As filed with the Securities and Exchange Commission on October 30, 2020.

File No. [        ]

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10

 

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

Pursuant to Section 12(b) or (g) of

the Securities Exchange Act of 1934

 

 

AARON’S SPINCO, INC.*

(Exact name of Registrant as specified in its charter)

 

 

 

 

Georgia   85-2483376

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. employer

identification number)

400 Galleria Parkway SE, Suite 300

Atlanta, Georgia

 

30339-3182

(Address of principal executive offices)   (Zip Code)

(678) 402-3000

(Registrant’s telephone number, including area code)

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

to be so Registered

 

Name of Each Exchange on which

Each Class is to be Registered

Common Stock, par value $0.50 per share   New York Stock Exchange

Securities to be registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “small reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

*

The registrant is currently named Aaron’s SpinCo, Inc. Prior to the effective date of this registration statement, the registrant plans to change its name.

 

 

 


INFORMATION REQUIRED IN REGISTRATION STATEMENT

CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT

AND ITEMS OF FORM 10

Certain information required to be included herein is incorporated by reference to specifically identified portions of the body of the information statement filed herewith as Exhibit 99.1. None of the information contained in the information statement shall be incorporated by reference herein or deemed to be a part hereof unless such information is specifically incorporated by reference.

 

Item 1.

Business.

The information required by this item is contained under the sections of the information statement entitled “Information Statement Summary,” “Risk Factors,” “Cautionary Statement Concerning Forward-Looking Statements,” “The Separation and Distribution,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Certain Relationships and Related Party Transactions” and “Where You Can Find More Information.” Those sections are incorporated herein by reference.

 

Item 1A.

Risk Factors.

The information required by this item is contained under the section of the information statement entitled “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.” Those sections are incorporated herein by reference.

 

Item 2.

Financial Information.

The information required by this item is contained under the sections of the information statement entitled “Capitalization,” “Selected Historical Combined Financial Data of Aaron’s SpinCo, Inc.,” “Unaudited Pro Forma Condensed Combined Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Those sections are incorporated herein by reference.

 

Item 3.

Properties.

The information required by this item is contained under the section of the information statement entitled “Business—Our Properties.” That section is incorporated herein by reference.

 

Item 4.

Security Ownership of Certain Beneficial Owners and Management.

The information required by this item is contained under the section of the information statement entitled “Security Ownership of Certain Beneficial Owners and Management.” That section is incorporated herein by reference.

 

Item 5.

Directors and Executive Officers.

The information required by this item is contained under the sections of the information statement entitled “Management” and “Directors.” Those sections are incorporated herein by reference.

 

Item 6.

Executive Compensation.

The information required by this item is contained under the sections of the information statement entitled “Compensation Discussion and Analysis” and “Executive Compensation.” That section is incorporated herein by reference.


Item 7.

Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is contained under the sections of the information statement entitled “Management,” “Directors” and “Certain Relationships and Related Party Transactions.” Those sections are incorporated herein by reference.

 

Item 8.

Legal Proceedings.

The information required by this item is contained under the section of the information statement entitled “Business—Legal Proceedings.” That section is incorporated herein by reference.

 

Item 9.

Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.

The information required by this item is contained under the sections of the information statement entitled “The Separation and Distribution,” “Dividend Policy” and “Description of Our Capital Stock.” Those sections are incorporated herein by reference.

 

Item 10.

Recent Sales of Unregistered Securities.

The information required by this item is contained under the section of the information statement entitled “Description of Our Capital Stock—Sale of Unregistered Securities.” That section is incorporated herein by reference.

 

Item 11.

Description of Registrant’s Securities to be Registered.

The information required by this item is contained under the sections of the information statement entitled “The Separation and Distribution,” and “Description of Our Capital Stock.” Those sections are incorporated herein by reference.

 

Item 12.

Indemnification of Directors and Officers.

The information required by this item is contained under the section of the information statement entitled “Description of Our Capital Stock—Limitation on Liability of Directors; Indemnification.” That section is incorporated herein by reference.

 

Item 13.

