Aarons 2006 Annual Report Download - page 24

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will be in default under these agreements, and all amounts would
become due immediately. We were in compliance with all of these
covenants at December 31, 2006.
On February 27, 2007, we amended the franchise loan facility
and guaranty to increase the maximum commitment amount from
$115.0 million to $125.0 million.
We purchase our common shares in the market from time to
time as authorized by our board of directors. As of December 31,
2006, Aaron Rents was authorized by its board of directors to
purchase up to an additional 2,670,502 common shares under
previously approved resolutions.
We have a consistent history of paying dividends, having paid
dividends for 20 consecutive years. A $.013 per share dividend
on Common Stock and Class A Common Stock was paid in January
2005, April 2005, and July 2005. Our board of directors increased
the dividend for the third quarter of 2005 to $.014 per share
from the previous quarterly dividend of $.013 per share. The
payment for the third quarter of 2005 was distributed in October
2005 for a total fiscal year cash outlay of $2.6 million. A $.014
per share dividend on Common Stock and Class A Common Stock
was paid in January 2006, April 2006, July 2006, and October
2006 for a total cash outlay of $2.9 million in 2006. Our board
of directors increased the dividend 7.1% for the fourth quarter of
2006 on November 7, 2006 to $.015 per share from the previous
quarterly dividend of $.014 per share. The payment for the fourth
quarter was paid in January 2007. Total cash outlay for dividends
was $2.9 million and $2.6 million for the years ended December
31, 2006 and 2005, respectively. Subject to sufficient operating
profits, any future capital needs and 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 return merchandise by expanding our
existing credit facilities, by securing additional debt financing,
or by seeking other sources of capital to ensure we 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
capital in the ordinary course of business.
COMMITMENTS
CONSTRUCTION AND LEASE FACILITY. On October 31, 2006,
our $25 million construction and lease facility expired. On
October 30, 2006, we purchased the 21 properties financed by
this facility for approximately $25.3 million, retained ownership
of eight properties and entered into sale-leaseback transactions
for the remaining 13 properties with an unrelated third party.
No gain or loss was recognized on this transaction.
INCOME TAXES. During 2006, we made $14.3 million in income
tax payments. During 2007, we anticipate that we will make
cash payments for income taxes approximating $40 million. The
Company has benefited in the past from the additional first-year
or “bonus” depreciation allowance under U.S. federal income tax
law, which generally allowed us to accelerate the depreciation on
rental merchandise we acquired after September 10, 2001 and
placed in service prior to January 1, 2005. The Company is
currently receiving benefits from bonus depreciation related
to its operations in the Gulf Opportunities Zone. We anticipate
having to make increased future tax payments on our income as
a result of expected profitability and the reversal of the acceler-
ated depreciation deductions that were taken in prior periods.
LEASES. We lease warehouse and retail store space for sub-
stantially 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. We also lease transportation and computer
equipment under operating leases expiring during the next five
years. We expect that most leases will be renewed or replaced
by other leases in the normal course of business.
We have 22 capital leases, 21 of which are with a limited
liability company (“LLC”) whose managers and owners are 14
Aaron Rents’ executive officers and its controlling shareholder,
with no individual, including the controlling shareholder, owning
more than 10.53% of the LLC. Eleven of these related party leases
relate to properties purchased from Aaron Rents in October and
November 2004 by the LLC for a total purchase price of $6.8
million. This LLC is leasing back these properties to Aaron Rents
for a 15-year term, with a five-year renewal at Aaron Rents’
option, at an aggregate annual rental of $883,000. Another ten
of these related party leases relate to properties purchased from
Aaron Rents in December 2002 by the LLC for a total purchase
price of approximately $5.0 million. This LLC is leasing back
these properties to Aaron Rents for a 15-year term at an
aggregate annual rental of $572,000.
During 2006, a property sold by Aaron Rents to a second LLC
controlled by the Company’s major shareholder 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 was sold to an unrelated third
party. We entered into a new capital lease with the unrelated
third party. No gain or loss was recognized on this transaction.
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 are accounted for as
operating leases. We do not have any retained or contingent