until the Board names an additional nominee or reduces the size of the Board to ten members. 3 6 All of the nominees listed below are now directors of the Company. The following information relating to age, positions with the Company, principal occupation, directorships in companies with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, subject to the requirements of Section 15(d) of that Act or registered as an investment company under the Investment Company Act of 1940, has been furnished by the respective nominees.
PRINCIPAL OCCUPATION FOR PAST DIRECTOR NAME AGE FIVE YEARS AND OTHER DIRECTORSHIPS SINCE ---- --- ---------------------------------- -------- R. Charles Loudermilk, Sr.... 73 Mr. Loudermilk, Sr. has served as Chairman of the 1962 Board and Chief Executive Officer of the Company since the Company's incorporation in 1962. From 1962 to 1997, he was also President of the Company. He has been a director of America's Mart Corporation, owner and manager of the Atlanta Merchandise Mart, since 1996. He is one of the founders and Chairman of the Board of The Buckhead Community Bank, and formerly the Chairman of the Board of Directors of the Metropolitan Atlanta Rapid Transit Authority. Robert C. Loudermilk, Jr..... 41 Mr. Loudermilk, Jr., has served as a Director of the 1983 Company since 1983, and as President and Chief Operating Officer of the Company since 1997. From 1993 to 1997, he was Vice President, Real Estate of the Company. From 1992 to 1993, he was a self-employed real estate investor. From 1990 to 1991, Mr. Loudermilk, Jr., was Executive Vice President of Ball Stalker Co., then a subsidiary of the Company. Gilbert L. Danielson......... 54 Mr. Danielson has served as Vice President, Finance 1990 and Chief Financial Officer and Director of the Company since 1990. He was named Executive Vice President in 1998. He also serves as a Director of Abrams Industries, Inc. Ronald W. Allen.............. 59 Mr. Allen has served as a Director of the Company 1997 since 1997. He was Chairman and Chief Executive Officer of Delta Air Lines, an international air passenger carrier, from 1987 to 1997. He also served as President of Delta Airline from 1983 to 1987 and from 1993 to 1997, and Chief Operating Officer from 1983 to 1997. He currently serves as a Director of The Coca-Cola Company. Leo Benatar * +.............. 71 Mr. Benatar has served as a Director of the Company 1994 since 1994. He has been an associated consultant with A.T. Kearney, Inc., a management consultant and executive search company, since 1996. He was Chairman of Engraph, Inc., and served as Chief Executive Officer of that company from 1981 to 1995. Mr. Benatar serves as a Director of Interstate Bakeries Corporation, Mohawk Industries, Inc., and Paxar Corporation. He previously served as Chairman of the Federal Reserve Bank of Atlanta.
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PRINCIPAL OCCUPATION FOR PAST DIRECTOR NAME AGE FIVE YEARS AND OTHER DIRECTORSHIPS SINCE ---- --- ---------------------------------- -------- Earl Dolive+................. 83 Mr. Dolive has served as a Director of the Company 1997 since 1977. He currently serves as a Director of Greenway Medical Technologies, Inc. and as Director Emeritus of Genuine Parts Company, a distributor of automobile replacement parts. Prior to his retirement in 1988, he was Vice Chairman of the Board of Genuine Parts Company. J. Rex Fuqua................. 51 Mr. Fuqua has served as a Director of the Company 1996 since 1996. He has been President and Chief Executive Officer of Realan Capital Corporation, a privately held real estate investment corporation, since 1985. He also has been President and Chief Executive Officer of Fuqua Capital Corporation, a privately held investment management corporation, since 1987. Previously, he was Chairman of the Board of Directors of Fuqua Enterprises, Inc., a company engaged in the manufacture and sale of medical products. Mr. Fuqua serves as a Director of Graham-Field Health Products, Inc. Ingrid Saunders Jones*....... 55 Ms. Jones has served as a Director of the Company 1995 since 1995. She has been Vice President of Corporate External Affairs of The Coca-Cola Company and Chairperson of The Coca-Cola Foundation since 1991. Previously, she was an Assistant Vice President of The Coca-Cola Company. M. Collier Ross+............. 74 Gen. Ross has served as a Director of the Company 1996 since 1996. He has been a self-employed management consultant since 1992. He is the former Executive Vice President of Sidwell-Ross and Associates, Inc., a management and technical consulting firm. Gen. Ross retired from the United States Army in 1983 as a Lt. General after 39 years of distinguished service. William K. Butler, Jr........ 48 Mr. Butler joined the Company in 1974 as a Store 2000 Manager. He served as Vice President of the Aaron's Rental Purchase Division from 1986 to 1995 and currently is President of that Division, now known as the Aaron's Sales and Lease Ownership Division. Mr. Butler has served as a Director of the Company since 2000.
--------------- * Member of the Stock Option Committee of the Board of Directors. + Member of the Audit Committee of the Board of Directors. There are no family relationships among any of the executive officers, directors, and nominees of the Company, except that Robert C. Loudermilk, Jr. is the son of R. Charles Loudermilk, Sr. The Board held four meetings during the year ended December 31, 2000. All of the incumbent directors attended at least 75% of the meetings of the Board and committees on which they served, except for J. Rex Fuqua, who attended 50% of the meetings of the Board during 2000. 5 8 The Board has a standing Audit Committee which is composed of Messrs. Benatar, Dolive, and Ross. The function of the Audit Committee is to review with the Company's independent auditors the scope and thoroughness of the auditors' examination, consider recommendations of the independent auditors, recommend to the Board the appointment of independent auditors for the year and review the sufficiency of the Company's system of internal controls with the financial officers and the independent auditors. The Audit Committee held two meetings during the year ended December 31, 2000. Please see page 17 for the 2001 Audit Committee Report. The Board has a Stock Option Committee, which is composed of Mr. Benatar and Ms. Jones. The function of the Stock Option Committee is to administer the Company's stock option plans. The Stock Option Committee held eight meetings during the year ended December 31, 2000. The Board does not have a nominating or compensation committee. Shareholder nominations for director must comply with the procedures for shareholder nominations set forth in Article III, Section 3 of the Company's Bylaws. REMUNERATION OF EXECUTIVE OFFICERS AND DIRECTORS EXECUTIVE OFFICERS Set forth below are the names and ages of all executive officers of the Company as of February 15, 2001. All positions and offices with the Company held by each such person are also indicated. Officers are elected annually for one-year terms or until their successors are elected and qualified. All executive officers are United States citizens.
POSITION WITH THE COMPANY AND PRINCIPAL OCCUPATION NAME (AGE) DURING THE PAST FIVE YEARS ---------- -------------------------------------------------- R. Charles Loudermilk, Sr.(73)............... Chairman of the Board of Directors and Chief Executive Officer of the Company.* Robert C. Loudermilk, Jr.(41)................ President and Chief Operating Officer of the Company.* Gilbert L. Danielson(54)..................... Executive Vice President and Chief Financial Officer of the Company.* James L. Cates(50)........................... Mr. Cates has served as Director of Risk Management since 1990, Vice President since 1994, and Secretary of the Company since 1999. William K. Butler, Jr.(48)................... President of the Aaron's Sales & Lease Ownership Division.* Eduardo Quinones(40)......................... Mr. Quinones joined the Company is 1985 as a Store Manager. He served as Vice President of the Rent-to-Rent Division from 1989 to 2000 and currently is President of that Division. David M. Rhodus(52).......................... Mr. Rhodus has served as Vice President, Legal since 1999. He was a senior attorney for Alumax, Inc., an aluminum products manufacturing company, from 1998 to 1999 and Vice President and General Counsel for Atlantax Systems, Inc., a business tax services company, from 1993 to 1998.
6 9
POSITION WITH THE COMPANY AND PRINCIPAL OCCUPATION NAME (AGE) DURING THE PAST FIVE YEARS ---------- -------------------------------------------------- B. Lee Landers(42)........................... Mr. Landers has served as Vice President, Chief Information Officer since 1999. Prior to 1999, he held various engineering and technology management positions with The Southern Company. Robert P. Sinclair, Jr.(39).................. Mr. Sinclair has served as Controller of the Company since 1990, Chief Financial Officer of the Aaron's Rental Purchase Division from 1995 to 1999, and Vice President, Corporate Controller since 1999.
