Aarons 2005 Annual Report Download - page 23

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Management’s Discussion and Analysis of Financial Condition and Results of Operations
GOODWILL AND OTHER INTANGIBLES. The $26.2
million increase in goodwill and other intangibles, to
$101.1 million on December 31, 2005 from $74.9 million
on December 31, 2004, is the result of a series of acquisitions
of sales and lease ownership businesses, net of amortization
of certain finite-life intangible assets. The aggregate purchase
price for these asset acquisitions totaled $46.6 million, with
the principal tangible assets acquired consisting of rental
merchandise and certain fixtures and equipment.
PREPAID EXPENSES AND OTHER ASSETS. Prepaid
expenses and other assets decreased $27.2 million to
$23.0 million on December 31, 2005 from $50.1 million
on December 31, 2004. The decrease is in part the result of
the collection during the year of $15.2 million in income tax
refunds that were receivable at December 31, 2004 and the
sale of shares of Rent-Way, Inc. common stock with a carrying
value of $6.1 million in 2005.
DEFERRED INCOME TAXES PAYABLE. The decrease of
$20.0 million in deferred income taxes payable at December
31, 2005 from December 31, 2004 is primarily the result of
previously benefiting from the additional first-year or “bonus”
depreciation allowance under U.S. federal income tax law,
which generally allowed the Company to accelerate the
depreciation on rental merchandise it acquired after September
10, 2001 and placed in service prior to January1, 2005. The
Company anticipates having to make future tax payments on
its income as a result of expected profitability and the taxes
that arenow due on accelerated or “bonus” depreciation
deductions that weretaken in prior periods.
CREDIT FACILITIES. The $95.2 million increase in the
amounts we owe under our credit facilities to $211.9 million
from $116.7 million on December 31, 2005 and 2004,
respectively, reflects net borrowings under our revolving credit
facility and notes during 2005 primarily to fund purchases
of rental merchandise, real estate, acquisitions, tax payments
and working capital. In 2005, we entered into a note purchase
agreement with a consortium of insurance companies. Pursuant
to this agreement, the Company and its two subsidiaries as
co-obligors issued $60.0 million in senior unsecured notes to
the purchasers in a private placement. The Company used
the proceeds from this financing to replace shorter-term
borrowings under the Company’s revolving credit agreement.
Liquidity and Capital Resources
General
Cash flows (used by) and generated from operating activities
for the years ended December 31, 2005 and 2004 were$(6.5)
million and $34.7 million, respectively. Our cash flows include
profits on the sale of rental return merchandise. Our primary
capital requirements consist of buying rental merchandise for
both Company-operated sales and lease ownership and cor-
porate furnishings stores. As Aaron Rents continues to grow,
the need for additional rental merchandise will continue to
be our major capital requirement. These capital requirements
historically have been financed through:
•cash flow from operations
•bank credit
•trade credit with vendors
•proceeds from the sale of rental return merchandise
•private debt
•stock offerings
At December 31, 2005, $81.3 million was outstanding
under our revolving credit agreement. Additionally, we entered
into an $18.0 million demand note as a means of temporary
financing and at December 31, 2005 $10.0 million was
outstanding under this note. The increase in borrowings is
primarily attributable to cash borrowed for purchases of rental
merchandise, acquisitions, tax payments, and working capital.
Our revolving credit agreement provides for maximum bor-
rowings of $87.0 million and expires on May 28, 2007. We
have $40.0 million in aggregate principal amount of 6.88%
senior unsecured notes due August 2009 currently outstanding,
the first principal repayments for which were due and paid in
2005 in the aggregate amount of $10.0 million. Additionally,
we have $60.0 million in aggregate principal amount of 5.03%
senior unsecured notes due July 2012 currently outstanding,
principal repayments for which are first required in 2008.
From time to time, we use interest rate swap agreements as
part of our overall long-term financing program.
Our revolving credit agreement, senior unsecured notes, and
the construction and lease facility and franchisee loan program
discussed below, contain financial covenants which, among
other things, forbid us from exceeding certain debt to equity
levels and require us to maintain minimum fixed charge
coverage ratios. If we fail to comply with these covenants,
we will be in default under these agreements, and all amounts
would become due immediately.These covenants wereamended
in July 2005 as a result of entry into the note purchase agree-
ment for $60.0 million in senior unsecured notes. The credit
agreements wereamended for the purpose of permitting the
new issuance of the note purchase agreement and amending
the negative covenants in the revolving credit agreement. We
werein compliance with all of these covenants at December
31, 2005.
On February 27, 2006, we entered into a second amendment
to the revolving credit agreement to increase the maximum
borrowing limit to $140.0 million from $87.0 million and
extend the expiration date to May 28, 2008. The franchise loan
facility and guaranty was amended to decrease the maximum
commitment amount from $140.0 million to $115.0 million.
We purchase our common shares in the market from
time to time as authorized by our Board of Directors. As of
December 31, 2005, Aaron Rents was authorized by its
Boardof Directors to purchase up to an additional 2,670,502
common shares.
We have a consistent history of paying dividends, having
paid dividends for 19 consecutive years. A $.013 per share
dividend on Common Stock and Class A Common Stock was
paid in January 2004 and July 2004. In addition, in July 2004
our Boardof Directors declared a 3-for-2 stock split, effected
in the form of a 50% stock dividend, which was distributed
to shareholders in August 2004. In August 2004, our Board of
Directors announced an increase in the frequency of the $0.013
per sharecash dividends on both Common Stock and Class A