Aarons 2012 Annual Report Download - page 47

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American Taxpayer Relief Act of 2012 extended bonus depreciation of 50% through the end of 2013. 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 2012 and prior periods. We
estimate that at December 31, 2012, the remaining tax deferral associated with the acts described above is
approximately $180.0 million, of which approximately 70% will reverse in 2013 and most of the remainder will reverse
between 2014 and 2015.
Leases. We lease warehouse and retail store space for most of our operations under operating leases expiring at various
times through 2028. Most of the leases contain renewal options for additional periods ranging from one to 15 years or
provide for options to purchase the related property at predetermined purchase prices that do not represent bargain
purchase options. We also lease transportation and computer equipment under operating leases expiring during the next
five 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, 2012 are shown in the below table under ―Contractual
Obligations and Commitments.‖
We have 20 capital leases, 19 of which are with a limited liability company (―LLC‖) whose managers and owners are
nine officers and two former officers of the Company of which there are six executive officers, 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
$716,000. Another ten of these related party leases relate to properties purchased from us in December 2002 by the
LLC for a total purchase price of approximately $5.0 million. The LLC is leasing back these properties to us for a 15-
year term at an aggregate annual lease of $556,000. 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.
Franchise Loan Guaranty. We have guaranteed the borrowings of certain independent franchisees under a franchise
loan program with several banks. On December 13, 2012, we entered into a fifth amendment to our second amended
and restated loan facility and guaranty, dated June 18, 2010, as amended, and we entered into a fourth amendment as of
May 16, 2012. The amendments to the franchise loan facility extended the maturity date until December 12, 2013,
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 $35.0 million to Cdn $50.0 million, included a revolving loan option
for Canadian borrowers, included HomeSmart franchisees in the United States as authorized borrowers under the
facility and conformed the covenants to those contained in the Company’s revolving credit agreement, which is
discussed in further detail in Note 6 to our Consolidated Financial Statements. We remain subject to financial covenants
under the franchise loan facility.
At December 31, 2012, the portion that we might be obligated to repay in the event franchisees defaulted was $117.3
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 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 proceedings 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