--------------- * For additional information concerning those individuals, see ELECTION OF DIRECTORS (Item 1) above. 7 10 EXECUTIVE COMPENSATION SUMMARY The following table provides certain summary information for the last three fiscal years of the Company concerning compensation paid or accrued by the Company and its subsidiaries to or on behalf of the Company's Chief Executive Officer and the other Named Executive Officers of the Company. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------- NUMBER OF ANNUAL COMPENSATION SECURITIES FISCAL ------------------------------------- UNDERLYING YEAR OTHER ANNUAL STOCK OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION ENDED SALARY BONUS COMPENSATION(1) (#) COMPENSATION --------------------------- ------ -------- -------- --------------- ------------- ------------ R. Charles Loudermilk, Sr. ........ 2000 $454,000 $455,861 -- 55,000 $104,005(2) Chairman of the Board and 1999 454,000 391,826 -- -- 92,172(3) Chief Executive Officer 1998 454,000 355,527 -- -- 82,975(4) Robert C. Loudermilk, Jr. ......... 2000 217,500 -- -- 20,000 1,636(5) President and Chief 1999 205,000 -- -- 10,000 2,719(5) Operating Officer 1998 200,000 -- -- -- 2,107(5) Gilbert L. Danielson............... 2000 242,500 -- -- 50,000 1,615(5) Executive Vice President and 1999 235,000 25,000 -- 54,000 2,665(5) Chief Financial Officer 1998 230,000 -- -- -- 2,001(5) William K. Butler, Jr.............. 2000 242,500 25,000 -- 40,000 1,724(5) President, Aaron's Sales & 1999 210,000 50,000 -- 20,000 3,472(5) Lease Ownership Division 1998 200,000 -- -- -- 2,200(5) Eduardo Quinones................... 2000 155,750 31,457 -- 30,000 1,441(5) President, Rent-to-Rent 1999 94,000 44,409 -- 12,000 2,190(5) Division 1998 86,500 72,506 -- -- 606(5)
--------------- (1) Excludes perquisites that do not exceed the lesser of $50,000 or 10% of the executive's salary and bonus. (2) Includes a matching contribution of $1,819 made by the Company to the executive's account in the Company's 401(k) plan, and $102,186 representing a portion of the premiums paid, and reimbursement of the executive's resulting income tax liability, with respect to the split dollar life insurance policies described in COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION below. (3) Includes a matching contribution of $2,656 made by the Company to the executive's account in the Company's 401(k) plan, and $89,516 representing a portion of the premiums paid, and reimbursement of the executive's resulting income tax liability, with respect to the split dollar life insurance policies described in COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION below. (4) Includes a matching contribution of $2,000 made by the Company to the executive's account in the Company's 401(k) plan, and $80,975 representing a portion of the premiums paid, and reimbursement of the executive's resulting income tax liability, with respect to the split dollar life insurance policies described in COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION below. (5) Represents a matching contribution made by the Company to the executive's account in the Company's 401(k) plan. BOARD OF DIRECTORS' REPORT ON EXECUTIVE COMPENSATION Decisions on compensation of the Company's executive officers generally are made by the entire Board of Directors, based upon the recommendation of the Chief Executive Officer. The Company has no separate 8 11 compensation committee. Pursuant to rules of the Securities and Exchange Commission designed to enhance disclosure of public company policies toward executive compensation, set forth below is a report submitted by the Board of Directors addressing the Company's executive compensation policies. GENERAL. The objectives of the Company's compensation program are to enhance the profitability of the Company, and thus shareholder value, by aligning executive compensation with the Company's business goals and performance and by attracting, retaining and rewarding executive officers who contribute to the long-term success of the Company. In determining the compensation to be paid to the executive officers of the Company, the directors rely upon their own knowledge of compensation paid to executives of companies of comparable size and complexity and consider the performance of the Company and the merits of the individual under consideration. It is the Company's intention that the compensation to be paid to its executive officers will not exceed the present maximum allowable amount for purposes of deductibility set forth in the Internal Revenue Code. SALARY AND BONUS. The Chief Executive Officer makes recommendations annually to the Board of Directors regarding the base salary and bonus, if any, for the Company's executive officers, including the Chief Executive Officer, based upon the profitability of the Company and the level of responsibility, time with the Company, contribution and performance of the executive officer. Evaluation of these factors is subjective, and no fixed, relative weights are assigned to the factors considered. The beginning point for determining such salaries is the salary the executive officer received in the prior fiscal year. The Chief Executive Officer received a salary of $454,000 during year ended December 31, 2000, which represented no change in his salary from the fiscal year ended December 31, 1999. At its March 13, 2000 meeting, the Board of Directors approved a bonus plan (the "Plan") for the Chief Executive Officer for the fiscal year. Under the Plan, a bonus was to be given to the Chief Executive Officer in an amount equal to 1% of the Company's pre-tax earnings for the fiscal year ended December 31, 2000 (without giving effect to his bonus under the Plan) if the Company's pre-tax earnings for 2000 (after giving effect to his bonus under the Plan) exceeded pre-tax earnings for the fiscal year ended December 31, 1999, which goal ultimately was achieved. Factors considered in setting the Chief Executive Officer's salary and bonus included the continued improvement in the Company's financial condition during the fiscal year and his dual role as both Chairman of the Board of Directors and Chief Executive Officer of the Company. STOCK OPTIONS. The Company in the past has used grants of stock options to its key employees and executive officers to more closely align the interests of such employees and officers with the interests of its shareholders. Options and awards equivalent to 444,500 shares of Common Stock were awarded to officers and employees during the year-end December 31, 2000. Options granted to the Chief Executive Officer and the other Named Executive Officers during the three prior fiscal years are reflected in the Summary Compensation Table above. THE BOARD OF DIRECTORS R. Charles Loudermilk, Sr. Robert C. Loudermilk, Jr. Gilbert L. Danielson Ronald W. Allen Leo Benatar Earl Dolive J. Rex Fuqua Ingrid Saunders Jones M. Collier Ross William K. Butler, Jr. 9 12 FIVE-YEAR SHAREHOLDER RETURN COMPARISON Set forth below is a line graph comparing, for the last five fiscal years of the Company, the yearly percentage change in the cumulative total shareholder return (assuming reinvestment of dividends) on the Company's Common Stock with that of (i) the S&P Small Cap 600 Index and (ii) a group of publicly traded rental purchase, rent-to-rent, and credit furniture retailer companies (the "Peer Group"). For 2000, the Peer Group consisted of Rent-A-Center, Inc., Rent-Way, Inc., and Heilig-Meyers Company. CORT Business Services Corporation and Globe Business Resources, Inc. were excluded from the Peer Group in 2000 after being included in prior years because they were acquired by larger companies during the year and ceased being independently-held companies. The stock price performance shown on the graph below is not necessarily indicative of future price performance. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AARON RENTS, INC. S & P SMALLCAP 600 PEER GROUP ----------------- ------------------ ---------- 12/95 100.00 100.00 100.00 12/96 132.32 121.32 93.96 12/97 216.50 152.36 95.14 12/98 169.40 156.52 98.34 12/99 169.77 175.93 61.10 12/00 158.28 196.69 54.35
* $100 invested on 12/31/95 in Stock or Index, including reinvestment of dividends. EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS Messrs. Loudermilk, Sr., Loudermilk, Jr., Danielson, Butler, and Quinones have each entered into employment agreements with the Company. The agreements provide that each executive's employment with the Company will continue until terminated by either party for any reason upon 60 days notice, or by either party for just cause at any time. Each such executive has agreed not to compete with the Company for a period of one year after the termination of his employment. DIRECTOR COMPENSATION Outside directors receive $2,000 for each Board meeting attended, and Audit Committee members receive fees of $500 for each Audit Committee meeting attended. Each outside director also is paid a quarterly retainer of $2,000. Directors who are employees of the Company receive no compensation for attendance at Board or committee meetings. 10 13 OPTION GRANTS The following table lists grants of stock options made by the Company during the last fiscal year to the Named Executive Officers. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL STOCK PRICE SECURITIES OPTIONS EXERCISE APPRECIATION FOR UNDERLYING GRANTED TO OR OPTION TERM(1) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------- NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($) ---- ----------- ------------ ---------- ---------- ---------- ---------- R. Charles Loudermilk, Sr...................... 55,000(2) 13.60% $12.875 10/02/2010 $1,153,461 $1,836,694 Robert C. Loudermilk, Jr...................... 20,000(2) 4.94% 12.875 10/02/2010 419,440 667,889 Gilbert L. Danielson...... 50,000(2) 12.36% 12.875 10/02/2010 1,048,601 1,669,722 William K. Butler, Jr..... 40,000(3) 9.89% 12.563 07/01/2010 818,520 1,303,356 Eduardo Quinones.......... 30,000(3) 7.43% 14.875 04/03/2010 726,894 1,157,458
--------------- (1) These amounts represent assumed rates of appreciation only. Actual gains, if any, on stock option exercises and holdings of Class A Common Stock and Common Stock are dependent upon the future performance of the shares and overall market conditions. There can be no assurance that the amounts reflected in this table will be achieved. (2) These options were granted outside of the Company's 1996 Stock Option Incentive Award Plan and are subject to shareholder approval at the Annual Meeting -- See Item (3): "Proposal to Approve Grants of Stock Options to Three Executive Officers" below. (3) These options were granted pursuant to the Company's 1996 Stock Option and Incentive Award Plan and consist of options to acquire Common Stock. Such options have terms of ten years from the date of grant and will vest on the third anniversary of the date of grant, or earlier upon the occurrence of a change of control of the Company. OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table shows for the Company's Chief Executive Officer and the Named Executive Officers information with respect to the exercise of options for Common Stock during the year ended December 31, 2000, the number of shares covered by both exercisable and non-exercisable stock options for Common Stock as of December 31, 2000, and the values of "in-the-money" options, based on the positive spread between the exercise price of any such existing stock options and the year-end price of the applicable class of the Company's Common Stock. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED SHARES OPTIONS AT VALUE OF UNEXERCISED ACQUIRED DECEMBER 31, 2000 IN-THE MONEY OPTIONS AT ON VALUE (NO. OF SHARES) DECEMBER 31, 2000(1) EXERCISE REALIZED ----------------------------- --------------------------- NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- -------- -------- ----------- ------------- ----------- ------------- R. Charles Loudermilk, Sr.... -- -- 200,000 55,000 $837,500 $65,313 Robert C. Loudermilk, Jr..... -- -- 60,000 30,000 251,250 33,125 Gilbert L. Danielson......... 30,000 202,500 110,000 104,000 418,750 110,000 William K. Butler, Jr........ 20,000 137,625 70,000 60,000 251,250 69,375 Eduardo Quinones............. -- 50,619 20,000 42,000 83,750 11,250
