Aarons 2005 Annual Report Download - page 36

34
Notes to Consolidated Financial Statements
lease agreements. The total amount advanced and outstanding
under this facility at December 31, 2005 was $24.5 million.
Since the resulting leases are operating leases, no debt obliga-
tion is recorded on the Company’s balance sheet. 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.
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, 2005, are as follows:
$68.3 million in 2006; $55.7 million in 2007; $40.9 million
in 2008; $27.2 million in 2009; $15.1 million in 2010; and
$40.8 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 $24.5 million.
The Company has guaranteed certain debt obligations of
some of the franchisees amounting to approximately $100.6
and $99.7million at December 31, 2005, and 2004, respectively.
The Company receives guarantee fees based on such fran-
chisees’ 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 $59.9 million in 2005, $50.3 million
in 2004, and $44.1 million in 2003.
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 $676,000 in 2005, $506,000 in 2004, and
$512,000 in 2003.
Note G: Shareholders’ Equity
The Company held 7,026,144 common shares in its treasury
and was authorized to purchase an additional 2,670,502 shares
at December 31, 2005. 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 likelihood 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 aresubject to forfeiture upon termination of service.
Under the plans, approximately 954,000 of the Company’s
shares are reserved for future grants at December 31, 2005.
The weighted average fair value of options granted was $8.09
in 2005, $5.18 in 2004, and $5.48 in 2003.
Pro forma information regarding net earnings and earnings
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 2005, 2004 and 2003 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 2005, 2004, and 2003, respectively: risk-free interest rates
of 3.86%, 3.16%, and 3.41%; a dividend yield of .25%,
.28%, and .23%; a volatility factor of the expected market
price of the Company’sCommon Stock of .43, .43, and .52;
and weighted average expected lives of the option of five,
four,and six 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 requirethe input of highly subjective
assumptions including the expected stock price volatility.
Because the Company’s employee stock options have charac-
teristics 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
areliable single measure of the fair value of its employee
stock options.