Financial Statements and Supplementary Data.

The information required by this item is contained under the section of the information statement entitled “Index to Financial Statements” and the financial statements referenced therein. That section is incorporated herein by reference.

 

Item 14.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

 

Item 15.

Financial Statements and Exhibits.

 

(a)

Financial Statements and Schedule

The information required by this item is contained under the sections of the information statement entitled “Unaudited Pro Forma Condensed Combined Financial Statements” and “Index to Financial Statements” and the financial statements referenced therein. Those sections are incorporated herein by reference.


(b) Exhibits

See below.

The following documents are filed as exhibits hereto:

 

Exhibit
Number

  

Exhibit Description

  2.1    Form of Separation and Distribution Agreement by and between Aaron’s Holdings Company, Inc. and Aaron’s SpinCo, Inc.
  3.1    Form of Amended and Restated Articles of Incorporation of Aaron’s SpinCo, Inc.
  3.2    Form of Amended and Restated Bylaws of Aaron’s SpinCo, Inc.
10.1    Form of Transition Services Agreement by and between Aaron’s Holdings Company, Inc. and Aaron’s SpinCo, Inc.
10.2    Form of Tax Matters Agreement by and between Aaron’s Holdings Company, Inc. and Aaron’s SpinCo, Inc.
10.3    Form of Employee Matters Agreement by and between Aaron’s Holdings Company, Inc. and Aaron’s SpinCo, Inc.
10.4    Form of Indemnification Agreement between Aaron’s SpinCo, Inc. and individual directors or officers
21.1    List of Subsidiaries
99.1    Information Statement of Aaron’s SpinCo, Inc., preliminary and subject to completion, dated October 30, 2020


SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

AARON’S SPINCO, INC.

By:

  /s/ Douglas A. Lindsay

Name:

  Douglas A. Lindsay

Title:

  Chief Executive Officer

Date: October 30, 2020

Exhibit 2.1

FORM OF

SEPARATION AND DISTRIBUTION AGREEMENT

By and Between

AARON’S HOLDINGS COMPANY, INC.

and

AARON’S SPINCO, INC.

Dated as of [•], 2020

 


TABLE OF CONTENTS

 

     Page  

ARTICLE I DEFINITIONS

     2  

Section 1.01.

  Definitions      2  

ARTICLE II THE SEPARATION

     20  

Section 2.01.

  Transfer of Assets and Assumption of Liabilities      20  

Section 2.02.

  Nonassignable Contracts and Permits      23  

Section 2.03.

  Certain Matters Governed Exclusively by Ancillary Agreements      23  

Section 2.04.

  Termination of Agreements      23  

Section 2.05.

  Shared Contracts      24  

Section 2.06.

  Bank Accounts; Checks      25  

Section 2.07.

  Novation of Liabilities; Release of Guarantees      25  

Section 2.08.

  Provision of Corporate Records      27  

Section 2.09.

  Disclaimer of Representations and Warranties; Waiver of Bulk-Sale and Bulk-Transfer Laws      27  

Section 2.10.

  Financing Arrangements; SpinCo Minimum Cash      28  

Section 2.11.

  Transition Committee      28  

ARTICLE III ACTIONS PENDING THE DISTRIBUTION

     29  

Section 3.01.

  Actions Prior to the Distribution      29  

Section 3.02.

  Conditions Precedent to Consummation of the Distribution      30  

Section 3.03.

  Sole and Absolute Discretion      32  

ARTICLE IV THE DISTRIBUTION

     32  

Section 4.01.

  The Distribution      32  

Section 4.02.

  Fractional Shares      33  

Section 4.03.

  Sole and Absolute Discretion of Parent      33  

ARTICLE V MUTUAL RELEASES; INDEMNIFICATION; COOPERATION; INSURANCE

     34  

Section 5.01.

  Release of Pre-Distribution Claims      34  

Section 5.02.

  Indemnification by SpinCo      36  

Section 5.03.

  Indemnification by Parent      36  

Section 5.04.

  Indemnification Obligations Net of Insurance Proceeds and Third-Party Proceeds      37  

Section 5.05.