11 14 --------------- (1) Aggregate market value (based on December 30, 2000 closing stock price of $14.0625 per share for the Common Stock) of the shares covered by the options, less aggregate exercise price payable by the executive. PROPOSAL TO APPROVE THE 2001 STOCK OPTION AND INCENTIVE AWARD PLAN (ITEM 2) The Board of Directors has adopted, subject to shareholder approval at the Annual Meeting, the Company's 2001 Stock Option and Incentive Award Plan (the "2001 Plan"). If approved by the shareholders, the 2001 Plan will become effective as of March 13, 2001. The Company's 1996 Stock Option Plan terminated on March 31, 2001. Shareholder approval of the 2001 Plan is sought to (1) qualify the 2001 Plan pursuant to Rule 16b-3 under the Exchange Act, and thereby render certain transactions under the 2001 Plan exempt from certain provisions of Section 16 of the Exchange Act, (2) qualify certain types of awards under the 2001 Plan as "performance based" compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and thereby allow the Company to exclude such compensation from the one million dollar cap on the tax deductibility of compensation paid to the "Named Executive Officers" and (3) satisfy the Company's obligations under its listing agreements with The New York Stock Exchange. Shareholder approval of the 2001 Plan is necessary to make the incentive awards contemplated by the 2001 Plan. The following is a summary of certain material features of the 2001 Plan: GENERALLY. The 2001 Plan is a flexible plan that will provide the Stock Option Committee of the Board of Directors (the "Committee") broad discretion to fashion the terms of awards to provide eligible participants with such stock-based incentives as the Committee deems appropriate. It will permit the issuance of awards in a variety of forms, including: (i) nonqualified stock options ("NQSOs") and incentive stock options ("ISOs"; NQSOs, and ISOs collectively, "Stock Options"), (ii) performance shares, and (iii) restricted stock awards. ADMINISTRATION. The 2001 Plan will be administered by the Committee, each member of which will be a "disinterested person" within the meaning of Section 16 of, and Rule 16b-3 under, the Exchange Act. The 2001 Plan vests broad powers in the Committee to administer and interpret the 2001 Plan. The Committee's powers include authority, within the limitations set forth in the 2001 Plan, to (i) select the persons to be granted awards, (ii) determine the size and type of awards, (iii) construe and interpret the 2001 Plan, (iv) establish, amend or waive rules and regulations for the administration of the 2001 Plan, and (v) determine whether an award, award agreement or payment of an award should be amended, reduced or eliminated, to the extent the 2001 Plan gives discretion to the Committee to do so. ELIGIBILITY. In general, employees, directors, independent contractors, consultants and other providers of service to the Company are eligible to receive awards under the 2001 Plan. NUMBER OF SHARES AVAILABLE. The 2001 Plan provides for the grant of up to 600,000 shares of Common Stock. Under certain circumstances, shares subject to an award that remain unissued upon termination of the award will become available for additional awards under the 2001 Plan. In the event of a stock dividend, stock split, recapitalization, or similar event, the Committee will equitably adjust the aggregate number of shares subject to the 2001 Plan and the number, class, and price of shares subject to awards outstanding. AMENDMENT AND TERMINATION. The 2001 Plan may be amended, modified, or terminated by the Board of Directors, subject to shareholder approval if such an amendment would materially modify the eligibility requirements thereunder, increase the total number of shares allowed to be issued thereunder, extend the term thereof, require shareholder approval under Rule 16b-3 of the Exchange Act or, in any case, if the Board determines that shareholder approval is appropriate. Unless earlier terminated by the Board of Directors or shareholders, the 2001 Plan will terminate on March 13, 2011. 12 15 CODE SECTION 162(M). At all times when the Committee determines that it is desirable to satisfy the conditions of Section 162(m) of the Code, all awards granted under the 2001 Plan will comply with such conditions. The Committee is nevertheless empowered to grant awards that would not constitute "performance based" compensation under Section 162(m). If changes are made to Section 162(m) to permit greater flexibility with respect to any awards available under the 2001 Plan, the Committee may, subject to the restrictions set forth in the preceding paragraph regarding amendment thereof, make any adjustments it deems appropriate. AWARDS UNDER THE 2001 PLAN STOCK OPTIONS. The Committee in its discretion will determine the number of shares of Common Stock subject to Stock Options to be granted to each participant, but no individual may be granted Stock Options to purchase more than 150,000 shares during any one calendar year. The Committee may grant NQSOs, ISOs, or a combination thereof to eligible persons, provided that ISOs may only be granted to employees. ISOs may only be granted if the aggregate fair market value (determined as of the date the options are granted) of the Common Stock underlying ISOs granted under all plans of the Company that become exercisable for the first time during any calendar year is less than $100,000. ISOs granted under the 2001 Plan will provide for the purchase of Common Stock at prices not less than 100% of the fair market value thereof on the date the Stock Option is granted. NQSOs granted under the 2001 Plan will provide for the purchase of Common Stock at prices determined by the Committee. No Stock Option granted will be exercisable later than the tenth anniversary date of its grant. Stock Options will be exercisable at such times and subject to such restrictions and conditions as the Committee approves. A holder of NQSOs may be able to transfer the Stock Options, under certain circumstances, to members of his or her immediate family (as defined in the 2001 Plan), to one or more trusts for the benefit of his or her immediate family or to partnerships in which immediate family members are the only partners, if such holder's option agreement expressly permits such transfer and the holder does not receive any consideration in any form whatsoever for the transfer. Other than the foregoing, Stock Options will not be transferable by the holder other than by will or applicable laws of descent and distribution. The option exercise price is payable in cash or, if approved by the Committee, in shares of Common Stock having a fair market value equal to the exercise price or in a combination of cash and such shares. PERFORMANCE SHARES. The Company may grant performance shares to employees of the Company or its subsidiaries in such amounts, and subject to such terms and conditions, as the Committee in its discretion determines; provided, however, that no individual may earn more than 150,000 performance shares with respect to any performance period. Each performance share will have a value equal to the fair market value of a share of Common Stock on the date the performance share is earned. The Committee in its discretion will set performance goals to be achieved over performance periods of not less than two years. The extent to which the performance goals are met will determine the number of performance shares earned by participants. The performance measure to be used for purposes of grants to Named Executive Officers will be one or more of the following: total shareholder return, return on assets, return on equity, earnings per share, revenue growth, operating income, estimated earnings, net income, market value of the shares, and pre-tax profit performance, unless and until the Company's shareholders vote to change such performance measures. In the event that applicable tax and/or securities laws change to permit the Committee discretion to alter the governing performance measures without obtaining shareholder approval, the Committee will have the sole discretion to make such changes without obtaining shareholder approval. In any event, with respect to employees that are not Named Executive Officers, the Committee may approve performance measures not listed above without shareholder approval. After the applicable performance period has ended, the Committee will certify the extent to which the established performance goals have been achieved, and each holder of performance shares will be entitled to receive payout on the number of performance shares earned by the participant over the performance period, to be determined as a function of the extent to which the corresponding performance goals have been achieved. The grantee of a performance share award will receive payment, within 75 days following the end of the applicable performance period, of performance shares earned in cash or shares of Common Stock (or in a 13 16 combination of cash and shares of Common Stock), which have, as of the close of the applicable performance period, an aggregate fair market value equal to the value of the earned performance shares. If the employment of a participant is terminated by reason of death or retirement or at the request of the Company without cause during the performance period, the participant will receive a prorated payout with respect to the performance shares earned, which will be determined by the Committee, in its sole discretion, and will be based upon the length of time the participant held the performance shares during the applicable performance period and upon achievement of the established performance goals. Such payment will be made at the same time as payments are made to participants who did not terminate employment during the applicable performance period. If a participant's employment is terminated for any other reason, all performance shares will be forfeited by the participant to the Company. Performance shares may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. RESTRICTED STOCK. The Committee may from time to time grant restricted stock awards to employees of the Company or its subsidiaries, but no individual may be granted more than 150,000 shares of Restricted Stock during any one calendar year. Each grant of restricted stock will be evidenced by a written grant agreement between the participant and the Company setting forth the terms and conditions of the grant, as determined by the Committee, at its discretion, to be necessary or desirable. Terms may include a requirement for payment by the participant to the Company for the restricted stock, which is granted. Each grant of restricted stock will be subject to restrictions, determined by the Committee in its discretion, for a period of at least six months (the "Restricted Period"). Such restrictions may include only the requirement of continued employment or may include other financial performance based criteria established by the Committee. The grant agreement may, at the discretion of the Committee and subject to any prescribed terms and conditions, also provide for the lapse of restrictions upon the occurrence of such specified events as a change in control of the Company or the termination of the participant's employment by reason of the participant's death, or retirement. During the Restricted Period the participant will have all the rights of a Company shareholder, including the right to receive dividends and vote the shares of restricted stock, except as follows. Cash dividends will be paid either in cash or in restricted stock, as the Committee determines. In addition, the restricted stock may not be transferred, assigned or encumbered unless and until all restrictions have lapsed. The restricted stock will be forfeited to the Company if all conditions to the lapse of the restrictions have not been met or waived at or prior to the expiration of the Restricted Period. CHANGES IN CONTROL. Except as provided otherwise in the applicable award agreement, upon the occurrence of certain change in control events, (i) all Stock Options outstanding will become immediately exercisable; (ii) all restrictions on restricted stock will lapse and (iii) the Committee may, in its discretion, make any other modifications to any awards as determined by the Committee to be deemed appropriate before the effective date of such change in control. FEDERAL TAX CONSEQUENCES The following summary of federal income tax consequences with respect to the 2001 Plan is not comprehensive and is based upon laws and regulations currently in effect. Such laws and regulations are subject to change. STOCK OPTIONS. There are generally no federal tax consequences either to the employee receiving Stock Options (the "Optionee") or to the Company upon the grant of a Stock Option. On exercise of an ISO, the Optionee will not recognize any income and the Company will not be entitled to a deduction for tax purposes, although such exercise may give rise to a liability for the Optionee under the Alternative Minimum Tax provisions of the Code. Generally, if the Optionee disposes of shares acquired upon exercise of an ISO within two years of the date of grant or one year after the date of exercise, the Optionee will recognize compensation income and the Company will be entitled to a deduction for tax purposes in the taxable year in which such disposition occurred in the amount of the excess of the fair market value of the shares of Common Stock on the date of exercise over the option exercise price (or the gain on sale, if less). Any additional gain will be capital gain for the optionee. Otherwise, the Company will not be entitled to any deduction for tax purposes 14 17 upon disposition of such shares, and the entire gain for the Optionee will be treated as a capital gain. On exercise of a NQSO, the amount by which the fair market value of the Common Stock on the date of exercise exceeds the option exercise price will generally be taxable to the Optionee as compensation income and will generally be deductible for tax purposes by the Company. The dispositions of shares of Common Stock acquired upon exercise of a NQSO will generally result in a capital gain or loss for the Optionee, but will have no tax consequences for the Company. PERFORMANCE SHARES. The grant of a performance share award will not result in income for the grantee or in a tax deduction for the Company. Upon the settlement of such a right or award, the grantee will recognize ordinary income equal to the fair market value of any shares of Common Stock and/or any cash received and the Company will be entitled to a tax deduction in the same amount. RESTRICTED STOCK. The Company is of the opinion that the participant will realize compensation income in an amount equal to the fair market value of the restricted stock (whether received as a grant or as a dividend), less any amount paid for such restricted stock, at the time when the participant's rights with respect to such restricted stock are no longer subject to a substantial risk of forfeiture, unless the participant elected, pursuant to a special election provided in the Code, to be taxed on the restricted stock at the time it was granted or received as a dividend, as the case may be. Dividends paid to the participant during the Restricted Period will be taxable as compensation income, rather than as dividend income, unless the election referred to above was made. The Company is also of the opinion that it will be entitled to a deduction under the Code in the amount and at the time that compensation income is realized by the participant. The amount of income realized by each participant and the amount of the deduction available to the Company will be affected by any change in the market price of the Common Stock during the limitation period. OPTION GRANTS. It is not possible to determine either the benefits or amounts that will be received by the Company's directors or executive officers, or any of its employees, at this time under the 2001 Plan, or that would have been received had the 2001 Plan been in effect during the last fiscal year. VOTING REQUIREMENTS. Approval of the 2001 Plan will require the affirmative vote of the holders of a majority of the shares of Class A Common Stock represented in person or by proxy and entitled to vote at the Annual Meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE 2001 PLAN, AND THE ENCLOSED PROXY WILL BE VOTED IN THAT MANNER UNLESS THE SHAREHOLDER EXECUTING THE PROXY SPECIFICALLY VOTES TO THE CONTRARY OR ABSTAINS FROM VOTING ON THIS PROPOSAL. PROPOSAL TO APPROVE GRANTS OF STOCK OPTIONS TO THREE EXECUTIVE OFFICERS (ITEM 3) The Board of Directors has approved, subject to shareholder approval at the Annual Meeting, the grant of stock options to three of the Company's executive officers made outside of the Company's 1996 Stock Option and Incentive Award Plan or the 2001 Plan. If approved by the shareholders, the grants will become effective as of October 2, 2000. The Board of Directors approved the following stock option grants as of October 2, 2000:
