Aarons 2003 Annual Report Download - page 23

We have no long-term commitments to purchase merchan-
dise. See Note G to the Consolidated Financial Statements
for further information. The following table shows our
approximate contractual obligations and commitments to
make future payments as of December 31, 2003:
Period Period Period Period
Less Than 1–3 4–5 Over
(In Thousands) Total 1 Year Years Years 5 Years
Credit Facilities,
Excluding Capital
Leases $ 68,107 $13,874 $20,008 $20,010 $14,215
Capital Leases 11,463 388 889 1,249 8,937
Operating Leases 124,094 40,329 53,900 21,718 8,147
Total Contractual
Cash
Obligations $203,664 $54,591 $74,797 $42,977 $31,299
The following table shows the Company’s approximate
commercial commitments as of December 31, 2003:
Period Period Period Period
Less Than 1–3 4–5 Over
(In Thousands) Total 1 Year Years Years 5 Years
Guaranteed
Borrowings of
Franchisees $67,455 $67,455 $ —$—$—
Residual Value
Guarantee Under
Operating Leases 21,149 21,149
Total Commercial
Commitments $88,604 $67,455 $21,149 $ —$—
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
merchandise or other goods specifying minimum quantities
or set prices that exceed our expected requirements for
three months.
Market Risk
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 agree-
ments. 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 minimizes to a large
extent the risk of counterparty default.
At December 31, 2003, we had swap agreements with
total notional principal amounts of $20 million that effec-
tively fixed the interest rates on obligations in the notional
amount of $20 million of debt under our variable payment
construction and lease facility at an average rate of
21
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 facil-
ity at December 31, 2003 was approximately $24.9 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 1.1%. The lease
facility contains residual value guarantee and default guaran-
tee provisions that would require us to make payments
to the lessor if the underlying properties are worth less at
termination of the facility than agreed-upon values in the
agreement. Although we believe the likelihood of funding
to be remote, the maximum guarantee obligation under the
residual value and default guarantee provisions upon termi-
nation are approximately $21.1 million and $24.9 million,
respectively, at December 31, 2003.
Leases. Aaron Rents leases warehouse and retail store
space for substantially all of its operations under operating
leases expiring at various times through 2017. 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 transporta-
tion 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
noncancelable terms in excess of one year as of December
31, 2003, including leases under our construction and lease
facility described above, are as follows: $40,329,000 in 2004;
$31,637,000 in 2005; $22,263,000 in 2006; $14,126,000 in
2007; $7,592,000 in 2008; and $8,147,000 thereafter.
We have 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. This LLC
is leasing back these properties to Aaron Rents for a 15-year
term at an aggregate annual rental of approximately
$635,000. The other 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. We have guaranteed the borrowings
of certain independent franchisees under a franchise loan
program with two 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-
chisees’ debt obligations, which would be due in full within
90 days of the event of default. At December 31, 2003, the
portion that we might be obligated to repay in the event
our franchisees defaulted was approximately $67.5 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.