Aarons 2011 Annual Report Download - page 36

Future minimum lease payments required under operating
leases that have initial or remaining non-cancelable terms in excess
of one year as of December 31, 2011, are as follows:
(In Thousands)
2012 $100,906
2013 87,393
2014 72,205
2015 56,252
2016 40,217
Thereafter 174,322
$531,295
Rental expense was $93.6 million in 2011, $96.1 million in
2010, and $88.1 million in 2009. The amount of sublease income
is $3.1 million in 2011, $2.8 million in 2010, and $1.5 million in
2009. The Company has anticipated future sublease rental income
of $4.7 million in 2012, $3.7 million in 2013, $3.0 million in
2014, $2.6 million in 2015, $2.1 million in 2016 and $8.8 million
thereafter through 2024. Rental expense and sublease income are
included in operating expenses.
Guarantees
The Company has guaranteed certain debt obligations of some of
the franchisees amounting to $128.8 million and $121.0 million
at December 31, 2011 and 2010, respectively. Of this amount,
approximately $108.5 million represents franchise borrowings out-
standing under the franchise loan program and approximately $20.3
million represents franchise borrowings under other debt facilities at
December 31, 2011. The Company receives guarantee fees based on
such franchisees’ outstanding debt obligations, which it recognizes
as the guarantee obligation is satisfied. The Company has recourse
rights to the assets securing the debt obligations, which consist
primarily of lease merchandise inventory and fixed assets. As a result,
the Company has never incurred any, nor does management expect
to incur, any significant losses under these guarantees. On May 18,
2011, the Company entered into a second amendment to its second
amended and restated loan facility and guaranty, dated June 18,
2010, as amended, and on July 1, 2011, the Company entered into
a third amendment. The amendments to the franchisee loan facil-
ity, among other things, (i) extend the maturity date until May 16,
2012, (ii) increase the maximum Canadian subfacility commitment
amount for loans to franchisees that operate stores in Canada (other
than in the Province of Quebec) from Cdn $25.0 million to Cdn
$35.0 million, (iii) add the defined terms “Institutional Investor”
and “Private Placement Debt” to further clarify the circumstances
under which the Company may incur indebtedness and still remain
in compliance with applicable negative covenants, (iv) modify the
negative covenant restricting debt applicable to the Company by,
among other things, increasing the amount of indebtedness the
Company may incur with respect to certain privately placed debt
from an aggregate principal amount of up to $60.0 million to an
aggregate principal amount of up to $150.0 million, and (v) replace
the pricing grid schedule to the franchisee loan facility to reduce the
applicable margins and participant unused commitment fee percent-
ages with respect to the funded participations.
Legal Proceedings
The Company is frequently a party to various legal proceedings aris-
ing in the ordinary course of business. Management regularly assesses
the Company’s insurance deductibles, analyzes litigation information
with the Company’s attorneys and evaluates its loss experience to
determine whether or not any legal proceedings may have an adverse
impact upon the Company’s business. The Company accrues for
litigation loss contingencies that are both probable and reasonably
estimable. Legal fees and expenses associated with the defense of all
of the Company’s litigation are expensed as such fees and expenses
are incurred. While the Company does not presently believe that any
of the legal proceedings to which the Company are currently a party
will ultimately have a material adverse impact upon our business,
financial position or results of operations, there can be no assurance
that we will prevail in all the proceedings we are party to, or that
the Company will not incur material losses from them. Some of the
proceedings the Company is currently a party to are described below:
In Kunstmann et al v. Aaron Rents, Inc., originally filed with the
United States District Court, Northern District of Alabama, on
October 29, 2008, plaintiffs alleged that the Company improperly
classified store general managers as exempt from the overtime pro-
visions of the Fair Labor Standards Act. Plaintiffs seek to recover
unpaid overtime compensation and other damages for all similarly
situated general managers nationwide for the period January 25,
2007 to present. After initially denying plaintiffs’ class certification
motion in April 2009, the court ruled to conditionally certify a
plaintiff class in early 2010. The current class includes 247 indi-
viduals. The Company has filed its motion to decertify the class
action as well as a motion for summary judgment on plaintiff’s
individual claims.
In Alford v. Aaron Rents, Inc. et al originally filed in the U.S.
District Court for the Southern District of Illinois on October 2,
2008, plaintiff alleged, among other claims, that she was sexually
harassed and subjected to retaliation, in violation of Title VII of
the Civil Rights Act of 1964, by a general manager of a Company
store. After trial, the jury returned a defense verdict solely on the
claim of retaliation. On June 14, 2011, the jury awarded plaintiff
compensatory damages in the amount of $13.5 million and puni-
tive damages in the amount of $80.0 million. Of the total damages
awarded, $53.7 million exceeded the maximum award permitted
by law. Consequently, the court reduced the judgment to $39.8
million. The Company filed motions to reduce the verdict and/
or for a new trial and was required to post a bond in the amount
of $5.0 million while judgment was stayed pending post-trial
motions. On January 13, 2012, the court ruled that the verdict
would not be sustained in its current form and the Company is
waiting for a detailed ruling from the court regarding whether it
will order a new trial on liability and/or damages or reduce the
jury’s damages award beyond the reduction previously described.
The Company has accrued $41.5 million, which represents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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