EXERCISE PRICE/FAIR NUMBER OF OPTIONS MARKET VALUE ON DATE NAME OF OPTION HOLDER GRANTED OF GRANT --------------------- ----------------- -------------------- R. Charles Loudermilk, Sr.......................... 55,000 $12.875/$12.875 Gilbert L. Danielson............................... 50,000 $12.875/$12.875 Robert C. Loudermilk, Jr........................... 20,000 $12.875/$12.875
15 18 All of the options granted to the three executive officers were non-qualified stock options. The stock options will be fully vested on October 2, 2003 and become exercisable on that date. Although not granted under the Company's existing 1996 Stock Option and Incentive Plan or the 2001 Plan, the terms of the grants are substantially identical to the terms of options available for grant under such plans. The Board of Directors determined to make these grants outside of the plans because the Company did not expect to have sufficient authorized shares available for grant under the plans to make the grants to those officers and to make planned grants to other non-executive officer employees. VOTING REQUIREMENTS. Approval of these grants by the shareholders is required by the rules of the New York Stock Exchange for the grants to be effective. Approval of the stock option grants described above will require the affirmative vote of the holders of a majority of the shares of Class A Common Stock represented in person or by proxy and entitled to vote at the Annual Meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE STOCK OPTION GRANTS TO THE THREE EXECUTIVE OFFICERS, AND THE ENCLOSED PROXY WILL BE VOTED IN THAT MANNER UNLESS THE SHAREHOLDER EXECUTING THE PROXY SPECIFICALLY VOTES TO THE CONTRARY OR ABSTAINS FROM VOTING ON THIS PROPOSAL. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company has no compensation committee. The Board of Directors of the Company, upon the recommendation of the Chairman and Chief Executive Officer, determines the annual compensation payable to its executive officers. The following directors of the Company served as officers or employees of the Company or its subsidiaries during the last fiscal year or prior thereto: R. Charles Loudermilk, Sr., Robert C. Loudermilk, Jr., Gilbert L. Danielson, and William K. Butler, Jr. The Company leases a 49,000 square foot building housing two stores in Alexandria, Virginia from a general partnership of which Mr. Loudermilk, Sr. is a 25% partner under a ten-year lease expiring in 2008 at a basic monthly rental of $17,726, subject to escalation every five years based on the consumer price index, but not to exceed 25%. All insurance, taxes, assessments, and other charges related to the property are paid by the Company as additional rent under the lease. The Company believes that these lease terms are as favorable as those that could have been obtained at the same time from unaffiliated parties. During 2000, the Company paid $140,509 for various store fixtures to Abrams Fixture Corporation, a subsidiary of Abrams Industries, Inc., of which Mr. Danielson serves as a Director. Each of two irrevocable trusts holds a cash value life insurance policy on the life of Mr. Loudermilk, Sr., the aggregate face value of which is $4,400,000. The Company and the Trustee of such trusts are parties to split-dollar agreements pursuant to which the Company has agreed to make all payments on the policies until Mr. Loudermilk, Sr.'s death. Upon his death, the Company will receive the aggregate cash value of those policies, which as of December 31, 2000 represented $1,363,716, and the balance of such policies will be payable to the trusts or beneficiaries of such trusts. The premiums paid by the Company on these policies during the year ended December 31, 2000 totaled $219,286. AUDIT MATTERS Ernst & Young LLP served as auditors of the Company for the year ended December 31, 2000. A representative of that firm is expected to be present at the Annual Meeting and will have an opportunity to make a statement and respond to appropriate questions. AUDIT FEES. The aggregate fees billed by the Company's auditors, Ernst & Young LLP, for professional services rendered for the audit of the Company's annual financial statements for the year ended December 31, 2000 and the reviews of the financial statements included in the Company's Forms 10-Q for that year were $179,250. 16 19 FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES. During 2000, Ernst & Young LLP billed the Company $65,125 for professional services with regard to financial information systems design and implementation. ALL OTHER FEES. The aggregate fees billed for services rendered by Ernst & Young LLP for 2000, other than the services described above, were $47,750. REPORT OF AUDIT COMMITTEE The Audit Committee is comprised of three "independent" members as defined under the listing standards of the New York Stock Exchange ("NYSE"). The Audit Committee acts under a written charter adopted and approved by the Board of Directors on May 2, 2000. A copy of the Audit Committee Charter is attached to this proxy statement as Appendix A. The responsibilities of the Audit Committee include recommending to the Board of Directors an accounting firm to be engaged as independent accountants. In addition, the Audit Committee is responsible for recommending to the Board of Directors that the financial statements be included in the Annual Report to Shareholders. In keeping with its responsibilities, the Audit Committee has reviewed and discussed the audited financial statements for the fiscal year ended December 31, 2000 with management and has discussed with Ernst & Young LLP, the independent public accountants, the matters required to be discussed by the Statement on Auditing Standards No. 61 (Communication with Audit Committees). The Audit Committee has also received the written disclosures and the letter from Ernst & Young LLP required by Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees) and the Audit Committee has discussed the independence of Ernst & Young LLP with that firm. In addition, the members of the Audit Committee considered whether the provision of services by Ernst & Young LLP for the year ended December 31, 2000 described above in AUDIT MATTERS -- "All Other Fees" was compatible with maintaining Ernst & Young LLP's independence. Based on the reports and discussions described in this report, and subject to the limitations on the role and responsibilities of the Committee referred to above and in the Audit Committee Charter, the Committee recommended to the Board of Directors that the audited consolidated financial statements of the Company be included in the Annual Report on Form 10-K for the year ended December 31, 2000 for filing with the Securities and Exchange Commission. This report is respectfully submitted by the Audit Committee of the Board of Directors. Earl Dolive, Chairman Leo Benatar M. Collier Ross SHAREHOLDER PROPOSALS FOR 2002 ANNUAL MEETING In accordance with the provisions of Rule 14a-8(a)(3)(i) of the Securities and Exchange Commission, proposals of shareholders intended to be presented at the Company's 2002 annual meeting must be received by December 6, 2001 to be eligible for inclusion in the Company's proxy statement and form of proxy for that meeting. 17 20 OTHER MATTERS The Board of Directors of the Company knows of no other matters to be brought before the Annual Meeting. However, if other matters should properly come before the Annual Meeting, it is the intention of each person named in the proxy to vote such proxy in accordance with his judgment of what is in the best interest of the Company. THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED TO SHAREHOLDERS UPON REQUEST WITHOUT CHARGE. REQUESTS FOR FORM 10-K REPORTS SHOULD BE SENT TO GILBERT L. DANIELSON, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, AARON RENTS, INC., 309 E. PACES FERRY ROAD, N.E., ATLANTA, GEORGIA 30305-2377. BY ORDER OF THE BOARD OF DIRECTORS James L. Cates Vice President, Risk Management and Secretary April 6, 2001 18 21 APPENDIX A AARON RENTS, INC. AUDIT COMMITTEE CHARTER AS ADOPTED MAY 2, 2000 ORGANIZATION The Audit Committee shall be composed solely of at least three independent directors who are free of any relationship to the Company that may interfere with the exercise of their independence from management and the Company. The Board of Directors, in selecting the members of the Audit Committee, shall make a determination that each member is independent. All Committee members shall be financially literate (or shall become financially literate within a reasonable period of time after appointment to the Committee) and at least one member shall have accounting or related financial management expertise. STATEMENT OF POLICY The Audit Committee shall assist the Board of Directors in exercising its authority with respect to financial matters. The Audit Committee will review the Company's accounting and financial reporting practices and the quality and integrity of the Company's financial reporting. In so doing, the Audit Committee will facilitate free and open communication between the Company's directors, independent auditors, internal auditors, and financial management. POWER AND AUTHORITY In its review of financial matters, the Audit Committee shall have and may exercise all the powers and authority of the Board of Directors to the extent permitted under Section 14-2-825 of the Georgia Business Corporation Code. Each member of the Audit Committee shall, in the performance of such member's duties, be fully protected in relying on information, opinions, reports, or statements prepared or presented by any of the Company's officers or employees or committees of the Board of Directors or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence, all to the extent permitted by Section 14-2-830 of the Georgia Business Corporation Code. ACTIVITIES The Audit Committee will review and monitor the Company's accounting policies and financial reporting practices, paying particular attention to any weaknesses in internal accounting policies and controls, with the primary goal being to help assure that the Company's financial statements present fairly the Company's financial results in accordance with generally accepted accounting principles. In the course of these activities, the Audit Committee will: 1. Recommend to the directors the independent auditors to be selected to audit the financial statements of the Company and review the independence and objectivity of the independent auditors. 2. Meet with the Company's independent auditors and financial management to review the scope of the proposed audit for the current year and the audit procedures to be utilized and, at the conclusion of the annual audit, review such audit, including any comments or recommendations of the independent auditors. 3. Prior to the public release of the annual financial statements, meet with the Company's financial management and the independent auditors to discuss the disclosure and content of the financial statements, including a discussion of the quality of the accounting principles applied and significant judgments affecting the Company's financial statements. 4. Discuss with, and report to, the Company's financial management and the Board of Directors the material findings included in the independent auditors' management letter, if any. A-1 22 5. Discuss with, and receive reports from, the Company's internal auditors, independent auditors, and financial management regarding material changes in the Company's accounting principles, standards, and policies. 6. Discuss with, and receive reports from, the Company's independent auditors, internal auditors, and financial management regarding the adequacy and effectiveness of the Company's accounting and financial controls. 7. Review the Company's internal audit function, including its independence and authority, the proposed audit plans for the coming year, and the coordination of such plans with the Company's independent auditors. 8. Consider and discuss with the Company's financial management and internal auditors significant finds from completed internal audits during the year and any material changes required in the planned scope of the internal audit plan. 9. Provide an opportunity for the Company's internal auditors and independent auditors to meet with the members of the Audit Committee without members of management present. Among the items to be discussed in these meetings are the independent auditors' evaluation of the Company's financial, accounting, and auditing personnel, and the cooperation that the independent auditors received during the course of the audit. 10. Investigate any matter brought to its attention within the scope of its duties, with the power to retain outside counsel for this purpose if, in its judgment, it is appropriate to do so. 11. Submit the minutes of all meetings of the Committee to, or discuss the matters discussed at each Committee meeting with, the Board of Directors. --------------- A-2 23 AARON RENTS, INC. 2001 STOCK OPTION AND INCENTIVE AWARD PLAN (Effective as of March 13, 2001) 24 TABLE OF CONTENTS ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION................................................................ 1 1.1 Establishment of the Plan........................................................................... 1 1.2 Purpose of the Plan................................................................................. 1 1.3 Duration of the Plan................................................................................ 1 ARTICLE 2. DEFINITIONS......................................................................................... 1 ARTICLE 3. ADMINISTRATION...................................................................................... 5 3.1 The Committee....................................................................................... 5 3.2 Authority of the Committee.......................................................................... 