  Procedures for Indemnification of Third-Party Claims      38  

Section 5.06.

  Direct Claims; Additional Matters      40  

Section 5.07.

  Management of Certain Actions and Shared Actions      41  

Section 5.08.

  Right of Contribution      42  

Section 5.09.

  Covenant Not to Sue      43  

Section 5.10.

  Remedies Cumulative      43  

 

i


Section 5.11.

  Survival of Indemnities      43  

Section 5.12.

  Limitation on Liability      43  

Section 5.13.

  Insurance Matters      43  

Section 5.14.

  Guarantees, Letters of Credit and Other Obligations      45  

ARTICLE VI ACCESS TO INFORMATION; CONFIDENTIALITY

     46  

Section 6.01.

  Agreement for Exchange of Information; Archives      46  

Section 6.02.

  Ownership of Information      47  

Section 6.03.

  Compensation for Providing Information      47  

Section 6.04.

  Record Retention      47  

Section 6.05.

  Financial Information Certifications      48  

Section 6.06.

  Limitations of Liability      49  

Section 6.07.

  Litigation Matters; Production of Witnesses; Records; Cooperation      49  

Section 6.08.

  Privileged Matters      50  

Section 6.09.

  Confidential Information      52  

ARTICLE VII CERTAIN INTELLECTUAL PROPERTY MATTERS

     53  

Section 7.01.

  Legal Names and Other Parties’ Trademarks      53  

Section 7.02.

  Domain Names      54  

Section 7.03.

  Licenses to Information and Other Intellectual Property      54  

ARTICLE VIII FURTHER ASSURANCES AND ADDITIONAL COVENANTS

     57  

Section 8.01.

  Further Assurances      57  

Section 8.02.

  Late Payments      57  

Section 8.03.

  Inducement      58  

Section 8.04.

  Post-Effective Time Conduct      58  

Section 8.05.

  Receipt of Misdirected Assets; Consumer Inquiries      58  

ARTICLE IX DISPUTE RESOLUTION

     58  

Section 9.01.

  Disputes      58  

Section 9.02.

  Negotiation and Mediation      59  

Section 9.03.

  Arbitration      59  

Section 9.04.

  Continuity of Service and Performance      62  

ARTICLE X TERMINATION

     62  

Section 10.01.

  Termination      62  

Section 10.02.

  Effect of Termination      62  

ARTICLE XI MISCELLANEOUS

     62  

Section 11.01.

  Counterparts; Entire Agreement; Conflicts; Corporate Power      62  

Section 11.02.

  Governing Law      63  

Section 11.03.

  Assignability      63  

 

ii


Section 11.04.

  Third-Party Beneficiaries      64  

Section 11.05.

  Notices      64  

Section 11.06.

  Severability      65  

Section 11.07.

  Publicity      65  

Section 11.08.

  Expenses      65  

Section 11.09.

  Headings      65  

Section 11.10.

  Survival of Agreements      66  

Section 11.11.

  Waivers of Default      66  

Section 11.12.

  Consent to Jurisdiction      66  

Section 11.13.

  Specific Performance      66  

Section 11.14.

  Amendments      66  

Section 11.15.

  Interpretation      66  

Section 11.16.

  Group Members      67  

Section 11.17.

  Force Majeure      67  

Section 11.18.

  Mutual Drafting      67  

Section 11.19.

  No Reliance on Other Party      67  

Section 11.20.

  Limited Liability      68  

Section 11.21.

  No Set-Off      68  

 

 

iii


SEPARATION AND DISTRIBUTION AGREEMENT

This SEPARATION AND DISTRIBUTION AGREEMENT is entered into on [•], 2020 and is effective as of the Effective Time, by and between AARON’S HOLDINGS COMPANY, INC., a Georgia corporation (“Parent”), and AARON’S SPINCO, INC., a Georgia corporation (“SpinCo”). Parent and SpinCo are sometimes referred to herein, individually, as a “Party” and, together, as the “Parties”. Capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to them in ARTICLE I.

