UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file Number. 1-13941
AARON’S, INC.
(Exact name of registrant as specified in its charter)
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GEORGIA | | 58-0687630 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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309 E. PACES FERRY ROAD, N.E. ATLANTA, GEORGIA | | 30305-2377 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (404) 231-0011
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Name of each exchange on which registered |
Common Stock, $.50 Par Value | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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Large Accelerated Filer | ý | | Accelerated Filer | | ¨ |
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Non-Accelerated Filer | ¨ | | Smaller Reporting Company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2014 was $2,298,400,890 based on the closing price on that date as reported by the New York Stock Exchange. Solely for the purpose of this calculation and for no other purpose, the non-affiliates of the registrant are assumed to be all shareholders of the registrant other than (i) directors of the registrant, (ii) executive officers of the registrant, and (iii) any shareholder that beneficially owns 10% or more of the registrant’s common shares.
As of February 26, 2015, there were 72,530,152 shares of the Company’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2015 annual meeting of shareholders, to be filed subsequently with the Securities and Exchange Commission, or SEC, pursuant to Regulation 14A, are incorporated by reference into Part III of this Annual Report on Form 10-K.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain oral and written statements made by Aaron’s, Inc. (the “Company” or “Aaron's”) about future events and expectations, including statements in this Annual Report on Form 10-K, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For those statements we claim the protection of the safe harbor provisions for forward-looking statements contained in such section. Forward-looking statements are not statements of historical facts but are based on management’s current beliefs, assumptions and expectations regarding our future economic performance, taking into account the information currently available to management.
Generally, the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “plan,” “project,” “would,” and similar expressions identify forward-looking statements. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including growth in store openings, franchises awarded, market share and statements expressing general optimism about future operating results, are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and the Company’s present expectations or projections. Factors that could cause our actual results to differ materially from any forward-looking statements include changes in general economic conditions, competition, pricing, customer demand, litigation and regulatory proceedings and those factors discussed in the Risk Factors section of this Annual Report on Form 10-K. We qualify any forward-looking statements entirely by these cautionary factors.
The above mentioned risk factors are not all-inclusive. Given these uncertainties and that such statements speak only as of the date made, you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise.
PART I.
ITEM 1. BUSINESS
Unless otherwise indicated or unless the context otherwise requires, all references in this Annual Report on Form 10-K to the “Company,” “we,” “us,” “our” and similar expressions are references to Aaron’s, Inc. and its consolidated subsidiaries.
General Development of Business
Established in 1955 and incorporated in 1962 as a Georgia corporation, Aaron’s, Inc., is a leading specialty retailer of furniture, consumer electronics, computers, appliances and household accessories. Our store-based operations engage in the lease ownership and retail sale of a wide variety of products such as flat-screen televisions, computers, tablets, living room, dining room and bedroom furniture, mattresses, washers, dryers and refrigerators. Our stores carry well-known brands such as Samsung®, Frigidaire®, Hewlett-Packard®, LG®, Maytag®, Simmons®, Philips®, RCA®, JVC®, Sharp® and Magnavox®.
On April 14, 2014, the Company acquired a 100% ownership interest in Progressive Finance Holdings, LLC (“Progressive”), a leading virtual lease-to-own company, for merger consideration of $700.0 million, net of cash acquired. Through our Progressive business, we offer lease-purchase solutions to the customers of traditional retailers, primarily in the furniture, mattress, mobile phone, consumer electronics, appliance and household accessory industries. Progressive has no stores of its own but provides lease-purchase solutions through over 15,000 retail partner locations in 46 states.
As of December 31, 2014, we had 2,108 stores, comprised of 1,326 Company-operated stores in 28 states and the District of Columbia and 782 independently-owned franchised stores in 47 states and Canada. Included in the Company-operated store counts above are 1,243 Aaron’s Sales & Lease Ownership stores and 83 HomeSmart stores, our weekly pay sales and lease ownership concept. In January of 2014, we sold our 27 Company-operated RIMCO stores and the rights to five franchised RIMCO stores.
We own or have rights to various trademarks and trade names used in our business including Aaron’s, Aaron’s Sales & Lease Ownership and Woodhaven Furniture Industries. We intend to file for additional trade name and trademark protection when appropriate.
Like many industries, the rent-to-own industry has been transformed by the internet and virtual marketplace. We believe the Progressive acquisition will be strategically transformational for the Company in this respect and will strengthen our business. We also believe the rent-to-own industry has suffered in recent periods due to economic challenges faced by our traditional rent-to-own customers. Accordingly, during 2014 we undertook a comprehensive review of our traditional rent-to-own (“core”) business in order to position us to succeed over the long-term. As a result, we have implemented a strategic plan focused on our core business as follows:
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• | Emphasizing same store revenue growth for our core portfolio through improved execution, optimization of merchandising and pricing and an enhanced go-to-market strategy - Same store revenues (revenues earned in stores open for the entirety of the measured periods) from our Company-operated sales and lease ownership stores resulted in a decline of 2.8% in 2014 and growth of .9% and 5.1% in 2013 and 2012, respectively. We calculate same store revenue by comparing revenues from comparable periods for all stores open during the entirety of those periods, excluding stores that received lease agreements from other acquired, closed or merged stores. |
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• | Enhancing and growing our online platform, as well as extending our assortment with online-only offerings - We believe the re-launch of Aarons.com represents an opportunity to provide a unique offering in the lease-to-own industry. We are focused on providing customers a seamless, direct-to-door platform through which to shop across our entire product offering. |
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• | Driving cost efficiency to recapture margin, including through selling, general and administrative cost savings and rationalizing underperforming stores - During 2014, we undertook a rigorous evaluation of the Company-operated store portfolio which, along with other cost-reduction initiatives, resulted in the closure of 44 underperforming stores and the realignment of home office and field support. |
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• | Moderating new Company-operated store growth to result in no net store growth after store closings - We open sales and lease ownership stores in existing and select new geographic markets. When opportune, we explore acquisitions of other rent-to-own operations and select franchised stores and, when attractive, we also seek to convert the stores of existing independent operators to Aaron's Sales & Lease Ownership franchised stores. Additional stores help us realize economies of scale in purchasing, marketing and distribution. Since the beginning of 2010, we have added a net of 244 Company-operated sales and lease ownership stores. We expect in the near term a small number of Company-operated store openings in strategic markets, which are expected to result in no net growth after the anticipated closures of underperforming stores. |
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• | Strengthening and growing the franchise store base - We believe that our franchise program allows for strategic growth and increased brand exposure in new markets. In addition, the combination of Company-operated and franchised stores creates a larger store base that generally enhances the economies of scale in purchasing, distribution, manufacturing and advertising. Franchise fees and royalties represent an important source of revenues for us. We have added a net of 185 franchised stores since the beginning of 2010. |
Business Segments
As of December 31, 2014, the Company had five operating and reportable segments: Sales and Lease Ownership, Progressive, HomeSmart, Franchise and Manufacturing. The results of Progressive, which is presented as a reportable segment, have been included in the Company’s consolidated results from the April 14, 2014 acquisition date. In January 2014, the Company sold the 27 Company-operated RIMCO stores and the rights to five franchised stores. In all periods presented, RIMCO has been reclassified from the RIMCO segment to Other.
All of our Company-operated stores are located in the United States. Our franchise operations are located in the United States and Canada. Additional information on our five reportable segments may be found in (i) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and (ii) Item 8. Financial Statements and Supplementary Data.
Sales & Lease Ownership
Our Aaron's Sales & Lease Ownership operation was established in 1987 and employs a monthly payment model to provide durable household goods to lower to middle income consumers. Its customer base is comprised primarily of consumers with limited access to traditional credit sources such as bank financing, installment credit or credit cards. Customers of our Aaron’s Sales & Lease Ownership division take advantage of our services to acquire consumer goods they might not otherwise be able to without incurring additional debt or long-term obligations.
We have developed a distinctive concept for our sales and lease ownership stores including specific merchandising, store layout, pricing and agreement terms all designed to appeal to our target consumer market. We believe these features create a store and a sales and lease ownership concept that is distinct from the operations of both the rent-to-own industry generally and of consumer electronics and home furnishings retailers who finance merchandise.
The typical Aaron’s Sales & Lease Ownership store layout is a combination showroom and warehouse comprising 6,000 to 8,000 square feet, with an average of approximately 7,200 square feet. In addition, we are testing a smaller concept in urban markets comprising 4,500 to 5,000 square feet. We select locations for new Aaron’s Sales & Lease Ownership stores by focusing on neighborhood shopping centers with good access that are located in established working class communities. In addition to inline space, we also lease and own several free standing buildings in certain markets. We typically locate the stores in centers with retailers who have similar customer demographics.
Each Aaron’s Sales & Lease Ownership store usually maintains at least two trucks and crews for pickups and deliveries. We generally offer same or next day delivery for addresses located within approximately ten miles of the store. Our stores provide a broad selection of brand name electronics, computers, appliances and furniture, including furniture manufactured by our Woodhaven Furniture Industries division.
We believe that our Aaron’s Sales & Lease Ownership stores offer prices that are lower than the prices for similar items offered by traditional rent-to-own operators, and substantially equivalent to the “all-in” contract price of similar items offered by retailers who finance merchandise. Approximately 96% of our Aaron's Sales & Lease Ownership agreements have monthly terms and the remaining 4% are semi-monthly. By comparison, weekly agreements are the industry standard. In addition, we believe our agreements generally provide for a shorter time to customer ownership of the merchandise.
We may re-lease or sell merchandise that customers return to us prior to the expiration of their agreements. We may also offer up-front purchase options at prices we believe are competitive with traditional retailers. At December 31, 2014, we had 1,243 Company-operated Aaron’s Sales & Lease Ownership stores in 28 states and the District of Columbia.
Progressive
Established in 1999, Progressive is the leader in the expanding virtual lease-to-own market. Progressive partners with retailers, primarily in the furniture, mattress, mobile phone, consumer electronics, appliance and household accessory industries, to offer a lease-purchase option for customers to acquire goods they might not otherwise have been able to obtain. We serve customers who are credit challenged and are therefore unlikely to have access to traditional credit-based financing options. We offer a technology-based application and approval process that does not require Progressive employees to be staffed in a store. Once a customer is approved, Progressive purchases the merchandise from the retailer and enters into a lease-to-own agreement with the customer. The contract provides early-buyout options or ownership after a contractual number of renewals. Progressive is headquartered in South Jordan, Utah, and has an additional call center located in Glendale, Arizona. Progressive has retail partners in 46 states and operates under state-specific regulations in those states.
HomeSmart
Our HomeSmart division began operations in 2010 and was developed to serve customers who prefer the flexibility of weekly payments and renewals. The consumer goods we provide in our HomeSmart division are substantially similar to those available in our Aaron’s Sales & Lease Ownership stores.
The typical HomeSmart store layout is a combination showroom and warehouse of 4,000 to 6,000 square feet, with an average of approximately 5,000 square feet. Store site selection, delivery capabilities and lease merchandise product mix are generally similar to those described above for our Aaron’s Sales & Lease Ownership stores.
We believe that our HomeSmart stores offer prices that are lower than the prices for similar items offered by traditional rent-to-own operators. Approximately 69% of our HomeSmart agreements have weekly terms, 4% are semi-monthly and the remaining 27% are monthly. We may also offer an up-front purchase option at prices we believe are competitive with traditional retailers. At December 31, 2014, we had 83 Company-operated HomeSmart stores in 11 states.
Franchise
We franchise our Aaron’s Sales & Lease Ownership and HomeSmart stores in markets where we have no immediate plans to enter. Our franchise program adds value to our Company by allowing us to (i) recognize additional revenues from franchise fees and royalties, (ii) strategically grow without incurring direct capital or other expenses, (iii) lower our average costs of purchasing, manufacturing and advertising through economies of scale and (iv) increase consumer recognition of our brands.
Franchisees are approved on the basis of the applicant’s business background and financial resources. We enter into agreements with our franchisees to govern the opening and operations of franchised stores. Under our standard agreement, we receive a franchise fee from $15,000 to $50,000 per store depending upon market size. Our standard agreement is for a term of ten years, with one ten-year renewal option. Franchisees are also obligated to remit to us royalty payments of 5% or 6% of the weekly cash collections from their franchised stores. Most franchisees are involved in the day-to-day operations of their stores.
Because of the importance of location to our store strategy, we assist each franchisee in selecting the proper site for each store. We typically will visit the intended market and provide guidance to the franchisee through the site selection process. Once the franchisee selects a site, we provide support in designing the floor plan, including the proper layout of the showroom and warehouse. In addition, we assist the franchisee in the design and decor of the showroom to ensure consistency with our requirements. We also lease the exterior signage to the franchisee and provide support with respect to pre-opening advertising, initial inventory and delivery vehicles.
Qualifying franchisees may take part in a financing arrangement we have established with several financial institutions to assist the franchisee in establishing and operating their store(s). Although an inventory financing plan is the primary component of the financing program, we have also arranged, in certain circumstances, for the franchisee to receive a revolving credit line, allowing them to expand operations. We provide guarantees for amounts outstanding under this franchise financing program.
All franchisees are required to complete a comprehensive training program and to operate their franchised sales and lease ownership stores in compliance with our policies, standards and specifications. Additionally, each franchise is required to represent and warrant its compliance with all applicable federal, state and/or local laws, regulations and ordinances with respect to its business operations. Although franchisees are not generally required to purchase their lease merchandise from our fulfillment centers, most do so in order to take advantage of Company-sponsored financing, bulk purchasing discounts and favorable delivery terms.
Our internal audit department conducts annual financial reviews of each franchisee, as well as annual operational audits of each franchised store. In addition, our proprietary management information system links each Company and franchised store to our corporate headquarters.
Manufacturing
Woodhaven Furniture Industries, our manufacturing division, was established in 1982, and we believe it makes us the only major furniture lease company in the United States that manufactures its own furniture. Integrated manufacturing enables us to control critical features such as quality, cost, delivery, styling, durability and quantity of our furniture products, and we believe this provides an integration advantage over our competitors. Substantially all produced items are leased or sold through Company-operated or franchised stores.
Our Woodhaven Furniture Industries division produces upholstered living-room furniture (including contemporary sofas, chairs and modular sofa and ottoman collections in a variety of natural and synthetic fabrics) and bedding (including standard sizes of mattresses and box springs). The furniture designed and produced by this division incorporates features that we believe result in reduced production costs, enhanced durability and improved shipping processes all relative to furniture we would otherwise purchase from third parties. These features include (i) standardized components, (ii) reduced number of parts and features susceptible to wear or damage, (iii) more resilient foam, (iv) durable and soil-resistant fabrics and sturdy frames which translate to longer life and higher residual value and (v) devices that allow sofas to stand on end for easier and more efficient transport. The division also provides replacement covers for all styles and fabrics of its upholstered furniture, as well as other parts, for use in reconditioning leased furniture that has been returned.
The division consists of five furniture manufacturing plants and nine bedding manufacturing facilities aggregating approximately 818,000 square feet of manufacturing capacity.
Aaron's Office Furniture
Prior to 2010, we operated Aaron’s Office Furniture stores which rented and sold new and rental return merchandise to individuals and businesses. Its focus was leasing office furniture to business customers. In June 2010, we made the strategic decision to wind down the operations of the remaining Aaron’s Office Furniture stores, and the last remaining store was sold in August 2012. We did not incur significant charges in 2014, 2013 or 2012 related to winding down this division.
Operations
Operating Strategy
Our operating strategy is based on distinguishing our brand from those of our competitors along with maximizing our operational efficiencies. We implement this strategy for our store-based operations by (i) emphasizing the uniqueness of our sales and lease ownership concept from those in our industry generally, (ii) offering high levels of customer service, (iii) promoting our vendors and Aaron’s brand names, (iv) managing merchandise through our manufacturing and distribution capabilities and (v) utilizing proprietary management information systems.
We believe that the success of our store-based operations is attributable to our distinctive approach to the business that distinguishes us from both our rent-to-own and credit retail competitors. We have pioneered innovative approaches to meeting changing customer needs that we believe differ from our competitors. These include (i) offering lease ownership agreements that result in a lower “all-in” price, (ii) maintaining larger and more attractive store showrooms, (iii) offering a wider selection of higher-quality merchandise and (iv) providing an up-front cash and carry purchase option on select merchandise at prices competitive with traditional retailers. Many of our sales and lease ownership customers make their payments in person and we use these frequent visits to strengthen the customer relationship.
Furthermore, our Progressive operating strategy is based on providing excellent service to both our retail partners and customers along with the continued development of technology-based solutions. This allows us to increase our retail partner’s sales, drive demand for our service, and scale in an efficient manner. We believe our ability to service a retailer with limited labor costs allows us to maintain a cost of ownership lower than that of other options available to our customers.
Store-Based Operations
Our Aaron’s Sales & Lease Ownership division has 12 divisional vice presidents who are responsible for the overall performance of their respective divisions. HomeSmart has one senior vice president and two directors responsible for that division’s performance. Each division is subdivided into geographic groupings of stores overseen by a total of 156 Aaron’s Sales & Lease Ownership regional managers and 14 HomeSmart regional managers.
At the individual store level, the store manager is primarily responsible for managing and supervising all aspects of store operations, including (i) customer relations and account management, (ii) deliveries and pickups, (iii) warehouse and inventory management, (iv) merchandise selection, (v) employment decisions, including hiring, training and terminating store employees and (vi) certain marketing initiatives. Store managers also administer the processing of lease return merchandise including making determinations with respect to inspection, repairs, sales, reconditioning and subsequent leasing.
Our business philosophy emphasizes safeguarding of Company assets, strict cost containment and fiscal controls. All personnel are expected to monitor expenses to contain costs. We pay all material invoices from Company headquarters in order to enhance fiscal accountability. We believe that careful monitoring of lease merchandise as well as operational expenses enables us to maintain financial stability and profitability.
We use computer-based management information systems to facilitate collections, merchandise returns and inventory monitoring. Through the use of proprietary software, each of our stores is network linked directly to corporate headquarters enabling us to monitor single store performance on a daily basis. This network system assists the store manager in (i) tracking merchandise on the showroom floor and warehouse, (ii) minimizing delivery times, (iii) assisting with product purchasing and (iv) matching customer needs with available inventory.
Lease Agreement Approval, Renewal and Collection
One of the factors in the success of our store-based operations is timely cash collections, which are monitored by store managers. Customers are contacted within a few days of their lease payment due dates to encourage them to keep their agreement current rather than returning the merchandise. Careful attention to cash collections is particularly important in sales and lease ownership operations, where the customer typically has the option to cancel the agreement at any time and each payment is considered a renewal of the agreement rather than a collection of a receivable.
We generally perform no formal credit check with third party service providers with respect to store-based sales and lease ownership customers. We do, however, verify employment or other reliable sources of income and personal references supplied by the customer. All of our agreements for merchandise require payments in advance and the merchandise normally is recovered if a payment is significantly in arrears. We do not extend credit to our customers.
Our Progressive business uses a proprietary underwriting algorithm to determine a customer’s ability to pay, which does not include traditional credit scoring. The transaction is completed through our online portal or through a point of sale integration with our retail partners. Contractual renewal payments are based on a customer’s pay frequency and are typically originated through automated clearing house payments. If the payment is unsuccessful, collections are managed in-house through our proprietary lease management system. Customers are contacted within a few days of the lease payment due date to encourage them to keep their agreement current rather than return the merchandise. If the customer chooses to return the merchandise, arrangements are made to receive the merchandise from the customer, either through our retail partners, our South Jordan location, or one of our customer service hubs.
Net Company-wide merchandise shrinkage as a percentage of combined lease revenues was 4.4%, 3.3% and 3.3% in 2014, 2013 and 2012, respectively. We believe that our collection and recovery policies materially comply with applicable law and we discipline any employee we determine to have deviated from such policies.
Customer Service
A critical component of our success in our operations is our commitment to developing good relationships with our customers. Building a relationship with the customer that ensures customer satisfaction is critical because our customers typically have the option of returning the leased merchandise at any time or after a very short initial term. Our goal, therefore, is to develop positive associations about Aaron’s and our products, service, and support in the minds of our customers from the moment they enter our showrooms. We demonstrate our commitment to superior customer service by providing customers with access to product through multiple channels, including Aarons.com, Progressive's network of over 15,000 retail locations and rapid delivery of leased merchandise, in many cases by same or next day delivery. Our Progressive business offers centralized customer and merchant support through contact centers located in South Jordan, Utah and Glendale, Arizona.
Through Aaron’s Service Plus, customers receive multiple service benefits. These benefits vary according to applicable state law but generally include the 120 days same-as-cash option (90-day cash price option at Progressive), merchandise repair service, lifetime reinstatement and other discounts and benefits. In order to increase leasing at existing stores, we foster relationships with existing customers to attract recurring business, and many new agreements are attributable to repeat customers. Similarly, we believe our strong focus on customer satisfaction at Progressive generates a strong rate of repeat business and long-lasting relationships with our retail partners.
Our emphasis on customer service requires that we develop skilled, effective employees who value our customers and project a genuine desire to serve their needs. To meet this requirement, we have developed the field development program, one of the most comprehensive employee training programs in the industry. Our field development program, called Aaron’s University, is designed to provide a uniform customer service experience without reference to store location or nature of store ownership. The primary focus of the field development program is equipping new associates with the knowledge and skills needed to build strong relationships with our customers. Our learning and development coaches provide live interactive instruction via webinars and by facilitating hands-on training in designated training stores. The program is also complimented with a robust e-learning library. Additionally, Aaron’s has a management development program that offers development for store managers and future store managers. Also, we periodically produce video-based communications on a variety of topics pertinent to store associates regarding current Company initiatives.
Purchasing and Retail Merchant Relationships
For our store-based operations, our product mix is determined by store managers in consultation with regional managers and divisional vice presidents, based on an analysis of customer demands. The following table shows the percentage of the Company’s store-based revenues for the years ended December 31, 2014, 2013 and 2012 attributable to different merchandise categories:
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Merchandise Category | 2014 |
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Furniture | 39 | % | | 36 | % | | 35 | % |
Electronics | 26 | % | | 29 | % | | 32 | % |
Appliances | 24 | % | | 22 | % | | 20 | % |
Computers | 9 | % | | 9 | % | | 10 | % |
Other | 2 | % | | 4 | % | | 3 | % |
We purchase the majority of our merchandise directly from manufacturers, with the balance from local distributors. One of our largest suppliers is our own Woodhaven Furniture Industries division, which supplies the majority of the upholstered furniture and bedding we lease or sell. Integrated manufacturing enables us to control the quality, cost, delivery, styling, durability and quantity of a substantial portion of our furniture and bedding merchandise as well as providing us with a reliable source of products. We have no long-term agreements for the purchase of merchandise.
The following table shows the percentage of Progressive’s revenues for the year ended December 31, 2014 attributable to different retail partner categories:
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Retail Partner Category | 2014 |
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Furniture | 44 | % |
Mattress | 24 | % |
Auto | 13 | % |
Mobile | 12 | % |
Jewelry | 4 | % |
Other | 3 | % |
During 2014, approximately 27% of the lease merchandise acquired by Progressive and subsequently leased to customers was concentrated in two retail partners.
Distribution for Store-based Operations
Sales and lease ownership operations utilize our 17 fulfillment centers to control merchandise. These centers average approximately 118,000 square feet, giving us approximately 2.0 million square feet of logistical capacity.
We believe that our network of fulfillment centers provides us with a strategic advantage over our competitors. Our distribution system allows us to deliver merchandise promptly to our stores in order to quickly meet customer demand and effectively manage inventory levels. Most of our continental U.S. stores are within a 250-mile radius of a fulfillment center, facilitating timely shipment of products to the stores and fast delivery of orders to customers.
We realize freight savings from bulk discounts and more efficient distribution of merchandise by using fulfillment centers. We use our own tractor-trailers, local delivery trucks and various contract carriers to make weekly deliveries to individual stores.
Marketing and Advertising
Our marketing for store-based operations targets both current Aaron’s customers and potential customers. We feature brand name products available through our no-credit-needed lease ownership plans. We reach our customer demographics by utilizing national broadcast, cable television and radio networks with a combination of brand/image messaging and product/price promotions. Examples of networks are as follows: FOX, TBS, TELEMUNDO, UNIVISION and multiple general market and Hispanic cable networks that target our customer. In addition, we have enhanced our broadcast presence with digital marketing and via social environments such as Facebook and Twitter.
We target new and current customers each month distributing over 29 million, four-page circulars to homes in the United States and Canada. The circulars advertise brand name merchandise along with the features, options, and benefits of Aaron’s no-credit-needed lease ownership plans. We implement grand opening marketing initiatives, designed to ensure each new store quickly establishes a strong customer base. We also distribute millions of email and direct mail promotions on an annual basis.
Aaron’s sponsors a motorsports team and event broadcasts at various levels along with select professional and collegiate sports, such as NFL and NBA teams, and SEC and ACC college athletic programs. We also began our 16th year as a sponsor of Michael Waltrip Racing in the NASCAR Sprint Cup Series. From a meager, six-race, part-time sponsorship of Michael Waltrip in the Xfinity Series in 2000, Aaron’s sponsorship and activity in the sport has grown every year. In 2014, we announced a full-time sponsorship of the Michael Waltrip Racing No. 55 with driver Brian Vickers in the NASCAR Sprint Cup Series in the 2014 and 2015 race seasons.
All of our sports partnerships are supported with advertising, promotional, marketing and brand activation initiatives that we believe significantly enhance the Company’s brand awareness and customer loyalty.
Our Progressive business executes its marketing strategy in partnership with retailers. This is typically accomplished through in-store signage and marketing material along with the education of retail sales associates.
Competition
The rent-to-own industry is highly competitive. Our largest competitor for store-based operations is Rent-A-Center, Inc. Aaron’s and Rent-A-Center, which are the two largest rent-to-own industry participants, account for approximately 5,300 of the 10,100 rent-to-own stores in the United States, Canada and Mexico. Our stores compete with other national and regional rent-to-own businesses, as well as with rental stores that do not offer their customers a purchase option. We also compete with retail stores for customers desiring to purchase merchandise for cash or on credit. Competition is based primarily on store location, product selection and availability, customer service and lease rates and terms.
Although an emerging market, the virtual rent-to-own industry is also competitive. Progressive's largest competitor is Acceptance Now, a division of Rent-A-Center. Other competition is fragmented and includes regional participants.
Working Capital
We are required to maintain significant levels of lease merchandise in order to provide the service demanded by our customers and to ensure timely delivery of our products. Consistent and dependable sources of liquidity are required to maintain such merchandise levels. Failure to maintain appropriate levels of merchandise could materially adversely affect our customer relationships and our business. We believe our operating cash flows, credit availability under our financing agreements and other sources of financing are adequate to meet our normal liquidity requirements.
Raw Materials
The principal raw materials we use in furniture manufacturing are fabric, foam, fiber, wire-innerspring assemblies, plywood, oriented strand board, and hardwood. All of these materials are purchased in the open market from unaffiliated sources. We are not dependent on any single supplier. None of the raw materials we use are in short supply.
Seasonality
Our revenue mix is moderately seasonal for both our store-based operations and our Progressive business. The first quarter of each year generally has higher revenues than any other quarter. This is primarily due to realizing the full benefit of business that historically gradually increases in the fourth quarter as a result of the holiday season, as well as the receipt by our customers in the first quarter of federal and state income tax refunds. Our customers will more frequently exercise the early purchase option on their existing lease agreements or purchase merchandise off the showroom floor during the first quarter of the year. We tend to experience slower growth in the number of agreements on lease in the third quarter for store-based operations and in the second quarter for our Progressive business when compared to the other quarters of the year. We expect these trends to continue in future periods.
Industry Overview
The Rent-to-Own Industry
The rent-to-own industry offers customers an alternative to traditional methods of obtaining electronics, computers, home furnishings and appliances. In a standard industry rent-to-own transaction, the customer has the option to acquire ownership of merchandise over a fixed term, usually 12 to 24 months, normally by making weekly lease payments. Subject to any applicable minimum lease terms, the customer may cancel the agreement at any time by returning the merchandise to the store. If the customer leases the item through the completion of the full term, he or she then obtains ownership of the item. The customer may also purchase the item at any time by tendering the contractually specified payment.
The rent-to-own model is particularly attractive to consumers who are unable to pay the full upfront purchase price for merchandise or who lack the credit to qualify for conventional financing programs. Other individuals who find the rent-to-own model attractive are consumers who, despite access to credit, do not wish to incur additional debt, have only a temporary need for the merchandise or desire to field test a particular brand or model before purchasing it.
Aaron’s Sales and Lease Ownership versus Traditional Rent-to-Own
We blend elements of rent-to-own and traditional retailing by providing customers with the option to either lease merchandise with the opportunity to obtain ownership or to purchase merchandise outright. We believe our sales and lease ownership program is a more effective method of retailing our merchandise to lower to middle income consumers than a typical rent-to-own business or the traditional method of credit installment sales.
Our model is distinctive from the conventional rent-to-own model in that we encourage our customers to obtain ownership of their leased merchandise. Based upon industry data, our customers obtain ownership more often (approximately 45%) than in the rent-to-own businesses in general (approximately 25%).
We believe our sales and lease ownership model offers the following distinguishing characteristics versus traditional rent-to-own stores:
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• | Lower total cost - our agreement terms generally provide a lower cost of ownership to the customer. |
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• | Wider merchandise selection - we generally offer a larger selection of higher-quality merchandise. |
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• | Larger store layout - our stores average 7,200 square feet, which is significantly larger than the average size of our largest competitor’s rent-to-own stores. |
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• | Fewer payments - our typical plan offers semi-monthly or monthly payments versus the industry standard of weekly payments. Our agreements also usually provide for a shorter term for the customer to obtain ownership. |
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• | Flexible payment methods - we offer our customers the opportunity to pay by cash, check, ACH, debit card or credit card. In conventional rent-to-own stores, cash is generally the primary payment medium. Our Aaron’s Sales and Lease Ownership stores currently receive approximately 60% of their payment volume (in dollars) from customers by check, debit card or credit card. For our HomeSmart stores, that percentage is approximately 54%. |
We believe our sales and lease ownership model also compares well against traditional retailers in areas such as store size, merchandise selection and the latest product offerings. As technology advances and home furnishings and appliances evolve, we intend to continue to offer our customers the latest product developments at affordable prices.
Unlike transactions with traditional retailers, where the customer is committed to purchasing the merchandise, our sales and lease ownership transactions are not credit installment contracts. Therefore, the customer may elect to terminate the transaction after a short, initial lease period. Our sales and lease ownership stores offer an up-front “cash and carry” purchase option and a 120 day same-as-cash option on most merchandise at prices that are competitive with traditional retailers. In addition, our Progressive business provides a 90 day cash price option on lease-purchase solutions offered through traditional retailers.
Government Regulation
Our operations are extensively regulated by and subject to the requirements of various federal, state and local laws and regulations. In general such laws regulate applications for leases, late fees, other finance rates, the form of disclosure statements, the substance and sequence of required disclosures, the content of advertising materials and certain collection procedures. Violations of certain provisions of these laws may result in material penalties. We are unable to predict the nature or effect on our operations or earnings of unknown future legislation, regulations and judicial decisions or future interpretations of existing and future legislation or regulations relating to our operations, and there can be no assurance that future laws, decisions or interpretations will not have a material adverse effect on our operations or earnings.
A summary of certain of the state and federal laws under which we operate follows. This summary does not purport to be a complete summary of the laws referred to below or of all the laws regulating our operations.
Currently, 47 states and the District of Columbia specifically regulate rent-to-own transactions, including states in which we currently operate Aaron’s Sales & Lease Ownership and HomeSmart stores, as well as states in which merchant partners of our Progressive business maintain operations. Most state lease purchase laws require rent-to-own companies to disclose to their customers the total number of payments, total amount and timing of all payments to acquire ownership of any item, any other charges that may be imposed, and miscellaneous other items. The more restrictive state lease purchase laws limit the total amount that a customer may be charged for an item, or regulate the “cost-of-rental” amount that rent-to-own companies may charge on rent-to-own transactions, generally defining “cost-of-rental” as lease fees paid in excess of the “retail” price of the goods. Our long-established policy in all states is to disclose the terms of our lease purchase transactions as a matter of good business ethics and customer service. We believe we are in material compliance with the various state lease purchase laws in those states where we use a lease purchase form of agreement. At the present time, no federal law specifically regulates the rent-to-own industry. Federal legislation to regulate the industry has been proposed from time to time.
There has been increased legislative attention in the United States, at both the federal and state levels, on consumer debt transactions in general, which may result in an increase in legislative regulatory efforts directed at the rent-to-own industry. We cannot predict whether any such legislation will be enacted and what the impact of such legislation would be on us. Although we are unable to predict the results of any regulatory initiatives, we do not believe that existing and currently proposed regulations will have a material adverse impact on our sales and lease ownership or other operations.
In a limited number of states, we utilize a consumer lease form as an alternative to a typical lease purchase agreement. The consumer lease differs from our state lease agreement in that it has an initial lease term in excess of four months. Generally, state laws that govern the rent-to-own industry only apply to lease agreements with an initial term of four months or less. The consumer lease is governed by federal and state laws and regulations other than the state lease purchase laws. The federal regulations applicable to the consumer lease require certain disclosures similar to the rent-to-own regulations, but are generally less restrictive as to pricing and other charges. We believe we are in material compliance with all laws applicable to our consumer lease program. Whether utilizing a state-specific rental purchase agreement or federal consumer lease form of agreement, it is our policy to provide full disclosure to our customers of all fees they will be charged in their transactions.
Our sales and lease ownership franchise program is subject to Federal Trade Commission, or FTC, regulation and various state laws regulating the offer and sale of franchises. Several state laws also regulate substantive aspects of the franchisor-franchisee relationship. The FTC requires us to furnish to prospective franchisees a franchise disclosure document containing prescribed information. A number of states in which we might consider franchising also regulate the sale of franchises and require registration of the franchise disclosure document with state authorities. We believe we are in material compliance with all applicable franchise laws in those states in which we do business and with similar laws in Canada.
Supply Chain Diligence and Transparency
Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was adopted to further the humanitarian goal of ending the violent conflict and human rights abuses in the Democratic Republic of the Congo and adjoining countries (“DRC”). This conflict has been partially financed by the exploitation and trade of tantalum, tin, tungsten and gold, often referred to as conflict minerals, which originate from mines or smelters in the region. Securities and Exchange Commission (“SEC”) rules adopted pursuant to the Dodd-Frank Act require reporting companies to disclose annually, among other things, whether any such minerals that are necessary to the functionality or production of products they manufactured during the prior calendar year originated in the DRC and, if so, whether the related revenues were used to support the conflict and/or abuses.
Some of the products manufactured by Woodhaven Furniture Industries, our manufacturing division, may contain tantalum, tin, tungsten and/or gold. Consequently, in compliance with SEC rules, we have adopted a policy on conflict minerals, which can be found on our website. We have also implemented a supply chain due diligence and risk mitigation process with reference to the Organisation for Economic Co-operation and Development, or the OECD, guidance approved by the SEC to assess and report annually whether our products are conflict free.
We expect our suppliers to comply with the OECD guidance and industry standards and to ensure that their supply chains conform to our policy and the OECD guidance. We plan to mitigate identified risks by working with our suppliers and may alter our sources of supply or modify our product design if circumstances require.
Employees
At December 31, 2014, the Company had approximately 12,400 employees. None of our employees are covered by a collective bargaining agreement and we believe that our relations with employees are good.
Available Information
We make available free of charge on our Internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports and the Proxy Statement for our Annual Meeting of Shareholders. Our Internet address is investor.aarons.com.
ITEM 1A. RISK FACTORS
Aaron’s business is subject to certain risks and uncertainties. Any of the following risk factors could cause our actual results to differ materially from historical or anticipated results. These risks and uncertainties are not the only ones we face, but represent the risks that we believe are material. However, there may be additional risks that we currently consider not to be material or of which we are not currently aware, and any of these risks could cause our actual results to differ materially from historical or anticipated results.
We are implementing a new strategic plan and there is no guarantee that the new strategic plan will produce results superior to those achieved under the Company’s prior plan.
We have a new strategic plan that, in addition to acquiring Progressive Finance Holdings, LLC (“Progressive”), includes focusing on improving same store revenues in our core stores, rationalizing underperforming stores and developing our online platform.
While the Company has always engaged in elements of the new strategy, the new strategy calls for increased emphasis on certain elements while moderating the focus on new store openings that had traditionally been a central tenet of the Company’s strategy. There can be no guarantee that the new strategy will yield the results we currently anticipate (or results that will exceed those that might be obtained under the prior strategy), if we fail to successfully execute on one or more prongs of the new strategy, even if we successfully implement one or more other prongs.
We may not fully execute on one or more elements of the new strategy due to any number of reasons, including, for instance, because of the division of management, financial and Company resources among multiple objectives, or other factors beyond or not completely within our control. The successful execution of our new strategy depends on, among other things, our ability to:
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• | improve same store revenues in stores that may be maturing; |
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• | rationalize our store base, including containing the costs of eliminating underperforming stores; |
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• | identify which markets are best suited for more disciplined store growth; and |
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• | introduce ecommerce to our customer base. |
If we cannot address these challenges successfully, or overcome other critical obstacles that may emerge as we gain experience with our new strategy, we may not be able to expand our business or increase our revenues or profitability at the rates we currently contemplate, if at all.
If we cannot integrate our recent acquisition of Progressive successfully, or if we are unable to expand and profitably operate the Progressive business, our business and prospects as a whole could be materially adversely affected.
On April 14, 2014, we completed the acquisition of Progressive, a virtual lease-to-own company, for $700 million. The continuing development of the Progressive business is key to our new strategy. We incurred approximately $491 million in indebtedness to partially finance the acquisition.
The success of the Progressive acquisition will depend significantly on how quickly and efficiently the acquired business is integrated with us. Integration of a substantial business is a challenging, time-consuming and costly process. The continued successful integration of Progressive will continue to require the dedication of significant management resources that may temporarily detract attention from the day-to-day businesses of both Aaron’s and Progressive.
Any disruption in Progressive’s business or changes in its business processes or methods could impede our ability to expand and profitably operate the Progressive business.
Our same store revenues have fluctuated significantly and have declined in recent periods.
Our historical same store revenue growth figures have fluctuated significantly from year to year. For example, we experienced same store revenue declines of 2.8% in 2014 and growth of .9% in 2013. We calculate same store revenue growth by comparing revenues for comparable periods for all stores open during the entirety of those periods. Even though we have achieved significant same store revenue growth in the past and consider it a key indicator of historical performance, our more recent same store revenue growth has not been as robust, and we may not be able to restore same store revenues to historical higher levels in the future. A number of factors have historically affected our same store revenues, including:
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• | general economic conditions; |
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• | new product introductions; |
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• | changes in our merchandise mix; |
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• | the opening of new stores; |
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• | the impact of our new stores on our existing stores, including potential decreases in existing stores’ revenues as a result of opening new stores; |
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• | timing of promotional events; and |
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• | our ability to execute our business strategy effectively. |
Changes in our quarterly and annual same store revenues could cause the price of our common stock to fluctuate significantly.
Continuation or worsening of current economic conditions could result in decreased revenues or increased costs.
The U.S. economy is currently experiencing prolonged uncertainty accompanied by high unemployment. We believe that the extended duration of current economic conditions, particularly as they apply to our customer base, may be resulting in our customers curtailing entering into sales and lease ownership agreements for the types of merchandise we offer, resulting in decreased revenues. In addition, unemployment may result in increased defaults on lease payments, resulting in increased merchandise return costs and merchandise losses.
If we cannot manage the costs of opening new stores, our profitability may suffer.
Opening large numbers of new stores requires significant start-up expenses, and new stores are generally not profitable until their second year of operation. Consequently, opening many stores over a short period can materially decrease our net earnings for a time. During 2014, we estimate that start-up expenses for new stores reduced our net earnings by approximately $7.8 million, or $.11 per diluted share, for our Aaron's Sales & Lease Ownership stores and approximately $648,000 for our HomeSmart stores, which had a $.01 impact on earnings per diluted share. We cannot be certain that we will be able to fully recover these significant costs in the future.
We may not be able to attract qualified franchisees, which may slow the growth of our business.
Our growth strategy depends significantly upon our franchisees developing new franchised sales and lease ownership stores, maximizing penetration of their designated markets and operating their stores successfully. We generally seek franchisees who meet our stringent business background and financial criteria and who are willing to enter into area development agreements for multiple stores. A number of factors could inhibit our ability to find qualified franchisees, including general economic downturns or legislative or litigation developments that make the rent-to-own industry less attractive to potential franchisees. These developments could also adversely affect the ability of our franchisees to obtain capital needed to develop and operate new stores.
If we are unable to compete effectively with the growing e-commerce sector, our business and results of operations may be materially adversely affected.
With the continued expansion of internet use, as well as mobile computing devices and smart phones, competition from the e-commerce sector continues to grow. Certain of our competitors, and a number of e-commerce retailers, have established e-commerce operations against which we compete for customers. It is possible that the increasing competition from the e-commerce sector may reduce our market share, gross margin and operating margin, and may materially adversely affect our business and results of operations in other ways.
Operational and other failures by our franchisees may adversely impact us.
Qualified franchisees who conform to our standards and requirements are important to the overall success of our business. Our franchisees, however, are independent businesses and not employees, and consequently we cannot and do not control them to the same extent as our Company-operated stores. Our franchisees may fail in key areas, which could slow our growth, reduce our franchise revenues or damage our reputation.
If we do not maintain the privacy and security of customer, employee, supplier or Company information, we could damage our reputation, incur substantial additional costs and become subject to litigation.
Our business involves the storage and transmission of customers’ personal information, consumer preferences and credit card information, as well as confidential information about our customers, employees, our suppliers and our Company. We also serve as an information technology provider to our franchisees including storing and processing information related to their customers on our systems. Our information systems are vulnerable to an increasing threat of continually evolving cybersecurity risks. Any significant compromise or breach of our data security, whether external or internal, or misuse of employee or customer data, could significantly damage our reputation, cause the disclosure of confidential customer, associate, supplier or Company information, and result in significant costs, lost sales, fines and lawsuits. Computer hackers may attempt to penetrate our network security and, if successful, misappropriate confidential customer or employee information. In addition, one of our employees, contractors or other third parties with whom we do business may attempt to circumvent our security measures in order to obtain such information, or inadvertently cause a breach involving such information. While we have implemented systems and processes to protect against unauthorized access to or use of secured data and to prevent data loss, there is no guarantee that these procedures are adequate to safeguard against all data security breaches or misuse of the data. The regulatory environment related to information security, data collection and use, and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs. These costs associated with information security, such as increased investment in technology, the costs of compliance with privacy laws, and costs incurred to prevent or remediate information security breaches, could adversely impact our business.
We have experienced security incidents in the past, including an incident in which customer information was compromised, although no security incidents have resulted in a material loss to date. We are in the process of improving our system security, although there can be no assurance that these improvements, or others that we implement from time to time, will be effective to prevent all security incidents. We maintain network security and private liability insurance intended to help mitigate the financial risk of such incidents, but there can be no guarantee that insurance will be sufficient to cover all losses related to such incidents.
A significant compromise of sensitive employee or customer information in our possession could result in legal damages and regulatory penalties. In addition, the costs of defending such actions or remediating breaches could be material. Security breaches could also harm our reputation with our customers, potentially leading to decreased revenues.
If our information technology systems are impaired, our business could be interrupted, our reputation could be harmed and we may experience lost revenues and increased costs and expenses.
We rely on our information technology systems to process transactions with our customers, including tracking lease payments on merchandise, and to manage other important functions of our business. Failures of our systems, such as “bugs,” crashes, operator error or catastrophic events, could seriously impair our ability to operate our business. If our information technology systems are impaired, our business (and that of our franchisees) could be interrupted, our reputation could be harmed, we may experience lost revenues or sales and we could experience increased costs and expenses to remediate the problem.
The risks in Progressive’s “virtual” lease-to-own business differ in some potentially significant respects from the risks of Aaron’s store-based lease-to-own business. The risks could have a material negative effect on Progressive or the expected benefits of the acquisition.
Our recently acquired Progressive segment offers its lease-to-own solution through the stores of third party retailers. Progressive consequently faces some different risks than are associated with Aaron’s sales and lease ownership concept, which Aaron’s and its franchisees offer through their own stores. These potential risks include, among others, Progressive’s:
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• | Reliance on third party retailers (over whom Progressive cannot exercise the degree of control and oversight that Aaron’s and its franchisees can assert over their own respective employees) for many important business functions, from advertising through lease transaction closing; |
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• | Revenue concentration in the customers of a relatively small number of retailers; |
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• | Lack of control over, and more product diversity within, its lease merchandise inventory relative to Aaron’s sale and lease ownership business, which can complicate matters such as merchandise repair and disposition of merchandise that is not leased to term; |
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• | Possibly different regulatory risks than apply to Aaron’s sales and lease ownership business, whether arising from the offer by third party retailers of Progressive’s lease-purchase solution alongside traditional cash, check or credit payment options or otherwise; |
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• | Reliance on automatic bank account drafts for lease payments, which may become disfavored as a payment method for these transactions by regulators; and |
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• | Potential that regulators may target the virtual lease-to-own transaction and/or new regulations or legislation could be adopted that negatively impact Progressive’s ability to offer virtual lease-to-own programs through third party retail partners. |
These risks could have a material negative effect on Progressive’s business. Moreover, because these risks depart from those normally encountered by Aaron’s sales and lease ownership business, Aaron’s management may not be familiar with all of their dimensions, which could interfere with the smooth integration of Progressive and/or hamper the recognition of synergies. Any of these consequences could result in a material adverse effect on the entire business.
We have incurred significant indebtedness. This substantial indebtedness, including the restrictive and financial covenants contained in the related agreements, could adversely affect the Company’s financial position and its ability to obtain financing in the future, and could limit its flexibility to react to changes in its business.
We have incurred approximately $491 million in new indebtedness under privately placed senior notes, term loans and our revolving credit facility to finance a portion of the purchase price of Progressive and related fees and expenses. Prior to the Progressive acquisition, the Company had relatively little debt and significant cash balances.
Because of this significant indebtedness:
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• | our ability to obtain additional financing for working capital, capital expenditures, other acquisitions, debt service requirements or general corporate purposes, and our ability to satisfy our obligations with respect to its indebtedness, may be impaired in the future; |
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• | a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes; |
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• | we may be at a disadvantage compared to any competitors with less debt, or comparable debt at more favorable interest rates; and |
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• | our flexibility to adjust to changing market conditions and our ability to withstand competitive pressures could be limited, and we may be more vulnerable to a downturn in general economic conditions or our business, or be unable to carry out capital spending that is necessary or important to our strategy. |
Furthermore, our various debt instruments contain restrictive and financial covenants that limit our activities. The financial covenants include requirements that we maintain specified ratios at the end of each fiscal quarter, calculated on a consolidated basis for the Company and our consolidated subsidiaries, of EBITDA plus lease expense to fixed charges and total debt to EBITDA. Refer to “Management’s Discussion and Analysis of Financial Condition-Liquidity and Capital Resources” for further information on the financial covenants.
We are also subject to various restrictive covenants that, among other things, limit our ability to:
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• | incur additional indebtedness; |
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• | pledge collateral to secure indebtedness; |
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• | make certain investments or extend certain loans; |
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• | declare or make certain dividends or other payments; or |
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• | sell assets, or sell and leaseback assets |
These limitations on our activities could limit our flexibility to react to future business changes.
If we are unable to integrate other acquired businesses successfully and realize anticipated economic, operational and other benefits in a timely manner, our profitability may decrease.
We frequently acquire other sales and lease ownership businesses. Since the beginning of 2010, we acquired the lease agreements, merchandise and assets of 137 Aaron’s Sales & Lease Ownership stores and 51 HomeSmart stores. If we are unable to successfully integrate businesses we acquire, we may incur substantial cost and delays in increasing our customer base. In addition, our efforts to integrate acquisitions successfully may divert management’s attention from our existing business, which may harm our profitability. The integration of an acquired business may be more difficult when we acquire a business in an unfamiliar market or with a different management philosophy or operating style.
Challenges to our corporate governance could have a negative effect on our business.
We may be subject from time to time to legal and business challenges in the operation of the Company via proxy contests, shareholder proposals, and other such corporate proceedings instituted by activist investors or other entities. Our business could be adversely affected by these proceedings because responding to threatened or actual proxy contests and related matters is time-consuming and can divert the attention of management and employees.
In response to threatened shareholder activism, we may incur advisory, legal fees, administrative and associated costs, and in the event a proxy contest or other event actually ensues, we may incur additional such costs, which may be significant or material. Perceived uncertainties as to our future direction may also adversely affect our employees’ morale and cause our stock price to experience periods of volatility or stagnation.
Furthermore, if, via proxy contest or related proceeding, insurgent director nominees are elected to our board who disagree with our current strategy and direction, it may impede our ability to implement our current strategy and to retain and attract the managers we might otherwise seek to employ to execute it.
Our competitors could impede our ability to attract new customers, or cause current customers to cease doing business with us.
The industries in which we operate are highly competitive. In the sales and lease ownership market, our competitors include national, regional and local operators of rent-to-own stores, virtual rent-to-own companies and traditional retailers. Our competitors in the traditional and virtual sales and lease ownership and traditional retail markets may have significantly greater financial and operating resources and greater name recognition in certain markets. Greater financial resources may allow our competitors to grow faster than us, including through acquisitions. This in turn may enable them to enter new markets before we can, which may decrease our opportunities in those markets. Greater name recognition, or better public perception of a competitor’s reputation, may help them divert market share away from us, even in our established markets.
In addition, new competitors may emerge or current and potential competitors may establish financial or strategic relationships among themselves or with third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. The occurrence of any of these events could materially adversely impact our business.
Our Progressive business relies heavily on relationships with retail partners. An increase in competition could cause our retail partners to no longer offer the Progressive product in favor of our competitors which could slow growth in the Progressive business and limit profitability.
If our independent franchisees fail to meet their debt service payments or other obligations under outstanding loans guaranteed by us as part of a franchise loan program, we may be required to pay to satisfy these obligations which could have a material adverse effect on our business and financial condition.
We have guaranteed the borrowings of certain franchisees under a franchise loan program with several banks with a maximum commitment amount of $175.0 million. In the event these franchisees are unable to meet their debt service payments or otherwise experience events of default, we would be unconditionally liable for a portion of the outstanding balance of the franchisees’ debt obligations, which at December 31, 2014 was $89.8 million.
We have had no significant losses associated with the franchise loan and guaranty program since its inception. Although we believe that any losses associated with defaults would be mitigated through recovery of lease merchandise and other assets, we cannot guarantee that there will be no significant losses in the future or that we will be able to adequately mitigate any such losses. If we fail to adequately mitigate any such future losses, our business and financial condition could be materially adversely impacted.
The loss of the services of our key executives, or our inability to attract and retain qualified managers, could have a material adverse impact on our operations.
We believe that we have benefited substantially from our current executive leadership and that the unexpected loss of their services in the future could adversely affect our business and operations. We also depend on the continued services of the rest of our management team. The loss of these individuals without adequate replacement could adversely affect our business. Although we have employment agreements with some of our key executives, they are generally terminable on short notice and we do not carry key man life insurance on any of our officers. The inability to attract and retain qualified individuals, or a significant increase in the costs to do so, would materially adversely affect our operations.
We are subject to legal and regulatory proceedings from time to time which seek material damages or seek to place significant restrictions on our business operations.
We are subject to legal and regulatory proceedings from time to time which may result in material damages or place significant restrictions on our business operations. Although we do not presently believe that any of our current legal or regulatory proceedings will ultimately have a material adverse impact on our operations, we cannot assure you that we will not incur material damages or penalties in a lawsuit or other proceeding in the future. Significant adverse judgments, penalties, settlement amounts, amounts needed to post a bond pending an appeal or defense costs could materially and adversely affect our liquidity and capital resources. It is also possible that, as a result of a future governmental or other proceeding or settlement, significant restrictions will be placed upon, or significant changes made to, our business practices, operations or methods, including pricing or similar terms. Any such restrictions or changes may adversely affect our profitability or increase our compliance costs.
Our operations are regulated by and subject to the requirements of various federal and state laws and regulations. These laws and regulations, which may be amended or supplemented or interpreted by the courts from time to time, could expose us to significant compliance costs or burdens or force us to change our business practices in a manner that may be materially adverse to our operations, prospects or financial condition.
For example, we must comply with annual disclosure and reporting rules adopted by the SEC pursuant to the Dodd-Frank Act because of certain materials used in products manufactured by our manufacturing division, Woodhaven Furniture Industries. Because our supply chain is complex and we do not source our minerals directly from the original mine or smelter, we incur costs in complying with these disclosure requirements, including for due diligence to determine the source of the subject minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities.
Currently, 47 states and the District of Columbia specifically regulate rent-to-own transactions, including states in which we currently operate Aaron’s Sales & Lease Ownership and HomeSmart stores, as well as states in which our Progressive business has retail partners. At the present time, no federal law specifically regulates the rent-to-own industry, although federal legislation to regulate the industry has been proposed from time to time. Any adverse changes in existing laws, or the passage of new adverse legislation by states or the federal government could materially increase both our costs of complying with laws and the risk that we could be sued or be subject to government sanctions if we are not in compliance. In addition, new burdensome legislation might force us to change our business model and might reduce the economic potential of our sales and lease ownership operations.
Most of the states that regulate rent-to-own transactions have enacted disclosure laws which require rent-to-own companies to disclose to their customers the total number of payments, total amount and timing of all payments to acquire ownership of any item, any other charges that may be imposed and miscellaneous other items. The more restrictive state lease purchase laws limit the total amount that a customer may be charged for an item, or regulate the “cost-of-rental” amount that rent-to-own companies may charge on rent-to-own transactions, generally defining “cost-of-rental” as lease fees paid in excess of the “retail” price of the goods.
There has been increased legislative attention in the United States, at both the federal and state levels, on consumer debt transactions in general, which may result in an increase in legislative regulatory efforts directed at the rent-to-own industry. We cannot guarantee that the federal government or states will not enact additional or different legislation that would be disadvantageous or otherwise materially adverse to us, nor can we guarantee that Canadian law will not be enacted that would be materially adverse to our franchisees there.
In addition to the risk of lawsuits related to the laws that regulate rent-to-own and consumer lease transactions, we or our franchisees could be subject to lawsuits alleging violations of federal and state or Canadian provincial laws and regulations and consumer tort law, including fraud, consumer protection, information security and privacy laws, because of the consumer-oriented nature of the rent-to-own industry. A large judgment against the Company could adversely affect our financial condition and results of operations. Moreover, an adverse outcome from a lawsuit, even one against one of our competitors, could result in changes in the way we and others in the industry do business, possibly leading to significant costs or decreased revenues or profitability.
We rely on our retail partners to ensure compliance with applicable regulations in our Progressive business. Lack of adherence to our policies and procedures by these retail partners could cause us not to be compliant with applicable regulatory requirements.
We are subject to laws that regulate franchisor-franchisee relationships. Our ability to develop new franchised stores and enforce our rights against franchisees may be adversely affected by these laws, which could impair our growth strategy and cause our franchise revenues to decline.
As a franchisor, we are subject to regulation by the Federal Trade Commission, state laws and certain Canadian provincial laws regulating the offer and sale of franchises. Because we plan to expand our business in part by awarding more franchises, our failure to obtain or maintain approvals to sell franchises could significantly impair our growth strategy. In addition, our failure to comply with applicable franchise regulations could cause us to lose franchise fees and ongoing royalty revenues. Moreover, state and provincial laws that regulate substantive aspects of our relationships with franchisees may limit our ability to terminate or otherwise resolve conflicts with our franchisees.
We may engage in litigation with our franchisees.
Although we believe we generally enjoy a positive working relationship with the vast majority of our franchisees, the nature of the franchisor-franchisee relationship may give rise to litigation with our franchisees. In the ordinary course of business, we are the subject of complaints or litigation from franchisees, usually related to alleged breaches of contract or wrongful termination under the franchise arrangements. We may also engage in future litigation with franchisees to enforce the terms of our franchise agreements and compliance with our brand standards as determined necessary to protect our brand, the consistency of our products and the customer experience. In addition, we may be subject to claims by our franchisees relating to our Franchise Disclosure Document, or FDD, including claims based on financial information contained in our FDD. Engaging in such litigation may be costly and time-consuming and may distract management and materially adversely affect our relationships with franchisees and our ability to attract new franchisees. Any negative outcome of these or any other claims could materially adversely affect our results of operations as well as our ability to expand our franchise system and may damage our reputation and brand. Furthermore, existing and future franchise-related legislation could subject us to additional litigation risk in the event we terminate or fail to renew a franchise relationship.
Changes to the current law with respect to the assignment of liabilities in the franchise business model could adversely impact our profitability.
One of the legal foundations fundamental to the franchise business model has been that, absent special circumstances, a franchisor is generally not responsible for the acts, omissions or liabilities of its franchisees. Recently, established law has been challenged and questioned by the plaintiffs’ bar and certain regulators, and the outcome of these challenges and new regulatory positions remains unknown. If these challenges and/or new positions are successful in altering currently settled law, it could significantly change the way we and other franchisors conduct business and adversely impact our profitability.
For example, a determination that we are a joint employer with our franchisees or that franchisees are part of one unified system with joint and several liability under the National Labor Relations Act, statutes administered by the Equal Employment Opportunity Commission, Occupational Safety and Health Administration, or OSHA, regulations and other areas of labor and employment law could subject us and/or our franchisees to liability for the unfair labor practices, wage-and-hour law violations, employment discrimination law violations, OSHA regulation violations and other employment-related liabilities of one or more franchisees. Furthermore, any such change in law would create an increased likelihood that certain franchised networks would be required to employ unionized labor, which could impact franchisors like us through, among other things, increased labor costs and difficulty in attracting new franchisees. In addition, if these changes were to be expanded outside of the employment context, we could be held liable for other claims against franchisees. Therefore, any such regulatory action or court decisions could impact our ability or desire to grow our franchised base and have a material adverse effect on our results of operations.
Progressive’s proprietary algorithm used to approve customers could no longer be indicative of our customer’s ability to pay.
We believe Progressive’s proprietary, centralized underwriting process to be a key to the success of the Progressive business. We assume behavior and attributes observed on prior customers, among other factors, are indicative of performance by future customers. Unexpected changes in behavior caused by macroeconomic conditions, changes in consumer preferences, availability of alternative products or other factors, however, could lead to increased merchandise return incidence and costs and/or merchandise losses.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company leases warehouse and retail store space for most of its store-based operations, as well as corporate management and call center space for Progressive’s operations, under operating leases expiring at various times through 2029. Most of the leases contain renewal options for additional periods ranging from one to 20 years or provide for options to purchase the related property at predetermined purchase prices that do not represent bargain purchase options. The following table sets forth certain information regarding our furniture manufacturing plants, bedding facilities, fulfillment centers, service centers, warehouses and corporate management and call center facilities: |
| | | |
LOCATION | SEGMENT, PRIMARY USE AND HOW HELD | SQ. FT. |
Cairo, Georgia | Manufacturing—Furniture Manufacturing – Owned | 300,000 |
|
Cairo, Georgia | Manufacturing—Bedding and Furniture Manufacturing – Owned | 147,000 |
|
Cairo, Georgia | Warehouse—Furniture Parts – Leased | 111,000 |
|
Coolidge, Georgia | Manufacturing—Furniture Manufacturing – Owned | 81,000 |
|
Coolidge, Georgia | Manufacturing—Furniture Manufacturing – Owned | 48,000 |
|
Coolidge, Georgia | Manufacturing—Furniture Manufacturing – Owned | 41,000 |
|
Coolidge, Georgia | Manufacturing—Administration and Showroom – Owned | 10,000 |
|
Lewisberry, Pennsylvania | Manufacturing—Bedding Manufacturing – Leased | 25,000 |
|
Fairburn, Georgia | Manufacturing—Bedding Manufacturing – Leased | 57,000 |
|
Sugarland, Texas | Manufacturing—Bedding Manufacturing – Owned | 23,000 |
|
Auburndale, Florida | Manufacturing—Bedding Manufacturing – Leased | 20,000 |
|
Kansas City, Kansas | Manufacturing—Bedding Manufacturing – Leased | 13,000 |
|
Phoenix, Arizona | Manufacturing—Bedding Manufacturing – Leased | 20,000 |
|
Plainfield, Indiana | Manufacturing—Bedding Manufacturing – Leased | 24,000 |
|
Cheswick, Pennsylvania | Manufacturing—Bedding Manufacturing – Leased | 19,000 |
|
Auburndale, Florida | Sales and Lease Ownership—Fulfillment Center – Leased | 131,000 |
|
Belcamp, Maryland | Sales and Lease Ownership—Fulfillment Center – Leased | 95,000 |
|
Obetz, Ohio | Sales and Lease Ownership—Fulfillment Center – Leased | 91,000 |
|
Dallas, Texas | Sales and Lease Ownership—Fulfillment Center – Leased | 133,000 |
|
Fairburn, Georgia | Sales and Lease Ownership—Fulfillment Center – Leased | 117,000 |
|
Sugarland, Texas | Sales and Lease Ownership—Fulfillment Center – Owned | 135,000 |
|
Huntersville, North Carolina | Sales and Lease Ownership—Fulfillment Center – Leased | 214,000 |
|
LaVergne, Tennessee | Sales and Lease Ownership—Fulfillment Center – Leased | 100,000 |
|
Oklahoma City, Oklahoma | Sales and Lease Ownership—Fulfillment Center – Leased | 130,000 |
|
Phoenix, Arizona | Sales and Lease Ownership—Fulfillment Center – Leased | 89,000 |
|
Magnolia, Mississippi | Sales and Lease Ownership—Fulfillment Center – Leased | 125,000 |
|
Plainfield, Indiana | Sales and Lease Ownership—Fulfillment Center – Leased | 90,000 |
|
Portland, Oregon | Sales and Lease Ownership—Fulfillment Center – Leased | 98,000 |
|
Rancho Cucamonga, California | Sales and Lease Ownership—Fulfillment Center – Leased | 92,000 |
|
Westfield, Massachusetts | Sales and Lease Ownership—Fulfillment Center – Leased | 131,000 |
|
Kansas City, Kansas | Sales and Lease Ownership—Fulfillment Center – Leased | 103,000 |
|
Cheswick, Pennsylvania | Sales and Lease Ownership—Fulfillment Center – Leased | 126,000 |
|
Auburndale, Florida | Sales & Lease Ownership—Service Center – Leased | 7,000 |
|
Belcamp, Maryland | Sales & Lease Ownership—Service Center – Leased | 5,000 |
|
Cheswick, Pennsylvania | Sales & Lease Ownership—Service Center – Leased | 10,000 |
|
Fairburn, Georgia | Sales & Lease Ownership—Service Center – Leased | 8,000 |
|
Grand Prairie, Texas | Sales & Lease Ownership—Service Center – Leased | 11,000 |
|
Houston, Texas | Sales & Lease Ownership—Service Center – Leased | 15,000 |
|
Huntersville, North Carolina | Sales & Lease Ownership—Service Center – Leased | 10,000 |
|
Kansas City, Kansas | Sales & Lease Ownership—Service Center – Leased | 8,000 |
|
Obetz, Ohio | Sales & Lease Ownership—Service Center – Leased | 7,000 |
|
Oklahoma City, Oklahoma | Sales & Lease Ownership—Service Center – Leased | 10,000 |
|
Phoenix, Arizona | Sales & Lease Ownership—Service Center – Leased | 6,000 |
|
Plainfield, Indiana | Sales & Lease Ownership—Service Center – Leased | 6,000 |
|
Rancho Cucamong, California | Sales & Lease Ownership—Service Center – Leased | 4,000 |
|
Ridgeland, Mississippi | Sales & Lease Ownership—Service Center – Leased | 10,000 |
|
South Madison, Tennessee | Sales & Lease Ownership—Service Center – Leased | 4,000 |
|
Brooklyn, New York | Sales & Lease Ownership—Warehouse – Leased | 32,000 |
|
Draper & South Jordan, Utah | Progressive—Call Center/Corporate Management – Leased | 226,000 |
|
Phoenix, Arizona | Progressive—Call Center/Corporate Management – Leased | 52,000 |
|
Our executive and administrative offices occupy approximately 69,000 of the 81,000 useable square feet in an 11-story, 105,000 square-foot office building that we own in Atlanta, Georgia. We lease most of the remaining space to third parties under leases with remaining terms averaging three years. We lease a two-story building with approximately 51,000 square feet
in Kennesaw, Georgia and a one-story building that includes approximately 44,000 square feet in Marietta, Georgia for additional administrative functions. During 2014, we also secured a lease in Kennesaw, Georgia for approximately 52,000 square feet of a building which we plan to occupy in 2015. We believe that all of our facilities are well maintained and adequate for their current and reasonably foreseeable uses.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceedings arising in the ordinary course of business. While any proceeding contains an element of uncertainty, we do not currently believe that any of the outstanding legal proceedings to which we are a party will have a material adverse impact on our business, financial position or results of operations. However, an adverse resolution of a number of these items may have a material adverse impact on our business, financial position or results of operations. For further information, see Note 8 to the consolidated financial statements under the heading “Legal Proceedings,” which discussion is incorporated by reference in response to this Item 3.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information, Holders and Dividends
Effective December 13, 2010, all shares of the Company’s common stock began trading as a single class on the New York Stock Exchange under the ticker symbol “AAN.” The CUSIP number of the Company's common stock is 002535300.
The number of shareholders of record of the Company’s common stock at February 26, 2015 was 205. The closing price for the common stock at February 26, 2015 was $29.67.
The following table shows the range of high and low sales prices per share for the Company’s common stock and the quarterly cash dividends declared per share for the periods indicated.
|
| | | | | | | | | | | |
Common Stock | High | | Low | | Cash Dividends Per Share |
Year Ended December 31, 2014 | | | | | |
First Quarter | $ | 32.64 |
| | $ | 26.18 |
| | $ | .021 |
|
Second Quarter | 35.82 |
| | 27.95 |
| | .021 |
|
Third Quarter | 36.74 |
| | 24.25 |
| | .021 |
|
Fourth Quarter | 31.33 |
| | 23.25 |
| | .023 |
|
|
| | | | | | | | | | | |
Common Stock | High | | Low | | Cash Dividends Per Share |
Year Ended December 31, 2013 | | | | | |
First Quarter | $ | 30.90 |
| | $ | 26.80 |
| | $ | .017 |
|
Second Quarter | 29.53 |
| | 26.92 |
| | .017 |
|
Third Quarter | 30.06 |
| | 26.43 |
| | .017 |
|
Fourth Quarter | 30.30 |
| | 26.20 |
| | .021 |
|
Subject to our ongoing ability to generate sufficient income, any future capital needs and other contingencies, we expect to continue our policy of paying quarterly dividends. Under our revolving credit agreement, we may pay cash dividends in any year so long as, after giving pro forma effect to the dividend payment, we maintain compliance with our financial covenants and no event of default has occurred or would result from the payment.
Issuer Purchases of Equity Securities
As of December 31, 2014, 10,496,421 shares of common stock remained available for repurchase under the purchase authority approved by the Company’s Board of Directors and publicly announced from time to time. The following table presents our share repurchase activity for the three months ended December 31, 2014:
|
| | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans |
October 1 through October 31, 2014 | — |
| | $ | — |
| | — |
| | 10,496,421 |
|
November 1 through November 30, 2014 | — |
| | — |
| | — |
| | 10,496,421 |
|
December 1 through December 31, 2014 | — |
| | — |
| | — |
| | 10,496,421 |
|
Total | — |
| | | | — |
| | |
Securities Authorized for Issuance Under Equity Compensation Plans
Information concerning the Company’s equity compensation plans is set forth in Item 12 of Part III of this Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data of Aaron’s, Inc., which have been derived from its Consolidated Financial Statements for each of the five years in the period ended December 31, 2014. Certain reclassifications have been made to the prior periods to conform to the current period presentation. This historical information may not be indicative of the Company’s future performance. The information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the notes thereto.
|
| | | | | | | | | | | | | | | | | | | |
(Dollar Amounts in Thousands, Except Per Share Data) | Year Ended December 31, 2014 | | Year Ended December 31, 2013 | | Year Ended December 31, 2012 | | Year Ended December 31, 2011 | | Year Ended December 31, 2010 |
OPERATING RESULTS | | | | | | | | | |
Revenues: | | | | | | | | | |
Lease Revenues and Fees | $ | 2,251,780 |
| | $ | 1,748,699 |
| | $ | 1,676,391 |
| | $ | 1,516,508 |
| | $ | 1,402,053 |
|
Retail Sales | 38,360 |
| | 40,876 |
| | 38,455 |
| | 38,557 |
| | 40,556 |
|
Non-Retail Sales | 363,355 |
| | 371,292 |
| | 425,915 |
| | 388,960 |
| | 362,273 |
|
Franchise Royalties and Fees | 65,902 |
| | 68,575 |
| | 66,655 |
| | 63,255 |
| | 59,112 |
|
Other | 5,842 |
| | 5,189 |
| | 5,411 |
| | 5,298 |
| | 4,799 |
|
| 2,725,239 |
| | 2,234,631 |
| | 2,212,827 |
| | 2,012,578 |
| | 1,868,793 |
|
Costs and Expenses: | | | | | | | | | |
Depreciation of Lease Merchandise | 932,634 |
| | 628,089 |
| | 601,552 |
| | 547,839 |
| | 501,467 |
|
Retail Cost of Sales | 24,541 |
| | 24,318 |
| | 21,608 |
| | 22,619 |
| | 22,893 |
|
Non-Retail Cost of Sales | 330,057 |
| | 337,581 |
| | 387,362 |
| | 351,887 |
| | 329,187 |
|
Operating Expenses | 1,262,007 |
| | 1,022,684 |
| | 952,617 |
| | 866,600 |
| | 822,637 |
|
Financial Advisory and Legal Costs | 13,661 |
| | — |
| | — |
| | — |
| | — |
|
Restructuring Expenses | 9,140 |
| | — |
| | — |
| | — |
| | — |
|
Retirement and Vacation Charges | 9,094 |
| | 4,917 |
| | 10,394 |
| | 3,532 |
| | — |
|
Progressive-Related Transaction Costs | 6,638 |
| | — |
| | — |
| | — |
| | — |
|
Legal and Regulatory (Income) Expense | (1,200 | ) | | 28,400 |
| | (35,500 | ) | | 36,500 |
| | — |
|
Other Operating (Income) Expense, Net | (1,176 | ) | | 1,584 |
| | (2,235 | ) | | (3,550 | ) | | (147 | ) |
| 2,585,396 |
| | 2,047,573 |
| | 1,935,798 |
| | 1,825,427 |
| | 1,676,037 |
|
Operating Profit | 139,843 |
| | 187,058 |
| | 277,029 |
| | 187,151 |
| | 192,756 |
|
Interest Income | 2,921 |
| | 2,998 |
| | 3,541 |
| | 1,718 |
| | 509 |
|
Interest Expense | (19,215 | ) | | (5,613 | ) | | (6,392 | ) | | (4,709 | ) | | (3,096 | ) |
Other Non-Operating(Expense) Income, Net | (1,845 | ) | | 517 |
| | 2,677 |
| | (783 | ) | | 617 |
|
Earnings Before Income Taxes | 121,704 |
| | 184,960 |
| | 276,855 |
| | 183,377 |
| | 190,786 |
|
Income Taxes | 43,471 |
| | 64,294 |
| | 103,812 |
| | 69,610 |
| | 72,410 |
|
Net Earnings | $ | 78,233 |
|
| $ | 120,666 |
|
| $ | 173,043 |
|
| $ | 113,767 |
|
| $ | 118,376 |
|
Earnings Per Share | $ | 1.08 |
| | $ | 1.59 |
| | $ | 2.28 |
| | $ | 1.46 |
| | $ | 1.46 |
|
Earnings Per Share Assuming Dilution | 1.08 |
| | 1.58 |
| | 2.25 |
| | 1.43 |
| | 1.44 |
|
Dividends Per Share: | | | | | | | | | |
Common Stock | .086 |
| | .072 |
| | .062 |
| | .054 |
| | .049 |
|
Former Class A Common Stock | — |
| | — |
| | — |
| | — |
| | .049 |
|
FINANCIAL POSITION | | | | | | | | | |
(Dollar Amounts in Thousands) | | | | | | | | | |
Lease Merchandise, Net | $ | 1,087,032 |
| | $ | 869,725 |
| | $ | 964,067 |
| | $ | 862,276 |
| | $ | 814,484 |
|
Property, Plant and Equipment, Net | 219,417 |
| | 231,293 |
| | 230,598 |
| | 226,619 |
| | 204,912 |
|
Total Assets | 2,456,844 |
| | 1,827,176 |
| | 1,812,929 |
| | 1,731,899 |
| | 1,500,853 |
|
Debt | 606,082 |
| | 142,704 |
| | 141,528 |
| | 153,789 |
| | 41,790 |
|
Shareholders’ Equity | 1,223,521 |
| | 1,139,963 |
| | 1,136,126 |
| | 976,554 |
| | 979,417 |
|
AT YEAR END | | | | | | | | | |
Stores Open: | | | | | | | | | |
Company-operated | 1,326 |
| | 1,370 |
| | 1,324 |
| | 1,232 |
| | 1,150 |
|
Franchised | 782 |
| | 781 |
| | 749 |
| | 713 |
| | 664 |
|
Lease Agreements in Effect | 1,665,000 |
| | 1,751,000 |
| | 1,724,000 |
| | 1,508,000 |
| | 1,325,000 |
|
Number of Associates | 12,400 |
| | 12,600 |
| | 11,900 |
| | 11,200 |
| | 10,400 |
|
Earnings per share data has been adjusted for the effect of the 3-for-2 partial stock split distributed on April 15, 2010 and effective April 16, 2010.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
Aaron’s, Inc. (“we”, “our”, “us”, “Aaron’s” or the “Company”) is a leading specialty retailer of furniture, consumer electronics, computers, household appliances and accessories. On April 14, 2014, the Company acquired a 100% ownership interest in Progressive Finance Holdings, LLC (“Progressive”), a leading virtual lease-to-own company, for merger consideration of $700.0 million, net of cash acquired. Progressive provides lease-purchase solutions through over 15,000 retail locations in 46 states. It does so by purchasing merchandise from third-party retailers desired by those retailers’ customers, and in turn leasing that merchandise to the customers on a rent-to-own basis. Progressive consequently has no stores of its own, but rather offers lease-purchase solutions to the customers of traditional retailers.
On July 15, 2014, the Company announced that a rigorous evaluation of the Company-operated store portfolio had been performed, which, along with other cost-reduction initiatives, resulted in the closure of 44 underperforming stores and the realignment of home office and field support.
Our major operating divisions are the Aaron’s Sales & Lease Ownership division, Progressive, HomeSmart and Woodhaven Furniture Industries, which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in our stores.
Historically, Aaron’s has demonstrated revenue growth from the opening of new sales and lease ownership stores and increases in same store revenues from previously opened stores. We also use our franchise program to help us expand our sales and lease ownership concept more quickly and into more communities than through opening only Company-operated stores. Total revenues increased from $2.213 billion in 2012 to $2.725 billion in 2014, primarily as a result of the Progressive acquisition during 2014. Total revenues for the year ended December 31, 2014 increased $490.6 million, or 22.0%, over the prior year. The increase was due to $549.5 million in revenue from Progressive, partially offset by a decrease of $58.9 million in revenue from our core business primarily resulting from a 2.8% decrease in Company-operated same store revenues.
The Company’s franchised and Company-operated store activity is summarized as follows: |
| | | | | | | | |
| 2014 | | 2013 | | 2012 |
Franchised stores | | | | | |
Franchised stores open at January 1, | 781 |
| | 749 |
| | 713 |
|
Opened | 23 |
| | 45 |
| | 56 |
|
Purchased from the Company | 6 |
| | 2 |
| | 3 |
|
Purchased by the Company | (9 | ) | | (10 | ) | | (21 | ) |
Closed, sold or merged | (19 | ) | | (5 | ) | | (2 | ) |
Franchised stores open at December 31, | 782 |
| | 781 |
| | 749 |
|
Company-operated Sales & Lease Ownership stores | | | | | |
Company-operated Sales & Lease Ownership stores open at January 1, | 1,262 |
| | 1,227 |
| | 1,144 |
|
Opened | 30 |
| | 33 |
| | 73 |
|
Added through acquisition | 9 |
| | 10 |
| | 21 |
|
Closed, sold or merged | (58 | ) | | (8 | ) | | (11 | ) |
Company-operated Sales & Lease Ownership stores open at December 31, | 1,243 |
| | 1,262 |
| | 1,227 |
|
Company-operated HomeSmart stores | | | | | |
Company-operated HomeSmart stores open at January 1, | 81 |
| | 78 |
| | 71 |
|
Opened | 3 |
| | 3 |
| | 7 |
|
Added through acquisition | — |
| | — |
| | 1 |
|
Closed, sold or merged | (1 | ) | | — |
| | (1 | ) |
Company-operated HomeSmart stores open at December 31, | 83 |
| | 81 |
| | 78 |
|
Company-operated RIMCO stores 1 | | | | | |
Company-operated RIMCO stores open at January 1, | 27 |
| | 19 |
| | 16 |
|
Opened |
|
| | 8 |
| | 3 |
|
Closed, sold or merged | (27 | ) | | — |
| | — |
|
Company-operated RIMCO stores open at December 31, | — |
| | 27 |
| | 19 |
|
1 In January 2014, we sold our 27 Company-operated RIMCO stores and the rights to five franchised RIMCO stores.
Same Store Revenues. We believe the changes in same store revenues are a key performance indicator. This indicator is calculated by comparing revenues for the year to revenues for the prior year for all stores open for the entire 24-month period, excluding stores that received lease agreements from other acquired, closed or merged stores.
Business Environment and Company Outlook
Like many industries, the rent-to-own industry has been transformed by the internet and virtual marketplace. We believe the Progressive acquisition will be strategically transformational for the Company in this respect and will strengthen our franchise. We also believe the rent-to-own industry has suffered in recent periods due to economic challenges faced by our core customers. Accordingly, we undertook a comprehensive review of our core business in order to position us to succeed over the long term. As a result, we are implementing a strategic plan focused on our core business as follows:
| |
• | Renewing our focus on same store revenue growth for our core portfolio, through improved execution, optimization of merchandising and pricing on an enhanced go-to-market strategy; |
| |
• | Enhancing and growing our online platform; |
| |
• | Driving cost efficiency to recapture margin, including through selling, general and administrative cost savings and rationalizing underperforming stores; |
| |
• | Moderating new Company-operated store growth to result in no net store growth after store closings; and |
| |
• | Strengthening and growing the franchise store base. |
We reduced our Company-operated sales and lease ownership stores by a net of 44 stores in 2014, net of store opening and acquisition activity. We spend on average approximately $700,000 to $800,000 in the first year of operation of a new store, which includes purchases of lease merchandise, investments in leasehold improvements and financing first-year start-up costs. Our new sales and lease ownership stores typically achieve revenues of approximately $1.1 million in their third year of operations. Comparable stores open more than three years normally achieve approximately $1.4 million in revenues, which we believe represents a higher unit revenue volume than the typical rent-to-own store. Most of our stores are cash flow positive in the second year of operations.
We use our franchise program to help us expand our sales and lease ownership concept more quickly and into more areas than through opening only Company-operated stores. Our franchisees added a net of one store in 2014, which was impacted by our purchase of nine franchised stores during the year. Franchise royalties and other related fees represent a source of high margin revenue for us. Total revenues from franchise royalties and fees for the year ended December 31, 2014 decreased from $66.7 million in 2012 to $65.9 million in 2014, representing a decline in the compounded annual growth rate of .6%. Total revenues from franchise royalties and fees for the year ended December 31, 2014 decreased $2.7 million, or 3.9%, over the prior year.
We offer lease-purchase solutions through our Progressive business to the customers of traditional retailers, primarily in the furniture, mattress, mobile phone, consumer electronics, appliance and household accessory industries. Progressive has no stores of its own but provides lease-purchase solutions through over 15,000 retail partner locations in 46 states.
Key Components of Net Earnings
In this management’s discussion and analysis section, we review our consolidated results. For the years ended December 31, 2014, 2013 and 2012, some of the key revenue and cost and expense items that affected earnings were as follows:
Revenues. We separate our total revenues into five components: lease revenues and fees, retail sales, non-retail sales, franchise royalties and fees and other. Lease revenues and fees include all revenues derived from lease agreements at Company-operated stores, including agreements that result in our customers acquiring ownership at the end of the terms, and at retail locations serviced by Progressive. Retail sales represent sales of both new and returned lease merchandise from our stores. Non-retail sales mainly represent new merchandise sales to our Aaron’s Sales & Lease Ownership franchisees. Franchise royalties and fees represent fees from the sale of franchise rights and royalty payments from franchisees, as well as other related income from our franchised stores. Other revenues primarily relate to revenues from leasing real estate properties to unrelated third parties, as well as other miscellaneous revenues.
Depreciation of Lease Merchandise. Depreciation of lease merchandise reflects the expense associated with depreciating merchandise held for lease and leased to customers by our Company-operated stores and by the retail locations serviced by Progressive.
Retail Cost of Sales. Retail cost of sales represents the original or depreciated cost of merchandise sold through our Company-operated stores.
Non-Retail Cost of Sales. Non-retail cost of sales primarily represents the cost of merchandise sold to our franchisees.
Operating Expenses. Operating expenses include personnel costs, selling costs, occupancy costs and delivery, among other expenses.
Other Operating Expense (Income), Net. Other operating expense (income), net consists of gains or losses on sales of Company-operated stores and delivery vehicles, impairment charges on assets held for sale and gains or losses on other dispositions of property, plant and equipment.