5 3.3 Decisions Binding................................................................................... 6 3.4 Employees in Foreign Countries...................................................................... 6 ARTICLE 4. SHARES SUBJECT TO THE PLAN.......................................................................... 6 4.1 Number of Shares.................................................................................... 6 4.2 Lapsed Awards....................................................................................... 7 4.3 Adjustments In Authorized Shares.................................................................... 7 ARTICLE 5. ELIGIBILITY AND PARTICIPATION....................................................................... 7 ARTICLE 6. STOCK OPTIONS....................................................................................... 7 6.1 Grant of Options.................................................................................... 7 6.2 Agreement........................................................................................... 8 6.3 Option Price........................................................................................ 8 6.4 Duration of Options................................................................................. 8 6.5 Exercise of Options................................................................................. 8 6.6 Payment............................................................................................. 9 6.7 Termination of Employment Due to Death or Retirement................................................ 9 6.8 Termination of Employment for Other Reasons......................................................... 10 6.9 Limited Transferability............................................................................. 10 6.10 Shareholder Rights.................................................................................. 11 ARTICLE 7. RESTRICTED STOCK; STOCK AWARDS...................................................................... 11 7.1 Grants.............................................................................................. 11 7.2 Restricted Period; Lapse of Restrictions............................................................ 11 7.3 Rights of Holder; Limitations Thereon............................................................... 11 7.4 Delivery of Unrestricted Shares..................................................................... 12 7.5 Nonassignability of Restricted...................................................................... 12 ARTICLE 8. PERFORMANCE SHARES.................................................................................. 13 8.1 Grant of Performance Shares......................................................................... 13 8.2 Value of Performance Shares......................................................................... 13
i 25 8.3 Earning of Performance Shares....................................................................... 13 8.4 Form and Timing of Payment of Performance Shares.................................................... 14 8.5 Termination of Employment Due to Death, Retirement or at the Request of the Company Without Cause............................................................................... 14 8.6 Termination of Employment for Other Reasons......................................................... 14 8.7 Nontransferability.................................................................................. 14 ARTICLE 9. BENEFICIARY DESIGNATION............................................................................. 14 ARTICLE 10. DEFERRALS.......................................................................................... 15 ARTICLE 11. RIGHTS OF PARTICIPANTS............................................................................. 15 11.1 Employment.......................................................................................... 15 12.2 Participation....................................................................................... 15 ARTICLE 12. CHANGE IN CONTROL.................................................................................. 15 ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION............................................................ 16 13.1 Amendment, Modification and Termination............................................................. 16 13.2 Awards Previously Granted........................................................................... 16 13.3 Compliance With Code Section 162(m)................................................................. 16 ARTICLE 14. WITHHOLDING........................................................................................ 16 14.1 Tax Withholding..................................................................................... 16 14.2 Share Withholding................................................................................... 17 ARTICLE 15. INDEMNIFICATION.................................................................................... 17 ARTICLE 16. SUCCESSORS......................................................................................... 17 ARTICLE 17. LEGAL CONSTRUCTION................................................................................. 17 17.1 Gender and Number................................................................................... 17 17.2 Severability........................................................................................ 17 17.3 Requirements of Law................................................................................. 17 17.4 Regulatory Approvals and Listing.................................................................... 18 17.5 Securities Law Compliance........................................................................... 18 17.6 Governing Law....................................................................................... 18
ii 26 AARON RENTS, INC. 2001 STOCK OPTION AND INCENTIVE AWARD PLAN ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION 1.1 ESTABLISHMENT OF THE PLAN. Aaron Rents, Inc., a Georgia corporation (hereinafter referred to as the "Company"), hereby establishes a stock option and incentive award plan known as the "Aaron Rents, Inc. 2001 Stock Option and Incentive Award Plan" (the "Plan"), as set forth in this document. The Plan permits the grant of Incentive Stock Options, Nonqualified Stock Options, Restricted Stock, Stock Awards, and Performance Share Awards. Subject to the approval of the Plan by the Company's shareholders, the Plan shall become effective on the date it is approved by the Board of Directors (the "Effective Date"), and shall remain in effect as provided in Section 1.3. Any Award made under this Plan prior to shareholder approval of the Plan shall be void unless the Plan is approved by shareholders at the next meeting of the shareholders of the Company. 1.2 PURPOSE OF THE PLAN. The purposes of the Plan are to promote greater stock ownership in the Company by key employees, directors, consultants, independent contractors, or other persons who perform services for the Company and/or its Parent, Subsidiaries, and affiliates (the "Participants"); to provide the means through which Participants can build a financial stake in the Company so as to align the economic interest of Participants with those of the Company's shareholders; and to provide flexibility to the Company in its ability to motivate, attract and retain the services of Participants upon whose judgment, interest and special effort the continued success of the Company depends. 1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date, and shall remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article 13, until the day prior to the tenth (10th) annual anniversary of the Effective Date. ARTICLE 2. DEFINITIONS. Whenever used in the Plan, the following terms shall have the meanings set forth below: (a) "Agreement" means an agreement entered into by each Participant and the Company, setting forth the terms and provisions applicable to Awards granted to Participants under this Plan. (b) "Award" means, individually or collectively, a grant under this Plan of Incentive Stock Options, Nonqualified Stock Options, Restricted Stock, Stock Awards, or Performance Share Awards. (c) "Beneficial Owner" or "Beneficial Ownership" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. -1- 27 (d) "Board" or "Board of Directors" means the Board of Directors of the Company. (e) "Cause" means: (i) with respect to the Company or any Subsidiary which employs the Participant, or for which the Participant primarily performs services, the commission by the Participant of an act of fraud, embezzlement, theft or proven dishonesty, or any other illegal act or practice (whether or not resulting in criminal prosecution or conviction); (ii) the willful engaging by the Participant in misconduct which is deemed by the Committee, in good faith, to be materially injurious to the Company or any Subsidiary, monetarily or otherwise; or (iii) the willful and continued failure or habitual neglect by the Participant to perform his duties with the Company or the Subsidiary substantially in accordance with the operating and personnel policies and procedures of the Company or the Subsidiary generally applicable to all their employees. For purposes of this Plan, no act or failure to act by the Participant shall be deemed to be "willful" unless done or omitted to be done by the Participant not in good faith and without reasonable belief that the Participant's action or omission was in the best interest of the Company and/or the Subsidiary. Notwithstanding the foregoing, if the Participant has entered into an employment agreement with the Company that is binding as of the date of employment termination, and if such employment agreement defines "Cause," then the definition of "Cause" in such agreement shall apply to the Participant in this Plan. "Cause" under either (i), (ii) or (iii) shall be determined by the Committee in its sole discretion. (f) "Change in Control" shall be deemed to have occurred if: (i) the Company consolidates or merges with or into another corporation, or is otherwise reorganized, and the Company is not the surviving corporation in such transaction or if after such transaction any other corporation, association or other person, entity or group or the shareholders thereof own, directly and/or indirectly, more than 50% of the then outstanding shares of Class A Common Stock or more than 50% of the assets of the Company; or (ii) more than 50% of the then outstanding shares of Class A Common Stock of the Company are, in a single transaction or in a series of related transactions, sold or otherwise transferred to or are acquired by (except as collateral security for a loan) any other corporation, association or other person, entity or group, whether or not any such shareholder or any shareholders included in such group were shareholders of the Company prior to the Change in Control; or (iii) all or substantially all of the assets of the Company are sold or otherwise transferred to or otherwise acquired by any other corporation, association or other person, entity or group; or -2- 28 (iv) the occurrence of any other event or circumstance which is not covered by (i) through (iii) above which the Committee determines affects control of the Company and constitutes a Change in Control for purposes of the Plan. (g) "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor act thereto. (h) "Committee" means (i) the committee appointed by the Board to administer the Plan with respect to grants of Awards, as specified in Article 3; or (ii) in the absence of such appointment, the Board itself. (i) "Company" means Aaron Rents, Inc., a Georgia corporation, or any successor thereto as provided in Article 16. (j) "Director" means any individual who is a member of the Board of Directors of the Company. (k) "Employee" means any employee of the Company or any Parent, Subsidiary, or affiliate of the Company. Directors who are not otherwise employed by the Company or a Parent, Subsidiary or affiliate of the Company are not considered Employees under this Plan. (l) "Effective Date" shall have the meaning ascribed to such term in Section 1.1. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. (n) "Fair Market Value" shall be determined as follows: (i) If, on the relevant date, the Shares are traded on a national or regional securities exchange or on The Nasdaq National Market System ("Nasdaq") and closing sale prices for the Shares are customarily quoted, on the basis of the closing sale price on the principal securities exchange (or Nasdaq) on which the Shares may then be traded or, if there is no such sale on the relevant date, then on the immediately preceding day on which a sale was reported; (ii) If, on the relevant date, the Shares are not listed on any securities exchange or traded on Nasdaq, but nevertheless are publicly traded and reported on Nasdaq without closing sale prices for the Shares being customarily quoted, on the basis of the mean between the closing bid and asked quotations in such other over-the-counter market as reported by Nasdaq; but, if there are no bid and asked quotations in the over-the-counter market as reported by Nasdaq on that date, then the mean between the closing bid and asked quotations in the over-the-counter market as reported by Nasdaq on the immediately preceding day such bid and asked prices were quoted; and -3- 29 (iii) If, on the relevant date, the Shares are not publicly traded as described in (i) or (ii), on the basis of the good faith determination of the Committee. (o) "Final Award" means the actual award earned during a performance period by a Participant, as determined by the Committee at the end of the performance period pursuant to Article 8. (p) "Incentive Payment Date" means the seventy-fifth day following the last day of the performance period during which the Final Award under Article 8 was earned, or such earlier date upon which Final Awards are paid to Participants. (q) "Incentive Stock Option" or "ISO" means an option to purchase Shares granted under Article 6 which is designated as an Incentive Stock Option and is intended to meet the requirements of Section 422 of the Code. (r) "Insider" shall mean an Employee who is, on the relevant date, an officer or a Director, or a beneficial owner of ten percent (10%) or more of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act, or