Aarons 2013 Annual Report Download - page 44

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Commitments
Income Taxes. During the year ended December 31, 2013, we made $54.0 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
$183.0 million.
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 (the "2010 TRA") 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 2010 TRA also allowed for a deduction of 50%
of the cost of qualified property placed in service during 2012. The 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 2013 and prior periods. We estimate that at
December 31, 2013, the remaining tax deferral associated with the acts described above is approximately $134.0 million, of
which approximately 65% is expected to reverse in 2014 and most of the remainder during 2015 and 2016.
Leases. We lease warehouse and retail store space for most of our 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 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, 2013 are shown in the below table under “Contractual Obligations and Commitments.”
As of December 31, 2013, we have 20 capital leases, 19 of which are with a limited liability company (“LLC”) whose
managers and owners are seven current officers (of which six are current executive officers) and four 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
$716,000. 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 December 12, 2013, we entered into a seventh amendment to our second amended and
restated loan facility and guaranty, dated June 18, 2010, as amended. The amendment to the franchise loan facility extended the
maturity date to December 11, 2014. Pursuant to this facility, subject to certain terms and conditions, the Company's
franchisees can borrow funds guaranteed by the Company. The amendment to the franchise loan agreement also (i) permit
franchise borrowers to use loan proceeds for any purpose approved by the Company, in addition to merchandise purchases and
related expenses, and (ii) impose certain restrictions on the indebtedness of franchisee borrowers, other than under the franchise
loan facility. The Company remains subject to financial covenants under the franchise loan facility.
At December 31, 2013, the portion that we might be obligated to repay in the event franchisees defaulted was $105.0 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.