Critical Accounting Policies
Revenue Recognition
Lease revenues are recognized in the month they are due on the accrual basis of accounting. For internal management reporting purposes, lease revenues from sales and lease ownership agreements are recognized by the reportable segments as revenue in the month the cash is collected. On a monthly basis, we record an accrual for lease revenues due but not yet received, net of allowances, and a deferral of revenue for lease payments received prior to the month due. Our revenue recognition accounting policy matches the lease revenue with the corresponding costs, mainly depreciation, associated with the lease merchandise. At December 31, 2014 and 2013, we had a revenue deferral representing cash collected in advance of being due or otherwise earned totaling $60.5 million and $45.1 million, respectively, and an accrued revenue receivable, net of allowance for doubtful accounts, based on historical collection rates of $30.2 million and $7.9 million, respectively. Revenues from the sale of merchandise to franchisees are recognized at the time of receipt of the merchandise by the franchisee and revenues from such sales to other customers are recognized at the time of shipment.
Lease Merchandise
Our Aaron’s Sales & Lease Ownership and HomeSmart divisions depreciate merchandise over the applicable agreement period, generally 12 to 24 months (monthly agreements) or 60 to 120 weeks (weekly agreements) when leased, and 36 months when not leased, to a 0% salvage value. The Company's Progressive division depreciates merchandise over the lease agreement period, which is typically over 12 months, while on lease.
Our policies generally require weekly lease merchandise counts at our store-based operations, which include write-offs for unsalable, damaged, or missing merchandise inventories. Full physical inventories are generally taken at our fulfillment and manufacturing facilities two to four times a year with appropriate provisions made for missing, damaged and unsalable merchandise. In addition, we monitor lease merchandise levels and mix by division, store and fulfillment center, as well as the average age of merchandise on hand. If unsalable lease merchandise cannot be returned to vendors, its carrying value is adjusted to net realizable value or written off.
All lease merchandise is available for lease and sale, excluding merchandise determined to be missing, damaged or unsalable. We record lease merchandise carrying value adjustments on the allowance method, which estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based on historical write off experience. As of December 31, 2014 and 2013, the allowance for lease merchandise write offs was $27.6 million and $8.3 million, respectively. Lease merchandise write-offs totaled $99.9 million, $58.0 million and $54.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Acquisition Accounting
We account for acquisitions under FASB Accounting Standards Codification 805, Business Combinations, which requires companies to record assets acquired and liabilities assumed at their respective fair values at the date of acquisition. We estimate the fair value of identifiable intangible assets using discounted cash flow analyses or estimates of replacement cost based on market participant assumptions. The excess of the purchase price paid over the estimated fair values of the identifiable net tangible and intangible assets acquired in connection with business acquisitions is recorded as goodwill. We consider accounting for business combinations critical because management's judgment is used to determine the estimated fair values assigned to assets acquired and liabilities assumed, as well as the useful life of and amortization method for intangible assets, which can materially affect the results of our operations. Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to an impairment charge if we are unable to recover the value of the recorded net assets.
Goodwill and Other Intangible Assets
Intangible assets are classified into one of three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. For intangible assets with definite lives, tests for impairment must be performed if conditions exist that indicate the carrying value may not be recoverable. For intangible assets with indefinite lives and goodwill, tests for impairment must be performed annually and when events or circumstances indicate that impairment may have occurred. Factors which could necessitate an interim impairment assessment include a sustained decline in the Company’s stock price, prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results.
Indefinite-lived intangible assets represent the value of trade names and trademarks acquired as part of the Progressive acquisition. At the date of acquisition, the Company determined that no legal, regulatory, contractual, competitive, economic or other factors limit the useful life of the trade name and trademark intangible asset and, therefore, the useful life is considered indefinite.
The following table presents the carrying value of goodwill and other intangible assets, net as of December 31, 2014:
|
| | | |
(In Thousands) | 2014 |
Goodwill | $ | 530,670 |
|
Other Indefinite-Lived Intangible Assets | 53,000 |
|
Definite-Lived Intangible Assets | 244,471 |
|
Goodwill and Other Intangibles, Net | $ | 828,141 |
|
The Company has historically performed its annual goodwill impairment test as of September 30 each year for its Sales and Lease Ownership and HomeSmart reporting units. During the three months ended December 31, 2014, the Company voluntarily changed its annual impairment assessment date from September 30 to October 1 for those reporting units. Upon the acquisition of Progressive, the Company selected October 1 as the annual impairment assessment date for the goodwill of the Progressive reporting unit and its indefinite-lived intangible assets. The Company believes this change in measurement date, which represents a change in method of applying an accounting principle, is preferable under the circumstances. The change was made to align the annual goodwill impairment test for the Sales and Lease Ownership and HomeSmart reporting units with the annual goodwill impairment and indefinite-lived intangible asset tests for the Progressive reporting unit and to provide the Company with additional time to complete its annual goodwill impairment testing in advance of its year-end reporting.
In connection with the change in the date of the annual goodwill impairment test, the Company performed a goodwill impairment test as of both September 30, 2014 and October 1, 2014, and no impairment was identified. The change in accounting principle does not delay, accelerate or avoid an impairment charge. The Company has determined that it is impracticable to objectively determine projected cash flows and related valuation estimates that would have been used as of October 1 for periods prior to October 1, 2014 without the use of hindsight. As such, the Company prospectively applied the change in the annual goodwill impairment assessment date beginning October 1, 2014.
Management has deemed its operating segments to be reporting units due to the fact that the operations included in each operating segment have similar economic characteristics. As of December 31, 2014, the Company had five operating segments and reporting units: Sales and Lease Ownership, Progressive, HomeSmart, Franchise and Manufacturing. As of December 31, 2014, the Company’s Sales and Lease Ownership, Progressive and HomeSmart reporting units were the only reporting units with assigned goodwill balances. The following is a summary of the Company’s goodwill by reporting unit at December 31, 2014:
|
| | | |
(In Thousands) | 2014 |
Sales and Lease Ownership | $ | 226,828 |
|
Progressive | 289,184 |
|
HomeSmart | 14,658 |
|
Total | $ | 530,670 |
|
We use a combination of valuation techniques to determine the fair value of our reporting units, including a multiple of gross revenue approach and discounted cash flow models that use assumptions consistent with those we believe hypothetical marketplace participants would use. We estimate the fair value of indefinite-lived trade name and trademark intangible assets based on projected discounted future cash flows under a relief from royalty type method. Under the income approach, we estimate fair value based on estimated discounted cash flows, which require assumptions about short-term and long-term
revenue growth rates, operating margins, capital requirements, and a weighted-average cost of capital and/or discount rate. Under the market approach, we estimate fair value after considering the multiples of gross revenue for benchmark companies. We believe the benchmark companies evaluated for each reporting unit serve as an appropriate input for calculating fair value as those benchmark companies have similar risks, participate in similar markets, provide similar products and services for their customers and compete with us directly. The values separately derived from each of the income and market approach valuation techniques were used to develop an overall estimate of each reporting unit's fair value. The selection and weighting of the various fair value techniques, which requires the use of management judgment to determine what is most representative of fair value, may result in a higher or lower fair value.
Intangible assets acquired in recent transactions are naturally more susceptible to impairment, primarily due to the fact that they are recorded at fair value based on recent operating plans and macroeconomic conditions present at the time of acquisition. Consequently, if operating results and/or macroeconomic conditions deteriorate shortly after an acquisition, it could result in the impairment of the acquired assets. A deterioration of macroeconomic conditions may not only negatively impact the estimated operating cash flows used in our cash flow models, but may also negatively impact other assumptions used in our analyses, including but not limited to, the estimated cost of capital and/or discount rates. Additionally, as discussed above, in accordance with accounting principles generally accepted in the United States, we are required to ensure that assumptions used to determine fair value in our analyses are consistent with the assumptions a hypothetical marketplace participant would use. As a result, the cost of capital and/or discount rates used in our analyses may increase or decrease based on market conditions and trends, regardless of whether our actual cost of capital has changed. Therefore, if the cost of capital and/or discount rates change, we may recognize an impairment of an intangible asset in spite of realizing actual cash flows that are approximately equal to, or greater than, our previously forecasted amounts.
During the performance of the 2014 annual assessment of goodwill for impairment, the Company did not identify any reporting units that were not substantially in excess of their carrying values, other than the HomeSmart reporting unit for which the estimated fair value exceeded the carrying value of the reporting unit by approximately 9%. While no impairment was noted in our impairment testing, if HomeSmart does not achieve its near-term financial projections or if macroeconomic conditions change causing the cost of capital to increase without an offsetting increase in operating results, it is likely that we would be required to recognize an impairment charge related to goodwill.
The Company completed its indefinite-lived intangible asset impairment test as of October 1, 2014 and determined that no impairment had occurred. No new indications of impairment existed during the fourth quarter of 2014. As a result, no impairment testing was updated as of December 31, 2014. We will continue to monitor the fair value of goodwill and other intangible assets in future periods.
Leases and Closed Store Reserves
The majority of our Company-operated stores are operated from leased facilities under operating lease agreements. The majority of the leases are for periods that do not exceed five years, although lease terms range in length up to approximately 15 years. Leasehold improvements related to these leases are generally amortized over periods that do not exceed the lesser of the lease term or useful life. While some of our leases do not require escalating payments, for the leases which do contain such provisions we record the related lease expense on a straight-line basis over the lease term. We do not generally obtain significant amounts of lease incentives or allowances from landlords. Any incentive or allowance amounts we receive are recognized ratably over the lease term.
From time to time, we close or consolidate stores. Our primary costs associated with closing stores are the future lease payments and related commitments. We record an estimate of the future obligation related to closed stores based upon the present value of the future lease payments and related commitments, net of estimated sublease income based upon historical experience. As of December 31, 2014 and 2013, our reserve for closed stores was $5.6 million and $2.1 million, respectively. Due to changes in market conditions, our estimates related to sublease income may change and, as a result, our actual liability may be more or less than the recorded amount. Excluding estimated sublease income, our future obligations related to closed stores on an undiscounted basis were $7.8 million and $2.9 million as of December 31, 2014 and 2013, respectively.
Insurance Programs
We maintain insurance contracts to fund workers compensation, vehicle liability, general liability and group health insurance claims. Using actuarial analyses and projections, we estimate the liabilities associated with open and incurred but not reported workers compensation, vehicle liability and general liability claims. This analysis is based upon an assessment of the likely outcome or historical experience, net of any stop loss or other supplementary coverage. We also calculate the projected outstanding plan liability for our group health insurance program using historical claims runoff data. Our gross estimated liability for workers compensation insurance claims, vehicle liability, general liability and group health insurance was $36.8 million and $31.9 million at December 31, 2014 and 2013, respectively. In addition, we have prefunding balances on deposit with the insurance carriers of $28.3 million and $24.4 million at December 31, 2014 and 2013, respectively.
If we resolve insurance claims for amounts that are in excess of our current estimates and within policy stop loss limits, we will be required to pay additional amounts beyond those accrued at December 31, 2014.
The assumptions and conditions described above reflect management’s best assumptions and estimates, but these items involve inherent uncertainties as described above, which may or may not be controllable by management. As a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future periods.
Legal and Regulatory Reserves
We are subject to various legal and regulatory proceedings arising in the ordinary course of business. Management regularly assesses the Company’s insurance deductibles, monitors our litigation and regulatory exposure with the Company’s attorneys and evaluates its loss experience. The Company establishes an accrued liability for legal and regulatory proceedings when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Legal fees and expenses associated with the defense of all of our litigation are expensed as such fees and expenses are incurred.
Income Taxes
The calculation of our income tax expense requires significant judgment and the use of estimates. We periodically assess tax positions based on current tax developments, including enacted statutory, judicial and regulatory guidance. In analyzing our overall tax position, consideration is given to the amount and timing of recognizing income tax liabilities and benefits. In applying the tax and accounting guidance to the facts and circumstances, income tax balances are adjusted appropriately through the income tax provision. Reserves for income tax uncertainties are maintained at levels we believe are adequate to absorb probable payments. Actual amounts paid, if any, could differ significantly from these estimates.
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets when we expect the amount of tax benefit to be realized is less than the carrying value of the deferred tax asset.
Fair Value Measurements
For the valuation techniques used to determine the fair value of financial assets and liabilities on a recurring basis, as well as assets held for sale, which are recorded at fair value on a nonrecurring basis, refer to Note 4 in the consolidated financial statements.
Results of Operations
As of December 31, 2014, the Company had five operating and reportable segments: Sales and Lease Ownership, Progressive, HomeSmart, Franchise and Manufacturing. The results of Progressive, which is presented as a reportable segment, have been included in the Company's consolidated results from the April 14, 2014 acquisition date. In January 2014, the Company sold the 27 Company-operated RIMCO stores and the rights to five franchised RIMCO stores. In all periods presented, RIMCO has been reclassified from the RIMCO segment to Other.
The Company’s Sales and Lease Ownership, Progressive, HomeSmart, and Franchise segments accounted for substantially all of the operations of the Company and, therefore, unless otherwise noted, only material changes within these four segments are discussed. The production of our Manufacturing segment, consisting of the Woodhaven Furniture Industries division, is primarily leased or sold through the Company-operated and franchised stores, and consequently, substantially all of that segment’s revenues and earnings before income taxes are eliminated through the elimination of intersegment revenues and intersegment profit.
Results of Operations – Years Ended December 31, 2014, 2013 and 2012
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Change |
| Year Ended December 31, | | 2014 vs. 2013 | | 2013 vs. 2012 |
(In Thousands) | 2014 | | 2013 | | 2012 | | $ | | % | | $ | | % |
REVENUES: | | | | | | | | | | | | | |
Lease Revenues and Fees | $ | 2,251,780 |
| | $ | 1,748,699 |
| | $ | 1,676,391 |
| | $ | 503,081 |
| | 28.8 | % | | $ | 72,308 |
| | 4.3 | % |
Retail Sales | 38,360 |
| | 40,876 |
| | 38,455 |
| | (2,516 | ) | | (6.2 | ) | | 2,421 |
| | 6.3 |
|
Non-Retail Sales | 363,355 |
| | 371,292 |
| | 425,915 |
| | (7,937 | ) | | (2.1 | ) | | (54,623 | ) | | (12.8 | ) |
Franchise Royalties and Fees | 65,902 |
| | 68,575 |
| | 66,655 |
| | (2,673 | ) | | (3.9 | ) | | 1,920 |
| | 2.9 |
|
Other | 5,842 |
| | 5,189 |
| | 5,411 |
| | 653 |
| | 12.6 |
| | (222 | ) | | (4.1 | ) |
| 2,725,239 |
| | 2,234,631 |
| | 2,212,827 |
| | 490,608 |
| | 22.0 |
| | 21,804 |
| | 1.0 |
|
COSTS AND EXPENSES: | | | | | | | | | | | | | |
Depreciation of Lease Merchandise | 932,634 |
| | 628,089 |
| | 601,552 |
| | 304,545 |
| | 48.5 |
| | 26,537 |
| | 4.4 |
|
Retail Cost of Sales | 24,541 |
| | 24,318 |
| | 21,608 |
| | 223 |
| | .9 |
| | 2,710 |
| | 12.5 |
|
Non-Retail Cost of Sales | 330,057 |
| | 337,581 |
| | 387,362 |
| | (7,524 | ) | | (2.2 | ) | | (49,781 | ) | | (12.9 | ) |
Operating Expenses | 1,262,007 |
| | 1,022,684 |
| | 952,617 |
| | 239,323 |
| | 23.4 |
| | 70,067 |
| | 7.4 |
|
Financial Advisory and Legal Costs | 13,661 |
| | — |
| | — |
| | 13,661 |
| | nmf |
| | — |
| | — |
|
Restructuring Expenses | 9,140 |
| | — |
| | — |
| | 9,140 |
| | nmf |
| | — |
| | — |
|
Retirement and Vacation Charges | 9,094 |
| | 4,917 |
| | 10,394 |
| | 4,177 |
| | 85.0 |
| | (5,477 | ) | | (52.7 | ) |
Progressive-Related Transaction Costs | 6,638 |
| | — |
| | — |
| | 6,638 |
| | nmf |
| | — |
| | — |
|
Legal and Regulatory (Income) Expenses | (1,200 | ) | | 28,400 |
| | (35,500 | ) | | (29,600 | ) | | nmf |
| | 63,900 |
| | nmf |
|
Other Operating (Income) Expense, Net | (1,176 | ) | | 1,584 |
| | (2,235 | ) | | (2,760 | ) | | (174.2 | ) | | 3,819 |
| | 170.9 |
|
| 2,585,396 |
| | 2,047,573 |
| | 1,935,798 |
| | 537,823 |
| | 26.3 |
| | 111,775 |
| | 5.8 |
|
| | | | | | | | | | | | | |
OPERATING PROFIT | 139,843 |
| | 187,058 |
| | 277,029 |
| | (47,215 | ) | | (25.2 | ) | | (89,971 | ) | | (32.5 | ) |
Interest Income | 2,921 |
| | 2,998 |
| | 3,541 |
| | (77 | ) | | (2.6 | ) | | (543 | ) | | (15.3 | ) |
Interest Expense | (19,215 | ) | | (5,613 | ) | | (6,392 | ) | | 13,602 |
| | 242.3 |
| | (779 | ) | | (12.2 | ) |
Other Non-Operating (Expense) Income, Net | (1,845 | ) | | 517 |
| | 2,677 |
| | (2,362 | ) | | (456.9 | ) | | (2,160 | ) | | (80.7 | ) |
| | | | | | | | | | | | | |
EARNINGS BEFORE INCOME TAXES | 121,704 |
| | 184,960 |
| | 276,855 |
| | (63,256 | ) | | (34.2 | ) | | (91,895 | ) | | (33.2 | ) |
| | | | | | | | | | | | | |
INCOME TAXES | 43,471 |
| | 64,294 |
| | 103,812 |
| | (20,823 | ) | | (32.4 | ) | | (39,518 | ) | | (38.1 | ) |
| | | | | | | | | | | | | |
NET EARNINGS | $ | 78,233 |
| | $ | 120,666 |
| | $ | 173,043 |
| | $ | (42,433 | ) | | (35.2 | )% | | $ | (52,377 | ) | | (30.3 | )% |
nmf—Calculation is not meaningful
Revenues
Information about our revenues by reportable segment is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Change |
| Year Ended December 31, | | 2014 vs. 2013 | | 2013 vs. 2012 |
(In Thousands) | 2014 | | 2013 | | 2012 | | $ | | % | | $ | | % |
REVENUES: | | | | | | | | | | | | | |
Sales and Lease Ownership1 | $ | 2,037,101 |
| | $ | 2,076,269 |
| | $ | 2,068,124 |
| | $ | (39,168 | ) | | (1.9 | )% | | $ | 8,145 |
| | .4 | % |
Progressive2 | 549,548 |
| | — |
| | — |
| | 549,548 |
| | nmf |
| | — |
| | — |
|
HomeSmart1 | 64,276 |
| | 62,840 |
| | 55,226 |
| | 1,436 |
| | 2.3 |
| | 7,614 |
| | 13.8 |
|
Franchise3 | 65,902 |
| | 68,575 |
| | 66,655 |
| | (2,673 | ) | | (3.9 | ) | | 1,920 |
| | 2.9 |
|
Manufacturing | 104,058 |
| | 106,523 |
| | 95,693 |
| | (2,465 | ) | | (2.3 | ) | | 10,830 |
| | 11.3 |
|
Other | 2,969 |
| | 22,158 |
| | 19,688 |
| | (19,189 | ) | | (86.6 | ) | | 2,470 |
| | 12.5 |
|
Revenues of Reportable Segments | 2,823,854 |
| | 2,336,365 |
| | 2,305,386 |
| | 487,489 |
| | 20.9 |
| | 30,979 |
| | 1.3 |
|
Elimination of Intersegment Revenues | (102,296 | ) | | (103,834 | ) | | (95,150 | ) | | 1,538 |
| | 1.5 |
| | (8,684 | ) | | (9.1 | ) |
Cash to Accrual Adjustments | 3,681 |
| | 2,100 |
| | 2,591 |
| | 1,581 |
| | 75.3 |
| | (491 | ) | | (19.0 | ) |
Total Revenues from External Customers | $ | 2,725,239 |
| | $ | 2,234,631 |
| | $ | 2,212,827 |
| | $ | 490,608 |
| | 22.0 | % | | $ | 21,804 |
| | 1.0 | % |
nmf—Calculation is not meaningful |
1 Segment revenue consists of lease revenues and fees, retail sales and non-retail sales. |
2 Segment revenue consists of lease revenues and fees. |
3 Segment revenue consists of franchise royalties and fees. |
Year Ended December 31, 2014 Versus Year Ended December 31, 2013
Sales and Lease Ownership. Sales and Lease Ownership segment revenues decreased $39.2 million to $2.037 billion due to a $33.1 million, or 2.0%, decrease in lease revenues and fees and a $7.0 million, or 1.9%, decrease in non-retail sales. Lease revenues and fees within the Sales and Lease Ownership segment decreased due to a 3.0% decrease in same store revenues, which more than offset the net addition of 16 Sales and Lease Ownership stores since the beginning of 2013. Non-retail sales decreased primarily due to less demand for product by franchisees.
Progressive. Progressive segment revenues were $549.5 million and have been included in the Company’s consolidated results from the April 14, 2014 acquisition date.
HomeSmart. HomeSmart segment revenues increased $1.4 million to $64.3 million due to a $1.3 million, or 2.2%, increase in lease revenues and fees. Lease revenues and fees within the HomeSmart segment increased due to a net addition of five HomeSmart stores since the beginning of 2013.
Franchise. Franchise segment revenues decreased $2.7 million to $65.9 million primarily due to a decrease in finance fees under the franchise loan program.
Other. Revenues in the Other segment are primarily revenues attributable to (i) the RIMCO segment through the date of sale in January 2014, (ii) leasing space to unrelated third parties in the corporate headquarters building and (iii) several minor unrelated activities.
Year Ended December 31, 2013 Versus Year Ended December 31, 2012
Sales and Lease Ownership. Sales and Lease Ownership segment revenues increased $8.1 million to $2.076 billion due to a $63.0 million, or 3.9%, increase in lease revenues and fees, partially offset by a $56.8 million, or 13.3%, decrease in non-retail sales. Lease revenues and fees within the Sales and Lease Ownership segment increased due to a net addition of 118 Company-operated stores since the beginning of 2012 and a .6% increase in same store revenues. Non-retail sales decreased primarily due to less demand for product by franchisees.
HomeSmart. HomeSmart segment revenues increased $7.6 million to $62.8 million due to $7.2 million, or 13.3%, increase in lease revenues and fees. Lease revenues and fees within the HomeSmart segment increased due to a net addition of 10 HomeSmart stores since the beginning of 2012 and a 9.3% increase in same store revenues.
Franchise. Franchise segment revenues increased $1.9 million to $68.6 million primarily due to an increase in royalty income from franchisees. Franchise royalty income increased due to the net addition of 68 franchised stores since the beginning of 2012 and a 1.5% increase in same store revenues of existing franchised stores.
Other. Revenues in the Other segment are primarily revenues attributable to (i) the RIMCO segment, (ii) leasing space to unrelated third parties in the corporate headquarters building, (iii) the Aaron's Office Furniture division through the date of sale in August 2012 and (iv) several minor unrelated activities.
Costs and Expenses
Year Ended December 31, 2014 Versus Year Ended December 31, 2013
Depreciation of lease merchandise. Depreciation of lease merchandise increased $304.5 million, or 48.5%, to $932.6 million during 2014 from $628.1 million during the comparable period in 2013. Levels of merchandise on lease relative to total lease merchandise for the Aaron's core business were consistent year over year, resulting in idle merchandise representing approximately 6% of total depreciation expense in 2014 as compared to 7% in 2013. As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to 41.4% from 35.9% in the prior year, primarily due to the inclusion of Progressive’s results of operations from the April 14, 2014 acquisition date. Progressive’s inclusion increased depreciation as a percentage of lease revenues due to, among other factors, their merchandise having a shorter average life on lease, as well as a higher rate of early buyouts, than our traditional lease-to-own business.
Retail cost of sales. Retail cost of sales increased $223,000, or .9%, to $24.5 million in 2014 from $24.3 million for the comparable period in 2013, and as a percentage of retail sales, increased to 64.0% from 59.5% due to increased discounting of pre-leased merchandise.
Non-retail cost of sales. Non-retail cost of sales decreased $7.5 million, or 2.2%, to $330.1 million in 2014, from $337.6 million for the comparable period in 2013, and as a percentage of non-retail sales, remained consistent at approximately 91% in both periods.
Operating expenses. Operating expenses increased $239.3 million, or 23.4%, to $1.3 billion in 2014, from $1.0 billion for the comparable period in 2013 due primarily to the consolidation of Progressive’s results from operations from the April 14, 2014 acquisition date. As a percentage of total revenues, operating expenses increased to 46.3% in 2014 from 45.8% in 2013 due to increased personnel, advertising and facility rent costs in Aaron's core business.
Financial advisory and legal costs. Financial advisory and legal costs of $13.7 million were incurred during 2014 related to addressing now-resolved strategic matters, including an unsolicited acquisition offer, two proxy contests and shareholder proposals.
Restructuring expenses. In connection with the Company’s July 15, 2014 announced closure of 44 Company-operated stores, restructuring charges of $9.1 million were incurred during in 2014. The restructuring was completed during the third quarter of 2014 and total restructuring charges were principally comprised of contractual lease obligations, the write-off and impairment of property, plant and equipment and workforce reductions.
Retirement and vacation charges. Retirement charges of $9.1 million were incurred during 2014 due to the retirements of both the Company’s Chief Executive Officer and Chief Operating Officer in 2014. Retirement and vacation charges during 2013 were $4.9 million primarily due to the retirement of the Company’s Chief Operating Officer and a change in the Company’s vacation policies.
Progressive-related transaction costs. Financial advisory and legal fees of $6.6 million were incurred in 2014 in connection with the April 14, 2014 acquisition of Progressive.
Legal and regulatory (income) expense. Regulatory income of $1.2 million in 2014 was recorded as a reduction in previously recognized regulatory expense upon the resolution of the regulatory investigation by the California Attorney General into the Company’s leasing, marketing and privacy practices. During 2013, regulatory expenses of $28.4 million were incurred related to the then-pending regulatory investigation by the California Attorney General. Refer to Note 8 to the Company’s consolidated financial statements for further discussion of this regulatory investigation.
Year Ended December 31, 2013 Versus Year Ended December 31, 2012
Depreciation of lease merchandise. Depreciation of lease merchandise increased $26.5 million to $628.1 million during 2013 from $601.6 million during the comparable period in 2012, or 4.4%, as a result of higher on-rent lease merchandise due to the growth of the Company’s Sales and Lease Ownership and HomeSmart segments. Levels of merchandise on lease decreased, resulting in idle merchandise representing approximately 7% of total depreciation expense in 2013 as compared to approximately 6% in 2012. As a percentage of total lease revenues and fees, depreciation of lease merchandise remained consistent at 35.9% in both periods.
Retail cost of sales. Retail cost of sales increased $2.7 million, or 12.5%, to $24.3 million in 2013, from $21.6 million for the comparable period in 2012, and as a percentage of retail sales, increased to 59.5% from 56.2% due to a change in the mix of products.
Non-retail cost of sales. Non-retail cost of sales decreased $49.8 million, or 12.9%, to $337.6 million in 2013, from $387.4 million for the comparable period in 2012, and as a percentage of non-retail sales, remained consistent at approximately 91% in both periods.
Operating expenses. Operating expenses increased $70.1 million, or 7.4%, to $1.0 billion in 2013 from $952.6 million for the comparable period in 2012. As a percentage of total revenues, operating expenses increased to 45.8% in 2013 from 43.0% in 2012 due to increased personnel, advertising and facility rent costs incurred to support continued revenue and store growth; increased lease merchandise adjustments; and a decrease in non-retail sales due to less demand for products by franchisees.
Retirement and vacation charges. Retirement and vacation charges during 2013 were $4.9 million due primarily to the retirement of the Company’s Chief Operating Officer and a change in the Company’s vacation policies. Retirement and vacation charges during 2012 were $10.4 million associated with the retirement of the Company’s founder and Chairman of the Board.
Legal and regulatory (income) expense. Regulatory expense during 2013 was $28.4 million relating to a then-pending regulatory investigation by the California Attorney General into the Company’s leasing, marketing and privacy practices. Refer to Note 8 to the Company’s consolidated financial statements for further discussion of this regulatory investigation. Legal and regulatory income during 2012 was $35.5 million and represents the reversal of an accrual in the first quarter of 2012 related to the settlement of a lawsuit.
Other Operating Expense (Income), Net
Other operating expense (income), net consists of gains or losses on sales of Company-operated stores and delivery vehicles, impairment charges on assets held for sale and gains or losses on other dispositions of property, plant and equipment. Information about the components of other operating expense (income), net is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(In Thousands) | 2014 | | 2013 | | 2012 |
Gains on sales of stores and delivery vehicles | $ | (2,793 | ) | | $ | (2,728 | ) | | $ | (3,545 | ) |
Impairment charges and losses on asset dispositions | 1,617 |
| | 4,312 |
| | 1,310 |
|
Other Operating Expense (Income), Net | $ | (1,176 | ) | | $ | 1,584 |
| | $ | (2,235 | ) |
In 2014, other operating income, net of $1.2 million included charges of $477,000 related to the impairment of various land outparcels and buildings that the Company decided not to utilize for future expansion and $762,000 related to the loss on sale of the RIMCO net assets. In addition, the Company recognized gains of $1.7 million from the sale of six Aaron's Sales & Lease Ownership stores during 2014.
In 2013, other operating expense, net of $1.6 million included charges of $3.8 million related to the impairment of various land outparcels and buildings that the Company decided not to utilize for future expansion and the net assets of the RIMCO operating segment (principally consisting of lease merchandise, office furniture and leasehold improvements) in connection with the Company's decision to sell the 27 Company-operated RIMCO stores. In addition, the Company recognized gains of $833,000 from the sale of two Aaron's Sales & Lease Ownership stores during 2013.
In 2012, other operating income, net of $2.2 million included gains $2.0 million from the sale of four stores.
Operating Profit
Interest income. Interest income decreased to $2.9 million in 2014 from $3.0 million in 2013 due to lower average interest-bearing investment and cash equivalent balances during 2014 as compared to 2013. Interest income decreased to $3.0 million in 2013 from $3.5 million during 2012 due to lower average investment and cash equivalent balances during 2013 as compared to 2012.
Interest expense. Interest expense increased to $19.2 million in 2014 from $5.6 million in 2013 due primarily to approximately $491.3 million of additional debt financing incurred in connection with the April 14, 2014 Progressive acquisition. Interest expense decreased to $5.6 million in 2013 from $6.4 million in 2012 due to lower average debt levels during 2013 as a result of the repayment at maturity of the remaining $12.0 million outstanding under the Company's 5.03% senior unsecured notes issued in July 2005 and due July 2012.
Other non-operating (expense) income, net. Other non-operating (expense) income, net includes the impact of foreign currency exchange gains and losses, as well as gains and losses resulting from changes in the cash surrender value of Company-owned life insurance related to the Company's deferred compensation plan. Included in other non-operating (expense) income, net were foreign exchange transaction losses of $2.3 million and $1.0 million during 2014 and 2013, respectively, and gains of $2.0 million during 2012. Changes in the cash surrender value of Company-owned life insurance resulted in gains of $432,000, $1.5 million and $703,000 during 2014, 2013 and 2012, respectively.
Earnings Before Income Taxes
Information about our earnings before income taxes by reportable segment is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Change |
| Year Ended December 31, | | 2014 vs. 2013 | | 2013 vs. 2012 |
(In Thousands) | 2014 | | 2013 | | 2012 | | $ | | % | | $ | | % |
EARNINGS BEFORE INCOME TAXES: | | | | | | | | | | | | | |
Sales and Lease Ownership | $ | 140,854 |
| | $ | 183,965 |
| | $ | 244,014 |
| | $ | (43,111 | ) | | (23.4 | )% | | $ | (60,049 | ) | | (24.6 | )% |
Progressive | 4,603 |
| | — |
| | — |
| | 4,603 |
| | nmf |
| | — |
| | — |
|
HomeSmart | (2,643 | ) | | (3,428 | ) | | (6,962 | ) | | 785 |
| | 22.9 |
| | 3,534 |
| | 50.8 |
|
Franchise | 50,504 |
| | 54,171 |
| | 52,672 |
| | (3,667 | ) | | (6.8 | ) | | 1,499 |
| | 2.8 |
|
Manufacturing | 860 |
| | 107 |
| | 382 |
| | 753 |
| | 703.7 |
| | (275 | ) | | (72.0 | ) |
Other | (75,905 | ) | | (56,114 | ) | | (12,337 | ) | | (19,791 | ) | | (35.3 | ) | | (43,777 | ) | | nmf |
|
Earnings Before Income Taxes for Reportable Segments | 118,273 |
| | 178,701 |
| | 277,769 |
| | (60,428 | ) | | (33.8 | ) | | (99,068 | ) | | (35.7 | ) |
Elimination of Intersegment Profit | (813 | ) | | (94 | ) | | (393 | ) | | (719 | ) | | (764.9 | ) | | 299 |
| | 76.1 |
|
Cash to Accrual and Other Adjustments | 4,244 |
| | 6,353 |
| | (521 | ) | | (2,109 | ) | | (33.2 | ) | | 6,874 |
| | nmf |
|
Total | $ | 121,704 |
| | $ | 184,960 |
| | $ | 276,855 |
| | $ | (63,256 | ) | | (34.2 | )% | | $ | (91,895 | ) | | (33.2 | )% |
nmf—Calculation is not meaningful
During 2014, earnings before income taxes decreased $63.3 million, or 34.2%, to $121.7 million from $185.0 million in 2013. In 2014 the results of the Company's operating segments were impacted by the following items:
| |
• | Sales and Lease Ownership earnings before income taxes included $4.8 million of restructuring charges related to the Company's strategic decision to close 44 Company-operated stores. |
| |
• | Other segment loss before income taxes included $13.7 million in financial and advisory costs related to addressing strategic matters, including proxy contests, $4.3 million of restructuring charges in connection with the store closures noted above, $9.1 million of charges associated with the retirement of both the Company's Chief Executive Officer and Chief Operating Officer, $6.6 million in transaction costs related to the Progressive acquisition and $1.2 million of regulatory income that reduced previously recognized regulatory expense upon the resolution of the regulatory investigation by the California Attorney General. |
During 2013, earnings before income taxes decreased $91.9 million, or 33.2% from $276.9 million in 2012. In 2013, the results of the Company's operating segments were impacted by the following items:
| |
• | Other segment loss before income taxes included $28.4 million related to an accrual for loss contingencies for the then-pending regulatory investigation by the California Attorney General and $4.9 million related to retirement expense and a change in vacation policies. |
In 2012, the results of the Company's operating segments were impacted by the following items:
| |
• | Sales and Lease Ownership earnings before income taxes included a $35.5 million reversal of a previously accrued lawsuit loss contingency. |
| |
• | Other segment loss before income taxes included $10.4 million in retirement charges associated with the retirement of the Company’s founder and Chairman of the Board. |
Income Tax Expense
Income tax expense decreased $20.8 million to $43.5 million in 2014, compared with $64.3 million in 2013, representing a 32.4% decrease due primarily to a 34.2% decrease in earnings before income taxes in 2014. Our effective tax rate increased to 35.7% in 2014 from 34.8% in 2013 as a result of decreased tax benefits related to the Company's furniture manufacturing operations and reduced federal credits.
Income tax expense decreased $39.5 million to $64.3 million in 2013, compared with $103.8 million in 2012, representing a 38.1% decrease due to a 33.2% decrease in earnings before income taxes in 2013 and a lower tax rate in 2013. Our effective tax rate decreased to 34.8% in 2013 from 37.5% in 2012 due to the recognition of income tax benefits primarily related to the Company's furniture manufacturing operations and increased federal and state tax credits being applied to lower than expected earnings.
Net Earnings
Net earnings decreased $42.4 million to $78.2 million in 2014 from $120.7 million in 2013, representing a 35.2% decrease. As a percentage of total revenues, net earnings were 2.9% and 5.4% in 2014 and 2013, respectively.
Net earnings decreased $52.4 million to $120.7 million in 2013 from $173.0 million in 2012, representing a 30.3% decrease. As a percentage of total revenues, net earnings were 5.4% and 7.8% in 2013 and 2012, respectively.
Overview of Financial Position
The Company’s consolidated balance sheet as of December 31, 2014 includes the impact of Progressive, which was acquired on April 14, 2014. The major changes in the consolidated balance sheet from December 31, 2013 to December 31, 2014, substantially all of which are the result of this significant acquisition, are as follows:
| |
• | Cash and cash equivalents decreased $227.5 million due primarily to the Company's use of approximately $693.1 million in cash on hand to partially finance the $700.0 million Progressive acquisition. Refer to “Liquidity and Capital Resources” below and Note 2 to the consolidated financial statements for further details regarding this transaction. |
| |
• | Investments decreased $91.1 million due to the sale of the Company's corporate bonds as a result of the Progressive acquisition. |
| |
• | Lease merchandise increased $217.3 million due primarily to the consolidation of Progressive's lease merchandise of $227.1 million as of December 31, 2014. |
| |
• | Goodwill increased $291.5 million due primarily to the addition of estimated Progressive-related goodwill of $289.2 million. Refer to Note 2 to the consolidated financial statements for further details regarding the acquisition accounting of this transaction. |
| |
• | Other intangible assets increased $293.9 million due primarily to recording the estimated fair value of identifiable Progressive-related intangible assets of $325.0 million. Refer to Note 2 to the consolidated financial statements for further details regarding the acquisition accounting of this transaction. |
| |
• | Income tax receivable increased $117.9 million primarily as a result of the enactment of the Tax Increase Prevention Act of 2014 in December 2014, which extended bonus depreciation on eligible inventory held during 2014. Throughout the year, the Company made payments based on the enacted law, resulting in an overpayment when the act was signed. |
| |
• | Deferred income taxes payable increased $41.6 million due primarily to the addition of $48.7 million of Progressive-related deferred tax liabilities. Refer to Note 2 to the consolidated financial statements for further details regarding the acquisition accounting of this transaction. |
| |
• | Debt increased $463.4 million due primarily to additional debt financing incurred to partially finance the $700.0 million Progressive acquisition. In connection with the acquisition, the Company incurred $491.3 million in additional debt, comprised of $300.0 million in senior unsecured notes, $126.3 million in term loans and $65.0 million in revolving credit facility borrowings. The Company used proceeds from the sale of corporate bonds to reduce the Progressive acquisition-related debt. Refer to “Liquidity and Capital Resources” below and Note 6 to the consolidated financial statements for further details regarding the Company's financing arrangements. |
Liquidity and Capital Resources
General
The Company's operating activities resulted in a use of cash in operating activities of $49.0 million for 2014 and resulted in cash provided by operating activities of $308.4 million and $59.8 million in 2013 and 2012, respectively. The $357.4 million decrease in cash flows from operating activities during 2014 as compared to 2013 was due, in part, to lower pretax earnings, a net $165.8 million increase in lease merchandise, net of the effects of acquisitions, and a $140.6 million decrease related to the Company's income tax receivable that existed as of December 31, 2014. The change in income tax receivable is due to the enactment of the Tax Increase Prevention Act of 2014 in December 2014, which extended bonus depreciation on eligible inventory held during 2014. Throughout the year, the Company made payments based on the enacted law, resulting in an overpayment when the act was signed.
Purchases of sales and lease ownership stores had a positive impact on operating cash flows. The positive impact on operating cash flows from purchasing stores occurs as the result of lease merchandise, other assets and intangibles acquired in these purchases being treated as an investing cash outflow. 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 lease merchandise purchased in acquisitions and shown under investing activities was $144.0 million in 2014, substantially all of which was the direct result of the April 14, 2014 Progressive acquisition. During 2013 and 2012, investing activities included the impact of $4.0 million and $11.9 million, respectively, of lease merchandise purchased in acquisitions.
Sales of Company-operated stores are an additional source of investing cash flows. Proceeds from such sales were $16.5 million in 2014 and included cash consideration of $10.0 million from a third party in connection with the sale of the 27 Company-operated RIMCO stores and the rights to five franchised RIMCO stores in January 2014. Proceeds from the sales of Company-operated stores were $2.2 million and $2.0 million in 2013 and 2012, respectively. The amount of lease merchandise sold in these sales and shown under investing activities was $3.1 million in 2014, $882,000 in 2013 and $1.4 million in 2012.
Our primary capital requirements consist of buying lease merchandise for sales and lease ownership stores and Progressive's operations. As we continue to grow, the need for additional lease merchandise is expected to remain our major capital requirement. Other capital requirements include purchases of property, plant and equipment and expenditures for acquisitions and income tax payments. These capital requirements historically have been financed through:
| |
• | cash flows from operations; |
| |
• | trade credit with vendors; |
| |
• | proceeds from the sale of lease return merchandise; and |
Debt Financing
In connection with the Company's acquisition of Progressive on April 14, 2014, the Company amended and restated its revolving credit agreement, amended certain other financing agreements and entered into two new note purchase agreements. On December 9, 2014, the Company amended the amended and restated revolving credit agreement, the senior unsecured notes and the franchise loan agreement. The April 2014 and December 2014 amendments are discussed in further detail in Note 6 to the Company's consolidated financial statements.
As of December 31, 2014, $121.9 million and $69.1 million of term loans and revolving credit balances, respectively, were outstanding under the revolving credit agreement. Our current revolving credit facility matures December 9, 2019 and the total available credit on the facility as of December 31, 2014 was $155.9 million.
As of December 31, 2014, the Company had outstanding $300.0 million in aggregate principal amount of senior unsecured notes issued in a private placement in connection with the April 14, 2014 Progressive acquisition. The notes bear interest at the rate of 4.75% per year and mature on April 14, 2021. Payments of interest are due quarterly, commencing July 14, 2014, with principal payments of $60.0 million each due annually commencing April 14, 2017.
As of December 31, 2014, the Company had outstanding $100.0 million in senior unsecured notes originally issued to several insurance companies in a private placement in July 2011. Effective April 28, 2014, the notes bear interest at the rate of 3.95% per year and mature on April 27, 2018. Quarterly payments of interest commenced July 27, 2011, and annual principal payments of $25.0 million commenced April 27, 2014.
Our revolving credit agreement and senior unsecured notes, and our franchise loan agreement discussed below, contain certain financial covenants. These covenants include requirements that the Company maintain ratios of (i) EBITDA plus lease expense to fixed charges of no less than 1.75:1.00 through December 31, 2015 and 2.00:1.00 thereafter and (ii) total debt to EBITDA of no greater than 3.25:1.00 through December 31, 2015 and 3.00:1.00 thereafter. In each case, EBITDA refers to the Company’s consolidated net income before interest and tax expense, depreciation (other than lease merchandise depreciation), amortization expense and other non-cash charges. If we fail to comply with these covenants, we will be in default under these agreements, and all amounts will become due immediately. We were in compliance with all of these covenants at December 31, 2014 and believe that we will continue to be in compliance in the future.
Share Repurchases
We purchase our stock in the market from time to time as authorized by our Board of Directors. In December 2013, the Company paid $125.0 million under an accelerated share repurchase program with a third party financial institution and received an initial delivery of 3,502,627 shares. In February 2014, the accelerated share repurchase program was completed and the Company received an additional 1,000,952 shares of common stock. As of December 31, 2014, the Company has 10,496,421 shares authorized for repurchase.
Dividends
We have a consistent history of paying dividends, having paid dividends for 27 consecutive years. Our annual common stock dividend was $.086 per share, $.072 per share and $.062 per share in 2014, 2013 and 2012, respectively, and resulted in aggregate dividend payments of $7.8 million, $3.9 million and $5.8 million in 2014, 2013 and 2012, respectively. At its November 2014 meeting, our Board of Directors increased the quarterly dividend by 9.5%, raising it to $.023 per share. The Company also increased its quarterly dividend rate by 23.5%, to $.021 per share, in November 2013 and by 13.3%, to $.017 per share, in November 2012. 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 operations, we anticipate we will supplement our expected cash flows from operations, existing credit facilities, vendor credit and proceeds from the sale of lease return merchandise 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 12 to 24 months.
Commitments
Income Taxes. During the year ended December 31, 2014, we made $187.7 million in income tax payments. Within the next twelve months, we anticipate that we will make cash payments for federal and state income taxes of approximately $83.0 million, net of refunds.
The American Recovery and Reinvestment Act of 2009, and the Small Business Jobs Act of 2010 provided for accelerated depreciation by allowing a bonus 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. The American Taxpayer Relief Act of 2012 extended bonus depreciation of 50% through the end of 2013. The Tax Increase Prevention Act of 2014 signed into law on December 20, 2014 extended bonus depreciation and reauthorized work opportunity tax credits through the end of 2014. As a result, the Company has already applied for and received a $100.0 million quick refund from the IRS. Accordingly, our cash flow benefited from having a lower cash tax obligation, which, in turn, provided additional cash flow from operations. Because of our sales and lease ownership model, where the Company 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 2014 and prior periods. We estimate that at December 31, 2014, the remaining tax deferral associated with the acts described above is approximately $176.0 million, of which approximately 79% is expected to reverse in 2015 and most of the remainder during 2016 and 2017.
Leases. We lease warehouse and retail store space for most of our store-based operations, as well as corporate management and call center space for Progressive's operations, under operating leases expiring at various times through 2029. Most of the leases contain renewal options for additional periods ranging from one to 20 years or provide for options to purchase the related property at predetermined purchase prices that do not represent bargain purchase options. We also lease computer equipment and transportation vehicles under operating leases expiring during the next four 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, 2014 are shown in the below table under “Contractual Obligations and Commitments.”
As of December 31, 2014, we have 20 capital leases, 19 of which are with a limited liability company (“LLC”) whose managers and owners are five current officers (of which four are current executive officers) and six former officers of the Company, 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 $788,000. Another 10 of these related party leases relate to properties purchased from the Company in December 2002 by the LLC for a total purchase price of approximately $5.0 million. The LLC leases back these properties to the Company for a 15-year term at an aggregate annual lease of $1.2 million. 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 operating 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 under "Contractual Obligations and Commitments."
Franchise Loan Guaranty. We have guaranteed the borrowings of certain independent franchisees under a franchise loan agreement with several banks. On April 14, 2014, in connection with the Progressive acquisition, the Company entered into the third amended and restated loan facility and guaranty. The amended franchise loan facility (i) reduces the maximum commitment available from $200.0 million to $175.0 million, (ii) conforms the interest rates on the facility to the rates applicable to the new revolving credit agreement and (iii) conforms the covenants, representations, warranties and events of default to the changes reflected in the revolving credit agreement, to contemplate the acquisition of Progressive, and to authorize the new 2014 senior unsecured notes.
On December 9, 2014, we amended our third amended and restated loan facility to, among other things, (i) extend the maturity date to December 9, 2015, (ii) modify certain financial covenants to make them more favorable to the Company, as more fully described in Note 6 to the Company's consolidated financial statements, (iii) provide for the joinder of certain new banks and other financial institutions as participants, (iv) amend and restate certain schedules and (v) add and modify certain other terms, covenants and representations and warranties.
At December 31, 2014, the portion that we might be obligated to repay in the event franchisees defaulted was $89.8 million. 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 associated losses. We believe the likelihood of any significant amounts being funded in connection with these commitments to be remote.
Contractual Obligations and Commitments. The following table shows our approximate contractual obligations, including interest, and commitments to make future payments as of December 31, 2014:
|
| | | | | | | | | | | | | | | | | | | |
(In Thousands) | Total | | Period Less Than 1 Year | | Period 1-3 Years | | Period 3-5 Years | | Period Over 5 Years |
Debt, Excluding Capital Leases | $ | 594,241 |
| | $ | 109,866 |
| | $ | 135,000 |
| | $ | 229,375 |
| | $ | 120,000 |
|
Capital Leases | 11,841 |
| | 2,731 |
| | 5,347 |
| | 2,672 |
| | 1,091 |
|
Interest Obligations | 85,448 |
| | 21,417 |
| | 36,731 |
| | 21,645 |
| | 5,655 |
|
Operating Leases | 519,294 |
| | 116,564 |
| | 171,070 |
| | 105,935 |
| | 125,725 |
|
Purchase Obligations | 20,839 |
| | 17,991 |
| | 2,485 |
| | 363 |
| | — |
|
Retirement Obligations | 7,678 |
| | 3,473 |
| | 4,144 |
| | 26 |
| | 35 |
|
Regulatory | 27,200 |
| | 27,200 |
| | — |
| | — |
| | — |
|
Total Contractual Cash Obligations | $ | 1,266,541 |
| | $ | 299,242 |
|
| $ | 354,777 |
|
| $ | 360,016 |
|
| $ | 252,506 |
|
For future interest payments on variable-rate debt, which are based on a specified margin plus a base rate (LIBOR), we used the variable rate in effect at December 31, 2014 to calculate these payments. Our variable rate debt at December 31, 2014 consisted of our borrowings under our revolving credit facilities. Future interest payments related to our revolving credit facilities are based on the borrowings outstanding at December 31, 2014 through their respective maturity dates, assuming such borrowings are outstanding at that time. The variable portion of the rate at December 31, 2014 ranged between 2.06% and 2.17% for all of our variable-rate debt. Future interest payments may be different depending on future borrowing activity and interest rates.
The following table shows the Company’s approximate commercial commitments as of December 31, 2014:
|
| | | | | | | | | | | | | | | | | | | |
(In Thousands) | Total Amounts Committed | | Period Less Than 1 Year | | Period 1-3 Years | | Period 3-5 Years | | Period Over 5 Years |
Guaranteed Borrowings of Franchisees | $ | 89,800 |
| | $ | 89,800 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Purchase obligations are primarily related to certain advertising and marketing programs. We have no long-term commitments to purchase merchandise nor do we have significant purchase agreements that specify minimum quantities or set prices that exceed our expected requirements for three months.
Retirement obligations primarily represent future payments associated with the retirement of the Company's founder and Chairman of the Board during the year ended December 31, 2012, the Chief Operating Officer during the year ended December 2013 and both the Chief Executive Officer and the Chief Operating Officer during the year ended December 31, 2014.
Deferred income tax liabilities as of December 31, 2014 were approximately $268.6 million. This amount is not included in the total contractual obligations table because we believe this presentation would not be meaningful. Deferred income tax liabilities are calculated based on temporary differences between the tax basis of assets and liabilities and their respective book basis, which will result in taxable amounts in future years when the liabilities are settled at their reported financial statement amounts. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods. As a result, scheduling deferred income tax liabilities as payments due by period could be misleading, because this scheduling would not relate to liquidity needs.
Recent Accounting Pronouncements
Refer to Note 1 to the Company's consolidated financial statements for a discussion of recently issued accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In connection with the Progressive acquisition, in April 2014, the Company amended its revolving credit agreement, amended certain financing agreements and entered into two new note purchase agreements, which are discussed in further detail in Note 6 to the consolidated financial statements.
As of December 31, 2014, we had $400 million of senior unsecured notes outstanding at a weighted-average fixed rate of 4.6%. Amounts outstanding under our revolving credit agreement as of December 31, 2014 consisted of $121.9 million in term loans and $69.1 million of revolving credit balances. Borrowings under the revolving credit agreement are indexed to LIBOR or the prime rate, which exposes us to the risk of increased interest costs if interest rates rise. Based on the Company's variable-rate debt outstanding as of December 31, 2014, a hypothetical 1.0% increase or decrease in interest rates would have increased or decreased interest expense by $1.9 million.
We do not use any significant market risk sensitive instruments to hedge commodity, foreign currency or other risks, and hold no market risk sensitive instruments for trading or speculative purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors of Aaron’s, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Aaron’s, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of earnings, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aaron’s, Inc. and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Aaron’s, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 2, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 2, 2015
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
The Board of Directors of Aaron’s, Inc. and Subsidiaries
We have audited Aaron’s, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Aaron’s, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompany Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Progressive Finance Holdings, LLC (“Progressive”), which is included in the 2014 consolidated financial statements of Aaron’s, Inc. and constituted approximately 35% of total consolidated assets as of December 31, 2014 and approximately 20% of consolidated total revenues for the year then ended. Our audit of the internal control over financial reporting of Aaron’s, Inc. also did not include an evaluation of the internal control over financial reporting of Progressive.
In our opinion, Aaron’s, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Aaron’s, Inc. and subsidiaries as of December 31, 2014 and 2013 and the related consolidated statements of earnings, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2014 of Aaron’s, Inc. and subsidiaries and our report dated March 2, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 2, 2015
Management Report on Internal Control over Financial Reporting
Management of Aaron’s, Inc. and subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) in Internal Control-Integrated Framework. Based on its assessment using those criteria, management concluded that, as of December 31, 2014, the Company’s internal control over financial reporting was effective.
On April 14, 2014, the Company acquired a 100% ownership interest in Progressive Finance Holdings, LLC (“Progressive”) for merger consideration of $700 million, net of cash acquired. As permitted by Securities and Exchange Commission guidance, the scope of management’s evaluation does not include Progressive’s internal controls over financial reporting. Progressive represented 35% of the Company's consolidated total assets as of December 31, 2014 and 20% of the Company’s consolidated total revenues for the year ended December 31, 2014.
The Company’s internal control over financial reporting as of December 31, 2014 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report dated March 2, 2015, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| December 31,
2014 | | December 31,
2013 |
| (In Thousands, Except Share Data) |
ASSETS: | | | |
Cash and Cash Equivalents | $ | 3,549 |
| | $ | 231,091 |
|
Investments | 21,311 |
| | 112,391 |
|
Accounts Receivable (net of allowances of $27,401 in 2014 and $7,172 in 2013) | 107,383 |
| | 68,684 |
|
Lease Merchandise (net of accumulated depreciation of $701,822 in 2014 and $594,436 in 2013) | 1,087,032 |
| | 869,725 |
|
Property, Plant and Equipment, Net | 219,417 |
| | 231,293 |
|
Goodwill | 530,670 |
| | 239,181 |
|
Other Intangibles, Net | 297,471 |
| | 3,535 |
|
Income Tax Receivable | 124,095 |
| | 6,201 |
|
Prepaid Expenses and Other Assets | 59,560 |
| | 49,235 |
|
Assets Held for Sale | 6,356 |
| | 15,840 |
|
Total Assets | $ | 2,456,844 |
| | $ | 1,827,176 |
|
LIABILITIES & SHAREHOLDERS’ EQUITY: | | | |
Accounts Payable and Accrued Expenses | $ | 270,421 |
| | $ | 243,910 |
|
Accrued Regulatory Expense | 27,200 |
| | 28,400 |
|
Deferred Income Taxes Payable | 268,551 |
| | 226,958 |
|
Customer Deposits and Advance Payments | 61,069 |
| | 45,241 |
|
Debt | 606,082 |
| | 142,704 |
|
Total Liabilities | 1,233,323 |
| | 687,213 |
|
Commitments and Contingencies (Note 8) | — |
| | — |
|
Shareholders’ Equity: | | | |
Common Stock: Par Value $.50 Per Share; Authorized: 225,000,000; Shares Issued: 90,752,123 at December 31, 2014 and December 31, 2013, respectively | 45,376 |
| | 45,376 |
|
Additional Paid-in Capital | 227,290 |
| | 198,182 |
|
Retained Earnings | 1,274,233 |
| | 1,202,219 |
|
Accumulated Other Comprehensive Loss | (90 | ) | | (64 | ) |
| 1,546,809 |
| | 1,445,713 |
|
Less: Treasury Shares at Cost | | | |
Common Stock: 18,263,589 Shares at December 31, 2014 and 17,795,293
Shares at December 31, 2013 | (323,288 | ) | | (305,750 | ) |
Total Shareholders’ Equity | 1,223,521 |
| | 1,139,963 |
|
Total Liabilities & Shareholders’ Equity | $ | 2,456,844 |
| | $ | 1,827,176 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
|
| | | | | | | | | | | |
| Year Ended December 31, 2014 | | Year Ended December 31, 2013 | | Year Ended December 31, 2012 |
| (In Thousands, Except Per Share Data) |
REVENUES: | | | | | |
Lease Revenues and Fees | $ | 2,251,780 |
| | $ | 1,748,699 |
| | $ | 1,676,391 |
|
Retail Sales | 38,360 |
| | 40,876 |
| | 38,455 |
|
Non-Retail Sales | 363,355 |
| | 371,292 |
| | 425,915 |
|
Franchise Royalties and Fees | 65,902 |
| | 68,575 |
| | 66,655 |
|
Other | 5,842 |
| | 5,189 |
| | 5,411 |
|
| 2,725,239 |
| | 2,234,631 |
| | 2,212,827 |
|
COSTS AND EXPENSES: | | | | | |
Depreciation of Lease Merchandise | 932,634 |
| | 628,089 |
| | 601,552 |
|
Retail Cost of Sales | 24,541 |
| | 24,318 |
| | 21,608 |
|
Non-Retail Cost of Sales | 330,057 |
| | 337,581 |
| | 387,362 |
|
Operating Expenses | 1,262,007 |
| | 1,022,684 |
| | 952,617 |
|
Financial Advisory and Legal Costs | 13,661 |
| | — |
| | — |
|
Restructuring Expenses | 9,140 |
| | — |
| | — |
|
Retirement and Vacation Charges | 9,094 |
| | 4,917 |
| | 10,394 |
|
Progressive-Related Transaction Costs | 6,638 |
| | — |
| | — |
|
Legal and Regulatory (Income) Expense | (1,200 | ) | | 28,400 |
| | (35,500 | ) |
Other Operating (Income) Expense, Net | (1,176 | ) | | 1,584 |
| | (2,235 | ) |
| 2,585,396 |
| | 2,047,573 |
| | 1,935,798 |
|
OPERATING PROFIT | 139,843 |
| | 187,058 |
| | 277,029 |
|
Interest Income | 2,921 |
| | 2,998 |
| | 3,541 |
|
Interest Expense | (19,215 | ) | | (5,613 | ) | | (6,392 | ) |
Other Non-Operating (Expense) Income, Net | (1,845 | ) | | 517 |
| | 2,677 |
|
EARNINGS BEFORE INCOME TAXES | 121,704 |
| | 184,960 |
| | 276,855 |
|
INCOME TAXES | 43,471 |
| | 64,294 |
| | 103,812 |
|
NET EARNINGS | $ | 78,233 |
| | $ | 120,666 |
| | $ | 173,043 |
|
EARNINGS PER SHARE | $ | 1.08 |
| | $ | 1.59 |
| | $ | 2.28 |
|
EARNINGS PER SHARE ASSUMING DILUTION | $ | 1.08 |
| | $ | 1.58 |
| | $ | 2.25 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | |
| Year End December 31, |
(In Thousands) | 2014 | | 2013 | | 2012 |
Net Earnings | $ | 78,233 |
| | $ | 120,666 |
| | $ | 173,043 |
|
Other Comprehensive (Loss) Income: | | | | | |
Foreign Currency Translation: | | | | | |
Foreign Currency Translation Adjustment | (26 | ) | | 5 |
| | (343 | ) |
Less: Reclassification Adjustments for Net Gains Included in Net Earnings | — |
| | — |
| | 373 |
|
Total Other Comprehensive (Loss) Income | (26 | ) | | 5 |
| | 30 |
|
Comprehensive Income | $ | 78,207 |
| | $ | 120,671 |
| | $ | 173,073 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | |
| Treasury Stock | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss |
(In Thousands, Except Per Share) | Shares | | Amount | | | | |
Balance, January 1, 2012 | (15,112 | ) | | $ | (200,106 | ) | | $ | 45,376 |
| | $ | 212,311 |
| | $ | 918,699 |
| | $ | 274 |
|
Dividends, $.062 per share |
| |
| |
| |
| | (4,710 | ) | |
|
Stock-Based Compensation |
| |
| |
| | 6,374 |
| |
| |
|
Reissued Shares | 1,317 |
| | 17,662 |
| |
| | 1,677 |
| |
| |
|
Repurchased Shares | (1,237 | ) | | (34,131 | ) | |
| |
| |
| |
|
Net Earnings |
| |
| |
| |
| | 173,043 |
| |
|
Foreign Currency Translation Adjustment |
| |
| |
| |
| |
| | (343 | ) |
Balance, December 31, 2012 | (15,032 | ) | | (216,575 | ) | | 45,376 |
| | 220,362 |
| | 1,087,032 |
| | (69 | ) |
Dividends, $.072 per share |
| |
| |
| |
| | (5,479 | ) | |
|
Stock-Based Compensation |
| |
| |
| | 2,250 |
| |
| |
|
Reissued Shares | 739 |
| | 10,825 |
| |
| | 570 |
| |
| |
|
Repurchased Shares | (3,502 | ) | | (100,000 | ) | |
| | (25,000 | ) | |
| |
|
Net Earnings |
| |
| |
| |
| | 120,666 |
| |
|
Foreign Currency Translation Adjustment |
| |
| |
| |
|
| |
| | 5 |
|
Balance, December 31, 2013 | (17,795 | ) | | (305,750 | ) | | 45,376 |
| | 198,182 |
| | 1,202,219 |
| | (64 | ) |
Dividends, $.086 per share |
| |
| |
| |
| | (6,219 | ) | |
|
Stock-Based Compensation | 17 |
| | 300 |
| |
| | 10,398 |
| |
| |
|
Reissued Shares | 515 |
| | 7,162 |
| |
| | (6,290 | ) | |
| |
|
Repurchased Shares | (1,001 | ) | | (25,000 | ) | |
| | 25,000 |
| |
| |
|
Net Earnings |
| |
| |
| |
| | 78,233 |
| |
|
Foreign Currency Translation Adjustment |
| |
| |
| |
|
| |
| | (26 | ) |
Balance, December 31, 2014 | (18,264 | ) | | $ | (323,288 | ) | | $ | 45,376 |
| | $ | 227,290 |
| | $ | 1,274,233 |
| | $ | (90 | ) |
The accompanying notes are an integral part of the Consolidated Financial Statements.
AARON’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| Year Ended December 31, 2014 | | Year Ended December 31, 2013 | | Year Ended December 31, 2012 |
| (In Thousands) |
OPERATING ACTIVITIES: | | | | | |
Net Earnings | $ | 78,233 |
| | $ | 120,666 |
| | $ | 173,043 |
|
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: | | | | | |
Depreciation of Lease Merchandise | 932,634 |
| | 628,089 |
| | 601,552 |
|
Other Depreciation and Amortization | 85,600 |
| | 57,016 |
| | 56,783 |
|
Bad Debt Expense | 99,283 |
| | 35,894 |
| | 31,842 |
|
Stock-Based Compensation | 10,863 |
| | 2,342 |
| | 6,454 |
|
Deferred Income Taxes | (7,157 | ) | | (36,763 | ) | | (23,241 | ) |
Other Changes, Net | 2,214 |
| | 3,996 |
| | 1,201 |
|
Changes in Operating Assets and Liabilities, Net of Effects of Acquisitions and Dispositions: | | | | | |
Additions to Lease Merchandise | (1,465,501 | ) | | (964,072 | ) | | (1,162,703 | ) |
Book Value of Lease Merchandise Sold or Disposed | 456,713 |
| | 425,673 |
| | 469,897 |
|
Accounts Receivable | (110,269 | ) | | (30,419 | ) | | (18,528 | ) |
Prepaid Expenses and Other Assets | (5,332 | ) | | (1,349 | ) | | (9,263 | ) |
Income Tax Receivable | (117,894 | ) | | 22,688 |
| | (22,379 | ) |
Accounts Payable and Accrued Expenses | (12,788 | ) | | 16,893 |
| | (4,635 | ) |
Accrued Litigation Expense | (1,200 | ) | | 28,400 |
| | (41,720 | ) |
Customer Deposits and Advance Payments | 5,639 |
| | (617 | ) | | 1,451 |
|
Cash (Used in) Provided by Operating Activities | (48,962 | ) | | 308,437 |
| | 59,754 |
|
INVESTING ACTIVITIES: | | | | | |
Purchase of Investments | — |
| | (74,845 | ) | | (91,000 | ) |
Proceeds from Maturities and Calls of Investments | 89,993 |
| | 47,930 |
| | 102,118 |
|
Additions to Property, Plant and Equipment | (47,565 | ) | | (58,145 | ) | | (65,073 | ) |
Acquisitions of Businesses and Contracts | (700,509 | ) | | (10,898 | ) | | (30,799 | ) |
Proceeds from Dispositions of Businesses and Contracts | 16,525 |
| | 2,163 |
| | 1,999 |
|
Proceeds from Sale of Property, Plant, and Equipment | 6,032 |
| | 6,841 |
| | 6,790 |
|
Cash Used by Investing Activities | (635,524 | ) | | (86,954 | ) | | (75,965 | ) |
FINANCING ACTIVITIES: | | | | | |
Proceeds from Debt | 904,956 |
| | 2,598 |
| | 16,258 |
|
Repayments of Debt | (441,603 | ) | | (4,954 | ) | | (28,519 | ) |
Acquisition of Treasury Stock | — |
| | (125,000 | ) | | (34,131 | ) |
Dividends Paid | (7,823 | ) | | (3,875 | ) | | (5,843 | ) |
Excess Tax Benefits From Stock-Based Compensation | 1,392 |
| | 1,381 |
| | 5,967 |
|
Issuance of Stock Under Stock Option Plans | 4,388 |
| | 9,924 |
| | 15,756 |
|
Other | (4,366 | ) | | — |
| | — |
|
Cash Provided (Used) by Financing Activities | 456,944 |
| | (119,926 | ) | | (30,512 | ) |
(Decrease) Increase in Cash and Cash Equivalents | (227,542 | ) | | 101,557 |
| | (46,723 | ) |
Cash and Cash Equivalents at Beginning of Year | 231,091 |
| | 129,534 |
| | 176,257 |
|
Cash and Cash Equivalents at End of Year | $ | 3,549 |
| | $ | 231,091 |
| | $ | 129,534 |
|
Cash Paid During the Year: | | | | | |
Interest | $ | 16,344 |
| | $ | 5,614 |
| | $ | 6,498 |
|
Income Taxes | 187,709 |
| | 54,027 |
| | 145,370 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
NOTE 1: BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Aaron’s, Inc. (the “Company” or “Aaron’s”) is a leading specialty retailer engaged in the business of leasing and selling furniture, consumer electronics, computers, appliances and household accessories throughout the United States and Canada.
On April 14, 2014, the Company acquired a 100% ownership interest in Progressive Finance Holdings, LLC, (“Progressive”), a leading virtual lease-to-own company, for merger consideration of $700.0 million, net of cash acquired. Progressive provides lease-purchase solutions through over 15,000 retail locations in 46 states. It does so by purchasing merchandise from third-party retailers desired by those retailers’ customers and, in turn, leasing that merchandise to the customers on a lease-to-own basis. Progressive consequently has no stores of its own, but rather offers lease-purchase solutions to the customers of traditional retailers.
Subsequent to the Progressive acquisition, our major operating divisions are the Aaron’s Sales & Lease Ownership division (established as a monthly payment concept), Progressive, HomeSmart (established as a weekly payment concept) and Woodhaven Furniture Industries, which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in our stores. In January of 2014, the Company sold the 27 Company-operated RIMCO stores, which were engaged in the leasing of automobile tires, wheels and rims under sales and lease ownership agreements, and the rights to five franchised RIMCO stores.
The following table presents store count by ownership type for the Company’s store-based operations:
|
| | | | | | | | |
Stores at December 31 (Unaudited) | 2014 | | 2013 | | 2012 |
Company-operated stores | | | | | |
Sales and Lease Ownership | 1,243 |
| | 1,262 |
| | 1,227 |
|
HomeSmart | 83 |
| | 81 |
| | 78 |
|
RIMCO | — |
| | 27 |
| | 19 |
|
Total Company-operated stores | 1,326 |
| | 1,370 |
| | 1,324 |
|
Franchised stores1 | 782 |
| | 781 |
| | 749 |
|
Systemwide stores | 2,108 |
| | 2,151 |
| | 2,073 |
|
1 As of December 31, 2014, 2013 and 2012, 920, 940 and 929 franchises had been awarded, respectively.
Basis of Presentation
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Generally, actual experience has been consistent with management’s prior estimates and assumptions. Management does not believe these estimates or assumptions will change significantly in the future absent unsurfaced and unforeseen events.
Certain reclassifications have been made to the prior periods to conform to the current period presentation. In all periods presented, the Company’s RIMCO operations have been reclassified from the RIMCO segment to Other in Note 12 to the consolidated financial statements.
Principles of Consolidation and Variable Interest Entities
The consolidated financial statements include the accounts of Aaron’s, Inc. and its wholly owned subsidiaries. Intercompany balances and transactions between consolidated entities have been eliminated.
On October 14, 2011, the Company purchased 11.5% of the common stock of Perfect Home Holdings Limited (“Perfect Home”), a privately-held rent-to-own company that is primarily financed by share capital and subordinated debt. Perfect Home is based in the U.K. and operated 67 retail stores as of December 31, 2014. As part of the transaction, the Company also received notes and an option to acquire the remaining interest in Perfect Home at any time through December 31, 2013. In May 2014, subsequent to the Company’s decision not to exercise the purchase option, the Company and Perfect Home extended the maturity date of the notes to June 30, 2015, canceled the Company’s equity interest in Perfect Home and terminated the option.
Perfect Home is a variable interest entity (“VIE”) as it does not have sufficient equity at risk; however, the Company is not the primary beneficiary and lacks the power through voting or similar rights to direct the activities of Perfect Home that most significantly affect its economic performance. As such, the VIE is not consolidated by the Company.
The notes purchased from Perfect Home totaling £13.7 million ($21.3 million) and £12.5 million ($20.7 million) at December 31, 2014 and 2013, respectively, are accounted for as held-to-maturity securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, Debt and Equity Securities, and are included in investments in the consolidated balance sheets. The increase in the Company’s British pound-denominated notes during the year ended December 31, 2014 relates to accretion of the original discount on the notes with a face value of £10.0 million.
The Company’s maximum exposure to any potential losses associated with this VIE is equal to its total recorded investment which was $21.3 million at December 31, 2014.
Revenue Recognition
Lease Revenues and Fees
The Company provides merchandise, consisting of furniture, consumer electronics, computers, appliances and household accessories, to its customers for lease under certain terms agreed to by the customer. Two primary store-based lease models are offered to customers: one through the Company’s Sales & Lease Ownership division (established as a monthly model) and the other through its HomeSmart division (established as a weekly model). The typical monthly store-based lease model is 12, 18 or 24 months, while the typical weekly store-based lease model is 60, 90 or 120 weeks. The Company’s Progressive division offers virtual lease-purchase solutions, typically over 12 months, to the customers of traditional retailers. The Company does not require deposits upon inception of customer agreements.
In a number of states, the Company utilizes a consumer lease form as an alternative to a typical lease purchase agreement. The consumer lease differs from the Company’s state lease agreement in that it has an initial lease term in excess of four months. Generally, state laws that govern the rent-to-own industry only apply to lease agreements with an initial term of four months or less. Following satisfaction of the initial term contained in the consumer or state lease, as applicable, the customer has the right to acquire title either through a purchase option or through payment of all required lease payments.
All of the Company’s customer agreements are considered operating leases under the provisions of ASC 840, Leases. As such, lease revenues are recognized as revenue in the month they are due. Lease payments received prior to the month due are recorded as deferred lease revenue, which is included in customer deposits and advance payments in the accompanying consolidated balance sheets. Until all payment obligations are satisfied under sales and lease ownership agreements, the Company maintains ownership of the lease merchandise. Initial direct costs related to the Company’s customer agreements are expensed as incurred and have been classified as operating expenses in the Company’s consolidated statements of earnings.
Retail and Non-Retail Sales
Revenues from the sale of merchandise to franchisees are recognized at the time of receipt of the merchandise by the franchisee based on the electronic receipt of merchandise by the franchisee within the Company’s fulfillment system. Additionally, revenues from the sale of merchandise to other customers are recognized at the time of shipment, at which time title and risk of ownership are transferred to the customer.
Substantially all of the amounts reported as non-retail sales and non-retail cost of sales in the accompanying consolidated statements of earnings relate to the sale of lease merchandise to franchisees. The Company classifies the sale of merchandise to other customers as retail sales in the consolidated statements of earnings.
Franchise Royalties and Fees
The Company franchises its Aaron’s Sales & Lease Ownership and HomeSmart stores in markets where the Company has no immediate plans to enter. Franchisees typically pay a non-refundable initial franchise fee from $15,000 to $50,000 depending upon market size and an ongoing royalty of either 5% or 6% of gross revenues. Franchise fees and area development fees are generated from the sale of rights to develop, own and operate sales and lease ownership stores. These fees are recognized as income when substantially all of the Company’s obligations per location are satisfied, generally at the date of the store opening. Franchise fees and area development fees are received before the substantial completion of the Company’s obligations and are deferred. The Company guarantees certain debt obligations of some of the franchisees and receives guarantee fees based on the outstanding debt obligations of such franchisees. The Company recognizes finance fee revenue as the guarantee obligation is satisfied. Refer to Note 8 for additional discussion of the Company’s franchise-related guarantee obligation.
Franchise agreement fee revenue was $1.0 million, $1.7 million and $2.4 million; royalty revenue was $58.8 million, $59.1 million and $56.5 million; and finance fee revenue was $3.7 million, $5.1 million and $4.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. Deferred franchise and area development agreement fees, included in accounts payable and accrued expenses in the accompanying consolidated balance sheets, were $2.8 million and $3.4 million at December 31, 2014 and 2013, respectively.
Sales Taxes
The Company presents sales net of related taxes for its traditional rent-to-own (“core”) business. Progressive presents lease revenues on a gross basis with sales taxes included. For the year ended December 31, 2014, the amount of Progressive sales tax recorded as lease revenues and fees and operating expenses was $30.2 million.
Lease Merchandise
The Company’s lease merchandise consists primarily of furniture, consumer electronics, computers, appliances and household accessories and is recorded at cost, which includes overhead from production facilities, shipping costs and warehousing costs. The sales and lease ownership stores depreciate merchandise over the lease agreement period, generally 12 to 24 months (monthly agreements) or 60 to 120 weeks (weekly agreements) when on lease and 36 months when not on lease, to a 0% salvage value. The Company’s Progressive division depreciates merchandise over the lease agreement period, which is typically over 12 months, while on lease.
The Company’s policies require weekly lease merchandise counts at its store-based operations, which include write-offs for unsalable, damaged, or missing merchandise inventories. Full physical inventories are generally taken at the fulfillment and manufacturing facilities two to four times per year, and appropriate provisions are made for missing, damaged and unsalable merchandise. In addition, the Company monitors lease merchandise levels and mix by division, store, and fulfillment center, as well as the average age of merchandise on hand. If unsalable lease merchandise cannot be returned to vendors, it is adjusted to its net realizable value or written off.
All lease merchandise is available for lease or sale. On a monthly basis, all damaged, lost or unsalable merchandise identified is written off. The Company records lease merchandise adjustments on the allowance method, which estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based on historical write off experience. As of December 31, 2014 and 2013, the allowance for lease merchandise write offs was $27.6 million and $8.3 million, respectively. Lease merchandise write-offs totaled $99.9 million, $58.0 million and $54.9 million during the years ended December 31, 2014, 2013 and 2012, respectively, substantially all of which are included in operating expenses in the accompanying consolidated statements of earnings.
Retail and Non-Retail Cost of Sales
Included in cost of sales is the net book value of merchandise sold, primarily using specific identification. It is not practicable to allocate operating expenses between selling and lease operations.
Shipping and Handling Costs
The Company classifies shipping and handling costs as operating expenses in the accompanying consolidated statements of earnings, and these costs totaled $81.1 million, $78.6 million and $74.9 million in 2014, 2013 and 2012, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising production costs are expensed when an advertisement appears for the first time. Such advertising costs amounted to $50.5 million, $43.0 million and $36.5 million in 2014, 2013 and 2012, respectively. These advertising expenses are shown net of cooperative advertising considerations received from vendors, substantially all of which represents reimbursement of specific, identifiable and incremental costs incurred in selling those vendors’ products. The amount of cooperative advertising consideration netted against advertising expense was $28.3 million, $25.0 million and $31.1 million in 2014, 2013 and 2012, respectively. The prepaid advertising asset was $1.3 million and $2.4 million at December 31, 2014 and 2013, respectively.
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are more fully described in Note 11. The Company estimates the fair value for the options granted on the grant date using a Black-Scholes-Merton option-pricing model and accounts for stock-based compensation under the fair value recognition provisions codified in ASC Topic 718, Stock
Compensation. The fair value of each share of restricted stock awarded is equal to the market value of a share of the Company’s common stock on the grant date.
Deferred Income Taxes
Deferred income taxes represent primarily temporary differences between the amounts of assets and liabilities for financial and tax reporting purposes. The Company’s largest temporary differences arise principally from the use of accelerated depreciation methods on lease merchandise for tax purposes.
Earnings per Share
Earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. The computation of earnings per share assuming dilution includes the dilutive effect of stock options, restricted stock units (“RSUs”), restricted stock awards (“RSAs”) and performance share units as determined under the treasury stock method. The following table shows the calculation of dilutive stock awards for the years ended December 31 (shares in thousands):
|
| | | | | | | | |
| 2014 | | 2013 | | 2012 |
Weighted average shares outstanding | 72,384 |
| | 75,747 |
| | 75,820 |
|
Effect of dilutive securities: | | | | | |
Stock options | 168 |
| | 421 |
| | 789 |
|
RSUs | 154 |
| | 206 |
| | 210 |
|
RSAs | 17 |
| | 16 |
| | 7 |
|
Weighted average shares outstanding assuming dilution | 72,723 |
| | 76,390 |
| | 76,826 |
|
Approximately 164,000 and 53,000 stock-based awards were excluded from the computations of earnings per share assuming dilution in 2014 and 2012, respectively, as the awards would have been anti-dilutive for the years presented. No stock options, RSUs or RSAs were anti-dilutive during 2013.
Cash and Cash Equivalents
The Company classifies highly liquid investments with maturity dates of three months or less when purchased as cash equivalents. The Company maintains its cash and cash equivalents in a limited number of banks. Bank balances typically exceed coverage provided by the Federal Deposit Insurance Corporation. However, due to the size and strength of the banks where the balances are held, such exposure to loss is believed to be minimal.
Investments
The Company maintains investments in various corporate debt securities, or bonds. Historically, the Company has had the positive intent and ability to hold its investments in debt securities to maturity. Accordingly, the Company classifies its investments in debt securities, which mature in 2015, as held-to-maturity securities and carries the investments at amortized cost in the consolidated balance sheets. Refer to Note 4 to these consolidated financial statements for further details of the Company’s sale of certain corporate debt securities during the year ended December 31, 2014 due to the Company’s Progressive acquisition.
The Company evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The Company does not intend to sell its remaining securities and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases.
Accounts Receivable
Accounts receivable consist primarily of receivables due from customers of Company-operated stores and Progressive, corporate receivables incurred during the normal course of business (primarily related to vendor consideration, real estate leasing activities, in-transit credit card transactions and the secondary escrow described in Note 2 to these consolidated financial statements) and franchisee obligations.
Accounts receivable, net of allowances, consists of the following as of December 31: |
| | | | | | | |
(In Thousands) | 2014 | | 2013 |
Customers | $ | 30,438 |
| | $ | 8,275 |
|
Corporate | 32,572 |
| | 16,730 |
|
Franchisee | 44,373 |
| | 43,679 |
|
| $ | 107,383 |
| | $ | 68,684 |
|
The Company maintains an allowance for doubtful accounts. The reserve for returns is calculated based on the historical collection experience associated with lease receivables. The Company’s policy for its store-based operations is to write off lease receivables that are 60 days or more past due on pre-determined dates occurring twice monthly. The Company’s policy for its Progressive division is to write off lease receivables that are 120 days or more contractually past due. The following is a summary of the Company’s allowance for doubtful accounts as of December 31:
|
| | | | | | | | | | | |
(In Thousands) | 2014 | | 2013 | | 2012 |
Beginning Balance | $ | 7,172 |
| | $ | 6,001 |
| | $ | 4,768 |
|
Accounts written off | (79,054 | ) | | (34,723 | ) | | (30,609 | ) |
Bad debt expense | 99,283 |
| | 35,894 |
| | 31,842 |
|
Ending Balance | $ | 27,401 |
| | $ | 7,172 |
| | $ | 6,001 |
|
Property, Plant and Equipment
The Company records property, plant and equipment at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the respective assets, which range from five to 40 years for buildings and improvements and from one to 15 years for other depreciable property and equipment. Costs incurred to develop software for internal use are capitalized and amortized over the estimated useful life of the software, which ranges from five to 10 years.
Gains and losses related to dispositions and retirements are recognized as incurred. Maintenance and repairs are also expensed as incurred; renewals and betterments are capitalized. Depreciation expense for property, plant and equipment is included in operating expenses in the accompanying consolidated statements of earnings and was $53.7 million, $53.3 million and $53.1 million during the years ended December 31, 2014, 2013 and 2012, respectively. Amortization of previously capitalized internal use software development costs, which is a component of depreciation expense for property, plant and equipment, was $5.4 million, $3.3 million and $2.6 million during the years ended December 31, 2014, 2013 and 2012, respectively.
The Company assesses its long-lived assets other than goodwill and other indefinite-lived intangible assets for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. When it is determined that the carrying values of the assets are not recoverable, the Company compares the carrying values of the assets to their fair values as estimated using discounted expected future cash flows, market values or replacement values for similar assets. The amount by which the carrying value exceeds the fair value of the asset, if any, is recognized as an impairment loss.