R E C I T A L S

WHEREAS, Parent, acting through itself and its direct and indirect Subsidiaries, currently conducts the Progressive Leasing and Vive Business and the Aaron’s Business;

WHEREAS, the board of directors of Parent has determined that it is appropriate, desirable and in the best interests of Parent and its shareholders to separate SpinCo from the rest of Parent and to establish SpinCo as a separate, publicly traded company, such that, following the Distribution: (i) Parent will own and conduct, directly and indirectly, the Progressive Leasing and Vive Business, and (ii) SpinCo will own and conduct, directly and indirectly, the Aaron’s Business; and in furtherance of the foregoing, to effect the Spin-Off as more fully described in this Agreement;

WHEREAS, Parent currently intends that, at the Effective Time, Parent shall distribute to the Record Holders, on a pro rata basis, all of the outstanding shares of SpinCo Common Stock, as more fully described in this Agreement (the “Distribution”);

WHEREAS, SpinCo has been incorporated solely for these purposes and has not engaged in activities except for activities undertaken in preparation for the Distribution;

WHEREAS, for U.S. federal income tax purposes, (i) the transfer by Parent of the SpinCo Assets and the SpinCo Liabilities (including, for the avoidance of doubt, all of the equity interests of Aaron’s) to SpinCo, as more fully described in this Agreement (the “Contribution”) in actual or constructive exchange for the issuance by SpinCo to Parent of all of the shares of SpinCo Common Stock and (ii) the Distribution, taken together, are intended to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Section 355 and Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”), and this Agreement together with the Ancillary Agreements, is intended to be, and is hereby adopted as, a “plan of reorganization” within the meaning of Treasury Regulation Section 1.368-2(g);

WHEREAS, Parent and SpinCo have prepared, and SpinCo has filed with the Commission, the Form 10, which includes the Information Statement, and which sets forth disclosure concerning SpinCo, the Separation and the Distribution; and

WHEREAS, it is appropriate and desirable to set forth the principal corporate transactions required to effect the Spin-Off and certain other agreements that will govern certain matters relating to the Spin-Off and the relationship of Parent, SpinCo and their respective Group Members following the Spin-Off.

NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:

 

1


ARTICLE I

DEFINITIONS

Section 1.01. Definitions. Reference is made to Section 11.15 regarding the interpretation of certain words and phrases used in this Agreement. In addition, for the purpose of this Agreement, the following terms shall have the meanings set forth below:

AAA” has the meaning set forth in Section 9.03(a).

AAA Rules” has the meaning set forth in Section 9.03(a).

Aaron’s” means Aaron’s, LLC, a Georgia limited liability company and successor to Aaron’s, Inc.

Aaron’s Business” means (a) the business, operations and activities of the “Aaron’s Business” segment of Parent conducted at any time prior to the Effective Time by either Party or any of their respective Group Members, including as described in the Information Statement, and (b) any terminated, divested or discontinued businesses, operations and activities that, at the time of termination, divestiture or discontinuation, primarily related to the business, operations or activities described in clause (a) as then conducted, including those set forth on Schedule I.

Action” means any claim, demand, action, suit, countersuit, arbitration, inquiry, subpoena, discovery request, proceeding or investigation of any nature (whether criminal, civil, legislative, administrative, regulatory, prosecutorial or otherwise) by or before any Governmental Authority or any Federal, state, local, foreign or international arbitration or mediation tribunal.

Affiliate” (including, with a correlative meaning, “affiliated”) means, when used with respect to a specified Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such specified Person. For the purpose of this definition, “control” (including, with correlative meanings, “controlled by” and “under common control with”), when used with respect to any specified Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or other interests, by contract, agreement, obligation, indenture, instrument, lease, promise, arrangement, release, warranty, commitment, undertaking or otherwise. The Parties agree that, for the purposes of this Agreement and the Ancillary Agreements, no Parent Group Member shall be deemed to be an Affiliate of any SpinCo Group Member and no SpinCo Group Member shall be deemed to be an Affiliate of any Parent Group Member.