any successor provision, all as defined under Section 16 of the Exchange Act. (s) "Named Executive Officer" means, if applicable, a Participant who, as of the date of vesting and/or payout of an Award, is one of the group of "covered employees," as defined in the regulations promulgated under Code Section 162(m), or any successor statute. (t) "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares granted under Article 6, and which is not intended or otherwise fails to meet the requirements of Code Section 422. (u) "Option" means an Incentive Stock Option or a Nonqualified Stock Option. (v) "Option Price" means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee. (w) "Parent" means a "parent corporation," whether now or hereafter existing as defined in Section 424(e) of the Code. (x) "Participant" means an Employee, Director, independent contractor, consultant or other person who performs services for the Company or a Parent, Subsidiary, or affiliate of the Company, and who has been granted an Award under the Plan which is outstanding. (y) "Performance Share Award" means an Award, which, in accordance with the terms of Article 8 and the other provisions of the Plan and subject to an Agreement, will entitle the Participant, or his estate or beneficiary in the event of the Participant's death, to receive cash, Common Stock or a combination thereof. -4- 30 (z) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. (aa) "Plan" means this Aaron Rents, Inc. 2001 Stock Option and Incentive Award Plan, including any amendments thereto. (bb) "Retirement" shall mean retiring from employment with the Company or any affiliate of the Company on or after attaining the age 65. (cc) "Restricted Stock" means an Award of Common Stock granted in accordance with the terms of Article 7 and the other provisions of the Plan, and which is nontransferable and subject to a substantial risk of forfeiture. Shares of Common Stock shall cease to be Restricted Stock when, in accordance with the terms hereof and the applicable Agreement, they become transferable and free of substantial risk of forfeiture. (dd) "Shares" means the shares of Class B Common Stock of the Company, par value $.50 per share (including any new, additional or different stock or securities resulting from the changes described in Section 4.3). (ee) "Stock Award" means a grant of Shares under Article 8 that is not generally subject to restrictions and pursuant to which a certificate for the Shares is transferred to the Employee. (ff) "Subsidiary" means (i) in the case of an ISO, any company during any period in which it is a "subsidiary corporation" (as that term is defined in Code Section 424(f)), and (ii) in the case of all other Awards, in addition to a "subsidiary corporation" as defined above, a partnership, limited liability company, joint venture or other entity in which the Company directly or indirectly controls fifty percent (50%) or more of the voting power or equity interests. ARTICLE 3. ADMINISTRATION 3.1 THE COMMITTEE. The Plan shall be administered by the Stock Option Committee of the Board of Directors (or a subcommittee thereof), or by any other committee or subcommittee appointed by the Board that is granted authority to administer the Plan. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. In the absence of any such appointment, the Plan shall be administered by the Board. 3.2 AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan, the Committee shall have full and exclusive power to select the Participants who shall participate in the Plan (who may change from year to year); determine the size and types of Awards; determine the terms and conditions of Awards in a manner consistent with the Plan (including conditions on the exercisability of all or a part of an Option, restrictions on transferability, vesting provisions on Restricted Stock or Performance Share Awards and the duration of the Awards); construe and interpret the Plan and any agreement or instrument entered into under the Plan; establish, amend or -5- 31 waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 13) amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan, including accelerating the time any Option may be exercised and establishing different terms and conditions relating to the effect of the termination of employment or other services to the Company. Further, the Committee shall make all other determinations which may be necessary or advisable in the Committee's opinion for the administration of the Plan. All expenses of administering this Plan shall be borne by the Company. 3.3 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders and resolutions of the Board shall be final, conclusive and binding on all Persons, including the Company, the shareholders, Participants and their estates and beneficiaries. 3.4 EMPLOYEES IN FOREIGN COUNTRIES. The Committee shall have the authority to adopt such modifications, procedures, appendices and subplans as may be necessary or desirable to comply with provisions of the laws of foreign countries in which the Company or any Subsidiary may operate to assure the viability of the benefits from Awards granted to Employees employed in such countries and to meet the objectives of the Plan. ARTICLE 4. SHARES SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3, the total number of Shares available for grant of Awards under the Plan shall be six hundred thousand (600,000) Shares. The Shares may, in the discretion of the Company, be either authorized but unissued Shares or Shares held as treasury shares, including Shares purchased by the Company, whether on the market or otherwise. The following rules shall apply for purposes of the determination of the number of Shares available for grant under the Plan: (a) The grant of an Option, Stock Award, or Restricted Stock Award shall reduce the Shares available for grant under the Plan by the number of Shares subject to such Award. (b) The Committee shall in each case determine the appropriate number of Shares to deduct from the authorized pool in connection with the grant of Performance Shares. (c) While an Option, Stock Award, Restricted Stock Award or Performance Share Award is outstanding, it shall be counted against the authorized pool of Shares, regardless of its vested status. (d) In the event an Award is paid in the form of Shares or derivatives of Shares, the authorized pool shall be reduced by the number of Shares or Share derivatives paid to the Participant, as determined by the Committee. (e) To the extent that an Award is settled in cash rather than in Shares, the authorized Share pool shall be credited with the appropriate number of Shares represented by -6- 32 the cash settlement of the Award, as determined at the sole discretion of the Committee (subject to the limitation set forth in Section 4.2). 4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled, terminates, expires or lapses for any reason, or if Shares are withheld in payment of the Option Price or for withholding taxes, any Shares subject to such Award or that are withheld shall again be available for the grant of an Award under the Plan. 4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of (i) any change in corporate capitalization, such as a stock split, reverse stock split, or stock dividend; (ii) any corporate transaction to which Code Section 424(a) applies; or (iii) such other event which in the judgment of the Committee necessitates an adjustment; such adjustment shall be made in the maximum number and kind of shares which may be delivered under the Plan as set forth in Section 4.1 above, and in the number and kind of and/or price of shares subject to outstanding Awards granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of shares subject to any Award shall always be a whole number, and the Committee shall make such adjustments as are necessary to insure Awards of whole shares. Except as expressly provided herein, the issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an outstanding Award. ARTICLE 5. ELIGIBILITY AND PARTICIPATION Any Director or Employee, or any independent contractor, advisor or consultant to the Company or a Parent, Subsidiary, or affiliate of the Company shall be eligible to receive an Award under the Plan. In determining the individuals to whom such an Award shall be granted and the number of Shares which may be granted pursuant to that Award, the Committee shall take into account the duties of the respective individual, his or her present and potential contributions to the success of the Company or a Parent, Subsidiary, or affiliate of the Company, and such other factors as the Committee shall deem relevant in connection with accomplishing the purpose of the Plan. ARTICLE 6. STOCK OPTIONS 6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan (including, if applicable, any appendix hereto), Options may be granted to Participants at any time and from time to time as shall be determined by the Committee. The Committee shall have sole discretion in determining the number of Shares subject to Options granted to each Participant. No Participant may be granted ISOs (under the Plan and all other incentive stock option plans of the Company and any Parent or Subsidiary) which are first exercisable in any calendar year for Common Stock having an aggregate Fair Market Value (determined as of the date an Option is granted) that exceeds One Hundred Thousand Dollars ($100,000). The preceding annual limit shall not apply to NQSOs. The Committee may grant a Participant ISOs, NQSOs or a combination thereof, and may vary such Awards among Participants; provided, however, that only an Employee may be granted an ISO. The maximum number of Shares subject to Options which can be granted under the Plan during any calendar year to any individual is 150,000 Shares. -7- 33 6.2 AGREEMENT. Each Option grant shall be evidenced by an Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains and such other provisions as the Committee shall determine. The Option Agreement shall further specify whether the Award is intended to be an ISO or an NQSO. Any portion of an Option that is not designated as an ISO, or otherwise fails or is not qualified as an ISO (even if designated as an ISO), shall be a NQSO. The Committee may provide in the Option Agreement for transfer restrictions, repurchase rights, vesting requirements and other limitations on the Shares to be issued pursuant to the exercise of an Option. 6.3 OPTION PRICE. The Option Price for each grant of an ISO shall not be less than one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted. In no event, however, shall any Participant who owns (within the meaning of Section 424(d) of the Code) stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company be eligible to receive an ISO at an Option Price less than one hundred ten percent (110%) of the Fair Market Value of a share on the date the ISO is granted. The Option Price for each grant of a NQSO shall be established by the Committee and, in its discretion, may be less than, equal to or more than the Fair Market Value of a Share on the date the Option is granted. The Committee is authorized to issue Options, whether ISOs or NQSOs, at an Option Price in excess of the Fair Market Value on the date the Option is granted (the so-called "Premium Price" Option) to encourage superior performance. 6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant; provided, further, however, that any ISO granted to any Participant who at such time owns (within the meaning of Section 424(d) of the Code) stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, shall not be exercisable later than the fifth (5th) anniversary date of its grant. 6.5 EXERCISE OF OPTIONS. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, including, without limitation, conditions related to the employment of or provision of services by the Participant with the Company or any Parent, Subsidiary or other entity, which need not be the same for each grant or for each Participant. Each Option shall be exercisable for such number of Shares and at such time or times, including periodic installments, as may be determined by the Committee at the time of the grant. The Committee may provide in the Agreement for automatic accelerated vesting and other rights upon the occurrence of a Change in Control (as defined in Section 12.1) of the Company or upon the occurrence of other events as specified in the Agreement. Except as otherwise provided in the Agreement and Article 12, the right to purchase Shares that are exercisable in periodic installments shall be cumulative so that when the right to purchase any Shares has accrued, such Shares or any part thereof may be purchased at any time thereafter until the expiration or termination of the Option. 6.6 PAYMENT. Options shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option Price upon exercise of any -8- 34 Option shall be payable to the Company in full, either: (a) in cash, (b) in cash equivalent approved by the Committee, (c) if approved by the Committee, by tendering previously acquired Shares (or delivering a certification of ownership of such Shares) having an aggregate Fair Market Value at the time of exercise equal to the total Option Price (provided that the Shares which are tendered must have been held by the Participant for a period of at least six months unless otherwise provided by the Committee), or (d) if approved by the Committee, by a combination of (a), (b) and (c). The Committee also may allow cashless exercises as permitted under Federal Reserve Board's Regulation T, subject to applicable securities law restrictions, or by any other means which the Committee determines to be consistent with the Plan's purpose and applicable law. The Company may, in its discretion, make a loan to the Participant for purposes of permitting the Participant to exercise an Option and to pay any withholding taxes in connection with the exercise of the Option. Such loan shall be on such terms and conditions as may be determined by the Company. As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s), and may place appropriate legends on the certificates representing such Shares. 