Assets Held for Sale
Certain properties, primarily consisting of parcels of land and commercial buildings, as well as the net assets of the former RIMCO operating segment, met the held for sale classification criteria as of December 31, 2014 and 2013. After adjustment to fair value, the $6.4 million and $15.8 million carrying value of these properties has been classified as assets held for sale in the consolidated balance sheets as of December 31, 2014 and 2013, respectively. The carrying value of assets held for sale at December 31, 2014 and 2013 were included in the Sales and Lease Ownership segment and the Other segment, respectively. In January 2014, the Company sold the 27 Company-operated RIMCO stores, which had a carrying value of $9.7 million as of December 31, 2013 (principally consisting of $7.2 million of lease merchandise and $2.5 million of property, plant and equipment). Refer to Note 4 to these consolidated financial statements for further discussion of the RIMCO disposal.
The Company estimated the fair values of real estate properties using the market values for similar properties and estimated the fair value of the RIMCO disposal group based upon expectations of a sale price. These properties are considered Level 2 assets as defined in ASC Topic 820, Fair Value Measurements.
During the years ended 2014, 2013 and 2012, the Company recorded impairment charges of $805,000, $3.8 million and $1.1 million, respectively. Such impairment charges related primarily to the impairment of various land outparcels and buildings included in the Sales and Lease Ownership segment that the Company decided not to utilize for future expansion, as
well as the sale of the net assets of the RIMCO disposal group, and are generally included in other operating (income) expense, net within the consolidated statements of earnings.
The disposal of assets held for sale resulted in the recognition of net losses of $754,000 in 2014 and net gains of $1.2 million in 2012. Gains and losses on the disposal of assets held for sale were not significant in 2013.
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the identifiable net tangible and intangible assets acquired in connection with business acquisitions. Impairment occurs when the carrying value of goodwill is not recoverable from future cash flows. The Company’s goodwill is not amortized but is subject to an impairment test at the reporting unit level annually and when events or circumstances indicate that impairment may have occurred. Factors which could necessitate an interim impairment assessment include a sustained decline in the Company’s stock price, prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results.
The Company has historically performed its annual goodwill impairment test as of September 30 each year for its Sales and Lease Ownership and HomeSmart reporting units. During the three months ended December 31, 2014, the Company voluntarily changed its annual impairment assessment date from September 30 to October 1 for those reporting units. Upon the acquisition of Progressive, the Company selected October 1 as the annual impairment assessment date for the goodwill of the Progressive reporting unit and its indefinite-lived intangible assets. The Company believes this change in measurement date, which represents a change in method of applying an accounting principle, is preferable under the circumstances. The change was made to align the annual goodwill impairment test for the Sales and Lease Ownership and HomeSmart reporting units with the annual goodwill impairment and indefinite-lived intangible asset tests for the Progressive reporting unit and to provide the Company with additional time to complete its annual goodwill impairment testing in advance of its year-end reporting.
In connection with the change in the date of the annual goodwill impairment test, the Company performed a goodwill impairment test as of both September 30, 2014 and October 1, 2014, and no impairment was identified. The change in accounting principle does not delay, accelerate or avoid an impairment charge. The Company has determined that it is impracticable to objectively determine projected cash flows and related valuation estimates that would have been used as of October 1 for periods prior to October 1, 2014 without the use of hindsight. As such, the Company prospectively applied the change in the annual goodwill impairment assessment date beginning October 1, 2014.
The Company has deemed its operating segments to be reporting units due to the fact that the operations included in each operating segment have similar economic characteristics. As of December 31, 2014, the Company had five operating segments and reporting units: Sales and Lease Ownership, Progressive, HomeSmart, Franchise and Manufacturing. As of December 31, 2014, the Company’s Sales and Lease Ownership, Progressive and HomeSmart reporting units were the only reporting units with assigned goodwill balances. The following is a summary of the Company’s goodwill by reporting unit at December 31:
|
| | | | | | | |
(In Thousands) | 2014 | | 2013 |
Sales and Lease Ownership | $ | 226,828 |
| | $ | 224,523 |
|
Progressive | 289,184 |
| | — |
|
HomeSmart | 14,658 |
| | 14,658 |
|
Total | $ | 530,670 |
| | $ | 239,181 |
|
The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare the fair value of the reporting unit to its carrying value, including goodwill. The Company uses a combination of valuation techniques to determine the fair value of its reporting units, including a multiple of gross revenue approach and discounted cash flow models that use assumptions consistent with those we believe hypothetical marketplace participants would use.
If the carrying value of the reporting unit exceeds the fair value, a second step is performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess.
During the performance of the annual assessment of goodwill for impairment in the 2014, 2013 and 2012 fiscal years, the Company did not identify any reporting units that were not substantially in excess of their carrying values, other than the HomeSmart reporting unit. While no impairment was noted in our impairment testing, if profitability is delayed as a result of
the significant start-up expenses associated with the HomeSmart stores, there could be a change in the valuation of the HomeSmart reporting unit that may result in the recognition of an impairment loss in future periods.
No new indications of impairment existed during the fourth quarter of 2014. As a result, no impairment testing was updated as of December 31, 2014.
Other Intangibles
Other intangibles include customer relationships, non-compete agreements and franchise development rights acquired in connection with store-based business acquisitions, as well as the identifiable intangible assets acquired as a result of the Progressive acquisition, which the Company records at the estimated fair value as of the acquisition date. The customer relationship intangible asset is amortized on a straight-line basis over a two-year estimated useful life. The non-compete intangible asset is amortized on a straight-line basis over a three-year useful life. Acquired franchise development rights are amortized on a straight-line basis over the unexpired life of the franchisee’s ten year area development agreement. As more fully described in Note 2 to these consolidated financial statements, the Company amortizes the definite-lived intangible assets acquired as a result of the Progressive acquisition on a straight-line basis over periods ranging from one to three years for customer lease contracts and internal use software and ten to 12 years for technology and merchant relationships.
Indefinite-lived intangible assets represent the value of trade names and trademarks acquired as part of the Progressive acquisition. At the date of acquisition, the Company determined that no legal, regulatory, contractual, competitive, economic or other factors limit the useful life of the trade name and trademark intangible asset and, therefore, the useful life is considered indefinite. Indefinite-lived intangible assets are not amortized but are subject to an impairment test annually and when events or circumstances indicate that impairment may have occurred. Upon the acquisition of Progressive, the Company selected October 1 as the annual impairment assessment date for goodwill of the Progressive reporting unit and its indefinite-lived intangible assets. The Company performs the impairment test for its indefinite-lived intangible assets by comparing the asset’s fair value to its carrying value. The Company estimates the fair value based on projected discounted future cash flows under a relief from royalty type method. An impairment charge is recognized if the asset’s estimated fair value is less than its carrying value.
The Company completed its indefinite-lived intangible asset impairment test as of October 1, 2014 and determined that no impairment had occurred.
Insurance Reserves
Estimated insurance reserves are accrued primarily for group health, general liability, automobile liability and workers compensation benefits provided to the Company’s employees. Estimates for these insurance reserves are made based on actual reported but unpaid claims and actuarial analysis of the projected claims run off for both reported and incurred but not reported claims.
Asset Retirement Obligations
The Company accrues for asset retirement obligations, which relate to expected costs to remove exterior signage, in the period in which the obligations are incurred. These costs are accrued at estimated fair value. When the related liability is initially recorded, the Company capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the Company recognizes a gain or loss for any differences between the settlement amount and the liability recorded. Asset retirement obligations amounted to approximately $2.7 million and $2.4 million as of December 31, 2014 and 2013, respectively.
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component for the year ended December 31, 2014 are as follows: |
| | | | | | | |
(In Thousands) | Foreign Currency | | Total |
Balance at January 1, 2014 | $ | (64 | ) | | $ | (64 | ) |
Other comprehensive loss | (26 | ) | | (26 | ) |
Balance at December 31, 2014 | $ | (90 | ) | | $ | (90 | ) |
There were no reclassifications out of accumulated other comprehensive loss for the year ended December 31, 2014.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
The Company measures assets held for sale at fair value on a nonrecurring basis and records impairment charges when they are deemed to be impaired. The Company maintains certain financial assets and liabilities, including investments and fixed-rate long term debt, that are not measured at fair value but for which fair value is disclosed.
The fair values of the Company’s other current financial assets and liabilities, including cash and cash equivalents, accounts receivable and accounts payable, approximate their carrying values due to their short-term nature.
Foreign Currency
The financial statements of international subsidiaries are translated to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs and expenses. Translation gains and losses of international subsidiaries are recorded in accumulated other comprehensive income as a component of shareholders’ equity. Foreign currency transaction gains and losses are recorded as a component of other non-operating (expense) income, net in the consolidated statements of earnings and amounted to losses of approximately $2.3 million and $1.0 million during 2014 and 2013, respectively, and gains of $2.0 million during 2012.
Recent Accounting Pronouncements
Revenue Recognition. In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods, and interim periods within that period, beginning after December 15, 2016 and early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company has not yet determined the potential effects of the adoption of ASU 2014-09 on its consolidated financial statements.
Other Comprehensive Income. In February 2013, the FASB issued ASU 2013-2, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-2”). ASU 2013-2 requires preparers to report, in one place, information about reclassifications out of accumulated other comprehensive income (“AOCI”). ASU 2013-2 also requires companies to report changes in AOCI balances. For significant items reclassified out of AOCI to net income in their entirety in the same reporting period, reporting (either on the face of the statement where net income is presented or in the notes) is required about the effect of the reclassifications on the respective line items in the statement where net income is presented. For items that are not reclassified to net income in their entirety in the same reporting period, a cross reference to other disclosures currently required under U.S. GAAP is required in the notes. The above information must be presented in one place (parenthetically on the face of the financial statements by income statement line item or in a note). ASU 2013-2 was effective for the Company beginning in 2013. The adoption of ASU 2013-2 did not have a material effect on the Company's consolidated financial statements.
NOTE 2: ACQUISITIONS
During the years ended December 31, 2014 and 2013, net cash payments related to the acquisitions of businesses and contracts were $700.5 million and $10.9 million, respectively. Cash payments made during the year ended December 31, 2014 were principally related to the April 2014 Progressive acquisition described below.
Acquisitions have been accounted for as business combinations, and the results of operations of the acquired businesses are included in the Company’s results of operations from their dates of acquisition. Progressive contributed revenues of $549.5 million and earnings before income taxes of $4.6 million from April 14, 2014 through December 31, 2014.
The effect of the Company’s other acquisitions on the consolidated financial statements for the years ended December 31, 2014 and 2013 was not significant.
Progressive Acquisition
On April 14, 2014, the Company acquired a 100% ownership interest in Progressive, a leading virtual lease-to-own company, for a total purchase price of $705.8 million, inclusive of cash acquired of $5.8 million. Progressive provides lease-purchase solutions through over 15,000 retail locations in 46 states. The Company believes the Progressive acquisition will be strategically transformational and will strengthen its business.
The following table reconciles the total estimated purchase price of the Company’s acquisition of Progressive:
|
| | | |
(In Thousands) | |
Proceeds from Private Placement Note Issuance | $ | 300,000 |
|
Proceeds from Term Loan | 126,250 |
|
Proceeds from Revolving Credit Facility | 65,000 |
|
Cash Consideration | 185,454 |
|
Deferred Cash Consideration | 29,106 |
|
Estimated Purchase Price | $ | 705,810 |
|
Refer to Note 6 to these consolidated financial statements for additional information regarding the debt incurred to partially finance the Progressive acquisition.
The initial deferred cash consideration had amounts outstanding as of December 31, 2014 which consist of $3.6 million of merger consideration payable in January 2015, as well as $3.3 million in withheld escrow amounts.
The purchase price includes a primary escrow of $35.8 million to secure indemnification obligations of the sellers relating to the accuracy of representations, warranties and the satisfaction of covenants. The primary escrow funds will be distributed 15 months from the April 14, 2014 closing date, after deducting for any claims. In addition, the purchase price includes a secondary escrow of $15.8 million to secure indemnification obligations of the sellers relating to certain acquired tax-related contingent liabilities. The Company believes that the $15.8 million is fully recoverable from the secondary escrow account and has included this indemnification asset as a receivable in the Company’s preliminary acquisition accounting. The secondary escrow is subject to current and future claims of the Company and any remaining undisputed balance is payable to the sellers 36 months from the April 14, 2014 closing date.
Preliminary Acquisition Accounting
The following table presents the summary of the preliminary estimated fair value of the assets acquired and liabilities assumed in the Progressive acquisition as of the April 14, 2014 acquisition date, as well as adjustments made during the year ended December 31, 2014 (referred to as the “measurement period adjustments”):
|
| | | | | | | | | | | |
(In Thousands) | Amounts Recognized as of Acquisition Date1 | | Measurement Period Adjustments2 | | Amounts Recognized as of Acquisition Date (as adjusted) |
Estimated Purchase Price | $ | 705,810 |
| | $ | — |
| | $ | 705,810 |
|
| | | | | |
Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed | | | | | |
Cash and Cash Equivalents | 5,810 |
| | — |
| | 5,810 |
|
Receivables3 | 27,581 |
| | — |
| | 27,581 |
|
Lease Merchandise2 | 138,198 |
| | 2,987 |
| | 141,185 |
|
Property, Plant and Equipment | 4,010 |
| | — |
| | 4,010 |
|
Other Intangibles2, 4 | 333,000 |
| | (8,000 | ) | | 325,000 |
|
Prepaid Expenses and Other Assets | 893 |
| | — |
| | 893 |
|
Total Identifiable Assets Acquired | 509,492 |
| | (5,013 | ) |
| 504,479 |
|
Accounts Payable and Accrued Expenses2 | (23,342 | ) | | (5,762 | ) | | (29,104 | ) |
Deferred Income Taxes Payable2 | (48,298 | ) | | (451 | ) | | (48,749 | ) |
Customer Deposits and Advance Payments | (10,000 | ) | | — |
| | (10,000 | ) |
Total Liabilities Assumed | (81,640 | ) | | (6,213 | ) | | (87,853 | ) |
Goodwill5 | 277,958 |
| | 11,226 |
| | 289,184 |
|
Net Assets Acquired | $ | 705,810 |
|
| $ | — |
|
| $ | 705,810 |
|
1 As previously reported in the notes to consolidated financial statements included in our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2014.
2 The measurement period adjustments primarily related to the resolution of certain sales tax exposures and other tax contingencies subsequent to the acquisition date, which also impacted the fair value estimates of lease merchandise, as well as the finalization of appraisals of intangible assets by the Company’s independent consultants.
3 Receivables include $15.8 million related to the secondary escrow amount, which the Company expects to recover prior to termination of the escrow agreement 36 months from the April 14, 2014 closing date. The gross amount due under customer-related receivables acquired was $22.7 million, of which $10.9 million was expected to be uncollectible.
4 Identifiable intangible assets are further disaggregated in the following table.
5 The total goodwill recognized in conjunction with the Progressive acquisition has been assigned to the Progressive operating segment. Of the goodwill recognized as part of this acquisition, $245.8 million is expected to be deductible for tax purposes. The primary reasons the purchase price of the acquisition exceeded the fair value of the net assets acquired, which resulted in the recognition of goodwill, is related to synergistic value created from the combination of Progressive’s virtual customer payment capabilities with the Company’s leading traditional lease-to-own model. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.
The Company has made certain estimates in its acquisition accounting related to sales tax exposures and income tax accounts, as final pre-acquisition Progressive tax return information was not available as of December 31, 2014. The Company expects to complete its assessment of the sales tax and income tax effects of the acquisition accounting in the first quarter of 2015.
The estimated intangible assets attributable to the Progressive acquisition are comprised of the following: |
| | | | | | |
| | Fair Value (in thousands) | | Weighted Average Life (in years) |
Internal Use Software | | $ | 14,000 |
| | 3.0 |
Technology | | 66,000 |
| | 10.0 |
Trade Names and Trademarks | | 53,000 |
| | Indefinite |
Customer Lease Contracts1 | | 11,000 |
| | 1.0 |
Merchant Relationships | | 181,000 |
| | 12.0 |
Total Acquired Intangible Assets2 | | $ | 325,000 |
| | |
1 During the fourth quarter of 2014, the Company recorded adjustments to the customer lease contract intangible asset previously recorded based on the finalization of appraisals by the Company’s independent consultants. The measurement period adjustment resulted in a reduction of customer lease contract intangible assets and an increase in goodwill of $8.0 million and did not have a material effect on amortization expense in the consolidated financial statements in any period presented.
2 Acquired definite-lived intangible assets have a total weighted average life of 10.6 years.
During the year ended December 31, 2014, the Company incurred $6.6 million of transaction costs in connection with the acquisition of Progressive. These costs were included in the line item “Progressive-related transaction costs” in the consolidated statements of earnings. In addition, during the year ended December 31, 2014, the Company incurred approximately $2.3 million in debt financing costs related to the $491.3 million of new indebtedness incurred to partially finance the acquisition, which has been capitalized as a component of prepaid expenses and other assets in the consolidated balance sheets.
Pro Forma Financial Information
The following table presents unaudited consolidated pro forma information as if the acquisition of Progressive had occurred on January 1, 2013:
|
| | | | | | | | | | | | | | | |
| Twelve Months Ended
December 31, |
| 2014 | | 2013 |
(In Thousands) | As Reported | | Pro Forma | | As Reported | | Pro Forma |
Revenues | $ | 2,725,239 |
| | $ | 2,894,413 |
| | $ | 2,234,631 |
| | $ | 2,638,582 |
|
Net Earnings | 78,233 |
| | 86,038 |
| | 120,666 |
| | 105,682 |
|
The unaudited pro forma financial information presented above does not purport to represent what the actual results of our operations would have been if the acquisition of Progressive had occurred on January 1, 2013, nor is it indicative of future performance. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, including, but not limited to, anticipated cost savings from operating synergies.
The unaudited pro forma financial information presented in the table above has been adjusted to give effect to adjustments that are (1) directly related to the business combination; (2) factually supportable; and (3) expected to have a continuing impact. These adjustments include, but are not limited to, amortization related to fair value adjustments to intangible assets and the adjustment of interest expense to reflect the additional borrowings of the Company in conjunction with the acquisition.
NOTE 3: GOODWILL AND INTANGIBLE ASSETS
Indefinite-Lived Intangible Assets
The following table summarizes information related to indefinite-lived intangible assets at December 31:
|
| | | | | | | |
(In Thousands) | 2014 | | 2013 |
Trade Names and Trademarks | $ | 53,000 |
| | $ | — |
|
Goodwill | 530,670 |
| | 239,181 |
|
Indefinite-lived Intangible Assets | $ | 583,670 |
| | $ | 239,181 |
|
The increase in goodwill and trade name-related intangible assets in 2014 is primarily due to the acquisition of Progressive as described in Note 2 to these consolidated financial statements.
The following table provides information related to the carrying value of goodwill by operating segment:
|
| | | | | | | | | | | | | | | |
(In Thousands) | Sales and Lease Ownership |
| Progressive | | HomeSmart |
| Total |
Balance at January 1, 2013 | $ | 219,547 |
| | $ | — |
| | $ | 14,648 |
| | $ | 234,195 |
|
Acquisitions | 5,429 |
| | — |
| | — |
| | 5,429 |
|
Disposals | (499 | ) | | — |
| | — |
| | (499 | ) |
Purchase Price Adjustments | 46 |
| | — |
| | 10 |
| | 56 |
|
Balance at December 31, 2013 | 224,523 |
| | — |
| | 14,658 |
| | 239,181 |
|
Acquisitions | 3,629 |
| | 277,958 |
| | — |
| | 281,587 |
|
Disposals | (1,321 | ) | | — |
| | — |
| | (1,321 | ) |
Purchase Price Adjustments | (3 | ) | | 11,226 |
| | — |
| | 11,223 |
|
Balance at December 31, 2014 | $ | 226,828 |
| | $ | 289,184 |
| | $ | 14,658 |
| | $ | 530,670 |
|
Definite-Lived Intangible Assets
The following table summarizes information related to definite-lived intangible assets at December 31: |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | 2013 |
(In Thousands) | Gross | | Accumulated
Amortization | | Net | | Gross | | Accumulated
Amortization | | Net |
Customer Relationships | $ | 1,064 |
| | $ | (554 | ) | | $ | 510 |
| | $ | 2,282 |
| | $ | (1,463 | ) | | $ | 819 |
|
Non-Compete Agreements | 1,906 |
| | (1,261 | ) | | 645 |
| | 3,265 |
| | (2,001 | ) | | 1,264 |
|
Acquired Franchise Development Rights | 2,751 |
| | (1,624 | ) | | 1,127 |
| | 3,529 |
| | (2,077 | ) | | 1,452 |
|
Internal Use Software | 14,000 |
| | (3,331 | ) | | 10,669 |
| | — |
| | — |
| | — |
|
Technology | 66,000 |
| | (4,712 | ) | | 61,288 |
| | — |
| | — |
| | — |
|
Customer Lease Contracts | 11,000 |
| | (11,000 | ) | | — |
| | — |
| | — |
| | — |
|
Merchant Relationships | 181,000 |
| | (10,768 | ) | | 170,232 |
| | — |
| | — |
| | — |
|
Total | $ | 277,721 |
| | $ | (33,250 | ) | | $ | 244,471 |
| | $ | 9,076 |
| | $ | (5,541 | ) | | $ | 3,535 |
|
The increase in definite-lived intangible assets in 2014 is primarily due to the acquisition of Progressive as described in Note 2 to these consolidated financial statements.
Total amortization expense of definite-lived intangible assets, included in operating expenses in the accompanying consolidated statements of earnings, was $31.9 million, $3.7 million and $3.7 million during the years ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, estimated future amortization expense for the next five years related to definite-lived intangible assets is as follows:
|
| | | |
(In Thousands) | |
2015 | $ | 27,496 |
|
2016 | 26,978 |
|
2017 | 23,311 |
|
2018 | 21,800 |
|
2019 | 21,734 |
|
NOTE 4: FAIR VALUE MEASUREMENT
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes financial liabilities measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | December 31, 2013 |
(In Thousands) | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Deferred Compensation Liability | $ | — |
| | $ | (12,677 | ) | | $ | — |
| | $ | — |
| | $ | (12,557 | ) | | $ | — |
|
The Company maintains a deferred compensation plan as described in Note 15 to these consolidated financial statements. The liability representing benefits accrued for plan participants is valued at the quoted market prices of the participants’ investment elections, which consist of equity and debt “mirror” funds. As such, the Company has classified the deferred compensation liability as a Level 2 liability.
Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table summarizes non-financial assets measured at fair value on a nonrecurring basis:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | December 31, 2013 |
(In Thousands) | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Assets Held for Sale | $ | — |
| | $ | 6,356 |
| | $ | — |
| | $ | — |
| | $ | 15,840 |
| | $ | — |
|
Assets held for sale includes real estate properties that consist mostly of parcels of land and commercial buildings, as well as the net assets of the former RIMCO operating segment, principally consisting of lease merchandise, office furniture and leasehold improvements, which have been included in the Other segment assets as of December 31, 2013. The highest and best use of these assets is as real estate land parcels for development or real estate properties for use or lease; however, the Company has chosen not to develop or use these properties. In accordance with ASC Topic 360, Property, Plant and Equipment, assets held for sale are written down to fair value less cost to sell, and the adjustment is recorded in other operating (income) expense, net. The Company estimated the fair values of real estate properties using the market values for similar properties and estimated the fair value of the RIMCO disposal group based upon expectations of a sale price.
In January 2014, the Company sold the 27 Company-operated RIMCO stores and the rights to five franchised RIMCO stores, which leased automobile tires, wheels and rims under sales and lease ownership agreements. The Company received total cash consideration of $10.0 million from a third party. During the year ended December 2013, the Company recognized impairment charges of $766,000 related to the write-down of the net assets of the RIMCO disposal group to fair value less cost to sell. During the year ended December 31, 2014, the Company recognized a net loss on the sale of the RIMCO disposal group of $762,000, which has been included in other operating (income) expense, net in the Company's results of operations. The Company expects any additional charges associated with the disposal of the former RIMCO segment to be immaterial to future results of operations.
Certain Financial Assets and Liabilities Not Measured at Fair Value
The following table summarizes the fair value of assets (liabilities) that are not measured at fair value in the consolidated balance sheets, but for which the fair value is disclosed:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | December 31, 2013 |
(In Thousands) | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Corporate Bonds 1 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 91,785 |
| | $ | — |
|
Perfect Home Notes 2 | — |
| | — |
| | 21,311 |
| | — |
| | — |
| | 20,661 |
|
Fixed-Rate Long Term Debt 3 | — |
| | (429,049 | ) | | — |
| | — |
| | (130,687 | ) | | — |
|
1 The fair value of corporate bonds is determined through the use of model-based valuation techniques for which all significant assumptions are observable in the market.
2 The Perfect Home notes were initially valued at cost. The Company periodically reviews the valuation utilizing company-specific transactions or changes in Perfect Home's financial performance to determine if fair value adjustments are necessary.
3 The fair value of fixed-rate long term debt is estimated using the present value of underlying cash flows discounted at a current market yield for similar instruments. The carrying value of fixed-rate long term debt was $400.0 million and $125.0 million at December 31, 2014 and December 31, 2013, respectively.
During the year ended December 31, 2014, the Company sold all of its investments in corporate bonds that were classified as held-to-maturity securities due to the Progressive acquisition. The amortized cost of the investments sold was $68.7 million, and a net realized gain of approximately $95,000 was recorded.
The Company has the positive intent and ability to hold its investment in Perfect Home notes to maturity. Accordingly, the Company classifies its Perfect Home notes, which mature in 2015, as held-to-maturity securities and carries the investment at amortized cost in the consolidated balance sheets.
At December 31, 2014 and 2013, investments classified as held-to-maturity securities consisted of the following:
|
| | | | | | | | | | | | | | | |
| | | Gross Unrealized | | |
(In Thousands) | Amortized Cost | | Gains | | Losses | | Fair Value |
2014 | | | | | | | |
Corporate Bonds | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Perfect Home Notes | 21,311 |
| | — |
| | — |
| | 21,311 |
|
Total | $ | 21,311 |
| | $ | — |
| | $ | — |
| | $ | 21,311 |
|
2013 | | | | | | | |
Corporate Bonds | $ | 91,730 |
| | $ | 98 |
| | $ | (43 | ) | | $ | 91,785 |
|
Perfect Home Notes | 20,661 |
| | — |
| | — |
| | 20,661 |
|
Total | $ | 112,391 |
| | $ | 98 |
| | $ | (43 | ) | | $ | 112,446 |
|
Information pertaining to held-to-maturity securities with gross unrealized losses is as follows.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or longer | | Total |
(In Thousands) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
December 31, 2014 | | | | | | | | | | | |
Corporate Bonds | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
December 31, 2013 | | | | | | | | | | | |
Corporate Bonds | $ | 28,839 |
| | $ | (40 | ) | | $ | 2,614 |
| | $ | (3 | ) | | $ | 31,453 |
| | $ | (43 | ) |
The unrealized losses relate principally to the increases in short-term market interest rates that occurred since the securities were purchased. As of December 31, 2013, 18 of the 48 securities were in an unrealized loss position and the Company expected the fair value to recover as the securities approached their maturities or if market yields for such investments declined. As a result of management’s analysis and review, no declines were deemed to be other than temporary as of December 31, 2013.
The Company has estimated that the carrying value of its Perfect Home notes approximates fair value and, therefore, no impairment is considered to have occurred as of December 31, 2014. While no impairment was noted during 2014, if profitability is delayed as a result of the significant start-up expenses associated with Perfect Home, there could be a change in the valuation of the Perfect Home notes that may result in the recognition of an impairment loss in future periods.
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Following is a summary of the Company’s property, plant, and equipment at December 31:
|
| | | | | | | |
(In Thousands) | 2014 | | 2013 |
Land | $ | 24,861 |
| | $ | 26,021 |
|
Buildings and Improvements | 83,053 |
| | 84,520 |
|
Leasehold Improvements and Signs | 107,380 |
| | 120,702 |
|
Fixtures and Equipment1 | 196,965 |
| | 172,483 |
|
Assets Under Capital Leases: | | | |
with Related Parties | 10,573 |
| | 10,574 |
|
with Unrelated Parties | 10,564 |
| | 10,550 |
|
Construction in Progress | 2,086 |
| | 4,347 |
|
| 435,482 |
| | 429,197 |
|
Less: Accumulated Depreciation and Amortization | (216,065 | ) | | (197,904 | ) |
| $ | 219,417 |
| | $ | 231,293 |
|
| |
1 | Includes internal-use software development costs of $50.3 million and $36.3 million as of December 31, 2014 and 2013, respectively. Accumulated amortization of internal-use software development costs amounted to $14.8 million and $9.5 million as of December 31, 2014 and 2013, respectively. |
Amortization expense on assets recorded under capital leases is included in operating expenses and was $1.7 million, $1.7 million and $1.2 million in 2014, 2013 and 2012, respectively. Capital leases consist of buildings and improvements. Assets under capital leases with related parties included $6.9 million and $5.8 million in accumulated depreciation and amortization as of December 31, 2014 and 2013, respectively. Assets under capital leases with unrelated parties included $5.7 million and $5.1 million in accumulated depreciation and amortization as of December 31, 2014 and 2013, respectively.
NOTE 6: INDEBTEDNESS
Following is a summary of the Company’s debt at December 31:
|
| | | | | | | |
(In Thousands) | 2014 | | 2013 |
Revolving Facility | $ | 69,116 |
| | $ | — |
|
Senior Unsecured Notes, 3.95%, Due in Installments through April 2018 | 100,000 |
| | 125,000 |
|
Term Loan, Due in Installments through December 2019 | 121,875 |
| | — |
|
Senior Unsecured Notes, 4.75%, Due in Installments through April 2021 | 300,000 |
| | — |
|
Capital Lease Obligation: |
| |
|
with Related Parties | 6,157 |
| | 7,412 |
|
with Unrelated Parties | 5,684 |
| | 7,042 |
|
Other Debt | 3,250 |
| | 3,250 |
|
| $ | 606,082 |
| | $ | 142,704 |
|
Revolving Credit Agreement and Term Loan
In connection with the April 14, 2014 acquisition of Progressive, the Company amended and restated its revolving credit agreement to, among other things, (i) provide for a new $126.3 million term loan, which was fully funded at closing, and (ii) increase the revolving credit commitments from $140.0 million to $200.0 million (including increases in the existing letter of credit subfacility from $10.0 million to $20.0 million and the existing swingline loan subfacility from $15.0 million to $25.0 million). The amendments also, among other things, conform the covenants, representations, warranties and events of default to those contained in the 2014 note purchase agreements described below, to contemplate the acquisition of Progressive, to authorize the new 2014 senior notes and to increase the applicable margin for Eurodollar loans under the credit facility.
On December 9, 2014, the Company entered into the first amendment to this agreement to, among other things, (i) extend the maturity date for an additional five year period, (ii) increase the revolving credit commitments to an aggregate principal amount of up to $225.0 million, (iii) provide for the extension of an additional term loan advance in the aggregate amount of $1.9 million, (iv) modify the amortization payments in respect of the term loan facility to provide for equal quarterly installments of $3.1 million, payable on the last day of each March, June, September and December, commencing on December 31, 2014, (v) provide for the joinder of certain new banks and other financial institutions as lenders, (vi) amend and restate certain schedules, (vii) modify certain financial covenants and related financial terms consistent with the financial covenant modifications in the franchise loan program discussed in Note 8 and (viii) add and modify certain other terms, covenants and representations and warranties.
The revolving credit and term loan agreement, which expires December 9, 2019, permits the Company to borrow, subject to certain terms and conditions, on an unsecured basis up to $225.0 million in revolving loans and also provides for an uncommitted incremental facility increase option which, subject to certain terms and conditions, permits the Company at any time prior to the maturity date to request an increase in extensions of credit available thereunder (whether through additional term loans and/or revolving credit commitments or any combination thereof) by an aggregate additional principal amount of up to $200.0 million, with such additional credit extensions provided by one or more lenders thereunder at their sole discretion.
The revolving credit borrowings and term loans bear interest at the lower of the lender's prime rate or one-month LIBOR plus a margin ranging from 1.75% to 2.25% as determined by the Company's ratio of total debt to EBITDA. The weighted-average interest rate for revolving credit borrowings and term loans outstanding as of December 31, 2014 was approximately 2.16%.
The Company pays a commitment fee on unused balances, which ranges from .15% to .30% as determined by the Company's ratio of total debt to EBITDA. As of December 31, 2014, $155.9 million was available for borrowings under the revolving credit agreement.
The revolving credit and term loan agreement, senior unsecured notes discussed below and franchise loan program discussed in Note 8 contain financial covenants. These covenants include requirements that the Company maintain ratios of (i) EBITDA plus lease expense to fixed charges of no less than 1.75:1.00 through December 31, 2015 and 2.00:1.00 thereafter and (ii) total debt to EBITDA of no greater than 3.25:1.00 through December 31, 2015 and 3.00:1.00 thereafter. In each case, EBITDA refers to the Company’s consolidated net income before interest and tax expense, depreciation (other than lease merchandise depreciation), amortization expense and other non-cash charges.
If the Company fails to comply with these covenants, the Company will be in default under these agreements, and all amounts would become due immediately. Under the Company’s revolving credit and term loan agreement, senior unsecured notes and franchise loan program, the Company may pay cash dividends in any year so long as, after giving pro forma effect to the dividend payment, the Company maintains compliance with its financial covenants and no event of default has occurred or would result from the payment.
At December 31, 2014, the Company was in compliance with all covenants.
Senior Unsecured Notes
2011 Note Purchase Agreement
On April 14, 2014, the Company entered into the third amendment to its note purchase agreement dated as of July 5, 2011 with several insurance companies. Pursuant to the note purchase agreement, the Company and certain of its subsidiaries as co-obligors previously issued $125.0 million in senior unsecured notes to the purchasers in a private placement. Payments of interest commenced on July 27, 2011 and are due quarterly, and principal payments of $25.0 million commenced on April 27, 2014 and are due annually until maturity. The maturity of the note purchase agreement remained at April 27, 2018.
The amendment revised the 2011 note purchase agreement to, among other things, replace the interest rate of 3.75% per year with an interest rate of 3.95% commencing April 28, 2014, conform the covenants, representations, warranties and events of default to the changes reflected in the revolving credit and term loan agreement, to contemplate the acquisition of Progressive and to authorize the new 2014 senior unsecured notes.
2014 Note Purchase Agreements
On April 14, 2014, the Company entered into note purchase agreements with several insurance companies, pursuant to which the Company and certain of its subsidiaries as co-obligors issued $300.0 million in aggregate principal amount of senior unsecured notes in a private placement. The notes bear interest at the rate of 4.75% per year and mature on April 14, 2021. Payments of interest are due quarterly, commencing July 14, 2014, with principal payments of $60.0 million each due annually commencing April 14, 2017.
The 2014 note purchase agreements contain 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 2011 note purchase agreement, revolving credit and term loan agreement and franchisee loan program, as modified by the amendments described herein. The Company used the net proceeds of the sale of the senior unsecured notes to the purchasers to partially pay for the Progressive acquisition.
On December 9, 2014, the Company entered into the fourth amendment to the 2011 note purchase agreement and the first amendment to the 2014 note purchase agreements to, among other things, conform the financial covenants and certain other covenants, terms and provisions to substantially reflect the same changes made to comparable covenants, terms and provisions in the franchisee loan program and in the revolving credit and term loan agreement, as modified by the amendments described herein. The Company remains subject to financial covenants under the 2011 note purchase agreement and the 2014 note purchase agreements, including maintaining a ratio of debt to earnings before interest, taxes, depreciation and amortization and a minimum fixed charge coverage ratio.
Capital Leases with Related Parties
As of December 31, 2014, the Company had 19 capital leases with a limited liability company (“LLC”) controlled by a group of executives, including a former Chairman of the Company. In October and November 2004, the Company sold 11 properties, including leasehold improvements, to the LLC. 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 term lease, with a five-year renewal at the Company’s option, at an aggregate annual rental of $788,000. 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 obligations are recorded in the Company’s consolidated financial statements. No gain or loss was recognized in this transaction.
In December 2002, the Company sold ten properties, including leasehold improvements, to the LLC. The LLC obtained borrowings collateralized by the land and buildings totaling $5.0 million. The Company occupies the land and buildings collateralizing the borrowings under a 15-year term lease at an aggregate annual rental of approximately $1.2 million. 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 10.1%. 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.
Sale-leasebacks
The Company finances a portion of 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 operating leases. The Company does not have any retained or contingent interests in the stores nor does the Company provide any guarantees, other than a corporate level guarantee of lease payments, in connection with the sale-leasebacks.
Other Debt
Other debt at December 31, 2014 and 2013 includes $3.3 million of industrial development corporation revenue bonds. The weighted-average interest rate on the outstanding bonds was .24% and .25% as of December 31, 2014 and 2013, respectively. No principal payments are due on the bonds until maturity in October 2015.
Future maturities under the Company’s debt and capital lease obligations are as follows:
|
| | | |
(In Thousands) | |
2015 | $ | 112,597 |
|
2016 | 40,207 |
|
2017 | 100,140 |
|
2018 | 98,857 |
|
2019 | 133,190 |
|
Thereafter | 121,091 |
|
| $ | 606,082 |
|
NOTE 7: INCOME TAXES
Following is a summary of the Company’s income tax expense for the years ended December 31:
|
| | | | | | | | | | | |
(In Thousands) | 2014 | | 2013 | | 2012 |
Current Income Tax Expense: | | | | | |
Federal | $ | 41,946 |
| | $ | 91,664 |
| | $ | 116,234 |
|
State | 8,682 |
| | 9,393 |
| | 10,819 |
|
| 50,628 |
| | 101,057 |
| | 127,053 |
|
Deferred Income Tax (Benefit): | | | | | |
Federal | (3,314 | ) | | (35,941 | ) | | (23,035 | ) |
State | (3,843 | ) | | (822 | ) | | (206 | ) |
| (7,157 | ) | | (36,763 | ) | | (23,241 | ) |
| $ | 43,471 |
| | $ | 64,294 |
| | $ | 103,812 |
|
At December 31, 2011, the Company had a federal net operating loss (“NOL”) carryforward of approximately $31.2 million available to offset future taxable income. The entire NOL carryforward was utilized during 2012.
As a result of the extended bonus depreciation provisions in the Tax Increase Prevention Act of 2014, the Company paid more than anticipated for the 2014 federal tax liability. The 2014 act provided an estimated tax deferral of approximately $126.0 million. The Company filed for and received a refund of $100.0 million in January 2015.
Significant components of the Company’s deferred income tax liabilities and assets at December 31 are as follows:
|
| | | | | | | |
(In Thousands) | 2014 | | 2013 |
Deferred Tax Liabilities: | | | |
Lease Merchandise and Property, Plant and Equipment | $ | 228,002 |
| | $ | 249,192 |
|
Goodwill & Other Intangibles | 40,644 |
| | 34,512 |
|
Investment in Partnership | 61,342 |
| | — |
|
Other, Net | 1,866 |
| | 2,782 |
|
Total Deferred Tax Liabilities | 331,854 |
| | 286,486 |
|
Deferred Tax Assets: | | | |
Accrued Liabilities | 42,024 |
| | 36,778 |
|
Advance Payments | 14,272 |
| | 15,400 |
|
Other, Net | 7,713 |
| | 8,032 |
|
Total Deferred Tax Assets | 64,009 |
| | 60,210 |
|
Less Valuation Allowance | (706 | ) | | (682 | ) |
Net Deferred Tax Liabilities | $ | 268,551 |
| | $ | 226,958 |
|
The Company’s effective tax rate differs from the statutory United States Federal income tax rate for the years ended December 31 as follows:
|
| | | | | | | | |
| 2014 | | 2013 | | 2012 |
Statutory Rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increases (Decreases) in United States Federal Taxes | | | | | |
Resulting From: | | | | | |
State Income Taxes, Net of Federal Income Tax Benefit | 2.6 |
| | 3.1 |
| | 2.5 |
|
Federal Tax Credits | (1.8 | ) | | (1.7 | ) | | (.1 | ) |
Other, Net | (.1 | ) | | (1.6 | ) | | .1 |
|
Effective Tax Rate | 35.7 | % | | 34.8 | % | | 37.5 | % |
The Company files a federal consolidated income tax return in the United States and the separate legal entities file in various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to federal, state and local tax examinations by tax authorities for years before 2011.
The following table summarizes the activity related to the Company’s uncertain tax positions:
|
| | | | | | | | | | | |
(In Thousands) | 2014 | | 2013 | | 2012 |
Balance at January 1, | $ | 1,960 |
| | $ | 1,258 |
| | $ | 1,412 |
|
Additions Based on Tax Positions Related to the Current Year | 311 |
| | 454 |
| | 178 |
|
Additions for Tax Positions of Prior Years | 928 |
| | 423 |
| | 83 |
|
Prior Year Reductions | (370 | ) | | (5 | ) | | (315 | ) |
Statute Expirations | (94 | ) | | (85 | ) | | (83 | ) |
Settlements | (91 | ) | | (85 | ) | | (17 | ) |
Balance at December 31, | $ | 2,644 |
| | $ | 1,960 |
| | $ | 1,258 |
|
As of December 31, 2014 and 2013, the amount of uncertain tax benefits that, if recognized, would affect the effective tax rate is $2.1 million and $1.5 million, respectively, including interest and penalties.
During the years ended December 31, 2014 and 2013, the Company recognized interest and penalties of $286,000 and $76,000, respectively. During the year ended December 31, 2012, the Company recognized a net benefit of $126,000 related to interest and penalties. The Company had $499,000 and $278,000 of accrued interest and penalties at December 31, 2014 and 2013, respectively. The Company recognizes potential interest and penalties related to uncertain tax benefits as a component of income tax expense.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Leases
The Company leases warehouse and retail store space for most of its store-based operations, as well as corporate management and call center space for Progressive’s operations, under operating leases expiring at various times through 2029. The Company also leases certain properties under capital leases that are more fully described in Note 6 to these consolidated financial statements. Most of the leases contain renewal options for additional periods ranging from one to 20 years or provide for options to purchase the related property at predetermined purchase prices that do not represent bargain purchase options. In addition, certain properties occupied under operating leases contain normal purchase options. Leasehold improvements related to these leases are generally amortized over periods that do not exceed the lesser of the lease term or 15 years. While a majority of leases do not require escalating payments, for the leases which do contain such provisions, the Company records the related lease expense on a straight-line basis over the lease term. The Company also leases computer equipment and transportation vehicles under operating leases expiring during the next four years. Management expects that most leases will be renewed or replaced by other leases in the normal course of business.
Future minimum lease payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 2014 are as follows:
|
| | | |
(In Thousands) | |
2015 | $ | 116,564 |
|
2016 | 95,403 |
|
2017 | 75,667 |
|
2018 | 59,093 |
|
2019 | 46,842 |
|
Thereafter | 125,725 |
|
| $ | 519,294 |
|
Rental expense was $116.4 million in 2014, $110.0 million in 2013 and $102.0 million in 2012. Rental expense for the year ended December 31, 2014 included $4.8 million related to the closure of 44 Company-operated stores in 2014, as discussed in Note 9 to these consolidated financial statements. These costs were included in the line item “Restructuring expenses” in the consolidated statements of earnings. All other rental expense was included as a component of operating expenses in the consolidated statements of earnings.
Sublease income was $3.9 million in 2014, $2.6 million in 2013 and $3.1 million in 2012. The Company has anticipated future sublease rental income of $4.5 million in 2015, $3.9 million in 2016, $3.3 million in 2017, $3.0 million in 2018, $2.5 million in 2019 and $5.2 million thereafter through 2026. Sublease income is included in other revenues in the consolidated statements of earnings.
Guarantees
The Company has guaranteed certain debt obligations of some of the franchisees under a franchise loan program with several banks. In the event these franchisees are unable to meet their debt service payments or otherwise experience an event of default, the Company would be unconditionally liable for the outstanding balance of the franchisees’ debt obligations under the franchisee loan program, which would be due in full within 90 days of the event of default. At December 31, 2014, the maximum amount that the Company would be obligated to repay in the event franchisees defaulted was $89.8 million. The Company has recourse rights to franchisee assets securing the debt obligations, which consist primarily of lease merchandise and fixed assets. As a result, the Company has never incurred, nor does management expect to incur, any significant losses under these guarantees. The carrying amount of the franchise-related borrowings guarantee, which is included in accounts payable and accrued expenses in the consolidated balance sheets, is approximately $1.4 million as of December 31, 2014.
On April 14, 2014, in connection with the Progressive acquisition, the Company entered into the third amended and restated loan facility and guaranty. The amended franchise loan facility (i) reduces the maximum commitment available from $200.0 million to $175.0 million, (ii) conforms the interest rates on the facility to the changes in the rates applicable to the new revolving credit agreement and (iii) conforms the covenants, representations, warranties and events of default to the changes reflected in the revolving credit agreement, to contemplate the acquisition of Progressive, and to authorize the new 2014 senior unsecured notes.
On December 9, 2014, the Company amended its third amended and restated loan facility to, among other things, (i) extend the maturity date to December 9, 2015, (ii) modify certain financial covenants to make them more favorable to the Company, as more fully described in Note 6 to these consolidated financial statements, (iii) provide for the joinder of certain new banks and other financial institutions as participants, (iv) amend and restate certain schedules and (v) add and modify certain other terms, covenants and representations and warranties.
The maximum facility commitment amount under the franchise loan program is $175.0 million, including a Canadian subfacility commitment amount for loans to franchisees that operate stores in Canada (other than in the Province of Quebec) of Cdn $50 million. The Company remains subject to the financial covenants under the franchise loan facility.
Legal Proceedings
From time to time, the Company is party to various legal and regulatory proceedings arising in the ordinary course of business.
Some of the proceedings to which we are currently a party are described below. We believe we have meritorious defenses to all of the claims described below, and intend to vigorously defend against the claims. However, these proceedings are still developing and due to the inherent uncertainty in litigation, regulatory and similar adversarial proceedings, there can be no guarantee that we will ultimately be successful in these proceedings, or in others to which we are currently a party. Substantial losses from these proceedings or the costs of defending them could have a material adverse impact upon our business, financial position and results of operations.
The Company establishes an accrued liability for legal and regulatory proceedings when it determines that a loss is both probable and the amount of the loss can be reasonably estimated. The Company continually monitors its litigation and regulatory exposure and reviews the adequacy of its legal and regulatory reserves on a quarterly basis in accordance with applicable accounting rules. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters.
At December 31, 2014, the Company had accrued $33.6 million for pending legal and regulatory matters for which it believes losses are probable, which is our best estimate of our exposure to loss, and mostly related to the now-settled regulatory investigation by the California Attorney General described below. The Company estimates that the aggregate range of possible loss in excess of accrued liabilities for such probable loss contingencies is between $0 and $4.0 million.
At December 31, 2014, the Company estimated that the aggregate range of loss for all material pending legal and regulatory proceedings for which a loss is reasonably possible, but less likely than probable (i.e., excluding the contingencies described in the preceding paragraph), is between $158,000 to $467,000. Those matters for which a reasonable estimate is not possible are not included within estimated ranges and, therefore, the estimated ranges do not represent the Company’s maximum loss exposure. The Company’s estimates as to legal and regulatory accruals, as to aggregate probable loss amounts and as to reasonably possible loss amounts, are all subject to the uncertainties and variables described above.
Labor and Employment
In Kunstmann et al v. Aaron Rents, Inc., filed with the United States District Court, Northern District of Alabama (Case No.: 2:08-CV-01969-KOB-JEO) on October 22, 2008, plaintiffs alleged that the Company improperly classified store general managers as exempt from the overtime provisions of the Fair Labor Standards Act (“FLSA”). The case was conditionally certified as an FLSA collective action on January 25, 2010. Plaintiffs sought to recover unpaid overtime compensation and other damages. In July 2014, the parties engaged in a successful mediation of this case and reached an agreement in principle to settle the matter for an immaterial amount. On October 16, 2014, the Court approved the parties’ settlement documents and order, and the case is now closed.
The matter of Kurtis Jewell v. Aaron’s, Inc., was originally filed in the United States District Court, Northern District of Ohio, Eastern Division on October 27, 2011 and was transferred on February 23, 2012 to the United States District Court for the Northern District of Georgia (Civil No.:1:12-CV-00563-AT). Plaintiff, on behalf of himself and all other non-exempt employees who worked in Company stores, alleged that the Company violated the FLSA when it automatically deducted 30 minutes from employees' time for meal breaks on days when plaintiffs allegedly did not take their meal breaks. On June 28, 2012, the Court granted conditional certification of a class, and in August 2014, the parties resumed a previous mediation and reached an agreement to settle the case. The court approved the settlement and the case is now closed.
In Daniel Antoine v. Aaron’s, Inc., filed in U.S. District Court for the Northern District of Georgia (Civil No.:1-14-CV-02120-AT-WEJ), on July 3, 2014, plaintiff alleged that the Company violated his rights and the rights of putative class members under the Fair Credit Reporting Act by refusing to hire plaintiff and other applicants based upon pre-employment background check reports without first sending such background reports and a pre-adverse action notice to the applicants. In December 2014 the parties reached an agreement to settle the case. The proposed settlement documents are in process.
Consumer
In Margaret Korrow, et al. v. Aaron's, Inc., originally filed in the Superior Court of New Jersey, Middlesex County, Law Division on October 26, 2010, plaintiff filed suit on behalf of herself and others similarly situated alleging that the Company is liable in damages to plaintiff and each class member because the Company's lease agreements issued after March 16, 2006 purportedly violated certain New Jersey state consumer statutes. Plaintiff's complaint seeks treble damages under the New Jersey Consumer Fraud Act, and statutory penalty damages of $100 per violation on all contracts issued in New Jersey, and also claim that there are multiple violations per contract. The Company removed the lawsuit to the United States District Court for the District of New Jersey on December 6, 2010 (Civil Action No.: 10-06317(JAP)(LHG)). Plaintiff on behalf of herself and others similarly situated seeks equitable relief, statutory and treble damages, pre- and post-judgment interest and attorneys' fees. Discovery on this matter is closed. On July 31, 2013, the Court certified a class comprising all persons who entered into a rent-to-own contract with the Company in New Jersey from March 16, 2006 through March 31, 2011. In August 2013, the Court of Appeals denied the Company’s request for an interlocutory appeal of the class certification issue. The Company has filed a motion to allow counterclaims against all newly certified class members who may owe legitimate fees or damages to the Company or who failed to return merchandise to the Company prior to obtaining ownership. That motion was denied by the magistrate judge on June 30, 2014, but an appeal of that ruling is pending with the District Court.
Privacy and Related Matters
In Crystal and Brian Byrd v. Aaron's, Inc., Aspen Way Enterprises, Inc., John Does (1-100) Aaron's Franchisees and Designerware, LLC, filed on May 16, 2011, in the United States District Court, Western District of Pennsylvania (Case No. 1:11-CV-00101-SPB), plaintiffs alleged that the Company and its independently owned and operated franchisee Aspen Way Enterprises (“Aspen Way”) knowingly violated plaintiffs' privacy in violation of the Electronic Communications Privacy Act (“ECPA”) and the Computer Fraud Abuse Act and sought certification of a putative nationwide class. Plaintiffs based these claims on Aspen Way's use of a software program called “PC Rental Agent.” Although the District Court dismissed the Company from the original lawsuit on March 20, 2012, after certain procedural motions, on May 23, 2013, the Court granted plaintiffs' motion for leave to file a third amended complaint, which asserts the claims under the ECPA, common law invasion of privacy, added a request for injunction, and named additional independently owned and operated Company franchisees as defendants. Plaintiffs filed the third amended complaint, and the Company moved to dismiss that complaint on substantially the same grounds as it sought to dismiss plaintiffs' prior complaints. Plaintiffs seek monetary damages as well as injunctive relief. Plaintiffs filed their motion for class certification on July 1, 2013, and the Company's response was filed in August 2013. On March 31, 2014, the U.S. District Judge dismissed all claims against all franchisees other than Aspen Way Enterprises, LLC. The Court also dismissed claims for invasion of privacy, aiding and abetting, and conspiracy against all defendants. In addition, the Court denied the plaintiffs’ motion to certify the class. Finally, the Judge denied the Company’s motion to dismiss the violation of ECPA claims. Plaintiffs requested and received immediate appellate review of these rulings by the U.S. Third Circuit Court of Appeals. Oral argument was heard on January 23, 2015, and a decision is pending.
In Michael Winslow and Fonda Winslow v. Sultan Financial Corporation, Aaron's, Inc., John Does (1-10), Aaron's Franchisees and Designerware, LLC, filed on March 5, 2013 in the Los Angeles Superior Court (Case No. BC502304), plaintiffs assert claims against the Company and its independently owned and operated franchisee, Sultan Financial Corporation (as well as certain John Doe franchisees), for unauthorized wiretapping, eavesdropping, electronic stalking, and violation of California's Comprehensive Computer Data Access and Fraud Act and its Unfair Competition Law. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiffs are seeking injunctive relief and damages in connection with the allegations of the complaint. Plaintiffs are also seeking certification of a putative California class. Plaintiffs are represented by the same counsel as in the above-described Byrd litigation. In April 2013, the Company timely removed this matter to federal court. On May 8, 2013, the Company filed a motion to stay this litigation pending resolution of the Byrd litigation, a motion to dismiss for failure to state a claim, and a motion to strike certain allegations in the complaint. The Court subsequently stayed the case. The Company's motions to dismiss and strike certain allegations remain pending.
In Lomi Price v. Aaron's, Inc. and NW Freedom Corporation, filed on February 27, 2013, in the State Court of Fulton County, Georgia (Case No. 13-EV-016812B), an individual plaintiff asserts claims against the Company and its independently owned and operated franchisee, NW Freedom Corporation, for invasion of privacy/intrusion on seclusion, computer invasion of privacy and infliction of emotional distress. Each of these claims arises out of the alleged use of PC Rental Agent software. The plaintiff is seeking compensatory and punitive damages of not less than $250,000. On April 3, 2013, the Company filed an answer and affirmative defenses. On that same day, the Company also filed a motion to stay the litigation pending resolution of the Byrd litigation, a motion to dismiss for failure to state a claim and a motion to strike certain allegations in the complaint. The court stayed the proceeding pending rulings on certain motions in the Byrd case. The stay has expired and the plaintiff filed an amended complaint. The Company has filed a motion to dismiss the amended complaint.
In Michael Peterson v. Aaron’s, Inc. and Aspen Way Enterprises, Inc., filed on June 19, 2014, in the U.S. District Court for the Northern District of Georgia, several plaintiffs allege that they leased computers for use in their law practice. The plaintiffs claim that the Company and Aspen Way knowingly violated plaintiffs' privacy and the privacy of plaintiff’s legal clients in violation of the ECPA and the Computer Fraud Abuse Act. Plaintiffs seek certification of a putative nationwide class. Plaintiffs based these claims on Aspen Way's use of a software program called PC Rental Agent. The plaintiffs claim that information and data obtained by defendants through PC Rental Agent was attorney-client privileged. The Company has filed a motion to dismiss plaintiffs' amended complaint.
Regulatory Investigations
California Attorney General Investigation. The California Attorney General investigated the Company's retail transactional practices, including various leasing and marketing practices, information security and privacy policies and practices related to the alleged use of PC Rental Agent software by certain independently owned and operated Company franchisees. The Company reached a comprehensive resolution of this matter without litigation. The final settlement and consent order were announced on October 13, 2014.
Pennsylvania Attorney General Investigation. There is a pending investigation by the Pennsylvania Attorney General relating to the Company's privacy practices in Pennsylvania. The privacy issues are related to the alleged use of PC Rental Agent software by certain independently owned and operated Company franchisees, and the Company's alleged responsibility for that use. The Company is continuing to cooperate in the investigation.
Other Matters
Noncompete Dispute. In January 2014, Aaron’s sold its Company-operated RIMCO stores and the rights to five franchised stores. The acquisition agreement provides that the Company will not compete with the acquiring entity for a specified period of time in certain geographic locations surrounding the purchased stores. In August 2014, the acquiring entity asserted that Aaron’s was violating the noncompete covenant in the acquisition agreement. The Company disputes that the noncompete covenant is being violated, and is engaged in discussions to resolve the dispute. To date, no lawsuit has been filed related to this matter.
Other Commitments
At December 31, 2014, the Company had non-cancelable commitments primarily related to certain advertising and marketing programs of $20.8 million. Payments under these commitments are scheduled to be $18.0 million in 2015, $1.7 million in 2016, $776,000 in 2017 and $363,000 in 2018.
The Company maintains a 401(k) savings plan for all its full-time employees with at least one year of service and who meet certain eligibility requirements. As of December 31, 2014, the plan allows employees to contribute up to 100% of their annual compensation in accordance with federal contribution limits with 100% matching by the Company on the first 3% of compensation and 50% on the next 2% of compensation for a total of 4% matching compensation. The Company’s expense related to the plan was $4.3 million in 2014, $3.3 million in 2013, and $999,000 in 2012.
The Company is a party to various claims and legal proceedings arising in the ordinary course of business. Management regularly assesses the Company’s insurance deductibles, monitors the Company's litigation and regulatory exposure with the Company’s attorneys and evaluates its loss experience. The Company also enters into various contracts in the normal course of business that may subject it to risk of financial loss if counterparties fail to perform their contractual obligations.
On July 15, 2014, the Company announced that a rigorous evaluation of the Company-operated store portfolio had been performed. As a result of this evaluation and other cost-reduction initiatives, during the year ended December 31, 2014, the Company closed 44 underperforming Company-operated stores and restructured its home office and field support to more closely align with current business conditions. The restructuring was completed during the third quarter of 2014 and total restructuring charges of $9.1 million were recorded during the year ended December 31, 2014, principally comprised of $4.8 million related to contractual lease obligations, $3.3 million related to the write-off and impairment of property, plant and equipment and $620,000 related to workforce reductions. These costs were included in the line item “Restructuring Expenses” in the consolidated statements of earnings.
Total restructuring charges of $4.8 million have been included in the Sales and Lease Ownership segment results and total restructuring charges of $4.3 million have been included in the Other segment results. The Company does not currently anticipate any remaining costs related to this restructuring plan to be material.
The following table summarizes the balances and activity related to the restructuring charges for the year ended December 31, 2014:
|
| | | | | | | | | | | | | | | |
(In Thousands) | Contractual Obligations Under Canceled Leases | Severance | Fixed Assets | Other | Total |
Balance at January 1, 2014 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Restructuring Expenses | 4,797 |
| 620 |
| 3,328 |
| 395 |
| 9,140 |
|
Payments | (1,570 | ) | (620 | ) | — |
| — |
| (2,190 | ) |
Impairment and Assets Written Off | — |
| — |
| (3,328 | ) | (395 | ) | (3,723 | ) |
Balance at December 31, 2014 | $ | 3,227 |
| $ | — |
| $ | — |
| $ | — |
| $ | 3,227 |
|
NOTE 10: SHAREHOLDERS’ EQUITY
The Company held 18,263,589 shares in its treasury and was authorized to purchase an additional 10,496,421 shares at December 31, 2014. The holders of common stock are entitled to receive dividends and other distributions in cash, stock or property of the Company as and when declared by its Board of Directors out of legally available funds. The Company repurchased 1,000,952 shares of its common stock in 2014 and 3,502,627 shares of its common stock in 2013 through an accelerated share repurchase program.
The Company has 1,000,000 shares of preferred stock authorized. The shares are issuable in series with terms for each series fixed by, and such issuance subject to approval by, the Board of Directors. As of December 31, 2014, no preferred shares have been issued.
On October 4, 2013, the Company amended its Amended and Restated Articles of Incorporation to confirm that shares of common stock the Company repurchases from time to time become treasury shares. As permitted by Georgia corporate law, the amendment was adopted by the Board of Directors of the Company without shareholder action.
Accelerated Share Repurchase Program
In December 2013, the Company entered into an accelerated share repurchase program with a third-party financial institution to purchase $125.0 million of the Company’s common stock, as part of its previously announced share repurchase program. The Company paid $125.0 million at the beginning of the program and received an initial delivery of 3,502,627 shares, estimated to be approximately 80% of the total number of shares to be repurchased under the agreement, which reduced the Company's shares outstanding at December 31, 2013. The value of the initial shares received on the date of purchase was $100.0 million, reflecting a $28.55 price per share, which was recorded as treasury shares. The Company recorded the remaining $25.0 million as a forward contract indexed to its own common stock in additional paid-in capital for the year ended December 31, 2013.
In February 2014, the accelerated share repurchase program was completed and the Company received 1,000,952 additional shares determined using a volume weighted average price of the Company's stock (inclusive of a discount) during the trading period, which resulted in an effective average price per share of $27.76. All amounts initially classified as additional paid-in capital were reclassified to treasury shares during the first quarter of 2014 upon settlement.
NOTE 11: STOCK OPTIONS AND RESTRICTED STOCK
The Company grants stock options, restricted stock units, restricted stock awards and performance share units to certain employees and directors of the Company under the 2001 Stock Option and Incentive Award Plan (the “2001 Incentive Award Plan”). This plan was originally approved by the Company’s shareholders in May 2001 and was amended and restated with shareholder approval in May 2009. As of December 31, 2014, the aggregate number of shares of common stock that may be issued or transferred under the 2011 Incentive Award Plan is 13,825,827.
Total stock-based compensation expense was $10.9 million, $2.3 million and $6.5 million in 2014, 2013 and 2012, respectively. Stock-based compensation expense for the year ended December 31, 2014 included $5.1 million related to the accelerated vesting of restricted stock and stock options upon the retirement of the Company’s Chief Executive Officer in 2014, as provided for in his employment agreement. These costs were included in the line item “Retirement and Vacation Charges” in the consolidated statements of earnings. All other stock-based compensation expense was included as a component of operating expenses in the consolidated statements of earnings.
The total income tax benefit recognized in the consolidated statements of earnings for stock-based compensation arrangements was $3.8 million, $889,000 and $2.4 million in 2014, 2013 and 2012, respectively. Benefits of tax deductions in excess of recognized compensation cost, which are included in financing cash flows, were $1.4 million, $1.4 million and $6.0 million for the years ended 2014, 2013 and 2012, respectively.
As of December 31, 2014, there was $16.5 million of total unrecognized compensation expense related to non-vested stock-based compensation which is expected to be recognized over a period of 2.6 years.
Stock Options
Under the Company’s 2001 Incentive Award Plan, options granted to date become exercisable after a period of one to five years and unexercised options lapse ten years after the date of the grant. Options are subject to forfeiture upon termination of service. The Company recognizes compensation expense for awards with graded vesting on a straight-line basis over the requisite service period for each separately vesting portion of the award. Shares are issued from the Company’s treasury shares upon share option exercises.
The Company determines the fair value of stock options on the grant date using a Black-Scholes-Merton option pricing model that incorporates expected volatility, expected option life, risk-free interest rates and expected dividend yields. The expected volatility is based on implied volatilities from traded options on the Company’s stock and the historical volatility of the Company’s common stock over the most recent period generally commensurate with the expected estimated life of each respective grant. The expected lives of options are based on the Company’s historical option exercise experience. The Company believes that the historical experience method is the best estimate of future exercise patterns. The risk-free interest rates are determined using the implied yield available for zero-coupon United States government issues with a remaining term equal to the expected life of the grant. The expected dividend yields are based on the approved annual dividend rate in effect and market price of the underlying common stock at the time of grant. No assumption for a future dividend rate increase has been included unless there is an approved plan to increase the dividend in the near term.
The Company granted 351,000 stock options during 2014. No stock options were granted in 2013 or 2012. The weighted-average fair value of options granted in 2014 and the weighted-average assumptions used in the Black-Scholes-Merton option pricing model for such grants were as follows: |
| | | |
| 2014 |
Dividend Yield | .3 | % |
Expected Volatility | 31.9 | % |
Risk-free Interest Rate | 1.9 | % |
Expected Term (in years) | 6.2 |
|
Weighted-average Fair Value of Stock Options Granted | $ | 9.61 |
|
The following table summarizes information about stock options outstanding at December 31, 2014:
|
| | | | | | | | | | | | | | | |
| Options Outstanding | | Options Exercisable |
Range of Exercise Prices | Number Outstanding December 31, 2014 | | Weighted Average Remaining Contractual Life (in Years) | | Weighted Average Exercise Price | | Number Exercisable December 31, 2014 | | Weighted Average Exercise Price |
$10.01-15.00 | 236,250 |
| | 3.79 | | $ | 14.11 |
| | 236,250 |
| | $ | 14.11 |
|
15.01-20.00 | 112,500 |
| | 5.15 | | 19.92 |
| | 52,500 |
| | 19.92 |
|
20.01-25.00 | 7,521 |
| | 9.85 | | 24.98 |
| | — |
| | — |
|
25.01-30.29 | 267,243 |
| | 9.62 | | 28.65 |
| | — |
| | — |
|
10.01-30.29 | 623,514 |
| | 6.61 | | 21.52 |
| | 288,750 |
| | 15.16 |
|
The table below summarizes option activity for the year ended December 31, 2014:
|
| | | | | | | | | | | | | | | | |
| Options (In Thousands) | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in Years) | | Aggregate Intrinsic Value (in Thousands) | | Weighted Average Fair Value |
Outstanding at January 1, 2014 | 687 |
| | $ | 15.95 |
| | | | | | |
Granted | 351 |
| | 28.82 |
| | | | | | |
Exercised | (307 | ) | | 15.60 |
| | | | | | |
Forfeited/expired | (107 | ) | | 26.72 |
| | | | | | |
Outstanding at December 31, 2014 | 624 |
| | 21.52 |
| | 6.61 | | $ | 5,643 |
| | $ | 8.35 |
|
Expected to Vest at December 31, 2014 | 323 |
| | 27.27 |
| | 8.96 | | 1,065 |
| | 9.81 |
|
Exercisable at December 31, 2014 | 289 |
| | 15.16 |
| | 4.04 | | 4,449 |
| | 6.60 |
|
The aggregate intrinsic value amounts in the table above represent the closing price of the Company’s common stock on December 31, 2014 in excess of the exercise price, multiplied by the number of in-the-money stock options as of that same date. Options outstanding that are expected to vest are net of estimated future option forfeitures.
The aggregate intrinsic value of options exercised, which represents the value of the Company’s common stock at the time of exercise in excess of the exercise price, was $4.4 million, $11.0 million and $20.0 million in 2014, 2013 and 2012, respectively. The total grant-date fair value of options vested was $1.3 million, $2.7 million and $2.2 million in 2014, 2013 and 2012, respectively.
Restricted Stock
Shares of restricted stock or restricted stock units (collectively, “restricted stock”) may be granted to employees and directors under the 2001 Incentive Award Plan and typically vest over approximately one to five year periods. Restricted stock grants may be subject to one or more objective employment, performance or other forfeiture conditions as established at the time of grant. Any shares of restricted stock that are forfeited may again become available for issuance.
The fair value of restricted stock is based on the fair market value of the Company’s common stock on the date of grant. The Company recognizes the fair value of time-based restricted stock as compensation expense on a straight-line basis over the vesting period.
In 2011, the Company established a restricted stock program as a component of the 2001 Incentive Award Plan, referred to as the Aaron’s Management Performance Plan (“AMP Plan”). Under the AMP Plan, which expired on December 31, 2012, restricted shares were granted quarterly to eligible participants upon achievement of certain pre-tax profit and revenue levels by the employees’ operating units or the overall Company. Restricted stock granted under the AMP Plan vests over four to five
years from the date of grant. Plan participants included certain vice presidents, director level employees and other key personnel in the Company’s home office, divisional vice presidents and regional managers.
During 2012 and 2013, the Company granted performance-based restricted stock to certain executive officers. The performance-based restricted stock under this program is released at the completion of a three-year period only upon the achievement of specific performance criteria over three annual performance periods. The compensation expense associated with these awards is amortized ratably over the vesting period based on the Company’s projected assessment of the level of performance that will be achieved and earned.
The Company granted 548,000, 307,000 and 368,000 shares of restricted stock at weighted-average fair values of $29.11, $29.23 and $26.08 in 2014, 2013 and 2012, respectively. The following table summarizes information about restricted stock activity during 2014:
|
| | | | | | |
| Restricted Stock (In Thousands) | | Weighted Average Fair Value |
Non-vested at January 1, 2014 | 682 |
| | $ | 25.77 |
|
Granted | 548 |
| | 29.11 |
|
Vested | (365 | ) | | 24.21 |
|
Forfeited | (167 | ) | | 27.69 |
|
Non-vested at December 31, 2014 | 698 |
| 1 | 28.75 |
|
1 The outstanding non-vested restricted stock as of December 31, 2014 includes 75,000 shares that are subject to performance conditions.
The total vest-date fair value of restricted stock and the performance share units described below that vested during the year was $11.1 million, $184,000 and $2.2 million in 2014, 2013 and 2012, respectively.
Performance Share Units
In 2014, as part of the Company’s long-term incentive compensation program (“LTIP Plan”) and pursuant to the Company’s 2001 Incentive Award Plan, the Company granted a mix of stock options, time-based restricted stock and performance share units to key executives and managers. For performance share units, which are generally settled in stock, the number of shares earned is determined at the end of the one-year performance period based upon achievement of certain pre-tax profit and revenue levels of the Company. If the performance criteria are met, the award is earned, which is then subject to a holding period of two years in order for the shares to be released. The number of performance-based shares which could potentially be issued ranges from zero to 200% of the target award.
The compensation expense associated with these awards is amortized ratably over the vesting period based on the Company’s projected assessment of the level of performance that will be achieved and earned. In the event the Company determines it is no longer probable that the minimum performance criteria specified in the plan will be achieved, all previously recognized compensation expense is reversed in the period such a determination is made.
The following table summarizes information about performance share unit activity during 2014:
|
| | | | | | |
| Performance Share Units (In Thousands) | | Weighted Average Fair Value |
Non-vested at January 1, 2014 | — |
| | $ | — |
|
Granted | 167 |
| | 32.14 |
|
Vested | (36 | ) | | 32.48 |
|
Forfeited/unearned | (20 | ) | | 32.22 |
|
Non-vested at December 31, 2014 | 111 |
| | 32.01 |
|
Retirement-Related Modifications
In connection with the retirement of the Company’s founder and Chairman of the Board in 2012, during the year ended December 31, 2012, the Company recorded a $10.4 million charge to operating expenses, of which $1.7 million related to the accelerated vesting of 75,000 shares of restricted stock and 25,000 stock options. The total incremental cost resulting from the modification, due primarily to increases in the Company’s stock price as of the modification date compared to the grant date, was $1.2 million in 2012. There were no similar modification charges in 2014 or 2013.
NOTE 12: SEGMENTS
Description of Products and Services of Reportable Segments
As of December 31, 2014, the Company had five operating and reportable segments: Sales and Lease Ownership, Progressive, HomeSmart, Franchise and Manufacturing. The results of Progressive, which is presented as a reportable segment, have been included in the Company's consolidated results from the April 14, 2014 acquisition date. In January 2014, the Company sold the 27 Company-operated RIMCO stores and the rights to five franchised stores. In all periods presented, RIMCO has been reclassified from the RIMCO segment to Other.
The Aaron’s Sales & Lease Ownership division offers furniture, electronics, appliances and computers to consumers primarily on a monthly payment basis with no credit requirements. Progressive is a leading virtual lease-to-own company that provides lease-purchase solutions through over 15,000 retail locations. The HomeSmart division was established to offer furniture, electronics, appliances and computers to consumers primarily on a weekly payment basis with no credit requirements. The Company’s Franchise operation awards franchises and supports franchisees of its sales and lease ownership concept. The Manufacturing segment manufactures upholstered furniture and bedding predominantly for use by Company-operated and franchised stores. Therefore, the Manufacturing segment's revenues and earnings before income taxes are primarily the result of intercompany transactions, substantially all of which revenues and earnings are eliminated through the elimination of intersegment revenues and intersegment profit.
Measurement of Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources based on revenue growth and pre-tax profit or loss from operations. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies except that the sales and lease ownership division revenues and certain other items are presented on a cash basis. Intersegment sales are completed at internally negotiated amounts. Since the intersegment profit affects inventory valuation, depreciation and cost of goods sold are adjusted when intersegment profit is eliminated in consolidation.
Factors Used by Management to Identify the Reportable Segments
The Company’s reportable segments are based on the operations of the Company that the chief operating decision maker regularly reviews to analyze performance and allocate resources among business units of the Company.
Information on segments and a reconciliation to earnings before income taxes are as follows for the years ended December 31:
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| | | | | | | | | | | |
(In Thousands) | 2014 | | 2013 | | 2012 |
Revenues From External Customers: | | | | | |
Sales and Lease Ownership | $ | 2,037,101 |
| | $ | 2,076,269 |
| | $ | 2,068,124 |
|
Progressive | 549,548 |
| | — |
| | — |
|
HomeSmart | 64,276 |
| | 62,840 |
| | 55,226 |
|
Franchise | 65,902 |
| | 68,575 |
| | 66,655 |
|
Manufacturing | 104,058 |
| | 106,523 |
| | 95,693 |
|
Other | 2,969 |
| | 22,158 |
| | 19,688 |
|
Revenues of Reportable Segments | 2,823,854 |
| | 2,336,365 |
| | 2,305,386 |
|
Elimination of Intersegment Revenues | (102,296 | ) | | (103,834 | ) | | (95,150 | ) |
Cash to Accrual Adjustments | 3,681 |
| | 2,100 |
| | 2,591 |
|
Total Revenues from External Customers | $ | 2,725,239 |
| | $ | 2,234,631 |
| | $ | 2,212,827 |
|
| | | | | |
Earnings (Loss) Before Income Taxes: | | | | | |
Sales and Lease Ownership | $ | 140,854 |
| | $ | 183,965 |
| | $ | 244,014 |
|
Progressive | 4,603 |
| | — |
| | — |
|
HomeSmart | (2,643 | ) | | (3,428 | ) | | (6,962 | ) |
Franchise | 50,504 |
| | 54,171 |
| | 52,672 |
|
Manufacturing | 860 |
| | 107 |
| | 382 |
|
Other | (75,905 | ) | | (56,114 | ) | | (12,337 | ) |
Earnings Before Income Taxes for Reportable Segments | 118,273 |
| | 178,701 |
| | 277,769 |
|
Elimination of Intersegment Profit | (813 | ) | | (94 | ) | | (393 | ) |
Cash to Accrual and Other Adjustments | 4,244 |
| | 6,353 |
| | (521 | ) |
Total Earnings Before Income Taxes | $ | 121,704 |
| | $ | 184,960 |
| | $ | 276,855 |
|
| | | | | |
Assets: | | | | | |
Sales and Lease Ownership | $ | 1,246,325 |
| | $ | 1,431,720 |
| | $ | 1,410,075 |
|
Progressive | 858,159 |
| | — |
| | — |
|
HomeSmart | 47,585 |
| | 47,970 |
| | 58,347 |
|
Franchise | 46,755 |
| | 47,788 |
| | 53,820 |
|
Manufacturing1 | 23,050 |
| | 24,305 |
| | 24,787 |
|
Other | 234,970 |
| | 275,393 |
| | 265,900 |
|
Total Assets | $ | 2,456,844 |
| | $ | 1,827,176 |
| | $ | 1,812,929 |
|
1 Includes inventory (principally raw materials and work-in-process) that has been classified within lease merchandise in the consolidated balance sheets of $13.2 million, $14.0 million and $14.1 million as of December 31, 2014, 2013 and 2012, respectively.
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| | | | | | | | | | | |
(In Thousands) | 2014 | | 2013 | | 2012 |
Depreciation and Amortization: | | | | | |
Sales and Lease Ownership | $ | 633,119 |
| | $ | 639,951 |
| | $ | 619,133 |
|
Progressive | 346,343 |
| | — |
| | — |
|
HomeSmart | 22,407 |
| | 23,977 |
| | 20,482 |
|
Franchise | 1,599 |
| | 1,781 |
| | 1,787 |
|
Manufacturing | 1,649 |
| | 2,081 |
| | 4,430 |
|
Other | 13,117 |
| | 17,315 |
| | 12,503 |
|
Total Depreciation and Amortization | $ | 1,018,234 |
| | $ | 685,105 |
| | $ | 658,335 |
|
| | | | | |
Interest Expense: | | | | | |
Sales and Lease Ownership | $ | 7,834 |
| | $ | 7,070 |
| | $ | 7,589 |
|
Progressive | 14,992 |
| | — |
| | — |
|
HomeSmart | 922 |
| | 916 |
| | 846 |
|
Franchise | — |
| | — |
| | — |
|
Manufacturing | 50 |
| | 80 |
| | 106 |
|
Other | (4,583 | ) | | (2,453 | ) | | (2,149 | ) |
Total Interest Expense | $ | 19,215 |
| | $ | 5,613 |
| | $ | 6,392 |
|
| | | | | |
Capital Expenditures: | | | | | |
Sales and Lease Ownership | $ | 24,135 |
| | $ | 30,831 |
| | $ | 33,460 |
|
Progressive | 1,625 |
| | — |
| | — |
|
HomeSmart | 1,020 |
| | 994 |
| | 4,121 |
|
Franchise | — |
| | — |
| | — |
|
Manufacturing | 1,477 |
| | 1,531 |
| | 4,493 |
|
Other | 19,308 |
| | 24,789 |
| | 22,999 |
|
Total Capital Expenditures | $ | 47,565 |
| | $ | 58,145 |
| | $ | 65,073 |
|
| | | | | |
Revenues From Canadian Operations (included in totals above): | | | | | |
Sales and Lease Ownership | $ | 179 |
| | $ | 300 |
| | $ | 308 |
|
| | | | | |
Assets From Canadian Operations (included in totals above): | | | | | |
Sales and Lease Ownership | $ | 776 |
| | $ | 1,021 |
| | $ | 1,391 |
|
Revenues in the Other segment are primarily attributable to (i) the RIMCO segment through the date of sale in January 2014 (ii) leasing space to unrelated third parties in the corporate headquarters building, (iii) revenues of the Aaron’s Office Furniture division through the date of sale in August 2012 and (iv) several minor unrelated activities. The pre-tax losses in the Other segment are the result of the activity mentioned above, net of the portion of corporate overhead not allocated to the reportable segments for management purposes.
In 2014, the results of the Company's operating segments were impacted by the following items:
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• | Sales and Lease Ownership earnings before income taxes included $4.8 million of restructuring charges related to the Company's strategic decision to close 44 Company-operated stores. |
| |
• | Other segment loss before income taxes included $13.7 million in financial and advisory costs related to addressing strategic matters, including proxy contests, $4.3 million of restructuring charges in connection with the store closures noted above, $9.1 million of charges associated with the retirement of both the Company's Chief Executive Officer and Chief Operating Officer, $6.6 million in transaction costs related to the Progressive acquisition and $1.2 million of regulatory income that reduced previously recognized regulatory expense upon the resolution of the regulatory investigation by the California Attorney General. |
In 2013, the results of the Company's operating segments were impacted by the following items:
| |
• | Other segment loss before income taxes included $28.4 million related to an accrual for loss contingencies for the then-pending regulatory investigation by the California Attorney General and $4.9 million related to retirement expense and a change in vacation policies. |
In 2012, the results of the Company's operating segments were impacted by the following items:
| |
• | Sales and Lease Ownership earnings before income taxes included a $35.5 million reversal of a previously accrued lawsuit loss contingency. |
| |
• | Other segment loss before income taxes included $10.4 million in retirement charges associated with the retirement of the Company’s founder and Chairman of the Board. |
NOTE 13: RELATED PARTY TRANSACTIONS
The Company leases certain properties under capital leases with certain related parties that are more fully described in Note 6 above.
NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Certain reclassifications have been made to prior quarters to conform to the current period presentation.
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| | | | | | | | | | | | | | | |
(In Thousands, Except Per Share Data) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
Year Ended December 31, 2014 | | | | | | | |
Revenues | $ | 585,423 |
| | $ | 672,510 |
| | $ | 707,564 |
| | $ | 759,742 |
|
Gross Profit * | 292,393 |
| | 319,405 |
| | 322,686 |
| | 331,837 |
|
Earnings Before Income Taxes | 60,710 |
| | 13,562 |
| | 13,199 |
| | 34,233 |
|
Net Earnings | 38,339 |
| | 8,505 |
| | 9,295 |
| | 22,094 |
|
Earnings Per Share | .53 |
| | .12 |
| | .13 |
| | .30 |
|
Earnings Per Share Assuming Dilution | .53 |
| | .12 |
| | .13 |
| | .30 |
|
Year Ended December 31, 2013 | | | | | | | |
Revenues | $ | 593,010 |
| | $ | 550,545 |
| | $ | 537,224 |
| | $ | 553,852 |
|
Gross Profit * | 302,439 |
| | 282,276 |
| | 265,056 |
| | 263,080 |
|
Earnings Before Income Taxes | 81,042 |
| | 40,387 |
| | 29,420 |
| | 34,111 |
|
Net Earnings | 51,000 |
| | 25,854 |
| | 21,138 |
| | 22,674 |
|
Earnings Per Share | .67 |
| | .34 |
| | .28 |
| | .30 |
|
Earnings Per Share Assuming Dilution | .67 |
| | .34 |
| | .28 |
| | .30 |
|
* Gross profit is the sum of lease revenues and fees, retail sales, and non-retail sales less retail cost of sales, non-retail cost of sales, depreciation of lease merchandise and write-offs of lease merchandise.