Agent” means Computershare Trust Company, N.A., or such other trust company or bank duly appointed by Parent to act as distribution agent, transfer agent and registrar for the SpinCo Common Stock in connection with the Distribution.

Agreement” means this Separation and Distribution Agreement, including the Schedules hereto.

Ancillary Agreements” means the TSA, TMA, EMA, TAA, the Transfer Documents, the Internal Reorganization Documents and any other instruments, assignments, documents and agreements executed in connection with the implementation of the transactions contemplated by this Agreement by the Parties or their Affiliates (but as to which no Third Party is a party).

Arbitration Act” means the Federal Arbitration Act, 9 U.S.C. Section 1, et seq.

 

2


Assets” means, with respect to any Person, all assets, properties, claims and rights (including goodwill) of such Person, wherever located (including in the possession of vendors or other third Persons or elsewhere), of every kind, character and description, whether real, personal or mixed, tangible or intangible, or accrued or contingent, in each case whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person, including the following:

(a) all accounting and other books, records and files, whether in paper, microfilm, microfiche, computer tape or disc, magnetic tape, electronic or any other form;

(b) all apparatus, computers and other electronic data processing equipment, fixtures, machinery, furniture, office and other equipment, including hardware systems, circuits and other computer and telecommunication assets and equipment, automobiles, trucks, aircraft, rolling stock, vessels, motor vehicles and other transportation equipment, special and general tools, test devices, prototypes and models and other tangible personal property;

(c) all inventories of materials, parts, raw materials, components, supplies, work-in-process and finished goods and products;

(d) all interests in real property of whatever nature, including buildings, land, structures, improvements and fixtures thereon, and all easements and rights-of-way appurtenant thereto, and all leasehold interests, whether as owner, mortgagee or holder of a Security Interest in real property, lessor, sublessor, lessee, sublessee or otherwise;

(e) (i) all interests in any capital stock or other equity, partnership, membership, joint venture or similar interests of any Subsidiary or any other Person; (ii) all bonds, notes, debentures or other securities issued by any Subsidiary or any other Person; (iii) all loans, advances or other extensions of credit or capital contributions to any Subsidiary or any other Person; (iv) all other investments in securities of any Person; and (v) all rights as a partner, joint venturer or participant;

(f) all license agreements, leases of personal property, open purchase orders for raw materials, supplies, parts or services, unfilled orders for the manufacture and sale of products and other contracts, agreements or commitments and all rights arising thereunder;

(g) all deposits, letters of credit, performance bonds and other surety bonds;

(h) all written (including in electronic form) technical information, data, specifications, research and development information, engineering drawings, operating and maintenance manuals and materials and analyses prepared by consultants and other Third Parties;

(i) all United States, state, multinational and foreign intellectual property, including Patents, Trademarks, Other Intellectual Property, licenses from Third Parties granting the right to use any of the foregoing and all tangible embodiments of the foregoing in whatever form or medium;

(j) all computer applications, programs, software and other code (in object and source code form), including operating software, network software, firmware, middleware, design software, design tools, systems documentation, instructions, ASP, HTML, DHTML, SHTML and XML files, cgi and other scripts, APIs, web widgets, algorithms, models, methodologies, files, documentation related to any of the foregoing and all tangible embodiments of the foregoing in whatever form or medium now known or yet to be created;

 

3


(k) all Internet URLs, domain names, social media handles and Internet user names and all UPC numbers or equivalent company name pre-fix numbers;

(l) all websites, databases, content, text, graphics, images, audio, video, data and other copyrightable works or other works of authorship including all translations, adaptations, derivations and combinations thereof;

(m) all cost information, sales and pricing data, customer prospect lists, supplier records, customer and supplier lists, customer and vendor data, correspondence and lists, product literature and other advertising and promotional materials, artwork, design, development and manufacturing files, vendor and customer drawings, formulations and specifications, server and traffic logs, quality records and reports and other books, records, studies, surveys, reports, plans, business records and documents;

(n) all prepaid expenses, trade accounts and other accounts and notes receivable (whether current or non-current);

