Aarons 2007 Annual Report Download - page 39

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The Company files a federal consolidated income tax
return in the United States and the separate legal entities file
in various states and foreign jurisdictions. With few excep-
tions, the Company is no longer subject to federal, state and
local tax examinations by tax authorities for years before
2004 or subject to non-United States income tax examina-
tions for the years ended prior to 2002. The Company does
not anticipate total uncertain tax benefits will significantly
change during the year due to settlement of audits and the
expiration of statutes of limitations. The Company adopted
the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes — an interpretation of FASB
Statement No. 109 (“FIN 48”), on January 1, 2007. As a
result of the implementation of FIN 48, the Company recog-
nized a $2.9 million increase in the liability for uncertain tax
benefits, which was accounted for as a reduction to the
January 1, 2007 balance of retained earnings.
The following table summarizes the activity related to our
uncertain tax positions:
(In Thousands)
Balance at January 1, 2007 $3,159
Additions based on tax positions related to the current year 178
Additions for tax positions of prior years 343
Statute expirations (61)
Settlements (137)
Balance at December 31, 2007 $3,482
As of December 31, 2007, the amount of uncertain tax
benefits that, if recognized, would affect the effective tax
rate is $3.5 million, including interest and penalties. During
the year ended December 31, 2007, the Company recog-
nized interest and penalties of $530,000. The Company had
$735,000 and $550,000 of accrued interest and penalties at
December 31, 2007 and January 1, 2007, respectively. The
Company recognizes potential interest and penalties related to
uncertain tax benefits as a component of income tax expense.
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 2021. 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.
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, 2007, are as follows:
$83.8 million in 2008; $66.2 million in 2009; $45.3 million
in 2010; $28.8 million in 2011; $19.5 million in 2012; and
$94.3 million thereafter.
The Company has guaranteed certain debt obligations of
some of the franchisees amounting to $108.6 million and
$111.6 million at December 31, 2007 and 2006, respectively.
Of this amount, approximately $77.4 million represents
franchise borrowings outstanding under the franchise loan
program and approximately $31.2 million represents fran-
chise borrowings under other debt facilities at December 31,
2007. 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 $83.7 million in 2007, $72.0 million
in 2006, and $59.9 million in 2005.
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 $806,000 in 2007, $791,000 in
2006, and $676,000 in 2005.
NOTE G: SHAREHOLDERS’ EQUITY
The Company held 6,896,220 common shares in its treasury
and was authorized to purchase an additional 4,307,958
shares at December 31, 2007. 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. The Company repurchased
692,042 shares of Common Stock in 2007.
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 con-
verts 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 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 vola-
tility of the Company’s Common Stock over the most recent
period generally commensurate with the expected estimated
life of each respective grant. The expected lives