The comparability of the Company's quarterly financial results during 2014 and 2013 was impacted by certain events, as described below on a pre-tax basis:
| |
• | The first quarter of 2014 included an $872,000 charge for financial advisory and legal costs related to addressing strategic matters, including proxy contests, and $803,000 in transaction costs related to the Progressive acquisition. |
| |
• | The second quarter of 2014 included an additional $12.4 million charge for the financial advisory and legal costs related to now-resolved strategic matters, an additional $5.5 million in transaction costs in connection with the Progressive acquisition and $2.3 million in leasehold improvement impairment charges related to the closure of 44 Company-operated stores announced July 15, 2014. |
| |
• | The third quarter of 2014 included an additional $385,000 charge for financial advisory and legal costs related to now-resolved strategic matters, an additional $6.9 million in restructuring charges related to the store closures noted above, $9.1 million due to the retirements of both the Company's Chief Executive Officer and Chief Operating Officer, an additional $371,000 in transaction costs related to the acquisition of Progressive and regulatory income of $1.2 million that reduced previously recognized regulatory expense upon the resolution of the regulatory investigation by the California Attorney General into the Company's leasing, marketing and privacy practices. |
| |
• | The second quarter of 2013 included a $15.0 million charge related to an accrual for loss contingencies for the then-pending regulatory investigation by the California Attorney General and a $4.9 million charge related to retirement expenses and a change in vacation policies. |
| |
• | The third quarter of 2013 included an additional $13.4 million charge related to the then-pending regulatory investigation. |
NOTE 15: DEFERRED COMPENSATION PLAN
The Aaron’s, Inc. Deferred Compensation Plan is an unfunded, nonqualified deferred compensation plan for a select group of management, highly compensated employees and non-employee directors. On a pre-tax basis, eligible employees can defer receipt of up to 75% of their base compensation and up to 100% of their incentive pay compensation, and eligible non-employee directors can defer receipt of up to 100% of both their cash and stock director fees.
Compensation deferred under the plan is credited to each participant’s deferral account and a deferred compensation liability is recorded in accounts payable and accrued expenses in the consolidated balance sheets. The deferred compensation plan liability was approximately $12.7 million and $12.6 million as of December 31, 2014 and 2013, respectively. Liabilities under the plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments. The Company has established a rabbi trust to fund obligations under the plan with Company-owned life insurance. The obligations are unsecured general obligations of the Company and the participants have no right, interest or claim in the assets of the Company, except as unsecured general creditors. The cash surrender value of these policies totaled $14.5 million and $14.1 million as of December 31, 2014 and 2013, respectively, and is included in prepaid expenses and other assets in the consolidated balance sheets.
Deferred compensation expense charged to operations for the Company’s matching contributions totaled $89,000, $139,000 and $285,000 in 2014, 2013 and 2012, respectively. Benefits of $1.9 million, $1.3 million and $616,000 were paid during the years ended December 31, 2014, 2013 and 2012, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation of Aaron’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, was carried out by management, with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as of the end of the period covered by this Annual Report on Form 10-K. Based on management’s evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2014 to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
Reports of Management and Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Management has assessed, and the Company’s independent registered public accounting firm, Ernst & Young LLP, has audited, the Company’s internal control over financial reporting as of December 31, 2014. The unqualified reports of management and Ernst & Young LLP thereon are included in Item 8 of this Annual Report on Form 10-K and are incorporated by reference herein.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, during the Company’s fourth fiscal quarter of 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE
The information required in response to this Item is contained under the captions “Executive Officers Who Are Not Directors”, “Composition, Meetings and Committees of the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement to be filed with the SEC pursuant to Regulation 14A. These portions of the Proxy Statement are hereby incorporated by reference.
We have adopted a written code of business conduct and ethics that applies to all our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller and other executive officers identified pursuant to this Item 10 who perform similar functions, which we refer to as the Selected Officers. The code is posted on our website at http://www.aarons.com. We will disclose any material changes in or waivers from our code of business conduct and ethics applicable to any Selected Officer on our website at http://www.aarons.com or by filing a Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item is contained under the captions “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan Based Awards in Fiscal Year 2014,” “Outstanding Equity Awards at 2014 Fiscal Year-End,” “Option Exercises and Stock Vested in Fiscal Year 2014,” “Non-Qualified Deferred Compensation as of December 31, 2014,” “Potential Payments Upon Termination or Change in Control,” “Non-Management Director Compensation in 2014,” “Employment Agreements with Named Executive Officers,” “Executive Bonus Plan,” “Amended and Restated 2001 Stock Option and Incentive Award Plan,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required in response to this Item is contained under the captions “Beneficial Ownership of Common Stock” and “Securities Authorized for Issuance under Equity Compensation Plans” in the Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required in response to this Item is contained under the captions “Certain Relationships and Related Transactions” and “Election of Directors” in the Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required in response to this Item is contained under the caption “Audit Matters” in the Proxy Statement. This portion of the Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS and SCHEDULES
a) 1. FINANCIAL STATEMENTS
The following financial statements and notes thereto of Aaron’s, Inc. and Subsidiaries, and the related Reports of Independent Registered Public Accounting Firm are set forth in Item 8 and Item 9A.
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|
Consolidated Balance Sheets—December 31, 2014 and 2013 |
Consolidated Statements of Earnings—Years ended December 31, 2014, 2013 and 2012 |
Consolidated Statement of Comprehensive Income—Years ended December 31, 2014, 2013 and 2012 |
Consolidated Statements of Shareholders’ Equity—Years ended December 31, 2014, 2013 and 2012 |
Consolidated Statements of Cash Flows—Years ended December 31, 2014, 2013 and 2012 |
Notes to Consolidated Financial Statements |
Report of Independent Registered Public Accounting Firm |
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting |
2. FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
3. EXHIBITS |
| |
EXHIBIT NO. | DESCRIPTION OF EXHIBIT |
| |
| Plans of Acquisition |
2.1† | Agreement and Plan of Merger, dated April 14, 2014, by and among the Company, Progressive Finance Holdings, LLC, Virtual Acquisition Company, LLC, and John W. Robinson, III in his capacity as the representative of the selling unitholders (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed with the SEC on April 15, 2014). |
2.2† | Purchase Agreement, dated April 14, 2014, by and among the Company, SP GE VIII-B Progressive Blocker Corp., SP SD IV-B Progressive Blocker Corp., Summit Partners Growth Equity Fund VIII-B, L.P., and Summit Partners Subordinated Debt Fund IV-B, L.P. (incorporated by reference to Exhibit 2.2 of the Registrant's Current Report on Form 8-K filed with the SEC on April 15, 2014). |
| |
| Articles of Incorporation and Bylaws |
3(i) | Amended and Restated Articles of Incorporation of Aaron's, Inc. (incorporated by reference to Exhibit 3(i) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 24, 2014). |
3(ii) | Amended and Restated By-laws of Aaron's, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 8, 2014). |
| |
| Instruments Defining the Rights of Security Holders, Including Indentures |
4 | Specimen of Form of Stock Certificate Representing Shares of Common Stock of the Registrant, par value $0.50 per share (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form 8-A/A filed with the SEC on December 10, 2010). |
| |
| Material Contracts |
10.1 | Loan Agreement between Fort Bend County Industrial Development Corporation and Aaron Rents, Inc. relating to the Industrial Development Revenue Bonds (Aaron Rents, Inc. Project), Series 2000 dated October 1, 2000 (incorporated by reference to Exhibit 10(m) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 filed with the SEC on March 30, 2001). |
10.2 | Letter of Credit and Reimbursement Agreement between the Registrant and First Union National Bank dated as of October 1, 2000 (incorporated by reference to Exhibit 10(n) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 filed with the SEC on March 30, 2001). |
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10.3 | Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and the purchasers dated as of July 5, 2011 and Form of Senior Note (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on July 8, 2011). |
10.4 | Amendment No. 1 to Note Purchase Agreement by and among Aaron’s, Inc. and certain other obligors and the purchasers, dated as of December 19, 2012 (incorporated by reference to Exhibit 10 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 26, 2012). |
10.5 | Amendment No. 2 to Note Purchase Agreement by and among Aaron's, Inc. and certain other obligors and the purchasers, dated as of October 8, 2013 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 15, 2013). |
10.6 | Amendment No. 3 to Note Purchase Agreement by and among Aaron's, Inc. and certain other obligors and the purchasers, dated as of April 14, 2014 and Form of Senior Note (incorporated by reference to Exhibit 10.4 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 8, 2014). |
10.7* | Amendment No. 4 to Note Purchase Agreement by and among Aaron's, Inc. and certain other obligors and the purchasers, dated as of December 9, 2014. |
10.8 | Note Purchase Agreement by and among Aaron's, Inc. and certain other obligors and the purchasers dated as of April 14, 2014 with respect to $225 million in aggregate principal amount of the Company's 4.75% Series A Senior Notes due April 14, 2021 and Form of Senior Note (incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 8, 2014). |
10.9* | Amendment No. 1 to Note Purchase Agreement by and among Aaron's, Inc. and certain other obligors and the purchasers dated as of December 9, 2014 with respect to $225 million in aggregate principal amount of the Company's 4.75% Series A Senior Notes Due April 14, 2021 and Form of Senior Note. |
10.10 | Note Purchase Agreement by and among Aaron's, Inc. and certain other obligors and the purchasers dated as of April 14, 2014 with respect to $75 million in aggregate principal amount of the Company's 4.75% Series B Senior Notes due April 14, 2021 and Form of Senior Note (incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 8, 2014). |
10.11* | Amendment No. 1 to Note Purchase Agreement by and among Aaron's, Inc. and certain other obligors and purchasers dated as of December 9, 2014 with respect to $75 million in aggregate principal amount of the Company's 4.75% Series B Senior Notes due April 14, 2021 and Form of Senior Notes. |
10.12 | Revolving Credit Agreement, dated as of May 23, 2008, among Aaron Rents, Inc., as borrower, the lenders from time to time party thereto, and SunTrust Bank, as administrative agent (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on May 30, 2008). |
10.13 | First Amendment made and entered into on March 31, 2011 to the Revolving Credit Agreement, dated as of May 23, 2008, by and among Aaron's, Inc., each of the other lending institutions party thereto as participants, and SunTrust Bank as administrative agent for the lenders (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 filed with the SEC on May 4, 2011). |
10.14 | Second Amendment to Revolving Credit Agreement, by and among Aaron's, Inc., as borrower, SunTrust Bank, as administrative agent, and each of the other financial institutions party thereto as lenders, dated as of May 18, 2011 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on May 24, 2011). |
10.15 | Third Amendment made and entered into as of July 1, 2011 to Revolving Credit Agreement dated as of May 23, 2008 by and among Aaron's, Inc., the several banks and other financial institutions from time to time party thereto and SunTrust Bank as administrative agent (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on July 8, 2011). |
10.16 | Fourth Amendment to Revolving Credit Agreement, by and among Aaron's, Inc., as borrower, SunTrust Bank, as administrative agent, and each of the lending institutions party thereto as lenders, dated as of December 13, 2012 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2012). |
10.17 | Fifth Amendment to Revolving Credit Agreement, by and among Aaron's, Inc., as borrower, SunTrust Bank, as administrative agent, and each of the lending institutions party thereto as lenders, dated as of October 8, 2013 (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 15, 2013). |
10.18 | Amended and Restated Revolving Credit and Term Loan Agreement, by and among Aaron's, Inc., as borrower, the several banks and other financial institutions from time to time party thereto and SunTrust Bank as administrative agent, dated as of April 14, 2014 (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 8, 2014). |
10.19* | First Amendment to Amended and Restated Revolving Credit and Term Loan Agreement, by and among Aaron's, Inc., as borrower, the several banks and other financial institutions from time to time party thereto and SunTrust Bank as administrative agent, dated December 9, 2014. |
10.20 | Second Amended and Restated Loan Facility Agreement and Guaranty, by and among Aaron's, Inc., SunTrust Bank, as servicer, and the other financial institutions party thereto as participants, dated as of June 18, 2010 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on June 24, 2010). |
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10.21 | First Amendment made and entered into as of March 31, 2011 to the Second Amended and Restated Loan Facility Agreement and Guaranty, dated as of June 18, 2010, by and among Aaron's, Inc. as sponsor, each of the other lending institutions party thereto as participants, and SunTrust Bank as servicer (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 filed with the SEC on May 4, 2011). |
10.22 | Second Amendment to Second Amended and Restated Loan Facility Agreement and Guaranty, by and among Aaron's, Inc., as sponsor, SunTrust Bank, as servicer, and each of the other financial institutions party thereto as participants, dated as of May 18, 2011 (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on May 24, 2011). |
10.23 | Third Amendment made and entered into as of July 1, 2011 to Second Amended and Restated Loan Facility Agreement and Guaranty dated as of June 18, 2010 by and among Aaron's, Inc. as sponsor, SunTrust Bank and each of the other lending institutions party thereto as participants, and SunTrust Bank as servicer (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on From 8-K filed with July 8, 2011). |
10.24 | Fourth Amendment made and entered into as of May 16, 2012 to Second Amended and Restated Loan Facility Agreement and Guarantee dated as of June 18, 2010 by and among Aaron's, Inc. as sponsor, SunTrust Bank and each of the other lending institutions party thereto as participants, and SunTrust Bank as servicer (incorporated by reference to Exhibit 10.41 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on February 22, 2013). |
10.25 | Fifth Amendment to Second Amended and Restated Loan Facility Agreement and Guaranty, by and among Aaron's, Inc., as sponsor, SunTrust Bank, as servicer, and each of the other financial institutions party thereto as participants, dated as of December 13, 2012 (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2012). |
10.26 | Sixth Amendment to Second Amended and Restated Loan Facility Agreement and Guaranty, by and among Aaron's, Inc., as sponsor, SunTrust Bank, as servicer, and each of the other financial institutions party thereto as participants, dated as of October 8, 2013 (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 15, 2013). |
10.27 | Seventh Amendment to Second Amended and Restated Loan Facility Agreement and Guaranty, by and among Aaron's, Inc. as sponsor, SunTrust Bank, as servicer, and each of the other financial institutions party thereto as participants, dated as of December 12, 2013 (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC on December 18, 2013). |
10.28 | Third Amended and Restated Loan Facility Agreement and Guaranty, by and among Aaron's, Inc. as sponsor, SunTrust Bank, as servicer, and each of the other lending institutions party thereto as participants, dated as of April 14, 2014 (incorporated by reference to Exhibit 10.5 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 8, 2014). |
10.29* | First Amendment to the Third Amended and Restated Loan Facility Agreement and Guaranty among Aaron's, Inc. as sponsor, SunTrust Bank, as servicer, and each of the other lending institutions party thereto as participants, dated December 9, 2014. |
10.30 | Fixed Dollar Discounted Accelerated Share Repurchase Agreement, dated December 3, 2013, by and between Aaron's, Inc. and Wells Fargo Securities, LLC. (incorporated by reference to Exhibit 10.40 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC February 24, 2014). |
10.31 | Agreement, dated as of May 13, 2014, by and among Aaron's, Inc., Vintage Capital Management, L.L.C., Kahn Capital Management, L.L.C., Brian R. Kahn, and Matthew E. Avril (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC on May 14, 2014). |
| |
| Management Contracts and Compensatory Plans or Arrangements |
10.32 | Aaron’s, Inc. Employees Retirement Plan and Trust, as amended and restated (incorporated by reference to Exhibit 99.3 of the Registrant’s Registration Statement on Form S-8 (333-171113) filed with the SEC on December 10, 2010). |
10.33 | Amendment No. 1 to the Aaron's, Inc. Employees Retirement Plan and Trust, as amended and restated, dated as of December 1, 2011 (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed with the SEC on August 2, 2013). |
10.34 | Amendment No. 2 to the Aaron's, Inc. Employees Retirement Plan and Trust, as amended and restated, dated as of December 29, 2011 (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed with the SEC on August 2, 2013). |
10.35 | Amendment No. 3 to the Aaron's, Inc. Employees Retirement Plan and Trust, as amended and restated, dated as of December 31, 2012 (incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed with the SEC on August 2, 2013). |
10.36 | Amended and Restated Aaron Rents, Inc. 2001 Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 10, 2009). |
10.37 | Form of Restricted Stock Unit Award Agreement for awards made prior to February 2014 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on From 10-Q for the quarter ended March 31, 2012 filed with the SEC on May 8, 2012). |
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10.38 | Form of Option Award Agreement for awards made prior to February 2014 (incorporated by reference to Exhibit 10.28 of the Registrant's Annual Report on form 10-K for the year ended December 31, 2013 filed with the SEC on February 24, 2013). |
10.39 | Form of Restricted Stock Unit Award for awards made in or after February 2014 (incorporated by reference to Exhibit 10.29 of the Registrant's Annual Report on form 10-K for the year ended December 31, 2013 filed with the SEC on February 24, 2013). |
10.40 | Form of Option Award Agreement for awards made in or after February 2014(incorporated by reference to Exhibit 10.30 of the Registrant's Annual Report on form 10-K for the year ended December 31, 2013 filed with the SEC on February 24, 2013). |
10.41 | Form of Performance Share Award Agreement for awards made in or after February 2014 (incorporated by reference to Exhibit 10.31 of the Registrant's Annual Report on form 10-K for the year ended December 31, 2013 filed with the SEC on February 24, 2013). |
10.42 | Aaron's Management Performance Plan (Summary of terms for Home Office Vice Presidents) (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on August 5, 2011). |
10.43 | Aaron's, Inc. 2001 Stock Option and Incentive Award Plan Master Restricted Stock Unit Agreement (Aaron's Management Performance Plan) (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed with the SEC on August 5, 2011). |
10.44 | Aaron's, Inc. Deferred Compensation Plan Master Plan Document, Effective July 1, 2009 (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC on June 12, 2009). |
10.45 | Employment Agreement, dated as of April 18, 2012, by and between Aaron's, Inc. and Ronald W. Allen (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC on April 24, 2012). |
10.46 | Employment Agreement, dated as of April 18, 2012, by and between Aaron's, Inc. and Gilbert L. Danielson (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed with the SEC on April 24, 2012). |
10.47* | Employment Agreement, dated as of November 10, 2014, by and between Aaron's, Inc. and John W. Robinson. |
10.48 | Executive Severance Pay Plan of Aaron's, Inc. (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC on January 31, 2014). |
10.49 | Separation Agreement, dated as of May 1, 2013, by and between Aaron's, Inc. and William K. Butler (incorporated by reference to Exhibit 10.4 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed with the SEC on August 2, 2013). |
10.50 | Waiver and Release Agreement between Aaron's, Inc. and David L. Buck, dated August 22, 2014 (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC on August 26, 2014). |
10.51 | Separation Agreement between Aaron's, Inc. and K. Todd Evans dated as of April 2, 2014 (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the SEC May 5, 2014).
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10.52 | Retirement Agreement between Aaron's, Inc. and R. Charles Loudermilk, Sr., dated August 24, 2012 (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC on August 30, 2012). |
10.53 | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed with the SEC on May 14, 2014). |
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| Other Exhibits and Certifications |
21* | Subsidiaries of the Registrant. |
23* | Consent of Ernst & Young LLP. |
31.1* | Certification of the Chief Executive Officer of Aaron's, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2* | Certification of the Chief Financial Officer of Aaron's, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1* | Certification of the Chief Executive Officer of Aaron's, Inc. furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2* | Certification of the Chief Financial Officer of Aaron's, Inc. furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 | The following financial information from Aaron's, Inc. Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2014 and December 31, 2013, (ii) Consolidated Statements of Earnings for the Years ended December 31, 2014, 2013 and 2012, (iii) Consolidated Statements of Comprehensive Income for the Years ended December 31, 2014, 2013 and 2012, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012, (v) Consolidated Statements of Shareholder's Equity for the Years ended December 31, 2014, 2013 and 2012 and (v) the Notes to Consolidated Financial Statements. |
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† The Company hereby agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon the request of the SEC. |
* Filed herewith. |
(b) EXHIBITS
The exhibits listed in Item 15(a)(3) are included elsewhere in this Report.
(c) FINANCIAL STATEMENTS AND SCHEDULES
The financial statements listed in Item 15(a)(1) are included in Item 8 in this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 2, 2015.
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AARON’S, INC. |
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By: | | /s/ GILBERT L. DANIELSON |
| | Gilbert L. Danielson |
| | Executive Vice President, Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 2, 2015.
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SIGNATURE | | | | TITLE |
/s/ JOHN W. ROBINSON, III John W. Robinson III | | | | Chief Executive Officer and Director (Principal Executive Officer) |
/s/ GILBERT L. DANIELSON Gilbert L. Danielson | | | | Executive Vice President, Chief Financial Officer (Principal Financial Officer) |
/s/ ROBERT P. SINCLAIR, JR. Robert P. Sinclair, Jr. | | | | Vice President, Corporate Controller (Principal Accounting Officer) |
/s/ MATTHEW E. AVRIL Matthew E. Avril | | | | Director |
/s/ LEO BENATAR Leo Benatar | | | | Director |
/s/ KATHY T. BETTY Kathy T. Betty | | | | Director |
/s/ CYNTHIA N. DAY Cynthia N. Day | | | | Director |
/s/ HUBERT L. HARRIS, JR. Hubert L. Harris, Jr. | | | | Director |
/s/ BRIAN R. KAHN Brian R. Kahn | | | | Director |
/s/ DAVID L. KOLB David L. Kolb | | | | Director |
/s/ EUGENE H. LOCKHART Eugene H. Lockhart | | | | Director |
/s/ RAY M. ROBINSON Ray M. Robinson | | | | Director |
Exhibit 10.7
AMENDMENT NO. 4 TO NOTE PURCHASE AGREEMENT
This AMENDMENT NO. 4 TO NOTE PURCHASE AGREEMENT (this “Agreement”), is made as of December 9, 2014, by and among
(a) AARON’S, INC., a Georgia corporation (together with its successors and assigns, the “Company”), AARON INVESTMENT COMPANY, a Delaware corporation (together with its successors and assigns,
“AIC” and together with the Company, collectively, the “Issuers”), and certain Subsidiaries of the Company signatory hereto (together with the Issuers, collectively, the “Obligors”), and
(b) each of the Persons holding one or more Notes (as defined below) on the Fourth Amendment Effective Date (as defined below) (collectively, the “Noteholders”), with respect to that certain Note Purchase Agreement, dated as of
July 5, 2011, as amended by that certain Amendment No. 1 to Note Purchase Agreement dated as of December 19, 2012, that certain Amendment No. 2 to Note Purchase Agreement dated as of October 8, 2013 and that certain
Amendment No. 3 to Note Purchase Agreement dated as of April 14, 2014 (as amended from time to time and as in effect immediately prior to giving effect to this Agreement, the “Original Note Purchase Agreement” and, as
amended pursuant to this Agreement and as may be further amended, restated or otherwise modified from time to time, the “Note Purchase Agreement”), by and among the Obligors and each of the Noteholders. Capitalized terms used herein
and not otherwise defined shall have the meanings ascribed to them in the Original Note Purchase Agreement.
RECITALS:
A. The Obligors and Noteholders are parties to the Original Note Purchase Agreement, pursuant to which the Obligors issued and sold an
aggregate principal amount of $125,000,000 of their Amended and Restated Senior Notes due April 27, 2018 (the “Notes”) to the Noteholders;
B. The Noteholders are the holders of all outstanding Notes; and
C. The Obligors have requested, and the Noteholders have agreed to, certain amendments and modifications to the provisions of the
Original Note Purchase Agreement, subject to the terms and conditions set forth herein.
AGREEMENT:
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Obligors and the
Noteholders agree as follows:
| 1. |
AMENDMENTS TO ORIGINAL NOTE PURCHASE AGREEMENT. |
Subject to the satisfaction of the
conditions set forth in Section 3 hereof, the Original Note Purchase Agreement is hereby amended by this Agreement as follows:
Paragraph 5F of the Original Note Purchase Agreement is hereby
amended and restated in its entirety to read as follows:
5F. Line of Business. The Company will not, and will not
permit any of its Subsidiaries to, engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the general nature
of the business in which the Company and its Subsidiaries, taken as a whole, are engaged on the date of this Agreement, which business may include but is not limited to the business of leasing and selling furniture, consumer electronics, computers,
appliances and other household goods and accessories inside and outside of the United States of America, through both independently-owned and franchised stores, providing lease-purchase solutions, credit and other financing solutions to customers
for the purchase and lease of such products, the manufacture and supply of furniture and bedding for lease and sale in such stores, and the provision of virtual rent-to-own programs inside and outside of the United States of America (including but
not limited to point-of-sale lease purchase programs).
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1.2. |
Fixed Charges Coverage Ratio. |
Paragraph 6A of the Original Note Purchase Agreement is
hereby amended and restated in its entirety to read as follows:
6A. Fixed Charges Coverage Ratio. The Company will
not permit the Consolidated Fixed Charge Coverage Ratio to be less than (a) with respect to the fiscal quarter of the Company ending December 31, 2014 and each fiscal quarter of the Company ending thereafter through and including
December 31, 2015, 1.75 to 1.00, and (b) for each fiscal quarter ending thereafter, 2.00 to 1.00.
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1.3. |
Total Debt to EBITDA Ratio. |
Paragraph 6B of the Original Note Purchase Agreement is
hereby amended and restated in its entirety to read as follows:
6B. Total Debt to EBITDA Ratio. The Company will
not, at any time, permit the Total Debt to EBITDA Ratio to be greater than (a) for the period from the Fourth Amendment Effective Date to and including March 30, 2016, 3.25 to 1.00 and (b) from and including March 31, 2016, 3.00
to 1.00.
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1.4. |
Amended and Restated Defined Terms. |
The following definitions set forth in paragraph
10B of the Original Note Purchase Agreement are hereby amended and restated in its entirety to read as follows:
“Consolidated EBITDA” shall mean, for the Company and its Subsidiaries for any period, an amount equal to the
sum of (a) Consolidated Net Income for such period plus (b) to the extent deducted in determining Consolidated Net Income for such period, (i) Consolidated Interest Expense, (ii) income tax expense, (iii) depreciation
(excluding depreciation of rental merchandise) and amortization, (iv) all other non-cash charges, (v) accruals incurred in the fiscal year of the Company ended December 31, 2013 related to legal and regulatory expenses, fees and costs
not to exceed $30,000,000 in the aggregate,
2
(vi) closing costs, fees and expenses incurred during such period in connection with the 2014 Acquisition and the transactions contemplated by the Financing Documents, the MetLife NPA, the
SunTrust Agreement, the 2014 Prudential NPA and the SunTrust Loan Facility Agreement, in each case paid during such period to Persons that are not Affiliates of the Company or any Subsidiary, not to exceed $15,000,000 in the aggregate,
(vii) cash charges incurred in the fiscal year of the Company ended December 31, 2013 related to the retirement of the Company’s Chief Operating Officer not to exceed $5,000,000 in the aggregate, determined on a consolidated basis in
accordance with GAAP in each case for such period, (viii) one-time fees, costs and expenses (including without limitation legal and other professional fees) in connection with (x) the retirement and severance of Ronald W. Allen and David
Buck and (y) the bid by Vintage Capital Management to acquire the Company, and other proxy contests and shareholder proposals, including costs, expenses and fees relating to responding to, defending and settling such matters, in each case to
the extent such fees, costs and expenses were incurred prior to the Fourth Amendment Effective Date, and (ix) transaction closing costs, fees and expenses actually incurred during such period in connection with the negotiation and closing of
the Fourth Amendment to NPA, and the related amendments to the SunTrust Loan Facility Agreement, the SunTrust Agreement, the MetLife NPA, the 2014 Prudential NPA, and the related transaction documents, in each case paid during such period to Persons
that are not Affiliates of the Company or any Subsidiary.
“SunTrust Agreement” shall mean that certain
Amended and Restated Revolving Credit and Term Loan Agreement, dated as of April 14, 2014, by and among the Company, the Administrative Agent, SunTrust and the other lenders signatory thereto, as amended by that certain First Amendment to
Credit Agreement dated as of December 9, 2014, and as further amended, restated, supplemented, replaced, refinanced or otherwise modified from time to time.
“SunTrust Loan Facility Agreement” shall mean that certain Third Amended and Restated Loan Facility Agreement
and Guaranty, dated as of April 14, 2014, by and among the Company, SunTrust and the financial institutions party thereto, as amended by that certain First Amendment to Loan Facility Agreement dated as of December 9, 2014, and as further
amended, restated, supplemented, replaced, refinanced or otherwise modified from time to time.
The following defined terms are hereby added to paragraph 10B of the
Original Note Purchase Agreement in their proper alphabetical order:
“Fourth Amendment Effective Date” means
December 9, 2014.
“Fourth Amendment to NPA” means that certain Amendment No. 4 to Note Purchase Agreement,
dated as of the Fourth Amendment Effective Date, by and among the Obligors and each of the holders of the Notes party thereto.
3
| 2. |
WARRANTIES AND REPRESENTATIONS. |
To induce the Noteholders to enter into this Agreement,
each of the Obligors represents and warrants to each of the Noteholders that as of the Fourth Amendment Effective Date:
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2.1. |
Corporate and Other Organization and Authority. |
(a) Each Obligor is a
corporation or limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or limited liability company and is in good standing in
each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect; and
(b) Each of the Obligors has the requisite organizational power and authority to execute and deliver
this Agreement and to perform its obligations hereunder and under the Note Purchase Agreement.
This Agreement has been duly authorized by all necessary corporate
or limited liability company action on the part of the Obligors, as applicable. Each of this Agreement and the Note Purchase Agreement constitutes a legal, valid and binding obligation of the Obligors, enforceable, in each case, against such Obligor
in accordance with its terms, except as such enforceability may be limited by:
(a) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and
(b)
general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
The execution and delivery by each Obligor of this Agreement and the
performance by such Obligor of its obligations under each of this Agreement and the Note Purchase Agreement do not conflict with, result in any breach in any of the provisions of, constitute a default under, violate or result in the creation of any
Lien upon any property of such Obligor under the provisions of:
(a) any charter document, constitutive document, agreement
with shareholders or members, bylaws or any other organizational or governing agreement of such Obligor;
(b) any
agreement, instrument or conveyance by which such Obligor or any of its Subsidiaries or any of their respective properties may be bound or affected; or
(c) any statute, rule or regulation or any order, judgment or award of any court, tribunal or arbitrator by which such Obligor
or any of its Subsidiaries or any of their respective properties may be bound or affected.
4
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2.4. |
Governmental Consent. |
The execution and delivery by the Obligors of this Agreement and
the performance by the Obligors of their respective obligations hereunder and under the Note Purchase Agreement do not require any consents, approvals or authorizations of, or filings, registrations or qualifications with, any Governmental Authority
on the part of any Obligor.
No event has occurred and is continuing and no condition exists which,
immediately before or immediately after giving effect to the amendments provided for in this Agreement, constitutes or would constitute a Default or an Event of Default.
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2.6. |
Representations in Note Purchase Agreement. |
After giving effect to this Agreement, the
representations and warranties contained in the Note Purchase Agreement and the Joinder Agreements executed by APC, 99LTO, Logistics, Procurement Company and Strategic Services are true and correct in all material respects as of the Fourth Amendment
Effective Date.
| 3. |
CONDITIONS TO EFFECTIVENESS OF AMENDMENTS. |
The amendment of the Original Note Purchase
Agreement as set forth in this Agreement shall become effective as of the date first written above (the “Fourth Amendment Effective Date”), provided that each of the following conditions shall have been satisfied:
(a) the Noteholders shall have received a fully executed copy of this Agreement executed by the Obligors and the Noteholders;
(b) the representations and warranties set forth in Section 2 of this Agreement shall be true and correct on such date;
(c) the Noteholders shall have received fully executed copies of the following:
(i) that certain Amendment No. 1 to Note Purchase Agreement, dated as of the Fourth Amendment Effective Date, by and
among, inter alios, the Company, AIC, and the MetLife Parties,
(ii) that certain Amendment No. 1 to Note
Purchase Agreement, dated as of the Fourth Amendment Effective Date, by and among, inter alios, the Company, AIC and the Prudential Parties,
(iii) that certain First Amendment to Credit Agreement, dated as of the Fourth Amendment Effective Date (the “Credit
Agreement Amendment”), by and
5
among, inter alios, the Company, SunTrust Bank, acting as Administrative Agent (the “Administrative Agent”) and in certain other capacities, and each of the lenders party
thereto,
(iv) that certain First Amendment to Loan Facility Agreement, dated as of the Fourth Amendment Effective Date
(the “Loan Facility Amendment”), by and among, inter alios, the Company, SunTrust and the other financial institutions party thereto, and
(v) that certain fee letter, dated as of the Fourth Amendment Effective Date (the “Fee Letter”), by and among,
inter alios, the Company and the Noteholders,
and each of the amendments referred to in the foregoing clauses (i) to (v), inclusive, shall be
in form and substance reasonably satisfactory to the Noteholders and shall have become effective prior to or concurrent with the effectiveness of this Agreement;
(d) the Noteholders shall have received a fee in the amount set forth in the Fee Letter; and
(e) the Company shall have paid all reasonable fees, charges and disbursements of counsel to the Noteholders incurred in connection with this
Agreement and the transactions contemplated hereby.
THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE.
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4.2. |
Duplicate Originals; Electronic Signature. |
Two or more duplicate originals of this
Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement may be executed in one or more counterparts and shall be effective when at least one
counterpart shall have been executed by each party hereto, and each set of counterparts that, collectively, show execution by each party hereto shall constitute one duplicate original. Delivery of an executed counterpart of a signature page to this
Agreement by facsimile transmission or electronic mail shall be effective as delivery of a manually executed counterpart of this Agreement.
6
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4.3. |
Waiver and Amendments. |
Neither this Agreement nor any term hereof may be changed,
waived, discharged or terminated orally, or by any action or inaction, but only by an instrument in writing signed by each of the parties signatory hereto.
Whether or not the amendments contemplated by this Agreement become
effective, each of the Obligors confirms its obligation under paragraph 11B of the Note Purchase Agreement and agrees that, on the Fourth Amendment Effective Date (or if an invoice is delivered subsequent to the Fourth Amendment Effective Date or if
such amendments do not become effective, promptly after receiving any statement or invoice therefor), it will pay all costs and expenses of the Noteholders relating to this Agreement, including, but not limited to, the statement for reasonable fees
and disbursements of the Noteholders’ special counsel presented to the Company on the Fourth Amendment Effective Date. The Obligors will also promptly pay, upon receipt thereof, each additional statement for reasonable fees and disbursements of
the Noteholders’ special counsel rendered after the Fourth Amendment Effective Date in connection with this Agreement.
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4.5. |
Successors and Assigns. |
This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties hereto. The provisions hereof are intended to be for the benefit of the Noteholders and shall be enforceable by any successor or assign of any such Noteholder, whether or not an express
assignment of rights hereunder shall have been made by such Noteholder or its successors and assigns.
All warranties, representations, certifications and covenants made by the
Obligors in this Agreement shall be considered to have been relied upon by the Noteholders and shall survive the execution and delivery of this Agreement, regardless of any investigation made by or on behalf of the Noteholders.
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4.7. |
Part of Original Note Purchase Agreement; Future References, etc. |
This Agreement shall
be construed in connection with and as a part of the Note Purchase Agreement and, except as expressly amended by this Agreement, all terms, conditions and covenants contained in the Original Note Purchase Agreement are hereby ratified and shall be
and remain in full force and effect. Any and all notices, requests, certificates and other instruments executed and delivered after the execution and delivery of this Agreement may refer to the Original Note Purchase Agreement without making
specific reference to this Agreement, but nevertheless all such references shall include this Agreement, unless the context otherwise requires.
7
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4.8. |
Affirmation of Obligations under Original Note Purchase Agreement and Notes; No Novation. |
Anything contained herein to the contrary notwithstanding, this Agreement is not intended to and shall not serve to effect a novation of the
obligations under the Original Note Purchase Agreement. Instead, it is the express intention of the parties hereto to reaffirm the indebtedness created under the Original Note Purchase Agreement, as amended by this Agreement, and the Notes. The
Obligors hereby acknowledge and affirm all of their respective obligations under the terms of the Original Note Purchase Agreement and the Notes. The execution, delivery and effectiveness of this Agreement shall not be deemed, except as expressly
provided herein, (a) to operate as a waiver of any right, power or remedy of any of the Noteholders under the Original Note Purchase Agreement or the Notes, nor constitute a waiver or amendment of any provision thereunder, or (b) to
prejudice any rights which any Noteholder now has or may have in the future under or in connection with the Note Purchase Agreement or the Notes or under applicable law.
[Remainder of page intentionally left blank. Next page is signature page.]
8
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 4 to
Note Purchase Agreement to be executed on its behalf by a duly authorized officer or agent thereof.
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| Very truly yours, |
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| AARON’S, INC. |
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| By: |
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/s/ Gilbert L. Danielson |
| Name: |
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Gilbert L. Danielson |
| Title: |
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Executive Vice President and Chief Financial Officer |
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| AARON INVESTMENT COMPANY |
|
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| By: |
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/s/ Gilbert L. Danielson |
| Name: |
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Gilbert L. Danielson |
| Title: |
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Vice President and Treasurer |
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| AARON’S PRODUCTION COMPANY |
|
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| By: |
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/s/ Gilbert L. Danielson |
| Name: |
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Gilbert L. Danielson |
| Title: |
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President and Chief Executive Officer |
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| 99LTO, LLC |
| By Aaron’s, Inc., as sole Manager |
|
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| By: |
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/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief Financial Officer |
[Signature page to Amendment No. 4 to Note Purchase Agreement – Aaron’s, Inc.]
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| AARON’S LOGISTICS, LLC |
| By Aaron’s, Inc., as sole Manager |
|
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| By: |
|
/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief |
|
|
Financial Officer |
|
| AARON’S STRATEGIC SERVICES, LLC |
| By Aaron’s, Inc., as sole Manager |
|
|
| By: |
|
/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief |
|
|
Financial Officer |
|
| AARON’S PROCUREMENT COMPANY, LLC |
| By Aaron’s, Inc., as sole Manager |
|
|
| By: |
|
/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief |
|
|
Financial Officer |
[Signature page to Amendment No. 4 to Note Purchase Agreement – Aaron’s, Inc.]
|
|
|
|
|
| PROGRESSIVE FINANCE HOLDINGS, LLC |
|
|
| By: |
|
/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President |
|
| Prog Finance Arizona, LLC |
| Prog Finance California, LLC |
| Prog Finance Florida, LLC |
| Prog Finance Georgia, LLC |
| Prog Finance Illinois, LLC |
| Prog Finance Michigan, LLC |
| Prog Finance New York, LLC |
| Prog Finance Ohio, LLC |
| Prog Finance Texas, LLC |
| Prog Finance Mid-West, LLC |
| Prog Finance North-East, LLC |
| Prog Finance South-East, LLC |
| Prog Finance West, LLC |
| NPRTO Arizona, LLC |
| NPRTO California, LLC |
| NPRTO Florida, LLC |
| NPRTO Georgia, LLC |
| NPRTO Illinois, LLC |
| NPRTO Michigan, LLC |
| NPRTO New York, LLC |
| NPRTO Ohio, LLC |
| NPRTO Texas, LLC |
| NPRTO Mid-West, LLC |
| NPRTO North-East, LLC |
| NPRTO South-East, LLC |
| NPRTO West, LLC, |
|
|
| By: |
|
PROG LEASING, LLC, Sole |
|
|
Manager |
|
|
| By: |
|
PROGRESSIVE FINANCE |
|
|
HOLDINGS, LLC, Sole Manager |
|
|
|
|
|
By: |
|
/s/ Gilbert L. Danielson |
|
|
Name: |
|
Gilbert L. Danielson |
|
|
Title: |
|
Executive Vice President |
[Signature page to
Amendment No. 4 to Note Purchase Agreement – Aaron’s, Inc.]
|
|
|
|
|
| PANGO LLC |
|
|
| By: |
|
PROGRESSIVE FINANCE |
|
|
HOLDINGS, LLC, Sole Manager |
|
|
|
|
|
By: |
|
/s/ Gilbert L. Danielson |
|
|
Name: |
|
Gilbert L. Danielson |
|
|
Title: |
|
Executive Vice President |
|
| PROG LEASING, LLC |
|
|
| By: |
|
PROGRESSIVE FINANCE |
|
|
HOLDINGS, LLC, Sole Manager |
|
|
|
|
|
By: |
|
/s/ Gilbert L. Danielson |
|
|
Name: |
|
Gilbert L. Danielson |
|
|
Title: |
|
Executive Vice President |
[Signature page to
Amendment No. 4 to Note Purchase Agreement – Aaron’s, Inc.]
Accepted and Agreed:
The foregoing Agreement is hereby accepted as of the date first above written.
|
|
|
|
|
| THE PRUDENTIAL INSURANCE COMPANY OF AMERICA |
|
|
| By: |
|
/s/ Ashley Dexter |
| Name: |
|
Ashley Dexter |
| Title: |
|
Vice President |
|
| PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY |
| By: |
|
Prudential Investment Management, Inc., |
|
|
as investment manager |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
|
| THE PRUDENTIAL LIFE INSURANCE COMPANY, LTD. |
| By: |
|
Prudential Investment Management (Japan), |
|
|
Inc., as Investment Manager |
|
|
| By: |
|
Prudential Investment Management, Inc., |
|
|
as Sub-Adviser |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
|
| ZURICH AMERICAN INSURANCE COMPANY |
| By: |
|
Prudential Private Placement Investors, |
|
|
L.P. (as Investment Advisor) |
|
|
| By: |
|
Prudential Private Placement Investors, Inc. |
|
|
(as its General Partner) |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
[Signature page to
Amendment No. 4 to Note Purchase Agreement – Aaron’s, Inc.]
|
|
|
|
|
| THE GIBRALTAR LIFE INSURANCE CO., LTD. |
|
|
| By: |
|
Prudential Investment Management Japan |
|
|
Co., Ltd., as Investment Manager |
|
|
| By: |
|
Prudential Investment Management, Inc., |
|
|
as Sub-Adviser |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
[Signature page to
Amendment No. 4 to Note Purchase Agreement – Aaron’s, Inc.]
Exhibit 10.9
AMENDMENT NO. 1 TO NOTE PURCHASE AGREEMENT
This AMENDMENT NO. 1 TO NOTE PURCHASE AGREEMENT (this “Agreement”), is made as of December 9, 2014, by and among
(a) AARON’S, INC., a Georgia corporation (together with its successors and assigns, the “Company”) and AARON INVESTMENT COMPANY, a Delaware corporation (together with its successors and assigns,
“AIC” and together with the Company, collectively, the “Issuers”), and (b) each of the Persons holding one or more Notes (as defined below) on the First Amendment Effective Date (as defined below)
(collectively, the “Noteholders”), with respect to that certain Note Purchase Agreement, dated as of April 14, 2014 (as amended from time to time and as in effect immediately prior to giving effect to this Agreement, the
“Original Note Purchase Agreement” and, as amended pursuant to this Agreement and as may be further amended, restated or otherwise modified from time to time, the “Note Purchase Agreement”), by and among the Issuers
and each of the Noteholders. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Original Note Purchase Agreement.
RECITALS:
A. The
Issuers and Noteholders are parties to the Original Note Purchase Agreement, pursuant to which the Issuers issued and sold an aggregate principal amount of $225,000,000 of their 4.75% Series A Senior Notes due April 14, 2021 (the
“Notes”) to the Noteholders;
B. The Noteholders are the holders of all outstanding Notes; and
C. The Issuers have requested, and the Noteholders have agreed to, certain amendments and modifications to the provisions of the
Original Note Purchase Agreement, subject to the terms and conditions set forth herein.
AGREEMENT:
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Issuers and the
Noteholders agree as follows:
| 1. |
AMENDMENTS TO ORIGINAL NOTE PURCHASE AGREEMENT. |
Subject to the satisfaction of the
conditions set forth in Section 3 hereof, the Original Note Purchase Agreement is hereby amended by this Agreement as follows:
Paragraph 5F of the Original Note Purchase Agreement is hereby
amended and restated in its entirety to read as follows:
5F. Line of Business. The Company will not, and will not
permit any of its Subsidiaries to, engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the general nature
of the business in which the Company and its Subsidiaries, taken as a whole, are engaged on the date of this Agreement, which
business may include but is not limited to the business of leasing and selling furniture, consumer electronics, computers, appliances and other household goods and accessories inside and outside
of the United States of America, through both independently-owned and franchised stores, providing lease-purchase solutions, credit and other financing solutions to customers for the purchase and lease of such products, the manufacture and supply of
furniture and bedding for lease and sale in such stores, and the provision of virtual rent-to-own programs inside and outside of the United States of America (including but not limited to point-of-sale lease purchase programs).
| |
1.2. |
Fixed Charges Coverage Ratio. |
Paragraph 6A of the Original Note Purchase Agreement is
hereby amended and restated in its entirety to read as follows:
6A. Fixed Charges Coverage Ratio. The Company will
not permit the Consolidated Fixed Charge Coverage Ratio to be less than (a) with respect to the fiscal quarter of the Company ending December 31, 2014 and each fiscal quarter of the Company ending thereafter through and including
December 31, 2015, 1.75 to 1.00, and (b) for each fiscal quarter ending thereafter, 2.00 to 1.00.
| |
1.3. |
Total Debt to EBITDA Ratio. |
Paragraph 6B of the Original Note Purchase Agreement is
hereby amended and restated in its entirety to read as follows:
6B. Total Debt to EBITDA Ratio. The Company will
not, at any time, permit the Total Debt to EBITDA Ratio to be greater than (a) for the period from the First Amendment Effective Date to and including March 30, 2016, 3.25 to 1.00 and (b) from and including March 31, 2016, 3.00
to 1.00.
| |
1.4. |
Amended and Restated Defined Terms. |
The following definitions set forth in paragraph
10B of the Original Note Purchase Agreement are hereby amended and restated in their entirety to read as follows:
“Consolidated EBITDA” shall mean, for the Company and its Subsidiaries for any period, an amount equal to the
sum of (a) Consolidated Net Income for such period plus (b) to the extent deducted in determining Consolidated Net Income for such period, (i) Consolidated Interest Expense, (ii) income tax expense, (iii) depreciation
(excluding depreciation of rental merchandise) and amortization, (iv) all other non-cash charges, (v) accruals incurred in the fiscal year of the Company ended December 31, 2013 related to legal and regulatory expenses, fees and costs
not to exceed $30,000,000 in the aggregate, (vi) closing costs, fees and expenses incurred during such period in connection with the Closing Date Acquisition and the transactions contemplated by the Financing Documents, the MetLife NPA, the
SunTrust Agreement, the Existing Note Purchase Agreement and the SunTrust Loan Facility Agreement, in each case paid during such period to Persons that are not Affiliates of the Company or any Subsidiary, not to exceed
2
$15,000,000 in the aggregate, (vii) cash charges incurred in the fiscal year of the Company ended December 31, 2013 related to the retirement of the Company’s Chief Operating
Officer not to exceed $5,000,000 in the aggregate, determined on a consolidated basis in accordance with GAAP in each case for such period, (viii) one-time fees, costs and expenses (including without limitation legal and other professional
fees) in connection with (x) the retirement and severance of Ronald W. Allen and David Buck and (y) the bid by Vintage Capital Management to acquire the Company, and other proxy contests and shareholder proposals, including costs, expenses
and fees relating to responding to, defending and settling such matters, in each case to the extent such fees, costs and expenses were incurred prior to the First Amendment Effective Date, and (ix) transaction closing costs, fees and expenses
actually incurred during such period in connection with the negotiation and closing of the First Amendment to NPA, and the related amendments to the SunTrust Loan Facility Agreement, the SunTrust Agreement, the MetLife NPA, the Existing Note
Purchase Agreement, and the related transaction documents, in each case paid during such period to Persons that are not Affiliates of the Company or any Subsidiary.
“SunTrust Loan Facility Agreement” shall mean that certain Third Amended and Restated Loan Facility Agreement
and Guaranty, dated as of the Date of Closing, by and among the Company, SunTrust and the financial institutions party thereto, as amended by that certain First Amendment to Loan Facility Agreement dated as of December 9, 2014, and as further
amended, restated, supplemented, replaced, refinanced or otherwise modified from time to time.
The following defined terms are hereby added to paragraph 10B of the
Original Note Purchase Agreement in their proper alphabetical order:
“First Amendment Effective Date” means
December 9, 2014.
“First Amendment to NPA” means that certain Amendment No. 1 to Note Purchase Agreement,
dated as of the First Amendment Effective Date, by and among the Issuers and each of the holders of the Notes party thereto.
| 2. |
WARRANTIES AND REPRESENTATIONS. |
To induce the Noteholders to enter into this Agreement,
each of the Issuers represents and warrants to each of the Noteholders that as of the First Amendment Effective Date:
| |
2.1. |
Corporate and Other Organization and Authority. |
(a) Each Issuer is a
corporation or limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or limited liability company and is in good standing in
each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect; and
(b) Each of the Issuers has the requisite organizational power and authority to execute and deliver
this Agreement and to perform its obligations hereunder and under the Note Purchase Agreement.
3
This Agreement has been duly authorized by all necessary corporate
or limited liability company action on the part of the Issuers, as applicable. Each of this Agreement and the Note Purchase Agreement constitutes a legal, valid and binding obligation of the Issuers, enforceable, in each case, against such Issuer in
accordance with its terms, except as such enforceability may be limited by:
(a) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and
(b)
general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
The execution and delivery by each Issuer of this Agreement and the
performance by such Issuer of its obligations under each of this Agreement and the Note Purchase Agreement do not conflict with, result in any breach in any of the provisions of, constitute a default under, violate or result in the creation of any
Lien upon any property of such Issuer under the provisions of:
(a) any charter document, constitutive document, agreement
with shareholders or members, bylaws or any other organizational or governing agreement of such Issuer;
(b) any agreement,
instrument or conveyance by which such Issuer or any of its Subsidiaries or any of their respective properties may be bound or affected; or
(c) any statute, rule or regulation or any order, judgment or award of any court, tribunal or arbitrator by which such Issuer
or any of its Subsidiaries or any of their respective properties may be bound or affected.
| |
2.4. |
Governmental Consent. |
The execution and delivery by the Issuers of this Agreement and
the performance by the Issuers of their respective obligations hereunder and under the Note Purchase Agreement do not require any consents, approvals or authorizations of, or filings, registrations or qualifications with, any Governmental Authority
on the part of any Issuer.
4
No event has occurred and is continuing and no condition exists which,
immediately before or immediately after giving effect to the amendments provided for in this Agreement, constitutes or would constitute a Default or an Event of Default.
| |
2.6. |
Representations in Note Purchase Agreement. |
After giving effect to this Agreement, the
representations and warranties contained in the Note Purchase Agreement are true and correct in all material respects as of the First Amendment Effective Date.
| 3. |
CONDITIONS TO EFFECTIVENESS OF AMENDMENTS. |
The amendment of the Original Note Purchase
Agreement as set forth in this Agreement shall become effective as of the date first written above (the “First Amendment Effective Date”), provided that each of the following conditions shall have been satisfied:
(a) the Noteholders shall have received a fully executed copy of this Agreement executed by the Issuers and the Noteholders;
(b) the Noteholders shall have received a fully executed copy of the Reaffirmation of Guarantee attached hereto as Exhibit A executed
by the Subsidiary Guarantors;
(c) the representations and warranties set forth in Section 2 of this Agreement shall be true and
correct on such date;
(d) the Noteholders shall have received fully executed copies of the following:
(i) that certain Amendment No. 1 to Note Purchase Agreement, dated as of the First Amendment Effective Date, by and among,
inter alios, the Company, AIC, and the MetLife Parties,
(ii) that certain Amendment No. 4 to Note Purchase
Agreement, dated as of the First Amendment Effective Date, by and among, inter alios, the Company, AIC and the Existing Noteholders,
(iii) that certain First Amendment to Credit Agreement, dated as of the First Amendment Effective Date (the “Credit
Agreement Amendment”), by and among, inter alios, the Company, SunTrust Bank, acting as Administrative Agent (the “Administrative Agent”) and in certain other capacities, and each of the lenders party thereto,
(iv) that certain First Amendment to Loan Facility Agreement, dated as of the First Amendment Effective Date (the “Loan
Facility Amendment”), by and among, inter alios, the Company, SunTrust and the other financial institutions party thereto, and
(v) that certain fee letter, dated as of the First Amendment Effective Date (the “Fee Letter”), by and among,
inter alios, the Company and the Noteholders,
5
and each of the amendments referred to in the foregoing clauses (i) to (v), inclusive, shall be in form and
substance reasonably satisfactory to the Noteholders and shall have become effective prior to or concurrent with the effectiveness of this Agreement;
(e) the Noteholders shall have received a fee in the amount set forth in the Fee Letter; and
(f) the Company shall have paid all reasonable fees, charges and disbursements of counsel to the Noteholders incurred in connection with this
Agreement and the transactions contemplated hereby.
THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE.
| |
4.2. |
Duplicate Originals; Electronic Signature. |
Two or more duplicate originals of this
Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement may be executed in one or more counterparts and shall be effective when at least one
counterpart shall have been executed by each party hereto, and each set of counterparts that, collectively, show execution by each party hereto shall constitute one duplicate original. Delivery of an executed counterpart of a signature page to this
Agreement by facsimile transmission or electronic mail shall be effective as delivery of a manually executed counterpart of this Agreement.
| |
4.3. |
Waiver and Amendments. |
Neither this Agreement nor any term hereof may be changed,
waived, discharged or terminated orally, or by any action or inaction, but only by an instrument in writing signed by each of the parties signatory hereto.
Whether or not the amendments contemplated by this Agreement become
effective, each of the Issuers confirms its obligation under paragraph 11B of the Note Purchase Agreement and agrees that, on the First Amendment Effective Date (or if an invoice is delivered subsequent to the First Amendment Effective Date or if
such amendments do not become effective, promptly after receiving any statement or invoice therefor), it will pay all costs and expenses of the Noteholders relating to this Agreement, including, but not limited to, the statement for reasonable fees
and disbursements of the Noteholders’ special counsel presented to the Company
6
on the First Amendment Effective Date. The Issuers will also promptly pay, upon receipt thereof, each additional statement for reasonable fees and disbursements of the Noteholders’ special
counsel rendered after the First Amendment Effective Date in connection with this Agreement.
| |
4.5. |
Successors and Assigns. |
This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties hereto. The provisions hereof are intended to be for the benefit of the Noteholders and shall be enforceable by any successor or assign of any such Noteholder, whether or not an express
assignment of rights hereunder shall have been made by such Noteholder or its successors and assigns.
All warranties, representations, certifications and covenants made by the
Issuers in this Agreement shall be considered to have been relied upon by the Noteholders and shall survive the execution and delivery of this Agreement, regardless of any investigation made by or on behalf of the Noteholders.
| |
4.7. |
Part of Original Note Purchase Agreement; Future References, etc. |
This Agreement shall
be construed in connection with and as a part of the Note Purchase Agreement and, except as expressly amended by this Agreement, all terms, conditions and covenants contained in the Original Note Purchase Agreement are hereby ratified and shall be
and remain in full force and effect. Any and all notices, requests, certificates and other instruments executed and delivered after the execution and delivery of this Agreement may refer to the Original Note Purchase Agreement without making
specific reference to this Agreement, but nevertheless all such references shall include this Agreement, unless the context otherwise requires.
| |
4.8. |
Affirmation of Obligations under Original Note Purchase Agreement and Notes; No Novation. |
Anything contained herein to the contrary notwithstanding, this Agreement is not intended to and shall not serve to effect a novation of the
obligations under the Original Note Purchase Agreement. Instead, it is the express intention of the parties hereto to reaffirm the indebtedness created under the Original Note Purchase Agreement, as amended by this Agreement, and the Notes. The
Issuers hereby acknowledge and affirm all of their respective obligations under the terms of the Original Note Purchase Agreement and the Notes. The execution, delivery and effectiveness of this Agreement shall not be deemed, except as expressly
provided herein, (a) to operate as a waiver of any right, power or remedy of any of the Noteholders under the Original Note Purchase Agreement or the Notes, nor constitute a waiver or amendment of any provision thereunder, or (b) to
prejudice any rights which any Noteholder now has or may have in the future under or in connection with the Note Purchase Agreement or the Notes or under applicable law.
7
[Remainder of page intentionally left blank. Next page is signature page.]
8
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 4 to
Note Purchase Agreement to be executed on its behalf by a duly authorized officer or agent thereof.
|
|
|
| Very truly yours, |
|
| ISSUERS: |
|
| AARON’S, INC. |
|
|
| By: |
|
/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief Financial Office |
|
| AARON INVESTMENT COMPANY |
|
|
| By: |
|
/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Vice President and Treasurer |
[Signature page to
Amendment No. 1 to Note Purchase Agreement – Aaron’s, Inc. (Prudential)]
Accepted and Agreed:
The foregoing Agreement is hereby accepted as of the date first above written.
|
|
|
|
|
| THE PRUDENTIAL INSURANCE COMPANY OF AMERICA |
|
|
| By: |
|
/s/ Ashley Dexter |
| Name: |
|
Ashley Dexter |
| Title: |
|
Vice President |
|
| UNITED OF OMAHA LIFE INSURANCE COMPANY |
|
|
| By: |
|
Prudential Private Placement Investors, L.P., |
|
|
as Investment Advisor |
|
|
| By: |
|
Prudential Private Placement Investors, Inc., |
|
|
as its General Partner |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
|
| LIBERTY NATIONAL LIFE INSURANCE COMPANY |
|
|
| By: |
|
Prudential Private Placement Investors, L.P., |
|
|
as Investment Advisor |
|
|
| By: |
|
Prudential Private Placement Investors, Inc., |
|
|
as its General Partner |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
[Signature page to
Amendment No. 1 to Note Purchase Agreement – Aaron’s, Inc. (Prudential)]
|
|
|
|
|
| FARMERS INSURANCE EXCHANGE |
|
|
| By: |
|
Prudential Private Placement Investors, L.P., |
|
|
as Investment Advisor |
|
|
| By: |
|
Prudential Private Placement Investors, Inc., |
|
|
as its General Partner |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
|
| WILLIAM PENN LIFE INSURANCE COMPANY OF NEW YORK |
|
|
| By: |
|
Prudential Private Placement Investors, L.P., |
|
|
as Investment Advisor |
|
|
| By: |
|
Prudential Private Placement Investors, Inc., |
|
|
as its General Partner |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
|
| FARMERS NEW WORLD LIFE INSURANCE COMPANY |
|
|
| By: |
|
Prudential Private Placement Investors, L.P., |
|
|
as Investment Advisor |
|
|
| By: |
|
Prudential Private Placement Investors, Inc., |
|
|
as its General Partner |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
[Signature page to
Amendment No. 1 to Note Purchase Agreement – Aaron’s, Inc. (Prudential)]
|
|
|
|
|
| ZURICH AMERICAN INSURANCE COMPANY |
|
|
| By: |
|
Prudential Private Placement Investors, L.P., |
|
|
as Investment Advisor |
|
|
| By: |
|
Prudential Private Placement Investors, Inc., |
|
|
as its General Partner |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
|
| MID CENTURY INSURANCE COMPANY |
|
|
| By: |
|
Prudential Private Placement Investors, L.P., |
|
|
as Investment Advisor |
|
|
| By: |
|
Prudential Private Placement Investors, Inc., |
|
|
as its General Partner |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
|
| AMERICAN INCOME LIFE INSURANCE COMPANY |
|
|
| By: |
|
Prudential Private Placement Investors, L.P., |
|
|
as Investment Advisor |
|
|
| By: |
|
Prudential Private Placement Investors, Inc., |
|
|
as its General Partner |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
[Signature page to
Amendment No. 1 to Note Purchase Agreement – Aaron’s, Inc. (Prudential)]
|
|
|
|
|
| GLOBE LIFE AND ACCIDENT INSURANCE COMPANY |
|
|
| By: |
|
Prudential Private Placement Investors, L.P., |
|
|
as Investment Advisor |
|
|
| By: |
|
Prudential Private Placement Investors, Inc., |
|
|
as its General Partner |
|
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|
|
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By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
|
| FAMILY HERITAGE LIFE INSURANCE COMPANY OF AMERICA |
|
|
| By: |
|
Prudential Private Placement Investors, L.P., |
|
|
as Investment Advisor |
|
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| By: |
|
Prudential Private Placement Investors, Inc., |
|
|
as its General Partner |
|
|
|
|
|
By: |
|
/s/ Ashley Dexter |
|
|
Name: |
|
Ashley Dexter |
|
|
Title: |
|
Vice President |
[Signature page to
Amendment No. 1 to Note Purchase Agreement – Aaron’s, Inc. (Prudential)]
EXHIBIT A
Reaffirmation of Guarantee
Dated:
December 9, 2014
Reference is made to that certain Note Purchase Agreement, dated as of April 14, 2014 (the “Original
Note Purchase Agreement”), by and among Aaron’s, Inc., a Georgia corporation (together with its successors and assigns, the “Company”), and Aaron Investment Company, a Delaware corporation (together with its successors
and assigns, “AIC”, and together with the Company, collectively, the “Issuers”), and each of the Persons holdings one or more of the Company’s 4.75% Series A Senior Notes due April 14, 2021 (the
“Notes”) on the date hereof (collectively, the “Noteholders”). The Original Note Purchase Agreement is being amended pursuant to the terms of that certain Amendment No. 1 to Note Purchase Agreement, of even
date herewith (the “Amendment Agreement”; and the Original Note Purchase Agreement, as amended by the Amendment Agreement, the “Amended NPA”). Capitalized terms used but not defined herein shall have the meaning
ascribed to them in the Amended NPA.
Each of the undersigned Subsidiaries (each a “Subsidiary Guarantor” and
collectively, the “Subsidiary Guarantors”) is a party to that certain Subsidiary Guarantee Agreement, dated as of April 14, 2014 (the “Subsidiary Guarantee Agreement”). Each of the Subsidiary Guarantors hereby
(i) acknowledges receipt of a copy of the Amendment Agreement, (ii) consents to the Issuers’ execution and delivery of the Amendment Agreement, (iii) acknowledges and affirms that nothing contained in the Amendment Agreement
shall modify in any respect whatsoever its obligations under the Subsidiary Guarantee Agreement and reaffirms that the Subsidiary Guarantee Agreement shall remain in full force and effect, and (iv) acknowledges and agrees that, for the
avoidance of doubt, Guaranteed Obligations (as such term is defined in the Subsidiary Guarantee Agreement) include obligations in respect of the Amended NPA. Although each of the Subsidiary Guarantors has been informed of the matters set forth
herein and has acknowledged and agreed to the same, each Subsidiary Guarantor understands that the Noteholders have no obligation to inform any Subsidiary Guarantor of such matters in the future or to seek any Subsidiary Guarantor’s
acknowledgment or agreement to future amendments, waivers or consents, and nothing herein shall create such a duty.
[Remainder of
page intentionally left blank; next page is signature page.]
|
|
|
| SUBSIDIARY GUARANTORS: |
|
| AARON’S PRODUCTION COMPANY |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
President and Chief Executive Officer |
|
| 99LTO, LLC |
| By Aaron’s, Inc., as sole Manager |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief Financial Officer |
|
| AARON’S LOGISTICS, LLC |
| By Aaron’s, Inc., as sole Manager |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief Financial Officer |
|
| AARON’S STRATEGIC SERVICES, LLC |
| By Aaron’s, Inc., as sole Manager |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief Financial Officer |
|
|
|
| AARON’S PROCUREMENT COMPANY, LLC |
| By Aaron’s, Inc., as sole Manager |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief Financial Officer |
|
| PROGRESSIVE FINANCE HOLDINGS, LLC |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President |
|
|
|
|
|
| Prog Finance Arizona, LLC
Prog Finance California, LLC Prog Finance Florida,
LLC Prog Finance Georgia, LLC Prog Finance
Illinois, LLC Prog Finance Michigan, LLC Prog
Finance New York, LLC Prog Finance Ohio, LLC
Prog Finance Texas, LLC Prog Finance Mid-West,
LLC Prog Finance North-East, LLC Prog Finance
South-East, LLC Prog Finance West, LLC NPRTO
Arizona, LLC NPRTO California, LLC NPRTO
Florida, LLC NPRTO Georgia, LLC NPRTO Illinois,
LLC NPRTO Michigan, LLC NPRTO New York,
LLC NPRTO Ohio, LLC NPRTO Texas, LLC
NPRTO Mid-West, LLC NPRTO North-East, LLC
NPRTO South-East, LLC NPRTO West,
LLC, |
|
|
| By: |
|
PROG LEASING, LLC, Sole |
|
|
Manager |
|
|
| By: |
|
PROGRESSIVE FINANCE |
|
|
HOLDINGS, LLC, Sole Manager |
|
|
|
|
|
By: |
|
|
|
|
Name: |
|
Gilbert L. Danielson |
|
|
Title: |
|
Executive Vice President |
|
|
|
|
|
| PANGO LLC |
|
|
| By: |
|
PROGRESSIVE FINANCE |
|
|
HOLDINGS, LLC, Sole Manager |
|
|
|
|
|
By: |
|
|
|
|
Name: |
|
Gilbert L. Danielson |
|
|
Title: |
|
Executive Vice President |
|
| PROG LEASING, LLC |
|
|
| By: |
|
PROGRESSIVE FINANCE |
|
|
HOLDINGS, LLC, Sole Manager |
|
|
|
|
|
By: |
|
|
|
|
Name: |
|
Gilbert L. Danielson |
|
|
Title: |
|
Executive Vice President |
Exhibit 10.11
AMENDMENT NO. 1 TO NOTE PURCHASE AGREEMENT
This AMENDMENT NO. 1 TO NOTE PURCHASE AGREEMENT (this “Agreement”), is made as of December 9, 2014, by and among
(a) AARON’S, INC., a Georgia corporation (together with its successors and assigns, the “Company”), and AARON INVESTMENT COMPANY, a Delaware corporation (together with its successors and assigns,
“AIC” and together with the Company, collectively, the “Issuers”), and (b) each of the Persons holding one or more Notes (as defined below) on the First Amendment Effective Date (as defined below)
(collectively, the “Noteholders”), with respect to that certain Note Purchase Agreement, dated as of April 14, 2014 (as amended from time to time and as in effect immediately prior to giving effect to this Agreement, the
“Original Note Purchase Agreement” and, as amended pursuant to this Agreement and as may be further amended, restated or otherwise modified from time to time, the “Note Purchase Agreement”), by and among the Issuers
and each of the Noteholders. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Original Note Purchase Agreement.
RECITALS:
A. The
Issuers and Noteholders are parties to the Original Note Purchase Agreement, pursuant to which the Issuers issued and sold an aggregate principal amount of $75,000,000 of their 4.75% Series B Senior Notes due April 14, 2021 (the
“Notes”) to the Noteholders;
B. The Noteholders are the holders of all outstanding Notes; and
C. The Issuers have requested, and the Noteholders have agreed to, certain amendments and modifications to the provisions of the
Original Note Purchase Agreement, subject to the terms and conditions set forth herein.
AGREEMENT:
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Issuers and the
Noteholders agree as follows:
| 1. |
AMENDMENTS TO ORIGINAL NOTE PURCHASE AGREEMENT. |
Subject to the satisfaction of the
conditions set forth in Section 3 hereof, the Original Note Purchase Agreement is hereby amended by this Agreement as follows:
Paragraph 5F of the Original Note Purchase Agreement is hereby
amended and restated in its entirety to read as follows:
5F. Line of Business. The Company will not, and will not
permit any of its Subsidiaries to, engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the general nature
of the business in which the Company and its Subsidiaries, taken as a whole, are engaged on the date of this Agreement, which
business may include but is not limited to the business of leasing and selling furniture, consumer electronics, computers, appliances and other household goods and accessories inside and outside
of the United States of America, through both independently-owned and franchised stores, providing lease-purchase solutions, credit and other financing solutions to customers for the purchase and lease of such products, the manufacture and supply of
furniture and bedding for lease and sale in such stores, and the provision of virtual rent-to-own programs inside and outside of the United States of America (including but not limited to point-of-sale lease purchase programs).
| |
1.2. |
Fixed Charges Coverage Ratio. |
Paragraph 6A of the Original Note Purchase Agreement is
hereby amended and restated in its entirety to read as follows:
6A. Fixed Charges Coverage Ratio. The Company will
not permit the Consolidated Fixed Charge Coverage Ratio to be less than (a) with respect to the fiscal quarter of the Company ending December 31, 2014 and each fiscal quarter of the Company ending thereafter through and including
December 31, 2015, 1.75 to 1.00, and (b) for each fiscal quarter ending thereafter, 2.00 to 1.00.
| |
1.3. |
Total Debt to EBITDA Ratio. |
Paragraph 6B of the Original Note Purchase Agreement is
hereby amended and restated in its entirety to read as follows:
6B. Total Debt to EBITDA Ratio. The Company will
not, at any time, permit the Total Debt to EBITDA Ratio to be greater than (a) for the period from the First Amendment Effective Date to and including March 30, 2016, 3.25 to 1.00 and (b) from and including March 31, 2016, 3.00
to 1.00.
| |
1.4. |
Amended and Restated Defined Terms. |
The following definitions set forth in paragraph
10B of the Original Note Purchase Agreement are hereby amended and restated in their entirety to read as follows:
“Consolidated EBITDA” shall mean, for the Company and its Subsidiaries for any period, an amount equal to the
sum of (a) Consolidated Net Income for such period plus (b) to the extent deducted in determining Consolidated Net Income for such period, (i) Consolidated Interest Expense, (ii) income tax expense, (iii) depreciation
(excluding depreciation of rental merchandise) and amortization, (iv) all other non-cash charges, (v) accruals incurred in the fiscal year of the Company ended December 31, 2013 related to legal and regulatory expenses, fees and costs
not to exceed $30,000,000 in the aggregate, (vi) closing costs, fees and expenses incurred during such period in connection with the Closing Date Acquisition and the transactions contemplated by the Financing Documents, the Prudential NPA, the
SunTrust Agreement, the Existing Note Purchase Agreement and the SunTrust Loan Facility Agreement, in each case paid during such period to Persons that are not Affiliates of the Company or any Subsidiary, not to exceed
2
$15,000,000 in the aggregate, (vii) cash charges incurred in the fiscal year of the Company ended December 31, 2013 related to the retirement of the Company’s Chief Operating
Officer not to exceed $5,000,000 in the aggregate, determined on a consolidated basis in accordance with GAAP in each case for such period, (viii) one-time fees, costs and expenses (including without limitation legal and other professional
fees) in connection with (x) the retirement and severance of Ronald W. Allen and David Buck and (y) the bid by Vintage Capital Management to acquire the Company, and other proxy contests and shareholder proposals, including costs, expenses
and fees relating to responding to, defending and settling such matters, in each case to the extent such fees, costs and expenses were incurred prior to the First Amendment Effective Date, and (ix) transaction closing costs, fees and expenses
actually incurred during such period in connection with the negotiation and closing of the First Amendment to NPA, and the related amendments to the SunTrust Loan Facility Agreement, the SunTrust Agreement, the Prudential NPA, the Existing Note
Purchase Agreement, and the related transaction documents, in each case paid during such period to Persons that are not Affiliates of the Company or any Subsidiary.
“SunTrust Loan Facility Agreement” shall mean that certain Third Amended and Restated Loan Facility Agreement
and Guaranty, dated as of the Date of Closing, by and among the Company, SunTrust and the financial institutions party thereto, as amended by that certain First Amendment to Loan Facility Agreement dated as of December 9, 2014, and as further
amended, restated, supplemented, replaced, refinanced or otherwise modified from time to time.
The following defined terms are hereby added to paragraph 10B of the
Original Note Purchase Agreement in their proper alphabetical order:
“First Amendment Effective Date” means
December 9, 2014.
“First Amendment to NPA” means that certain Amendment No. 1 to Note Purchase Agreement,
dated as of the First Amendment Effective Date, by and among the Issuers and each of the holders of the Notes party thereto.
| 2. |
WARRANTIES AND REPRESENTATIONS. |
To induce the Noteholders to enter into this Agreement,
each of the Issuers represents and warrants to each of the Noteholders that as of the First Amendment Effective Date:
| |
2.1. |
Corporate and Other Organization and Authority. |
(a) Each Issuer is a
corporation or limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or limited liability company and is in good standing in
each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect; and
(b) Each of the Issuers has the requisite organizational power and authority to execute and deliver
this Agreement and to perform its obligations hereunder and under the Note Purchase Agreement.
3
This Agreement has been duly authorized by all necessary corporate
or limited liability company action on the part of the Issuers, as applicable. Each of this Agreement and the Note Purchase Agreement constitutes a legal, valid and binding obligation of the Issuers, enforceable, in each case, against such Issuer in
accordance with its terms, except as such enforceability may be limited by:
(a) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and
(b)
general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
The execution and delivery by each Issuer of this Agreement and the
performance by such Issuer of its obligations under each of this Agreement and the Note Purchase Agreement do not conflict with, result in any breach in any of the provisions of, constitute a default under, violate or result in the creation of any
Lien upon any property of such Issuer under the provisions of:
(a) any charter document, constitutive document, agreement
with shareholders or members, bylaws or any other organizational or governing agreement of such Issuer;
(b) any agreement,
instrument or conveyance by which such Issuer or any of its Subsidiaries or any of their respective properties may be bound or affected; or
(c) any statute, rule or regulation or any order, judgment or award of any court, tribunal or arbitrator by which such Issuer
or any of its Subsidiaries or any of their respective properties may be bound or affected.
| |
2.4. |
Governmental Consent. |
The execution and delivery by the Issuers of this Agreement and
the performance by the Issuers of their respective obligations hereunder and under the Note Purchase Agreement do not require any consents, approvals or authorizations of, or filings, registrations or qualifications with, any Governmental Authority
on the part of any Issuer.
4
No event has occurred and is continuing and no condition exists which,
immediately before or immediately after giving effect to the amendments provided for in this Agreement, constitutes or would constitute a Default or an Event of Default.
| |
2.6. |
Representations in Note Purchase Agreement. |
After giving effect to this Agreement, the
representations and warranties contained in the Note Purchase Agreement are true and correct in all material respects as of the First Amendment Effective Date.
| 3. |
CONDITIONS TO EFFECTIVENESS OF AMENDMENTS. |
The amendment of the Original Note Purchase
Agreement as set forth in this Agreement shall become effective as of the date first written above (the “First Amendment Effective Date”), provided that each of the following conditions shall have been satisfied:
(a) the Noteholders shall have received a fully executed copy of this Agreement executed by the Issuers and the Noteholders;
(b) the Noteholders shall have received a fully executed copy of the Reaffirmation of Guarantee attached hereto as Exhibit A
executed by the Subsidiary Guarantors;
(c) the representations and warranties set forth in Section 2 of this Agreement shall be true
and correct on such date;
(d) the Noteholders shall have received fully executed copies of the following:
(i) that certain Amendment No. 1 to Note Purchase Agreement, dated as of the First Amendment Effective Date, by and among,
inter alios, the Company, AIC, and the Prudential Parties,
(ii) that certain Amendment No. 4 to Note Purchase
Agreement, dated as of the First Amendment Effective Date, by and among, inter alios, the Company, AIC and the Existing Noteholders,
(iii) that certain First Amendment to Credit Agreement, dated as of the First Amendment Effective Date (the “Credit
Agreement Amendment”), by and among, inter alios, the Company, SunTrust Bank, acting as Administrative Agent (the “Administrative Agent”) and in certain other capacities, and each of the lenders party thereto,
(iv) that certain First Amendment to Loan Facility Agreement, dated as of the First Amendment Effective Date (the “Loan
Facility Amendment”), by and among, inter alios, the Company, SunTrust and the other financial institutions party thereto, and
(v) that certain fee letter, dated as of the First Amendment Effective Date (the “Fee Letter”), by and among,
inter alios, the Company and the Noteholders,
5
and each of the amendments referred to in the foregoing clauses (i) to (v), inclusive, shall be in form and
substance reasonably satisfactory to the Noteholders and shall have become effective prior to or concurrent with the effectiveness of this Agreement;
(e) the Noteholders shall have received a fee in the amount set forth in the Fee Letter; and
(f) the Company shall have paid all reasonable fees, charges and disbursements of counsel to the Noteholders incurred in connection with this
Agreement and the transactions contemplated hereby.
THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE.
| |
4.2. |
Duplicate Originals; Electronic Signature. |
Two or more duplicate originals of this
Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement may be executed in one or more counterparts and shall be effective when at least one
counterpart shall have been executed by each party hereto, and each set of counterparts that, collectively, show execution by each party hereto shall constitute one duplicate original. Delivery of an executed counterpart of a signature page to this
Agreement by facsimile transmission or electronic mail shall be effective as delivery of a manually executed counterpart of this Agreement.
| |
4.3. |
Waiver and Amendments. |
Neither this Agreement nor any term hereof may be changed,
waived, discharged or terminated orally, or by any action or inaction, but only by an instrument in writing signed by each of the parties signatory hereto.
Whether or not the amendments contemplated by this Agreement become
effective, each of the Issuers confirms its obligation under paragraph 11B of the Note Purchase Agreement and agrees that, on the First Amendment Effective Date (or if an invoice is delivered subsequent to the First Amendment Effective Date or
if such amendments do not become effective, promptly after receiving any statement or invoice therefor), it will pay all costs and expenses of the Noteholders relating to this Agreement, including, but not limited to, the statement for reasonable
fees and disbursements of the Noteholders’ special counsel presented to the Company
6
on the First Amendment Effective Date. The Issuers will also promptly pay, upon receipt thereof, each additional statement for reasonable fees and disbursements of the Noteholders’ special
counsel rendered after the First Amendment Effective Date in connection with this Agreement.
| |
4.5. |
Successors and Assigns. |
This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties hereto. The provisions hereof are intended to be for the benefit of the Noteholders and shall be enforceable by any successor or assign of any such Noteholder, whether or not an express
assignment of rights hereunder shall have been made by such Noteholder or its successors and assigns.
All warranties, representations, certifications and covenants made by the
Issuers in this Agreement shall be considered to have been relied upon by the Noteholders and shall survive the execution and delivery of this Agreement, regardless of any investigation made by or on behalf of the Noteholders.
| |
4.7. |
Part of Original Note Purchase Agreement; Future References, etc. |
This Agreement shall
be construed in connection with and as a part of the Note Purchase Agreement and, except as expressly amended by this Agreement, all terms, conditions and covenants contained in the Original Note Purchase Agreement are hereby ratified and shall be
and remain in full force and effect. Any and all notices, requests, certificates and other instruments executed and delivered after the execution and delivery of this Agreement may refer to the Original Note Purchase Agreement without making
specific reference to this Agreement, but nevertheless all such references shall include this Agreement, unless the context otherwise requires.
| |
4.8. |
Affirmation of Obligations under Original Note Purchase Agreement and Notes; No Novation. |
Anything contained herein to the contrary notwithstanding, this Agreement is not intended to and shall not serve to effect a novation of the
obligations under the Original Note Purchase Agreement. Instead, it is the express intention of the parties hereto to reaffirm the indebtedness created under the Original Note Purchase Agreement, as amended by this Agreement, and the Notes. The
Issuers hereby acknowledge and affirm all of their respective obligations under the terms of the Original Note Purchase Agreement and the Notes. The execution, delivery and effectiveness of this Agreement shall not be deemed, except as expressly
provided herein, (a) to operate as a waiver of any right, power or remedy of any of the Noteholders under the Original Note Purchase Agreement or the Notes, nor constitute a waiver or amendment of any provision thereunder, or (b) to
prejudice any rights which any Noteholder now has or may have in the future under or in connection with the Note Purchase Agreement or the Notes or under applicable law.
7
[Remainder of page intentionally left blank. Next page is signature page.]
8
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 1 to
Note Purchase Agreement to be executed on its behalf by a duly authorized officer or agent thereof.
|
|
|
| Very truly yours, |
|
| ISSUERS: |
|
| AARON’S, INC. |
|
|
| By: |
|
/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief Financial Officer |
|
| AARON INVESTMENT COMPANY |
|
|
| By: |
|
/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Vice President and Treasurer |
[Signature page to Amendment No. 1 to Note Purchase Agreement – Aaron’s, Inc. (Met Life)]
Accepted and Agreed:
The foregoing Agreement is hereby accepted as of the date first above written.
METROPOLITAN LIFE INSURANCE COMPANY
METLIFE
INSURANCE COMPANY USA
by Metropolitan Life Insurance Company, its Investment Manager
NEW ENGLAND LIFE INSURANCE COMPANY
by Metropolitan
Life Insurance Company, its Investment Manager
GENERAL AMERICAN LIFE INSURANCE COMPANY
by Metropolitan Life Insurance Company, its Investment Manager
|
|
|
| By: |
|
/s/ John Wills |
| Name: |
|
John Wills |
| Title: |
|
Managing Director |
[Signature page to
Amendment No. 1 to Note Purchase Agreement – Aaron’s, Inc. (Met Life)]
EXHIBIT A
Reaffirmation of Guarantee
Dated:
December 9, 2014
Reference is made to that certain Note Purchase Agreement, dated as of April 14, 2014 (the “Original
Note Purchase Agreement”), by and among Aaron’s, Inc., a Georgia corporation (together with its successors and assigns, the “Company”), and Aaron Investment Company, a Delaware corporation (together with its successors
and assigns, “AIC”, and together with the Company, collectively, the “Issuers”), and each of the Persons holdings one or more of the Company’s 4.75% Series B Senior Notes due April 14, 2021 (the
“Notes”) on the date hereof (collectively, the “Noteholders”). The Original Note Purchase Agreement is being amended pursuant to the terms of that certain Amendment No. 1 to Note Purchase Agreement, of even
date herewith (the “Amendment Agreement”; and the Original Note Purchase Agreement, as amended by the Amendment Agreement, the “Amended NPA”). Capitalized terms used but not defined herein shall have the meaning
ascribed to them in the Amended NPA.
