Aarons 2005 Annual Report Download - page 24

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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Common Stock from a semi-annual to a quarterly basis. The
payment for the third quarter of 2004 was distributed in
October 2004 for a total fiscal year cash outlay of $2.0 million.
The payment for the fourth quarter of 2004 was paid in
January 2005. The payment for the first quarter 2005 was
paid in April 2005, the payment for the second quarter was
paid in July 2005, and the payment for the third quarter was
paid in November 2005 for a total cash outlay of $2.6 million
in 2005. The payment for the fourth quarter was paid in
January 2006. Our Board of Directors increased the dividend
7.7% for the third quarter of 2005 on August 4, 2005 to $.014
per share from the previous quarterly dividend of $.013 per
share. The fourth quarter of 2005 dividend was also $.014
per share. Subject to sufficient operating profits, to any future
capital needs and to other contingencies, we currently expect
to continue our policy of paying dividends.
If we achieve our expected level of growth in our operations,
we anticipate we will supplement our expected cash flows from
operations, existing credit facilities, vendor credit, and proceeds
from the sale of rental returnmerchandise by expanding our
existing credit facilities, by securing additional debt financing,
or by seeking other sources of capital to ensurewe will be able
to fund our capital and liquidity needs for at least the next 24
months. We believe we can secure these additional sources of
liquidity in the ordinarycourse of business.
Commitments
CONSTRUCTION AND LEASE FACILITY. On October 31,
2001, we renewed our $25.0 million construction and lease
facility. From 1996 to 1999, we arranged for a bank holding
company to purchase or construct properties identified by us
pursuant to this facility,and we subsequently leased these
properties from the bank holding company under operating
lease agreements. The total amount advanced and outstanding
under this facility at December 31, 2005 was $24.5 million.
Since the resulting leases are accounted for as operating leases,
we do not record any debt obligation on our balance sheet.
This construction and lease facility expires in 2006. The
construction and lease facility was amended in July 2005 as
aresult of entry into a note purchase agreement for $60.0
million in senior unsecured notes. The facility was amended
for the purpose of permitting the new issuance of the note
purchase agreement and amending the negative covenants
in the revolving credit agreement. Lease payments fluctuate
based upon current interest rates and are generally based
upon LIBOR plus 135 basis points. The lease facility contains
residual value guarantee and default guarantee provisions that
would require us to make payments to the lessor if the under-
lying properties are worth less at termination of the facility
than agreed upon values in the agreement. Although we
have not recognized any liability to date under the guarantee
provisions and believe the likelihood of funding to be remote,
the maximum guarantee obligation under the residual value
and default guarantee provisions upon termination are $20.9
million and $24.5 million, respectively,at December 31, 2005.
INCOME TAXES. During 2005, we made $51.2 million in
income tax payments. During 2006, we anticipate that we will
make cash payments for 2005 income taxes approximating
$55 million. The Company has in the past benefited 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 January 1, 2005. The Company anticipates having to
make future tax payments on its income as a result of expected
profitability and the taxes that are now due on accelerated
or “bonus” depreciation deductions that were taken in
prior periods.
LEASES. We lease warehouse and retail store space for
substantially all of our operations under operating leases
expiring at various times through 2021. 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. Wealso lease transportation and
computer equipment under operating leases expiring during the
next five years. Weexpect that most leases will be renewed or
replaced by other leases in the normal course of business.
We have 24 capital leases, 22 of which are with limited
liability companies (“LLCs”) whose owners include certain
Aaron Rents’ executive officers and our controlling shareholder.
Eleven of these related party leases relate to properties pur-
chased from Aaron Rents in October and November 2004 by
one of the LLCs for a total purchase price of $6.8 million.
This LLC is leasing back these properties to Aaron Rents for
a15-year term, with a five-year renewal at the Company’s
option, at an aggregate annual rental of $883,000. Another
eleven of these related party leases relate to properties pur-
chased from Aaron Rents in December 2002 by one of the
LLCs for a total purchase price of approximately $5.0 million.
This LLC is leasing back these properties to Aaron Rents for
a15-year term at an aggregate annual rental of $702,000.
The other related party capital lease relates to a property
sold by Aaron Rents to a second LLC for $6.3 million in April
2002 and leased back to Aaron Rents for a 15-year term at an
annual rental of $681,000. See Note D to the Consolidated
Financial Statements. None of the sale transactions resulted in
any gain or loss in our financial statements, and we did not
change the basis of the assets subject to the leases. These
transactions were accounted for as financings.
We finance a portion of our store expansion through sale-
leaseback transactions. The properties are sold at net book
value and the resulting leases qualify and areaccounted for as
operating leases. We do not have any retained or contingent
interests in the stores nor do we provide any guarantees,
other than a corporate level guarantee of lease payments, in
connection with the sale-leasebacks. The operating leases that
resulted from these transactions are included in the table below.