6.7 TERMINATION OF EMPLOYMENT DUE TO DEATH OR RETIREMENT. Unless otherwise provided by the Committee in an Award Agreement, the following rules shall apply in the event of the Participant's termination of employment due to death or Retirement: (a) Termination by Death. In the event the Participant dies while actively employed, all outstanding unvested Options granted to that Participant shall immediately vest, and thereafter all vested Options shall remain exercisable at any time prior to their expiration date, or for two (2) years after the date of death, whichever period is shorter, by (i) such person(s) as shall have been named as the Participant's beneficiary, (ii) such person(s) that have acquired the Participant's rights under such Options by will or by the laws of descent and distribution, (iii) the Participant's estate or representative of the Participant's estate or (iv) by a transferee of the Option who has acquired the Option in a transaction that is permitted by Section 6.9. (b) Termination by Retirement. In the event the employment of the Participant is terminated by reason of Retirement, (i) with respect to all ISO's held by the Participant, all outstanding unvested Options granted to that Participant shall immediately vest, and thereafter all vested Options shall remain exercisable at any time prior to their expiration date, or for three (3) months after the effective date of Retirement, whichever period is shorter, and (ii) with respect to all NQSO's held by the Participant, all outstanding Options shall continue to be exercisable in accordance with the vesting schedule in effect for such Options as if the Participant's employment had not terminated. (c) Employment Termination Followed by Death. In the event that a Participant's employment terminates by reason of Retirement, and within the exercise period following such termination the Participant dies, then the remaining exercise -9- 35 period for outstanding Options shall be one (1) year following death. Such Options shall be exercisable by the persons specified in subsection (a) above. 6.8 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. Unless otherwise provided by the Committee in an Award Agreement and subject to the provisions of Article 12 hereof, if the employment of a Participant shall terminate for any reason other than the reasons set forth in Section 6.7, the rules of this Section 6.8 shall apply. All Options held by the Participant which are not vested as of the effective date of employment termination immediately shall be forfeited to the Company (and shall, subject to Section 4.2, once again become available for grant under the Plan). However, the Committee, in its sole discretion, shall have the right to immediately vest all or any portion of such Options, subject to such terms as the Committee, in its sole discretion, deems appropriate; provided, however, that the foregoing discretion shall not be applicable with regard to Awards to Named Executive Officers except to the extent permitted under Code Section 162(m). In the event an Employee's employment is terminated by the Company or a Subsidiary for Cause, or an Employee voluntarily terminates his employment (other than upon Retirement), the Participant's right to exercise any then vested outstanding Options shall terminate immediately upon such termination of employment. If the Employee's employment is terminated by the Company or Subsidiary without Cause, any Options vested as of such Employee's date of termination shall remain exercisable at any time prior to their expiration date or for two months after such Employee's date of termination of employment, whichever period is shorter. 6.9 LIMITED TRANSFERABILITY. If permitted by the Committee in the Agreement, a Participant may transfer an Option granted hereunder, including, but not limited to, transfers to members of his or her Immediate Family (as defined below), to one or more trusts for the benefit of such Immediate Family members, or to one or more partnerships where such Immediate Family members are the only partners, if (i) the Participant does not receive any consideration in any form whatsoever for such transfer, (ii) such transfer is permitted under applicable tax laws, and (iii) the Participant is an Insider, such transfer is permitted under Rule 16b-3 of the Exchange Act as in effect from time to time. Any Option so transferred shall continue to be subject to the same terms and conditions in the hands of the transferee as were applicable to said Option immediately prior to the transfer thereof. Any reference in any such Agreement to the employment by or performance of services for the Company by the Participant shall continue to refer to the employment of, or performance by, the transferring Participant. For purposes hereof, "Immediate Family" shall mean the Participant and the Participant's spouse, and their respective siblings, ancestors and descendants. Any Option that is granted pursuant to any Agreement that did not initially expressly allow the transfer of said Option, and that has not been amended to expressly permit such transfer, shall not be transferable by the Participant other than by will or by the laws of descent and distribution, and such Option thus shall be exercisable in the Participant's lifetime only by the Participant. 6.10 SHAREHOLDER RIGHTS. No Participant shall have any rights as a shareholder with respect to Shares subject to his Option until the issuance of such Shares to the Participant pursuant to the exercise of such Option. -10- 36 ARTICLE 7. RESTRICTED STOCK; STOCK AWARDS 7.1 GRANTS. The Committee may from time to time in its discretion grant Restricted Stock and Stock Awards to Participants, and may determine the number of Shares of Restricted Stock or Stock Awards to be granted. The Committee shall determine the terms and conditions of, and the amount of payment, if any, to be made by the Participant for such Shares or Restricted Stock. A grant of Restricted Stock may, in addition to other conditions, require the Participant to pay for such Shares of Restricted Stock, but the Committee may establish a price below Fair Market Value at which the Participant can purchase the Shares of Restricted Stock. Each grant of Restricted Stock shall be evidenced by an Agreement containing terms and conditions not inconsistent with the Plan as the Committee shall determine to be appropriate in its sole discretion. The maximum number of Shares of Restricted Stock or Stock Awards which can be granted under the Plan during any calendar year to any individual is 150,000 Shares. 7.2 RESTRICTED PERIOD; LAPSE OF RESTRICTIONS. At the time a grant of Restricted Stock is made, the Committee shall establish a period or periods of time (the "Restricted Period") applicable to such grant which, unless the Committee otherwise provides, shall not be less than six months. Subject to the other provisions of this Article 7, at the end of the Restricted Period all restrictions shall lapse and the Restricted Stock shall vest in the Participant. At the time a grant is made, the Committee may, in its discretion, prescribe conditions for the incremental lapse of restrictions during the Restricted Period, and for the lapse or termination of restrictions upon the occurrence of other conditions in addition to or other than the expiration of the Restricted Period, with respect to all or any portion of the Restricted Stock. Such conditions may, but need not, include, without limitation, the following: (a) The death or Retirement of the Employee to whom Restricted Stock is granted, or (b) The occurrence of a Change in Control (as defined in Section 12.1). The Committee may also, in its discretion, shorten or terminate the Restricted Period, or waive any conditions for the lapse or termination of restrictions with respect to all or any portion of the Restricted Stock at any time after the date the grant is made. 7.3 RIGHTS OF HOLDER; LIMITATIONS THEREON. Upon a grant of Restricted Stock, a stock certificate (or certificates) representing the number of Shares of Restricted Stock granted to the Participant shall be registered in the Participant's name, and shall be held in custody by the Company or a bank selected by the Committee for the Participant's account. Following such registration, the Participant shall have the rights and privileges of a shareholder as to such Restricted Stock, including the right to receive dividends, if and when declared by the Board of Directors, and to vote such Restricted Stock, except that the right to receive cash dividends shall be the right to receive such dividends either in cash currently or by payment in Restricted Stock, as the Committee shall determine, and except further that, the following restrictions shall apply: (a) The Participant shall not be entitled to delivery of a certificate until the expiration or termination of the Restricted Period for the Shares represented by such certificate and the satisfaction of any and all other conditions prescribed by the Committee; -11- 37 (b) None of the Shares of Restricted Stock may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period and until the satisfaction of any and all other conditions prescribed by the Committee; and (c) All of the Shares of Restricted Stock that have not vested shall be forfeited, and all rights of the Participant to such Shares of Restricted Stock shall terminate without further obligation on the part of the Company, unless the Participant has remained an employee of (or non-Employee Director of or active independent contractor or consultant providing services to) the Company or any of its Subsidiaries, until the expiration or termination of the Restricted Period and the satisfaction of any and all other conditions prescribed by the Committee applicable to such Shares of Restricted Stock. Upon the forfeiture of any Shares of Restricted Stock, such forfeited Shares shall be transferred to the Company without further action by the Participant, and shall, in accordance with Section 4.2, again be available for grant under the Plan. If the Participant paid any amount for the Shares of Restricted Stock that are forfeited, the Company shall pay the Participant the lesser of the Fair Market Value of the Shares on the date they are forfeited or the amount paid by the Participant. With respect to any Shares received as a result of adjustments under Section 4.3 hereof and any Shares received with respect to stock dividends or in lieu of cash dividends declared on Restricted Stock, the Participant shall have the same rights and privileges, and be subject to the same restrictions, as are set forth in this Article 7. 7.4 DELIVERY OF UNRESTRICTED SHARES. Upon the expiration or termination of the Restricted Period for any Shares of Restricted Stock and the satisfaction of any and all other conditions prescribed by the Committee, the restrictions applicable to such Shares of Restricted Stock shall lapse and a stock certificate for the number of Shares of Restricted Stock with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions except any that may be imposed by law, to the holder of the Restricted Stock. The Company shall not be required to deliver any fractional Share, but will pay, in lieu thereof, the Fair Market Value (determined as of the date the restrictions lapse) of such fractional Share to the holder thereof. Concurrently with the delivery of a certificate for Restricted Stock, the holder shall be required to pay an amount necessary to satisfy any applicable federal, state and local tax requirements as set out in Article 15 below. 7.5 NONASSIGNABILITY OF RESTRICTED. Unless the Committee provides otherwise in the Agreement, no grant of, nor any right or interest of a Participant in or to, any Restricted Stock, or in any instrument evidencing any grant of Restricted Stock under the Plan, may be assigned, encumbered or transferred except, in the event of the death of a Participant, by will or the laws of descent and distribution. ARTICLE 8. PERFORMANCE SHARES 8.1 GRANT OF PERFORMANCE SHARES. Subject to the terms hereof, Performance Shares may be granted to eligible Employees at any time and from time to time for no consideration, as -12- 38 shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Performance Shares granted to each Participant; provided, however, that unless and until the Company's shareholders vote to change the maximum number of Performance Shares that may be earned by any one Named Executive Officer (subject to the provisions of Article 13), none of the Named Executive Officers may earn more than 150,000 Performance Shares with respect to any performance period. 8.2 VALUE OF PERFORMANCE SHARES. Each Performance Share shall have a value equal to the Fair Market Value of a Share on the date the Performance Share is earned. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the number of Performance Shares that will be earned by the Participants. The time period during which the performance goals must be met shall be called a "performance period." Performance periods shall, in all cases, equal or exceed two (2) years in length. The performance goals shall be established at the beginning of the performance period (or within such time period as is permitted by Code Section 162(m) and the regulations thereunder). Unless and until the Company's shareholders vote to change the general performance measures (subject to the provisions of Article 13), the attainment of which shall determine the number of Performance Shares earned hereunder, the Committee will use one or more of the following performance measures for purposes of Awards under the Plan to Named Executive Officers: total shareholder return, return on assets, return on equity, earnings per share, revenue growth, operating income, estimated earnings, net income, market value of shares and pre-tax profit performance. Each fiscal year of the Company, the Committee, in its sole discretion, may select among the performance measures specified in this Section 8.2 and set the relative weights to be given to such performance measures. However, in the case of Participants who are not Named Executive Officers, the Committee in its sole discretion may approve performance measures that are not specified in this Section 8.2 without obtaining shareholder approval of such measures. In the event that applicable tax and/or securities laws (including, but not limited to, Code Section 162(m) and Section 16 of the Exchange Act) change to permit the Committee discretion to alter the governing performance measures without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval. 8.3 EARNING OF PERFORMANCE SHARES. After the applicable performance period has ended, the Committee shall certify the extent to which the established performance goals have been achieved. Subsequently, each holder of Performance Shares shall be entitled to receive payout on the number of Performance Shares earned by the Participant over the performance period, to be determined as a function of the extent to which the corresponding performance goals have been achieved. The Committee may, in its sole discretion, increase or decrease the amount of a Final Award otherwise payable to a Participant under this Article 8 if, in the Committee's view, the Company's financial performance during the relevant period justifies such adjustment, whether or not any one or more of the established performance goals has been achieved; provided, however, that the Committee shall have no discretion to increase the amount of a Final Award otherwise payable to a Named Executive Officer under this Article 8. -13- 39 8.4 FORM AND TIMING OF PAYMENT OF PERFORMANCE SHARES. Except as otherwise provided in Article 12 hereof, payment of earned Performance Shares shall be made, in a single lump sum, promptly but in no event later than the Incentive Payment Date. The Committee, in its sole discretion, may pay earned Performance Shares in the form of cash or in Shares (or in a combination thereof) which have, as of the close of the applicable performance period, an aggregate Fair Market Value equal to the value of the earned Performance Shares. 