Each of the undersigned Subsidiaries (each a “Subsidiary Guarantor” and
collectively, the “Subsidiary Guarantors”) is a party to that certain Subsidiary Guarantee Agreement, dated as of April 14, 2014 (the “Subsidiary Guarantee Agreement”). Each of the Subsidiary Guarantors hereby
(i) acknowledges receipt of a copy of the Amendment Agreement, (ii) consents to the Issuers’ execution and delivery of the Amendment Agreement, (iii) acknowledges and affirms that nothing contained in the Amendment Agreement
shall modify in any respect whatsoever its obligations under the Subsidiary Guarantee Agreement and reaffirms that the Subsidiary Guarantee Agreement shall remain in full force and effect, and (iv) acknowledges and agrees that, for the
avoidance of doubt, Guaranteed Obligations (as such term is defined in the Subsidiary Guarantee Agreement) include obligations in respect of the Amended NPA. Although each of the Subsidiary Guarantors has been informed of the matters set forth
herein and has acknowledged and agreed to the same, each Subsidiary Guarantor understands that the Noteholders have no obligation to inform any Subsidiary Guarantor of such matters in the future or to seek any Subsidiary Guarantor’s
acknowledgment or agreement to future amendments, waivers or consents, and nothing herein shall create such a duty.
[Remainder of
page intentionally left blank; next page is signature page.]
|
|
|
| SUBSIDIARY GUARANTORS: |
|
| AARON’S PRODUCTION COMPANY |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
President and Chief Executive Officer |
|
| 99LTO, LLC |
| By Aaron’s, Inc., as sole Manager |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief Financial Officer |
|
| AARON’S LOGISTICS, LLC |
| By Aaron’s, Inc., as sole Manager |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief Financial Officer |
|
| AARON’S STRATEGIC SERVICES, LLC |
| By Aaron’s, Inc., as sole Manager |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief Financial Officer |
|
|
|
| AARON’S PROCUREMENT COMPANY, LLC |
| By Aaron’s, Inc., as sole Manager |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President and Chief Financial Officer |
|
| PROGRESSIVE FINANCE HOLDINGS, LLC |
|
|
| By: |
|
|
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President |
|
|
|
|
|
| Prog Finance Arizona, LLC |
| Prog Finance California, LLC |
| Prog Finance Florida, LLC |
| Prog Finance Georgia, LLC |
| Prog Finance Illinois, LLC |
| Prog Finance Michigan, LLC |
| Prog Finance New York, LLC |
| Prog Finance Ohio, LLC |
| Prog Finance Texas, LLC |
| Prog Finance Mid-West, LLC |
| Prog Finance North-East, LLC |
| Prog Finance South-East, LLC |
| Prog Finance West, LLC |
| NPRTO Arizona, LLC |
| NPRTO California, LLC |
| NPRTO Florida, LLC |
| NPRTO Georgia, LLC |
| NPRTO Illinois, LLC |
| NPRTO Michigan, LLC |
| NPRTO New York, LLC |
| NPRTO Ohio, LLC |
| NPRTO Texas, LLC |
| NPRTO Mid-West, LLC |
| NPRTO North-East, LLC |
| NPRTO South-East, LLC |
| NPRTO West, LLC, |
|
|
| By: |
|
PROG LEASING, LLC, Sole |
|
|
Manager |
|
|
| By: |
|
PROGRESSIVE FINANCE |
|
|
HOLDINGS, LLC, Sole Manager |
|
|
|
|
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By: |
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Gilbert L. Danielson |
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Title: |
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Executive Vice President |
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| PANGO LLC |
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PROGRESSIVE FINANCE |
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HOLDINGS, LLC, Sole Manager |
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By: |
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Name: |
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Gilbert L. Danielson |
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Title: |
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Executive Vice President |
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| PROG LEASING, LLC |
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PROGRESSIVE FINANCE |
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HOLDINGS, LLC, Sole Manager |
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By: |
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Name: |
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Gilbert L. Danielson |
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Title: |
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Executive Vice President |
Exhibit 10.19
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT dated December 9, 2014 (this “Amendment”) is entered into among
Aaron’s, Inc., a Georgia corporation (the “Borrower”), the Guarantors, the Lenders party hereto and SunTrust Bank, as Administrative Agent. All capitalized terms used herein and not otherwise defined herein shall have
the meanings given to such terms in the Credit Agreement (as defined below).
RECITALS
WHEREAS, the Borrower, the Lenders and SunTrust Bank, as Administrative Agent, Swingline Lender and Issuing Bank, entered into that certain
Amended and Restated Revolving Credit and Term Loan Agreement dated as of April 14, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”);
WHEREAS, the Borrower has requested certain amendments to the Credit Agreement;
WHEREAS, the Lenders agree to such requested amendments subject to the terms and conditions of this Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Amendments to Credit Agreement.
The Credit Agreement is hereby amended as follows:
(a) The cover page of the Credit Agreement is amended by adding the following at the
bottom of such cover page:
SUNTRUST ROBINSON HUMPHREY, INC.,
as Joint Lead Arranger and Sole Bookrunner
and
BANK OF AMERICA, N.A.,
FIFTH THIRD BANK
and
REGIONS CAPITAL MARKETS,
a division of Regions Bank,
as Joint Lead Arrangers
(b) The
following definitions are added in the appropriate alphabetical order to Section 1.1 of the Credit Agreement:
“First
Amendment Effective Date” means December 9, 2014.
“First Amendment to Credit Agreement” means
that certain First Amendment to Credit Agreement dated as of the First Amendment Effective Date, by and between Borrower, Administrative Agent, the Lenders party thereto and the Subsidiary Loan Parties party thereto.
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“Material Domestic Subsidiary” means any Domestic Subsidiary of the
Borrower that has not already become a Subsidiary Loan Party that (a) at any time (i) accounted for five percent (5.0%) of Consolidated EBITDA for any period of four (4) Fiscal Quarters ended or (ii) holds assets with an
aggregate book value equal to or greater than five percent (5.0%) of the aggregate fair market value of the total assets of the Borrower and its Subsidiaries on a consolidated basis or (b) when taken together with other Domestic
Subsidiaries that are not already Subsidiary Loan Parties, (x) accounted for ten percent (10.0%) of Consolidated EBITDA for any period of four (4) Fiscal Quarters ended or (y) holds assets with an aggregate book value equal to or
greater than ten percent (10.0%) of the aggregate fair market value of the total assets of the Borrower and its Subsidiaries on a consolidated basis. Upon the acquisition of a new Domestic Subsidiary or the merger or consolidation of any Person
with or into an existing Domestic Subsidiary (or the acquisition of other assets by an existing Domestic Subsidiary), the qualification of the affected Domestic Subsidiary as a “Material Subsidiary” pursuant to the foregoing requirements
of this definition shall be determined on a pro forma basis as if such Domestic Subsidiary had been acquired or such merger, consolidation or other acquisition had occurred, as applicable, at the beginning of the relevant period of four consecutive
Fiscal Quarters.
“Sanctions” shall mean economic or financial sanctions or trade embargoes administered or
enforced from time to time by (a) the U.S. government, including those administered by OFAC or the U.S. Department of State or (b) the United Nations Security Council, the European Union or Her Majesty’s Treasury of the United
Kingdom.
(c) The following definitions in Section 1.1 of the Credit Agreement are amended as follows:
(i) The definition of “Aggregate Revolving Commitments” is amended to read as follows:
“Aggregate Revolving Commitments” shall mean, collectively, all Revolving Commitments of all Lenders at any time
outstanding. On the First Amendment Effective Date, the amount of Aggregate Revolving Commitments is $225,000,000.
(ii)
The definition of “Anti-Terrorism Order” is deleted in its entirety.
(iii) The definition of “Applicable
Margin” is amended by replacing the last sentence of such definition with the following sentence:
Notwithstanding the foregoing, the
Applicable Margin from the First Amendment Effective Date until the financial statements and Compliance Certificate for the Fiscal Quarter ending on December 31, 2014 are delivered shall be at Level III.
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(iv) The definition of “Applicable Percentage is amended by replacing the
last sentence of such definition with the following sentence:
Notwithstanding the foregoing, the Applicable Percentage for the commitment
fee from the First Amendment Effective Date until the financial statements and Compliance Certificate for the Fiscal Quarter ending on December 31, 2014 are delivered shall be at Level III.
(v) The definition of “Consolidated EBITDA” is amended by deleting the “and” immediately prior to clause
(vii) and adding the following after clause (vii):
, (viii) one-time fees, costs and expenses (including without limitation
legal and other professional fees) in connection with (x) the retirement and severance of Ronald W. Allen and David Buck and (y) the bid by Vintage Capital Management to acquire the Borrower, and other proxy contests and shareholder
proposals, including costs, expenses and fees relating to responding to, defending and settling such matters, in each case to the extent such fees, costs and expenses were incurred prior to the First Amendment Effective Date, and
(ix) transaction closing costs, fees and expenses actually incurred during such period in connection with the negotiation and closing of the First Amendment to Credit Agreement, and the related amendments to the Loan Facility Agreement and the
Note Agreements and the related transaction documents, in each case paid during such period to Persons that are not Affiliates of the Borrower or any Subsidiary.
(vi) The definition of “Fee Letter” is amended to read as follows:
“Fee Letter” shall mean that certain letter agreement dated as of October 31, 2014, by and between the Borrower,
SunTrust Robinson Humphrey, Inc. and the Administrative Agent, setting forth certain fees applicable to the revolving credit and term loan facilities described herein, either as originally executed or as hereafter amended or modified.
(vii) The definition of “Joint Lead Arrangers” is amended to read as follows:
“Joint Lead Arrangers” shall mean SunTrust Robinson Humphrey, Inc., Bank of America, N.A., Fifth Third Bank and Regions
Capital Markets, a division of Regions Bank, each in its capacity as a joint lead arranger in connection with this Agreement.
(viii) The definition of “LIBOR” is amended by adding the following proviso at the end of the proviso of such
definition:
; provided, further, that, if LIBOR would be less than zero, such rate shall be deemed to be zero for purposes of this
Agreement.
(ix) The definition of “Maturity Date” is amended by replacing “December 13, 2017” therein
with “December 9, 2019”.
(x) The definition of “Revolving Commitment Termination Date” is amended by
replacing “December 13, 2017” therein with “December 9, 2019”.
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(xi) The definition of “Sanctioned Country” is amended to read as
follows:
“Sanctioned Country” shall mean, at any time, a country or territory that is, or whose government is, the
subject or target of any Sanctions.
(xii) The definition of “Sanctioned Person” is amended to read as follows:
“Sanctioned Person” shall mean, at any time, (a) any Person listed in any Sanctions-related list of
designated Persons maintained by OFAC, the U.S. Department of State, the United Nations Security Council, the European Union or any EU member state, (b) any Person located, organized or resident in a Sanctioned Country or (c) any Person
controlled by any such Person.
(xiii) The definition of “Term Loan Commitment” is amended to read as follows:
“Term Loan Commitment” shall mean, with respect to each Lender, the obligation of such Lender to make a Term Loan
hereunder on the First Amendment Effective Date, in a principal amount not exceeding the amount set forth with respect to such Lender on Schedule 1.1(b). The aggregate principal amount of all Lenders’ Term Loan Commitments as of the
First Amendment Effective Date is $125,000,000.
(d) Section 2.6 of the Credit Agreement is amended to read as follows:
2.6 Term Loan Commitments. Immediately prior to the First Amendment Effective Date, the aggregate outstanding principal amount of
Term Loans was $123,093,750. Subject to the terms and conditions set forth in this Agreement, on the First Amendment Effective Date, each Lender holding a Term Loan Commitment agrees to (x) extend the maturity date of its portion of the
outstanding term loan under the Existing Credit Agreement to the Maturity Date and (y) make an advance in the amount of its Pro Rata Share of the $1,906,250 being advanced to the Borrower on the First Amendment Effective Date (and, to the
extent necessary such that the portion of such extended Term Loans held by such Lender equals such Lender’s Term Loan Commitment, make additional advances and/or permit the reallocation of its Term Loans among the other Lenders holding Term
Loan Commitments). The Term Loans may be, from time to time, Base Rate Loans or Eurodollar Loans or a combination thereof.
(e)
Section 2.10(c) of the Credit Agreement is amended to read as follows:
The Borrower unconditionally promises to pay to the
Administrative Agent for the account of each Lender the then unpaid principal amount of the Term Loan of such Lender in equal quarterly installments payable on the last day of each March, June, September and December, commencing on December 31,
2014, with each such installment being in the aggregate principal amount for all Lenders equal to $3,125,000 (and on such other date(s) and in such other amounts as may be required from time to time pursuant to this Agreement); provided that, to the
extent not previously paid, the entire unpaid principal balance of the Term Loans shall be due and payable in full on the Maturity Date.
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(f) Sections 4.16 and 4.17 of the Credit Agreement are deleted in their entirety and replaced
with the following Section 4.16:
Section 4.16. Anti-Corruption Laws and Sanctions. The Borrower has implemented and
maintains in effect policies and procedures designed to ensure compliance in all material respects by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions,
and the Borrower, its Subsidiaries and their respective officers (in such capacity), employees (in such capacity) and, to the knowledge of the Borrower, its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions.
None of (a) the Borrower, any Subsidiary or any of their respective officers (in such capacity) or employees (in such capacity), or (b) to the knowledge of the Borrower, any director or agent of the Borrower or any Subsidiary is a
Sanctioned Person. No Borrowing or Letter of Credit, use by the Borrower or any Subsidiary of the proceeds thereof or other transactions contemplated hereby will violate Anti-Corruption Laws or applicable Sanctions.
(g) Section 5.1(g) of the Credit Agreement is amended by (i) adding “, in each case, on a quarter by quarter basis for such
forecasted Fiscal Year information;” at the end of such Section and (ii) deleting the period at the end of such Section.
(h)
Section 5.3 of the Credit Agreement is amended by adding the following language immediately prior to the proviso appearing in said Section:
, including but not limited to the business of leasing and selling furniture, consumer electronics, computers, appliances and other household
goods and accessories inside and outside of the United States of America, through both independently-owned and franchised stores, providing lease-purchase solutions, credit and other financing solutions to customers for the purchase and lease of
such products, the manufacture and supply of furniture and bedding for lease and sale in such stores, and the provision of virtual rent-to-own programs inside and outside of the United States of America (including but not limited to point-of-sale
lease purchase programs).
(i) Section 5.9(a) of the Credit Agreement is amended to read as follows:
(a) as an extension and continuation of Indebtedness owing under, and to amend, this Agreement on the First Amendment Effective Date and to pay
fees and expenses related thereto and
(j) Section 5.9 of the Credit Agreement is amended by adding the following as a new paragraph
to such Section:
The Borrower will not request any Borrowing or Letter of Credit, and the Borrower shall not use, and the Borrower shall
ensure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use, the proceeds of any Borrowing or Letter of Credit (i) in furtherance of an offer, payment, promise to pay, or authorization of the
payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, (ii) for the purpose of funding, financing or facilitating any activities, business or
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transaction of or with any Sanctioned Person, or in any Sanctioned Country or (iii) in any manner that would result in the violation of any Sanctions applicable to any party hereto.
(k) Section 5.10(a) of the Credit Agreement is amended to read as follows:
(a) Within ten (10) Business Days (or such later date as the Administrative Agent may agree in its sole discretion) after any Subsidiary
is acquired or formed, the Borrower shall (i) notify the Administrative Agent and the Lenders thereof, (ii) if such Subsidiary is a Material Domestic Subsidiary, cause such Subsidiary to become a Subsidiary Loan Party by executing
agreements in the form of Annex I to the Subsidiary Guarantee Agreement and (iii) if such Subsidiary is a Material Domestic Subsidiary, cause such Domestic Subsidiary to deliver simultaneously therewith similar documents applicable to such
Domestic Subsidiary described in Section 3.1 as reasonably requested by the Administrative Agent. In the event that any Domestic Subsidiary that is not already a Subsidiary Loan Party becomes a Material Domestic Subsidiary at any
time after its formation or acquisition, the Borrower shall have up to (10) Business Days (or such later date as the Administrative Agent may agree in its sole discretion) to cause it to (x) become a Subsidiary Loan Party by executing
agreements in the form of Annex I to the Subsidiary Guarantee Agreement and (y) deliver simultaneously therewith similar documents applicable to such Domestic Subsidiary described in Section 3.1 as reasonably requested by the
Administrative Agent.
(l) The first sentence of Section 5.10(b) of the Loan Facility Agreement is amended to read as follows:
The Borrower may, after the Effective Date, acquire (subject to Section 7.4) or form additional Foreign Subsidiaries.
(m) Section 6.1 of the Credit Agreement is amended to read as follows:
Section 6.1 Total Debt to EBITDA Ratio. The Borrower and its Subsidiaries shall maintain, as of the last day of each Fiscal
Quarter, a Total Debt to EBITDA Ratio of not greater than (a) with respect to the Fiscal Quarter ending December 31, 2014 and each Fiscal Quarter ending thereafter through and including December 31, 2015, 3.25:1.00, and (b) for
each Fiscal Quarter ending thereafter, 3.00:1.00.
(n) Section 6.2 of the Credit Agreement is amended to read as follows:
Section 6.2 Fixed Charge Coverage Ratio. The Borrower and its Subsidiaries shall maintain, as of the last day of each Fiscal
Quarter, a Fixed Charge Coverage Ratio of not less than (a) with respect to the Fiscal Quarter ending December 31, 2014 and each Fiscal Quarter ending thereafter through and including December 31, 2015, 1.75:1.00, and (b) for
each Fiscal Quarter ending thereafter, 2.00:1.00.
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(o) Section 10.1(b) of the Credit Agreement is amended by adding the following new clauses
(iii) and (iv):
(iii) The Borrower agrees that the Administrative Agent may, but shall not be obligated to, make Communications (as
defined below) available to the Issuing Bank and the other Lenders by posting the Communications on Debt Domain, Intralinks, Syndtrak, ClearPar or a substantially similar Electronic System.
(iv) Any Electronic System used by the Administrative Agent is provided “as is” and “as available.” The Agent Parties (as
defined below) do not warrant the adequacy of such Electronic Systems and expressly disclaim liability for errors or omissions in the Communications. No warranty of any kind, express, implied or statutory, including, without limitation, any warranty
of merchantability, fitness for a particular purpose, non-infringement of third-party rights or freedom from viruses or other code defects, is made by any Agent Party in connection with the Communications or any Electronic System. In no event shall
the Administrative Agent or any of its Related Parties (collectively, the “Agent Parties”) have any liability to any Loan Party, any Lender, the Issuing Bank or any other Person or entity for damages of any kind, including,
without limitation, direct or indirect, special, incidental or consequential damages, losses or expenses (whether in tort, contract or otherwise) arising out of any Loan Party’s or the Administrative Agent’s transmission of Communications
through an Electronic System. “Communications” means, collectively, any notice, demand, communication, information, document or other material provided by or on behalf of any Loan Party pursuant to any Loan Document or the
transactions contemplated therein which is distributed by the Administrative Agent, any Lender or the Issuing Bank by means of electronic communications pursuant to this Section, including through an Electronic System.
(p) Section 10.3(b) of the Credit Agreement is amended by deleting the final sentence of such Section in its entirety.
(q) Schedule 1.1(b) of the Credit Agreement is amended to read as Schedule 1.1(b) attached hereto.
(r) Schedule 2.24 of the Credit Agreement is amended by deleting the description of the Irrevocable Standby Letter of Credit included therein
and replacing such description with “None.”.
2. Lender Joinder.
(a) Each lender party hereto that does not have a Commitment and/or outstanding Loans under the Credit Agreement prior to the First Amendment
Effective Date (each, a “New Lender”) hereby agrees to provide a Revolving Commitment and a Term Loan Commitment to the Borrower in the respective amounts set forth on Schedule 1.1(b) attached hereto. Each New Lender
with a Revolving Commitment shall be deemed to have purchased, without recourse, a risk participation from the Issuing Bank in all Letters of Credit issued by it under the Credit Agreement and the obligations arising thereunder in an amount equal to
its Pro Rata Share of the obligations under such Letters of Credit, and shall absolutely, and unconditionally assume, and be obligated to pay to the Issuing Lender and discharge when due as provided in the Credit Agreement, its Pro Rata Share of the
obligations arising under such Letters of Credit. Each New Lender shall be deemed to have purchased, without recourse, a risk
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participation from the Swingline Lender in all Swingline Loans made by it under the Credit Agreement and the obligations arising thereunder in an amount equal to its Pro Rata Share of the
obligations under such Swingline Loans, and shall absolutely and unconditionally assume, and be obligated to pay to the Swingline Lender and discharge when due as provided in the Credit Agreement, its Pro Rata Share of the obligations arising under
such Swingline Loans.
(b) Each New Lender (i) represents and warrants that (1) it has full power and authority, and has taken
all action necessary, to execute and deliver this Amendment and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (2) from and after the date hereof, it shall be bound by the provisions of the
Credit Agreement as a Lender thereunder and shall have the obligations of a Lender thereunder, (3) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to
Section 5.1 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Amendment and, based on such information, has made such analysis and decision
independently and without reliance on the Administrative Agent or any other Lender and (4) it has delivered to the Borrower and/or the Administrative Agent, as applicable, any documentation required to be delivered by it pursuant to the terms
of the Credit Agreement, duly completed and executed by such New Lender (including, but not limited to, completion, execution and delivery of applicable Internal Revenue Service tax withholding exemption forms); and (ii) agrees that it will
(1) independently and without reliance on the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking
action under the Loan Documents and (2) perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.
(c) Each of the Loan Parties, the Lenders (including the New Lenders) and the Administrative Agent agrees that, as of the First Amendment
Effective Date, each New Lender shall (i) be a party to the Credit Agreement, (ii) be a “Lender” for all purposes of the Credit Agreement and the other Loan Documents and (iii) have the rights and obligations of a Lender
under the Credit Agreement and the other Loan Documents.
3. Aggregate Revolving Commitments and Term Loan. The Administrative
Agent and the Lenders agree that the Commitments of each of the Lenders immediately prior to the effectiveness of this Amendment shall be reallocated (and to the extent necessary with respect to each Lender, increased or decreased) among the Lenders
such that, immediately after the effectiveness of this Amendment in accordance with its terms, the Commitments of each Lender shall be as set forth on Schedule 1.1(b) attached hereto. In order to effect such reallocations, assignments shall
be deemed to be made among the Lenders in such amounts as may be necessary, and with the same force and effect as if such assignments were evidenced by the applicable Assignments and Acceptances (but without the payment of any related assignment
fee), and no other documents or instruments shall be required to be executed in connection with such assignments (all of which such requirements are hereby waived). Further, to effect the foregoing, each Lender agrees to make cash settlements in
respect of any outstanding Loans, either directly or through the Administrative Agent, as the Administrative Agent may direct or approve, such that after giving effect to this Amendment, each Lender holds Loans equal to its Pro Rata Share (based on
the Commitment of each Lender as set forth on Schedule 1.1(b) attached hereto).
4. Conditions Precedent. This Amendment
shall be effective upon satisfaction of the following conditions precedent in each case in a manner reasonably satisfactory to the Administrative Agent and each Lender:
(a) Amendment. Receipt of a counterpart of this Amendment signed by each of the Loan Parties, the Lenders and the Administrative Agent.
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(b) Opinion of Counsel. Receipt of a favorable written opinion of Kilpatrick
Townsend & Stockton LLP, counsel to the Loan Parties, addressed to the Administrative Agent and each of the Lenders, and covering such matters relating to the Loan Parties, the Loan Documents and the transactions contemplated therein as the
Administrative Agent or the Lenders shall reasonably request.
(c) Organization Documents, Resolutions, Etc. Receipt by the
Administrative Agent of the following:
(i) a certificate of the Secretary or Assistant Secretary of each Loan Party
attaching and certifying copies of its bylaws or operating agreement, as applicable, and of the resolutions of its board of directors (or equivalent governing body), authorizing the execution, delivery and performance of this Amendment and
certifying the name, title and true signature of each officer of such Loan Party executing this Amendment; and
(ii)
certified copies of the articles of incorporation or other charter documents of each Loan Party, together with certificates of good standing or existence, as may be available from the Secretary of State of the jurisdiction of incorporation of such
Loan Party.
(d) Material Adverse Effect. Since December 31, 2013, there shall have been no change which has had or could
reasonably be expected to have a Material Adverse Effect.
(e) No Default. At the time of and immediately after giving effect to
the Borrowings on the First Amendment Effective Date, no Default or Event of Default shall exist.
(f) Representations and
Warranties. At the time of and immediately after giving effect to the Borrowings on the First Amendment Effective Date, all representations and warranties of each Loan Party set forth in the Loan Documents shall be true and correct in all
material respects (other than those representations and warranties that are expressly qualified by Material Adverse Effect or other materiality, in which case such representations and warranties shall be true and correct in all respects);
provided, that to the extent such representation or warranty relates to a specific prior date, such representation or warranty shall be true and correct in all material respects (other than those representations and warranties that are
expressly qualified by Material Adverse Effect or other materiality, in which case such representations and warranties shall be true and correct in all respects) only as of such specific prior date.
(g) Closing Certificate. Receipt by the Administrative Agent of a certificate, dated the First Amendment Effective Date and signed by a
Responsible Officer, (i) confirming compliance with the conditions set forth in Sections 2(d), (e) and (f), and (ii) certifying that (x) all consents, approvals, authorizations, registrations and filings and
orders required or advisable to be made or obtained under any applicable laws, or by any contractual obligation of each Loan Party, in connection with the execution, delivery, performance, validity and enforceability of this Amendment or any of the
transactions contemplated hereby, and such consents, approvals, authorizations, registrations, filings and orders shall be in full force and effect and all applicable waiting periods shall have expired, and (y) no known investigation or inquiry
by any Governmental Authority regarding the Commitments or any transaction being financed with the proceeds thereof shall be ongoing.
(h)
OFAC, Patriot Act, Etc. Receipt by the Administrative Agent and any requesting Lender of all documentation and other information with respect to the Loan Parties that the Administrative Agent
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or such Lender, as applicable, has requested of the Borrower and which the Administrative Agent or such Lender, as applicable, reasonably believes is required by regulatory authorities under
applicable “know-your-customer” and anti-money laundering rules and regulations, including without limitation the Patriot Act.
(i) Amendments to Loan Facility Documents. The Loan Facility Agreement and the other Loan Facility Documents shall have been amended
and restated in a manner reasonably satisfactory to the Administrative Agent.
(j) Amendments to Note Agreements. The Note
Agreements shall have been (or shall be substantially simultaneously herewith) amended in a manner reasonably satisfactory to the Administrative Agent.
(k) Fees and Attorney Costs. Receipt by the Administrative Agent, the Joint Lead Arrangers and the Lenders of all fees and other
amounts due and payable on or prior to the First Amendment Effective Date, including reimbursement or payment of all out-of-pocket expenses (including reasonable fees, charges and disbursements of counsel to the Administrative Agent) required to be
reimbursed or paid by the Borrower hereunder, under any other Loan Document and under any agreement with the Administrative Agent or either Joint Lead Arranger.
5. Miscellaneous.
(a)
This Amendment shall be deemed to be, and is, a Loan Document.
(b) Each Loan Party (i) acknowledges and consents to all of the terms
and conditions of this Amendment, (ii) agrees that this Amendment and all documents executed in connection herewith do not operate to reduce or discharge its obligations under the Credit Agreement or the other Loan Documents or any
certificates, documents, agreements and instruments executed in connection therewith, (iii) affirms all of its obligations under the Loan Documents, (iv) affirms that each of the Liens granted in or pursuant to the Loan Documents are valid
and subsisting and (v) agrees that this Amendment shall in no manner impair or otherwise adversely affect any of the Liens granted in or pursuant to the Loan Documents.
(c) Effective as of the First Amendment Effective Date, all references to the Credit Agreement in each of the Loan Documents shall hereafter
mean the Credit Agreement as amended by this Amendment.
(d) Each of the Loan Parties hereby represents and warrants to the Administrative
Agent and the Loan Parties as follows:
(i) such Loan Party has taken all necessary action to authorize the execution,
delivery and performance of this Amendment;
(ii) this Amendment has been duly executed and delivered by such Loan Party
and constitutes such Loan Party’s legal, valid and binding obligations, enforceable in accordance with its terms, except as such enforceability may be subject to (A) bankruptcy, insolvency, reorganization, fraudulent conveyance or
transfer, moratorium or similar laws affecting creditors’ rights generally and (B) general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity); and
(iii) no consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental
authority or third party is required in connection with the execution, delivery or performance by any Loan Party of this Amendment.
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(e) This Amendment may be executed in any number of counterparts, each of which when so executed
and delivered shall be an original, but all of which shall constitute one and the same agreement. Delivery of an executed counterpart of this Amendment by telecopy, pdf or other similar electronic transmission shall be effective as an original and
shall constitute a representation that an executed original shall be delivered.
(f) This Amendment shall be construed in accordance with
and be governed by the law (without giving effect to the conflict of law principles thereof) of the State of Georgia.
[Signature pages
follow]
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as
of the date first above written.
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| BORROWER: |
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AARON’S, INC. |
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By: |
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/s/ Gilbert L. Danielson |
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Name: |
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Gilbert L. Danielson |
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Title: |
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Executive Vice President and Chief Financial Officer |
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| GUARANTORS: |
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AARON INVESTMENT COMPANY, |
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as a Guarantor |
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By: |
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/s/ Gilbert L. Danielson |
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Name: |
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Gilbert L. Danielson |
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Title: |
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Vice President and Treasurer |
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AARON’S PRODUCTION COMPANY, |
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as a Guarantor |
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By: |
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/s/ Gilbert L. Danielson |
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Name: |
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Gilbert L. Danielson |
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Title: |
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Vice President and Chief Executive Officer |
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99LTO, LLC, |
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AARON’S LOGISTICS, LLC, |
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AARON’S PROCUREMENT COMPANY, LLC, |
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AARON’S STRATEGIC SERVICES, LLC, |
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each as a Guarantor |
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By: |
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AARON’S, INC., as sole Manager |
|
|
|
|
|
|
|
|
By: |
|
/s/ Gilbert L. Danielson |
|
|
|
|
Name: |
|
Gilbert L. Danielson |
|
|
|
|
Title: |
|
Executive Vice President, Chief Financial Officer |
|
|
|
|
|
|
|
PROGRESSIVE FINANCE HOLDINGS, LLC, |
|
|
|
|
as a Guarantor |
|
|
|
|
|
|
|
|
By: |
|
/s/ Gilbert L. Danielson |
|
|
|
|
Name: |
|
Gilbert L. Danielson |
|
|
|
|
Title: |
|
Executive Vice President |
FIRST AMENDMENT TO
CREDIT AGREEMENT
AARON’S, INC.
|
|
|
|
|
| Prog Finance Arizona, LLC |
| Prog Finance California, LLC |
| Prog Finance Florida, LLC |
| Prog Finance Georgia, LLC |
| Prog Finance Illinois, LLC |
| Prog Finance Michigan, LLC |
| Prog Finance New York, LLC |
| Prog Finance Ohio, LLC |
| Prog Finance Texas, LLC |
| Prog Finance Mid-West, LLC |
| Prog Finance North-East, LLC |
| Prog Finance South-East, LLC |
| Prog Finance West, LLC |
| NPRTO Arizona, LLC |
| NPRTO California, LLC |
| NPRTO Florida, LLC |
| NPRTO Georgia, LLC |
| NPRTO Illinois, LLC |
| NPRTO Michigan, LLC |
| NPRTO New York, LLC |
| NPRTO Ohio, LLC |
| NPRTO Texas, LLC |
| NPRTO Mid-West, LLC |
| NPRTO North-East, LLC |
| NPRTO South-East, LLC |
| NPRTO West, LLC, each as a
Guarantor |
|
|
| By: |
|
PROG LEASING, LLC, Sole Manager |
|
|
|
|
|
By: |
|
PROGRESSIVE FINANCE |
|
|
|
|
HOLDINGS, LLC, Sole Manager |
|
|
| By: |
|
/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President |
|
| PANGO LLC, as a Guarantor |
|
|
| By: |
|
PROGRESSIVE FINANCE HOLDINGS, LLC, Sole Manager |
|
|
| By: |
|
/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President |
FIRST AMENDMENT TO
CREDIT AGREEMENT
AARON’S, INC.
|
|
|
| PROG LEASING, LLC, as a Guarantor |
|
|
| By: |
|
PROGRESSIVE FINANCE HOLDINGS, LLC, Sole Manager |
|
|
| By: |
|
/s/ Gilbert L. Danielson |
| Name: |
|
Gilbert L. Danielson |
| Title: |
|
Executive Vice President |
FIRST AMENDMENT TO
CREDIT AGREEMENT
AARON’S, INC.
|
|
|
|
|
|
|
| ADMINISTRATIVE AGENT: |
|
|
|
SUNTRUST BANK, |
|
|
|
|
as Administrative Agent, as Issuing Bank, as Swingline Lender and as a Lender |
|
|
|
|
|
|
|
|
By |
|
/s/ Toby Stoops |
|
|
|
|
Name: |
|
Toby Stoops |
|
|
|
|
Title: |
|
Vice President |
FIRST AMENDMENT TO
CREDIT AGREEMENT
AARON’S, INC.
|
|
|
|
|
|
|
| LENDERS: |
|
|
|
Bank of America, N.A., |
|
|
|
|
as a Lender |
|
|
|
|
|
|
|
|
By |
|
/s/ Ryan Maples |
|
|
|
|
Name: |
|
Ryan Maples |
|
|
|
|
Title: |
|
Vice President |
FIRST AMENDMENT TO
CREDIT AGREEMENT
AARON’S, INC.
|
|
|
|
|
|
|
| LENDERS: |
|
|
|
FIFTH THIRD BANK, |
|
|
|
|
as a Lender |
|
|
|
|
|
|
|
|
By |
|
/s/ Kenneth W. Deere |
|
|
|
|
Name: |
|
Kenneth W. Deere |
|
|
|
|
Title: |
|
Senior Vice President |
FIRST AMENDMENT TO
CREDIT AGREEMENT
AARON’S, INC.
|
|
|
|
|
|
|
| LENDERS: |
|
|
|
Regions Bank, |
|
|
|
|
as a Lender |
|
|
|
|
|
|
|
|
By |
|
/s/ Gilbert H. Reese |
|
|
|
|
Name: |
|
Gilbert H. Reese |
|
|
|
|
Title: |
|
Senior Vice President |
FIRST AMENDMENT TO
CREDIT AGREEMENT
AARON’S, INC.
|
|
|
|
|
|
|
| LENDERS: |
|
|
|
Branch Banking and Trust Company, |
|
|
|
|
as a Lender |
|
|
|
|
|
|
|
|
By |
|
/s/ Bradley B. Sands |
|
|
|
|
Name: |
|
Bradley B. Sands |
|
|
|
|
Title: |
|
Assistant Vice President |
FIRST AMENDMENT TO
CREDIT AGREEMENT
AARON’S, INC.
|
|
|
|
|
|
|
| LENDERS: |
|
|
|
Citizens Bank, N.A., |
|
|
|
|
as a Lender |
|
|
|
|
|
|
|
|
By |
|
/s/ Peter van der Horst |
|
|
|
|
Name: |
|
Peter van der Horst |
|
|
|
|
Title: |
|
Senior Vice President |
FIRST AMENDMENT TO
CREDIT AGREEMENT
AARON’S, INC.
|
|
|
|
|
|
|
| LENDERS: |
|
|
|
Synovus Bank, |
|
|
|
|
as a Lender |
|
|
|
|
|
|
|
|
By |
|
/s/ Mike Sawicki |
|
|
|
|
Mike Sawicki |
|
|
|
|
Corporate Banking |
FIRST AMENDMENT TO
CREDIT AGREEMENT
AARON’S, INC.
SCHEDULE 1.1(b)
LENDER COMMITMENTS
|
|
|
|
|
|
|
|
|
| Lender |
|
Revolving
Commitment |
|
|
Term Loan
Commitment |
|
| SunTrust Bank |
|
$ |
47,142,857.14 |
|
|
$ |
26,190,476.19 |
|
| Bank of America, N.A. |
|
$ |
38,571,428.57 |
|
|
$ |
21,428,571.43 |
|
| Fifth Third Bank |
|
$ |
38,571,428.57 |
|
|
$ |
21,428,571.43 |
|
| Regions Bank |
|
$ |
38,571,428.57 |
|
|
$ |
21,428,571.43 |
|
| Branch Banking & Trust Company |
|
$ |
34,285,714.29 |
|
|
$ |
19,047,619.05 |
|
| Citizens Bank |
|
$ |
17,142,857.14 |
|
|
$ |
9,523,809.52 |
|
| Synovus Bank |
|
$ |
10,714,285.71 |
|
|
$ |
5,952,380.95 |
|
|
|
|
|
|
|
|
|
|
| Total: |
|
$ |
225,000,000.00 |
|
|
$ |
125,000,000.00 |
|
Exhibit 10.29
FIRST AMENDMENT TO LOAN FACILITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN FACILITY AGREEMENT dated December 9, 2014 (this “Amendment”) is entered into among
Aaron’s, Inc., a Georgia corporation (the “Sponsor”), the Guarantors, the Participants party hereto and SunTrust Bank, as Servicer. All capitalized terms used herein and not otherwise defined herein shall have the
meanings given to such terms in the Loan Facility Agreement (as defined below).
RECITALS
WHEREAS, the Sponsor, the Participants and SunTrust Bank, as Servicer, entered into that certain Third Amended and Restated Loan Facility
Agreement dated as of April 14, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Facility Agreement”);
WHEREAS, the Sponsor has requested certain amendments to the Loan Facility Agreement;
WHEREAS, the Participants agree to such requested amendments subject to the terms and conditions of this Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Amendments to Loan Facility
Agreement. The Loan Facility Agreement is hereby amended as follows:
(a) The cover page of the Loan Facility Agreement is amended by
adding the following at the bottom of such cover page:
SUNTRUST ROBINSON HUMPHREY, INC.,
as Joint Lead Arranger and Sole Bookrunner
and
BANK OF AMERICA, N.A.,
FIFTH THIRD BANK
and
REGIONS CAPITAL
MARKETS,
a division of Regions Bank,
as Joint Lead Arrangers
(b) The
following definitions are added in the appropriate alphabetical order to Section 1.1 of the Loan Facility Agreement:
“First Amendment Effective Date” means December 9, 2014.
“First Amendment to Loan Facility Agreement” means that certain First Amendment to Loan Facility Agreement dated as of
the First Amendment Effective Date, by and between the Sponsor, the Servicer, the Participants party thereto and the Guarantors party thereto.
1
“Material Domestic Subsidiary” means any Domestic Subsidiary of the
Sponsor that has not already become a Guarantor that (a) at any time (i) accounted for five percent (5.0%) of Consolidated EBITDA for any period of four (4) Fiscal Quarters ended or (ii) holds assets with an aggregate book
value equal to or greater than five percent (5.0%) of the aggregate fair market value of the total assets of the Sponsor and its Subsidiaries on a consolidated basis or (b) when taken together with other Domestic Subsidiaries that are not
already Guarantors, (x) accounted for ten percent (10.0%) of Consolidated EBITDA for any period of four (4) Fiscal Quarters ended or (y) holds assets with an aggregate book value equal to or greater than ten percent
(10.0%) of the aggregate fair market value of the total assets of the Sponsor and its Subsidiaries on a consolidated basis. Upon the acquisition of a new Domestic Subsidiary or the merger or consolidation of any Person with or into an existing
Domestic Subsidiary (or the acquisition of other assets by an existing Domestic Subsidiary), the qualification of the affected Domestic Subsidiary as a “Material Subsidiary” pursuant to the foregoing requirements of this definition shall
be determined on a pro forma basis as if such Domestic Subsidiary had been acquired or such merger, consolidation or other acquisition had occurred, as applicable, at the beginning of the relevant period of four consecutive Fiscal Quarters.
“Sanctions” shall mean economic or financial sanctions or trade embargoes administered or enforced from time to time by
(a) the U.S. government, including those administered by OFAC or the U.S. Department of State or (b) the United Nations Security Council, the European Union or Her Majesty’s Treasury of the United Kingdom.
(c) The following definitions in Section 1.1 of the Loan Facility Agreement are amended as follows:
(i) The definition of “Anti-Terrorism Order” is deleted in its entirety.
(ii) The definition of “Applicable Margin” is amended by replacing the last sentence of such definition with the
following sentence:
Notwithstanding the foregoing, the Applicable Margin from the First Amendment Effective Date until the financial
statements and Compliance Certificate for the Fiscal Quarter ending on December 31, 2014 are delivered shall be at Level III.
(iii) The definition of “Applicable Percentage is amended by replacing the last sentence of such definition with the
following sentence:
Notwithstanding the foregoing, the Applicable Percentage for the commitment fee from the First Amendment Effective
Date until the financial statements and Compliance Certificate for the Fiscal Quarter ending on December 31, 2014 are delivered shall be at Level III.
2
(iv) The definition of “Canadian LIBOR” is amended by adding the
following proviso at the end of such definition:
; provided, that, if Canadian LIBOR would be less than zero, such rate shall be deemed to
be zero for purposes of this Agreement.
(v) The definition of “Canadian Loan Agreement” is amended to read as
follows:
“Canadian Loan Agreement” shall mean a Loan Agreement setting forth the terms and conditions, as between
a Canadian Borrower and the Servicer, under which the Servicer has established a Canadian Loan Commitment to make Advances to such Canadian Borrower pursuant to the Canadian Loan Commitment, substantially in the form of Exhibit B, with such
changes as may be mutually agreed by the Sponsor and the Servicer (it being understood that the Servicer will not unreasonably withhold or delay its agreement to any such changes requested by the Sponsor).
(vi) The definition of “Consolidated EBITDA” is amended by deleting the “and” immediately prior to clause
(vii) and adding the following after clause (vii):
, (viii) one-time fees, costs and expenses (including without limitation
legal and other professional fees) in connection with (x) the retirement and severance of Ronald W. Allen and David Buck and (y) the bid by Vintage Capital Management to acquire the Sponsor, and other proxy contests and shareholder
proposals, including costs, expenses and fees relating to responding to, defending and settling such matters, in each case to the extent such fees, costs and expenses were incurred prior to the First Amendment Effective Date, and
(ix) transaction closing costs, fees and expenses actually incurred during such period in connection with the negotiation and closing of the First Amendment to Loan Facility Agreement, and the related amendments to the Credit Agreement and the
Note Agreements and the related transaction documents, in each case paid during such period to Persons that are not Affiliates of the Sponsor or any Subsidiary.
(vii) The definition of “Fee Letter” is amended to read as follows:
“Fee Letter” shall mean that certain letter agreement, dated as of the First Amendment Effective Date, by and between
the Sponsor and the Servicer, setting forth certain fees applicable to the loan facility described herein, either as originally executed or as hereafter amended or modified.
(viii) The definition of “Sanctioned Country” is amended to read as follows:
“Sanctioned Country” shall mean, at any time, a country or territory that is, or whose government is, the subject or
target of any Sanctions.
(ix) The definition of “Sanctioned Person” is amended to read as follows:
“Sanctioned Person” shall mean, at any time, (a) any Person listed in any Sanctions-related list of designated
Persons maintained by OFAC, the U.S. Department of State, the United Nations Security Council, the European Union or any EU member state, (b) any Person located, organized or resident in a Sanctioned Country or (c) any Person controlled by
any such Person.
3
(x) The definition of “Servicing Agreement” is amended to read as
follows:
“Servicing Agreement” shall mean that certain Fifth Amended and Restated Servicing Agreement, dated as of
December 9, 2014, by and between the Sponsor and the Servicer, as amended, restated, supplemented or otherwise modified from time to time.
(xi) The definition of “US LIBOR” is amended by adding the following proviso at the end of the proviso of such
definition:
; provided, further, that, if US LIBOR would be less than zero, such rate shall be deemed to be zero for purposes of this
Agreement.
(xii) The definition of “US Loan Agreement” is amended to read as follows:
“US Loan Agreement” shall mean a Loan and Security Agreement setting forth the terms and conditions, as between a US
Borrower and the Servicer, under which the Servicer has established a US Loan Commitment to make Advances to such Borrower pursuant to the US Loan Commitment, substantially in the form of Exhibit C, with such changes as may be mutually agreed
by the Sponsor and the Servicer (it being understood that the Servicer will not unreasonably withhold or delay its agreement to any such changes requested by the Sponsor); provided, however, that any loan agreement or line of credit agreement
executed by any Borrower and the Servicer prior to the Effective Date shall be substantially in the form required under the Existing Loan Facility Agreement (with such changes as may be mutually agreed by the Sponsor and the Servicer, it being
understood that the Servicer will not unreasonably withhold or delay its agreement to any such changes requested by the Sponsor).
(d)
Section 2.1(a) of the Loan Facility Agreement is amended by replacing “December 11, 2014” with “December 11, 2015”.
(e) Section 3.1(b) of the Loan Facility Agreement is amended to read as follows:
(b) The forms of Loan Agreements, Canadian Security Agreement and Notes used by the Servicer as documentation for each Loan on and after the
First Amendment Effective Date shall be substantially in the forms attached hereto with such changes as may be mutually agreed by the Sponsor and the Servicer (it being understood that the Servicer will not unreasonably withhold or delay its
agreement to any such changes requested by the Sponsor).
(f) Sections 5.17 and 5.18 of the Loan Facility Agreement are deleted in their
entirety and replaced with the following Section 5.17:
Section 5.17. Anti-Corruption Laws and Sanctions. The Sponsor has
implemented and maintains in effect policies and procedures designed to ensure compliance in all material respects by the Sponsor, its Subsidiaries and their respective directors, officers,
4
employees and agents with Anti-Corruption Laws and applicable Sanctions, and the Sponsor, its Subsidiaries and their respective officers (in such capacity), employees (in such capacity) and, to
the knowledge of the Sponsor, its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions. None of (a) the Sponsor, any Subsidiary or any of their respective officers (in such capacity) or employees (in such
capacity), or (b) to the knowledge of the Sponsor, any director or agent of the Sponsor or any Subsidiary is a Sanctioned Person. No Borrowing or Letter of Credit, use by the Sponsor or any Subsidiary of the proceeds thereof or other
transactions contemplated hereby will violate Anti-Corruption Laws or applicable Sanctions.
(g) Section 6.1(g) of the Loan Facility
Agreement is amended by (i) adding “, in each case, on a quarter by quarter basis for such forecasted Fiscal Year information;” at the end of such Section and (ii) deleting the period at the end of such Section.
(h) Section 6.3 of the Loan Facility Agreement is amended by adding the following language immediately prior to the proviso appearing in
said Section:
, including but not limited to the business of leasing and selling furniture, consumer electronics, computers, appliances
and other household goods and accessories inside and outside of the United States of America, through both independently-owned and franchised stores, providing lease-purchase solutions, credit and other financing solutions to customers for the
purchase and lease of such products, the manufacture and supply of furniture and bedding for lease and sale in such stores, and the provision of virtual rent-to-own programs inside and outside of the United States of America (including but not
limited to point-of-sale lease purchase programs).
(i) Section 6.9 of the Loan Facility Agreement is amended by adding the following
as a new paragraph to such Section:
The Sponsor shall ensure that the Borrowers and their respective directors, officers, employees and
agents shall not use the proceeds of any Loans (i) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws,
(ii) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country or (iii) in any manner that would result in the violation of any Sanctions
applicable to any party hereto.
(j) Section 6.10(a) of the Loan Facility Agreement is amended to read as follows:
(a) Within ten (10) Business Days (or such later date as the Servicer may agree in its sole discretion) after any Domestic Subsidiary is
acquired or formed, the Sponsor shall (i) notify the Servicer and the Participants thereof, (ii) if such Domestic Subsidiary is a Material Domestic Subsidiary, cause such Subsidiary to become a Guarantor by executing agreements in the form
of Annex I to the Subsidiary Guarantee Agreement and (iii) if such Subsidiary is a Material Domestic Subsidiary, cause such Domestic Subsidiary to deliver simultaneously therewith similar documents applicable to such Domestic Subsidiary
described in
5
Section 3.1 as reasonably requested by the Servicer. In the event that any Domestic Subsidiary that is not already a Guarantor becomes a Material Domestic Subsidiary at any time
after its formation or acquisition, the Sponsor shall have up to (10) Business Days (or such later date as the Servicer may agree in its sole discretion) to cause it to (x) become a Guarantor by executing agreements in form and substance
reasonably satisfactory to the Servicer and (y) deliver simultaneously therewith similar documents applicable to such Domestic Subsidiary described in Section 13.1 as reasonably requested by the Servicer.
(k) The first sentence of Section 6.10(b) of the Loan Facility Agreement is amended to read as follows:
The Sponsor may, after the Effective Date, acquire (subject to Section 8.4) or form additional Foreign Subsidiaries.
(l) Section 7.1 of the Loan Facility Agreement is amended to read as follows:
Section 7.1 Total Debt to EBITDA Ratio. The Sponsor and its Subsidiaries shall maintain, as of the last day of each Fiscal
Quarter, a Total Debt to EBITDA Ratio of not greater than (a) with respect to the Fiscal Quarter ending December 31, 2014 and each Fiscal Quarter ending thereafter through and including December 31, 2015, 3.25:1.00, and (b) for
each Fiscal Quarter ending thereafter, 3.00:1.00.
(m) Section 7.2 of the Loan Facility Agreement is amended to read as follows:
Section 7.2 Fixed Charge Coverage Ratio. The Sponsor and its Subsidiaries shall maintain, as of the last day of each Fiscal
Quarter, a Fixed Charge Coverage Ratio of not less than (a) with respect to the Fiscal Quarter ending December 31, 2014 and each Fiscal Quarter ending thereafter through and including December 31, 2015, 1.75:1.00, and (b) for
each Fiscal Quarter ending thereafter, 2.00:1.00.
(n) Section 15.1(b) of the Loan Facility Agreement is amended by adding the
following new clauses (iii) and (iv):
(iii) The Sponsor agrees that the Servicer may, but shall not be obligated to, make
Communications (as defined below) available to the Participants by posting the Communications on Debt Domain, Intralinks, Syndtrak, ClearPar or a substantially similar Electronic System.
(iv) Any Electronic System used by the Servicer is provided “as is” and “as available.” The Agent Parties (as defined
below) do not warrant the adequacy of such Electronic Systems and expressly disclaim liability for errors or omissions in the Communications. No warranty of any kind, express, implied or statutory, including, without limitation, any warranty of
merchantability, fitness for a particular purpose, non-infringement of third-party rights or freedom from viruses or other code defects, is made by any Agent Party in connection with the Communications or any Electronic System. In no event shall the
Servicer or any of its Related Parties (collectively, the “Agent Parties”) have any liability to any
6
Credit Party, any Participant or any other Person or entity for damages of any kind, including, without limitation, direct or indirect, special, incidental or consequential damages, losses or
expenses (whether in tort, contract or otherwise) arising out of any Credit Party’s or the Servicer’s transmission of Communications through an Electronic System. “Communications” means, collectively, any notice,
demand, communication, information, document or other material provided by or on behalf of any Credit Party pursuant to any Operative Document or the transactions contemplated therein which is distributed by the Servicer or any Participant by means
of electronic communications pursuant to this Section, including through an Electronic System.
(o) Schedule 1.1(b) of the Loan Facility
Agreement is amended to read as Schedule 1.1(b) attached hereto.
(p) Exhibits B and C of the Loan Facility Agreement are amended
to read, respectively, as Exhibits B and C attached hereto.
2. Participant Joinder.
(a) Each participant party hereto that does not have a Participating Commitment and/or Funded Participation under the Loan Facility Agreement
prior to the First Amendment Effective Date (each, a “New Participant”) hereby agrees to provide a Participating Commitment in an amount set forth on Schedule 1.1(b) attached hereto.
(b) Each New Participant (i) represents and warrants that (1) it has full power and authority, and has taken all action necessary,
to execute and deliver this Amendment and to consummate the transactions contemplated hereby and to become a Participant under the Loan Facility Agreement, (2) from and after the date hereof, it shall be bound by the provisions of the Loan
Facility Agreement as a Participant thereunder and shall have the obligations of a Participant thereunder, (3) it has received a copy of the Loan Facility Agreement, together with copies of the most recent financial statements delivered
pursuant to Section 6.1 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Amendment and, based on such information, has made such analysis and decision
independently and without reliance on the Servicer or any other Participant and (4) it has delivered to the Sponsor and/or the Servicer, as applicable, any documentation required to be delivered by it pursuant to the terms of the Loan Facility
Agreement, duly completed and executed by such New Participant (including, but not limited to, completion, execution and delivery of applicable Internal Revenue Service tax withholding exemption forms); and (ii) agrees that it will
(1) independently and without reliance on the Servicer or any other Participant, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action
under the Operative Documents and (2) perform in accordance with their terms all of the obligations which by the terms of the Operative Documents are required to be performed by it as a Participant.
(c) Each of the Credit Parties, the Participants (including the New Participants) and the Servicer agrees that, as of the First Amendment
Effective Date, each New Participant shall (i) be a party to the Loan Facility Agreement, (ii) be a “Participant” for all purposes of the Loan Facility Agreement and the other Operative Documents and (iii) have the rights
and obligations of a Participant under the Loan Facility Agreement and the other Operative Documents.
7
3. Participating Commitments. The Servicer and the Participants agree that the
Participating Commitments of each of the Participants immediately prior to the effectiveness of this Amendment shall be reallocated (and to the extent necessary with respect to each Participant, increased or decreased) among the Participants such
that, immediately after the effectiveness of this Amendment in accordance with its terms, the Participating Commitments of each Participant shall be as set forth on Schedule 1.1(b) attached hereto. In order to effect such reallocations,
assignments shall be deemed to be made among the Participants in such amounts as may be necessary, and with the same force and effect as if such assignments were evidenced by the applicable Assignments and Acceptances (but without the payment of any
related assignment fee), and no other documents or instruments shall be required to be executed in connection with such assignments (all of which such requirements are hereby waived). Further, to effect the foregoing, each Participant agrees to make
cash settlements in respect of any outstanding Funded Participations, either directly or through the Servicer, as the Servicer may direct or approve, such that after giving effect to this Amendment, each Participant holds Funded Participations equal
to its Pro Rata Share (based on the Participating Commitment of each Participant as set forth on Schedule 1.1(b) attached hereto).
4. Conditions Precedent. This Amendment shall be effective upon satisfaction of the following conditions precedent in each case in a
manner reasonably satisfactory to the Servicer and each Participant:
(a) Amendment. Receipt of a counterpart of (i) this
Amendment signed by each of the Credit Parties, the Participants and the Servicer, (ii) the Fifth Amended and Restated Servicing Agreement signed by the Sponsor and the Servicer and (iii) the Fee Letter signed by the Sponsor and the
Servicer.
(b) Opinion of Counsel. Receipt of a favorable written opinion of Kilpatrick Townsend & Stockton LLP, counsel
to the Credit Parties, addressed to the Servicer and each of the Participants, and covering such matters relating to the Credit Parties, the Operative Documents and the transactions contemplated therein as the Servicer or the Participants shall
reasonably request.
(c) Organization Documents, Resolutions, Etc. Receipt by the Servicer of the following:
(i) a certificate of the Secretary or Assistant Secretary of each Credit Party attaching and certifying copies of its bylaws or
operating agreement, as applicable, and of the resolutions of its board of directors (or equivalent governing body), authorizing the execution, delivery and performance of this Amendment and certifying the name, title and true signature of each
officer of such Credit Party executing this Amendment; and
(ii) certified copies of the articles of incorporation or other
charter documents of each Credit Party, together with certificates of good standing or existence, as may be available from the Secretary of State of the jurisdiction of incorporation of such Credit Party.
(d) Material Adverse Effect. Since December 31, 2013, there shall have been no change which has had or could reasonably be
expected to have a Material Adverse Effect.
(e) No Default. As of the First Amendment Effective Date, no Credit Event or Unmatured
Credit Event shall exist.
(f) Representations and Warranties. As of the First Amendment Effective Date, all representations and
warranties of each Credit Party set forth in the Operative Documents shall be true and correct in all material respects (other than those representations and warranties that are expressly qualified by Material Adverse Effect or other materiality, in
which case such representations and
8
warranties shall be true and correct in all respects); provided, that to the extent such representation or warranty relates to a specific prior date, such representation or warranty shall
be true and correct in all material respects (other than those representations and warranties that are expressly qualified by Material Adverse Effect or other materiality, in which case such representations and warranties shall be true and correct
in all respects) only as of such specific prior date.
(g) Closing Certificate. Receipt by the Servicer of a certificate, dated the
First Amendment Effective Date and signed by a Responsible Officer, (i) confirming compliance with the conditions set forth in Sections 2(d), (e) and (f), and (ii) certifying that (x) all consents, approvals,
authorizations, registrations and filings and orders required or advisable to be made or obtained under any applicable laws, or by any contractual obligation of each Credit Party, in connection with the execution, delivery, performance, validity and
enforceability of this Amendment or any of the transactions contemplated hereby, and such consents, approvals, authorizations, registrations, filings and orders shall be in full force and effect and all applicable waiting periods shall have expired,
and (y) no known investigation or inquiry by any Governmental Authority regarding the Commitments or any transaction being financed with the proceeds thereof shall be ongoing.
(h) OFAC, Patriot Act, Etc. Receipt by the Servicer and any requesting Participant of all documentation and other information with
respect to the Credit Parties that the Servicer or such Participant, as applicable, has requested of the Sponsor and which the Servicer or such Participant, as applicable, reasonably believes is required by regulatory authorities under applicable
“know-your-customer” and anti-money laundering rules and regulations, including without limitation the Patriot Act.
(i)
Amendments to Credit Documents. The Credit Agreement and the other Credit Documents shall have been amended in a manner reasonably satisfactory to the Servicer.
(j) Amendments to Note Agreements. The Note Agreements shall have been (or shall be substantially simultaneously herewith) amended in a
manner reasonably satisfactory to the Servicer.
(k) Fees and Attorney Costs. Receipt by the Servicer and the Participants of all
fees and other amounts due and payable on or prior to the First Amendment Effective Date, including reimbursement or payment of all out-of-pocket expenses (including reasonable fees, charges and disbursements of counsel to the Servicer) required to
be reimbursed or paid by the Sponsor hereunder, under any other Operative Document and under any agreement with the Servicer.
5.
Miscellaneous.
(a) This Amendment shall be deemed to be, and is, an Operative Document.
(b) Each Credit Party (i) acknowledges and consents to all of the terms and conditions of this Amendment, (ii) agrees that this
Amendment and all documents executed in connection herewith do not operate to reduce or discharge its obligations under the Loan Facility Agreement or the other Operative Documents or any certificates, documents, agreements and instruments executed
in connection therewith, (iii) affirms all of its obligations under the Operative Documents, (iv) affirms that each of the Liens granted in or pursuant to the Operative Documents are valid and subsisting and (v) agrees that this
Amendment shall in no manner impair or otherwise adversely affect any of the Liens granted in or pursuant to the Operative Documents.
9
(c) Effective as of the First Amendment Effective Date, all references to the Loan Facility
Agreement in each of the Operative Documents shall hereafter mean the Loan Facility Agreement as amended by this Amendment.
(d) Each of
the Credit Parties hereby represents and warrants to the Servicer and the Credit Parties as follows:
(i) such Credit Party
has taken all necessary action to authorize the execution, delivery and performance of this Amendment;
(ii) this Amendment
has been duly executed and delivered by such Credit Party and constitutes such Credit Party’s legal, valid and binding obligations, enforceable in accordance with its terms, except as such enforceability may be subject to (A) bankruptcy,
insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting creditors’ rights generally and (B) general principles of equity (regardless of whether such enforceability is considered in a proceeding
at law or in equity); and
(iii) no consent, approval, authorization or order of, or filing, registration or qualification
with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by any Credit Party of this Amendment.
(e) This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all
of which shall constitute one and the same agreement. Delivery of an executed counterpart of this Amendment by telecopy, pdf or other similar electronic transmission shall be effective as an original and shall constitute a representation that an
executed original shall be delivered.
(f) This Amendment shall be construed in accordance with and be governed by the law (without giving
effect to the conflict of law principles thereof) of the State of Georgia.
[Signature pages follow]
10
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as
of the date first above written.
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| SPONSOR: |
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AARON’S, INC. |
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By: |
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/s/ Gilbert L. Danielson |
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Name: |
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Gilbert L. Danielson |
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Title: |
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Executive Vice President and Chief Financial Officer |
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| GUARANTORS: |
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AARON INVESTMENT COMPANY, |
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as a Guarantor |
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By: |
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/s/ Gilbert L. Danielson |
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Name: |
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Gilbert L. Danielson |
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Title: |
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Vice President and Treasurer |
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AARON’S PRODUCTION COMPANY, |
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as a Guarantor |
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By: |
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/s/ Gilbert L. Danielson |
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Name: |
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Gilbert L. Danielson |
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Title: |
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Vice President and Chief Executive Officer |
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99LTO, LLC, |
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AARON’S LOGISTICS, LLC, |
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AARON’S PROCUREMENT COMPANY, LLC, |
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AARON’S STRATEGIC SERVICES, LLC, |
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each as a Guarantor |
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By: |
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AARON’S, INC., as sole Manager |
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By: |
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/s/ Gilbert L. Danielson |
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Name: |
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Gilbert L. Danielson |
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Title: |
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Executive Vice President, Chief Financial Officer |
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PROGRESSIVE FINANCE HOLDINGS, LLC, |
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as a Guarantor |
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By: |
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/s/ Gilbert L. Danielson |
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Name: |
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Gilbert L. Danielson |
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Title: |
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Executive Vice President |
FIRST AMENDMENT TO
LOAN FACILITY AGREEMENT
AARON’S, INC.
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| Prog Finance Arizona, LLC |
| Prog Finance California, LLC |
| Prog Finance Florida, LLC |
| Prog Finance Georgia, LLC |
| Prog Finance Illinois, LLC |
| Prog Finance Michigan, LLC |
| Prog Finance New York, LLC |
| Prog Finance Ohio, LLC |
| Prog Finance Texas, LLC |
| Prog Finance Mid-West, LLC |
| Prog Finance North-East, LLC |
| Prog Finance South-East, LLC |
| Prog Finance West, LLC |
| NPRTO Arizona, LLC |
| NPRTO California, LLC |
| NPRTO Florida, LLC |
| NPRTO Georgia, LLC |
| NPRTO Illinois, LLC |
| NPRTO Michigan, LLC |
| NPRTO New York, LLC |
| NPRTO Ohio, LLC |
| NPRTO Texas, LLC |
| NPRTO Mid-West, LLC |
| NPRTO North-East, LLC |
| NPRTO South-East, LLC |
| NPRTO West, LLC, each as a
Guarantor |
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| By: |
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PROG LEASING, LLC, Sole Manager |
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By: |
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PROGRESSIVE FINANCE |
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HOLDINGS, LLC, Sole Manager |
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| By: |
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/s/ Gilbert L. Danielson |
| Name: |
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Gilbert L. Danielson |
| Title: |
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Executive Vice President |
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| PANGO LLC, as a Guarantor |
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| By: |
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PROGRESSIVE FINANCE HOLDINGS, LLC, Sole Manager |
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| By: |
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/s/ Gilbert L. Danielson |
| Name: |
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Gilbert L. Danielson |
| Title: |
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Executive Vice President |
FIRST AMENDMENT TO
LOAN FACILITY AGREEMENT
AARON’S, INC.
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| PROG LEASING, LLC, as a Guarantor |
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| By: |
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PROGRESSIVE FINANCE HOLDINGS, LLC, Sole Manager |
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| By: |
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/s/ Gilbert L. Danielson |
| Name: |
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Gilbert L. Danielson |
| Title: |
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Executive Vice President |
FIRST AMENDMENT TO
LOAN FACILITY AGREEMENT
AARON’S, INC.
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| SERVICER: |
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SUNTRUST BANK, |
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as Servicer and as a Participant |
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By |
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/s/ William David Hart |
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Name: |
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William David Hart |
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Title: |
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Managing Director |
FIRST AMENDMENT TO
LOAN FACILITY AGREEMENT
AARON’S, INC.
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| PARTICIPANTS: |
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BANK OF AMERICA, N.A., |
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as a Participant |
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By |
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/s/ Ryan Maples |
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Name: |
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Ryan Maples |
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Title: |
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Vice President |
FIRST AMENDMENT TO
LOAN FACILITY AGREEMENT
AARON’S, INC.
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| PARTICIPANTS: |
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Regions Bank, |
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as a Participant |
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By |
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/s/ Gilbert H. Reese |
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Name: |
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Gilbert H. Reese |
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Title: |
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Senior Vice President |
FIRST AMENDMENT TO
LOAN FACILITY AGREEMENT
AARON’S, INC.
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| PARTICIPANTS: |
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Branch Banking and Trust Company, |
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as a Participant |
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By |
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/s/ Bradley B. Sands |
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Name: |
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Bradley B. Sands |
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Title: |
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Assistant Vice President |
FIRST AMENDMENT TO
LOAN FACILITY AGREEMENT
AARON’S, INC.
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| PARTICIPANTS: |
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Citizens Bank, N.A., |
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as a Participant |
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By |
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/s/ Peter van der Horst |
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Name: |
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Peter van der Horst |
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Title: |
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Senior Vice President |
FIRST AMENDMENT TO
LOAN FACILITY AGREEMENT
AARON’S, INC.
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| PARTICIPANTS: |
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FIFTH THIRD BANK, |
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as a Participant |
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By |
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/s/ Kenneth W. Deere |
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Name: |
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Kenneth W. Deere |
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Title: |
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Senior Vice President |
FIRST AMENDMENT TO
LOAN FACILITY AGREEMENT
AARON’S, INC.
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| PARTICIPANTS: |
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Synovus Bank, |
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as a Participant |
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By |
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/s/ Mike Sawicki |
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Mike Sawicki |
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Corporate Banking |
FIRST AMENDMENT TO
LOAN FACILITY AGREEMENT
AARON’S, INC.
SCHEDULE 1.1(b)
PARTICIPANT COMMITMENTS
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| Participant |
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Participating
Commitment |
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| SunTrust Bank |
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$ |
36,666,667.00 |
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| Bank of America, N.A. |
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$ |
30,000,000.00 |
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| Fifth Third Bank, an Ohio banking corporation |
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$ |
30,000,000.00 |
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| Regions Bank |
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$ |
30,000,000.00 |
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| Branch Banking & Trust Company |
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$ |
26,666,667.00 |
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| Citizens Bank |
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$ |
13,333,333.00 |
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| Synovus Bank |
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$ |
8,333,333.00 |
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| Total: |
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$ |
175,000,000.00 |
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EXHIBIT B
EXHIBIT B
TO
THIRD
AMENDED AND RESTATED LOAN FACILITY AGREEMENT
AND GUARANTY
FORM OF CANADIAN LOAN AGREEMENT
THIS LOAN AGREEMENT (this “Agreement”) dated as of
, is made between
(“Borrower”), a
[incorporated]/[formed]under the laws of , and SUNTRUST BANK (“Bank”), a Georgia banking corporation having its
principal office in Atlanta, Georgia.
W I T N E S S E T H:
WHEREAS, Borrower engages in the business of leasing and selling furniture, electronics, appliances, and other household goods and is a
franchisee of Aaron’s, Inc., a Georgia corporation formerly known as Aaron Rents, Inc. (“Aaron”);
WHEREAS, Borrower
has requested and Bank has agreed to provide financing to Borrower;
WHEREAS, Borrower and Bank wish to enter into this Agreement to set
forth the terms and conditions of Bank’s establishment of a credit facility for Borrower;
THEREFORE, upon the terms and conditions
hereinafter stated, and in consideration of the mutual premises set forth above and other adequate consideration, the receipt and sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows:
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1. |
DEFINITIONS AND RULES OF CONSTRUCTION. |
1.1 As used in this Agreement, the following
terms shall have the meanings set forth below (terms defined in the singular to have the same meaning when used in the plural and vice versa):
“Aaron’s Proprietary System” means Aaron’s proprietary point of sale software system, as modified from time to
time, used by Aaron and its franchisees, such as Borrower.
“Account” means any right of Borrower to payment for goods
sold or leased or for services rendered which is not evidenced by an Instrument or Chattel Paper, whether or not earned by performance.
“Account Debtor” means any Person who is liable on an Account.
“Advance” means an advance of funds by Bank on behalf of Borrower pursuant to the Line of Credit or Revolving Note executed
by Borrower.
“Agreement” means this Loan Agreement and all exhibits, riders and schedules at any time executed by the
parties and made a part hereof by reference, either as originally executed or as hereafter amended, restated, modified or supplemented from time to time.
“Anti-Corruption Laws” shall mean all laws, rules, and regulations of any
jurisdiction applicable to the Borrower and its Subsidiaries from time to time concerning or relating to bribery or corruption.
“Anti-Terrorism Order” shall mean Executive Order 13224, signed by President George W. Bush on September 23, 2001.
“Applicable Law” means all laws, rules and regulations applicable to the Person, conduct, transaction, covenant or Loan
Documents in question, including, without limitation, all applicable law and equitable principles; all provisions of all applicable state, provincial, territorial and federal constitutions, statutes, rules, regulations and orders of governmental
bodies; and all orders, judgments and decrees of all courts and arbitrators.
“Approved Invoice” means an invoice for the
aggregate purchase price of Merchandise purchased by Borrower with a purchase order approved by Aaron.
“Asset
Disposition” means (i) all sales of Merchandise; (ii) all Merchandise which is determined to have been stolen; (iii) all Merchandise that is destroyed, lost or otherwise removed from the premises of Borrower other than
pursuant to a Lease Contract or by outright sale or for repair work; and (iv) all “skipped” Merchandise which is Merchandise subject to a Lease Contract.
“Asset Disposition Prepayment” shall have the meaning set forth in Section 2.10(b) hereof.
“Bank” means SunTrust Bank and its successors and assigns.
“BIA” means the Bankruptcy and Insolvency Act (Canada), as it may be amended from time to time.
“Books and Records” means all of Borrower’s books and records evidencing or relating to its business, financial
condition or the Collateral, including, but not limited to, all customer lists, ledgers, invoices, purchase orders, financial statements, computer tapes and disks.
“Borrowing Base” shall mean, on any date of determination, an amount equal to
[ ] multiplied by Rental Revenue for the most recently ended three calendar months.
“Borrowing Base Report” shall have the meaning set forth in Section 2.5(iv) hereof.
“Business Day” means any day other than a Saturday, Sunday or a day on which commercial banks in Toronto, Ontario are
authorized by law to close.
“Business PAD” shall have the meaning set forth in the Pre-Authorized Debt Rules.
“CCAA” means the Companies Creditors Arrangement Act (Canada), as it may be amended from time to time.
“Chattel Paper” shall have the meaning ascribed to it in the PPSA.
“Closing Date” means for (i) the Revolving Commitment, the date set forth in the Revolving Note on which all Loan
Documents have been executed and delivered and the conditions precedent to funding an Advance thereunder have been satisfied, (ii) the Term Loan, the date set forth in the Term Note on which all Loan Documents have been executed and delivered
and the conditions precedent to funding the loan have been satisfied, and (iii) the Line of Credit Commitment, the date set forth in the Line of Credit Note on which all Loan Documents have been executed and delivered and the conditions
precedent to funding the loan have been satisfied.
“Closing Fee” shall have the meaning given to such term in Section 2.11
hereof.
“Collateral” shall have the meaning given to such term in the Security Agreement.
“Collateral Agreement” means an agreement executed by Borrower and any other Persons primarily or secondarily liable for all
or part of the Loans or granting a security interest to Bank in specified Collateral as security for the Loans, including without limitation, this Agreement and any Guaranties.
“Commitment Fee” shall have the meaning set forth in Section 2.12 hereof.
“Debt” means (i) indebtedness for borrowed money or for the deferred purchase price of property or services (other than
trade accounts payable on customary terms in the ordinary course of business), (ii) financial obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) financial obligations as lessee under leases which shall
have been or should be, in accordance with GAAP, recorded as capital leases, and (iv) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to
assure a creditor against loss in respect of, indebtedness or financial obligations of others of the kinds referred to in clauses (i) through (iii) above.
“Debt Service” means, for any particular period, the total required payments of principal (excluding any payments of
principal required to be made as a result of any Asset Disposition), interest and fees made by Borrower with respect to its Debt (other than Debt of Borrower which is subordinated to the Loan Indebtedness owing to Bank pursuant to a subordination
agreement in form and substance satisfactory to Bank) during such period to the extent that such Debt arises pursuant to this Agreement or any other financing arrangement with respect to Merchandise.
“Default Condition” means the occurrence of any event which, after satisfaction of any requirement for the giving of notice
or the lapse of time, or both, would become an Event of Default.
“Default Rate” means the annual percentage interest
rate applied to the principal of the Loans not paid when due under the terms of the applicable Loan Documents, which rate shall equal the sum of two percent (2%) per annum plus the Floating Rate.
“Delinquent Payment Fee” shall have the meaning set forth in Section 2.13 hereof.
“Environment” means the component of the Earth, and includes (i) land, water and air, including all layers of the
atmosphere; (ii) all organic and inorganic matter and living organisms; and (iii) the interacting natural systems that include components referred to in paragraphs (i) and (ii).
“Environmental Laws” means federal, provincial, local and foreign laws, principles of common law, regulations and codes, as
well as orders, decrees, judgments or injunctions issued, promulgated, approved or entered thereunder relating to pollution, protection and presentation of the environment or occupational health and safety, including, but not limited to the release
or threatened release of Hazardous Substances into the Environment or otherwise relating to the presence, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances.
“Equipment” means all machinery, equipment, furniture, fixtures, motor vehicles
and other tangible personal property (other than Inventory) of Borrower, including, but not limited to, all items described on the Equipment Schedule (if attached) and all substitutions and replacements thereof.
“Event of Default” shall have the meaning set forth in Section 9 hereof.
“FCTA” means Borrower’s Foreign Currency Transaction Account held with Bank into which Bank shall deposit the Advances
for the purpose of (i) paying, by means of SWIFT transfer (or such other method approved in writing by Aaron and acceptable to Bank), Approved Invoices arising from purchases of Merchandise from a supplier, including any freight charges to the
extent Aaron consents thereto, (ii) paying, to Borrower’s own account (or, with the written consent of Aaron, such other account for which wiring instructions have been provided to the Bank) upon the consent of Aaron, state use taxes
associated therewith, and (iii) paying, to Borrower’s own account (or, with the written consent of Aaron, such other account for which wiring instructions have been provided to the Bank) any other items to the extent expressly permitted to
be paid hereunder.
“Floating Rate” means a rate of interest per annum equal to the Prime Rate plus an additional [four
and three-quarters] percent ([4.75%]1) per annum, such rate to change as and when the Prime Rate changes.
“Franchise Agreement” means the written agreement between Aaron and Borrower whereby Borrower is authorized to establish an
“Aaron’s” franchise.
“GAAP” means generally accepted accounting principles in Canada, consistently
applied.
“Guarantor” means each Person who now or hereafter guarantees payment of the whole or any part of the Loan
Indebtedness.
“Guaranty” means any guaranty agreement executed by each of the partners, shareholders, and where not
prohibited by law, the spouses of such persons, of Borrower, or such other Persons as may be required by Bank, in favor of Bank with respect to the obligations of Borrower with respect to the Loans in the form provided by Bank, as the same may be
amended, restated or supplemented from time to time.
“Hazardous Substances” means any waste, pollutant, hazardous
substance, toxic substance, hazardous waste, special waste, industrial substance or waste, petroleum or petroleum-derived substance or waste, or any constituent of any such substance or waste, including without limitation, any such substance
regulated under or defined by any Environmental Law.
“Instrument” shall have the meaning ascribed to it in the PPSA.
“Inventory” means all inventory of Borrower, including, without limitation, all raw materials, work in process, finished
goods, goods being leased pursuant to Lease Contracts, and other goods held by Borrower for sale or lease or furnished under contracts of service.
“Lease Contract” means a contract between Borrower and a customer to lease Merchandise in the form approved by Aaron (and
which may include purchase options).
| 1 |
Note: This interest rate shall be as designated by Aaron’s in the applicable loan Funding Approval Notice. |
“Lien” means any interest in property securing an obligation, whether such
interest is based on the common law, statute or contract, including, without limitation, a security interest, lien or security title arising from a security agreement, mortgage, security deed, trust deed, pledge, hypothec or conditional sale, or a
lease, consignment or bailment for security purposes.
“Line of Credit Commitment” means the committed line of credit
facility established by Bank in favor of Borrower in the amount set forth in the Line of Credit Note and upon the terms described in this Agreement.
“Line of Credit Loan” means a loan or an advance made by Bank to Borrower under its Line of Credit Commitment.
“Line of Credit Note” means a note executed by Borrower in favor of Bank, substantially in the form of Exhibit A-1
attached hereto in the committed principal amount of Bank’s Line of Credit Commitment evidencing the obligation of Borrower to repay its Line of Credit Loans.
“Loan Account” means the internal bank loan account established by Bank for Borrower.
“Loan Documents” means this Agreement, the Notes, the Collateral Agreements, any other documents relating to the Loans
delivered by Borrower or any guarantor or surety thereof to Bank and any amendments thereto.
“Loan Indebtedness” means
all amounts due and payable by Borrower under the terms of the Loan Documents with respect to the Loans made thereunder, including, without limitation, outstanding principal, accrued interest, any late charges, and all reasonable costs and expenses
of any legal proceeding brought by Bank to collect any of the foregoing (including without limitation, reasonable legal or attorneys’ fees).
“Loans” means the Line of Credit Loans, Revolving Loans or Term Loan.
“Loan Term” shall have the meaning set forth in Section 2.6(i) hereof.
“Material Adverse Effect” means any materially adverse change in (i) the business, results of operations, financial
condition, assets or prospects of Borrower, taken as a whole, (ii) the ability of Borrower to perform its obligations under this Agreement, or (iii) the ability of the Guarantors (taken as a whole) to perform their respective obligations
under the Guaranty.
“Maturity Date” means for (i) ) the Revolving Commitment, the date set forth in the Revolving
Note, as it may be extended in accordance with the provisions of Section 2.8, (ii) the Term Loan, the date set forth in the Term Note and (iii) the Line of Credit Commitment, the date set forth in the Line of Credit Note.
“Merchandise” means goods distributed or sold to Borrower through Aaron.
“Net Book Value” means, for any item of Merchandise, the cost of such Merchandise less accumulated depreciation as calculated
in accordance with the Aaron’s Proprietary System.
“Note” means the Line of Credit Note, the Revolving Note or the
Term Note, as the case may be.
“Opening Date” means with respect to each store location, the date determined by Aaron to
be the opening date of such location in accordance with its standard practice, as notified to Bank.
“PAD Authorization” means a pre-authorized debit authorization executed by
Borrower authorizing Bank to cause a specified account of Borrower to be debited to pay amounts payable hereunder, such authorization to be in the form attached hereto as Exhibit F or such other form as Bank may require from time to
time.
“Patriot Act” shall mean the USA PATRIOT Improvement and Reauthorization Act of 2005 (Pub. L. 109-177 (signed into
law March 9, 2006)), as amended and in effect from time to time.
“Payment Date” means the last day of each calendar
month; provided, however, if such day is not a Business Day, the next succeeding Business Day which is also a US Business Day.
“Permitted Liens” means Liens in favor of Bank or Aaron; Liens for taxes not yet due or payable; statutory Liens securing the
claims of materialmen, mechanics, carriers and landlords for labor, materials, supplies or leases incurred in the ordinary course of Borrower’s business, but only if payment thereof is not at the time required and such Liens are at all times
junior in priority to the Liens in favor of Bank; Liens shown on Exhibit B attached hereto (if any); and Liens hereafter consented to by Bank in writing.
“Person” means a corporation, an association, partnership, an organization, a business, a business trust, a limited liability
company, an individual, a government or political subdivision thereof or a governmental agency.
“Personal PAD” shall
have the meaning set forth in the Pre-Authorized Debit Rules.
“PPSA” means the Personal Property Security Act as in
effect from time to time in the Province of Ontario.
“Pre-Authorized Debit Rules” means Rule H-1 of the Canadian
Payments Association, as the same may be amended, modified, supplemented, restated, re-enacted or replaced from time to time.
“Prime Rate” means, on any date of determination, the higher of (a) the reference rate of interest, expressed as an
annual rate, publicly announced or posted from time to time by Bloomberg on page BTMM for Canadian Money Market rates or (b) the average one month Bankers’ Acceptance rate quoted on Reuters Service, page CDOR, as at approximately 10:00
a.m. (Toronto, Ontario time) on such day plus 1% per annum.
“Quarterly Covenant Compliance Report” means that
Quarterly Covenant Compliance Report substantially in the form of Exhibit D attached hereto.
“Rental
Revenue” means, for any period, the gross revenues of Borrower from leases to the public of Borrower’s furniture inventory, computers, electronics, appliances and lease equipment including, without limitation, all customer deposits,
advance lease payments, waiver fees, late fees, delivery fees, nonsufficient fund fees and reinstatement fees, but excluding all retail sales proceeds, goods and services tax, harmonized sales tax or provincial sales taxes.
“Revolving Commitment” means the committed revolving facility established by the Bank in favor of Borrower in the amount set
forth in the Revolving Note and upon the terms described in this Agreement.
“Revolving Loan” means a loan or an advance
made by the Bank to the Borrower under its Revolving Commitment.
“Revolving Note” means a note executed by Borrower in favor of Bank,
substantially in the form of Exhibit A-3 attached hereto, in the committed principal amount of the Bank’s Revolving Commitment evidencing the obligation of the Borrower to repay its Revolving Loans.
“Sanctioned Country” shall mean, at any time, a country or territory that is, or whose government is, the subject or target
of any Sanctions.
“Sanctioned Person” shall mean, at any time, (a) any Person listed in any Sanctions-related list
of designated Persons maintained by OFAC, the U.S. Department of State, the United Nations Security Council, the European Union or any EU member state, (b) any Person located, organized or resident in a Sanctioned Country or (c) any Person
controlled by any such Person.
“Sanctions” shall mean economic or financial sanctions or trade embargoes administered or
enforced from time to time by (a) the U.S. government, including those administered by OFAC or the U.S. Department of State or (b) the United Nations Security Council, the European Union or Her Majesty’s Treasury of the United
Kingdom.
“Security Agreement” means a security agreement made by Borrower in favour of Bank substantially in the form
attached hereto as Exhibit E attached hereto.
