Aarons 2011 Annual Report Download - page 37

the judgment, as reduced, and associated legal fees and expenses
and has insurance coverage of $5.0 million for this litigation.
Additional positive or negative developments in the lawsuit could
affect the assumptions, and therefore, the accrual.
In Margaret Korrow, et al. v. Aaron’s Inc., originally filed in the
Superior Court of New Jersey, Middlesex County, Law Division
on October 26, 2010, plaintiff filed suit on behalf of herself and
others similarly situated alleging that Company is liable in dam-
ages to plaintiff and each class member because the Company’s
lease agreements issued after March 16, 2006 purportedly violated
certain New Jersey state consumer statutes. The Company removed
the lawsuit to the United States District Court for the District of
New Jersey on December 6, 2010. Discovery is proceeding and no
class has yet been certified.
In Crystal and Brian Byrd v. Aaron’s, Inc., Aspen Way Enterprises,
Inc., John Does (1-100) Aaron’s Franchisees and Designerware,
LLC., filed on May 16, 2011 in the United States District
Court, Western District of Pennsylvania, plaintiffs allege that
the Company and its franchisees knowingly violated plaintiffs’
and other similarly situated plaintiffs’ privacy in violation of the
Electronic Communications Privacy Act and the Computer Fraud
Abuse Act through its use of a software program called “PC Rental
Agent.” The Company expressly denies that any of its Company-
operated stores engaged in the alleged conduct and intends to
defend itself vigorously. On February 17, 2012, the Magistrate
Judge recommended in her report to the district court that the
Company be dismissed from the lawsuit. It is expected that the
district court will issue a final ruling based upon this recommenda-
tion in the second quarter of 2012. It is possible that the court
may permit plaintiffs to file an amended complaint. The Company
has received inquiries from government agencies requesting infor-
mation regarding this lawsuit and another incident involving the
compromise of customer information, and inquiring about, among
other things, the Company’s retail transactional, information
security and privacy policies and practices.
The Company believes it has meritorious defenses to the claims
described above, and intends to vigorously defend itself against
the claims. However, due to inherent uncertainty in litigation and
similar adversarial proceedings, there can be no guarantee that the
Company will ultimately be successful in these proceedings, or in
others to which it is currently a party. Substantial losses from legal
proceedings or the costs of defending them could have a material
adverse impact upon the Company’s business, financial position or
results of operations.
Accrued litigation expense was $41.7 million and $1.7 million
at December 31, 2011 and 2010, respectively. The Company
believes this reserve was adequate at December 31, 2011, and
is adequate currently, but future developments in pending legal
proceedings can affect the required reserve. We do not currently
believe that the reasonably possible aggregate range of loss for
our pending litigation will exceed the amount we have currently
accrued for litigation expense by any material amount, although
this belief is subject to the uncertainties and variables described
above. We continually monitor our litigation exposure, and review
the adequacy of our legal reserves on a quarterly basis in accordance
with applicable accounting rules.
Other Commitments
At December 31, 2011, the Company had non-cancelable com-
mitments primarily related to certain advertising and marketing
programs of $38.7 million. Payments under these commitments are
scheduled to be $19.5 million in 2012, $17.3 million in 2013, and
$1.9 million 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 100% of their annual compensation in accor-
dance with federal contribution limits with 50% matching by
the Company on the first 4% of compensation. The Company’s
expense related to the plan was $891,000 in 2011, $841,000 in
2010, and $844,000 in 2009.
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.
NOTE G: SHAREHOLDERS’
EQUITY
The Company held 15,111,635 shares in its treasury and was autho-
rized to purchase an additional 5,281,344 shares at December 31,
2011. The Company repurchased 5,075,675 shares of its Common
Stock on the open market in 2011 and 1,478,805 shares of its for-
mer Nonvoting Common Stock on the open market in 2010. The
Company did not repurchase any shares of its capital stock in 2009.
The Company has 1,000,000 shares of preferred stock autho-
rized. 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, 2011, no preferred shares
have been issued.
NOTE H: 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
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