Aarons 2005 Annual Report Download - page 34

32
Notes to Consolidated Financial Statements
BANK DEBT — The Company has a revolving credit
agreement dated May 28, 2004 with several banks providing
for unsecured borrowings up to $87.0 million, which includes
a$12.0 million credit line to fund daily working capital
requirements. Amounts borrowed bear interest at the lower of
the lender’s prime rate or LIBOR plus 125 basis points. The
pricing under the working capital line is based upon overnight
bank borrowing rates. At December 31, 2005 and 2004,
respectively, an aggregate of $81.3 million (bearing interest at
5.35%) and $45.5 million (bearing interest at 3.41%) was out-
standing under the revolving credit agreement. The Company
pays a .20% commitment fee on unused balances. The weighted
average interest rate on borrowings under the revolving credit
agreement (before giving effect to interest rate swaps in 2004
and 2003) was 4.42% in 2005, 2.72% in 2004, and 2.53% in
2003. The revolving credit agreement expires May 28, 2007.
See Note N for subsequent event disclosures.
The revolving credit agreement contains certain covenants
which require that the Company not permit its consolidated
net worth as of the last day of any fiscal quarter to be less than
the sum of (a) $338,340,000 plus (b) 50% of the Company’s
consolidated net income (but not loss) for the period beginning
April 1, 2004 and ending on the last day of such fiscal quarter.
It also places other restrictions on additional borrowings
and requires the maintenance of certain financial ratios. The
revolving credit agreement was amended in July 2005 as a
result of entry into a note purchase agreement for $60.0 million
in senior unsecured notes. The agreement was amended for the
purpose of permitting a new issuance of senior unsecured notes
and amending the negative covenants in the revolving credit
agreement. At December 31, 2005, $47.2 million of retained
earnings was available for dividend payments and stock repur-
chases under the debt restrictions, and the Company was in
compliance with all covenants.
On December 16, 2005 the Company entered into an $18.0
million demand note as a means of temporary financing and at
December 31, 2005 $10.0 million was outstanding at a rate of
LIBOR plus 100 basis points.
SENIOR UNSECURED NOTES — On August 14, 2002, the
Company sold $50.0 million in aggregate principal amount of
senior unsecured notes in a private placement to a consortium
of insurance companies. The unsecured notes mature August
13, 2009. Quarterly interest only payments at an annual rate
of 6.88% are due for the first two years followed by annual
$10,000,000 principal repayments plus interest for the five
years thereafter. The notes were amended in July 2005 as a
result of entry into a note purchase agreement for an additional
$60.0 million in senior unsecured notes to the purchasers in a
private placement. The agreement was amended for the pur-
pose of permitting the new issuance of the notes and amending
the negative covenants in the revolving credit agreement.
On July 27, 2005, the Company entered into a note
purchase agreement with a consortium of insurance companies.
Pursuant to this agreement, the Company and its two sub-
sidiaries as co-obligors issued $60.0 million in senior unsecured
notes to the purchasers in a private placement. The notes bear
interest at a rate of 5.03% per year and matureon July 27,
2012. Interest only payments aredue quarterly for the first two
years, followed by annual $12 million principal repayments
plus interest for the five years thereafter, beginning on July 27,
2008. The Company used the proceeds from this financing
to replace shorter-term borrowings under the Company’s
revolving credit agreement. The new note purchase agreement
contains financial maintenance covenants, negative covenants
regarding the Company’s other indebtedness, its guarantees
and investments, and other customary covenants substantially
similar to the covenants in the Company’s existing note
purchase agreement, revolving credit facility, loan facility
agreement and guaranty, and its construction and lease facility,
as modified by the amendments described herein.
CAPITAL LEASES WITH RELATED PARTIES— In October
and November 2004, the Company sold eleven properties,
including leasehold improvements, to a separate limited
liability corporation (“LLC”) controlled by a group of
Company executives and managers, including the Company’s
chairman, chief executive officer, and controlling shareholder.
The LLC obtained borrowings collateralized by the land and
buildings totaling $6.8 million. The Company occupies the land
and buildings collateralizing the borrowings under a 15-year
termlease, with a five-year renewal at the Company’soption,
at an aggregate annual rental of $883,000. The transaction
has been accounted for as a financing in the accompanying
consolidated financial statements. The rate of interest implicit
in the leases is approximately 9.7%. Accordingly, the land and
buildings, associated depreciation expense, and lease obliga-
tions arerecorded in the Company’s consolidated financial
statements. No gain or loss was recognized in this transaction.
In December 2002, the Company sold eleven properties,
including leasehold improvements, to a separate limited liability
corporation (“LLC”) controlled by a group of Company
executives and managers, including the Company’s chairman,
chief executive officer,and controlling shareholder.The LLC
obtained borrowings collateralized by the land and buildings
totaling approximately $5.0 million. The Company occupies
the land and buildings collateralizing the borrowings under
a15-year term lease at an aggregate annual rental of approxi-
mately $702,000. The transaction has been accounted for
as a financing in the accompanying consolidated financial
statements. The rate of interest implicit in the leases is
approximately 11.1%. Accordingly, the land and buildings,
associated depreciation expense, and lease obligations are
recorded in the Company’s consolidated financial statements.
No gain or loss was recognized in this transaction.
In April 2002, the Company sold land and buildings with a
carrying value of $6.3 million to a limited liability corporation
(“LLC”) controlled by the Company’smajor shareholder.
Simultaneously, the Company and the LLC entered into a
15-year lease for the building and a portion of the land, with
two five-year renewal options at the discretion of the Company.
The LLC obtained borrowings collateralized by the land and
building totaling $6.4 million. The Company occupies the land
and building collateralizing the borrowings under a 15-year
term lease at an aggregate annual rental of $681,000. The
transaction has been accounted for as a financing in the
accompanying consolidated financial statements. The rate of
interest implicit in the lease financing is 8.7%. Accordingly,the