“Set Interval” shall have the meaning set forth in the
Pre-Authorized Debit Rules.
“Solvent” means, as to any Person, such Person (i) is able to pay, and does pay, its
debts as they mature and (ii) has a positive tangible net worth determined in accordance with GAAP.
“Sporadic”
shall have the meaning set forth in the Pre-Authorized Debit Rules.
“Spousal Consent” means any agreement provided by
the spouse of any Person executing a Guaranty to the extent such spouse has not personally executed a Guaranty, to be substantially in the form provided by Bank.
“Subsidiary” means any corporation or other entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by Borrower.
“SWIFT” means Society for Worldwide Interbank Financial Telecommunication.
“Term Loan” means a single loan made by Bank to Borrower in an amount not to exceed the Term Loan Commitment.
“Term Loan Commitment” means the obligation of Bank to make a Term Loan in favor of Borrower in the amount set forth in the
Term Note and upon the terms described in this Agreement.
“Term Note” means a note executed by Borrower in favor of
Bank, substantially in the form of Exhibit A-2 attached hereto in the committed principal amount of Bank’s Term Loan Commitment evidencing the obligation of Borrower to repay its Term Loan.
“US Business Day” means any day other than a Saturday, Sunday or a day on which commercial banks in Atlanta, Georgia are
authorized by law to close.
1.2 Accounting Terms and Determination. Accounting terms used in this Agreement such as
“amortization,” “depreciation,” “interest expense,” and “tangible net worth” shall have the meaning normally given them by, and shall be calculated (both as to amounts and classification of items) in
accordance with, GAAP. Any pronoun used herein shall be deemed to cover all genders. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations, and all references to any
instruments or agreements, including, without limitation, references to any of the Loan Documents, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof.
1.3 Interest Calculation and Payments. Unless otherwise stated, wherever in this Agreement reference is made to a rate of interest
“per annum” or a similar expression is used, such interest will be calculated on the basis of a calendar year of 360 days, as the case may be, and using the nominal rate method of calculation and not the effective rate method of
calculation or on any other basis that gives effect to the principle of deemed reinvestment of interest. Interest will continue to accrue after maturity and default and/or judgment, if any, until payment thereof, and interest will accrue on overdue
interest, if any.
1.4 Interest Act (Canada). For the purposes of this Agreement, whenever interest to be paid hereunder is to be
calculated on the basis of 360 days or any other period of time that is less than a calendar year, the yearly rate of interest to which the rate determined pursuant to such calculation is equivalent is the rate so determined multiplied by the actual
number of days in the calendar year in which the same is to be ascertained and divided by 360 or such other number of days in such period, as the case may be.
1.5 Currency. All references herein to currency or to $ are to lawful currency of Canada.
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2. |
LOAN; USE OF PROCEEDS. |
2.1 Establishment of FCTA; Loan Account.
(i) Prior to the Closing Date, Bank shall (unless the Borrower has only a Term Loan) establish a FCTA for Borrower.
(ii) Prior to the Closing Date, Bank shall also establish on its books an internal loan account in Borrower’s name (the “Loan
Account”) in which Bank shall record, in accordance with customary accounting practice, all charges, expenses and other items properly chargeable to Borrower; all payments made by Borrower on account of indebtedness evidenced by the Loan
Account; all proceeds of Collateral which are finally paid to Bank at its office in cash or solvent credits; and other appropriate debits and credits. The debit balance of the Loan Account shall reflect the amount of Borrower’s Loan
Indebtedness from time to time by reason of the Loans and other appropriate charges hereunder. At least once each month, Bank shall render a statement of account for the Loan Account, which statement shall be considered correct, and accepted by and
conclusively binding upon Borrower, unless Borrower notifies Bank to the contrary within thirty (30) days after Bank’s sending of said statement to Borrower.
2.2 Establishment of Line of Credit Loan. Any Line of Credit Commitment now or hereafter committed to by Bank pursuant to which
Borrower shall execute and deliver to Bank a Line of Credit Note shall be governed by and issued pursuant to the provisions, terms and conditions set forth herein.
2.3 Line of Credit Advances.
(i) Upon Borrower’s execution of this Agreement and a Line of Credit Note and compliance with the terms of this Agreement, and subject to
Bank’s confirmation if requested by Aaron that Bank has a first priority security interest in the Collateral, Bank shall notify Borrower that Borrower may request Advances pursuant to the Line of Credit Commitment. Bank shall make such Advances
into the FCTA (or, with the written consent of Aaron, such other account for which wiring instructions have been provided to Bank) for the sole purposes of (x) honoring requests from Borrower, made through Aaron by fax, email or other
electronic form of notification to Aaron by 12:00 noon (Atlanta, Georgia time) on the last Business Day immediately prior to the 10th or the
25th day of each month, for SWIFT transfers to suppliers of Merchandise in payment of Approved Invoices, and (y) honoring requests from Borrower for Advances made via wire transfers (or such
other method approved in writing by Aaron and acceptable to Bank) to the FCTA (or, with the written consent of Aaron, such other account of Borrower or of a third party for which wiring instructions have been provided to Bank) for working capital
and for any other lawful purposes, in each case, to the extent approved in writing by Aaron. Borrower shall not use the FCTA for any other purpose. The maximum principal amount of Advances under the Line of Credit Commitment at any time outstanding
shall not exceed the committed amount of the Line of Credit Commitment. Each Advance shall be in the amount of not less than $500.
(ii)
Borrower shall submit purchase order requests for Merchandise to Aaron from time to time. In the event that the purchase order is authorized pursuant to the Franchise Agreement, Aaron will prepare the purchase order and submit the same to the
appropriate supplier requested by Borrower. The supplier will be instructed to ship all Merchandise directly to Borrower and Borrower will be responsible for (a) inspecting all Merchandise and resolving all disputes regarding the Merchandise
with such supplier and (b) paying all freight and other shipping and/or insurance charges arising in connection therewith with funds other than the proceeds of Loans, unless otherwise agreed by Aaron. The supplier will invoice Borrower for such
Merchandise in accordance with normal industry practice. When Borrower wishes to pay such invoice, Borrower, subject to availability of the Line of Credit Commitment and the minimum borrowing threshold, shall pay such invoice by requesting, by way
of fax, email or other electronic form of notification by 12:00 noon (Atlanta, Georgia time) on the last Business Day immediately prior to the 10th or the 25th day of each month, that Aaron direct Bank to pay such invoice by initiating a SWIFT transfer from Borrower’s FCTA to the applicable vendor and Bank shall be entitled to rely on such request
from Aaron as if it had been made directly by Borrower. Any directions for SWIFT transfers transmitted by Aaron to Bank prior to 12:00 noon (Atlanta, Georgia time) on the Business Day immediately preceding the 10th or the 25th day of a month, shall be paid by Bank no later than the next Business Day thereafter, unless Borrower is otherwise notified by Aaron
or Bank.
(iii) Upon receipt of the request for an SWIFT transfer (provided, however, that such request relates to an
Approved Invoice), Bank shall honor such request by making an Advance pursuant to the Line of Credit Commitment in the amount of such request into Borrower’s FCTA and forwarding such amount to the supplier by means of a SWIFT transfer in
accordance with the instructions of Borrower. Upon receipt of any request to deposit funds into another account in the name of Borrower or to an account of a third party, upon receipt of Aaron’s written approval thereof, Bank shall honor such
request by making an Advance pursuant to the Line of Credit Commitment in the amount of such request into Borrower’s FCTA and automatically forwarding such amount to such account of Borrower (or such other approved account) by means of an SWIFT
transfer (or such other method approved in writing by Aaron and acceptable to Bank) in accordance with the instructions of Borrower. In the event that a request for a SWIFT transfer (or other method of transfer approved in writing by Aaron and
acceptable to Bank) is presented for payment and Borrower’s availability pursuant to the Line of Credit Commitment is insufficient to honor such request, Bank may, but shall have no obligation to, make such overadvance, which shall be an
Advance for all purposes hereunder, but shall be due and payable upon demand. At the end of each calendar month, Bank shall provide Borrower with a monthly FCTA statement in the form customarily used by Bank for its commercial customers and a loan
account statement.
(iv) The aggregate amount of Advances made to Borrower during such month shall be amortized into twenty-four
(24) equal payments of principal due and payable on the next succeeding Payment Dates; provided, however, that, in the event that Bank terminates the Line of Credit Commitment as provided in Section 2.6 below, all outstanding
amounts shall be due and payable on the 24th Payment Date following such termination.
2.4 Establishment of Revolving Loan. Any Revolving Commitment now or hereafter committed
to by Bank pursuant to which Borrower shall execute and deliver to Bank a Revolving Note shall be governed by and issued pursuant to the provisions, terms and conditions set forth herein.
2.5 Revolving Advances.
(i) Upon Borrower’s execution of this Agreement and a Revolving Note and compliance with the terms of this Agreement and subject to
Bank’s confirmation if requested by Aaron that Bank has a first priority security interest in the Collateral, Bank shall notify Borrower that Borrower may request Advances pursuant to the Revolving Commitment. Bank shall make such Advances into
the FCTA for the sole purpose of honoring requests from Borrower, made through Aaron by fax, email or other electronic form of notification to Aaron by 12:00 noon (Atlanta, Georgia time) on the Business Day immediately preceding the 10th or the 25th
day of each month, to purchase inventory or, to the extent permitted, by Aaron, for any other purpose. Borrower shall not use the FCTA for any purpose other than as contemplated by this Agreement. The maximum principal amount of Advances under the
Revolving Commitment at any time outstanding shall not exceed the lesser of (A) the committed amount of the Revolving Commitment and (B) (1) the Borrowing Base, as most recently reported by Aaron to Bank pursuant to
Section 2.5(iv) hereof minus (2) the outstanding principal amount of the Term Loan (such lesser amount herein referred to as the “Revolver Availability”). Each Advance shall be in the amount of not less than $500.
(ii) Borrower shall submit purchase order requests for Merchandise to Aaron from time to time. In the event that the purchase order is
authorized pursuant to the Franchise Agreement, Aaron will prepare the purchase order and submit the same to the appropriate supplier requested by Borrower. The supplier will be instructed to ship all Merchandise directly to Borrower and Borrower
will be responsible for (a) inspecting all Merchandise and resolving all disputes regarding the Merchandise with such supplier and (b) paying all freight and other shipping and/or insurance charges arising in connection therewith with
funds other than the proceeds of Loans, unless otherwise agreed by Aaron. The supplier will invoice Borrower for such Merchandise in accordance with normal industry practice. When Borrower wishes to pay such invoice by Advance pursuant to the
Revolving Commitment, Borrower, subject to the Revolver Availability, shall pay such invoice by requesting, through fax, email or other electronic form of notification, that Aaron direct Bank to pay such invoice by initiating a SWIFT transfer from
Borrower’s FCTA to the applicable vendor and Bank shall be entitled to rely on such request from Aaron as if it had been made directly by Borrower. Any directions for such SWIFT transfers transmitted by Aaron to Bank prior to 12:00 noon
(Atlanta, Georgia time) on any Business Day immediately preceding the 10th or the 25th day of any month, shall be paid by the Bank no later than the next Business Day thereafter, unless Borrower is otherwise notified by Aaron or the Bank.
(iii) Upon receipt of the request for a SWIFT transfer (provided, however, that such request relates to an Approved Invoice), the Bank shall
honor such request by making an Advance pursuant to the Revolving Commitment in the amount of such request into Borrower’s FCTA and automatically forwarding such amount to the supplier by means of a SWIFT transfer in accordance with the
instructions
of Borrower. Upon receipt of any request to deposit funds in another account in the name of Borrower or to an account of a third party, and receipt of Aaron’s written approval thereof, Bank
shall honor such request by making an Advance pursuant to the Revolving Commitment in the amount of such request into Borrower’s FCTA and automatically forwarding such amount to such account of Borrower (or such other approved account) by means
of a SWIFT transfer (or such other method approved in writing by Aaron and acceptable to Bank) in accordance with the instructions of Borrower. In the event that a request for a SWIFT transfer (or other method of transfer approved in writing by
Aaron and acceptable to Bank) is presented for payment and Borrower’s availability pursuant to the Revolving Commitment is insufficient to honor such request, Bank may, but shall have no obligation to, make such overadvance, which shall be an
Advance for all purposes hereunder, but shall be due and payable upon demand. At the end of each calendar month, Bank shall provide Borrower with a monthly FCTA statement in the form customarily used by Bank for its commercial customers and a loan
account statement.
(iv) On the fifth Business Day of each month, for a Borrower with a Revolving Loan (as determined on the last day of
the preceding calendar month), Aaron shall calculate the Borrowing Base and report the same to Bank in writing (the “Borrowing Base Report”), and Bank shall be entitled to rely conclusively upon such information. Upon receipt of the
Borrowing Base Report, Bank shall input such information into Bank’s loan records to be effective as of the date which is two Business Days after receipt of such information. On the 15th day of each calendar month, Bank shall mail to Borrower a
bill setting forth the total amount of principal (to the extent that the Revolving Availability is less than zero) and interest due on the next Payment Date which bill shall be considered correct, and accepted by and conclusively binding upon
Borrower, unless Borrower notifies Bank to the contrary within thirty (30) days after Bank’s sending of said bill to Borrower. In addition, Bank, on the date which is two Business Days after receipt of the Borrowing Base Report from Aaron,
shall notify Borrower in writing (including facsimile) of the new Borrowing Base for Borrower and shall require that Borrower repay on the next Payment Date any additional Advances made since the date of the preparation of the statement for such
Payment Date if necessary to avoid any overadvance as of such date and such amount (in addition to any amounts set forth in the bill to Borrower) shall be due and payable on the next Payment Date.
2.6 Term Loan. Any Term Loan Commitment now or hereafter committed to by Bank pursuant to which Borrower shall execute and deliver to
Bank a Term Note shall be governed by and issued pursuant to the provisions, terms and conditions set forth herein. Upon Borrower’s execution of this Agreement and a Term Note and compliance with the terms of this Agreement and subject to
Bank’s confirmation if requested by Aaron that Bank has a first priority security interest in the Collateral, Bank may make a Term Loan to Borrower in a principal amount not to exceed the Term Loan Commitment; provided, however,
that if for any reason the full amount of Bank’s Term Loan Commitment is not fully drawn on the Closing Date, the undrawn portion thereof shall automatically be cancelled.
2.7 Repayment.
(i)
Line of Credit Loans. Payments of principal for Line of Credit Loans shall be due and payable by Borrower to Bank on each Payment Date and subject to the provisions of Section 2.10(ii) below, on the Maturity Date for the Line of Credit
Commitment, unless sooner accelerated in accordance with the terms hereof.
(ii) Revolving Loans. Payments of principal for
Revolving Loans shall be due and payable by Borrower to Bank, subject to the provisions of Section 2.10(ii) below, on the Maturity Date for the Revolving Commitment, unless sooner accelerated in accordance with the terms hereof.
(iii) Term Loans. Payments of principal for Term Loans shall be due and payable by Borrower to Bank in installments payable on the
dates set forth in the Term Note, provided, however, that, to the extent not previously paid, the aggregate unpaid principal balance of the Term Loans shall be due and payable on the Maturity Date for the Term Loan.
(iii) Except as provided below, all payments of principal of, or interest on, the Loans (including Asset Disposition Prepayments) and all
other sums due under the terms of the Loan Documents at Set Intervals shall be made by way of pre-authorized debit from an account at a financial institution in Canada specified by Borrower. All voluntary prepayments of the Loan shall be made to
Bank at the Lender’s Account by way of SWIFT transfer of immediately available funds or by pre-authorized debit from an account at a financial institution in Canada specified by Borrower.
2.8 Loan Term; Voluntary Termination.
(i) The original term of the Line of Credit Commitment shall be for a period of 364 days from the Closing Date (the “Loan
Term”). Thereafter, the Loan Term shall automatically be extended on each anniversary of the Closing Date for an additional 364 day period unless either party terminates the Line of Credit Commitment as set forth hereunder. Upon ninety
(90) days prior written notice to Borrower, Bank may, at its option, terminate the Line of Credit Commitment. Upon written notice to Bank, Borrower may, at its option, terminate the Line of Credit Commitment. Bank may also terminate the Line of
Credit Commitment pursuant to Section 10 hereof. Upon the effective date of a termination of the Line of Credit Commitment effected by Borrower, the principal of and all accrued but unpaid interest on the Loan Indebtedness in respect of the
Line of Credit Loans shall be forthwith due and payable, but all of the duties and covenants of Borrower hereunder, and all rights, remedies and privileges of Bank under this Agreement and Bank’s security interest in the Collateral, shall
continue in full force and effect until all of the Loan Indebtedness in respect of the Line of Credit Loans is fully and finally paid. In the event Bank elects to terminate, (a) Bank shall continue to make Advances until the effective date of
the termination and (b) Advances outstanding at the effective date of the termination shall be repaid according to the twenty-four (24) month amortization schedule provided above, provided, however, that, notwithstanding the
foregoing all outstanding Loan Indebtedness in respect of the Line of Credit Loans shall be due and payable in full on the 24th Payment Date following termination of the Line of Credit Commitment
by Bank. Nothing set forth in this Section 2.8(i) shall be deemed to limit the ability of Bank to declare all amounts outstanding under the Line of Credit Note immediately due and payable upon the occurrence of an Event of Default hereunder as
provided herein.
(ii) The original term of the Revolving Commitment shall terminate on the Maturity Date, subject to Section 10
hereof, which may be extended from time to time in the sole discretion of the Bank for an additional period up to 364 days (the “Extended Loan Term”) by written notice from Bank to Borrower, unless either party terminates the Loan as set
forth hereunder. The Bank may, at its option, terminate the Revolving Commitment, which termination will occur on the then-current Maturity Date without further notice or action by the Bank. Upon the termination of the Revolving Commitment, the
principal of and all accrued but unpaid interest on the Loan Indebtedness shall be forthwith due and payable, but all of the duties and covenants of Borrower hereunder, and all rights, remedies and privileges of Bank under this Agreement and
Bank’s security interest in the Collateral, shall continue in full force and effect until all of the Loan Indebtedness is fully and finally paid.
(iii) The Term Loan shall terminate on the Maturity Date for the Term Loan set forth in the Term Note, as the case may be, which date shall be
no more than two years from the Closing Date, subject to Section 10 hereof. Upon the termination of the Term Loan, the principal of and all accrued but unpaid interest on the Loan Indebtedness in respect of the Term Loan shall be forthwith due
and payable, but all of the duties and covenants of Borrower hereunder, and all rights, remedies and privileges of Bank under this Agreement and Bank’s security interest in the Collateral, shall continue in full force and effect until all of
such Loan Indebtedness is fully and finally paid.
2.9 Interest.
(i) From and after the date hereof, interest shall accrue on the unpaid principal amount of the Loan Indebtedness at the Floating Rate.
Interest shall be calculated daily and shall be computed on the basis of actual days elapsed over the period of a 360 day year. Interest shall be payable in arrears on each Payment Date and on the Maturity Date, whether due to acceleration or
otherwise. Any principal balance outstanding pursuant to a Loan not paid when due shall bear interest at a rate of interest per annum equal to the Default Rate, such interest to be payable upon demand. After the occurrence of an Event of Default and
during the continuance thereof, the outstanding principal balance of the Loans shall bear interest at the Default Rate, which shall be payable on demand.
(ii) In no contingency or event whatsoever shall the amount paid or agreed to be paid to Bank for the use, forbearance or detention of money
advanced under this Agreement exceed the highest lawful rate permissible under Applicable Law. It is the intent hereof that Borrower will not pay or contract to pay, and that Bank not receive or contract to receive, directly or indirectly in any
manner whatsoever, interest in excess of that which may be charged to and paid by Borrower under Applicable Law. All interest (and charges deemed interest) paid or agreed to be paid to Bank shall, to the extent permitted by Applicable Law, be
amortized, pro rated, allocated and spread in equal parts throughout the full term hereof until payment in full of the principal amount of the Loan Indebtedness owing hereunder (including the period of any renewal or extension hereof) so that
interest on the principal amount of the Loan Indebtedness outstanding hereunder for such full period will not exceed the maximum amount permitted by Applicable Law.
2.10 Loan Prepayment.
(i) Voluntary Prepayment. Borrower shall have the right to prepay the Loans in whole or in part on any Payment Date, but subject to
Borrower having provided at least two (2) Business Days’ prior written notice to Bank. Partial prepayments of any Line of Credit Loan (other than proceeds of Asset Dispositions which shall be applied as set forth in the following
Section 2.10(ii)) shall be applied to reduce the current month’s Advance(s) to such Borrower with any excess prepayment applied to unpaid principal payments of the Loan as Aaron and the Bank may mutually agree (which may include, but is
not limited to, application of such excess prepayment to unpaid principal payments of the Loan in inverse order of maturity or on a pro rata basis).
(ii) Mandatory Prepayment. For the Line of Credit Loan, mandatory prepayment shall be required for Asset Dispositions. For the
Revolving Loan, on any Payment Date on which the aggregate outstanding principal amount of the Revolving Loan exceeds the lesser of (x) the Revolving Commitment or (y) (1) the Borrowing Base, as most recently reported to Borrower by
Bank pursuant to Section 2.7(iv) hereof minus (2) the outstanding principal balance of the Term Loan, Borrower shall prepay the Revolving Loans in the amount of such overadvance, as notified to Borrower by Bank.
2.11 Audits. Borrower hereby consents and authorizes Aaron or Bank or any agent or
representative thereof to conduct periodic field audits of Borrower. Such field audits may include, without limitation, examinations of the payment receipts, tax returns, bank statements, loan statements, Lease Contracts, inventory on hand,
computer-generated reports of Asset Dispositions, Rental Revenue and other financial data necessary to determine the accuracy and validity of the reports, compliance certificates, financial reports and other information forwarded to either of Bank
or Aaron by Borrower in connection with the Loan.
2.12 Tracking of Merchandise; Asset Dispositions.
(i) All Merchandise financed by Bank must be serialized by means of the Aaron’s Proprietary System for appropriate reconciliation of
Advances and receipt of Merchandise and for purposes of tracking Asset Dispositions, if applicable. Borrower shall be obligated to furnish serial numbers for all Merchandise purchased directly to Aaron on a weekly basis (and, if available, on a
daily basis) by transmittal of Borrower’s receiving report (containing Aaron’s Proprietary System numbers) directly to Aaron on the Aaron’s Proprietary System. As set forth more fully below, Aaron will maintain and track such
information as agent for Bank and Bank shall at all times have access to such information.
(ii) If Borrower has a Line of Credit Note and
an Asset Disposition occurs, Borrower shall immediately report such Asset Disposition to Aaron by means of the Aaron’s Proprietary System, such information to include the Aaron’s Proprietary System numbers, and if assigned, the serial
numbers of the Merchandise subject to the Asset Disposition, the Net Book Value of such Merchandise and the proceeds received by Borrower therefrom. Aaron, on a monthly basis, shall transmit all such information to Bank in a summary form. Based
solely on such information provided by Aaron, Bank will notify Borrower on a monthly basis, of the amount of the required prepayment (the “Asset Disposition Prepayment”) of the aggregate outstanding amount of the Line of Credit Loan
due on the next Payment Date which amount shall be equal to the Net Book Value of the Asset Dispositions during the preceding month not applied to Advances made during such month as set forth above, unless otherwise agreed to by Bank. Borrower shall
be notified by Bank by the Business Day next following the 25th day of each calendar month of the Asset Disposition Prepayment and payment thereof shall be due on the next succeeding Payment Date.
2.13 Closing Fee. On the Closing Date of each Loan, Borrower shall pay to Bank a closing fee (“Closing Fee”) in
the amount of $500 per store location [plus $5,000]2.
2.14 Commitment
Fees.
(i) Borrower shall pay a commitment fee (the “Commitment Fee”) on any unused portion of the Line of Credit
Commitment and the Revolving Commitment in the amount of % per annum, such Commitment Fee to be paid quarterly in arrears on every third Payment Date, commencing on the third Payment Date after the Closing Date.
(ii) All Commitment Fees shall be paid on the dates due, in immediately available funds, to Bank.
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Note: in the case of an Borrower with a Term Loan Commitment that has customized financial covenants as specified by Sponsor in accordance with Section 6 hereof, an additional $5,000 fee will be charged.
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2.15 Delinquent Payment Fees. In the event that any payment due and payable hereunder is
not received by Bank on the Payment Date when due (including, without limitation, any payment not received as a result of the dishonour of a pre-authorized debit or a return of a pre-authorized debit initiated by Borrower), Borrower shall, upon
request from Bank, pay to Bank a delinquent payment fee (the “Delinquent Payment Fee”) in an amount equal to the greater of (i) one percent (1%) of the amount of the late payment and (ii) $500.00.
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3. |
COLLATERAL AND INSURANCE. |
3.1 Granting of Security Interest in
Collateral. As security for the payment and performance of all of the Loan Indebtedness, Borrower shall enter into the Security Agreement and grant Bank thereunder a continuing security interest in its Collateral. The Loan Indebtedness shall
also be secured by any other property (whether real or personal) in which Borrower may have heretofore or concurrently herewith granted, or may hereafter grant, a Lien in favor of Bank.
3.2 Form of Lease Contracts. All Lease Contracts will be (i) in a form prescribed by Aaron for use by its franchisees,
(ii) be transferable to Bank and (iii) contain the following provision directly above Borrower’s customer’s signature:
“NOTWITHSTANDING ANYTHING SET FORTH IN THIS AGREEMENT TO THE CONTRARY, THE UNDERSIGNED ACKNOWLEDGES AND CONSENTS TO THE TRANSFER OF, OR
GRANT OF A SECURITY INTEREST IN, ANY OR ALL OF THE LESSOR’S RIGHT, TITLE AND INTEREST (RESIDUAL OR OTHERWISE) IN AND UNDER THIS AGREEMENT TO ANY THIRD PARTY. NO SUCH TRANSFER OR GRANT OF SECURITY INTEREST WILL: (A) AFFECT THE
UNDERSIGNED’S LOAN INDEBTEDNESS; (B) CHANGE ANY DUTIES OF, OR INCREASE ANY BURDENS OR RISKS IMPOSED ON, THE PARTIES TO THIS AGREEMENT; NO ENFORCEMENT OF ANY SECURITY INTEREST WILL CONSTITUTE A TRANSFER THAT CHANGES ANY DUTIES OF, OR
INCREASES ANY BURDENS OR RISK IMPOSED ON, THE PARTIES TO THIS AGREEMENT.”
Immediately upon execution of the same, all Lease Contracts shall be
hereby assigned to Bank, and, immediately upon Bank’s request, delivered to Bank together with any and all related documents, and will contain, by way of a stamp or as a part of the preprinted lease contract, the following legend directly below
Borrower’s customer’s signature:
“FOR VALUE RECEIVED, THIS AGREEMENT HAS BEEN ASSIGNED TO SUNTRUST BANK AND THERE ARE NO
DEFENSES AGAINST THE ASSIGNEE.”
Borrower will not assign, sell, pledge, convey or by any other means transfer to any person other than Bank any
Lease Contracts or Chattel Paper, without Bank’s prior written consent.
3.3 Other Documents. Borrower shall execute and
deliver, or shall be caused to be executed and delivered, to Bank such other instruments, agreements, assignments, notifications or other documents relating to the Collateral as Bank may from time to time request in order to evidence, perfect or
continue the perfection of Bank’s Liens upon any of the Collateral.
3.4 Insurance. Borrower shall maintain and keep in force
insurance of the types and in the amounts customarily carried in lines of business similar to Borrower’s and such other insurance as Bank may require, including, without limitation, theft, fire, public liability, business interruption,
casualty,
property damage, and worker’s compensation insurance, which insurance shall be carried with companies and in amounts satisfactory to Bank. All casualty and property damage insurance shall
name Bank as mortgagee, sole loss payee, or additional insured, as appropriate. Borrower shall deliver to Bank from time to time, at Bank’s request, copies of all such insurance policies and certificates of insurance and schedules setting forth
all insurance then in effect. Each policy of insurance shall contain a clause requiring the insurer to give not less than thirty (30) days’ prior written notice to Bank in the event of any lapse, termination or cancellation of the policy
for any reason whatsoever and a clause that the interest of Bank shall not be impaired or invalidated by any act or neglect of Borrower or owner of the property nor by the occupation of the premises for purposes more hazardous than are permitted by
said policy. All such insurance policies shall contain such other provisions as Bank may require in order to protect Bank’s Lien in the collateral and Bank’s right to receive payments under such policies. Borrower hereby appoints Bank as
attorney in fact for Borrower to file claims under any insurance policies, to receive, receipt and give acquittance for any payments that may be payable to Borrower thereunder, and to execute any and all endorsements, receipts, releases,
assignments, reassignments, or other documents that may be necessary to effect the collection, compromise or settlement of any claims under any such insurance policies, which power of attorney shall be deemed coupled with an interest and irrevocable
so long as Bank shall have a Lien in any of the Collateral pursuant to this Agreement. If Borrower shall fail to procure such insurance or to pay any premium with respect thereto, then Bank may, at its discretion, procure such insurance or pay such
premium and any costs so incurred by Bank shall constitute a part of the Loan Indebtedness. Bank may apply the proceeds of any insurance policy received by Bank to the payment of any liabilities, whether or not due, in such order of application as
Bank shall determine. Borrower shall promptly furnish Bank with certificates or other evidence satisfactory to Bank indicating compliance with the foregoing insurance requirements.
3.5 Validation and Collection of Accounts. Whether or not a Default Condition or an Event of Default has occurred, Bank shall have the
right, at any time or times hereafter, in the name of Bank or any designee of Bank to verify the validity, amount or any other matter relating to any Accounts by mail, telephone or otherwise, and Borrower shall fully cooperate with Bank in an effort
to facilitate and promptly conclude any such verification process. Unless Bank shall at any time following the occurrence of an Event of Default, elect to give notice to Account Debtors to make payments on the Accounts directly to Bank, Borrower
shall endeavor in the first instance to make collection of its Accounts for Bank. Borrower shall at the request of Bank notify the Account Debtors of the security interest of Bank in any Account and Bank may itself at any time so notify Account
Debtors. Upon or after the occurrence of an Event of Default, Borrower shall (if and to the extent requested to do so by Bank) notify the Account Debtors to make all payments owing to Borrower directly to Bank for application to the Loan
Indebtedness.
3.6 Maintenance of Collateral. Borrower shall maintain all Inventory and Equipment in good condition, reasonable
wear and tear excepted in the case of Equipment, and shall, as and when requested by Bank, provide Bank with a list of all of the Equipment and evidence of ownership thereof. Borrower shall not permit any of the Equipment to become affixed to any
real property so that such Equipment is deemed a fixture under the real estate laws of the applicable jurisdiction.
3.7 Expenses
Relating to Collateral. Borrower shall pay Bank on demand an amount equal to any and all expenses, including legal fees, incurred or paid by Bank in connection with Bank’s insuring, maintaining, protecting, storing, safeguarding, or paying
Liens with respect to any of the Collateral or otherwise discharging any duty or obligation of Borrower with respect to any of the Collateral.
3.8 Rights to Collateral. Bank shall have no duty to collect, protect or preserve the underlying value of any Collateral or any income
thereon or to preserve any rights against prior parties. Bank may exercise its rights and remedies with respect to the Collateral without first resorting (and without regard) to any other security for the Loans or other sources of payment or
reimbursement for the Loan Indebtedness.
Borrower shall deliver and Bank shall have received the following
documents, each in form and substance satisfactory to Bank, as conditions precedent of the Loans:
(i) a validly executed copy of this
Agreement and the Security Agreement;
(ii) the validly executed Notes;
(iii) a validly executed copy of a Guaranty of each partner or majority stockholder of Borrower, and to the extent not prohibited by
Applicable Law, the spouse of such Person together, in the case of the spouse, a certificate of independent legal advice with respect to the spouse’s execution of such Guaranty; provided, however, that if such spouse is not
providing a Guaranty, a validly executed copy of the Spousal Consent;
(iv) [Reserved.];
(v) a validly executed PAD Authorization in the form attached hereto as Exhibit F, authorizing Bank to debit Borrower’s bank
account at a Canadian financial institution specified therein for payments due hereunder at Set Intervals, including without limitation, Asset Disposition Prepayments and mandatory prepayments of the Loans pursuant to Section 2.8(ii);
(vi) a validly executed subordination agreement, in form and substance satisfactory to Bank, from each other debtholder of Borrower;
(vii) evidence of Borrower’s good standing;
(viii) a validly executed officer’s certificate or such other evidence acceptable to Bank evidencing Borrower’s corporate,
partnership or other necessary authorization of the Loans and incumbency;
(ix) a certificate of insurance from an insurer acceptable to
Bank evidencing Borrower’s compliance with Section 3.4 hereof and naming Bank as loss payee/additional insured as follows:
Aaron’s Program Manager
SunTrust Bank
Program Lending
303 Peachtree Street, N.E.
2nd
Floor
Mail Code 1802
Atlanta,
Georgia 30308
(x) a validly executed authorization in favour of Aaron, authorizing Aaron to initiate SWIFT transfers from the FCTA to pay
vendors in accordance with Section 2.3(ii); and
(xi) valid Personal Property Security Act financing statements suitable for filing
to enable Bank to perfect the security interest granted to it under this Agreement.
In addition, (x) Bank shall have satisfied itself that (i) all necessary steps have been taken and all
necessary registrations have been made to perfect Bank’s security interest in the Collateral, and (ii) there are no Liens on any of the Collateral, and Bank shall be satisfied that all corporate or partnership proceedings necessary for the
authorization of the Loan shall have been taken and Bank shall have received any other documents that it deems necessary or advisable and (y) unless waived in writing by Aaron, Aaron shall have obtained a validly executed landlord’s waiver
for each location leased by Borrower where the financed Merchandise is located, which Aaron shall provide to Bank up request.
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5. |
BORROWER’S REPRESENTATIONS AND WARRANTIES. |
To induce Bank to enter into this
Agreement, Borrower represents and warrants as follows:
5.1 Organization and Qualification of Borrower. Borrower is
under the laws of the province shown on the first page hereof or under the laws of Canada, and is qualified to do business in
all jurisdictions where the character of its properties or the nature of its activities make such qualification necessary.
5.2 Trade
Names, Subsidiaries and Location of Assets. Exhibit B attached hereto and made a part hereof fully and accurately discloses any legal name, trade name or style ever used by Borrower, any Subsidiaries owned by Borrower, and each office,
other place of business or location of assets of Borrower.
5.3 Corporate or Other Authority; No Violation of Other Agreements. The
execution, delivery and performance by Borrower of this Agreement and the other Loan Documents have been duly authorized by all necessary action on the part of Borrower and do not and will not (i) violate any provision of Borrower’s
articles of incorporation, by laws, or other organizational documents or any Applicable Law, or (ii) be in conflict with, result in a breach of, or constitute (following notice or lapse of time or both) a default under any agreement to which
Borrower is a party or by which Borrower or any of its property is bound. Each PAD Authorization has been executed by persons with signing authority in respect of the account at a Canadian financial institution that is the subject of such PAD
Authorization and any such PAD Authorization is a Business PAD and not a Personal PAD.
5.4 Enforceability. This Agreement and each
of the other Loan Documents create legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.
5.5 Entire Agreement. The Notes and accompanying Loan Documents executed in connection with the Loans and delivered to Bank are the
only contracts evidencing the transaction described herein and constitute the entire agreement of the parties hereto with respect to the transaction.
5.6 Genuineness of Signatures. The Notes and each accompanying Loan Document executed in connection with the Loans are genuine and all
signatures, names, amounts and other facts and statements therein and thereon are true and correct.
5.7 Litigation. There are no
actions, suits, proceedings or investigations pending or, to the knowledge of Borrower, threatened before any court, tribunal or administrative or governmental agency that may, individually or collectively, adversely affect the financial condition
or business operations of Borrower.
5.8 Financial Condition. Borrower’s financial statement previously delivered to Aaron,
fairly and accurately presents the financial condition of Borrower as of such date and has been prepared in
accordance with GAAP consistently applied, and since the date of that financial statement, there has been no material adverse change in the financial condition of Borrower. Borrower is now and
will remain Solvent.
5.9 Taxes. All federal, provincial and local tax returns have been duly filed, and all taxes, assessments and
withholdings shown on such returns or billed to Borrower have been paid, and Borrower maintains adequate reserves and accruals in respect of all such federal, provincial and other taxes, assessments and withholdings. There are no unpaid assessments
pending against Borrower for any taxes or withholdings, and Borrower knows of no basis therefor.
5.10 Compliance with Laws.
Borrower has duly complied with, and its properties and business operations are in compliance in all material respects with, the provisions of all Applicable Laws, including, without limitation, all Environmental Laws. Borrower possesses all
permits, franchises, licenses, trademark rights, trade names, patents and other authorizations necessary to enable it to conduct its business operations as now conducted, and no filing with, and no consent, authorization, order or license of, any
Person is necessary in connection with the execution or performance of this Agreement or the other Loan Documents.
5.11 No
Default. No Default Condition or Event of Default exists.
5.12 Accounts. Each Account arises out of a bona fide lease or sale
and delivery of goods or rendition of services by Borrower and, unless otherwise indicated by Borrower to Bank in writing promptly after learning thereof, the facts appearing on the invoice evidencing such Account and Borrower’s books relating
thereto are true and accurate and payment thereof is not subject to any known dispute, offset or claim except for discounts granted in the ordinary course of Borrower’s business that are reflected on the face of such invoice.
5.13 Use of Proceeds. None of the proceeds of any Advances by Bank or the Term Loan have been or will be used to purchase or carry (or
to satisfy or refinance any indebtedness incurred to purchase or carry) any “margin stock” (as defined in Regulation U of the Federal Reserve Board). Advances shall be made for the sole purposes of honoring requests for SWIFT transfers to
(i) suppliers of Merchandise in payment of Approved Invoices, and (ii) other accounts specified by Borrower with respect to Advances made for working capital purposes, subject to the approval of Aaron, which requests have been made to
Aaron as provided in Section 2.3(i) or Section 2.3(ii), or upon the consent of Aaron, for the purpose of payment of freight charges (but not for the purpose of paying provincial sales taxes, goods and services tax, harmonized sales tax or
customs duty). The proceeds of the Term Loan shall be used solely for the purpose of financing the acquisition and expansion of stores franchised by Aaron and operated by the Borrower and for Aaron-approved working capital purposes, but excluding in
all cases any non-business purposes.
5.14 Anti-Corruption Laws and Sanctions. The Borrower has implemented and maintains in effect
policies and procedures designed to ensure compliance in all material respects by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions, and the Borrower, its
Subsidiaries and their respective officers (in such capacity), employees (in such capacity) and, to the knowledge of the Borrower, its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions. None of (a) the
Borrower, any Subsidiary or any of their respective officers (in such capacity) or employees (in such capacity), or (b) to the knowledge of the Borrower, any director or agent of the Borrower or any Subsidiary is a Sanctioned Person. No
borrowing or other extension of credit hereunder, use by the Borrower or any Subsidiary of the proceeds thereof or other transactions contemplated hereby will violate Anti-Corruption Laws or applicable Sanctions.
5.15 Patriot Act. Neither the Borrower nor any of its Subsidiaries is an “enemy”
or an “ally of the enemy” within the meaning of Section 2 of the Trading with the Enemy Act or any enabling legislation or executive order relating thereto. Neither the Borrower nor any of its Subsidiaries is in violation of
(a) the Trading with the Enemy Act, (b) any of the foreign assets control regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto
or (c) the Patriot Act. Neither the Borrower nor any of its Subsidiaries (i) is a blocked person described in Section 1 of the Anti-Terrorism Order or (ii) to the best of its knowledge, engages in any dealings or transactions, or
is otherwise associated, with any such blocked person.
Each submission of an Approved Invoice made by Borrower pursuant to this Agreement or any other
Loan Document shall constitute an automatic representation and warranty by Borrower to Bank that there does not then exist any Default Condition or Event of Default and a reaffirmation as of the date of said request that all representations and
warranties of Borrower contained in this Agreement and the other Loan Documents are true in all material respects. All representations and warranties contained in this Agreement or in any of the other Loan Documents shall survive the execution,
delivery and acceptance hereof by Bank and the closing of the transactions described herein.
Borrower shall comply with the following financial covenant[s]:
(i) [Rental Revenue to Debt Service. Commencing on the first day of the calendar quarter in which the 25th month following the
Opening Date of the first store location of Borrower occurs and measured as of the last day of the calendar quarter in which such 25th month occurs and on the last day of each calendar quarter thereafter, the ratio of Borrower’s Rental Revenue
to Debt Service for such quarter shall not be less than 2.2:1.0;]3
(ii) Debt to
Rental Revenue. [Commencing on the first day of the calendar quarter in which the first day of the 19th month following the Opening Date of the first store location of Borrower occurs and measured as of the last day of the calendar quarter in
which such 19th month occurs and on the last day of each calendar quarter thereafter,][On the last day of each calendar quarter] the ratio of Borrower’s Debt to Borrower’s Rental Revenue shall not exceed [ ]:1.0.4
To the extent any of the financial covenants set forth above in this Section 6 are
calculated based upon the Opening Date of a store location, the financial information from store locations that have not reached the Opening Date anniversary incorporated into such covenants shall be excluded from such calculations. Debt Service and
Debt attributable to such locations and deducted from the final calculations shall be deducted on a pro rata basis calculated by dividing such stores’ aggregate Net Book Value of Merchandise by the Net Book Value of Merchandise for all store
locations. The financial covenants shall otherwise be calculated on a consolidated basis as to all store locations.
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Note: This covenant will not apply in the case of any Borrowers who have Revolving Loans or Term Loans as, in such case, the Borrowing Base in the applicable Loan Agreement will apply in lieu of this covenant.
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| 4 |
Note: This covenant will apply and be tested on last day of each calendar quarter and not be tied to any Opening Date of store locations in the case of any Loan Agreement providing for Loans to be made available to a
Borrower consisting of Revolving Loans and/or Term Loans. Covenant levels for this covenant will be established by Sponsor for each Borrower as per the Servicing Agreement. |
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7. |
BORROWER’S AFFIRMATIVE COVENANTS. |
During the term of this Agreement, and
thereafter for so long as there is any outstanding Loan Indebtedness to Bank, Borrower covenants that, unless otherwise consented to by Bank in writing, it shall:
7.1 Financial Reports. Deliver to Aaron or cause to be delivered to Aaron:
(i) on or before the last Business Day of each month, an unaudited balance sheet and income statement accurately reflecting the financial
transactions and status of Borrower as of the end of the prior month and on a year to date basis, on a consolidated and per store basis; prepared in accordance with GAAP in the format recommended by Aaron;
(ii) on or before the last Business Day of each month after the end of each calendar quarter (a) an unaudited balance sheet and income
statement accurately reflecting the financial transactions and status of Borrower as of the end of the prior month and on a quarterly basis, on a consolidated and per store basis, prepared in accordance with GAAP in the format recommended by Aaron,
and (b) a compliance certificate as described below in Section 7.2;
(iii) within 90 days after the end of each fiscal year a
balance sheet and income statement of Borrower as of the end of such year and for the fiscal year then ended, compiled by such firm of chartered accountants as may be designated by Borrower and be satisfactory to Bank as prepared in accordance with
GAAP and, to the extent delivered to Aaron, audited financial statements for such period;
(iv) within 120 days after the end of each
fiscal year, an annual personal financial statement of each Guarantor; and
(v) with reasonable promptness, all reports by Borrower to its
shareholders and such other information as Aaron or Bank may reasonably request from time to time.
7.2 Compliance Certificate.
Prepare and deliver to Aaron, to the extent Borrower has a Line of Credit Loan, in conjunction with the quarterly financial reports required to be delivered pursuant to Section 7.1(iii) above, a quarterly compliance certificate (the form of
which is attached hereto as Exhibit C), including a Quarterly Covenant Compliance Report (the form of which is attached hereto as Exhibit D) presenting the calculation of the financial covenants set forth above in Section 6,
noting any negative variances with the covenants and explaining any such variances.
Borrower acknowledges that Aaron will review each compliance
certificate and may revise the calculations set forth on such compliance certificate to be consistent with the information shown on quarterly detailed Inventory reconciliation reports and detailed revenue reports prepared by Aaron each quarter
showing the amount of Inventory at each of Borrower’s stores as of the end of such quarter and the amount of monthly and quarterly revenue at each of Borrower’s stores. Borrower acknowledges that Aaron will forward copies of each
compliance certificate, with revised calculations as appropriate, to Bank and agrees that Bank shall be entitled to rely each such compliance certificate, as revised by Aaron, for purposes of determining whether the covenants set forth in
Section 6 above have been met.
7.3 Books and Records. Maintain its Books and Records and accounts in accordance with GAAP
and permit any Person designated by Bank or Aaron to visit Borrower’s premises, inspect any of the Collateral or any of the Books and Records, and to make copies thereof and take extracts therefrom, and to discuss Borrower’s financial
affairs with Borrower’s financial officers and accountants.
7.4 Taxes. Promptly file all tax returns and pay and discharge
all taxes, assessments, withholdings and other governmental charges imposed upon it, its income or profits, or upon any property belonging to it, prior to the date on which penalties attach thereto.
7.5 Notices to Bank. Promptly notify Bank in writing of (i) the occurrence of any Default Condition or Event of Default;
(ii) any pending or threatened litigation claiming damages in excess of $25,000 or seeking relief that, if granted, would adversely affect the financial condition or business operations of Borrower; (iii) the release or discharge of any
Hazardous Substance on any property owned by Borrower; and (iv) any asserted violation by Borrower of or demand for compliance by Borrower with any Applicable Law.
7.6 Compliance with Applicable Laws. Comply in all material respects with all Applicable Laws, including, without limitation, all
Environmental Laws.
7.7 Corporate Existence. Maintain its separate corporate existence and all rights, privileges and franchises
in connection therewith, and maintain its qualification and good standing in all jurisdictions where the failure to do so could have a Material Adverse Effect upon its financial condition or ability to collect the Accounts.
7.8 Electronic Debit Authorizations. Execute and deliver to Bank and maintain in effect at all times a PAD Authorization authorizing
Bank to debit Borrower’s specified account at a Canadian financial institution for all payments required hereunder that are due at Set Intervals, including, without limitation, all payments of interest payable pursuant to Section 2.7, all
Asset Disposition Prepayments and other mandatory principal prepayments payable pursuant to Section 2.8 and all Commitment Fees payable pursuant to Section 2.12 and, if requested by Bank in connection with any Sporadic payment required to
be made by Borrower hereunder, a PAD Authorization in respect of such Sporadic payment, each such PAD Authorization to be executed and delivered by persons having signing authority over the bank account that is the subject of such PAD Authorization.
During the term of this Agreement, and thereafter for so long as
there are is Loan Indebtedness outstanding, Borrower covenants that unless Bank has first consented thereto in writing, it will not:
8.1
Merger; Disposal or Moving of Collateral. Amalgamate, merge or consolidate with or acquire any substantial portion of the assets or stock of any Person; sell, lease, transfer or otherwise dispose of all or any portion of its properties
(including any of the Collateral), except sales or leases of Inventory in the ordinary course of business; or, without having given Bank at least 60 days prior written notice and having executed such instruments and agreements as Bank shall require,
change its name, adopt a French form of name, change the location of any Collateral or the location of its chief executive office, principal place of business or the office at which it maintains its Books and Records. Notwithstanding the foregoing,
to the extent that Borrower is calculating its compliance with the financial covenants set forth in Section 6 hereof on a consolidated basis, Borrower may move Inventory from one location included in such calculation to another of
Borrower’s Aaron’s locations without complying with the notice provisions hereof, as long as such Inventory is properly transferred in the Aaron’s Proprietary System.
8.2 Liens. Grant or suffer to exist any Lien upon any of the Collateral except Permitted
Liens.
8.3 Guarantees. Guarantee, assume, endorse or otherwise become contingently liable for any obligation or indebtedness of
any Person, either directly or indirectly, exceeding $25,000 not existing as of this date, except by endorsement of items of payment for deposit or collection.
8.4 Loans. Make loans or advances of money to or investments in any Person, or (except in the ordinary course of business and on fair
and reasonable terms) engage in any transaction with a Subsidiary or affiliate.
8.5 Stock of Borrower. Repurchase, or pay or
declare any dividend on, any of its capital stock; provided, however, that if no Default Condition or Event of Default exists and Borrower remains in compliance with the financial covenants set forth in Section 6 above after
giving effect thereto, it may pay dividends and make such repurchases.
8.6 Sanctions and Anti-Corruption Laws. Request or use any
borrowing or other extension of credit hereunder, or use, and the Borrower shall ensure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use, the proceeds of any borrowing or other extension of
credit hereunder (i) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, (ii) for the purpose of
funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country or (iii) in any manner that would result in the violation of any Sanctions applicable to any party hereto.
9.1 List of Events of Default. The occurrence of any one or
more of the following conditions or events shall constitute an “Event of Default”:
(i) Borrower shall fail to pay any of
the Loan Indebtedness (including any overadvance) or to repay principal as required in connection with any Asset Disposition within ten (10) days of the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise
and including any failure to pay resulting from a dishonour of a pre-authorized debit or a return of a pre-authorized debit initiated by Borrower);
(ii) any warranty, representation, or other statement by Borrower herein or in any instrument, certificate or financial statement furnished in
compliance herewith proves to have been false or misleading in any material respect when made;
(iii) Borrower shall fail or neglect to
perform, keep or observe any covenant contained in this Agreement, any of the other Loan Documents or any other agreement now or hereafter entered into with Bank; Borrower shall fail to abide by the financial covenants set forth in Section 6
hereof, provided that Aaron may waive any financial covenant.
(iv) Borrower or any Guarantor shall fail to pay when due any amount owed
to any creditor (other than Bank) or Borrower or any Guarantor shall fail to pay or perform any liability or obligation in accordance with the terms of any agreement with Bank;
(v) Borrower, Aaron or any Guarantor shall cease to be Solvent, shall die or become incompetent, shall suffer the appointment of a receiver,
trustee, custodian or similar fiduciary, shall make an assignment for the benefit of creditors, or shall make an offer of settlement or composition to their respective unsecured creditors generally;
(vi) any petition for an order for relief shall be filed by or against Borrower or any Guarantor
or Aaron under the BIA or the CCAA (if against Borrower or any Guarantor, the continuation of such proceeding for more than 30 days);
(vii) any judgment, writ of attachment or similar process is entered or filed against Borrower or any Guarantor or any of Borrower’s or
any Guarantor’s property and such judgment, writ of attachment or process is not dismissed, satisfied or vacated within ten (10) days thereafter or (ii) results in the creation or imposition of any Lien upon any Collateral that is not
a Permitted Lien;
(viii) any Guarantor shall revoke or attempt to revoke the guaranty signed by such Guarantor or shall repudiate such
Guarantor’s liability thereunder or Aaron shall default in its obligations to Bank with respect to the Loan Indebtedness or repudiate its liability therefor;
(ix) any Person, or group of Persons (whether or not related), shall have or obtain legal or beneficial ownership of a majority of the
outstanding voting securities or rights of Borrower, other than any Person, or group of Persons, that has such majority ownership on the date of execution of this Agreement;
(x) Borrower shall lose its franchise, license or right to lease or to sell the Inventory or Borrower’s Franchise Agreement is terminated
or revoked for any reason;
(xi) Borrower shall fail to enter properly any acquisition of Inventory or Equipment or any Asset Disposition
on the Aaron’s Proprietary System;
(xii) Borrower shall use its FCTA for any use other than as explicitly authorized pursuant to
this Agreement; or
(xiii) Borrower shall not have in effect at all times an effective PAD Authorization in respect of the payment of all
amounts payable by it hereunder at Set Intervals or shall fail, if so requested by Lender, to execute and deliver a PAD Authorization in respect of any sporadic payment due hereunder.
9.2 Cure Period. Borrower shall have a five (5) calendar day period after Bank gives it notice of the occurrence of an Event of
Default (other than an Event of Default pursuant to Section 9.1(vi) above), during which it may cure such Event of Default. An Event of Default arising under Section 9.1(i) above shall only be cured by Bank’s receipt of payment in
immediately available funds by wire transfer or pre-authorized debit.
9.3 Advances. In no event shall Bank have any obligation to
make any Loan hereunder or an Advance pursuant to a Line of Credit Commitment or Revolving Commitment hereunder if there exists a Default Condition or an Event of Default.
All of the Loan Indebtedness shall become immediately due and payable and the
Line of Credit Commitment and Revolving Commitment shall be deemed immediately terminated (without notice to or demand upon Borrower) upon the occurrence of an Event of Default under Section 9.1(vi) of this Agreement; and upon and after the
occurrence of any other Event of Default, subject to the cure period set
forth in Section 9.2 hereof, Bank shall have the right to terminate immediately the Line of Credit Commitment and Revolving Commitment and to declare the entire unpaid principal balance of
and accrued interest with respect to the Loan Indebtedness to be, and the same shall thereupon become, immediately due and payable upon receipt by Borrower of written notice and demand. From and after the date on which the Loan Indebtedness becomes
automatically due and payable or is declared by Bank to be due and payable as aforesaid, Bank shall have and may exercise from time to time any and all rights and remedies afforded to a secured party under the PPSA or any other Applicable Law. If
the Loan Indebtedness is collected by or through legal counsel, Bank shall be entitled to collect reasonable legal fees and court costs from Borrower. In addition to, and without limiting the generality of the foregoing, Bank shall have the rights
and remedies set forth in the Security Agreement and the following rights and remedies which it may exercise at any time or times (all of which rights and remedies shall be cumulative and may be exercised singularly or concurrently):
(i) the right to notify any Account Debtor to make all payments owing to Borrower directly to Bank for application to the Loan Indebtedness
and to collect all amounts owing from any such Account Debtor;
(ii) the right to sell, lease or otherwise dispose of any or all of the
Collateral at public or private sale, for cash, upon credit or upon such other terms as Bank deems advisable in its sole discretion, or otherwise to realize upon the whole or from time to time any part of the Collateral in which Bank may have a
security interest. Any requirement of reasonable notice shall be met if such notice is sent to Borrower in accordance with Section 12 hereof at least seven (7) days before the date of sale or other disposition of the Collateral. Bank may
bid and be the purchaser at any such sale if permitted by Applicable Law;
(iii) the right to require Borrower, at Borrower’s
expense, to assemble the Collateral and make it available to Bank at a place reasonably convenient to both parties (and, for purposes hereof, Borrower stipulates that Bank shall be entitled to the remedy of specific performance). Alternatively, Bank
may peaceably by its own means or with judicial assistance enter Borrower’s premises and take possession of the Collateral or dispose of the Collateral on Borrower’s premises without interference by Borrower;
(iv) the right to incur legal fees and expenses in exercising any of the rights, remedies, powers or privileges provided hereunder, and the
right (but not the obligation) to pay, satisfy and discharge, or to bond, deposit or indemnify against, any tax or other Lien which in the opinion of Bank may in any manner or to any extent encumber any of the Collateral, all of which fees, payments
and expenses shall become part of Bank’s expenses of retaking, holding, preparing for sale and the like, and shall be added to and become a part of the principal amount of the Loan Indebtedness;
(v) the right, in Bank’s sole discretion, to perform any agreement of Borrower hereunder which Borrower shall fail to perform and take
any other action which Bank deems necessary for the maintenance or preservation of any of the Collateral or Bank’s interest therein, and Borrower agrees forthwith to reimburse Bank for all expenses incurred in connection with the foregoing,
together with interest thereon at the Default Rate from the date incurred until the date of reimbursement;
(vi) the right at any time or
times, to the fullest extent permitted by Applicable Law, to set off and apply any and all deposits (general or special, time or demand) held by Bank for Borrower’s account against any of the Loan Indebtedness, irrespective of whether or not
Bank has made any demand under the this Agreement;
(vii) the right to apply the proceeds realized from any collection, sale, lease or other
disposition of the Collateral first to the costs, expenses and legal fees incurred by Bank for collection and for acquisition, protection, removal, storage, sale and delivery of the Collateral; secondly, to interest due upon the principal amount of
the Loan Indebtedness; and thirdly, to the principal amount of the Loan Indebtedness. If any deficiency shall arise, Borrower and Guarantors shall remain bound and liable to Bank therefor; and
(viii) the right to act as Borrower’s attorney in fact (and Borrower hereby irrevocably appoints Bank as Borrower’s agent and
attorney in- fact), in Borrower’s or Bank’s name, but at Borrower’s cost and expense, to receive, open and dispose of all mail addressed to Borrower pertaining to any of the Collateral, to notify postal authorities to change the
address and delivery of mail to Borrower to such address as Bank may designate, to sign Borrower’s name on any bill of lading constituting or relating to any Collateral, to send verifications with respect to the Collateral, to execute in
Borrower’s name any affidavits or notices with regard to any and all Lien rights and to do all other acts and things necessary to carry out the terms of this Agreement or to discharge any obligation of Borrower hereunder, this power, being
coupled with an interest, is to be irrevocable so long as any Loan Indebtedness is outstanding.
Borrower waives notice of Bank’s acceptance hereof. Borrower hereby
waives any requirement on the part of Bank to post any bond or other security as a condition to Bank’s right to obtain an immediate writ of possession with respect to any Collateral. Bank shall not be deemed to have waived any of its rights
upon or remedies hereunder or any Event of Default unless such waiver be in writing and signed by Bank. No delay or omission on the part of Bank in exercising any right shall operate as a waiver of such right or any other right. A waiver on any one
occasion shall not be construed as a bar to or waiver of any right on any future occasion.
All notices and demands to or upon a party hereto shall be in writing and
shall be sent by certified or registered mail, return receipt requested, personal delivery against receipt or by telecopier or other facsimile transmission and shall be deemed to have been validly served, given or delivered when delivered against
receipt or one Business Day after deposit in the mail, postage prepaid, or, in the case of facsimile transmission, when indicated by verification receipt printed by the sending machine as having been received at the office of the noticed party,
addressed in each case as follows:
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,
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Telecopier No.: |
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| If to Bank: |
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SunTrust Bank |
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Program Lending |
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Attn: Aaron’s Program Manager |
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303 Peachtree Street, N.E., 2nd Floor |
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Mail Code 1802 |
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Atlanta, Georgia 30308 |
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Telecopier No.: (404) 724-3716 |
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or to such other address as each party may designate for itself by like notice given in accordance with this Section 12. Any written notice or demand that is not sent in conformity with the
provisions hereof shall nevertheless be effective on the date that such notice is actually received by the individual to whose attention such notice is to be sent as specified above or such individual’s successor in office.
Borrower hereby agrees to indemnify Bank and hold Bank harmless from
and against any liability, loss, damage, suit, action or proceeding ever suffered or incurred by Bank as the result of Borrower’s failure to observe, perform or discharge Borrower’s duties hereunder. Without limiting the generality of the
foregoing, this indemnity shall extend to any claims asserted against Bank by any Person under any environmental laws. If any taxes, fees or other charges shall be payable by Borrower or Bank on account of the execution, delivery or recording of any
of the Loan Documents or any loans outstanding hereunder, Borrower will pay (or reimburse Bank’s payment of) all such taxes, fees or other charges, including any applicable interests and penalties, and will indemnify and hold Bank harmless from
and against liability in connection therewith. The indemnity obligations of Borrower under this Section 13 shall survive the payment in full of the Loan Indebtedness.
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14. |
ENTIRE AGREEMENT; AMENDMENT. |
This Agreement and the other Loan Documents embody the
entire understanding and agreement between the parties hereto with respect to the subject matter hereof, and this Agreement may not be modified or amended except by an agreement in writing signed by Borrower and Bank.
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15. |
SUCCESSORS AND ASSIGNS. |
This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns; but Borrower shall not assign this Agreement or any right or benefit hereunder to any Person. Bank may assign its rights and obligations hereunder at any time and to any Person,
including without limitation, to Aaron.
ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT
SHALL BE DETERMINED BY ARBITRATION IN ACCORDANCE WITH THE INTERNATIONAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION EXCEPT TO THE EXTENT OTHERWISE SET FORTH IN THIS SECTION 16. THE PLACE OF ARBITRATION SHALL BE ATLANTA, GEORGIA
AND THE LANGUAGE OF ARBITRATION SHALL BE ENGLISH. THE NUMBER OF ARBITRATORS SHALL BE THREE SELECTED AS FOLLOWS: WITHIN FOURTEEN (14) DAYS AFTER THE COMMENCEMENT OF ARBITRATION, EACH PARTY WILL APPOINT ONE ARBITRATOR. THESE TWO ARBITRATORS WILL
THEN NAME A PRESIDING ARBITRATOR WITHIN FOURTEEN (14) DAYS AFTER THE SELECTION OF THE PARTY APPOINTEES. EACH ARBITRATOR SHALL BE AN ATTORNEY ADMITTED BEFORE THE BAR OF ANY STATE OF THE UNITED STATES OR THE BAR OF ANY PROVINCE OF CANADA. IF
EITHER PARTY FAILS TO APPOINT AN ARBITRATOR, OR IF THE TWO ARBITRATORS DO NOT NAME A THIRD ARBITRATOR WITHIN THESE TIME PERIODS, THE INTERNATIONAL CENTRE FOR DISPUTE RESOLUTION SHALL AT THE WRITTEN REQUEST OF EITHER PARTY COMPLETE THE APPOINTMENTS
THAT HAVE NOT BEEN MADE PURSUANT TO THE INTERNATIONAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION. THE ARBITRATORS SHALL AWARD TO
THE PREVAILING PARTY, IF ANY, AS DETERMINED BY THE ARBITRATORS, ALL COSTS AND EXPENSES OF THE ARBITRATORS AND THE INTERNATIONAL CENTRE FOR DISPUTE RESOLUTION. ALL WITNESS TESTIMONY AT THE HEARING
SHALL BE TRANSCRIBED BY A PUBLIC STENOGRAPHER OR COURT REPORTER. ALL PARTIES AGREE TO BE BOUND BY THE RESULTS OF SUCH ARBITRATIONS; JUDGMENT UPON THE AWARD SO RENDERED MAY BE ENTERED AND ENFORCED IN ANY COURT OF COMPETENT JURISDICTION. TO THE EXTENT
REASONABLY PRACTICABLE, BOTH PARTIES AGREE TO CONTINUE PERFORMING THEIR RESPECTIVE OBLIGATIONS UNDER THIS AGREEMENT WHILE THE DISPUTE IS BEING RESOLVED.
Time is of the essence of this Agreement. Bank reserves the right to
participate, sell or assign the Loans made hereunder and provide any participant or assignee all information in Bank’s possession regarding Borrower, its business and the Collateral. Borrower shall reimburse Bank for Bank’s out-of-pocket
expenses and for the fees and expenses and disbursements of Bank’s counsel in connection with the negotiation, documentation and closing of the transactions contemplated hereby, and Borrower will pay all expenses incurred by Borrower in
connection with the transactions. The Section headings are for convenience only and shall not limit or otherwise affect any of the terms hereof. THIS AGREEMENT AND ALL RIGHTS AND OBLIGATIONS HEREUNDER, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY
AND PERFORMANCE, SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF GEORGIA (WITHOUT REGARD TO THE LAWS OF CONFLICTS THEREOF) AND IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT.
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18. |
RELATIONS WITH AARON. |
Borrower recognizes and acknowledges that Bank has made the Loans
available to Borrower hereunder at the behest of and as an accommodation to Aaron. Accordingly, Borrower agrees that from time to time Bank may release to Aaron such information about Borrower and the Loans as Aaron may request, and Bank may
condition its agreement to any waiver, modification or amendment on the prior written consent of Aaron. Borrower further agrees that upon the occurrence of an Event of Default hereunder, Bank may notify Aaron of such Event of Default prior to
notifying Borrower thereof, and Bank shall not be liable to Borrower for failure to give simultaneous notice to Borrower. Borrower further agrees that Bank shall not be liable to Borrower as a result of any information or document obtained by Bank
regarding Borrower which is shared by Bank with Aaron.
WITNESS the hand and seal of the parties hereto on the date first above written.
Accepted in Atlanta, Georgia:
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| BORROWER: |
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| BANK: |
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| SUNTRUST BANK: |
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| By: |
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| Name: |
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| Title: |
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EXHIBIT A-1
FORM OF
LINE
OF CREDIT NOTE
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| Closing Date: [Closing Date] |
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$ |
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Atlanta, Georgia |
FOR VALUE RECEIVED, the undersigned,
(the “Borrower”), promises to pay to the order of SUNTRUST BANK, a Georgia banking corporation (the
“Bank”), at Bank’s principal office in Atlanta, Georgia, or at such other place as the holder hereof may designate by notice in writing to Borrower, in immediately available funds in lawful money of Canada, on
, (the
“Maturity Date”, as such date may be extended from time to time, for an additional 364 day period unless either party terminates the Loan as set forth in Section 2.6 of the Loan Agreement), the lesser of (x) the principal sum of
the Line of Credit Commitment: ($ ), or (y) so much principal thereof as
shall have been from time to time disbursed hereunder in accordance with that certain Loan Agreement, dated as of [ ], by and
between Borrower and Bank (as amended, restated, modified or supplemented from time to time, the “Agreement”) and not theretofore repaid, as shown on the records of Bank.
In addition to principal, Borrower agrees to pay interest on the principal amounts disbursed hereunder at a floating rate of interest equal to
the Prime Rate plus an additional
, from
time to time, upon such dates as provided for in the Agreement. Interest shall accrue on the outstanding principal balance from the date hereof up to and through the date on which all principal and interest hereunder is paid in full, and shall be
computed on the basis of the actual number of days elapsed in a year of 360 days. Such interest is to be paid to Bank at its address set forth above or as otherwise provided in the Agreement. For informational purposes, as of the date hereof the
Prime Rate in effect is % per annum, thus producing an initial interest rate under the Agreement on such date of % per annum and, when adjusted for a year of 365 days, an initial simple interest rate
of % per annum. Any principal amount due under this Line of Credit Note (the “Note”) that is not paid on the due date therefor whether on the Maturity Date, or resulting from the acceleration of maturity upon
the occurrence of an Event of Default (as defined in the Agreement), shall bear interest from the date due until payment in full at the Default Rate, as such term is defined in the Agreement.
This Note evidences a loan incurred pursuant to the terms and conditions of the Agreement to which reference is hereby made for a full and
complete description of such terms and conditions, including, without limitation, provisions for the acceleration of the maturity hereof upon the existence or occurrence of certain conditions or events, and the terms of any permitted prepayments
hereof. All capitalized terms used in this Note shall have the same meanings as set forth in the Agreement.
Upon the existence or
occurrence of any Event of Default, the principal and all accrued interest hereof shall automatically become, or may be declared, due and payable in the manner and with the effect provided in the Agreement. In addition, this Note is subject to
mandatory prepayment upon the terms and conditions of the Agreement.
Bank shall at all times have a right of set off against any deposit
balances of Borrower in the possession of Bank and Bank may apply the same against payment of this Note or any other indebtedness of Borrower to Bank. The payment of any indebtedness evidenced by this Note prior to the Maturity
Date shall not affect the enforceability of this Note as to any future, different or other indebtedness incurred hereunder by Borrower. In the event the indebtedness evidenced by this Note is
collected by legal action or through legal counsel, Bank shall be entitled to recover from Borrower all costs of collection, including, without limitation, reasonable legal fees if collected by or through legal counsel.
Borrower acknowledges that the actual crediting of the amount of any disbursement under the Agreement to an account of Borrower or recording
such amount in the records of Bank shall, in the absence of manifest error, constitute presumptive evidence of such disbursement and that such Advance was made and borrowed under the Agreement. Such account records shall constitute, in the absence
of manifest error, presumptive evidence of principal amounts outstanding and the payments made under the Agreement at any time and from time to time, provided, however, that the failure of Bank to record in such account the type or
amount of any Advance shall not affect the obligation of the undersigned to repay such amount together with interest thereon in accordance with this Note and the Agreement.
For the purposes of this Note, whenever interest to be paid hereunder is to be calculated on the basis of 360 days or any other period of
time that is less than a calendar year, the yearly rate of interest to which the rate determined pursuant to such calculation is equivalent is the rate so determined multiplied by the actual number of days in the calendar year in which the same is
to be ascertained and divided by 360 or such other number of days in such period, as the case may be.
Failure or forbearance of
Bank to exercise any right hereunder, or otherwise granted by the Agreement or by law, shall not affect or release the liability of Borrower hereunder, and shall not constitute a waiver of such right unless so stated by Bank in writing. THIS NOTE
AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF) OF THE STATE OF GEORGIA. TIME IS OF THE ESSENCE OF THIS NOTE.
PRESENTMENT FOR PAYMENT, NOTICE OF DISHONOR AND PROTEST ARE HEREBY WAIVED.
Executed under hand and seal of Borrower as of the day and year first above written.
EXHIBIT A-2
FORM OF
TERM
NOTE
|
|
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| Closing Date: [Closing Date] |
|
$ |
|
|
Atlanta, Georgia |
FOR VALUE RECEIVED, the undersigned,
(the “Borrower”), promises to pay to the order of SUNTRUST BANK, a Georgia banking corporation (the
“Bank”), at Bank’s principal office in Atlanta, Georgia, or at such other place as the holder hereof may designate by notice in writing to Borrower, in immediately available funds in lawful money of Canada,
($ ).
Repayment will be in consecutive equal monthly installments of principal in the amount of $ based on a month amortization plus accrued and unpaid
interest and shall be due and payable on each Payment Date, with the first installment being due and payable on , and the
remaining outstanding principal balance, together with all accumulated unpaid interest shall be due and payable on , (the
“Maturity Date”).
In addition to principal, Borrower agrees to pay interest on the principal amounts disbursed hereunder at a
floating rate of interest equal to the Prime Rate plus an additional
, from
time to time, upon such dates as provided for in that certain Loan Agreement dated as of [ ], by and between Borrower and Bank (as
amended, restated, modified or supplemented from time to time, the “Agreement”). Interest shall accrue on the outstanding principal balance from the date hereof up to and through the date on which all principal and interest hereunder is
paid in full, and shall be computed on the basis of the actual number of days elapsed in a year of 360 days. Such interest is to be paid to Bank at its address set forth above or as otherwise provided in the Agreement. For informational purposes, as
of the date hereof the Prime Rate in effect is % per annum, thus producing an initial interest rate under the Agreement on such date of % per annum and, when adjusted for a year of 365 days, an initial
simple interest rate of % per annum. Any principal amount due under this Term Note (the “Note”) that is not paid on the due date therefor whether on the due date, or resulting from the acceleration of
maturity upon the occurrence of an Event of Default (as defined in the Agreement), shall bear interest from the date due until payment in full at the Default Rate, as such term is defined in the Agreement.
This Note evidences a loan incurred pursuant to the terms and conditions of the Agreement to which reference is hereby made for a full and
complete description of such terms and conditions, including, without limitation, provisions for the acceleration of the maturity hereof upon the existence or occurrence of certain conditions or events, and the terms of any permitted prepayments
hereof. All capitalized terms used in this Note shall have the same meanings as set forth in the Agreement.
Upon the existence or
occurrence of any Event of Default, the principal and all accrued interest hereof shall automatically become, or may be declared, due and payable in the manner and with the effect provided in the Agreement. In addition, this Note is subject to
mandatory prepayment upon the terms and conditions of the Agreement.
Bank shall at all times have a right of set off against any deposit
balances of Borrower in the possession of Bank and Bank may apply the same against payment of this Note or any other indebtedness of Borrower to Bank, irrespective of whether or not Bank has made any demand under the Agreement. The payment of any
indebtedness evidenced by this Note prior to the Maturity Date shall not affect the
enforceability of this Note as to any future, different or other indebtedness incurred hereunder by Borrower. In the event the indebtedness evidenced by this Note is collected by legal action or
through legal counsel, Bank shall be entitled to recover from Borrower all costs of collection, including, without limitation, reasonable legal fees if collected by or through legal counsel.
Borrower acknowledges that the actual crediting of the amount of any disbursement under the Agreement to an account of Borrower or recording
such amount in the records of Bank shall, in the absence of manifest error, constitute presumptive evidence of such disbursement. Such account records shall constitute, in the absence of manifest error, presumptive evidence of principal amounts
outstanding and the payments made under the Agreement at any time and from time to time, provided, however, that the failure of Bank to record in such account the type or amount of any advance shall not affect the obligation of the
undersigned to repay such amount together with interest thereon in accordance with this Note and the Agreement.
For the purposes of
this Note, whenever interest to be paid hereunder is to be calculated on the basis of 360 days or any other period of time that is less than a calendar year, the yearly rate of interest to which the rate determined pursuant to such calculation
is equivalent is the rate so determined multiplied by the actual number of days in the calendar year in which the same is to be ascertained and divided by 360 or such other number of days in such period, as the case may be.
Failure or forbearance of Bank to exercise any right hereunder, or otherwise granted by the Agreement or by law, shall not affect or release
the liability of Borrower hereunder, and shall not constitute a waiver of such right unless so stated by Bank in writing. THIS NOTE AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW (WITHOUT
GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF) OF THE STATE OF GEORGIA. TIME IS OF THE ESSENCE OF THIS NOTE.
PRESENTMENT
FOR PAYMENT, NOTICE OF DISHONOR AND PROTEST ARE HEREBY WAIVED.
Executed under hand and seal of Borrower as of the day and year first
above written.
EXHIBIT A-3
FORM OF
REVOLVING NOTE
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| Closing Date: [Closing Date] |
|
$ |
|
|
Atlanta, Georgia |
FOR VALUE RECEIVED, the undersigned,
(the “Borrower”), promises to pay to the order of SUNTRUST BANK, a Georgia banking corporation (the “Bank”),
at Bank’s principal office in Atlanta, Georgia, or at such other place as the holder hereof may designate by notice in writing to Borrower, in immediately available funds in lawful money of Canada, on
, (the
“Maturity Date”, as such date may be extended from time to time in the sole discretion of Bank for up to an additional 364 day period by written notice from Bank to Borrower unless either party terminates the Loan as set forth in
Section 2.8 of the Loan Agreement), the lesser of (i) principal sum of the Revolving Commitment:
($ ), or (ii) so much thereof as shall have been from time to time disbursed hereunder in accordance with certain Loan Agreement, dated as of
[ ], by and between Borrower and Bank (as amended, restated, modified or supplemented from time to time, the
“Agreement”) and not theretofore repaid, as shown on the records of Bank.
In addition to principal, Borrower agrees to pay
interest on the principal amounts disbursed hereunder at a floating rate of interest equal to the Prime Rate plus an additional
, from
time to time, upon such dates as provided for in the Agreement. Interest shall accrue on the outstanding principal balance from the date hereof up to and through the date on which all principal and interest hereunder is paid in full, and shall be
computed on the basis of the actual number of days elapsed in a year of 360 days. Such interest is to be paid to Bank at its address set forth above or as otherwise provided in the Agreement. For informational purposes, as of the date hereof the
Prime Rate in effect is % per annum, thus producing an initial interest rate under the Agreement on such date of % per annum and, when adjusted for a year of 365 days, an initial simple interest rate
of % per annum. Any principal amount due under this Revolving Note (the “Note”) that is not paid on the due date therefor whether on the Maturity Date, or resulting from the acceleration of maturity upon the
occurrence of an Event of Default (as defined in the Agreement), shall bear interest from the date due until payment in full at the Default Rate, as such term is defined in the Agreement.
This Note evidences loans incurred pursuant to the terms and conditions of the Agreement to which reference is hereby made for a full and
complete description of such terms and conditions, including, without limitation, provisions for the acceleration of the maturity hereof upon the existence or occurrence of certain conditions or events, and the terms of any permitted prepayments
hereof. All capitalized terms used in this Note shall have the same meanings as set forth in the Agreement.
Upon the existence or
occurrence of any Event of Default, the principal and all accrued interest hereof shall automatically become, or may be declared, due and payable in the manner and with the effect provided in the Agreement. In addition, this Note is subject to
mandatory prepayment upon the terms and conditions of the Agreement.
Bank shall at all times have a right of set-off against
any deposit balances of Borrower in the possession of Bank and Bank may apply the same against payment of this Note or any other indebtedness of Borrower to Bank, irrespective of whether or not Bank has made any demand under the Loan Agreement. The
payment of any indebtedness evidenced by this Note prior to the Maturity Date shall not affect the enforceability of this Note as to any future, different or other indebtedness incurred hereunder by Borrower. In the event the indebtedness evidenced
by this Note is collected by legal action or through legal counsel, the Bank shall be entitled to recover from Borrower all costs of collection, including, without limitation, reasonable legal fees if collected by or through legal counsel.
Borrower acknowledges that the actual crediting of the amount of any disbursement under the Agreement to an account of Borrower or recording
such amount in the records of Bank shall, in the absence of manifest error, constitute presumptive evidence of such disbursement and that such Advance was made and borrowed under the Agreement. Such account records shall constitute, in the absence
of manifest error, presumptive evidence of principal amounts outstanding and the payments made under the Agreement at any time and from time to time, provided, however, that the failure of Bank to record in such account the type or amount of
any Advance shall not affect the obligation of the undersigned to repay such amount together with interest thereon in accordance with this Note and the Agreement.
For the purposes of this Note, whenever interest to be paid hereunder is to be calculated on the basis of 360 days or any other period of
time that is less than a calendar year, the yearly rate of interest to which the rate determined pursuant to such calculation is equivalent is the rate so determined multiplied by the actual number of days in the calendar year in which the same is
to be ascertained and divided by 360 or such other number of days in such period, as the case may be.
Failure or forbearance of Bank to
exercise any right hereunder, or otherwise granted by the Agreement or by law, shall not affect or release the liability of Borrower hereunder, and shall not constitute a waiver of such right unless so stated by Bank in writing. THIS NOTE AND THE
RIGHTS AND OBLIGATION HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF) OF THE STATE OF GEORGIA. TIME IS OF THE ESSENCE OF THIS NOTE.
PRESENTMENT FOR PAYMENT, NOTICE OF DISHONOR AND PROTEST ARE HEREBY WAIVED.
Executed under hand and seal of Borrower as of the day and year first above written.
EXHIBIT B
Permitted Liens
The following described Liens are Permitted Liens (if none, so state):
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| Name of Lien Holder |
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Date of Recording |
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Collateral |
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Trade Names and Styles
The following are the only trade names or trade styles ever used by Borrower (if none, so state):
Subsidiaries
The
following are all of the subsidiaries owned by Borrower (if none, so state):
Business Locations
The following are all of the locations where Borrower has an office or other place of business or owns assets:
EXHIBIT C
COMPLIANCE CERTIFICATE OF BORROWER
(Pursuant to Section 7.2 of Loan Agreement dated
)
(the “Borrower”)
HEREBY CERTIFIES that:
This Compliance Certificate is furnished pursuant to the Loan Agreement (the “Agreement”) dated
by and between Borrower and SUNTRUST BANK (“Bank”). Unless otherwise defined herein, the terms used in this
Report have the meanings given to them in this Agreement.
The figures and information for determining compliance by Borrower with the financial covenants
set forth in the Quarterly Covenant Compliance Report attached hereto have been prepared based upon the financial reports accompanied hereby and both the Quarterly Covenant Compliance Report and such financial reports are true and complete as of the
date hereof.
The activities of Borrower during the preceding quarter have been reviewed by the president or other authorized officer or the employees or
agents under his immediate supervision. Based on such review, to the best knowledge and belief of the president or other authorized officer, and as of the date of this Certificate, Borrower has performed and observed each and every covenant
contained in the Agreement to be performed by it, and no Event of Default or Default Condition exists, except for the following:
Please describe or
indicate “None” if none exist:
Borrower has properly and accurately reported all Asset Dispositions pursuant to Section 2.10 of the Agreement.
WITNESS my hand this day of ,
.
EXHIBIT D
QUARTERLY COVENANT COMPLIANCE REPORT
(Section 6 - Financial Covenants)
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| Test Borrower |
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| For Quarter Ending: |
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With respect to the financial covenants set forth below which are calculated based upon the Opening Date of a
store location, the financial information from store locations that have not reached the Opening Date anniversary incorporated into such covenants shall be excluded from such calculations. [Debt Service and] Debt attributable to such locations and
deducted from the final calculations shall be deducted on a pro rata basis calculated by dividing such stores’ aggregate Net Book Value of Merchandise by the Net Book Value of Merchandise for all store locations. The financial covenants shall
otherwise be calculated on a consolidated basis as to all store locations.
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| I. |
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Rental Revenue to Debt Service |
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| A. |
|
Enter amount of quarterly Rental Revenue. |
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$ |
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| B. |
|
Enter amount of quarterly Rental Revenue attributable to store locations open less than 25 months. |
|
$ |
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|
|
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| C. |
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Subtract B from A. |
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$ |
|
|
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| D. |
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Enter amount of quarter’s Debt Service. |
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Enter amount of quarter’s Debt Service attributable to store locations open less than 25 months. |
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Subtract E from D. |
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Ratio of C:F. |
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STANDARD — Ratio not less than — |
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2.2: 1.0 |
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| Compliance? Yes ¨ No ¨ |
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Debt to Rental Revenue |
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Enter amount of Debt. |
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[Subtract B from A. |
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| D. Enter Amount of last quarter’s Rental Revenue. |
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| F. [Subtract E from D. |
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5 |
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Ratio of C : F. |
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STANDARD |
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[ ] : 1.0 |
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Compliance? Yes ¨ No ¨ |
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Note: All terms are those used in generally accepted accounting practices unless specifically defined in the Agreement.
| 5 |
Note: This covenant will apply and be tested on last day of each calendar quarter and not be tied to any Opening Date of store locations in the case of any Loan Agreement providing for Loans to made available to a
Borrower consisting solely of Revolving Loans. In which case, the bracketed portions of this Debt to Rental Revenue covenant will not be applicable. Covenant levels for this covenant will be established by Sponsor for each Borrower as per the
Servicing Agreement. |
EXHIBIT E
FORM OF SECURITY AGREEMENT
THIS AGREEMENT is made as of —, 20—
BETWEEN
—, a [corporation][limited partnership][partnership] [incorporated/formed] under the laws of [the Province of —][Canada] (the
“Debtor”),
- and -
SUNTRUST BANK, a Georgia banking corporation (the “Secured Party”).