8.5 TERMINATION OF EMPLOYMENT DUE TO DEATH, RETIREMENT OR AT THE REQUEST OF THE COMPANY WITHOUT CAUSE. Unless the Award Agreement provides otherwise, in the event the employment of a Participant is terminated by reason of death, Retirement or by the Company without Cause during a performance period, the Participant shall receive a prorated payout with respect to the unearned Performance Shares. The prorated payout shall be determined by the Committee, in its sole discretion, and shall be based upon the length of time that the Participant held the unearned Performance Shares during the performance period relative to the length of the performance period, and shall be the greater of the target award prorated for the applicable time period, or the payout earned on the basis of actual performance measured by the achievement of the established performance goals prorated to the time of his termination due to death, Retirement or by the Company without Cause. Payment of earned Performance Shares to Participants whose termination is due to Retirement or by the Company without Cause shall be made at the same time payments are made to Participants who did not terminate employment during the applicable performance period. 8.6 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. Except as provided in Article 12 and in the Award Agreement, in the event that a Participant's employment terminates during a performance period for any reason other than those reasons set forth in Section 8.5, all unearned Performance Shares shall be forfeited by the Participant to the Company. 8.7 NONTRANSFERABILITY. Unless the Committee provides otherwise in the Award Agreement, Performance Shares may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, a Participant's Performance Share rights under the Plan shall be exercisable during the Participant's lifetime only by the Participant or the Participant's legal representative. ARTICLE 9. BENEFICIARY DESIGNATION To the extent applicable, each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company and shall be effective only when filed by the Participant, in writing, with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. If required, the spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of a beneficiary or beneficiaries other than the spouse. -14- 40 ARTICLE 10. DEFERRALS The Committee may permit a Participant to defer to another plan or program such Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option, the vesting of Restricted Stock, or the earning of a Performance Share Award. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. ARTICLE 11. RIGHTS OF PARTICIPANTS 11.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company or a Parent, Subsidiary, or affiliate of the Company to terminate any Participant's employment by, or performance of services for, the Company or any Parent, Subsidiary, or affiliate of the Company, at any time, nor confer upon any Participant any right to continue in the employ or service of the Company or a Parent, Subsidiary, or affiliate of the Company. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiaries (or between Subsidiaries) shall not be deemed a termination of employment. 11.2 PARTICIPATION. No Employee shall have the right to be selected to receive an Award under this Plan, or, previously having been so selected, to be selected to receive a future Award. ARTICLE 12. CHANGE IN CONTROL Upon the occurrence of a Change in Control, except as provided otherwise in the Award Agreement or unless otherwise specifically prohibited by the terms of Article 17: (a) Any and all Options granted to Participants under the Plan shall become fully vested and immediately exercisable; (b) To the extent provided by the Committee in the Award Agreement, the earning of unearned Performance Shares will be based upon the target award levels or the actual performance compared with goals prorated to the date of the Change in Control. Unearned Performance Shares outstanding at the time of a Change in Control will be fully vested (subject to the employment requirements in the next sentence) and will be payable in Common Stock or cash, or a combination thereof as determined by the Committee. The Participant will be entitled to payment of vested Performance Shares for a performance period only if (i) he remains employed by the Company or Subsidiary (or their respective successors) until the date that would have been the last day of the performance period, at which time the payment of the Performance Shares shall be made, or (ii) prior to the end of the performance period, his employment is terminated by the Company or Subsidiary without Cause, he terminates employment for a reason other than Cause or he retires as permitted by any retirement plan of the Company then in effect, or he dies. In any of these cases, payment of vested Performance Shares shall be made as soon as possible after the Participant ceases active employment. -15- 41 (c) Unless otherwise provided in the Award Agreement, all restrictions on an Award of Restricted Stock shall lapse and such Restricted Stock shall be delivered to the Participant in accordance with Section 7.4; and (d) Subject to Article 13 hereof the Committee shall have the authority to make any modifications to the Awards as determined by the Committee to be appropriate before the effective date of the Change in Control. ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION 13.1 AMENDMENT, MODIFICATION AND TERMINATION. The Board may, at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part; provided, that, unless approved by the holders of a majority of the total number of Shares of the Company represented and voted at a meeting at which a quorum is present, no amendment shall be made to the Plan if such amendment would (a) materially modify the eligibility requirements provided in Article 5; (b) increase the total number of Shares which may be granted under the Plan (except as provided in Section 4.3); (c) extend the term of the Plan; or (d) amend the Plan in any other manner which the Board, in its discretion, determines should become effective only if approved by the shareholders, even if such shareholder approval is not expressly required by the Plan or by law. 13.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award. The Committee shall, with the written consent of the Participant holding such Award, have the authority to cancel Awards outstanding. 13.3 COMPLIANCE WITH CODE SECTION 162(M). At all times when the Committee determines that compliance with Code Section 162(m) is required or desired, all Awards granted under this Plan to Named Executive Officers shall comply with the requirements of Code Section 162(m). In addition, in the event that changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or Awards under the Plan, the Committee may, subject to this Article 13, make any adjustments it deem appropriate. ARTICLE 14. WITHHOLDING 14.1 TAX WITHHOLDING. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising in connection with an Award under this Plan. 14.2 SHARE WITHHOLDING. With respect to withholding required upon the exercise of Options, or upon any other taxable event arising as a result of Awards granted hereunder which are to be paid in the form of Shares, Participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All elections shall be irrevocable, made in -16- 42 writing, signed by the Participant, and elections by Insiders shall additionally comply with all legal requirements applicable to Share transactions by such Participants. ARTICLE 15. INDEMNIFICATION Each person who is or shall have been a member of the Committee, or the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such action, suit or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall be in addition to any other rights of indemnification to which such persons may be entitled under the Company's articles of incorporation or bylaws as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. ARTICLE 16. SUCCESSORS All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 17. LEGAL CONSTRUCTION 17.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein shall also include the feminine; the plural shall include the singular and the singular shall include the plural. 17.2 SEVERABILITY. If any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 17.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 17.4 REGULATORY APPROVALS AND LISTING. The Company shall not be required to issue any certificate or certificates for Shares under the Plan prior to (i) obtaining any approval from any governmental agency which the Company shall, in its discretion, determine to be necessary or advisable; (ii) the admission of such shares to listing on any national securities exchange or Nasdaq on which the Company's Shares may be listed; and (iii) the completion of any registration or other qualification of such Shares under any state or federal law or ruling or regulation of any -17- 43 governmental body which the Company shall, in its sole discretion, determine to be necessary or advisable. To the extent applicable, if required by the then-current Section 16 of the Exchange Act, any "derivative security" or "equity security" offered pursuant to the Plan to any Insider may not be sold or transferred for at least six (6) months after the date of grant of such Award. The terms "equity security" and "derivative security" shall have the meanings ascribed to them in the then-current rules promulgated under Section 16(a) under the Exchange Act. The Committee may impose such restrictions on any Shares acquired pursuant to the Plan as it may deem advisable, including, without limitation, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded and under any blue sky or state securities laws applicable to such Shares. 17.5 SECURITIES LAW COMPLIANCE. To the extent applicable, with respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provisions of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 17.6 GOVERNING LAW. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Georgia. AS APPROVED BY THE BOARD OF DIRECTORS OF AARON RENTS, INC. ON MARCH 13, 2001. AARON RENTS, INC. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- -18- 44 AARON RENTS, INC. THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 1, 2001 CLASS A COMMON STOCK PROXY The undersigned shareholder of Aaron Rents, Inc. hereby constitutes and appoints R. Charles Loudermilk, Sr. and James L. Cates, or either of them, the true and lawful attorneys and proxies of the undersigned with full power of substitution and appointment, for and in the name, place and stead of the undersigned, to vote all of the undersigned's shares of Class A Common Stock of Aaron Rents, Inc., at the Annual Meeting of the Shareholders to be held in Atlanta, Georgia on Tuesday, the 1st day of May, 2001, at 10:00 a.m., Eastern Time and at any and all adjournments thereof as follows: (1) [ ] FOR all nominees listed below (except as marked to the contrary below): NOMINEES: R. Charles Loudermilk, Sr., Robert C. Loudermilk, Jr., Gilbert L. Danielson, Earl Dolive, Ronald W. Allen, Leo Benatar, Ingrid Saunders Jones, J. Rex Fuqua, M. Collier Ross, and William K. Butler, Jr. [ ] WITHHOLD AUTHORITY to vote for all nominees listed. (INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee's name in the space provided below.) ------------------------------------------------------------ (2) [ ] FOR the approval of the Aaron Rents, Inc. 2001 Stock Option and Incentive Award Plan. [ ] FOR [ ] AGAINST [ ] ABSTAIN (3) FOR the approval of stock option grants to three executive officers of the Company as described in accompanying Proxy Statement. [ ] FOR [ ] AGAINST [ ] ABSTAIN (4) FOR the transaction of such other business as may lawfully come before the meeting, hereby revoking any proxies as to said shares heretofore given by the undersigned and ratifying and confirming all that said attorneys and proxies may lawfully do by virtue hereof.
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" EACH OF THE NOMINEES AND PROPOSALS LISTED ABOVE AND UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THE PROXY WILL BE SO VOTED. It is understood that this proxy confers discretionary authority in respect to matters not known or determined at the time of the mailing of the notice of the meeting to the undersigned. The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of Shareholders dated April 6, 2001 and the Proxy Statement furnished therewith. Dated and signed -----------------------------------------------------------------------, 2001 ------------------------------ ------------------------------ (Signature should agree with the name(s) hereon. Executors, administrators, trustees, guardians and attorneys should so indicate when signing. For joint accounts each owner should sign. Corporations should sign their full corporate name by a duly authorized officer.) This proxy is revocable at or at any time prior to the meeting. Please sign and return this proxy to SunTrust Bank, Atlanta, Attn: Corporate Trust Department, P.O. Box 4625, Atlanta, Georgia 30302, in the accompanying prepaid envelope.