Aarons 2014 Annual Report Download - page 81

71
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.