Aarons 2010 Annual Report Download - page 38

$12.7 million represents franchise borrowings under other debt
facilities at December 31, 2010. 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, which
consist primarily of lease merchandise inventory and fixed assets. As
a result, the Company has never incurred any, nor does management
expect to incur any, significant losses under these guarantees. The
guaranty was amended on June 18, 2010, to increase the maximum
commitment amount under the facility from $175.0 million to
$200.0 million; provide for the ability to extend loans to franchisees
that operate stores located in Canada (other than in the Province of
Quebec); increase the maximum available amount of swing loans
from $20.0 million to $25.0 million; reduce the Company’s interest
obligations with respect to franchisees that operate stores located in
the United States and establish the Company’s interest obligations
with respect to franchisees that operate stores located in Canada.
Rental expense was $96.1 million in 2010, $88.1 million in
2009, and $81.8 million in 2008. As of December 31, 2010,
the total amount of sublease income expected to be received was
$22.1 million.
At December 31, 2010, the Company had non-cancelable
commitments primarily related to certain advertising and marketing
programs of $47.5 million. Payments under these commitments
are scheduled to be $31.5 million in 2011, $13.6 million in 2012,
$2.2 million in 2013 and $195,000 in 2014.
The Company maintains a 401(k) savings plan for all its full-time
employees with at least one year of service 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 $841,000 in 2010, $844,000 in 2009, and
$775,000 in 2008.
The Company is a party to various claims and legal proceedings
arising in the ordinary course of business. Management regularly
assesses the Company’s insurance deductibles, analyzes litigation
information with the Company’s attorneys and evaluates its loss
experience. The Company also enters into various contracts in the
normal course of business that may subject it to risk of financial loss
if counterparties fail to perform their contractual obligations.
The Company does not currently believe its exposure to loss
under any claims is probable, nor can the Company estimate a range
of amounts of loss that are reasonably possible. Notwithstanding
the foregoing, the Company is currently a party to the following
proceeding:
In Kunstmann et al v. Aaron Rents, Inc. originally filed with the
United States District Court, Northern District of Alabama (the
“court”) on October 28, 2008, plaintiffs alleged that the Company
improperly classified store general managers as exempt from the
overtime provisions of the Fair Labor Standards Act. Plaintiffs seek
to recover unpaid overtime compensation and other damages for
all similarly situated general managers nationwide for the period
January 25, 2007 to present. After initially denying plaintiffs’ class
certification motion in April 2009, the court ruled to conditionally
certify a plaintiff class in early 2010. The current class includes
237 individuals, which may decrease as discovery continues. Those
individuals who affirmatively opt to join the class may be required to
travel at their own expense to Alabama for discovery purposes and/or
trial. The court’s class certification ruling is procedural only and does
not address the merits of the plaintiffs’ claims.
The Company believes it has meritorious defenses to the claim
described above, and intends to vigorously defend itself against the
litigation. However, this proceeding is still developing, and due to
inherent uncertainty in litigation and similar adversarial proceed-
ings, there can be no guarantee that the Company will ultimately be
successful in this proceeding, or in others to which it is currently a
party. Substantial losses from this proceeding could have a material
adverse impact upon the Company’s business, financial position or
results of operations. In addition, the Company’s requirement to
record or disclose potential losses under generally accepted account-
ing principles could change in the near term depending upon chang-
es in facts and circumstances. The Company believes it has recorded
an adequate reserve for contingencies at December 31, 2010.
Shareholders’
Equity
The Company held 10,664,728 shares in its treasury and was
authorized to purchase an additional 4,401,815 shares at
December 31, 2010. The Company repurchased 1,478,805 shares
of its Nonvoting Common Stock on the open market in 2010.
The Company did not repurchase any shares of its capital stock in
2009. The Company repurchased 387,545 shares of its Nonvoting
Common Stock in 2008.
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. As of December 31, 2010, no preferred shares have
been issued.
Stock Options and
Restricted Stock
The Company’s outstanding stock options are exercisable for its
Common Stock. The Company estimates the fair value for the
options 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 gener-
ally commensurate with the expected estimated life of each respective
grant. The expected lives of options are based on the Company’s his-
torical 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-
Notes to Consolidated Financial Statements
G
Note
H
Note
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