Aarons 2006 Annual Report Download - page 36

34
Notes to Consolidated Financial Statements
employees to contribute up to 10% of their annual compensation
with 50% matching by the Company on the first 4% of compen-
sation. The Company’s expense related to the plan was $791,000
in 2006, $676,000 in 2005, and $506,000 in 2004.
NOTE G: SHAREHOLDERS’ EQUITY
The Company held 6,364,404 common shares in its treasury
and was authorized to purchase an additional 2,670,502 shares
at December 31, 2006. 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 author-
ized. 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
Prior to January 1, 2006, the Company accounted for stock
awards granted following the recognition and measurement
principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related inter-
pretations. Effective January 1, 2006, the Company adopted
the fair value recognition provisions of SFAS 123R, using the
modified prospective application method. Under this transition
method, compensation expense recognized in the year ended
December 31, 2006 includes the applicable amounts of com-
pensation expense of all stock-based payments granted prior
to, but not yet vested, as of January 1, 2006, based on
the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”), and previously presented in the
pro forma footnote disclosures.
The Company estimates the fair value for the options granted
on the grant date using a Black-Scholes option-pricing model.
The expected volatility is based on the historical volatility of the
Company’s Common Stock over the most recent period generally
commensurate with the expected estimated life of each respec-
tive grant. The expected lives of options are based on the
Company’s historical share option exercise experience. Forfeiture
assumptions are based on the Company’s historical forfeiture
experience. The Company believes that the historical experience
method is the best estimate of future exercise and forfeiture
patterns currently available. The risk-free interest rates are
determined using the implied yield currently available for zero-
coupon U.S. government issues with a remaining term equal to
the expected life of the options. The expected dividend yields
are based on the approved annual dividend rate in effect and
current market price of the underlying Common Stock at the time
of grant. No assumption for a future dividend rate increase has
been included unless there is an approved plan to increase the
dividend in the near term.
For the pro forma information regarding net income and
earnings per share, the Company recognizes compensation
expense over the explicit service period up to the date of
actual retirement. Upon adoption of SFAS 123R, the Company
is required to recognize compensation expense over a period to
the date the employee first becomes eligible for retirement for
awards granted or modified after the adoption of SFAS 123R.
The results of operations for the year ended December 31,
2006 include $3.5 million in compensation expense related to
unvested grants as of January 1, 2006. At December 31, 2006,
there was $1.8 million of total unrecognized compensation
expense related to non-vested stock options which is expected
to be recognized over a period of 1.75 years. SFAS 123R requires
that the benefits of tax deductions in excess of recognized
compensation expense be reported as financing cash flows,
rather than as operating cash flow as required under prior
guidance. Excess tax benefits of $3.9 million were accordingly
included in cash provided by financing activities for the year
ended December 31, 2006. The related net tax benefit from the
exercise of stock options in the year ended December 31, 2006
was $4.7 million.
Under the Company’s stock option plans, options granted
to date 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, 712,000 of the Company’s shares are reserved
for future grants at December 31, 2006. The weighted average
fair value of options granted was $8.09 and $5.18 in 2005
and 2004, respectively. 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 and 2004, respectively: risk-free interest rates of 3.86%
and 3.16%; a dividend yield of .25% and .28%; a volatility factor
of the expected market price of the Company’s Common Stock of
.43 and .43; weighted average assumptions of forfeiture rates of
5.85% and 9.87%; and weighted average expected lives of the
option of five and four years. The aggregate intrinsic value of
options exercised was $12.7 million, $3.7 million, and $8.6