Aarons 2007 Annual Report Download - page 40

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Notes to Consolidated Financial Statements
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,
2007 and 2006 include $1.9 million and $3.5 million, respec-
tively, in compensation expense related to unvested grants
as of January 1, 2006. At December 31, 2007, there was
$3.1 million of total unrecognized compensation expense
related to non-vested stock options which is expected to be
recognized over a period of 2.9 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 $789,000 were accordingly
included in cash provided by financing activities for the year
ended December 31, 2007. The related net tax benefit from
the exercise of stock options in the year ended December 31,
2007 was $1.1 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, 374,500 of the Company’s
shares are reserved for future grants at December 31, 2007.
The Company did not grant any stock options in 2006. The
weighted average fair value of options granted was $10.79
and $8.09 in 2007 and 2005, 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 2007 and 2005, respec-
tively: risk-free interest rates of 5.11% and 3.86%; a dividend
yield of .24% and .25%; a volatility factor of the expected
market price of the Company’s Common Stock of .39 and
.43; weighted average assumptions of forfeiture rates of
6.82% and 5.85%; and weighted average expected lives of the
option of eight and five years. The aggregate intrinsic value
of options exercised was $2.9 million, $12.7 million, and
$3.7 million in 2007, 2006, and 2005, respectively. The total
fair value of options vested was $6.6 million, $4.9 million,
and $1.2 million in 2007, 2006, and 2005, respectively. The
Company granted 337,500 in stock options during the fourth
quarter of 2007.
The Company amended the Key Executive grants in
2006 and raised the exercise price of each of the stock
options to the fair market value of the common stock on
the original grant date, adjusted for a 3-for-2 stock dividend
that occurred on August 2, 2004 in the case of those stock
options with an original grant date that preceded the stock
dividend date. The amendment also provides that, in order
to compensate the grantees for the increase in the exercise
price of the stock options, the full original discounted
amount will be paid in cash on the applicable 2007 vesting
date.
Shares of restricted stock may be granted to employees
and directors and typically vest over approximately three
years. Restricted stock grants may be subject to one or
more objective employment, performance or other forfeiture
conditions as established at the time of grant. Any shares
of restricted stock that are forfeited will again become avail-
able for issuance. Compensation cost for restricted stock is
equal to the fair market value of the shares at the date of
the award and is amortized to compensation expense over
the vesting period. Total compensation expense related to
restricted stock was $1.7 million and $277,000 in 2007 and
2006, respectively.
The following table summarizes information about
restricted stock activity:
Restricted Weighted Average
(In Thousands) Stock Grant Price
Outstanding at January 1, 2007 242 $25.40
Granted — —
Vested — —
Forfeited (17) 25.40
Outstanding at December 31, 2007 225 $25.40