(o) all claims or rights against any Person arising from the ownership of any other Asset, all rights in connection with any bids or offers, all claims, causes in action, lawsuits, judgments or similar rights, all rights under express or implied warranties, all rights of recovery and all rights of setoff of any kind and demands of any nature, in each case whether accrued or contingent, whether in tort, contract or otherwise and whether arising by way of counterclaim or otherwise;

(p) all Insurance Proceeds and rights under insurance policies and all rights in the nature of insurance, indemnification or contribution;

(q) all licenses, permits, consents, approvals and authorizations that have been issued by any Governmental Authority and all pending applications therefor, and in each case all rights thereunder;

(r) Cash, bank accounts, lock boxes and other deposit arrangements;

(s) interest rate, currency, commodity or other swap, collar, cap or other hedging or similar agreements or arrangements; and

(t) all goodwill as a going concern and other intangible properties.

Business Day” means a day other than a Saturday, a Sunday or a day on which banking institutions located in Atlanta, Georgia are authorized or obligated by Law or executive order to close.

Business Entity” means any corporation, general or limited partnership, trust, joint venture, unincorporated organization, limited liability entity or other entity.

Cash” means cash, cash equivalents, bank deposits and marketable securities, as well as petty cash in registers, in each case, whether denominated in United States dollars or otherwise.

Code” has the meaning set forth in the recitals.

Commission” means the Securities and Exchange Commission.

Common Privileges” has the meaning set forth in Section 6.08.

Confidential Information” has the meaning set forth in Section 6.09(a).

 

4


Consents” means any consents, waivers or approvals from, or notification requirements to, any Third Party.

Contribution” has the meaning set forth in the recitals.

Custodial Party” has the meaning set forth in Section 6.04(b).

Direct Claim” has the meaning set forth in Section 5.06(a).

Disclosure Schedules” means the disclosure schedules attached hereto.

Disputes” has the meaning set forth in Section 9.01.

Distribution” has the meaning set forth in the recitals.

Distribution Date” means the date, determined in accordance with Section 4.03, on which the Distribution occurs.

Distribution Ratio” means the number of shares of SpinCo Common Stock to be distributed in respect of each share of Parent Common Stock in the Distribution, which ratio shall be determined by the board of directors of Parent prior to the Record Date.

Domain Names” means the domain name registrations owned by a Parent Group Member or a SpinCo Group Member, including those listed on Section 7.02(a) or Section 7.02(b) of the Disclosure Schedules.

Effective Time” has the meaning set forth in Section 4.01(b).

EMA” means the Employee Matters Agreement dated as of the date of this Agreement by and between Parent and SpinCo.

Environmental Law” shall mean any Law relating to pollution, protection or restoration of or prevention of harm to the environment or natural resources, including the use, handling, transportation, treatment, storage, disposal, Release or discharge of Hazardous Materials or the protection of or prevention of harm to human health and safety.

Environmental Liabilities” means all Liabilities relating to, arising out of or resulting from any Hazardous Materials, Environmental Law or contract or agreement relating to environmental, health or safety matters (including all removal, remediation or cleanup costs, investigatory costs, response costs, natural resources damages, property damages, personal injury damages, costs of compliance, including with any product take back requirements, or with any settlement, judgment or other determination of Liability and indemnity, contribution or similar obligations) and all costs and expenses, interest, fines, penalties or other monetary sanctions in connection therewith.

Escalation Notice” has the meaning set forth in Section 9.02(a).

Exchange Act” means the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder.

 

5


Existing Parent Financing Arrangements” means (a) the Second Amended and Restated Revolving Credit and Term Loan Agreement, dated as of September 18, 2017, among Aaron’s, Inc. the guarantors named therein, the lenders party thereto and Truist Bank (formerly SunTrust Bank), as administrative agent, as amended, (b) the Fourth Amended and Restated Loan Facility Agreement and Guaranty, dated as of October 25, 2017, among Aaron’s, Inc. the guarantors named therein, the participants party thereto and Truist Bank (formerly SunTrust Bank), as servicer, as amended, (c) the Note Purchase Agreement, dated as of April 14, 2014, by Aaron’s, Inc. and Aaron Investment Company as Issuers of Series A Senior Notes due April 14, 2021, as amended, and (d) the Note Purchase Agreement, dated as of April 14, 2014, by Aaron’s, Inc. and Aaron Investment Company as Issuers of Series B Senior Notes due April 14, 2021, as amended.

