Aarons 2010 Annual Report Download - page 26

first-year depreciation deduction of 50% of the adjusted basis of
qualified property, such as our lease merchandise, placed in service
during those years. The Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 allowed for
deduction of 100% of the adjusted basis of qualified property
for assets placed in service after September 8, 2010 and before
December 31, 2011. Accordingly, our cash flow benefited from hav-
ing a lower cash tax obligation which, in turn, provided additional
cash flow from operations. Because of our sales and lease ownership
model where Aaron’s remains the owner of merchandise on lease,
we benefit more from bonus depreciation, relatively, than traditional
furniture, electronics and appliance retailers. In future years, we
anticipate having to make increased tax payments on our earnings as
a result of expected profitability and the reversal of the accelerated
depreciation deductions that were taken in 2010 and prior periods.
We estimate that at December 31, 2010, the remaining tax deferral
associated with the acts described above is approximately $150.0 mil-
lion, of which approximately 76% will reverse in 2011 and most of
the remainder will reverse between 2012 and 2013.
LEASES. We lease warehouse and retail store space for most of our
operations under operating leases expiring at various times through
2028. Most of the leases contain renewal options for additional peri-
ods 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. Approximate
future minimum rental payments required under operating leases
that have initial or remaining non-cancelable terms in excess of one
year as of December 31, 2010 are shown in the below table under
“Contractual Obligations and Commitments.”
We have 20 capital leases, 19 of which are with a limited liability
company (“LLC”) whose managers and owners are 11 officers of
the company of which there are eight executive officers, with no
individual, owning more than 13.33% of the LLC. Nine of these
related party leases relate to properties purchased from us in October
and November of 2004 by the LLC for a total purchase price of
$6.8 million. The LLC is leasing back these properties to us for a
15-year term, with a five-year renewal at our option, at an aggregate
annual lease amount of $716,000. Another 10 of these related party
leases relate to properties purchased from us in December 2002 by
the LLC for a total purchase price of approximately $5.0 million.
The LLC is leasing back these properties to us for a 15-year term at
an aggregate annual lease of $556,000. We do not currently plan to
enter into any similar related party lease transactions in the future.
We finance a portion of our store expansion through sale-
leaseback transactions. The properties are generally sold at net book
value and the resulting leases qualify and are accounted for as operat-
ing 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.
FRANCHISE LOAN GUARANTY. We have guaranteed the bor-
rowings of certain independent franchisees under a franchise loan
program with several banks and we also guarantee franchisee borrow-
ings under certain other debt facilities. The guaranty was amended
on June 18, 2010 to increase the maximum commitment amount
under the facility from $175.0 million to $200.0 million, provide
for the ability to extend loans to franchisees that operate stores
located in Canada (other than in the Province of Quebec), increase
the maximum available amount of swing loans from $20.0 million
to $25.0 million, reduce our interest obligations with respect to
franchisees that operate stores located in the United States and
establish our interest obligations with respect to franchisees that
operate stores located in Canada. At December 31, 2010, the portion
that we might be obligated to repay in the event franchisees defaulted
was $121.0 million. Of this amount, approximately $108.3 million
represents franchise borrowings outstanding under the franchisee
loan program and approximately $12.7 million represents franchisee
borrowings that we guarantee under other debt facilities. However,
due to franchisee borrowing limits, we believe any losses associated
with any defaults would be mitigated through recovery of lease
merchandise and other assets. Since its inception in 1994, we have
had no significant losses associated with the franchise loan and
guaranty program. We believe the likelihood of any significant
amounts being funded in connection with these commitments to
be remote. We receive guarantee fees based on such franchisees’
outstanding debt obligations, which it recognizes as the guarantee
obligation is satisfied.
We have no long-term commitments to purchase merchandise.
See Note F to the Consolidated Financial Statements for further
information. The following table shows our approximate contractual
obligations, including interest, and commitments to make future
payments as of December 31, 2010:
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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