Aarons 2002 Annual Report Download - page 19

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major capital requirement. These capital requirements historically
have been financed through:
• bank credit • cash flow from operations
• trade credit with vendors • proceeds from the sale of
• private debt rental return merchandise
• stock offerings
In August 2002, we sold $50 million in aggregate principal
amount of our 6.88% senior unsecured notes due August 2009 in
a private placement. Quarterly interest payments are due for the
first two years followed by annual $10 million principal repay-
ments plus interest for the next five years. We used some of the
net proceeds of the sale to repay borrowings under our existing
revolving credit facility, and intend to use a portion to finance
future expansion. Information regarding our obligations to make
future payments under our senior unsecured notes appears under
“Commitments” below.
In June 2002, we completed an underwritten public offering of
1.725 million newly-issued shares of our common stock (including
shares issued pursuant to the underwriters’ over-allotment option)
for net proceeds, after the underwriting discount and expenses, of
approximately $34.1 million. We used the proceeds to repay bor-
rowings under our revolving credit facility. A selling shareholder
sold an additional 575,000 shares in the offering.
Aaron Rents has financed its growth through a revolving credit
agreement with several banks, collateralized real estate borrow-
ings, trade credit with vendors, and internally generated funds.
Our revolving credit agreement dated March 30, 2001 provides
for unsecured borrowings up to $110 million, including an $8
million credit line to fund daily working capital requirements.
The interest rate under our revolving credit agreement is currently
the lower of the lender’s prime rate or LIBOR plus 1.25%. The
agreement expires on March 30, 2004.
At December 31, 2002, an aggregate of $7.3 million was out-
standing under the revolving credit agreement, bearing interest at
a weighted average variable rate of 3.1%. The Company’s long-
term debt decreased by approximately $4.4 million in 2002. The
decline in borrowings is primarily attributable to cash generated
from operating activities of $221.7 million along with the $34.1
million in net proceeds from a public offering of 1.725 million
shares of our Common Stock. Information regarding our obliga-
tions to make future payments under our credit facility appears
under “Commitments” below. We use interest rate swap agree-
ments as part of our overall long-term financing program, as
described below under “Market Risk.”
Aaron Rents’ revolving credit agreement, senior unsecured
notes, the construction and lease facility, and the franchise loan
program discussed below, contain financial covenants which,
among other things, forbid us from exceeding certain debt to
equity levels and require us to maintain minimum fixed charge
coverage ratios. If we fail to comply with these covenants, then
we will be in default under these commitments, and all amounts
would become due immediately. Aaron Rents was complying with
all these covenants at December 31, 2002.
As of December 31, 2002, Aaron Rents was authorized by
its board of directors to purchase up to an additional 1,186,890
common shares.
Aaron Rents has paid dividends for 16 consecutive years. A
$.02 per share dividend on our common stock and Class A stock
was paid in January 2002 and July 2002, for a total fiscal year cash
outlay of $798,000. Subject to sufficient operating profits, to any
future capital needs and to other contingencies, we currently
expect to continue our policy of paying dividends.
We believe that the proceeds from our public stock offering,
our senior note offering, our expected cash flows from operations,
proceeds from the sale of rental return merchandise, bank and
other borrowings, and vendor credit will be sufficient to fund
our capital and liquidity needs for at least the next 24 months.
COMMITMENTS
Construction and Lease Facility. On October 31, 2001,
we renewed our $25 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, 2002 was approximately $24.7 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. Lease payments fluctuate based
upon current interest rates and are generally based upon LIBOR
plus 1.35%. The lease facility contains residual value guarantee
and default guarantee provisions. Although we believe the likeli-
hood of funding to be remote, the maximum guarantee obligation
under the residual value and default guarantee provisions upon
termination are approximately $20.9 million and $24.7 million,
respectively, at December 31, 2002.
Leases. Aaron Rents leases warehouse and retail store space
for substantially all of its operations under operating leases
expiring at various times through 2015. 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 which do not represent bargain
purchase options. We also lease transportation and computer
equipment under operating leases expiring during the next three
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, 2002 including leases under our con-
struction and lease facility described above are as follows: $33.3
million in 2003; $27.8 million in 2004; $19.8 million in 2005; $12.6
million in 2006; $6.8 million in 2007; and $7.1 million thereafter.
The Company has 13 capital leases, 12 of which are with
limited liability companies (LLCs) whose owners include Aaron
Rents’ executive officers, and majority shareholder. Eleven of
these related party leases relate to properties purchased from
Aaron Rents in December 2002 by one of the LLCs for a total
purchase price of approximately $5 million. The LLC is leasing
back these properties to Aaron Rents for 15-year terms at an
aggregate annual rental of approximately $635,000. The twelfth
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 approximately $617,000. See Note E to the Consolidated
Financial Statements.
Franchise Guaranty. Aaron Rents has guaranteed the bor-
rowings of certain independent franchisees under a franchise loan
program with a bank. In the event these franchisees are unable to
meet their debt service payments or otherwise experience an event