First Post-Distribution SEC Report” has the meaning set forth in Section 11.07.

Force Majeure” means, with respect to a Party, an event beyond the control of such Party (or any Person acting on its behalf), which by its nature could not reasonably have been foreseen by such Party (or such Person), or, if it could reasonably have been foreseen, was unavoidable, and includes acts of God, unusually severe weather conditions, floods, riots, fires, explosions, sabotage, civil commotion or civil unrest, interference by civil or military authorities, cyberattacks, epidemics, pandemics, acts of war (declared or undeclared) or armed hostilities, other regional, national or international calamities or acts of terrorism, strikes, labor stoppages, or slowdowns or other industrial disturbances; or failures of energy sources or distribution or transportation facilities. Notwithstanding the foregoing, the receipt by a Party of an unsolicited takeover offer or other acquisition proposal, even if unforeseen or unavoidable, and such Party’s response thereto shall not be deemed an event of Force Majeure.

Form 10” means the registration statement on Form 10 filed by SpinCo with the Commission pursuant to Section 12(b) of the Exchange Act to effect the registration of SpinCo Common Stock to be distributed in the Distribution, as such registration statement may be amended or supplemented from time to time.

Georgia Courts” has the meaning set forth in Section 11.12.

Governmental Approvals” means any notices, reports or other filings to be given to or made with, or any Consents, licenses, authorizations, registrations or permits to be obtained from, any Governmental Authority, including, for the avoidance of doubt, state regulators.

Governmental Authority” means any supranational, international, national, federal, state, provincial or local court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority, including the NYSE and any similar self-regulatory body under applicable securities Laws.

Group” means either the Parent Group or the SpinCo Group, as the context requires.

Group Action” means any past, present or future Action involving Parent, a Parent Group Member, a Parent Indemnitee (but only if in a capacity entitling such Person to the rights of a Parent Indemnitee), SpinCo, a SpinCo Group Member, or a SpinCo Indemnitee (but only if in a capacity entitling such Person to the rights of a SpinCo Indemnitee), in each case other than any such matter solely between Parent, any Parent Group Member or Parent Indemnitee (only if in a capacity entitling such Person to the rights of a Parent Indemnitee), on the one hand, and SpinCo, any SpinCo Group Member, or SpinCo Indemnitee (only if in a capacity entitling such Person to the rights of a SpinCo Indemnitee), on the other hand, arising with respect to a controversy, dispute or claim under this Agreement or any Ancillary Agreement.

 

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Group Member” means any Business Entity that is a part of either the Parent Group or the SpinCo Group, as the context requires. “Group Members” mean Business Entities of either or both of the Parent Group or the SpinCo Group, as the context requires.

Hazardous Materials” means any chemical, material, substance, waste, pollutant, emission, discharge, release or contaminant that could result in Liability under, or that is prohibited, limited or otherwise regulated by or pursuant to, any Environmental Law, including petroleum, petroleum products and byproducts, asbestos and asbestos-containing materials, urea formaldehyde foam insulation, electronic, medical or infectious wastes, polychlorinated biphenyls, radon gas, radioactive substances, chlorofluorocarbons and all other ozone-depleting substances, and anything defined as a hazardous substance, extremely hazardous substance, solid waste, hazardous waste, hazardous material or toxic substance under a relevant Environmental Law.

Indemnifying Party” has the meaning set forth in Section 5.04(a).

Indemnitee” has the meaning set forth in Section 5.04(a).

Indemnity Payment” has the meaning set forth in Section 5.04(a).

Information” means information in written, oral, electronic or other tangible or intangible forms, including studies, reports, records, books, contracts, instruments, surveys, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts, data, marketing plans, customer names, Privileged Information, and other technical, financial, employee or business information or data; provided that “Information” does not include Patents, Trademarks, or Other Intellectual Property.

