Aarons 2005 Annual Report Download - page 25

23
Management’s Discussion and Analysis of Financial Condition and Results of Operations
FRANCHISE GUARANTY. We have guaranteed the borrow-
ings of certain independent franchisees under a franchise loan
program with several banks. In the event these franchisees
are unable to meet their debt service payments or otherwise
experience an event of default, we would be unconditionally
liable for a portion of the outstanding balance of the fran-
chisee’s debt obligations, which would be due in full within
90 days of the event of default. At December 31, 2005, the
portion that we might be obligated to repay in the event our
franchisees defaulted was $100.6 million. However, due to
franchisee borrowing limits, we believe any losses associated
with any defaults would be mitigated through recovery of
rental merchandise and other assets. Since its inception, we
have had no losses associated with the franchisee loan and
guaranty program.
We have no long-term commitments to purchase merchan-
dise. See Note F to the Consolidated Financial Statements
for further information. The following table shows our
approximate contractual obligations and commitments
to make futurepayments as of December 31, 2005:
Period Period Period Period
Less Than 2–3 4–5 Over
(In Thousands) Total 1Year Years Years 5 Years
Credit Facilities,
Excluding Capital
Leases $194,667 $20,004 $113,346 $34,012 $27,305
Capital Leases 17,206 643 1,663 2,108 12,792
Operating Leases 247,974 68,269 96,562 42,349 40,794
Total Contractual
Cash
Obligations $459,847 $88,916 $211,571 $78,469 $80,891
The following table shows the Company’sapproximate
commercial commitments as of December 31, 2005:
Period Period Period Period
Less Than 2–3 4–5 Over
(In Thousands) Total 1 Year Years Years 5 Years
Guaranteed
Borrowings of
Franchisees $100,631 $100,631 $ — $ ——$——
Residual Value
Guarantee Under
Operating Leases 20,858 20,858 — ————
Total Commercial
Commitments $121,489 $121,489 $ — $ ——$——
Purchase orders or contracts for the purchase of rental
merchandise and other goods and services are not included in
the table above. We are not able to determine the aggregate
amount of such purchase orders that represent contractual
obligations, as purchase orders may represent authorizations
to purchase rather than binding agreements. Our purchase
orders are based on our current distribution needs and are
fulfilled by our vendors within short time horizons. We do
not have significant agreements for the purchase of rental mer-
chandise or other goods specifying minimum quantities or set
prices that exceed our expected requirements for three months.
Market Risk
From time-to-time, we manage our exposure to changes
in short-term interest rates, particularly to reduce the impact
on our variable payment construction and lease facility and
floating-rate borrowings, by entering into interest rate swap
agreements. These swap agreements involve the receipt of
amounts by us when floating rates exceed the fixed rates and
the payment of amounts by us to the counterparties when
fixed rates exceed the floating rates in the agreements over
their term. We accrue the differential we may pay or receive
as interest rates change, and recognize it as an adjustment
to the floating rate interest expense related to our debt.
The counterparties to these contracts are high credit quality
commercial banks, which we believe largely minimizes the
risk of counterparty default.
At December 31, 2005 we did not have any swap
agreements.
We do not use any market risk sensitive instruments
to hedge commodity, foreign currency, or risks other than
interest rate risk, and hold no market risk sensitive instruments
for trading or speculative purposes.
Recent Accounting Pronouncements
In September 2004, the Emerging Issues Task Force
(EITF) of the FASB issued EITF Issue No. 04-1, Accounting
for Preexisting Relationships Between the Parties to a Business
Combination (EITF 04-1). EITF 04-1 requires an acquirer in a
business combination to evaluate any preexisting relationships
with the acquired party to determine if the business combination
in effect contains a settlement of the preexisting relationship.
Abusiness combination between parties with a preexisting rela-
tionship should be viewed as a multiple element transaction.
EITF 04-1 is effective for business combinations after October
13, 2004, but requires goodwill resulting from prior business
combinations involving parties with a preexisting relationship
to be tested for impairment by applying the guidance in the
consensus. The adoption of EITF 04-1 did not have a material
impact on the Company’sfinancial condition or results
of operations.