WHEREAS the Debtor has entered into the Loan Agreement with the Secured Party pursuant to which certain credit facilities will be extended to
the Debtor;
AND WHEREAS the Debtor has agreed to grant a security interest and assignment, mortgage and charge in the Collateral to the
Secured Party in order to secure the performance of its Obligations;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the
covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1 - INTERPRETATION
1.1
Interpretation. In this Agreement, unless something in the subject matter or context is inconsistent therewith, capitalized terms used and not otherwise defined in this Agreement have the meanings given to them in the Loan agreement and:
“Agreement” means this agreement, including its recitals and schedules, as amended from time to time.
“Collateral” has the meaning set out in Section 2.1.
“Loan Agreement” means the loan agreement made as of —, 20— between the Debtor and the Secured Party as amended from time to time.
“Event of
Default” means any of the events described as “events of default” in the Loan Agreement.
“Obligations” means all
obligations and liabilities of any kind whatsoever of the Debtor to the Secured Party in connection with or relating to the Loan Agreement, including all debts and liabilities, present or future, direct or indirect, absolute or contingent, matured
or not, whenever, wherever and however incurred, in any currency at any time owing by the Debtor to the Secured Party or remaining unpaid by the Debtor to the Secured Party and whether the same is from time to time reduced and thereafter increased
or entirely extinguished and thereafter incurred again, whether incurred by the Debtor alone or with another or others and whether as principal or surety or otherwise, including all interest, commissions, legal and other costs, charges and
expenses.
The terms “accessions”, “accounts”, “chattel paper”,
“documents of title”, “goods”, “instruments”, “intangibles”, “inventory”, “money”, “proceeds” and “securities” whenever used herein have the meanings given to those
terms in the Personal Property Security Act currently in effect in the province referred to in Section 5.13 below.
1.2 Headings. The
division of this Agreement into Articles and Sections and the insertion of headings are for convenience of reference only and do not affect the construction or interpretation of this Agreement. The terms “hereof”, “hereunder” and
similar expressions refer to this Agreement and not to any particular Article, Section or other portion hereof. Unless something in the subject matter or context is inconsistent therewith, references herein to Articles and Sections are to Articles
and Sections of this Agreement. 1.3 Extended Meanings. In this Agreement words importing the singular number only include the plural and vice versa, words importing any gender include all genders and words importing persons include
individuals, corporations, limited and unlimited liability companies, general and limited partnerships, associations, trusts, unincorporated organizations, joint ventures and governmental authorities. The term “including” means
“including without limiting the generality of the foregoing”. The inclusion of reference to Permitted Liens in the Loan Agreement or herein, by reference or otherwise, is not intended to subordinate, and will not subordinate, the security
granted hereunder to any such Permitted Lien.
ARTICLE II - GRANT OF SECURITY INTEREST
2.1 Security Interest. As general and continuing security for the payment and performance of all Obligations, the Debtor hereby grants to the Secured
Party a security interest in all of the Debtor’s present and after-acquired undertaking and property, both real and personal including, without limitation, all Lease Contracts (collectively, the “Collateral”), and, as further
general and continuing security for the payment and performance of the Obligations, the Debtor hereby also assigns the Collateral (other than trademarks) to the Secured Party and mortgages and charges the Collateral as and by way of a fixed and
specific mortgage and charge to the Secured Party.
2.2 Attachment of Security Interest. The Debtor acknowledges that value has been given and
agrees that the security interest granted hereby attaches upon the execution of this Agreement by the Debtor (or, in the case of any after-acquired property, at the time of acquisition by the Debtor of any rights therein).
2.3 Real Property. The assignment, mortgage and charge granted hereby will not extend to the last day of the term of any lease or agreement relating to
real property, but the Debtor will hold such last day in trust for the Secured Party and, upon the enforcement by the Secured Party of its security, will assign such last day as directed by the Secured Party.
ARTICLE III - DEALING WITH COLLATERAL
3.1
Dealing with Collateral by the Debtor. The Debtor must not sell, lease or otherwise dispose of any of the Collateral without the prior written consent of the Secured Party, except that the Debtor may, until an Event of Default occurs, deal
with its money or rent, lease or sell items of Inventory in the ordinary course of its business so that the purchaser thereof takes title thereto free and clear of the security interest, assignment and mortgage and charge granted hereby, but all
proceeds of any such sale will continue to be subject to the security granted hereby. Upon the occurrence of an Event of Default and the exercise by the Secured Party of any of its rights and remedies under Section 4.1, all money received by
the Debtor will be held by the Debtor in trust for the Secured Party and must be held separate and apart from other money of the Debtor and paid over to the Secured Party on request.
3.2 Rights and Duties of the Secured Party. The Secured Party may perform any of its rights and duties
hereunder by or through agents and is entitled to retain counsel and to act in reliance upon the advice of such counsel concerning all matters pertaining to its rights and duties hereunder.
ARTICLE IV - REMEDIES
4.1 Consequences of a
Default. On or after the occurrence of any Event of Default that has not been either cured or waived, at the option of the Secured Party, (a) any or all of the Obligations not yet payable will become immediately payable, without
presentment, protest, notice of protest or notice of dishonour, all of which are expressly waived; (b) the obligation, if any, of the Secured Party to extend further credit to the Debtor will cease; and (c) the security granted hereby will
become immediately enforceable.
4.2 Remedies. In addition to any right or remedy otherwise provided herein or by law, on or after the occurrence
of any Event of Default that has not been either cured or waived, the Secured Party will have the rights and remedies set out in the Loan Agreement and those rights and remedies set forth below, all of which may be enforced successively or
concurrently:
(a) the Secured Party may take possession of the Collateral and require the Debtor to assemble the Collateral and deliver or
make the Collateral available to the Secured Party at such places as may be specified by the Secured Party, and neither the Secured Party nor any Receiver will be or be deemed to be a mortgagee in possession by virtue of any such actions;
(b) the Secured Party may take such steps as it considers desirable to maintain, preserve or protect the Collateral;
(c) the Secured Party may carry on, or concur in the carrying on of, all or any part of the business of the Debtor;
(d) the Secured Party may have, exercise or enforce any rights of the Debtor in respect of the Collateral;
(e) the Secured Party may sell, lease or otherwise dispose of the Collateral at public auction, by private tender, by private sale or otherwise
either for cash or upon credit, upon such terms and conditions as the Secured Party may determine and without notice to the Debtor unless required by law;
(f) the Secured Party may accept all or any part of the Collateral in total or partial satisfaction of the Obligations in the manner provided
by law;
(g) the Secured Party may, for any purpose specified herein, including for the maintenance, preservation or protection of any
Collateral or for carrying on any of the business or undertaking of the Debtor, borrow money on the security of the Collateral, which security will rank in priority to the security granted hereby;
(h) the Secured Party may occupy and use all or any of the premises, buildings and plants occupied by the Debtor and use all or any of the
Equipment and other property of the Debtor for such time as the Secured Party requires to facilitate the realization of the Collateral, free of charge and the Secured Party will not be liable for any rent, charges, depreciation or damages in
connection with such actions, nor will the Secured Party or any Receiver be or be deemed to be a mortgagee in possession by virtue of any such actions;
(i) the Secured Party may appoint a receiver or receiver and manager (each herein referred to as
the “Receiver”) of the whole or any part of the Collateral and may remove or replace such Receiver from time to time or may institute proceedings in any court of competent jurisdiction for the appointment of a Receiver of the
Collateral;
(j) the Secured Party may discharge any claim, lien, mortgage, charge, security interest, encumbrance or any rights of others
that may exist or be threatened against the Collateral, and in every such case the amounts so paid together with costs, charges and expenses incurred in connection therewith will be added to the Obligations.
4.3 Powers of the Receiver. Any Receiver will have all of the rights and powers that the Secured Party is entitled to exercise pursuant to
Section 4.3 but the Secured Party will not be in any way responsible for any misconduct or negligence of any such Receiver.
4.4 Liability of
Secured Party. The Secured Party will not be liable or responsible for any failure to seize, collect, realize, or obtain payment with respect to the Collateral and is not bound to institute proceedings or to take other steps for the purpose of
seizing, collecting, realizing or obtaining possession or payment with respect to the Collateral or for the purpose of preserving any rights of the Secured Party, the Debtor or any other person in respect of the Collateral. In the exercise of its
rights and the performance of its obligations, the Secured Party will only be liable for gross negligence or wilful misconduct.
4.5 Proceeds of
Realization. The Secured Party may apply any proceeds of realization of the Collateral to payment of costs, fees and expenses, including those related to the realization of the Collateral, and the Secured Party may apply any balance to payment
of all other Obligations in such order as the Secured Party sees fit. If there is any surplus remaining, the Secured Party may pay it to any person entitled thereto by law of whom the Secured Party has knowledge and any balance remaining may be paid
to the Debtor. If the realization of the Collateral fails to satisfy the Obligations, the Debtor will be liable to pay any deficiency to the Secured Party.
4.6 Waivers by Debtor. The Secured Party may (a) grant extensions of time, (b) take and perfect or abstain from taking and perfecting
security, (c) give up any security, (d) accept compositions or compromises, (e) grant releases and discharges, and (f) otherwise waive rights against the Debtor, debtors of the Debtor, guarantors and others and with respect to
the Collateral and other security as the Secured Party sees fit. No such action or omission will reduce the Obligations or affect the Secured Party’s rights hereunder.
ARTICLE V - GENERAL
5.1 Appointment of
Consultant. The Secured Party will be entitled to an appoint a consultant to provide such services and advice as the Secured Party may determine in its sole discretion, with power to enter the Debtor’s premises, to inspect and evaluate the
Collateral, to make copies of the Debtor’s records, to review the Debtor’s business plans and projections, to assess the conduct and viability of the Debtor’s business, to prepare reports on the Debtor’s affairs and to distribute
such reports to the Secured Party or to other such persons as the Secured Party may direct. Such consultant will act as an agent for the Secured Party and will owe no duty to the Debtor. The consultant is to have no managerial or advisory capacity
and will have no decision making responsibility. The Debtor authorizes the Secured Party to provide confidential information to the consultant. All fees and expenses in connection with the engagement of a consultant are payable by the Debtor to the
Secured Party.
5.2 Waivers of Legal Limitations. To the fullest extent permitted by law, the Debtor waives all of the
rights, benefits and protections that is given by the provisions of any law that imposes limitations upon the powers, rights or remedies of a secured party, including any law that limits the rights of a secured party to both seize Collateral and sue
for any deficiency following realization of Collateral. Without limitation, the Debtor (if a corporation) agrees that the Limitation of Civil Rights Act and Part IV of the Saskatchewan Farm Securities Act of the Province of
Saskatchewan will not apply to this agreement or any of the rights, remedies or powers of the Secured Party or any Receiver hereunder.
5.3 Benefit of
the Agreement. This Agreement will enure to the benefit of and be binding upon the respective successors and permitted assigns of the parties.
5.4
Entire Agreement. This Agreement has been entered into pursuant to the provisions of the Loan Agreement and is subject to all the terms and conditions thereof and, if there is any conflict or inconsistency between the provisions of this
Agreement and the provisions of the Loan Agreement, the rights and obligations of the parties will be governed by the provisions of the Loan Agreement. This Agreement cancels and supersedes any prior understandings and agreements between the parties
with respect thereto. There are no representations, warranties, terms, conditions, undertakings or collateral agreements, express, implied or statutory, between the Secured Party and the Debtor with respect to the subject matter hereof except as
expressly set forth herein or in the Loan Agreement.
5.5 Amendments and Waivers. No amendment to this Agreement will be valid or binding unless
set forth in writing and duly executed by all of the parties. No waiver of any breach of any provision of this Agreement will be effective or binding unless made in writing and signed by the party purporting to give the same and, unless otherwise
provided, will be limited to the specific breach waived.
5.6 Assignment. The rights of the Secured Party under this Agreement may be assigned by
the Secured Party without the prior consent of the Debtor. The Debtor may not assign its obligations under this Agreement.
5.7 Severability. If
any provision of this Agreement is determined by any court of competent jurisdiction to be illegal or unenforceable, that provision will be severed from this Agreement and the remaining provisions will continue in full force and effect so long as
the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either of the parties.
5.8
Notices. Any demand, notice or other communication to be given in connection with this Agreement must be given in accordance with the Loan Agreement
5.9 Remedies Cumulative; Additional Continuing Security. The rights and remedies of the Secured Party hereunder are cumulative and are in addition to
and not in substitution for any other security now or hereafter held by the Secured Party or any other rights or remedies available at law or in equity or otherwise. No single or partial exercise by the Secured Party of any right or remedy precludes
or otherwise affects the exercise of any other right or remedy to which the Secured Party may be entitled. This Agreement is a continuing agreement and security that will remain in full force and effect until discharged by the Secured Party.
5.10 Further Assurances. Each of the Debtor and the Secured Party will from time to time execute and deliver all such further documents and
instruments, including financing statements and schedules, and do all acts and things as the other party may reasonably require to effectively carry out or better evidence or perfect the security granted hereby and the full intent and meaning of
this Agreement.
5.11 Power of Attorney. The Debtor hereby irrevocably appoints any officer for the time being of the
Secured Party the true and lawful attorney of the Debtor upon the occurrence of an Event of Default that is continuing, with full power of substitution, to do all things and execute and deliver all such documents and instruments, including financing
statements and schedules, as are referred to in Section 5.9 above, with the right to use the name of the Debtor whenever and wherever the officer may deem necessary or expedient and from time to time to exercise all rights and powers and to
perform all acts of ownership in respect to the Collateral in accordance with this Agreement.
5.12 Discharge. The Debtor will be entitled to a
discharge of this Agreement and termination of any and all commitments under the Loan Agreement or under any other Loan Document upon written request by the Debtor and full and irrevocable payment, performance and satisfaction of the Obligations. No
discharge will be effective unless in writing and executed by the Secured Party.
5.13 Governing Law. This Agreement is governed by and will be
construed in accordance with the laws of the Province of — and the laws of Canada applicable therein.
5.14 Copy of Documents and Consent to Filings. The Debtor acknowledges having received a fully executed copy of this Agreement and, to the extent
permitted by applicable law, waives all rights to receive from the Secured Party a copy of any financing statement, financing change statement, or verification statement, filed or issued at any time in respect of this Agreement. The Debtor confirms
its consent to the filing by the Secured Party or on its behalf of any financing statement or financing change statement filed or issued at any time in respect of this Agreement.
IN WITNESS WHEREOF the parties have executed this Agreement.
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| DEBTOR |
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— |
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Per: |
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| Date of Execution |
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Name: |
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c/s |
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Name: |
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Title: |
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| SECURED PARTY: |
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SUNTRUST BANK |
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Per: |
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c/s |
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EXHIBIT F
FORM OF PAYOR’S PAD AGREEMENT
Business Pre-Authorized Debit Plan* -
Authorization of the Payor to the Payee to Direct Debit an Account
Instructions:
| 1. |
Please complete all sections in order to instruct your financial institution to make payments directly from your account. |
| 2. |
Please sign the Terms and Conditions that are part of this document. |
| 3. |
Return the completed form with a blank cheque marked “VOID” to the Payee at the address noted below. |
| 4. |
If you have any questions, please write or call the Payee. |
PAYOR INFORMATION (Please type or
print clearly)
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| Payor Name: |
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| Address: |
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| Telephone:
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| Name(s) of Authorized Signing Officer(s): |
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| Signature(s) of Authorized Signing Officer(s): |
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Date: |
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PAYOR FINANCIAL INSTITUTION/BANKING INFORMATION (Please type or print clearly)
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Account Number |
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Postal Code |
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PAYEE INFORMATION (Please type or print clearly)
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Address: Number, Street/Avenue/Blvd/Crsc/ City/Province/Postal
Code |
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Telephone: Fax:
Email: |
PAYMENT INFORMATION (Please type or print clearly)
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| Please
specify whether the payment is a: (Please check one) |
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Fixed Amount: (Please specify) |
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Variable Amount: If variable, please specify whether there is a maximum amount or indicate N/A if there is no maximum amount:
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| Occurring at:
(Please check one) |
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Set intervals: Please specify the timing (i.e. weekly, bi-weekly, monthly) |
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Sporadic intervals
The Payor must describe the occurrence of an Event or other criteria that will trigger the debit of the account |
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Mandatory description here:
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permissible? (Please check one) |
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Yes
No |
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| * |
This form is for PADs which relate to commercial activities of a Payor who is a corporation, organization, trade, association, government entity, profession, venture or enterprise. |
PAYOR’S PAD AGREEMENT
Business Pre-Authorized Debit Plan
Terms & Conditions
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In this Agreement “we”, “us” and “our” refers to the Payor indicated on page 1. |
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2. |
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We agree to participate in this Business Pre-Authorized Debit Plan and we authorize the Payee indicated on page 1 and any
successor or assign of the Payee to draw a debit in paper, electronic or other form for the purpose of making payment for goods or services related to our commercial activities (a “Business PAD”) on our account indicated on the page 1 (the
“Account”) at the financial institution indicated on page 1 (the “Financial Institution”) and we authorize the Financial Institution to honour and pay such debits.
This Agreement and our authorization are provided for the benefit of the Payee and our
Financial Institution and are provided in consideration of our Financial Institution agreeing to process debits against our Account in accordance with the Rules of the Canadian Payments Association.
We agree that any direction we may provide to draw a Business PAD, and any Business PAD
drawn in accordance with this Agreement, shall be binding on us as if signed by us, and, in the case of paper debits, as if they were cheques signed by us. |
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3. |
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We may revoke or cancel this Agreement at any time upon notice being provided by us either in writing or orally. We acknowledge
that in order to revoke or cancel the authorization provided in this Agreement, we must provide notice of revocation or cancellation to the Payee.
This Agreement applies only to the method of payment and we agree that revocation or cancellation of this Agreement does not terminate or otherwise have any
bearing on any contract that exists between us and the Payee. The Payee shall use best
efforts to cancel the Business PAD in the next business, billing or processing cycle but shall within not more than 30 days from the notice cease to issue any new Business PADs.
We understand that we may obtain a sample cancellation form, or further information on our
right to cancel a PAD Agreement, at our financial institution or at www.cdnpay.ca. |
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4. |
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We agree that our Financial Institution is not required to verify that any Business PAD has been drawn in accordance with this Agreement, including the amount, frequency and fulfillment of any purpose of any Business
PAD. |
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5. |
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We agree that delivery of this Agreement to the Payee constitutes delivery by us to our Financial Institution. We agree that the Payee may deliver this Agreement to the Payee’s financial institution and agree to the
disclosure of any information which may be contained in this Agreement to such financial institution. |
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| Delete either 6(a) or 6(b) as applicable |
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We understand that with respect to: |
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fixed amount Business PADs occurring at set intervals, we shall receive written notice from the Payee of the amount to be debited and the due date(s) of debiting, at least 10 calendar days before the first Business PAD, and such
notice shall be received every time there is a change in the amount or payment date(s), except as provided in clause (iii) below; |
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(ii) |
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variable amount Business PADs occurring at set intervals, we shall receive written notice from the Payee of the amount to be debited and the due date(s) of debiting, at least 10 calendar days before the due date of every Business
PAD, except as provided in clause (iii) below; and |
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(iii) |
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fixed amount and variable amount Business PADs occurring at set intervals, where the Business PAD Plan provides for a change in the amount of such fixed and variable amount PADs as a result of our direct action (such as, but not
limited to, a telephone instruction) requesting the Payee to change the amount of a PAD, no pre-notification of such changes is required. |
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- OR - |
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| If Payor agrees to waive pre-notification, Payor must sign where indicated |
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(b) We agree to waive the pre-notification requirements in section 6(a) of this Agreement. |
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Signature of Payor |
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Signature of Payor |
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We agree that with respect to Business PADs, where the payment frequency is sporadic, an authorization given using a password or secret code or
other signature equivalent that is issued to us shall constitute a valid authorization for the Payee or its agent to debit our account. |
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We may dispute a Business PAD by providing a signed declaration to our Financial Institution under the following conditions: |
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the Business PAD was not drawn in accordance with this Agreement; |
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this Agreement was revoked or cancelled; or |
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any pre-notification required and not waived by section 6(b) was not received by us. |
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We acknowledge that, in order to obtain reimbursement from our Financial Institution for the amount of a disputed Business PAD, we must sign a declaration to the effect that either (a), (b) or (c) above took place and
present it to our Financial Institution up to and including but not later than ten (10) business days after the date on which the disputed Business PAD was posted to our Account. |
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We acknowledge that, after this ten (10) business day period, we shall resolve any dispute regarding a Business PAD solely with the Payee, and that our Financial Institution shall have no liability to us respecting any
such Business PAD. |
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We certify that all information provided with respect to the Account is accurate and we agree to inform the Payee, in writing, of any change in the Account information provided in this Agreement at least ten (10)
business days prior to the next due date of a Paper and/or Electronic Business PAD. In the event of any such change, this Agreement shall continue in respect of any new account to be used for Business PADs. |
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We have certain recourse/reimbursement rights if any debit does not comply with this Agreement. For example, we have the right to receive reimbursement for any debit that is not authorized or is not consistent with this
PAD Agreement. To obtain more information on our recourse/reimbursement rights, we may contact our financial institution or visit the CPA website at www.cdnpay.ca. |
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We warrant and guarantee that all persons whose signatures are required to sign on the Account have signed this Agreement below. In addition we
warrant and guarantee, where applicable, that we have the authority to electronically agree to commit to this Agreement by secure electronic signature and that our secure electronic signature conforms with the requirements of Rule H1. |
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We agree that a payment service provider will administer the PAD. [INSERT NAME] will be administering the PAD. |
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We understand and agree to the foregoing terms and conditions. |
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We agree to comply with the Rules of the Canadian Payments Association, or any other rules or regulations which may affect the services
described herein, as may be introduced in the future or are currently in effect and we agree to execute any further documentation which may be prescribed from time to time by the Canadian Payments Association in respect of the services described
herein. |
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Applicable to the Province of Quebec only: It is the express wish of the parties that this Agreement and any related documents be drawn
up and executed in English. Les parties conviennent que la présente convention et tous les documents s’y rattachant soient rédigés et signés en anglais. |
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Per: |
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Signature of Authorized Signing Officer |
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Signature of Authorized Signing Officer |
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EXHIBIT C
EXHIBIT C
TO
THIRD
AMENDED AND RESTATED LOAN FACILITY AGREEMENT
AND GUARANTY
FORM OF LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of
, is made between
(“Borrower”), and SUNTRUST BANK (“Bank”), a Georgia banking corporation having its principal office in
Atlanta, Georgia.
W I T N E S S E T H:
WHEREAS, Borrower engages in the business of leasing and selling furniture, electronics, appliances, and other household goods and is a
franchisee of Aaron’s, Inc., a Georgia corporation formerly known as Aaron Rents, Inc. (“Aaron”);
WHEREAS, Borrower has
requested and Bank has agreed to provide financing to Borrower;
WHEREAS, Borrower and Bank wish to enter into this Agreement to set forth
the terms and conditions of Bank’s establishment of a credit facility for Borrower;
THEREFORE, upon the terms and conditions
hereinafter stated, and in consideration of the mutual premises set forth above and other adequate consideration, the receipt and sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows:
1. DEFINITIONS AND RULES OF CONSTRUCTION
1.1. As used in this Agreement, the following terms shall have the meanings set forth below (terms defined in the singular to have the same
meaning when used in the plural and vice versa):
“Aaron’s Proprietary System” shall mean Aaron’s proprietary
point of sale software system, as modified from time to time, used by Aaron and its franchisees, such as Borrower.
“Account” means any right of Borrower to payment for goods sold or leased or for services rendered which is not evidenced by
an Instrument or Chattel Paper, whether or not earned by performance.
“Account Debtor” means any Person who is liable on
an Account.
“Advance” shall mean an advance of funds by Bank on behalf of Borrower pursuant to the Line of Credit Note
or Revolving Note executed by Borrower.
“Agreement” means this Loan and Security Agreement and all exhibits, riders and
schedules at any time executed by the parties and made a part hereof by reference, either as originally executed or as hereafter amended, restated, modified or supplemented from time to time.
“Anti-Corruption Laws” shall mean all laws, rules, and regulations of any
jurisdiction applicable to the Borrower and its Subsidiaries from time to time concerning or relating to bribery or corruption.
“Anti-Terrorism Order” shall mean Executive Order 13224, signed by President George W. Bush on September 23, 2001.
“Applicable Law” means all laws, rules and regulations applicable to the Person, conduct, transaction, covenant or Loan
Documents in question, including, without limitation, all applicable law and equitable principles; all provisions of all applicable state and federal constitutions, statutes, rules, regulations and orders of governmental bodies; and all orders,
judgments and decrees of all courts and arbitrators.
“Approved Invoice” means an invoice for the aggregate purchase
price of Merchandise purchased by Borrower with a purchase order approved by Aaron.
“Asset Disposition” shall mean
(i) all sales of Merchandise; (ii) all Merchandise which is determined to have been stolen; (iii) all Merchandise that is destroyed, lost or otherwise removed from the premises of Borrower other than pursuant to a Lease Contract or by
outright sale or for repair work; and (iv) all “skipped” Merchandise which is Merchandise subject to a Lease Contract.
“Asset Disposition Prepayment” shall have the meaning set forth in Section 2.12(b) hereof.
“Balances” means all monies and funds of Borrower at any time on deposit with Bank.
“Bank” shall mean SunTrust Bank and its successors and assigns.
“Bankruptcy Code” means the Bankruptcy Reform Act of 1978, as may be amended from time to time.
“Books and Records” means all of Borrower’s books and records evidencing or relating to its business, financial
condition or the Collateral, including, but not limited to, all customer lists, ledgers, invoices, purchase orders, financial statements, computer tapes and disks.
“Borrowing Base” shall mean, on any date of determination, an amount equal to [ ] multiplied by Rental
Revenue for the most recently ended three calendar months.
“Borrowing Base Report” shall have the meaning set forth in
Section 2.5(iv) hereof.
“Business Day” shall mean any day other than a Saturday, Sunday or a day on which
commercial banks in Atlanta, Georgia are authorized by law to close.
“Chattel Paper” shall have the meaning ascribed to
it in the Code.
“Closing Date” shall mean for (i) the Revolving Commitment, the date set forth in the Revolving
Note on which all Loan Documents have been executed and delivered and the conditions precedent to funding the loan have been satisfied, (ii) the Term Loan, the date set forth in the Term Note on which all Loan Documents have been executed and
delivered and the conditions precedent to funding the loan have been satisfied and (iii) the Line of Credit Commitment, the date set forth in the Line of Credit Note on which all Loan Documents have been executed and delivered and the
conditions precedent to funding the loan have been satisfied.
“Closing Fee” shall have the meaning given to such term in Section 2.13
hereof.
“Code” means the Uniform Commercial Code as in effect from time to time in the State of Georgia.
“Collateral” shall have the meaning given to such term in Section 3.1 hereof.
“Collateral Agreement” means an agreement executed by Borrower and any other Persons primarily or secondarily liable for all
or part of the Loans or granting a security interest to Bank in specified Collateral as security for the Loans, including without limitation, this Agreement and any Guaranties.
“Commitment Fee” shall have the meaning set forth in Section 2.14 hereof.
“DDA Account” shall mean Borrower’s Demand Deposit Account into which Bank shall deposit the Advances for the purpose of
(i) paying, by means of ACH transfer, Approved Invoices arising from purchases of Merchandise from a supplier, including any freight charges to the extent Aaron consents thereto, (ii) paying, to Borrower’s own account (or, with the
written consent of Aaron, such other account for which wiring instructions have been provided to the Bank) upon the consent of Aaron, state use taxes associated therewith, and (iii) paying, to Borrower’s own account (or, with the written
consent of Aaron, such other account for which wiring instructions have been provided to the Bank) any other items to the extent expressly permitted to be paid hereunder.
“Debt” means (i) indebtedness for borrowed money or for the deferred purchase price of property or services (other than
trade accounts payable on customary terms in the ordinary course of business), (ii) financial obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) financial obligations as lessee under leases which shall
have been or should be, in accordance with GAAP, recorded as capital leases, and (iv) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to
assure a creditor against loss in respect of, indebtedness or financial obligations of others of the kinds referred to in clauses (i) through (iii) above.
“Debt Service” shall mean, for any particular period, the total required payments of principal (excluding any payments of
principal required to be made as a result of any Asset Disposition), interest and fees made by Borrower with respect to its Debt (other than Debt of the Borrower which is subordinated to the Loan Indebtedness owing to the Bank pursuant to a
subordination agreement in form and substance satisfactory to the Bank) during such period to the extent that such Debt arises pursuant to this Agreement or any other financing arrangement with respect to Merchandise.
“Default Condition” means the occurrence of any event which, after satisfaction of any requirement for the giving of notice
or the lapse of time, or both, would become an Event of Default.
“Default Rate” means the annual percentage interest
rate applied to the principal of the Loans not paid when due under the terms of the applicable Loan Documents, which rate shall equal the sum of two percent (2%) per annum plus the Floating Rate.
“Delinquent Payment Fee” shall have the meaning given to such term in Section 2.15 hereof.
“Documents” shall have the meaning ascribed to it in the Code.
“Environment” means navigable waters, waters of the contiguous zone, ocean
waters, natural resources, surface waters, ground water, drinking water supply, land surface, subsurface strata, ambient air, both inside and outside of buildings and structures.
“Environmental Laws” means federal, state, local and foreign laws, principles of common law, regulations and codes, as well
as orders, decrees, judgments or injunctions issued, promulgated, approved or entered thereunder relating to pollution, protection of the environment or public health and safety, including, but not limited to the release or threatened release of
Hazardous Substances into the Environment or otherwise relating to the presence, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances.
“Equipment” means all machinery, equipment, furniture, fixtures, motor vehicles and other tangible personal property (other
than Inventory) of Borrower, including, but not limited to, all items described on the Equipment Schedule (if attached) and all substitutions and replacements thereof.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
“Event of Default” shall have the meaning given to such term in Section 9 hereof.
“Floating Rate” means a rate of interest per annum equal to the Prime Rate plus an additional [four and three-quarters]
percent ([4.75%]6) per annum, such rate to change as and when the Prime Rate changes.
“Franchise Agreement” means the written agreement between Aaron and Borrower whereby Borrower is authorized to establish an
“Aaron’s” franchise.
“GAAP” means generally accepted accounting principles in the United States,
consistently applied.
“General Intangibles” shall have the meaning ascribed to it in the Code and shall include, without
limitation, all of Borrower’s tax refund claims, patents, copyrights, licenses, trademarks, trade names, service marks, patent applications and choses in action.
“Guarantor” means each Person who now or hereafter guarantees payment of the whole or any part of the Loan Indebtedness.
“Guaranty” means any guaranty agreement executed by each of the partners, shareholders, and where not prohibited by law, the
spouses of such persons, of Borrower, or such other Persons as may be required by the Bank, in favor of the Bank with respect to the obligations of Borrower with respect to the Loans in the form provided by the Bank, as the same may be amended,
restated or supplemented from time to time.
“Hazardous Substances” means any waste, pollutant, hazardous substance,
toxic substance, hazardous waste, special waste, industrial substance or waste, petroleum or petroleum-derived substance or waste, or any constituent of any such substance or waste, including without limitation, any such substance regulated under or
defined by any Environmental Law.
“Instrument” shall have the meaning ascribed to it in the Code.
| 6 |
Note: This interest rate shall be as designated by Aaron’s in the applicable loan Funding Approval Notice. |
“Inventory” means all inventory of Borrower, including, without limitation, all
raw materials, work-in-process, finished goods, goods being leased pursuant to Lease Contracts, and other goods held by Borrower for sale or lease or furnished under
contracts of service.
“Investment Property” shall have the meaning ascribed to it in the Code.
“Lease Contract” means a contract between Borrower and a customer to lease Merchandise in the form approved by Aaron (and
which may include purchase options).
“Lien” means any interest in property securing an obligation, whether such interest
is based on the common law, statute or contract, including, without limitation, a security interest, lien or security title arising from a security agreement, mortgage, security deed, trust deed, pledge or condition sale, or a lease, consignment or
bailment for security purposes.
“Line of Credit Commitment” means the committed line of credit facility established by
the Bank in favor of Borrower in the amount set forth in the Line of Credit Note and upon the terms described in this Agreement.
“Line of Credit Loan” means a loan or an advance made by the Bank to the Borrower under its Line of Credit Commitment.
“Line of Credit Note” means a note executed by Borrower in favor of Bank, substantially in the form of Exhibit A-1
attached hereto in the committed principal amount of the Bank’s Line of Credit Commitment evidencing the obligation of the Borrower to repay its Line of Credit Loans.
“Loan Account” means the internal bank loan account established by the Bank for Borrower.
“Loan Documents” means this Agreement, the Notes, the Collateral Agreements, any other documents relating to the Loans
delivered by Borrower or any guarantor or surety thereof to the Bank and any amendments thereto.
“Loan Indebtedness”
means all amounts due and payable by Borrower under the terms of the Loan Documents with respect to the Loans made thereunder, including, without limitation, outstanding principal, accrued interest, any late charges, and all reasonable costs and
expenses of any legal proceeding brought by the Bank to collect any of the foregoing (including without limitation, reasonable attorneys’ fees).
“Loans” means the Line of Credit Loans, Revolving Loans or Term Loans.
“Loan Term” shall have the meaning set forth in Section 2.8 hereof.
“Maturity Date” shall mean for (i) the Revolving Commitment, the date set forth in the Revolving Note, (ii) the
Term Loan, the date set forth in the Term Note and (iii) the Line of Credit Commitment, the date set forth in the Line of Credit Note.
“Merchandise” means goods distributed or sold to Borrower through Aaron.
“Net Book Value” means, for any item of Merchandise, the cost of such Merchandise less accumulated depreciation as
calculated in accordance with the Aaron’s Proprietary System.
“Note” means the Line of Credit Note, the Revolving
Note, or the Term Note, as the case may be.
“Opening Date” shall mean with respect to each store location, the date
determined by Aaron to be the opening date of such location in accordance with its standard practice, as notified to the Bank.
“Patriot Act” shall mean the USA PATRIOT Improvement and Reauthorization Act of 2005 (Pub. L. 109-177 (signed into law
March 9, 2006)), as amended and in effect from time to time.
“Payment Date” shall mean the last day of each
calendar month; provided, however, if such day is not a Business Day, the next succeeding Business Day.
“Permitted
Liens” means Liens in favor of Bank or Aaron; Liens for taxes not yet due or payable; statutory Liens securing the claims of materialmen, mechanics, carriers and landlords for labor, materials, supplies or leases incurred in the ordinary
course of Borrower’s business, but only if payment thereof is not at the time required and such Liens are at all times junior in priority to the Liens in favor of Bank; Liens shown on Exhibit B (if any); and Liens hereafter consented to
by Bank in writing.
“Person” means a corporation, an association, partnership, an organization, a business, a business
trust, a limited liability company, an individual, a government or political subdivision thereof or a governmental agency.
“Prime
Rate” means the per annum rate of interest designated from time to time by the Bank to be its prime rate, with any change in the rate of interest resulting from a change in the Prime Rate to be effective as of the opening of business of the
Bank on the day of such change. The prime rate is one of several reference rates used by the Bank and the Bank makes loans at rates both higher and lower than the Prime Rate.
“Quarterly Covenant Compliance Report” shall mean that Quarterly Covenant Compliance Report substantially in the form of
Exhibit D attached hereto.
“Rental Revenue” means, for any period, the gross revenues of Borrower from leases to
the public of Borrower’s furniture inventory, computer, electronics, appliances and lease equipment including, without limitation, all customer deposits, advance lease payments, waiver fees, late fees, delivery fees, nonsufficient fund fees,
reinstatement fees, but excluding all retail sales proceeds and sales taxes.
“Revolving Commitment” means the committed
revolving facility established by the Bank in favor of Borrower in the amount set forth in the Revolving Note and upon the terms described in this Agreement.
“Revolving Loan” means a loan or an advance made by the Bank to the Borrower under its Revolving Commitment.
“Revolving Note” means a note executed by Borrower in favor of Bank, substantially in the form of Exhibit A-2 attached
hereto, in the committed principal amount of the Bank’s Revolving Commitment evidencing the obligation of the Borrower to repay its Revolving Loans.
“Sanctioned Country” shall mean, at any time, a country or territory that is, or whose government is, the subject or target
of any Sanctions.
“Sanctioned Person” shall mean, at any time, (a) any Person listed in any Sanctions-related list
of designated Persons maintained by OFAC, the U.S. Department of State, the United Nations Security Council, the European Union or any EU member state, (b) any Person located, organized or resident in a Sanctioned Country or (c) any Person
controlled by any such Person.
“Sanctions” shall mean economic or financial sanctions or trade embargoes
administered or enforced from time to time by (a) the U.S. government, including those administered by OFAC or the U.S. Department of State or (b) the United Nations Security Council, the European Union or Her Majesty’s Treasury of
the United Kingdom.
“Solvent” means, as to any Person, such Person (i) is able to pay, and does pay, its debts as
they mature and (ii) has a positive tangible net worth determined in accordance with GAAP.
“Spousal Consent” shall
mean any agreement provided by the spouse of any Person executing a Guaranty to the extent such spouse has not personally executed a Guaranty, to be substantially in the form provided by the Bank.
“Subsidiary” means any corporation or other entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by Borrower.
“Term Loan” shall mean a single loan made by the Bank to the Borrower in an amount not to exceed the Term Loan Commitment.
“Term Loan Commitment” shall mean the obligation of the Bank to make a Term Loan in favor of Borrower in the
amount set forth in the Term Note and upon the terms described in this Agreement.
“Term Note” means a note executed by
Borrower in favor of Bank, substantially in the form of Exhibit A-3 attached hereto in the committed principal amount of the Bank’s Term Loan Commitment evidencing the obligation of the Borrower to repay its Term Loan.
1.2. Accounting Terms and Determination. Accounting terms used in this Agreement such as “amortization,”
“depreciation,” “interest expense,” and “tangible net worth” shall have the meaning normally given them by, and shall be calculated (both as to amounts and classification of items) in accordance with, GAAP. Any pronoun
used herein shall be deemed to cover all genders. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations, and all references to any instruments or agreements, including,
without limitation, references to any of the Loan Documents, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof.
2. LOAN; USE OF PROCEEDS.
2.1.
Establishment of DDA Account; Loan Account. (a) Prior to the Closing Date, Bank shall establish a DDA Account for Borrower.
(b) Prior to the Closing Date, Bank shall also establish on its books an internal loan account in Borrower’s name (the “Loan
Account”) in which Bank shall record, in accordance with customary accounting practice, all charges, expenses and other items properly chargeable to Borrower; all payments made by Borrower on account of indebtedness evidenced by the Loan
Account; all proceeds of Collateral which are finally paid to Bank at its office in cash or solvent credits; and other appropriate debits and credits. The debit balance of the Loan Account shall reflect the amount of Borrower’s Loan
Indebtedness from time to time by reason of the Loans and other appropriate charges hereunder. At least
once each month, Bank shall render a statement of account for the Loan Account, which statement shall be considered correct, and accepted by and conclusively binding upon Borrower, unless
Borrower notifies Bank to the contrary within thirty (30) days after Bank’s sending of said statement to Borrower.
2.2.
Establishment of Line of Credit Loan. Any Line of Credit Commitment now or hereafter committed to by Bank pursuant to which Borrower shall execute and deliver to Bank a Line of Credit Note shall be governed by and issued pursuant to the
provisions, terms and conditions set forth herein.
2.3. Line of Credit Advances. (i) Upon Borrower’s execution of this
Agreement and a Line of Credit Note and compliance with the terms of this Agreement ,and subject to Bank’s confirmation if requested by Aaron that Bank has a first priority security interest in the Collateral, Bank shall notify Borrower that
Borrower may request Advances pursuant to the Line of Credit Commitment. Bank shall make such Advances into the DDA Account (or, with the written consent of Aaron, such other account for which wiring instructions have been provided to Bank) for the
sole purposes of (x) honoring requests from Borrower, made through the Aaron’s Proprietary System, for ACH transfers to suppliers of Merchandise in payment of Approved Invoices, including any freight charges to the extent Aaron consents
thereto, or with Aaron’s consent, to Borrower’s own account for the payment of sales use taxes, and (y) honoring requests from Borrower for Advances made via wire transfers (or such other method approved in writing by Aaron and
acceptable to Bank) to the DDA Account (or, with the written consent of Aaron, such other account of Borrower or of a third party for which wiring instructions have been provided to Bank) for working capital and for any other lawful purposes, in
each case, to the extent approved in writing by Aaron. Borrower shall not use the DDA Account for any other purpose. The maximum principal amount of Advances under the Line of Credit Commitment at any time outstanding shall not exceed the committed
amount of the Line of Credit Commitment. Each Advance shall be in the amount of not less than $500.
(ii) Borrower shall submit purchase
order requests for Merchandise to Aaron from time to time. In the event that the purchase order is authorized pursuant to the Franchise Agreement, Aaron will prepare the purchase order and submit the same to the appropriate supplier requested by
Borrower. The supplier will be instructed to ship all Merchandise directly to Borrower and Borrower will be responsible for (i) inspecting all Merchandise and resolving all disputes regarding the Merchandise with such supplier and
(ii) paying all freight and other shipping and/or insurance charges arising in connection therewith with funds other than Loan proceeds, unless otherwise agreed by Aaron. The supplier will invoice Borrower for such Merchandise in accordance
with normal industry practice. When Borrower wishes to pay such invoice, Borrower, subject to availability of the Line of Credit Commitment, shall pay such invoice by directing Bank, through the Aaron’s Proprietary System, to pay such invoice
by means of an ACH transfer (or such other method approved in writing by Aaron and acceptable to Bank) from its DDA Account. Any directions for ACH transfers correctly inputted into the Aaron’s Proprietary System prior to 12:00 Midnight
(Atlanta, Georgia time) on any Business Day, shall be paid by Bank no later than the third Business Day thereafter, unless Borrower is otherwise notified by Aaron or Bank.
(iii) Upon receipt of the request for an ACH transfer (provided that such request relates to an Approved Invoice), Bank shall honor such
request by making an Advance pursuant to the Line of Credit Commitment in the amount of such request into Borrower’s DDA Account and automatically forwarding such amount to the supplier by means of an ACH transfer in accordance with the
instructions of Borrower. Upon receipt of any request by Borrower to deposit funds into another account in the name of Borrower or in the name of a third party, and receipt of Aaron’s written approval thereof, Bank shall honor such request by
making an Advance pursuant to the Line of Credit Commitment in the amount of such request into Borrower’s DDA Account (or, with the written consent of Aaron, such other account for which wiring instructions have been provided to Bank). In the
event that a request for an ACH transfer
(or other method of transfer approved in writing by Aaron and acceptable to Bank) is presented for payment and Borrower’s availability pursuant to the Line of Credit Commitment is
insufficient to honor such request, Bank may, but shall have no obligation to, make such overadvance, which shall be an Advance for all purposes hereunder, but shall be due and payable upon demand. At the end of each calendar month, Bank shall
provide Borrower with a monthly DDA Account statement in the form customarily used by Bank for its commercial customers and a loan account statement.
(iv) The aggregate amount of Advances made to the Borrower during such month shall be amortized into eighteen (18) or twenty-four
(24) (as designated by Aaron in writing from time to time) equal payments of principal due and payable on the next succeeding Payment Dates; provided that, in the event that Bank terminates the Line of Credit Commitment as provided in
Section 2.8 below, all outstanding amounts shall be due and payable on the 24th Payment Date following such termination.
2.4.
Establishment of Revolving Loan. Any Revolving Commitment now or hereafter committed to by Bank pursuant to which Borrower shall execute and deliver to Bank a Revolving Note shall be governed by and issued pursuant to the provisions, terms
and conditions set forth herein.
2.5. Revolving Advances. (i) Upon Borrower’s execution of this Agreement and a
Revolving Note and compliance with the terms of this Agreement and subject to Bank’s confirmation if requested by Aaron that Bank has a first priority security interest in the Collateral, Bank shall notify Borrower that Borrower may request
Advances pursuant to the Revolving Commitment. Bank shall make such Advances into the DDA Account (or, with the written consent of Aaron, such other account for which wiring instructions have been provided to Bank) solely for the purposes specified
in Section 2.3. The maximum principal amount of Advances under the Revolving Commitment at any time outstanding shall not exceed the lesser of (A) the committed amount of the Revolving Commitment and (B) the sum of the Borrowing Base
minus the outstanding principal amount of the Term Loan, as most recently reported by Aaron to Bank pursuant to Section 2.5(iv) hereof (such lesser amount herein referred to as the “Revolver Availability”). Each Advance shall be in
the amount of not less than $500.
(ii) Borrower shall submit purchase order requests for Merchandise to Aaron. In the event that the
purchase order is authorized pursuant to the Franchise Agreement, Aaron will prepare the purchase order and submit the same to the appropriate supplier requested by Borrower. The supplier will be instructed to ship all Merchandise directly to
Borrower and Borrower will be responsible for (i) inspecting all Merchandise and resolving all disputes regarding the Merchandise with such supplier and (ii) paying all freight and other shipping and/or insurance charges arising in
connection therewith with funds other than Loan proceeds, unless otherwise agreed by Aaron. The supplier will invoice Borrower for such Merchandise in accordance with normal industry practice. When Borrower wishes to pay such invoice, Borrower,
subject to the Revolver Availability, shall pay such invoice by directing Bank, through the Aaron’s Proprietary System, to pay such invoice by means of an ACH transfer from its DDA Account. Any directions for ACH transfers correctly inputted
into the Aaron’s Proprietary System prior to 12:00 Midnight (Atlanta, Georgia time) on any Business Day, shall be paid by Bank no later than the third Business Day thereafter, unless Borrower is otherwise notified by Aaron or Bank.
(iii) Upon receipt of the request for an ACH transfer (provided that such request relates to an Approved Invoice), Bank shall honor such
request by making an Advance pursuant to the Revolving Commitment in the amount of such request into Borrower’s DDA Account and automatically forwarding such amount to the supplier by means of an ACH transfer in accordance with the instructions
of Borrower. Upon receipt of any request by Borrower to deposit funds in another account in the name of Borrower or in the name of a third party, and receipt of Aaron’s written approval thereof, Bank shall honor such request by making an
Advance pursuant to the Revolving Commitment in the amount of such request into Borrower’s DDA Account (or, with the written consent of Aaron, such other account for
which wiring instructions have been provided to Bank). In the event that a request for an ACH transfer (or such other method of transfer approved in writing by Aaron and acceptable to Bank) is
presented for payment and Borrower’s availability pursuant to the Revolving Commitment is insufficient to honor such request, Bank may, but shall have no obligation to, make such overadvance, which shall be an Advance for all purposes
hereunder, but shall be due and payable upon demand. At the end of each calendar month, Bank shall provide Borrower with a monthly DDA Account statement in the form customarily used by Bank for its commercial customers and a loan account statement.
(iv) On the fifth Business Day of each month, for Borrowers with a Revolving Loan (as determined on the last day of the preceding
calendar month), Aaron shall calculate the Borrowing Base and report the same to Bank in writing (the “Borrowing Base Report”), and Bank shall be entitled to rely conclusively upon such information. Upon receipt of the Borrowing Base
Report, Bank shall input such information into Bank’s loan records to be effective as of the date which is two Business Days after receipt of such information. On the 15th day of each
calendar month, Bank shall mail to Borrower a bill setting forth the total amount of principal (to the extent that the aggregate outstanding principal amount of the Revolving Loans exceeds the lesser of the Revolving Commitment or the Borrowing Base
as set forth in the most recent Borrowing Base Report) and interest due on the next Payment Date which bill shall be considered correct, and accepted by and conclusively binding upon Borrower, unless Borrower notifies Bank to the contrary within
thirty (30) days after Bank’s sending of said bill to Borrower. In addition, Bank, on the date which is two Business Days after receipt of the Borrowing Base Report from Aaron, shall notify Borrower in writing (including facsimile) of the
new Borrowing Base for Borrower and shall require that Borrower repay on the next Payment Date any additional Advances made since the date of the preparation of the statement for such Payment Date if necessary to avoid any overadvance as of such
date and such amount (in addition to any amounts set forth in the bill to Borrower) shall be due and payable on the next Payment Date.
2.6. Term Loan. Any Term Loan Commitment now or hereafter committed to by Bank pursuant to which Borrower shall execute and deliver to
Bank a Term Note shall be governed by and issued pursuant to the provisions, terms and conditions set forth herein. Upon Borrower’s execution of this Agreement and a Term Note and compliance with the terms of this Agreement and subject to
Bank’s confirmation if requested by Aaron that Bank has a first priority security interest in the Collateral, Bank may make a Term Loan to the Borrower in a principal amount not to exceed the Term Loan Commitment; provided, that if for
any reason the full amount of the Bank’s Term Loan Commitment is not fully drawn on the Closing Date, the undrawn portion thereof shall automatically be cancelled.
2.7. Repayment.
(i)
Line of Credit Loans. Payments of principal and interest with respect to Line of Credit Loans shall be due and payable by Borrower to Bank on each Payment Date and subject to the provisions of Section 2.8 below, on the Maturity Date for
the Line of Credit Commitment, unless sooner accelerated in accordance with the terms hereof.
(ii) Revolving Loans. Payments of
principal for Revolving Loans shall be due and payable by Borrower to Bank, subject to the provisions of Section 2.10(b) below, on the Maturity Date for the Revolving Commitment, unless sooner accelerated in accordance with the terms hereof.
(iii) Term Loans. Payments of principal for Term Loans shall be due and payable by Borrower to Bank in installments payable on the
dates set forth in the Term Note, provided, that, to the extent not previously paid, the aggregate unpaid principal balance of the Term Loans shall be due and payable on the Maturity Date for the Term Loan.
(iv) Except as provided below, all payments of principal of, or interest on, the Loan Documents
(including Asset Disposition Prepayments) and all other sums due under the terms of the Loan shall be made in either (x) immediately available funds (including ACH transfers), or (y) checks or money orders made payable to the Bank at its
principal office in Atlanta, Georgia in accordance with written instructions provided by the Bank. All voluntary prepayments of the Loan shall be made to the Bank at its Program Lending Department in Atlanta, Georgia using preprinted envelopes
provided by the Bank for such purpose or, if such envelopes are unavailable, mailed to the following address:
Aaron’s Program
Manager
SunTrust Bank
Program Lending
303 Peachtree
Street, N.E., 2nd Floor
Mail Code 1802
Atlanta, Georgia 30308
2.8.
Loan Term; Voluntary Termination. (i) The original term of the Line of Credit Commitment shall be for a period of one year from the Closing Date (the “Loan Term”). Thereafter, the Loan Term shall automatically be extended on
each anniversary of the Closing Date for an additional one year period unless either party terminates the Loan as set forth hereunder. Upon ninety (90) days prior written notice to the Borrower, the Bank may, at its option, terminate the Line
of Credit Commitment. Upon written notice to the Bank, the Borrower may, at its option, terminate the Line of Credit Commitment. Bank may also terminate the Line of Credit Commitment pursuant to Section 10 hereof. Upon the effective date of a
termination of the Line of Credit Commitment effected by Borrower, the principal of and all accrued but unpaid interest on the Loan Indebtedness shall be forthwith due and payable, but all of the duties and covenants of Borrower hereunder, and all
rights, remedies and privileges of Bank under this Agreement and Bank’s security interest in the Collateral, shall continue in full force and effect until all of the Loan Indebtedness is fully and finally paid. In the event Bank elects to
terminate, (i) Bank shall continue to make Advances until the effective date of the termination and (ii) Advances outstanding at the effective date of the termination shall be repaid according to an eighteen (18) month amortization
schedule or a twenty-four (24) month amortization schedule provided above, provided that, notwithstanding the foregoing all outstanding Loan Indebtedness shall be due and payable in full on the 24th Payment Date following termination of the
Line of Credit Commitment by the Bank. Nothing set forth in this Section 2.8 shall be deemed to limit the ability of the Bank to declare all amounts outstanding under the Note immediately due and payable upon the occurrence of an Event of
Default hereunder as provided herein.
(ii) The Revolving Commitment and the Term Loan shall terminate on the Maturity Date for the
Revolving Commitment and the Term Loan set forth in the Revolving Note and the Term Note, as the case may be, which date shall be no more than four years from the Closing Date, subject to Section 10 hereof. Upon the termination of the Revolving
Commitment or the Term Loan, the principal of and all accrued but unpaid interest on the Loan Indebtedness shall be forthwith due and payable, but all of the duties and covenants of Borrower hereunder, and all rights, remedies and privileges of Bank
under this Agreement and Bank’s security interest in the Collateral, shall continue in full force and effect until all of the Loan Indebtedness is fully and finally paid.
2.9. Interest. (a) From and after the date hereof, interest shall accrue on the unpaid principal amount of the Loan Indebtedness
at the Floating Rate. Interest shall be calculated daily and shall be computed on the basis of actual days elapsed over the period of a 360 day year. Interest shall be payable in arrears on each Payment Date and on the Maturity Date, whether due to
acceleration or otherwise. Any principal amount outstanding pursuant to a Loan not paid when due shall bear interest at the Default Rate, which shall be payable upon demand. After the occurrence of an Event of Default and during the continuance
thereof, the outstanding principal balance of the Loans shall bear interest at the Default Rate, which shall be payable upon demand.
(b) In no contingency or event whatsoever shall the amount paid or agreed to be paid to Bank for
the use, forbearance or detention of money advanced under this Agreement exceed the highest lawful rate permissible under Applicable Law. It is the intent hereof that Borrower will not pay or contract to pay, and that Bank not receive or contract to
receive, directly or indirectly in any manner whatsoever, interest in excess of that which may be charged to and paid by Borrower under Applicable Law. All interest (and charges deemed interest) paid or agreed to be paid to Bank shall, to the extent
permitted by Applicable Law, be amortized, pro rated, allocated and spread in equal parts throughout the full term hereof until payment in full of the principal amount of the Loan Indebtedness owing hereunder (including the period of any renewal or
extension hereof) so that interest on the principal amount of the Loan Indebtedness outstanding hereunder for such full period will not exceed the maximum amount permitted by Applicable Law.
2.10. Loan Prepayment.
(a) Voluntary Prepayment. Borrower shall have the right to prepay the Loans in whole or in part on any Payment Date, but subject to
Borrower having provided at least two (2) Business Days’ prior written notice to Bank. Partial prepayments of any Line of Credit Loan (other than proceeds of Asset Dispositions which shall be applied as set forth in the following
Section 2.10(b)(ii)) shall be applied to reduce the current month’s Advance(s) to such Borrower with any excess prepayment applied to unpaid principal payments of the Loan as Aaron and the Bank may mutually agree (which may include, but is
not limited to, application of such excess prepayment to unpaid principal payments of the Loan in inverse order of maturity or on a pro rata basis)
(b) Mandatory Prepayment. (i) For the Line of Credit Loan, mandatory prepayment shall be required for Asset Dispositions. For the
Revolving Loan, on any Payment Date on which the aggregate outstanding principal amount of the Revolving Loan exceeds the lesser of the Revolving Commitment or the Borrowing Base, as most recently reported to Borrower by Bank pursuant to
Section 2.5(iv) hereof, Borrower shall prepay the Revolving Loans in the amount of such overadvance, as notified to Borrower by Bank.
2.11. Audits. Borrower hereby consents and authorizes Aaron or the Bank or any agent or representative thereof to conduct periodic
field audits of Borrower. Such field audits may include, without limitation, examinations of the payment receipts, tax returns, bank statements, loan statements, Lease Contracts, inventory on hand, computer-generated reports of Asset Dispositions,
Rental Revenue and other financial data necessary to determine the accuracy and validity of the reports, compliance certificates, financial reports and other information forwarded to either of the Bank or Aaron by Borrower in connection with the
Loan.
2.12. Tracking of Merchandise; Asset Dispositions.
(a) All Merchandise financed by the Bank must be serialized by means of the Aaron’s Proprietary System for appropriate reconciliation of
Advances and receipt of Merchandise and for purposes of tracking Asset Dispositions, if applicable. Borrower shall be obligated to furnish serial numbers for all Merchandise purchased directly to Aaron on a weekly basis (and, if available, on a
daily basis) by transmittal of Borrower’s receiving report (containing Aaron’s Proprietary System numbers) directly to Aaron on the Aaron’s Proprietary System. As set forth more fully below, Aaron will maintain and track such
information as agent for the Bank and the Bank shall at all times have access to such information.
(b) If Borrower has a Line of Credit Note and an Asset Disposition occurs, Borrower shall
immediately report such Asset Disposition to Aaron by means of the Aaron’s Proprietary System, such information to include the Aaron’s Proprietary System numbers, and if assigned, the serial numbers of the Merchandise subject to the Asset
Disposition, the Net Book Value of such Merchandise and the proceeds received by Borrower therefrom. Aaron, on a monthly basis, shall transmit all such information to the Bank in a summary form. Based solely on such information provided by Aaron,
the Bank will notify Borrower on a monthly basis, of the amount of the required prepayment (the “Asset Disposition Prepayment”) of the aggregate outstanding amount of the Line of Credit Loan due on the next Payment Date which amount shall
be equal to the Net Book Value of the Asset Dispositions during the preceding month not applied to Advances made during such month as set forth above, unless otherwise agreed to by the Bank. The Borrower shall be notified by the Bank by the 15th day
of each calendar month of the Asset Disposition Prepayment and payment thereof shall be due on the next succeeding Payment Date.
2.13.
Closing Fee. On the Closing Date of each Loan, Borrower shall pay to Bank a closing fee (“Closing Fee”) in the amount of $500 per store location [plus $5,000]7.
2.14. Commitment Fees.
(a) Borrower shall pay a commitment fee (the “Commitment Fee”) on any unused portion of the Line of Credit Commitment and the
Revolving Commitment in the amount of % per annum, such Commitment Fee to be paid quarterly in arrears on every third Payment Date, commencing on the third Payment Date after the Closing Date.
(b) All Commitment Fees shall be paid on the dates due, in immediately available funds, to the Bank.
2.15. Delinquent Payment Fees. In the event that any payment due and payable hereunder is not received by the Bank on the Payment Date
when due, the Borrower shall, upon request from the Bank, pay to the Bank a delinquent payment fee (the “Delinquent Payment Fee”) in an amount equal to the greater of (i) one percent (1%) of the amount of the late payment and
(ii) $500.00.
3. COLLATERAL AND INSURANCE.
3.1. Granting of Security Interest in Collateral. As security for the payment and performance of all of the Loan Indebtedness, Bank
shall have and Borrower hereby grants to Bank a continuing security interest in the following described property of Borrower, whether now in existence or hereafter created or acquired and wherever located (collectively, the “Collateral”):
all Accounts, Merchandise, Inventory, Investment Property, Equipment, General Intangibles, Documents, Instruments, Chattel Paper (including, but not limited to, the Lease Contracts), Balances, fixtures, and Books and Records, and all products and
proceeds of the foregoing (including insurance proceeds). The Loan Indebtedness shall also be secured by any other property (whether real or personal) in which Borrower may have heretofore or concurrently herewith granted, or may hereafter grant, a
Lien in favor of Bank.
| 7 |
Note: in the case of an Borrower with a Revolving Commitment or a Term Loan Commitment that has customized financial covenants as specified by Sponsor in accordance with Section 6 hereof, an additional $5,000 fee
will be charged. |
3.2. Form of Lease Contracts. All Lease Contracts will (a) be in a form prescribed by
Aaron for use by its franchisees, (b) be transferable to Bank and (c) contain the following provision directly above Borrower’s customer’s signature:
“NOTWITHSTANDING ANYTHING SET FORTH IN THIS AGREEMENT TO THE CONTRARY, THE UNDERSIGNED ACKNOWLEDGES AND CONSENTS TO THE TRANSFER OF, OR
GRANT OF A SECURITY INTEREST IN, ANY OR ALL OF THE LESSOR’S RIGHT, TITLE AND INTEREST (RESIDUAL OR OTHERWISE) IN AND UNDER THIS AGREEMENT TO ANY THIRD PARTY. NO SUCH TRANSFER OR GRANT OF SECURITY INTEREST WILL: (A) AFFECT THE
UNDERSIGNED’S LOAN INDEBTEDNESS; (B) CHANGE ANY DUTIES OF, OR INCREASE ANY BURDENS OR RISKS IMPOSED ON, THE PARTIES TO THIS AGREEMENT; OR (C) GIVE RISE TO ANY RIGHTS OR REMEDIES PROVIDED UNDER SECTION
2A-303(1)(b) OF THE UNIFORM COMMERCIAL CODE, AS ADOPTED IN THE APPLICABLE JURISDICTION. NO ENFORCEMENT OF ANY SECURITY INTEREST WILL CONSTITUTE A TRANSFER THAT CHANGES ANY DUTIES OF, OR INCREASES ANY BURDENS
OR RISK IMPOSED ON, THE PARTIES TO THIS AGREEMENT. THE UNDERSIGNED WAIVES ALL RIGHTS AND REMEDIES PROVIDED UNDER SECTION 2A-303 OF THE UNIFORM COMMERCIAL CODE, AS ADOPTED IN THE APPLICABLE JURISDICTION.”
Immediately upon execution of the same, all Lease Contracts shall be hereby assigned to Bank, and, immediately upon Bank’s request, delivered to
Bank together with any and all related documents, and will contain, by way of a stamp or as a part of the preprinted lease contract, the following legend directly below Borrower’s customer’s signature:
“FOR VALUE RECEIVED, THIS AGREEMENT HAS BEEN ASSIGNED TO SUNTRUST BANK AND THERE ARE NO DEFENSES AGAINST THE ASSIGNEE.”
Borrower will not assign, sell, pledge, convey or by any other means transfer to any person other than Bank any Lease Contracts or Chattel Paper, without
Bank’s prior written consent.
3.3. Other Documents. Borrower shall execute and deliver, or shall be caused to be executed and
delivered, to Bank such other instruments, agreements, assignments, notifications or other documents relating to the Collateral as Bank may from time to time request in order to evidence, perfect or continue the perfection of Bank’s Liens upon
any of the Collateral.
3.4. Insurance. Borrower shall maintain and keep in force insurance of the types and in the amounts
customarily carried in lines of business similar to Borrower’s and such other insurance as Bank may require, including, without limitation, theft, fire, public liability, business interruption, casualty, property damage, and worker’s
compensation insurance, which insurance shall be carried with companies and in amounts satisfactory to Bank. All casualty and property damage insurance shall name Bank as mortgagee, sole loss payee or additional insured, as appropriate. Borrower
shall deliver to Bank from time to time, at Bank’s request, copies of all such insurance policies and certificates of insurance and schedules setting forth all insurance then in effect. Each policy of insurance shall contain a clause requiring
the insurer to give not less than thirty (30) days’ prior written notice to Bank in the event of any lapse, termination or cancellation of the policy for any reason whatsoever and a clause that the interest of Bank shall not be impaired or
invalidated by any act or neglect of Borrower or owner of the property nor by the occupation of the premises for purposes more hazardous than are permitted by said policy. All such insurance policies shall contain such other provisions as Bank may
require in order to protect Bank’s security interests in the collateral and Bank’s right to receive payments under such policies. Borrower hereby appoints Bank as
attorney-in-fact for Borrower to file claims under any insurance policies, to receive, receipt and give acquittance for any payments that may be payable to Borrower
thereunder, and to execute any and all endorsements, receipts, releases, assignments, reassignments, or other documents that may be necessary to effect the collection, compromise or settlement of any claims under any such insurance policies, which
power of attorney shall be deemed coupled with an interest and irrevocable so
long as Bank shall have a security interest in any of the Collateral pursuant to this Agreement. If Borrower shall fail to procure such insurance or to pay any premium with respect thereto, then
Bank may, at its discretion, procure such insurance or pay such premium and any costs so incurred by Bank shall constitute a part of the liabilities secured hereby. Bank may apply the proceeds of any insurance policy received by Bank to the payment
of any liabilities, whether or not due, in such order of application as Bank shall determine. Borrower shall promptly furnish Bank with certificates or other evidence satisfactory to Bank indicating compliance with the foregoing insurance
requirements.
3.5. Validation and Collection of Accounts. Whether or not a Default Condition or an Event of Default has occurred,
Bank shall have the right, at any time or times hereafter, in the name of Bank or any designee of Bank to verify the validity, amount or any other matter relating to any Accounts by mail, telephone or otherwise, and Borrower shall fully cooperate
with Bank in an effort to facilitate and promptly conclude any such verification process. Unless Bank shall at any time following the occurrence of an Event of Default, elect to give notice to Account Debtors to make payments on the Accounts
directly to Bank, Borrower shall endeavor in the first instance to make collection of its Accounts for Bank. Borrower shall at the request of Bank notify the Account Debtors of the security interest of Bank in any Account and Bank may itself at any
time so notify Account Debtors. Upon or after the occurrence of an Event of Default, Borrower shall (if and to the extent requested to do so by Bank) notify the Account Debtors to make all payments owing to Borrower directly to Bank for application
to the Loan Indebtedness.
3.6. Maintenance of Collateral. Borrower shall maintain all Inventory and Equipment in good condition,
reasonable wear and tear excepted in the case of Equipment, and shall, as and when requested by Bank, provide Bank with a list of all of the Equipment and evidence of ownership thereof. Borrower shall not permit any of the Equipment to become
affixed to any real property so that such Equipment is deemed a fixture under the real estate laws of the applicable jurisdiction.
3.7.
Expenses Relating to Collateral. Borrower shall pay Bank on demand an amount equal to any and all expenses, including legal fees, incurred or paid by Bank in connection with Bank’s insuring, maintaining, protecting, storing,
safeguarding, or paying Liens with respect to any of the Collateral or otherwise discharging any duty or obligation of Borrower with respect to any of the Collateral.
3.8. Rights to Collateral. Bank shall have no duty to collect, protect or preserve the underlying value of any Collateral or any income
thereon or to preserve any rights against prior parties. Bank may exercise its rights and remedies with respect to the Collateral without first resorting (and without regard) to any other security for the Loan or other sources of payment or
reimbursement for the Loan Indebtedness.
4. CONDITIONS PRECEDENT.
Borrower shall deliver and Bank shall have received the following documents, each in form and substance satisfactory to Bank, as conditions
precedent of the Loans:
(a) a validly executed copy of this Agreement;
(b) the validly executed Notes;
(c) a validly executed copy of a Guaranty of each partner or majority stockholder of Borrower, and to the extent not prohibited
by Applicable Law, the spouse of such Person; provided, however, that if such spouse is not providing a Guaranty, a validly executed copy of the Spousal Consent;
(d) [Reserved];
(e) a validly executed subordination agreement, in form and substance satisfactory to the Bank, from each other debtholder of
Borrower;
(f) valid Uniform Commercial Code Financing Statements suitable for filing to enable Bank to perfect the
security interest granted to it under this Agreement;
(g) evidence of Borrower’s good standing;
(h) a validly executed officer’s certificate or such other evidence acceptable to Bank evidencing Borrower’s
corporate, partnership or other necessary authorization of the Loans and incumbency;
(i) a certificate of insurance from
an insurer acceptable to Bank evidencing Borrower’s compliance with Section 3.4 hereof and naming the Bank as loss payee/additional insured as follows:
Aaron’s Program Manager
SunTrust Bank
Program Lending
303 Peachtree Street, N.E., 2nd Floor
Mail Code 1802
Atlanta,
Georgia 30308
(j) a validly executed authorization to make the ACH transfers for payments of principal, interest and fees
contemplated hereunder, including without limitation, Asset Disposition Prepayments, mandatory prepayments of the Loans pursuant to Section 2.10(b), which authorization shall be in form and substance satisfactory to the Bank; and
(k) an initial Borrowing Base Report from Aaron, if applicable.
In addition, (x) Bank shall have satisfied itself that (i) all necessary steps have been taken and all necessary registrations have been made to
perfect Bank’s security interest in the Collateral, and (ii) there are no Liens on any of the Collateral, and Bank shall be satisfied that all corporate or partnership proceedings necessary for the authorization of the Loan shall have been
taken and Bank shall have received any other documents that it deems necessary or advisable and (y) unless waived in writing by Aaron, Aaron shall have obtained a validly executed landlord’s waiver for each location leased by Borrower
where the financed Merchandise is located, which Aaron shall provide to Bank up request.
5. BORROWER’S REPRESENTATIONS AND WARRANTIES.
To induce Bank to enter into this Agreement, Borrower represents and warrants as follows:
5.1. Organization and Qualification of Borrower. Borrower is
under the laws of the state shown on the first page hereof, and is qualified to do business in all jurisdictions where the
character of its properties or the nature of its activities make such qualification necessary.
5.2. Trade Names, Subsidiaries and Location of Assets. Exhibit B attached hereto
and made a part hereof fully and accurately discloses any legal name, trade name or style ever used by Borrower, any Subsidiaries owned by Borrower, and each office, other place of business or location of assets of Borrower.
5.3. Corporate or Other Authority; No Violation of Other Agreements. The execution, delivery and performance by Borrower of this
Agreement and the other Loan Documents have been duly authorized by all necessary action on the part of Borrower and do not and will not (i) violate any provision of Borrower’s articles of incorporation,
by-laws, or other organizational documents or any Applicable Law, or (ii) be in conflict with, result in a breach of, or constitute (following notice or lapse of time or both) a default under any
agreement to which Borrower is a party or by which Borrower or any of its property is bound.
5.4. Enforceability. This Agreement
and each of the other Loan Documents create legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.
5.5. Entire Agreement. The Notes and accompanying Loan Documents executed in connection with the Loans and delivered to Bank are the
only contracts evidencing the transaction described herein and constitute the entire agreement of the parties hereto with respect to the transaction.
5.6. Genuineness of Signatures. The Notes and each accompanying Loan Document executed in connection with the Loans are is genuine and
all signatures, names, amounts and other facts and statements therein and thereon are true and correct.
5.7. Litigation. There are
no actions, suits, proceedings or investigations pending or, to the knowledge of Borrower, threatened before any court or administrative or governmental agency that may, individually or collectively, adversely affect the financial condition or
business operations of Borrower.
5.8. Financial Condition. Borrower’s financial statement previously delivered to Aaron,
fairly and accurately presents the financial condition of Borrower as of such date and has been prepared in accordance with GAAP consistently applied, and since the date of that financial statement, there has been no material adverse change in the
financial condition of Borrower. Borrower is now and will remain Solvent.
5.9. Taxes. All federal, state and local tax returns
have been duly filed, and all taxes, assessments and withholdings shown on such returns or billed to Borrower have been paid, and Borrower maintains adequate reserves and accruals in respect of all such federal, state and other taxes, assessments
and withholdings. There are no unpaid assessments pending against Borrower for any taxes or withholdings, and Borrower knows of no basis therefor.
5.10. Compliance with Laws. Borrower has duly complied with, and its properties and business operations are in compliance in all
material respects with, the provisions of all Applicable Laws, including, without limitation ERISA, the Fair Labor Standards Act and all Environmental Laws. Borrower possesses all permits, franchises, licenses, trademark rights, trade names, patents
and other authorizations necessary to enable it to conduct its business operations as now conducted, and no filing with, and no consent, authorization, order or license of, any Person is necessary in connection with the execution or performance of
this Agreement or the other Loan Documents.
5.11. No Default. No Default Condition or Event of Default exists.
5.12. Accounts. Each Account arises out of a bona fide lease or sale and delivery of goods
or rendition of services by Borrower and, unless otherwise indicated by Borrower to Bank in writing promptly after learning thereof, the facts appearing on the invoice evidencing such Account and Borrower’s books relating thereto are true and
accurate and payment thereof is not subject to any known dispute, offset or claim except for discounts granted in the ordinary course of Borrower’s business that are reflected on the face of such invoice.
5.13. Use of Proceeds. None of the proceeds of any Advances or the Term Loan by Bank have been or will be used to purchase or carry (or
to satisfy or refinance any indebtedness incurred to purchase or carry) any “margin stock” (as defined in Regulation U of the Federal Reserve Board). Advances shall be made for the sole purposes of honoring requests for ACH transfers to
(i) suppliers of Merchandise in payment of Approved Invoices, and (ii) other accounts specified by Borrower with respect to Advances made for working capital purposes, subject to the approval of Aaron, which requests have been entered by
the Borrower in the Aaron’s Proprietary System as provided above, or upon the consent of Aaron, for the purpose of payment of state use taxes and freight charges. The proceeds of the Term Loan shall be used for acquisition financing, general
working capital purposes or such other purpose approved by Aaron.
5.14 Anti-Corruption Laws and Sanctions. The Borrower has
implemented and maintains in effect policies and procedures designed to ensure compliance in all material respects by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and
applicable Sanctions, and the Borrower, its Subsidiaries and their respective officers (in such capacity), employees (in such capacity) and, to the knowledge of the Borrower, its directors and agents, are in compliance with Anti-Corruption Laws and
applicable Sanctions. None of (a) the Borrower, any Subsidiary or any of their respective officers (in such capacity) or employees (in such capacity), or (b) to the knowledge of the Borrower, any director or agent of the Borrower or any
Subsidiary is a Sanctioned Person. No borrowing or other extension of credit hereunder, use by the Borrower or any Subsidiary of the proceeds thereof or other transactions contemplated hereby will violate Anti-Corruption Laws or applicable
Sanctions.
5.15 Patriot Act. Neither the Borrower nor any of its Subsidiaries is an “enemy” or an “ally of the
enemy” within the meaning of Section 2 of the Trading with the Enemy Act or any enabling legislation or executive order relating thereto. Neither the Borrower nor any of its Subsidiaries is in violation of (a) the Trading with the
Enemy Act, (b) any of the foreign assets control regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto or (c) the Patriot Act.
Neither the Borrower nor any of its Subsidiaries (i) is a blocked person described in Section 1 of the Anti-Terrorism Order or (ii) to the best of its knowledge, engages in any dealings or transactions, or is otherwise associated,
with any such blocked person.
Each submission of an Approved Invoice made by Borrower pursuant to this Agreement or any other Loan Document shall
constitute an automatic representation and warranty by Borrower to Bank that there does not then exist any Default Condition or Event of Default and a reaffirmation as of the date of said request that all representations and warranties of Borrower
contained in this Agreement and the other Loan Documents are true in all material respects. All representations and warranties contained in this Agreement or in any of the other Loan Documents shall survive the execution, delivery and acceptance
hereof by Bank and the closing of the transactions described herein.
6. FINANCIAL COVENANTS.
Borrower shall comply with the following financial covenant[s]:
[(i) Rental Revenue to Debt Service. Commencing on the first day of the calendar quarter in which the 25th month
following the Opening Date of the first store location of the Borrower occurs and measured as of the last day of the calendar quarter in which such 25th month occurs and on the last day of each calendar quarter thereafter, the ratio of the
Borrower’s Rental Revenue to Debt Service for such quarter shall not be less than 2.2:1.0;]8
(ii) Debt to Rental Revenue. [Commencing on the first day of the calendar quarter in which the first day of the 19th
month following the Opening Date of the first store location of Borrower occurs and measured as of the last day of the calendar quarter in which such 19th month occurs and on the last day of each calendar quarter thereafter,][On the last day of each
calendar quarter] the ratio of Borrower’s Debt to Borrower’s Rental Revenue, shall not exceed [ ]:1.0.9
To the extent any of the financial covenants set forth above in this Section 6 are calculated based upon the Opening Date of a store
location, the financial information from store locations that have not reached the Opening Date anniversary incorporated into such covenants shall be excluded from such calculations. Debt Service and Debt attributable to such locations and deducted
from the final calculations shall be deducted on a pro rata basis calculated by dividing such stores’ aggregate Net Book Value of Merchandise by the Net Book Value of Merchandise for all store locations. The financial covenants shall otherwise
be calculated on a consolidated basis as to all store locations.
7. BORROWER’S AFFIRMATIVE COVENANTS.
During the term of this Agreement, and thereafter for so long as there is any outstanding Loan Indebtedness to Bank, Borrower covenants that,
unless otherwise consented to by Bank in writing, it shall:
7.1. Financial Reports. Deliver to Aaron or cause to be delivered to
Aaron:
(i) on or before the last Business Day of each month, an unaudited balance sheet and income statement accurately
reflecting the financial transactions and status of the Borrower as of the end of the prior month and on a year to date basis, on a consolidated and per store basis; prepared in accordance with GAAP in the format recommended by Aaron;
(ii) on or before the last Business Day of each month after the end of each calendar quarter (a) an unaudited balance
sheet and income statement accurately reflecting the financial transactions and status of Borrower as of the end of the prior month and on a quarterly basis, on a consolidated and per store basis, prepared in accordance with GAAP in the format
recommended by Aaron, and (b) a compliance certificate as described below in Section 7.2;
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Note: This covenant will not apply in the case of any Borrowers who have Revolving Loans or Term Loans as, in such case, the Borrowing Base in the applicable Loan Agreement will apply in lieu of this covenant.
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Note: This covenant will apply and be tested on last day of each calendar quarter and not be tied to any Opening Date of store locations in the case of any Loan Agreement providing for Loans to be made available to a
Borrower consisting of Revolving Loans and/or Term Loans. Covenant levels for this covenant will be established by Sponsor for each Borrower as per the Servicing Agreement. |
(iii) within 90 days after the end of each fiscal year a balance sheet and income
statement of Borrower as of the end of such year, compiled by such firm of independent public accountants as may be designated by Borrower and be satisfactory to Bank as prepared in accordance with GAAP and, to the extent delivered to Aaron, audited
financial statements for such period;
(iv) within 120 days after the end of each fiscal year, an annual personal financial
statement of each Guarantor; and
(v) with reasonable promptness, all reports by Borrower to its shareholders and such
other information as Aaron or the Bank may reasonably request from time to time.
7.2. Compliance Certificate. Prepare and deliver
to Aaron, to the extent that Borrower has a Line of Credit Loan, in conjunction with the quarterly financial reports required to be delivered pursuant to Section 7.1(iii) above, a quarterly Compliance Certificate (the form of which is attached
hereto as Exhibit C) including the Quarterly Covenant Compliance Report attached hereto as Exhibit D) presenting the calculation of the financial covenants set forth above in Section 6, noting any negative variances with the
covenants and explaining any such variances.
Borrower acknowledges that Aaron will review each Compliance Certificate and may revise the calculations set
forth on such Compliance Certificate to be consistent with the information shown on quarterly detailed Inventory reconciliation reports and detailed revenue reports prepared by Aaron each quarter showing the amount of Inventory at each of
Borrower’s stores as of the end of such quarter and the amount of monthly and quarterly revenue at each of Borrower’s stores. Borrower acknowledges that Aaron will forward copies of each Compliance Certificate, with revised calculations as
appropriate, to Bank and agrees that Bank shall be entitled to rely each such Compliance Certificate, as revised by Aaron, for purposes of determining whether the covenants set forth in Section 6 above have been met.
7.3. Books and Records. Maintain its Books and Records and accounts in accordance with GAAP and permit any Person designated by Bank or
Aaron to visit Borrower’s premises, inspect any of the Collateral or any of the Books and Records, and to make copies thereof and take extracts therefrom, and to discuss Borrower’s financial affairs with Borrower’s financial officers
and accountants.
7.4. Taxes. Promptly file all tax returns and pay and discharge all taxes, assessments, withholdings and other
governmental charges imposed upon it, its income or profits, or upon any property belonging to it, prior to the date on which penalties attach thereto.
7.5. Notices to Bank. Promptly notify Bank in writing of (i) the occurrence of any Default Condition or Event of Default;
(ii) any pending or threatened litigation claiming damages in excess of $25,000 or seeking relief that, if granted, would adversely affect the financial condition or business operations of Borrower; (iii) the release or discharge of any
Hazardous Substance on any property owned by Borrower; and (iii) any asserted violation by Borrower of or demand for compliance by Borrower with any Applicable Law.
7.6. Compliance with Applicable Laws. Comply in all material respects with all Applicable Laws, including, without limitation, ERISA,
the Fair Labor Standards Act and all Environmental Laws.
7.7. Corporate Existence. Maintain its separate corporate existence and
all rights, privileges and franchises in connection therewith, and maintain its qualification and good standing in all jurisdictions where the failure to do so could have a material adverse effect upon its financial condition or ability to collect
the Accounts.
8. NEGATIVE COVENANTS.
During the term of this Agreement, and thereafter for so long as there are is Loan Indebtedness outstanding, Borrower covenants that unless
Bank has first consented thereto in writing, it will not:
8.1. Merger; Disposal or Moving of Collateral. Merge or consolidate with
or acquire any substantial portion of the assets or stock of any Person; sell, lease, transfer or otherwise dispose of all or any portion of its properties (including any of the Collateral), except sales or leases of Inventory in the ordinary course
of business; or, without having given Bank at least 60 days prior written notice and having executed such instruments and agreements as Bank shall require, change its name, the location of any Collateral or the location of its chief executive
office, principal place of business or the office at which it maintains its Books and Records. Notwithstanding the foregoing, to the extent that Borrower is calculating its compliance with the financial covenants set forth in Section 6 hereof
on a consolidated basis, Borrower may move Inventory from one location included in such calculation to another of Borrower’s Aaron’s locations without complying with the notice provisions hereof, as long as such Inventory is properly
transferred in the Aaron’s Proprietary System.
8.2. Liens. Grant or suffer to exist any Lien upon any of the Collateral
except Permitted Liens.
8.3. Guarantees. Guarantee, assume, endorse or otherwise become contingently liable for any obligation or
indebtedness of any Person, either directly or indirectly, exceeding $25,000 not existing as of this date, except by endorsement of items of payment for deposit or collection.
