Aarons 2007 Annual Report Download - page 28

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on February 27, 2006, extending the life of the agreement
until May 28, 2008 and increasing the total available credit to
$140.0 million. We have $20.0 million currently outstanding
in aggregate principal amount of 6.88% senior unsecured
notes due August 2009, the first principal repayments of
which were due and paid in 2005 in the aggregate amount
of $10.0 million, with annual $10.0 million repayments due
until August 2009. Additionally, we have $60.0 million cur-
rently outstanding in aggregate principal amount of 5.03%
senior unsecured notes due July 2012, principal repayments
of which are first required in 2008.
Our revolving credit agreement and senior unsecured
notes, and our franchisee loan program discussed below,
contain certain financial covenants. These covenants include
requirements that we maintain ratios of: (1) EBITDA plus
lease expense to fixed charges of no less than 2:1; (2) total
debt to EBITDA of no greater than 3:1; and (3) total debt to
total capitalization of no greater than 0.6:1. EBITDA in each
case, means consolidated net income before interest and
tax expense, depreciation (other than rental merchandise
depreciation) and amortization expense, and other non-
cash charges. The Company is also required to maintain a
minimum amount of shareholder’s equity. See the full text
of the covenants themselves in our credit and guarantee
agreements, which we have previously filed as exhibits to
our Securities and Exchange Commission reports, for the
details of these covenants and other terms. If we fail to
comply with these covenants, we 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, 2007 and believe that we
will continue to be in compliance in the future.
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.
Purchases of sales and lease ownership stores had a posi-
tive impact on operating cash flows in each period presented.
The positive impact on operating cash flows from purchasing
stores occurs as the result of rental merchandise acquired in
these purchases being treated as an investing cash outflow
rather than as an operating cash flow as occurs with our
normal rental merchandise purchases. As such, the operating
cash flows attributable to the newly purchased stores usually
have an initial positive effect on operating cash flows that
may not be indicative of the extent of their contributions in
future periods. The amount of rental merchandise purchased
in these acquisitions and shown under investing activities
was $20.4 million in 2007, $13.3 million in 2006 and
$16.8 million in 2005.
We purchase our common shares in the market from
time to time as authorized by our board of directors. As
of December 31, 2007, Aaron Rents was authorized by its
board of directors to purchase up to 4,307,958 common
shares under approved resolutions. We repurchased 692,042
shares during the fourth quarter of 2007.
We have a consistent history of paying dividends, having
paid dividends for 20 consecutive years. A $.014 per share
dividend on Common Stock and Class A Common Stock was
paid in January 2006, April 2006, and July 2006. Our board
of directors increased the dividend for the third quarter of
2006 to $.015 per share from the previous quarterly dividend
of $.014 per share. The payment for the third quarter of
2006 was distributed in October 2006 for a total fiscal year
cash outlay of $2.9 million. A $.015 per share dividend on
Common Stock and Class A Common Stock was paid in
January 2007, April 2007, July 2007, and October 2007 for
a total cash outlay of $3.2 million in 2007. Our board of
directors increased the dividend 6.7% for the fourth quarter
of 2007 on November 15, 2007 to $.016 per share from the
previous quarterly dividend of $.015 per share. The payment
for the fourth quarter was paid in January 2008. 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 opera-
tions, we anticipate we will supplement our expected cash
flows from operations, existing credit facilities, vendor
credit, and proceeds from the sale of rental return merchan-
dise 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
INCOME TAXES. During 2007, we made $50.9 million in
income tax payments. During 2008, we anticipate that we
will make cash payments for income taxes approximating
$19 million. The Company has benefited in the past from the
additional first-year or “bonus” depreciation allowance under
U.S. federal income tax law related to its operations in the
Gulf Opportunities Zone. The Company will also benefit from
the Economic Stimulus Act of 2008 as bonus depreciation
will be available on its assets nationwide and tax payments
will be reduced for one year. In future years we anticipate
having to make increased tax payments on our income as
a result of expected profitability and the reversal of the
accelerated 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 2027. 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 trans-
portation and computer equipment under operating leases