Aarons 2011 Annual Report Download - page 23

Franchise Loan Guaranty. We have guaranteed the borrowings
of certain independent franchisees under a franchise loan program
with several banks and we also guarantee franchisee borrowings
under certain other debt facilities. On May 18, 2011, we entered
into a second amendment to our second amended and restated loan
facility and guaranty, dated June 18, 2010, as amended, and on July
1, 2011, we entered into a third amendment. The amendments to
the franchisee loan facility extended the maturity date until May 16,
2012, increased the maximum Canadian subfacility commitment
amount for loans to franchisees that operate stores in Canada (other
than in the Province of Quebec) from Cdn $25.0 million to Cdn
$35.0 million, and added the defined terms “Institutional Investor”
and “Private Placement Debt” to further clarify the circumstances
under which we may incur indebtedness and still remain in compli-
ance with applicable negative covenants, modified the negative
covenant restricting debt applicable to us by, among other things,
increasing the amount of indebtedness we may incur with respect to
certain privately placed debt from an aggregate principal amount of
up to $60.0 million to an aggregate principal amount of up to $150
million, replaced the pricing grid schedule to the franchisee loan
facility to reduce the applicable margins and participant unused com-
mitment fee percentages with respect to the funded participations,
and permitted the issuance of our 3.75% unsecured senior notes
issued to several insurance companies as described above under the
heading “Liquidity and Capital Resources—General.” We remain
subject to the financial covenants under the franchisee loan facility.
At December 31, 2011, the portion that we might be obligated
to repay in the event franchisees defaulted was $128.8 million. Of
this amount, approximately $108.5 million represents franchise
borrowings outstanding under the franchisee loan program and
approximately $20.3 million represents franchisee borrowings that
we guarantee under other debt facilities. However, due to fran-
chisee borrowing limits, we believe any losses associated with any
defaults would be mitigated through recovery of lease merchandise
and other assets. Since its inception in 1994, we have had no
significant losses associated with the franchise loan and guaranty
program. We believe the likelihood of any significant amounts
being funded in connection with these commitments to be remote.
We receive guarantee fees based on such franchisees’ outstanding
debt obligations, which were recognized as the guarantee obligation
is satisfied.
Legal Reserves. We are frequently a party to various legal proceed-
ings arising in the ordinary course of business. Management regularly
assesses the Company’s insurance deductibles, analyzes litigation
information with the Company’s attorneys and evaluates its loss
experience. We accrue for litigation loss contingencies that are both
probable and reasonably estimable. Legal fees and expenses associated
with the defense of all of our litigation are expensed as such fees and
expenses are incurred. Some of the proceedings we are currently a
party to are described in Item 3, “Legal Proceedings” of our Annual
Report on Form 10-K for the year ended December 31, 2011
filed with the SEC and in Note F to our Consolidated Financial
Statements.
Accrued litigation expense increased $40.0 million to $41.7
million at December 31, 2011 from $1.7 million at December 31,
2010, substantially due to the Alford v. Aarons Rents, Inc. et al.
case discussed in Item 3 of our Annual Report on Form 10-K for
the year ended December 31, 2011 filed with the SEC and in
Note F to our Consolidated Financial Statements.
While we do not presently believe that any of the legal proceed-
ings to which we are currently a party will ultimately have a mate-
rial adverse impact upon our business, financial position or results
of operations, there can be no assurance that we will prevail in all
the proceedings we are party to, or that we will not incur material
losses from them.
Contractual Obligations and Commitments. We have no long-
term commitments to purchase merchandise. See Note F to the
Consolidated Financial Statements for further information. The
following table shows our approximate contractual obligations,
including interest, and commitments to make future payments as of
December 31, 2011:
Contractual Obligations Total
and Commitments Amounts Period Less Period 1–3 Period 3–5 Period Over
(In Thousands) Committed Than 1 Year Years Years 5 Years
Credit Facilities, Excluding Capital Leases $173,703 $ 17,228 $ 34,475 $ 62,625 $ 59,375
Capital Leases 16,359 2,030 4,244 4,276 5,809
Operating Leases 532,810 100,906 160,296 96,983 174,625
Purchase Obligations 38,998 19,761 19,237 — —
Total Contractual Cash Obligations $761,870 $139,925 $218,252 $163,884 $239,809
The following table shows the Company’s approximate commercial commitments as of December 31, 2011:
Total
Amounts Period Less Period 1–3 Period 3–5 Period Over
(In Thousands) Committed Than 1 Year Years Years 5 Years
Guaranteed Borrowings of Franchisees $128,761 $128,222 $ 539 $ — $ — 21