8.4. Loans. Make loans or advances of money to or investments in any Person, or (except in the ordinary course of business and on fair
and reasonable terms) engage in any transaction with a Subsidiary or affiliate.
8.5. Stock of Borrower. Repurchase, or pay or
declare any dividend on, any of its capital stock; provided, however, that if no Default Condition or Event of Default exists and Borrower remains in compliance with the financial covenants set forth in Section 6 above after
giving effect thereto, it may pay dividends and make such repurchases.
8.6 Sanctions and Anti-Corruption Laws. Request or use any
borrowing or other extension of credit hereunder, or use, and the Borrower shall ensure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use, the proceeds of any borrowing or other extension of
credit hereunder (i) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, (ii) for the purpose of
funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country or (iii) in any manner that would result in the violation of any Sanctions applicable to any party hereto.
9. EVENTS OF DEFAULT.
9.1. List
of Events of Default. The occurrence of any one or more of the following conditions or events shall constitute an “Event of Default”:
(a) Borrower shall fail to pay any of the Loan Indebtedness (including any overadvance) or to pay for any Asset Disposition
within ten (10) days of the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise);
(b) any warranty, representation, or other statement by Borrower herein or in any
instrument, certificate or financial statement furnished in compliance herewith proves to have been false or misleading in any material respect when made;
(c) Borrower shall fail or neglect to perform, keep or observe any covenant contained in this Agreement, any of the other Loan
Documents or any other agreement now or hereafter entered into with Bank; Borrower shall fail to abide by the financial covenants set forth in Section 6 hereof, provided that Aaron may waive any financial covenant.
(d) Borrower or any Guarantor shall fail to pay when due any amount owed to any creditor (other than Bank) or any Guarantor
shall fail to pay or perform any liability or obligation in accordance with the terms of any agreement with Bank;
(e)
Borrower, Aaron or any Guarantor shall cease to be Solvent, shall die or become incompetent, shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, shall make an assignment for the benefit of creditors, or shall make an
offer of settlement or composition to their respective unsecured creditors generally;
(f) any petition for an order for
relief shall be filed by or against Borrower or any Guarantor or Aaron under the Bankruptcy Code (if against Borrower or any Guarantor, the continuation of such proceeding for more than 30 days);
(g) any judgment, writ of attachment or similar process is entered or filed against Borrower or any Guarantor or any of
Borrower’s or any Guarantor’s property and such judgment, writ of attachment or process is not dismissed, satisfied or vacated within ten (10) days thereafter or results in the creation or imposition of any Lien upon any Collateral
that is not a Permitted Lien;
(h) Any Guarantor shall revoke or attempt to revoke the guaranty signed by such Guarantor or
shall repudiate such Guarantor’s liability thereunder or Aaron shall default in its obligations to Bank with respect to the Loan Indebtedness or repudiate its liability therefor;
(i) any Person, or group of Persons (whether or not related), shall have or obtain legal or beneficial ownership of a majority
of the outstanding voting securities or rights of Borrower, other than any Person, or group of Persons, that has such majority ownership on the date of execution of this Agreement;
(j) Borrower shall lose its franchise, license or right to lease or to sell the Inventory or Borrower’s Franchise
Agreement is terminated or revoked for any reason;
(k) Borrower shall fail to enter properly any acquisition of Inventory
or Equipment or any Asset Disposition on the Aaron’s Proprietary System; or
(l) Borrower shall use its DDA Account
for any use other than as explicitly authorized pursuant to this Agreement.
9.2. Cure Period. Borrower shall have a five
(5) calendar day period after the Bank gives it notice of the occurrence of an Event of Default (other than an Event of Default pursuant to Section 9.1(f)) above, during which it may cure such Event of Default. An Event of Default arising
under Section 9.1(a) above shall only be cured by the Bank’s receipt of payment in immediately available funds by wire transfer, money order or cashier’s check.
9.3. Advances. In no event shall the Bank have any obligation to make any Loan hereunder
or an Advance pursuant to a Line of Credit Commitment or Revolving Commitment hereunder if there exists a Default Condition or an Event of Default.
10.
REMEDIES.
All of the Loan Indebtedness shall become immediately due and payable and the Line of Credit Commitment and Revolving
Commitment shall be deemed immediately terminated (without notice to or demand upon Borrower) upon the occurrence of an Event of Default under Section 9.1(f) of this Agreement; and upon and after the occurrence of any other Event of Default,
subject to the cure period set forth in Section 9.2 hereof, Bank shall have the right to terminate immediately the Line of Credit Commitment and Revolving Commitment and to declare the entire unpaid principal balance of and accrued interest
with respect to the Loan Indebtedness to be, and the same shall thereupon become, immediately due and payable upon receipt by Borrower of written notice and demand. From and after the date on which the Loan Indebtedness becomes automatically due and
payable or is declared by Bank to be due and payable as aforesaid, Bank shall have and may exercise from time to time any and all rights and remedies afforded to a secured party under the Code or any other Applicable Law. If the Loan Indebtedness is
collected by or through an attorney at law, Bank shall be entitled to collect reasonable attorneys’ fees and court costs from Borrower. In addition to, and without limiting the generality of the foregoing, Bank shall have the following rights
and remedies which it may exercise at any time or times (all of which rights and remedies shall be cumulative and may be exercised singularly or concurrently):
(a) The right to notify any Account Debtor to make all payments owing to Borrower directly to Bank for application to the Loan Indebtedness
and to collect all amounts owing from any such Account Debtor;
(b) The right to sell, lease or otherwise dispose of any or all of the
Collateral at public or private sale, for cash, upon credit or upon such other terms as Bank deems advisable in its sole discretion, or otherwise to realize upon the whole or from time to time any part of the Collateral in which Bank may have a
security interest. Any requirement of reasonable notice shall be met if such notice is sent to Borrower in accordance with Section 12 hereof at least seven (7) days before the date of sale or other disposition of the Collateral. Bank may
bid and be the purchaser at any such sale if permitted by Applicable Law;
(c) The right to require Borrower, at Borrower’s expense,
to assemble the Collateral and make it available to Bank at a place reasonably convenient to both parties (and, for purposes hereof, Borrower stipulates that Bank shall be entitled to the remedy of specific performance). Alternatively, Bank may
peaceably by its own means or with judicial assistance enter Borrower’s premises and take possession of the Collateral or dispose of the Collateral on Borrower’s premises without interference by Borrower;
(d) The right to incur attorneys’ fees and expenses in exercising any of the rights, remedies, powers or privileges provided hereunder,
and the right (but not the obligation) to pay, satisfy and discharge, or to bond, deposit or indemnify against, any tax or other Lien which in the opinion of Bank may in any manner or to any extent encumber any of the Collateral, all of which fees,
payments and expenses shall become part of Bank’s expenses of retaking, holding, preparing for sale and the like, and shall be added to and become a part of the principal amount of the Loan Indebtedness;
(e) The right, in Bank’s sole discretion, to perform any agreement of Borrower hereunder which Borrower shall fail to perform and take
any other action which Bank deems necessary for the maintenance or preservation of any of the Collateral or Bank’s interest therein, and Borrower agrees forthwith to reimburse Bank for all expenses incurred in connection with the foregoing,
together with interest thereon at the Default Rate from the date incurred until the date of reimbursement;
(f) The right at any time or times, to the fullest extent permitted by Applicable Law, to set off
and apply any and all deposits (general or special, time or demand) held by Bank for Borrower’s account against any of the Loan Indebtedness, irrespective of whether or not Bank has made any demand under the this Agreement;
(g) The right to apply the proceeds realized from any collection, sale, lease or other disposition of the Collateral first to the costs,
expenses and attorneys’ fees incurred by Bank for collection and for acquisition, protection, removal, storage, sale and delivery of the Collateral; secondly, to interest due upon the principal amount of the Loan Indebtedness; and thirdly, to
the principal amount of the Loan Indebtedness. If any deficiency shall arise, Borrower and Guarantors shall remain bound and liable to Bank therefor;
(h) The right to act as Borrower’s attorney-in-fact (and
Borrower hereby irrevocably appoints Bank as Borrower’s agent and attorney-in- fact), in Borrower’s or Bank’s name, but at Borrower’s cost and expense, to receive, open and dispose of all
mail addressed to Borrower pertaining to any of the Collateral, to notify postal authorities to change the address and delivery of mail to Borrower to such address as Bank may designate, to sign Borrower’s name on any bill of lading
constituting or relating to any Collateral, to send verifications with respect to the Collateral, to execute in Borrower’s name any affidavits or notices with regard to any and all Lien rights and to do all other acts and things necessary to
carry out the terms of this Agreement or to discharge any obligation of Borrower hereunder, this power, being coupled with an interest, is to be irrevocable so long as any Loan Indebtedness is outstanding.
11. WAIVERS.
Borrower waives notice of
Bank’s acceptance hereof. Borrower hereby waives any requirement on the part of Bank to post any bond or other security as a condition to Bank’s right to obtain an immediate writ of possession with respect to any Collateral. Bank shall not
be deemed to have waived any of its rights upon or remedies hereunder or any Event of Default unless such waiver be in writing and signed by Bank. No delay or omission on the part of Bank in exercising any right shall operate as a waiver of such
right or any other right. A waiver on any one occasion shall not be construed as a bar to or waiver of any right on any future occasion.
12.
NOTICES.
All notices and demands to or upon a party hereto shall be in writing and shall be sent by certified mail, return receipt
requested, personal delivery against receipt or by telecopier or other facsimile transmission and shall be deemed to have been validly served, given or delivered when delivered against receipt or one Business Day after deposit in the mail, postage
prepaid, or, in the case of facsimile transmission, when indicated by verification receipt printed by the sending machine as having been received at the office of the noticed party, addressed in each case as follows:
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SunTrust Bank |
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Program Lending |
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Attn: Aaron’s Program Manager |
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Atlanta, Georgia 30308 |
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Telecopier No.: (404)724-3716 |
or to such other address as each party may designate for itself by like notice given in accordance with this Section. Any
written notice or demand that is not sent in conformity with the provisions hereof shall nevertheless be effective on the date that such notice is actually received by the individual to whose attention such notice is to be sent as specified above or
such individual’s successor in office.
13. INDEMNIFICATION.
Borrower hereby agrees to indemnify Bank and hold Bank harmless from and against any liability, loss, damage, suit, action or proceeding ever
suffered or incurred by Bank as the result of Borrower’s failure to observe, perform or discharge Borrower’s duties hereunder. Without limiting the generality of the foregoing, this indemnity shall extend to any claims asserted against
Bank by any Person under any environmental laws. If any taxes, fees or other charges shall be payable by Borrower or Bank on account of the execution, delivery or recording of any of the Loan Documents or any loans outstanding hereunder, Borrower
will pay (or reimburse Bank’s payment of) all such taxes, fees or other charges, including any applicable interests and penalties, and will indemnify and hold Bank harmless from and against liability in connection therewith. The indemnity
obligations of Borrower under this Section shall survive the payment in full of the Loan Indebtedness.
14. ENTIRE AGREEMENT; AMENDMENT.
This Agreement and the other Loan Documents embody the entire understanding and agreement between the parties hereto with respect to the
subject matter hereof, and this Agreement may not be modified or amended except by an agreement in writing signed by Borrower and Bank.
15. SUCCESSORS
AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and
assigns; but Borrower shall not assign this Agreement or any right or benefit hereunder to any Person. The Bank may assign its rights and obligations hereunder at any time and to any Person, including without limitation, to Aaron.
16. ARBITRATION.
ANY CONTROVERSY
ARISING WITH RESPECT TO THIS AGREEMENT SHALL BE DETERMINED BY ARBITRATION IN THE CITY AGREED UPON BY BORROWER AND BANK. IF BORROWER AND BANK FAIL TO SO AGREE, THEN SUCH ARBITRATION SHALL TAKE PLACE IN ATLANTA, GEORGIA. ARBITRATION SHALL BE IN
ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION EXCEPT TO THE EXTENT OTHERWISE SET FORTH IN THIS SECTION. THE DISPUTE SHALL BE DETERMINED BY AN ARBITRATOR ACCEPTABLE TO BOTH PARTIES WHO SHALL BE SELECTED
WITHIN SEVEN (7) DAYS OF FILING OF NOTICE OF INTENTION TO ARBITRATE. OTHERWISE, THE DISPUTE SHALL BE DETERMINED BY A PANEL OF THREE
ARBITRATORS SELECTED AS FOLLOWS: WITHIN SEVEN (7) DAYS OF FILING NOTICE OF INTENTION TO ARBITRATE, EACH PARTY WILL APPOINT ONE ARBITRATOR, WHO SHALL BE AN ATTORNEY ADMITTED BEFORE THE BAR OF
ANY STATE OF THE UNITED STATES (BUT NEITHER SUCH ATTORNEY NOR ANY FIRM WITH WHICH SUCH ATTORNEY HAS BEEN ASSOCIATED IN THE IMMEDIATELY PRECEDING FIVE YEARS SHALL HAVE BEEN RETAINED BY SUCH PARTY DURING THE IMMEDIATELY PRECEDING FIVE YEARS). THESE
TWO ARBITRATORS WILL THEN NAME A THIRD ARBITRATOR, WHO SHALL ALSO BE AN ATTORNEY ADMITTED BEFORE THE BAR OF ANY STATE OF THE UNITED STATES (BUT NEITHER SUCH ATTORNEY NOR ANY FIRM WITH WHICH SUCH ATTORNEY HAD BEEN ASSOCIATED FOR THE IMMEDIATELY
PRECEDING FIVE YEARS SHALL HAVE BEEN RETAINED BY EITHER PARTY DURING THE IMMEDIATELY PRECEDING FIVE YEARS) AND WHO SHALL PRESIDE OVER THE PANEL. IF EITHER PARTY FAILS TO APPOINT AN ARBITRATOR, OR IF THE TWO ARBITRATORS DO NOT NAME A THIRD ARBITRATOR
WITHIN SEVEN (7) DAYS, EITHER PARTY MAY REQUEST THE AMERICAN ARBITRATION ASSOCIATION TO APPOINT THE NECESSARY ARBITRATOR(S) PURSUANT TO THE COMMERCIAL ARBITRATION RULES. ARBITRATORS SHALL BE COMPENSATED FOR THEIR SERVICES BY THE NON-PREVAILING PARTY AT THE STANDARD HOURLY RATE CHARGED BY SUCH ARBITRATORS IN THEIR PRIVATE PROFESSIONAL ACTIVITIES. ALL TESTIMONY SHALL BE TRANSCRIBED BY A PUBLIC STENOGRAPHER OR COURT REPORTER. THE AWARD OF THE
PANEL SHALL BE ACCOMPANIED BY FINDINGS OF FACT AND A STATEMENT OF REASONS FOR THE DECISION. ALL PARTIES AGREE TO BE BOUND BY THE RESULTS OF SUCH ARBITRATIONS; JUDGMENT UPON THE AWARD SO RENDERED MAY BE ENTERED AND ENFORCED IN ANY COURT OF COMPETENT
JURISDICTION. TO THE EXTENT REASONABLY PRACTICABLE, BOTH PARTIES AGREE TO CONTINUE PERFORMING THEIR RESPECTIVE OBLIGATIONS UNDER THIS AGREEMENT WHILE THE DISPUTE IS BEING RESOLVED.
17. MISCELLANEOUS. Time is of the essence of this Agreement. Bank reserves the right to participate, sell or assign the Loans made hereunder and
provide any participant or assignee all information in Bank’s possession regarding Borrower, its business and the Collateral. Borrower shall reimburse Bank for Bank’s
out-of-pocket expenses and for the fees and expenses and disbursements of Bank’s counsel in connection with the negotiation, documentation and closing of the
transactions contemplated hereby, and Borrower will pay all expenses incurred by Borrower in connection with the transactions. The Section headings are for convenience only and shall not limit or otherwise affect any of the terms hereof. THIS
AGREEMENT AND ALL RIGHTS AND OBLIGATIONS HEREUNDER, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF GEORGIA (WITHOUT REGARD TO THE LAWS OF CONFLICTS THEREOF) AND IS INTENDED TO TAKE
EFFECT AS A SEALED INSTRUMENT.
18. RELATIONS WITH AARON.
Borrower recognizes and acknowledges that the Bank has made the Loans available to Borrower hereunder at the behest of and as an accommodation
to Aaron. Accordingly, Borrower agrees that from time to time the Bank may release to Aaron such information about Borrower and the Loans as Aaron may request, and the Bank may condition its agreement to any waiver, modification or amendment on the
prior written consent of Aaron. Borrower further agrees that upon the occurrence of an Event of Default hereunder, the Bank may notify Aaron of such Event of Default prior to notifying Borrower thereof, and the Bank shall not be liable to Borrower
for failure to give simultaneous notice to Borrower. Borrower further agrees that the Bank shall not be liable to Borrower as a result of any information or document obtained by Bank regarding Borrower which is shared by Bank with Aaron.
WITNESS the hand and seal of the parties hereto on the date first above written.
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SUNTRUST BANK: |
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EXHIBIT A-1
FORM OF
LINE
OF CREDIT NOTE
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Atlanta, Georgia
FOR VALUE RECEIVED, the undersigned,
(the “Borrower”), promises to pay to the order of SUNTRUST BANK, a Georgia banking corporation (the “Bank”),
at Bank’s principal office in Atlanta, Georgia, or at such other place as the holder hereof may designate by notice in writing to Borrower, in immediately available funds in lawful money of the United States of America, on
, (the
“Maturity Date”, as such date may be extended from time to time, for an additional 364 day period unless either party terminates the Loan as set forth in Section 2.8 of the Loan and Security Agreement) the lesser of (x) the
principal sum of the Line of Credit Commitment: ($ ), or (y) so much
principal thereof as shall have been from time to time disbursed hereunder in accordance with that certain Loan and Security Agreement, dated as of
[ ], by and between the Borrower and Bank (as amended, restated, modified or supplemented from time to time, the
“Agreement”) and not theretofore repaid, as shown on the records of the Bank.
In addition to principal, Borrower agrees to pay
interest on the principal amounts disbursed hereunder at a floating rate of interest equal to the Prime Rate plus an additional
, from
time to time, from the date of each disbursement until paid at such rates of interest per annum and upon such dates as provided for in the Agreement. Interest shall accrue on the outstanding principal balance from the date hereof up to and through
the date on which all principal and interest hereunder is paid in full, and shall be computed on the basis of the actual number of days elapsed in a 360-day year. Such interest is to be paid to Bank at its
address set forth above or as otherwise provided in the Agreement. For informational purposes, as of the date hereof the Prime Rate in effect is % per annum, thus producing an initial interest rate under the Agreement on such
date of % per annum and, when adjusted for a year of 365 days, an initial simple interest rate of % per annum. Any principal amount due under this Line of Credit Note (the “Note”) that is not
paid on the due date therefor whether on the Maturity Date, or resulting from the acceleration of maturity upon the occurrence of an Event of Default (as defined in the Agreement), shall bear interest from the date due until payment in full at the
Default Rate, as such term is defined in the Agreement.
This Note evidences a loan incurred pursuant to the terms and conditions of the
Agreement to which reference is hereby made for a full and complete description of such terms and conditions, including, without limitation, provisions for the acceleration of the maturity hereof upon the existence or occurrence of certain
conditions or events, and the terms of any permitted prepayments hereof. All capitalized terms used in this Note shall have the same meanings as set forth in the Agreement.
Upon the existence or occurrence of any Event of Default, the principal and all accrued interest hereof shall automatically become, or may be
declared, due and payable in the manner and with the effect provided in the Agreement. In addition, this Note is subject to mandatory prepayment upon the terms and conditions of the Agreement.
Bank shall at all times have a right of set-off against any deposit balances of Borrower in the
possession of the Bank and the Bank may apply the same against payment of this Note or any other
indebtedness of Borrower to the Bank. The payment of any indebtedness evidenced by this Note prior to the Maturity Date shall not affect the enforceability of this Note as to any future,
different or other indebtedness incurred hereunder by the Borrower. In the event the indebtedness evidenced by this Note is collected by legal action or through an
attorney-at-law, the Bank shall be entitled to recover from Borrower all costs of collection, including, without limitation, reasonable attorneys’ fees if collected
by or through an attorney-at-law.
Borrower acknowledges
that the actual crediting of the amount of any disbursement under the Agreement to an account of Borrower or recording such amount in the records of the Bank shall, in the absence of manifest error, constitute presumptive evidence of such
disbursement and that such Advance was made and borrowed under the Agreement. Such account records shall constitute, in the absence of manifest error, presumptive evidence of principal amounts outstanding and the payments made under the Agreement at
any time and from time to time, provided that the failure of Bank to record in such account the type or amount of any Advance shall not affect the obligation of the undersigned to repay such amount together with interest thereon in accordance with
this Note and the Agreement.
Failure or forbearance of Bank to exercise any right hereunder, or otherwise granted by the Loan Agreement
or by law, shall not affect or release the liability of Borrower hereunder, and shall not constitute a waiver of such right unless so stated by Bank in writing. THIS NOTE AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE
WITH AND BE GOVERNED BY THE LAW (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF) OF THE STATE OF GEORGIA. TIME IS OF THE ESSENCE OF THIS NOTE.
PRESENTMENT FOR PAYMENT, NOTICE OF DISHONOR AND PROTEST ARE HEREBY WAIVED.
Executed under hand and seal of the Borrower as of the day and year first above written.
EXHIBIT A-2
FORM OF
REVOLVING NOTE
|
|
|
| Closing Date: [Closing Date] |
|
$ |
Atlanta, Georgia
FOR VALUE RECEIVED, the undersigned,
(the “Borrower”), promises to pay to the order of SUNTRUST BANK, a Georgia banking corporation (the “Bank”),
at Bank’s principal office in Atlanta, Georgia, or at such other place as the holder hereof may designate by notice in writing to Borrower, in immediately available funds in lawful money of the United States of America, on
, (the
“Maturity Date”, as such date may be extended from time to time, for an additional 364 day period unless either party terminates the Loan as set forth in Section 2.8 of the Loan and Security Agreement), the lesser of
(i) principal sum of the Revolving Commitment: ($ ), or (ii) so much
thereof as shall have been from time to time disbursed hereunder in accordance with certain Loan and Security Agreement, dated as of
[ ], by and between the Borrower and Bank (as amended, restated, modified or supplemented from time to time, the
“Agreement”) and not theretofore repaid, as shown on the records of the Bank.
In addition to principal, Borrower agrees to pay
interest on the principal amounts disbursed hereunder at a floating rate of interest equal to the Prime Rate plus an additional
, from
time to time, from the date of each disbursement until paid at such rates of interest per annum and upon such dates as provided for in the Agreement. Interest shall accrue on the outstanding principal balance from the date hereof up to and through
the date on which all principal and interest hereunder is paid in full, and shall be computed on the basis of the actual number of days elapsed in a 360-day year. Such interest is to be paid to Bank at its
address set forth above or as otherwise provided in the Agreement. For informational purposes, as of the date hereof the Prime Rate in effect is % per annum, thus producing an initial interest rate under the Agreement on such
date of % per annum and, when adjusted for a year of 365 days, an initial simple interest rate of % per annum. Any principal amount due under this Revolving Note (the “Note”) that is not paid
on the due date therefor whether on the Maturity Date, or resulting from the acceleration of maturity upon the occurrence of an Event of Default (as defined in the Agreement), shall bear interest from the date due until payment in full at the
Default Rate, as such term is defined in the Agreement.
This Note evidences loans incurred pursuant to the terms and conditions of the
Agreement to which reference is hereby made for a full and complete description of such terms and conditions, including, without limitation, provisions for the acceleration of the maturity hereof upon the existence or occurrence of certain
conditions or events, and the terms of any permitted prepayments hereof. All capitalized terms used in this Note shall have the same meanings as set forth in the Agreement.
Upon the existence or occurrence of any Event of Default, the principal and all accrued interest hereof shall automatically become, or may be
declared, due and payable in the manner and with the effect provided in the Agreement. In addition, this Note is subject to mandatory prepayment upon the terms and conditions of the Agreement.
Bank shall at all times have a right of set-off against any deposit balances of Borrower in the
possession of the Bank and the Bank may apply the same against payment of this Note or any other
indebtedness of Borrower to the Bank, irrespective of whether or not Bank has made any demand under the Loan Agreement. The payment of any indebtedness evidenced by this Note prior to the
Maturity Date shall not affect the enforceability of this Note as to any future, different or other indebtedness incurred hereunder by the Borrower. In the event the indebtedness evidenced by this Note is collected by legal action or through an attorney-at-law, the Bank shall be entitled to recover from Borrower all costs of collection, including, without limitation, reasonable attorneys’ fees if collected by or
through an attorney-at-law.
Borrower acknowledges that
the actual crediting of the amount of any disbursement under the Agreement to an account of Borrower or recording such amount in the records of the Bank shall, in the absence of manifest error, constitute presumptive evidence of such disbursement
and that such Advance was made and borrowed under the Agreement. Such account records shall constitute, in the absence of manifest error, presumptive evidence of principal amounts outstanding and the payments made under the Agreement at any time and
from time to time, provided that the failure of Bank to record in such account the type or amount of any Advance shall not affect the obligation of the undersigned to repay such amount together with interest thereon in accordance with this Note and
the Agreement.
Failure or forbearance of Bank to exercise any right hereunder, or otherwise granted by the Agreement or by law, shall not
affect or release the liability of Borrower hereunder, and shall not constitute a waiver of such right unless so stated by Bank in writing. THIS NOTE AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED
BY THE LAW (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF) OF THE STATE OF GEORGIA. TIME IS OF THE ESSENCE OF THIS NOTE.
PRESENTMENT FOR PAYMENT, NOTICE OF DISHONOR AND PROTEST ARE HEREBY WAIVED.
Executed under hand and seal of the Borrower as of the day and year first above written.
EXHIBIT A-3
FORM OF
TERM
NOTE
|
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| Closing Date: [Closing Date] |
|
$ |
Atlanta, Georgia
FOR VALUE RECEIVED, the undersigned,
(the “Borrower”), promises to pay to the order of SUNTRUST BANK, a Georgia banking corporation (the “Bank”),
at Bank’s principal office in Atlanta, Georgia, or at such other place as the holder hereof may designate by notice in writing to Borrower, in immediately available funds in lawful money of the United States of America,
($ ). Repayment will be in consecutive equal monthly installments of principal in the amount of $ based
on a month amortization plus accrued and unpaid interest and shall be due and payable on each Payment Date, with the first installment being due and payable on
, and the remaining outstanding principal balance, together with all accumulated unpaid interest shall be due and payable on
(the “Maturity Date”).
In addition to principal, Borrower agrees to pay interest on the principal amounts disbursed hereunder at a floating rate of interest equal to
the Prime Rate plus an additional
, from
time to time, upon such dates as provided for in that certain Loan Agreement dated as of [ ], by and between Borrower and Bank (as
amended, restated, modified or supplemented from time to time, the “Agreement”). Interest shall accrue on the outstanding principal balance from the date hereof up to and through the date on which all principal and interest hereunder is
paid in full, and shall be computed on the basis of the actual number of days elapsed in a 360-day year. Such interest is to be paid to Bank at its address set forth above or as otherwise provided in the
Agreement. For informational purposes, as of the date hereof the Prime Rate in effect is % per annum, thus producing an initial interest rate under the Agreement on such date of % per annum and, when
adjusted for a year of 365 days, an initial simple interest rate of % per annum. Any principal amount due under this Term Note (the “Note”) that is not paid on the due date therefor whether on the due date, or
resulting from the acceleration of maturity upon the occurrence of an Event of Default (as defined in the Agreement), shall bear interest from the date due until payment in full at the Default Rate, as such term is defined in the Agreement.
This Note evidences a loan incurred pursuant to the terms and conditions of the Agreement to which reference is hereby made for a full and
complete description of such terms and conditions, including, without limitation, provisions for the acceleration of the maturity hereof upon the existence or occurrence of certain conditions or events, and the terms of any permitted prepayments
hereof. All capitalized terms used in this Note shall have the same meanings as set forth in the Agreement.
Upon the existence or
occurrence of any Event of Default, the principal and all accrued interest hereof shall automatically become, or may be declared, due and payable in the manner and with the effect provided in the Agreement. In addition, this Note is subject to
mandatory prepayment upon the terms and conditions of the Agreement.
Bank shall at all times have a right of set-off against any deposit balances of Borrower in the possession of the Bank and the Bank may apply the same against payment of this Note or any other indebtedness of Borrower to the Bank, irrespective of whether
or not Bank has made any demand under
the Agreement. The payment of any indebtedness evidenced by this Note prior to the Maturity Date shall not affect the enforceability of this Note as to any future, different or other indebtedness
incurred hereunder by the Borrower. In the event the indebtedness evidenced by this Note is collected by legal action or through an attorney-at-law, the Bank shall be
entitled to recover from Borrower all costs of collection, including, without limitation, reasonable attorneys’ fees if collected by or through an attorney-at-law.
Borrower acknowledges that the actual crediting of the amount of any disbursement under the Agreement to an account of Borrower or
recording such amount in the records of the Bank shall, in the absence of manifest error, constitute presumptive evidence of such disbursement. Such account records shall constitute, in the absence of manifest error, presumptive evidence of
principal amounts outstanding and the payments made under the Agreement at any time and from time to time, provided that the failure of Bank to record in such account the type or amount of any advance shall not affect the obligation of the
undersigned to repay such amount together with interest thereon in accordance with this Note and the Agreement.
Failure or forbearance of
Bank to exercise any right hereunder, or otherwise granted by the Loan Agreement or by law, shall not affect or release the liability of Borrower hereunder, and shall not constitute a waiver of such right unless so stated by Bank in writing. THIS
NOTE AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF) OF THE STATE OF GEORGIA. TIME IS OF THE ESSENCE OF THIS NOTE.
PRESENTMENT FOR PAYMENT, NOTICE OF DISHONOR AND PROTEST ARE HEREBY WAIVED.
Executed under hand and seal of the Borrower as of the day and year first above written.
EXHIBIT B
The following described Liens are Permitted Liens (if none, so
state):
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| Name of Lien Holder |
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Date of Recording |
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Collateral |
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| B. |
Trade Names and Styles |
The following are the only trade names or trade styles
ever used by Borrower (if none, so state):
The following are all of the subsidiaries owned by Borrower (if
none, so state):
The following are all of the locations where Borrower has an
office or other place of business or owns assets:
EXHIBIT C
COMPLIANCE CERTIFICATE OF BORROWER
(Pursuant to Section 7.2 of Loan and Security Agreement dated
)
(the “Borrower”) HEREBY
CERTIFIES that:
This Compliance Certificate is furnished pursuant to the Loan and Security Agreement (the “Agreement”) dated
by and between the Borrower and SUNTRUST BANK (the “Bank”). Unless otherwise defined herein, the terms used in this
Report have the meanings given to them in this Agreement.
1. The figures and information for determining compliance by the Borrower with
the financial covenants set forth in the Quarterly Covenant Compliance Report attached hereto have been prepared based upon the financial reports accompanied hereby and both the Quarterly Covenant Compliance Report and such financial reports are
true and complete as of the date hereof.
2. The activities of the Borrower during the preceding quarter have been reviewed by the
president or other authorized officer or the employees or agents under his immediate supervision. Based on such review, to the best knowledge and belief of the president or other authorized officer, and as of the date of this Certificate, the
Borrower has performed and observed each and every covenant contained in the Agreement to be performed by it, and no Event of Default or Default Condition exists, except for the following:
Please describe or indicate “None” if none exist:
3. The Borrower has properly and accurately reported all Asset Dispositions pursuant to Section 2.12 of
the Agreement.
WITNESS my hand this day of
, .
EXHIBIT D
QUARTERLY COVENANT COMPLIANCE REPORT
(Section 6 - Financial Covenants)
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| Test Borrower |
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| For Quarter Ending: |
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With respect to the financial covenants set forth below which are calculated based upon the Opening Date of a
store location, the financial information from store locations that have not reached the Opening Date anniversary incorporated into such covenants shall be excluded from such calculations. [Debt Service and] Debt attributable to such locations and
deducted from the final calculations shall be deducted on a pro rata basis calculated by dividing such stores’ aggregate Net Book Value of Merchandise by the Net Book Value of Merchandise for all store locations. The financial covenants shall
otherwise be calculated on a consolidated basis as to all store locations.
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| I. |
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Rental Revenue to Debt Service |
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A. |
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Enter amount of quarterly Rental Revenue. |
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$ |
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B. |
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Enter amount of quarterly Rental Revenue attributable to store locations open less than 25 months. |
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$ |
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C. |
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Subtract B from A. |
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$ |
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D. |
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Enter amount of quarter’s Debt Service. $ |
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E. |
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Enter amount of quarter’s Debt Service attributable to store locations open less than 25 months. |
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$ |
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F. |
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Subtract E from D. |
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$ |
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Ratio of C:F. |
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STANDARD — Ratio not less than — 2.2: 1.0 |
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Compliance? ¨ Yes ¨ No |
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| II. |
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Debt to Rental Revenue |
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A. |
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Enter amount of Debt. |
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$ |
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B. |
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[Enter amount of Debt attributable to store locations open less than 19 months. |
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$ ] |
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C. |
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[Subtract B from A. |
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$ ] |
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D. |
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Enter Amount of last quarter’s Rental Revenue. |
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$ |
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E. |
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[Enter amount of last quarter’s Rental Income attributable to store locationsopen less than 19 months. |
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$ ] |
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F. |
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[Subtract E from D. |
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$ ]10 |
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Ratio of C : F. |
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STANDARD [ ]:1.0 |
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Compliance? ¨ Yes ¨ No |
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Note: All terms are those used in generally accepted accounting practices unless specifically defined in the Agreement.
| 10 |
Note: This covenant will apply and be tested on last day of each calendar quarter and not be tied to any Opening Date of store locations in the case of any Loan Agreement providing for Loans to made available to a
Borrower consisting solely of Revolving Loans. In which case, the bracketed portions of this Debt to Rental Revenue covenant will not be applicable. Covenant levels for this covenant will be established by Sponsor for each Borrower as per the
Servicing Agreement. |
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into effective as of the 10th day of November, 2014 (the “Effective Date”), by and among Aaron’s, Inc., a corporation organized under the laws of the State of Georgia (the “Company”), Progressive Holdings, LLC, a Delaware limited liability company (“Progressive”) and John W. Robinson (“Executive”).
WHEREAS, the Company, Progressive and Executive are party to an Employment Agreement dated April 14, 2014 (the “Prior Employment Agreement”);
WHEREAS, the Company desires to continue to employ Executive, and Executive desires to continue to be employed by the Company on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the promises, agreements and conditions contained in this Agreement, the parties hereto agree as follows:
1. Employment. Subject to the terms and conditions of this Agreement, Executive shall be employed by the Company as the Chief Executive Officer of the Company, and shall perform such reasonable duties and functions for the Company and any company controlling, controlled by or under common control with the Company (such companies hereinafter collectively called “Affiliates”) as shall be specified from time to time by the Board of Directors of the Company (the “Board”); Executive hereby accepts such employment and agrees to perform such executive duties as may be reasonably assigned to him.
2. Duties. Executive shall devote his full business related time and best efforts to accomplishing such executive duties as are customary and incidental to the position of Executive or such other lawful duties as may be from time to time reasonably requested by the Board. While employed by the Company, Executive shall not serve as a principal, partner, employee, officer or director of, or consultant to, any other business or entity conducting business for profit without the prior written approval of the Board. As long as it does not interfere with the performance of Executive’s duties for the Company, Executive may spend a reasonable amount of time supervising his personal, passive investments, and may participate (as a board member, officer or volunteer) in civic, political and charitable activities. In addition, Executive shall be permitted to serve on the board of directors of for-profit corporations (in addition to the Board of the Company) with the approval of the Board as long as such service does not interfere with the performance of Executive’s duties for the Company. Approval shall be deemed to have been given with respect to any director positions held by Executive on the Effective Date.
3. Term. The term of this Agreement shall be for a rolling, three (3) year term commencing on the date hereof, and shall be deemed automatically (without further action by either the Company or Executive) to extend each day for an additional day such that the remaining term of the Agreement shall continue to be three (3) years; provided, however, that the Company may, by notice to Executive, cause this Agreement to cease to extend automatically and, upon such notice, the “Term” of this Agreement shall be three (3) years following such notice.
4. Compensation, Benefits and Other Arrangements. As compensation for his services during the Term of this Agreement, Executive shall be paid and receive the amounts and benefits set forth in subsections (a) through (i) below:
(a) Base Salary. An annual base salary (“Base Salary”) of $700,000 prorated for any partial year of employment. Executive’s Base Salary shall be subject to annual review, for adjustments at such time as the Company conducts salary reviews for its executive officers generally, subject to approval of the Compensation Committee or Board, as appropriate, which shall not be less than $700,000. Executive’s salary shall be payable in accordance with the Company’s regular payroll practices in effect from time to time for executive officers of the Company.
(b) Bonus. In addition to the Base Salary, Executive shall be entitled to participate in the Company’s annual incentive plan in a manner consistent with the other senior executives of the Company. For 2014, Executive’s bonus shall be determined based on the terms of the Prior Employment Agreement. For 2015, Executive shall be eligible to earn a bonus with an annual target equal to one hundred percent (100%) of Executive’s then-current Base Salary, based on the achievement of performance metrics determined by the Board after consultation in good faith with Executive. Executive’s annual target bonus opportunity shall be subject to annual review, for adjustments at such time as the Company conducts bonus reviews for its executive officers generally, subject to approval of the Compensation Committee or Board, as appropriate.
(c) Long-Term Incentive Plan. Executive shall be eligible to participate in the Company’s long-term incentive plan beginning in 2015, in accordance with the terms of such plan, as in effect from time to time and in a manner consistent with other senior executives and commensurate with Executive’s position, with Executive receiving credit for the period of Executive’s employment with Progressive prior to the Effective Date for purposes of any length of service requirements under such plan. Executive’s target award value for 2015 shall be $5,200,000, of which 50% (i.e., $2,600,000) shall be allocated as a grant of performance-based restricted sock units (the “PSUs”), 25% (i.e., $1,300,000) shall be allocated as a grant of stock options (the “Options”) and 25% (i.e., $1,300,000) shall be allocated as a grant of time-based restricted stock units (the “RSUs” and collectively, with the PSUs and Options, the “LTI Awards”). The performance metrics for the PSUs shall be determined by the Board after consultation in good faith with Executive. Each LTI Award shall be granted pursuant to the Company’s Amended and Restated 2001 Stock Option and Incentive Award Plan (the “Plan”) and shall vest in equal annual installments on each of the first, second and third anniversaries of the Effective Date, subject to the terms and conditions of the applicable award agreement. Executive’s annual target award value shall be subject to annual review, for adjustments at such time as the Company conducts award reviews for its executive officers generally, subject to approval of the Compensation Committee or Board, as appropriate.
(d) Other Benefits. Executive shall be entitled to vacation with pay, life insurance, health insurance, fringe benefits, and such other employee benefits generally made available by the Company to its senior executive officers, in accordance with the established plans and policies of the Company, as in effect from time to time, with Executive receiving credit for the
period of Executive’s employment with Progressive prior to the Effective Date for purposes of any length of service requirements under such plans or policies.
(e) Indemnification. During the Term of this Agreement and after Executive’s termination, the Company shall indemnify Executive and hold Executive harmless from and against any claim, loss or cause of action arising from or out of Executive’s performance as an officer, director or employee of the Company or any of its subsidiaries or other affiliates or in any other capacity, including any fiduciary capacity, in which Executive serves at the Company’s request, in each case to the maximum extent permitted by law and under the Company’s Articles of Incorporation and By-Laws. During the Term and after Executive’s termination, Executive shall be covered by any policy of directors’ and officers’ liability insurance maintained by the Company for the benefit of its officers and directors.
(f) Transition and Relocation Arrangements. Executive shall use reasonable efforts to relocate his primary residence to the Atlanta, Georgia metropolitan area no later than August 31, 2015. Until such time as Executive relocates his primary residence to the Atlanta, Georgia metropolitan area, Executive shall be provided, at the expense of the Company, the Company’s aircraft or other private aircraft services for personal travel between his primary residence and Atlanta, Georgia; provided, however, that the incremental cost to the Company of such personal use shall not exceed $150,000 without the prior approval of the Board or the Compensation Committee. Members of Executive’s immediate family may accompany Executive on such travel. Executive shall be solely responsible for any taxable income recognized by him in connection with the personal use of the Company aircraft and shall not be entitled to any tax gross up payments or other reimbursement from the Company in connection therewith.
(g) Business Travel. Executive shall be permitted to use, at the expense of the Company, the Company’s aircraft or other private aircraft for all business-related flights and/or flights incurred by Executive in connection with the performance of Executive’s duties hereunder.
(h) Attorney’s Fees. Not later than 15 days following the execution of this Agreement, the Company shall reimburse Executive’s reasonable costs of entering into this Agreement, including the reasonable fees and expenses of the Executive’s counsel, up to a maximum of $20,000.
(i) Restricted Stock Unit Grant. As of the Effective Date, the Company shall grant Executive 5,000 restricted stock units pursuant to the Plan, which shall vest 100% on the first anniversary of the Effective Date, subject to the terms and conditions of the applicable award agreement.
5. Termination. Executive’s employment hereunder may be terminated as follows:
(a) By Executive. Executive may voluntarily terminate his employment hereunder at any time, to be effective 60 days after delivery to the Company of his signed, written resignation.
Company may accept said resignation and pay Executive his Base Salary for such notice period in lieu of waiting for passage of the notice period.
(b) By Executive for Good Reason. Executive may terminate his employment for Good Reason (as defined below) in accordance with the Good Reason Process.
(c) By the Company for Cause. The Company may terminate Executive’s employment for Cause (as defined below) at any time, subject to the notice provisions in Section 5(g)(i) below.
(d) By the Company without Cause. Subject to Section 6 below, the Company may terminate Executive’s employment hereunder, without Cause, at any time upon written notice to Executive.
(e) Upon Death. Executive’s employment shall terminate immediately upon Executive’s death.
(f) Due to Disability. The Company may terminate Executive’s employment if Executive, due to physical or mental injury or illness, is unable to perform the essential functions of his position with or without reasonable accommodation for a period of one hundred eighty (180) days, whether or not consecutive, occurring within any period of twelve (12) consecutive months (a “Disability”), subject to any limitation imposed by federal, state or local laws, including, without limitation, the American with Disabilities Act.
(g) Definitions. For purposes of this Agreement, the following terms have the following meanings:
(i) “Cause” shall mean: (A) Executive’s material fraud, malfeasance, gross negligence, or willful misconduct with respect to business affairs of the Company which is, or is reasonably likely to be if such action were to become known by others, directly or materially harmful to the business or reputation of the Company or any subsidiary of the Company; (B) Executive’s conviction of or failure to contest prosecution for a felony or a crime involving fraud, embezzlement, theft or moral turpitude; or (C) Executive’s material breach of this Agreement. A termination of Executive for Cause based on clause (A) or (C) of the preceding sentence shall take effect 30 days after Executive receives from Company written notice of intent to terminate and Company’s description of the alleged Cause, unless Executive shall, during such 30-day period, remedy the events or circumstances constituting Cause; provided, however, that such termination shall take effect immediately upon the giving of written notice of termination of Cause under any clause if the Company shall have determined in good faith that such events or circumstances are not remediable (which determination shall be stated in such notice).
(ii) “Change in Control” shall mean:
(a) The acquisition (other than from the Company) by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Act (but without regard to any time period specified in Rule 13d-3(d)(1)(i))), of thirty-five percent (35%) or more of the combined voting power of then outstanding securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); excluding, however, (1) any acquisition by the Company or (2) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company;
(b) A majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election; or
(c) Consummation by the Company of a reorganization, merger, or consolidation or sale of all or substantially all of the assets of the Company (a “Transaction”); excluding, however, a Transaction pursuant to which (i) all or substantially all of the individuals or entities who are the beneficial owners, respectively, of the Outstanding Company Voting Securities immediately prior to such Transaction will beneficially own, directly or indirectly, more than 50 percent of the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors of the corporation resulting from such Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or indirectly) in substantially the same proportions relative to each other as their ownership, immediately prior to such Transaction, of the Outstanding Company Voting Securities.
Provided, however, a Change in Control shall not be deemed to occur unless the transaction also constitutes a change in the ownership or effective control of the Company or a change in the ownership of a substantial portion of the assets of the Company, each as defined in Section 409A(a)(2)(A)(v) of the Internal Revenue Code of 1986, as amended (the “Code”) and the regulations promulgated thereunder.
(iii) “Good Reason” shall mean that Executive has complied with the Good Reason Process following the occurrence of any of the following events or actions: (A) any material reduction in Executive’s Base Salary, (B) any material reduction in Executive’s authority, duties or responsibilities (for the avoidance of doubt, if, at any time following a Change in Control, the Board or the Company takes action such that Executive is no longer the Chief Executive Officer of the Company or its successor, or if the Company or its successor is a subsidiary of another entity, the ultimate parent entity of the Company or its successor, then a material reduction in Executive’s authority, duties or responsibilities shall be deemed to have occurred), (C) any change in the geographic location at which Executive must perform his duties requiring Executive to be based at
any office or location more than 50 miles from Atlanta, Georgia or (D) any material breach of this Agreement by the Company.
(iv) “Good Reason Process” shall mean that (A) Executive reasonably determines in good faith that a “Good Reason” condition has occurred; (B) Executive notifies the Company in writing of the first occurrence of the Good Reason condition within 60 days of the first occurrence of such condition; (C) Executive cooperates in good faith with the Company’s efforts, for a period not less than 30 days following such notice (the “Cure Period”), to remedy the condition; (D) notwithstanding such efforts, the Good Reason condition continues to exist; and (E) Executive terminates his employment within 60 days after the end of the Cure Period. If the Company cures the Good Reason condition during the Cure Period, Good Reason shall be deemed not to have occurred.
(v) “Protection Period” shall mean the period which begins on the date of a Change in Control and ends on the second anniversary of such Change in Control.
6. Payments upon Termination.
(a) By Executive not for Good Reason. If Executive voluntarily terminates his employment at any time, other than for Good Reason, then Executive shall be entitled to no payment or compensation whatsoever from the Company under this Agreement, other than accrued amounts as may be due him through his last day of employment (the “Termination Date”), including Executive’s Base Salary and any Earned Bonus through the Termination Date. “Earned Bonus” shall mean any bonus that was earned by and payable to Executive but that was not yet paid as of the Termination Date. The Earned Bonus shall be paid on the 60th day following the Termination Date. In addition, Executive shall be entitled to a prorated annual bonus for the year in which he terminates, calculated under the applicable bonus plan based on the actual performance results for the year, but prorated for the number of months Executive was employed during such year. Any such prorated annual bonus shall be payable at the same time such bonuses are paid to other executive officers.
(b) By the Company for Cause. If the Company terminates Executive’s employment for Cause, Executive shall be entitled to no payment or compensation whatsoever from the Company under this Agreement, other than accrued amounts as may be due him through the Termination Date, including Executive’s Base Salary and any Earned Bonus through the Termination Date
(c) By Company other than for Cause or by Executive for Good Reason. If, prior to the end of the Term of this Agreement and outside of Executive’s Protection Period, (i) the Company terminates Executive’s employment without Cause and other than due to Disability (or death) or, (ii) Executive terminates his employment for Good Reason after complying with the Good Reason Process, and in each case if Executive executes and does not timely revoke a release of claims in favor of the Company (as discussed in Section 6(h) below), Executive shall be entitled to receive as damages payable as a result of, and arising from, a breach of this Agreement (in addition to any amounts that have otherwise accrued but remain unpaid prior to such termination), the compensation and benefits set forth in (i) through (v) below. All
compensation payable under (i) through (v) below shall be subject to the terms of Section 9 below, which may delay the payment of the compensation for up to 6 months.
(i) Base Salary and Target Bonus. Executive will (a) continue to receive his current Base Salary (subject to withholding of all applicable taxes) for a period of twenty-four (24) months from the Termination Date, payable in normal payroll periods, in the same manner as it was being paid as of the Termination Date, and no less frequently than monthly and (b) receive additional cash payments from the Company (subject to withholding of all applicable taxes) in each of the twenty-four (24) months following the month in which his employment is terminated in an amount for each such month equal to one-twelfth of his target annual incentive for the year in which such termination occurs; provided, however, any payments that would otherwise be payable during the first 60 days following the Termination Date shall be accumulated without interest and paid on the 60th day following the Termination Date. For purposes hereof, Executive’s “current Base Salary” shall be the highest rate in effect during the twelve-month period prior to Executive’s termination.
(ii) Pro Rata Bonus. The Company shall (subject to withholding of all applicable taxes) pay executive an amount equal to the product of (a) the average (“Average Bonus”) of the bonuses earned by him for the two calendar years immediately preceding the year in which such Termination Date occurs (provided, however, that if such Termination Date occurs before the completion of two full fiscal years after the Effective Date, the Average Bonus will be based on the average bonuses during the full (if any) and partial fiscal years after the Effective Date, using the actual bonus paid for any completed year and the target bonus for any year not yet complete) and (b) a fraction, the numerator of which is the number of days from January 1 of the year during which the Termination Date occurs to the Termination Date and the denominator of which is 365. This severance benefit shall be payable in equal monthly installments for a period of twenty-four (24) months from the Termination Date; provided, however, any payments that would otherwise be payable during the first 60 days following the Termination Date shall be accumulated without interest and paid on the 60th day following the Termination Date. Any bonus amounts that Executive had previously earned from the Company but which may not yet have been paid as of the date of termination shall not be affected by this provision.
(iii) Health and Dental Insurance Coverage. Executive (and any spouse or dependents covered at the time of Executive’s termination) shall be entitled to elect to continue coverage under the Company’s group medical and dental programs as provided under COBRA. To continue such coverage, Executive will be required to pay the applicable COBRA premiums. To help compensate Executive for the cost of COBRA or alternative medical and dental coverage, the Company shall pay Executive a lump sum, on the 60th day following the Termination Date, equal to an amount such that after payment of all estimated taxes on such amount, Executive retains a net amount equal to the difference between (a) the applicable monthly COBRA premium and (b) the monthly
premium that an active employee would pay for the same coverage, as of the Termination Date, multiplied by twenty-four (24).
(iv) Stock Options and Other Equity Awards. As of the Termination Date, all outstanding stock options, stock appreciation rights, restricted stock units, and other equity awards granted to Executive under the Plan and any other Company stock plans (the “Stock Plans”) shall become vested and exercisable to the extent provided under the terms of the applicable Stock Plans and award agreements.
(v) Accrued Vacation. Executive shall receive payment for all accrued paid time off through the Termination Date on the 60th day following the Termination Date.
(d) Change of Control Termination. If, prior to the end of the Term of this Agreement and during Executive’s Protection Period, (i) the Company terminates Executive’s employment without Cause and other than due to disability (or death) or, (ii) Executive terminates his employment for Good Reason, and in each case if Executive executes and does not timely revoke a release of claims in favor of the Company (as discussed in Section 6(h) below), Executive shall be entitled to receive as damages payable as a result of, and arising from, a breach of this Agreement (in addition to any amounts that have otherwise accrued but remain unpaid prior to such termination), the compensation and benefits set forth in (i) through (v) below. All compensation payable under (i) through (v) below shall be subject to the terms of Section 9 below, which may delay the payment of the compensation for up to 6 months.
(i) Base Salary and Target Bonus. Executive will receive a lump sum payment on the 60th day following the Termination Date (subject to withholding of all applicable taxes) equal to the sum of (a) two (2) times his current Base Salary and (b) two (2) times his target annual incentive for the year in which such termination occurs. For purposes hereof, Executive’s “current Base Salary” shall be the highest rate in effect during the twelve-month period prior to Executive’s termination.
(ii) Pro Rata Bonus. The Company shall (subject to withholding of all applicable taxes) pay executive an amount equal to the product of (a) the Average Bonus and (b) a fraction, the numerator of which is the number of days from January 1 of the year during which the Termination Date occurs to the Termination Date and the denominator of which is 365. This severance benefit shall be payable in lump sum payment on the 60th day following the Termination Date (subject to withholding of all applicable taxes).
(iii) Health and Dental Insurance Coverage. Executive (and any spouse or dependents covered at the time of Executive’s termination) shall be entitled to elect to continue coverage under the Company’s group medical and dental programs as provided under COBRA. To continue such coverage, Executive will be required to pay the applicable COBRA premiums. To help compensate Executive for the cost of COBRA or alternative medical and dental coverage, the Company shall pay Executive a lump sum, on the 60th day following Executive’s Termination Date, equal to an amount such that after payment of all estimated taxes on such amount, Executive retains a net amount
equal to the cost of the applicable monthly COBRA premium as of Executive’s Termination Date, multiplied by twenty-four (24).
(iv) Stock Options and Other Equity Awards. As of the Termination Date, all outstanding stock options, stock appreciation rights, restricted stock units, and other equity awards granted to Executive under the Stock Plans shall become vested and exercisable to the extent provided under the terms of the applicable Stock Plans and award agreements.
(v) Accrued Vacation. Executive shall receive payment for all accrued paid time off through Executive’s Termination Date on the 60th day following Executive’s Termination Date.
(e) By Death. If Executive’s employment is terminated due to Executive’s death, Executive’s surviving spouse, or if none, his estate, shall receive no later than 60 days after Executive’s death, any amounts accrued through his date of death, including Base Salary and Earned Bonus, plus a prorated bonus for such fiscal year equal to the bonus that would be payable to Executive under any annual bonus plan based on the Company’s performance at the end of the last completed fiscal quarter, prorated as appropriate based on the number of days he worked in such year, divided by 365 days (the “Prorated Annual Bonus”). No additional amounts shall be payable under this Agreement. Executive or his estate, as the case may be, shall not by operation of this Section forfeit any rights in which he is vested at the time of his death.
(f) For Disability. If Executive’s employment is terminated due to Executive’s Disability, Executive shall be entitled to receive no later than 60 days after his termination, any amounts accrued through the Termination Date for Disability, including Base Salary and Earned Bonus, plus a Prorated Annual Bonus. No additional amounts shall be payable under this Agreement. Executive shall not by operation of this Section forfeit any rights in which he is vested at the time of his termination for disability.
(g) Survival of Restrictive Covenants. Upon termination of Executive’s employment for any reason whatsoever (whether voluntary on the part of Executive, for Cause, or other reasons), the obligations of Executive pursuant to Sections 7 and 8 hereof shall survive and remain in effect for the periods described in Section 7.
(h) Requirements for a Release. Payments and benefits under Sections 6(c) and 6(d) above are conditioned upon Executive timely signing and returning, and then not revoking, a release in the form reasonably requested by the Company (the “Release”). The Release will release rights and claims against the Company that are in existence at the time of signing the Release, whether they are known or not known by Executive. The Release will not release rights under this Agreement, vested rights under the Company’s benefit plans, or Executive’s right to indemnification as provided herein (or in any other agreement between the Company and Executive) and as provided under the Company’s bylaws or other governing instruments. The Release will be provided to Executive no later than the seventh day following the Termination Date. The Release will specify the time period for Executive to review and consider the Release and the deadline for returning the executed Release, as well as any applicable revocation period.
To allow time for Executive to consider the Release, and in accordance with applicable law, payments and benefits will generally not commence until the 60th day following the Termination Date. If Executive does not sign and return the Release or, if applicable, timely revokes the Release, Executive shall only be entitled to amounts accrued through the Termination Date and the additional amounts in Sections 6(c) and 6(d) above shall not be payable.
(i) Payments after Death. In the event there are any monies due under this Agreement after the death of Executive, the Company shall pay such monies to Executive’s estate in a lump sum payment within thirty (30) days after the date of death.
7. Restrictive Covenants.
(a) Acknowledgments.
(i) Access to Confidential Information. Executive acknowledges and agrees that Executive has been and will be provided and entrusted with Confidential Information (as that term is defined below) during Executive’s employment with the Company, including highly confidential information that is subject to extensive measures to maintain its secrecy within the Company, is not known in the trade or disclosed to the public, and would materially harm the Company’s legitimate business interests if it was disclosed or used in violation of this Agreement.
(ii) Valuable Customer, Franchisee and Associate Relationships. Executive acknowledges and agrees that the Company’s relationships and goodwill with its current and prospective customers and franchisees and its associates are critical to the Company’s long-term success.
(iii) Potential Unfair Competition. Executive acknowledges and agrees that as a result of Executive’s employment with the Company, knowledge of and access to Confidential Information, and relationships with the Company’s customers, franchisees, associates and employees, Executive would have an unfair competitive advantage if Executive were to engage in activities in violation of the covenants set forth in this Agreement. Executive further acknowledges and agrees that such covenants are reasonable and necessary to protect the Company’s legitimate business interests.
(iv) No Undue Hardship. Executive acknowledges and agrees that Executive possesses marketable skills and abilities that will enable Executive to find suitable employment following the Termination Date, without violating the covenants set forth in this Agreement.
(b) Definitions. The following capitalized terms used in this Agreement shall have the meanings assigned to them below, which definitions shall apply to both the singular and the plural forms of such terms:
(i) “Competitive Services” means directly or indirectly (i) engaging in or franchising the sale, lease ownership or financing of new, rental, or reconditioned
residential furniture, consumer electronics, home appliances or wheels and tires accessories or other activities, in each case, in a manner that is competitive with the products and services offered by the Company or its subsidiaries and/or (ii) providing web-based, virtual or remote lease-to-own programs or financing that are competitive with the products and services offered by, the Company or its subsidiaries. For purposes hereof, “Services” is defined as providing executive-level management and strategic guidance with respect to any Competitor.
(ii) “Competitor” means any Person, other than the Company and its subsidiaries, that is engaged, in whole or in part, in Competitive Services, including, but not by way of limitation, the following entities which Executive acknowledges and agrees directly compete with the Company: AcceptanceNow; American First Finance, Inc.; American Rental; Bi-Rite Co., d/b/a Buddy’s Home Furnishings; Bestway Rental, Inc.; Better Finance, Inc.; billfloat; Bluestem Brands, Inc.; Conn’s, Inc.; Crest Financial; Curacao Finance; Dent-A-Med, Inc. d/b/a The HELPcard; Discover Rentals; Easyhome, Inc.; Flexi Compras Corp.; FlexShopper LLC; Fortiva Financial, LLC; Genesis Financial Solutions, Inc.; Lendmark Financial Services, Inc.; Mariner Finance, LLC; Merchants Preferred Lease-Purchase Services; New Avenues, LLC; Okinus; Premier Rental-Purchase, Inc.; OneMaine Financial Holdings, Inc.; Purchasing Power, LLC; Regional Management Corp.; Rent-A-Center, Inc. (including, but not limited to, Colortyme); Santander Consumer USA Inc.; Springleaf Financial; Tidewater Finance Company; WhyNotLeaseIt, as well as any other parent, owner or affiliated corporate entity or person of any of the listed Companies or trade names above to the extent such parent, owner or affiliated corporate entity or person provides Competitive Services.
(iii) “Confidential Information” means any and all data and information relating to the Company, its activities, business, or clients that (1) is disclosed to Executive or of which Executive becomes aware as a consequence of Executive’s employment with the Company; (2) has value to the Company; and (3) is not generally known outside of the Company. “Confidential Information” shall include, but is not limited to the following types of information regarding, related to, or concerning the Company: trade secrets (as defined by O.C.G.A. § 10-1-761); financial plans and data; management planning information; business plans; operational methods; market studies; marketing plans or strategies; rate and pricing information; product development techniques or plans, including, but not limited to, information on the development, maintenance and use of unique techniques, concepts and knowledge with respect to renting, leasing, and selling practices; and information relating to the machinery, equipment, and processes by which the Company manufactures products for its business; customer lists; customer files, data and financial information; details of customer contracts; current and anticipated customer requirements; information dealing with the nature of customers’ accounts, including the dates on which agreements between the Company and such customers will end and be subject to renewal; identifying and other information pertaining to business referral sources; past, current and planned research and development; computer aided systems, software, strategies and programs; business acquisition plans; management organization and related information (including, without limitation, data and other information
concerning the compensation and benefits paid to officers, directors, associates, employees and management); personnel and compensation policies; new personnel acquisition plans; and other similar information. In addition to data and information relating to the Company, “Confidential Information” also includes any and all data and information relating to or concerning a third party that otherwise meets the definition set forth above, that was provided or made available to the Company by such third party, and that the Company has a duty or obligation to keep confidential. This definition shall not limit any definition of “confidential information” or any equivalent term under state or federal law. “Confidential Information” shall not include (i) data or information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right or privilege of the Company, (ii) data or information that has been voluntarily disclosed by the Company except where such public disclosure has been made by Executive without the Company’s authorization, or (iii) data or information which has been independently developed by Executive outside of his role as an employee of the Company without reference to the Confidential Information or has been independently developed and disclosed by others.
(iv) “Material Contact” means contact between Executive and a customer or potential customer of the Company, or between Executive and a franchisee or potential franchisee of the Company, (1) with whom Executive has or had dealings on behalf of the Company; (2) whose dealings with the Company are or were coordinated or supervised by Executive; or (3) about whom Executive obtains Confidential Information in the ordinary course of business as a result of Executive’s employment with the Company.
(v) “Person” means any individual or any corporation, partnership, joint venture, limited liability company, association or other entity or enterprise.
(vi) “Principal or Representative” means a principal, owner, partner, shareholder, joint venturer, investor, member, trustee, director, officer, manager, associate, agent, representative or consultant.
(vii) “Protected Customer” means any Person to whom the Company has sold its products or services or actively solicited to sell its products or services, and with whom Executive has had Material Contact on behalf of the Company during Executive’s employment with the Company.
(viii) “Protected Franchisee” means any Person who is a franchisee of the Company, and with whom Executive has had Material Contact on behalf of the Company during Executive’s employment with the Company.
(ix) “Protected Work” means any and all ideas, inventions, formulas, source codes, object codes, techniques, processes, concepts, systems, programs, software, software integration techniques, hardware systems, schematics, flow charts, computer data bases, client lists, trademarks, service marks, brand names, trade names, compilations, documents, data, notes, designs, drawings, technical data and/or training materials, including improvements thereto or derivatives therefrom, whether or not
patentable, and whether or not subject to copyright or trademark or trade secret protection, conceived, developed or produced by Executive, or by others working with Executive or under Executive’s direction, during the period of Executive’s employment, or conceived, produced or used or intended for use by or on behalf of the Company or its customers.
(x) “Restricted Period” means the period beginning on the date hereof and ending on the second anniversary of the Termination Date.
(xi) “Restricted Territory” means the United States, which is the geographic area in which the Company does business.
(xii) “Restrictive Covenants” means the restrictive covenants contained in Sections 7(c) through 7(g) hereof.
(c) Restriction on Disclosure and Use of Confidential Information. Executive agrees that Executive shall not, directly or indirectly, use Confidential Information on Executive’s own behalf or on behalf of any Person other than the Company, or reveal, divulge, or disclose any Confidential Information to any Person not expressly authorized by the Company to receive Confidential Information. This obligation shall remain in effect for as long as the information or materials in question retain their status as Confidential Information. Executive further agrees that Executive shall fully cooperate with the reasonable requests of the Company in maintaining the Confidential Information to the extent permitted by law. The Parties acknowledge and agree that this Agreement is not intended to, and does not, alter either the Company’s rights or Executive’s obligations under any state or federal statutory or common law regarding trade secrets and unfair trade practices. Anything herein to the contrary notwithstanding, Executive shall not be restricted from disclosing information that is required to be disclosed by law, court order or other valid and appropriate legal process; provided, however, that in the event such disclosure is required by law, Executive shall provide the Company with prompt notice of such requirement so that the Company may seek an appropriate protective order prior to any such required disclosure by Executive.
(d) Non-Competition. Executive agrees that, during the Restricted Period, Executive will not, without the prior written consent of the Company, directly or indirectly (i) within the Restricted Territory, carry on or engage in any of the Competitive Services which Executive engages or engaged in as an employee of the Company, or (ii) own, manage, operate, join, control or participate in the ownership, management, operation or control, of any business, whether in corporate, proprietorship or partnership form or otherwise, that is a Competitor; provided, however, that the following shall not be deemed to violate this clause (ii): (A) ownership in and of itself of less than five percent (5%) of a publicly traded company; (B) Executive’s existing passive investment in 5 Star Rental Purchase that has been disclosed in writing to the Company; and (C) Executive’s ownership of equity incentive securities in a Person in connection with Executive’s service relationship with such Person (or an affiliate of such Person), where such service relationship does not involve or relate to, directly or indirectly, the provision of Competitive Services.
(e) Non-Solicitation of Protected Customers. Executive agrees that, during the Restricted Period, Executive shall not, without the prior written consent of the Company, directly or indirectly, on Executive’s own behalf or as a Principal or Representative of any Person, solicit, divert, take away from the Company, or attempt to solicit, divert, or take away from the Company a Protected Customer with respect to products and services within the scope of the Competitive Services.
(f) Non-Recruitment of Employees. Executive agrees that, during the Restricted Period, Executive shall not, directly or indirectly, whether on Executive’s own behalf or as a Principal or Representative of any Person, solicit or induce, or attempt to solicit or induce, any associate or employee of the Company to terminate his or her employment relationship with the Company or to enter into employment with the Executive or any other Person. Notwithstanding the foregoing, nothing in this Section shall prohibit (i) general solicitations for employment and advertisements that are not specifically targeted towards employees of the Company, or (ii) using search firms that are not instructed to target employees of the Company.
(g) Non-Recruitment of Protected Franchisees. Executive agrees that, during the Restricted Period, Executive shall not, directly or indirectly, whether on Executive’s own behalf or as a Principal or Representative of any Person, solicit or induce, or attempt to solicit or induce, any Protected Franchisee of the Company to terminate its relationship with the Company.
(h) Standstill. Executive agrees that, during the two years following the Termination Date, Executive shall not, directly or indirectly, alone or in concert with others, (i) seek to control or change the management, Board or policies of the Company, or (ii) make or in any way participate in any “solicitation” of proxies or consents to vote any securities of the Company.
(h) Tolling. In the event the enforceability of any of the Restrictive Covenants is challenged in a claim or counterclaim in court during the Restricted Period, and Executive is not immediately enjoined from breaching such Restrictive Covenant, then if a court of competent jurisdiction later finds that such Restrictive Covenant is enforceable, the Restricted Period applicable to such Restrictive Covenant shall be deemed tolled upon the filing of the claim or counterclaim until the dispute is finally resolved; provided, however, that to the extent Executive complies with such Restrictive Covenant during such challenge, the Restricted Period applicable to such Restrictive Covenant shall not be deemed tolled. The Company’s rights and remedies as set forth in this Section 7 shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity.
(i) Severability and Modification of Covenants. Executive acknowledges and agrees that each of the Restrictive Covenants is reasonable and valid in time and scope and in all other respects. The Parties agree that it is their intention that the Restrictive Covenants be enforced in accordance with their terms to the maximum extent permitted by law. Each of the Restrictive Covenants shall be considered and construed as a separate and independent covenant. Should any part or provision of any of the Restrictive Covenants be held invalid, void, or unenforceable, such invalidity, voidness, or unenforceability shall not render invalid, void, or unenforceable any other part or provision of the Restrictive Covenants. If any portion of any of the Restrictive
Covenants is found to be invalid or unenforceable because its duration, geographic territory, scope of activities, or information covered is considered to be unreasonable in scope, the invalid or unenforceable term shall be redefined, or a new enforceable term provided, such that the intent of the Company and Executive in agreeing to the provisions of this Agreement will not be impaired and the provision in question shall be enforced to the fullest extent permitted by law.
8. Injunctive Relief. Executive acknowledges that his services to be rendered to the Company are of a special and unusual character which have a unique value to the Company, the loss of which cannot adequately be compensated by damages in an action at law. Executive further acknowledges that any breach of the terms of Section 7 would result in material damage to the Company, although it might be difficult to establish the monetary value of the damage. Executive therefore agrees that the Company, in addition to any other rights and remedies available to it, shall be entitled to seek an immediate injunction (whether temporary or permanent) from any court of appropriate jurisdiction in the event of any such breach thereof by Executive, or threatened breach which the Company in good faith believes will or is likely to result in irreparable harm to the Company. The existence of any claim or cause of action by Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of Executive’s agreement under this Section and Section 7 above.
9. Section 409A.
(a) Meaning of Termination of Employment. Solely as necessary to comply with Section 409A of the Code (“Section 409A”), for purposes of Section 6, “termination of employment” or “employment termination” or similar terms shall have the same meaning as “separation from service” under Section 409A(a)(2)(A)(i) of the Code, and no payments shall be made under Section 6(c) or 6(d) unless a separation from service has occurred.
(b) Installment Payments. For purposes of Section 6(c) or 6(d) with respect to amounts payable in the event of termination of Executive’s employment by the Company without Cause or by Executive for Good Reason, each such payment is a separate payment within the meaning of the final regulations under Section 409A.
(c) Six-Month Delay. This Agreement will be construed and administered to preserve the exemption from Section 409A of payments that qualify as a short-term deferral or that qualify for the two-times separation pay exception. With respect to other amounts that are subject to Section 409A, it is intended, and this Agreement will be so construed, that any such amounts payable under this Agreement and the Company’s and Executive’s exercise of authority or discretion hereunder shall comply with the provisions of Section 409A and the treasury regulations relating thereto so as not to subject Executive to the payment of interest and additional tax that may be imposed under Section 409A. As a result, in the event Executive is a “specified employee” on the date of Executive’s termination of employment (with such status determined by the Company in accordance with rules established by the Company in writing in advance of the “specified employee identification date” that relates to the date of Executive’s termination of employment, or in the absence of such rules established by the Company, under
the default rules for identifying specified employees under Section 409A), then any payment that is subject to Section 409A and that is payable to Executive in connection with Executive’s separation from service shall not be paid until the first business day following the expiration of six months after the Termination Date (if Executive dies after the Termination Date but before any payment has been made, such remaining payments that were or could have been delayed will be paid to Executive’s estate without regard to such six-month delay).
10. Section 280G Parachute Payments. Notwithstanding any provision of this Agreement to the contrary, if any payment or benefit to be paid or provided hereunder would be a “Parachute Payment,” within the meaning of Section 280G of the Code, or any successor provision thereto, but for the application of this sentence, then the payments and benefits to be paid or provided hereunder shall be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any such payment or benefit, as so reduced, constitutes a Parachute Payment; provided, however, that the foregoing reduction shall not be made if the total of the unreduced aggregate payments and benefits to be provided to Executive, determined on an after-tax basis (taking into account the excise tax imposed pursuant to Section 4999 of the Code, or any successor provision thereto, any tax imposed by any comparable provision of state law, and any applicable federal, state and local income taxes), exceeds by at least ten percent (10%) the total after-tax amount of such aggregate payments and benefits after application of the foregoing reduction. The determination of whether any reduction in such payments or benefits to be provided hereunder is required pursuant to the preceding sentence shall be made at the expense of the Company, if requested by Executive or the Company, by the Company’s independent accountants. The fact that Executive’s right to payments or benefits may be reduced by reason of the limitations contained in this Section shall not of itself limit or otherwise affect any other rights of Executive under this Agreement. In the event that any payment or benefit intended to be provided hereunder is required to be reduced pursuant to this Section and no such payment or benefit qualifies as a “deferral of compensation” within the meaning of and subject to Section 409A (“Nonqualified Deferred Compensation”), Executive shall be entitled to designate the payments and/or benefits to be so reduced in order to give effect to this Section. The Company shall provide Executive with all information reasonably requested by Executive to permit Executive to make such designation. In the event that any payment or benefit intended to be provided hereunder is required to be reduced pursuant to this Section and any such payment or benefit constitutes Nonqualified Deferred Compensation or Executive fails to elect an order in which payments or benefits will be reduced pursuant to this Section, then the reduction shall occur in the following order: (a) reduction of cash payments described in Sections 6(c) and 6(d) (with such reduction being applied to the payments in the reverse order in which they would otherwise be made, that is, later payments shall be reduced before earlier payments); (b) cancellation of acceleration of vesting on any equity awards for which the exercise price exceeds the then fair market value of the underlying equity; and (c) cancellation of acceleration of vesting of equity awards not covered under (c) above. Within any category of payments and benefits (that is, (a), (b) or (c)), a reduction shall occur first with respect to amounts that are not Nonqualified Deferred Compensation within the meaning of Section 409A and then with respect to amounts that are. In the event that acceleration of vesting of equity awards is to be cancelled, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of such equity awards, that is, later equity awards shall be canceled before earlier equity awards.
11. Clawback. Any incentive based compensation, or any other compensation, paid or payable to Executive pursuant to this Agreement or any other agreement or arrangement with the Company, which is subject to recovery under any law, government regulation, order or stock exchange listing requirement, will be subject to such deductions and clawback (recovery) as may be required to be made pursuant to law, government regulation, order, stock exchange listing requirement (or any policy of the Company adopted pursuant to any such law, government regulation, order or stock exchange listing requirement). Executive specifically authorizes the Company to withhold from future wages any amounts that may become due under this provision; provided, however, nothing in this provision is intended to permit a change in the terms of payment of any deferred compensation subject to Section 409A in any manner that would violate or create a plan failure under Section 409A. This Section 11 shall survive the termination of this Agreement for a period of three (3) years.
12. Arbitration.
(a) Rules; Jurisdiction. Any controversy, dispute or claim between the parties, including any controversy, dispute or claim arising out of, relating to or concerning this Agreement, the breach of this Agreement, the employment of Executive, or the termination of Executive’s employment (a “Disputed Matter”) will be resolved pursuant to this Section 12. Any such controversy, dispute or claim will be settled in Atlanta, Georgia, in accordance with the applicable rules of the American Arbitration Association (the “AAA”) then in effect; provided, however, that a breach of the obligations under Section 7 may be enforced by an action for injunctive relief and damages in a court of competent jurisdiction. If the rules of the AAA differ from any provisions of this Agreement, the provisions of this Agreement will control.
(b) Terms of Arbitration. The arbitrator chosen in accordance with these provisions shall not have the power to alter, amend or otherwise affect the terms of these arbitration provisions or the provisions of this Agreement except as otherwise expressly provided herein.
(c) Binding Effect. The arbitrator will have the authority to grant only such equitable and legal remedies that would be available in any judicial proceeding instituted to resolve a Disputed Matter, and the decision of the arbitrator within the scope of the submission will be final and conclusive upon the parties. Judgment upon any award rendered by the arbitrator may be entered in any court having subject matter jurisdiction to render such judgment. In the event any provision of this Section 12 is found to be unenforceable for any reason by a court or an arbitrator, the court or arbitrator, as the case may be, shall reform this Section 12 to the extent necessary to render it enforceable.
(d) Time for Arbitration. Any demand for arbitration involving an alleged breach of this Agreement shall be filed within one (1) year of the date the claim became known or should have become known; provided, however, any claim involving an alleged statutory obligation may be filed with the AAA and served on the other party at any time within the period covered by the applicable statute of limitations.
(e) Payment of Costs. To the extent permitted by applicable law, each party hereby agrees to pay one half the arbitrator’s fees, the costs of transcripts and all other expenses of the
arbitration proceedings; provided, however, that the arbitrator shall have the authority to determine payment of costs as part of the award or to allocate costs in accordance with the AAA rules.
(f) Burden of Proof; Basis of Decision. For any claim submitted to arbitration, the burden of proof shall be as it would be if the claim were litigated in a judicial proceeding except where otherwise specifically provided in this Agreement, and the decision shall be based on the application of the law of the State of Georgia (as determined from statutes, court decisions and other recognized authorities) to the facts found by the arbitrator.
13. Miscellaneous.
(a) Notice. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and shall be deemed to have been duly given when delivered in person or three business days after mailing if mailed first class by registered or certified mail, postage prepaid, or the next day if sent by overnight delivery, addressed as follows:
| |
If to the Company: | Aaron’s, Inc.
309 E. Paces Ferry Road, N.E.
Atlanta, Georgia 30305-2377
Attention: Chairman of the Board |
| |
If to Executive: | John W. Robinson
Address in the Company’s files |
or to such other address as any party may designate by notice to the other.
(b) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to Executive’s employment by the Company, and supersedes and is in full substitution for any and all prior understandings or agreements with respect to Executive’s employment, including the Prior Employment Agreement and all other prior offer letters and/or employment agreements; provided, however, that the award agreements governing Executive’s outstanding equity awards shall remain in full force and effect and such awards shall continue to be governed by the terms thereof, subject to potential modification pursuant to Sections 6(c)(iv) and 6(d)(iv) hereof. The Prior Employment Agreement is hereby terminated by mutual agreement of the parties thereto and shall be of no further force and effect; provided, that (i) Executive shall be entitled to accrued amounts as may be due him pursuant to the terms of the Prior Employment Agreement through the Effective Date and (ii) for 2014, Executive’s bonus shall be determined based on the terms of the Prior Employment Agreement, as provided in Section 4(b) hereof. If Executive is entitled to severance benefits under Section 6 of this Agreement, Executive shall not be entitled to receive any benefits under any other severance plan, program or arrangement of the Company.
(c) Amendment. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in
writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto to comply with any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision, or a waiver of the provision itself, or a waiver of any other provision of this Agreement.
(d) Binding Effect. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by Executive or the Company, except for assignment by the Company to any wholly owned subsidiary.
(e) Severability and Modification. If any provision of this Agreement or portion thereof is so broad, in scope or duration, so as to be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. In addition, to the extent that any provision of this Agreement as applied to either party or to any circumstances shall be adjudged by a court of competent jurisdiction to be void or unenforceable, the same shall in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement.
(f) Interpretation. This Agreement shall be interpreted, construed and governed by and under the laws of the State of Georgia. If any provision of this Agreement is deemed or held to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, this Agreement shall be considered divisible and inoperative as to such provision to the extent it is deemed to be illegal, invalid or unenforceable, and in all other respects this Agreement shall remain in full force and effect; provided, however, that if any provision of this Agreement is deemed or held to be illegal, invalid or unenforceable there shall be added hereto automatically a provision as similar as possible to such illegal, invalid or unenforceable provision as shall be legal, valid or enforceable. Further, should any provision contained in this Agreement ever be reformed or rewritten by any judicial body of competent jurisdiction, such provision as so reformed or rewritten shall be binding upon Executive and the Company.
(g) Failure to Enforce. The failure of either party hereto at any time, or for any period of time, to enforce any of the provisions of this Agreement shall not be construed as a waiver of such provision(s) or of the right of such party hereafter to enforce each and every such provision.
(h) Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.
(i) No Conflicting Agreement. Executive represents and warrants that he is not party to any agreement, contract or understanding which would prohibit him from entering into this Agreement or performing fully his obligations hereunder.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
AARON’S, INC.
By: /s/ Ray M. Robinson
Name: Ray M. Robinson
Title: Chairman of the Board of Directors
PROGRESSIVE HOLDINGS, LLC
By: /s/ Robert W. Kamerschen
Name: Robert W. Kamerschen
Title: Executive Vice President, General Counsel & Corporate Secretary
EXECUTIVE
/s/ John W. Robinson
John W. Robinson
Exhibit 21
|
| | |
NAME | | STATE OR COUNTRY OF INCORPORATION |
Aaron Investment Company | | Delaware |
Aaron Rents, Inc. Puerto Rico | | Commonwealth of Puerto Rico |
Aaron’s Canada, ULC | | Canada |
Aaron’s Foundation, Inc. | | Georgia |
Aaron’s Logistics, LLC | | Georgia |
Aaron’s Procurement Company, LLC | | Georgia |
Aaron’s Production Company | | Georgia |
Aaron’s Strategic Services, LLC | | Georgia |
99LTO, LLC | | Georgia |
Progressive Finance Holdings, LLC | | Utah |
Prog Leasing, LLC | | Utah |
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
| |
1) | Registration Statement (Form S-8 No. 333-160357) dated June 30, 2009 pertaining to the Aaron’s, Inc. Deferred Compensation Plan, and |
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2) | Registration Statement (Form S-8 No. 333-171113) dated December 10, 2010 pertaining to the 2001 Stock Option and Incentive Award Plan, as Amended and Restated, and Aaron’s, Inc. Employees Retirement Plan and Trust, as Amended and Restated; |
of our reports dated March 2, 2015, with respect to the consolidated financial statements of Aaron’s, Inc. and subsidiaries and the effectiveness of internal control over financial reporting of Aaron’s, Inc. and subsidiaries included in this Annual Report (Form 10-K) of Aaron’s, Inc. and subsidiaries for the year ended December 31, 2014.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 2, 2015
Exhibit 31.1
CERTIFICATION
I, John W. Robinson, III, certify that:
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1. | I have reviewed this annual report on Form 10-K of Aaron’s, Inc.; |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and |
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5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
|
| | |
| | |
Date: March 2, 2015 | | /s/ John W. Robinson, III |
| | John W. Robinson, III |
| | Chief Executive Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, John W. Robinson, III, Chief Executive Officer of Aaron’s, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
| |
(1) | The Annual Report on Form 10-K of the Company for the annual period ended December 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and |
| |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
| | |
| | |
Date: March 2, 2015 | | /s/ John W. Robinson, III |
| | John W. Robinson, III |
| | Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Gilbert L. Danielson, certify that:
| |
1. | I have reviewed this annual report on Form 10-K of Aaron’s, Inc.; |
| |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and |
| |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
|
| | |
| | |
Date: March 2, 2015 | | /s/ Gilbert L. Danielson |
| | Gilbert L. Danielson |
| | Executive Vice President, |
| | Chief Financial Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Gilbert L. Danielson, Chief Financial Officer of Aaron’s, Inc. (the “Company”), certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
| |
(1) | The Annual Report on Form 10-K of the Company for the annual period ended December 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and |
| |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
| | |
| | |
Date: March 2, 2015 | | /s/ Gilbert L. Danielson |
| | Gilbert L. Danielson |
| | Executive Vice President, |
| | Chief Financial Officer |
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