Aarons 2004 Annual Report Download - page 31

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2004 2003 2002
Statutory Rate 35.0% 35.0% 35.0%
Increases in U.S. Federal
Taxes Resulting From:
State Income Taxes,
Net of Federal Income
Tax Benefit 2.8 2.0 2.1
Other, Net (0.1)
Effective Tax Rate 37.7% 37.0% 37.1%
Note F: Commitments
The Company leases warehouse and retail store space for
substantially all of its operations under operating leases
expiring at various times through 2019. The Company also
leases certain properties under capital leases that are more
fully described in Note D. Most of the leases contain renewal
options for additional periods ranging from one to 15 years
or provide for options to purchase the related property at
predetermined purchase prices that do not represent bargain
purchase options. In addition, certain properties occupied
under operating leases contain normal purchase options. The
Company also leases transportation and computer equipment
under operating leases expiring during the next five years.
Management expects that most leases will be renewed or
replaced by other leases in the normal course of business.
The Company also has a $25.0 million construction
and lease facility. Properties acquired by the lessor are pur-
chased or constructed and then leased to the Company under
operating lease agreements. The total amount advanced and
outstanding under this facility at December 31, 2004 was
approximately $24.9 million. Since the resulting leases are
operating leases, no debt obligation is recorded on the
Company’s balance sheet.
Future minimum rental payments required under
operating leases that have initial or remaining non-cancelable
terms in excess of one year as of December 31, 2004, are
as follows: $50.7 million in 2005, $40.6 million in 2006,
$29.9 million in 2007, $19.5 million in 2008, $11.6 million
in 2009, and $23.5 million thereafter. Certain operating
leases expiring in 2006 contain residual value guarantee
provisions and other guarantees in the event of a default.
Although the likelihood of funding under these guarantees
is considered by the Company to be remote, the maximum
amount the Company may be liable for under such
guarantees is approximately $24.9 million.
The Company has guaranteed certain debt obligations of
some of the franchisees amounting to approximately $99.7
million at December 31, 2004. 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. As a result, the Company has
never incurred any, nor does Management expect to incur
any, significant losses under these guarantees.
Rental expense was $50.1 million in 2004, $44.1 million
in 2003, and $39.0 million in 2002.
The Company maintains a 401(k) savings plan for all
full-time employees with at least one year of service with the
Company and who meet certain eligibility requirements.
The plan allows employees to contribute up to 10% of their
annual compensation with 50% matching by the Company
on the first 4% of compensation. The Company’s expense
related to the plan was $506,000 in 2004, $512,000 in 2003,
and $453,000 in 2002.
Note G: Shareholders’ Equity
The Company held 7,292,853 common shares in its treas-
ury and was authorized to purchase an additional 2,670,502
shares at December 31, 2004. During 2002 the Company
purchased approximately 221,000 shares of the Company’s
Class A Common Stock at an aggregate cost of $1,667,490.
The Company also transferred 22,239 shares of the
Company’s Common Stock at an aggregate cost of approxi-
mately $218,000 back into treasury, reflected net against
reissued shares in the consolidated statement of shareholders’
equity. The Company’s articles of incorporation provide that
no cash dividends may be paid on the Class A Common
Stock unless equal or higher dividends are paid on the
Common Stock.
If the number of the Class A Common Stock (voting) falls
below 10% of the total number of outstanding shares of the
Company, the Common Stock (non-voting) automatically
converts into Class A Common Stock. The Common Stock
may convert to Class A Common Stock in certain other
limited situations whereby a national securities exchange
rule might cause the Board of Directors to issue a resolution
requiring such conversion. Management considers the likeli-
hood of any conversion to be remote at the present time.
The Company has 1,000,000 shares of preferred stock
authorized. The shares are issuable in series with terms for
each series fixed by the Board and such issuance is subject to
approval by the Board of Directors. No preferred shares have
been issued.
Note H: Stock Options
The Company has stock option plans under which options
to purchase shares of the Company’s Common Stock are
granted to certain key employees. Under the plans, options
granted become exercisable after a period of three years and
unexercised options lapse ten years after the date of the
grant. Options are subject to forfeiture upon termination
of service. Under the plans, approximately 922,000 of the
Company’s shares are reserved for future grants at December
31, 2004. The weighted average fair value of options granted
was $5.18 in 2004, $5.48 in 2003, and $4.37 in 2002.
Pro forma information regarding net earnings and earn-
ings per share, presented in Note A, is required by SFAS 123,
and has been determined as if the Company had accounted
for its employee stock options granted in 2004, 2003 and
2002 under the fair value method. The fair value for these
options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted
average assumptions for 2004, 2003, and 2002, respectively:
risk-free interest rates of 3.16%, 3.41%, and 5.78%; a
dividend yield of .28%, .23%, and .18%; a volatility factor
of the expected market price of the Company’s Common
Stock of .43, .52, and .46; and weighted average expected
lives of the option of four, six, and five years.
The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions including the expected stock price
volatility. Because the Company’s employee stock options
have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.