Information Statement” means the information statement, included with the Form 10 and to be sent to the holders of Parent Common Stock in connection with the Distribution, as such Information Statement may be amended from time to time.

Insurance Proceeds” means, with respect to any insured party, those monies:

(a) received by an insured (or its successor-in-interest) from an insurance carrier;

(b) paid by an insurance carrier on behalf of the insured (or its successor-in-interest); or

(c) received (including by way of set-off) from any Third Party in the nature of insurance, contribution or indemnification in respect of any Liability;

in any such case net of any applicable premium adjustments (including reserves and retrospectively rated premium adjustments), net of any costs or expenses incurred in the collection thereof and net of any Taxes resulting from the receipt thereof.

Intended Tax Treatment” has the meaning set forth in the TMA.

Intercompany Accounts” has the meaning set forth in Section 2.04(a).

Intercompany Agreements” has the meaning set forth in Section 2.04(a).

Internal Reorganization” means the transactions described in the Plan of Reorganization, including the Contribution.

 

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Internal Reorganization Documents” means the documents and agreements pursuant to which the Internal Reorganization shall be implemented.

Law” means any supranational, international, national, federal, state, provincial, local or similar law (including common law), statute, code, order, ordinance, rule, regulation, treaty (including any Tax treaty), license, permit, authorization, approval, Consent, decree, injunction, binding judicial or administrative interpretation or other requirement, in each case enacted, promulgated, issued or entered by a Governmental Authority, whether now or hereinafter in effect and, in each case, as amended.

Liabilities” means any and all debts, liabilities, obligations, responsibilities, response actions, losses, damages (whether compensatory, punitive, consequential, incidental, treble or other), expenses, fines, penalties and sanctions, absolute or contingent, matured or unmatured, liquidated or unliquidated, foreseen or unforeseen, joint, several or individual, asserted or unasserted, accrued or unaccrued, known or unknown, whenever arising, including those arising under or in connection with any Law or other pronouncements of Governmental Authorities having the effect of Law, Action, threatened Action, order or consent decree of any Governmental Authority or any award of any arbitration tribunal, and those arising under any contract, guarantee, commitment or undertaking, whether sought to be imposed by a Governmental Authority, private party, or Party, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, or otherwise, and including any costs, expenses, interest, attorneys’ fees, disbursements and expenses of counsel, expert and consulting fees and costs related thereto or to the investigation or defense thereof.

Licensed Parent Information” means information and data in written, oral, electronic or other tangible or intangible forms, that, immediately after the Effective Time, is owned by a Parent Group Member, that, immediately prior to the Effective Time, was used or held for use in the Aaron’s Business as established by reasonably sufficient evidence; provided that “Licensed Parent Information” does not include Patents, Trademarks, personally identifiable information (except as otherwise mutually agreed to by the relevant Parent Group Member and SpinCo), or customer, vendor and supplier lists that are protectible under trade secret laws, in each instance, that are owned by a Parent Group Member immediately after the Effective Time or any information or data that the Parent Group Member owner thereof would be prohibited from licensing to SpinCo under applicable Law, and provided further that in the event any Licensed Parent Information would also be Licensed Parent Other IP (under the definition of that term), such Licensed Parent Information shall be deemed to be Licensed Parent Other IP (and not Licensed Parent Information).

Licensed Parent Other IP” means: (a) published and unpublished works of authorship and copyrights therein, and all applications, registrations, and renewals in connection therewith; (b) software, data, databases and compilations of information; and (c) inventions (whether patentable or not), invention disclosures, shop rights, formulas, processes, developments, technology, designs, trade secrets and know-how that, immediately after the Effective Time, are owned by a Parent Group Member and, immediately prior to the Effective Time, were used or held for use in the Aaron’s Business as established by reasonably sufficient evidence; provided that “Licensed Parent Other IP” does not include Patents, Trademarks, personally identifiable information (except as otherwise mutually agreed to by the relevant Parent Group Member owner and SpinCo), or customer, vendor and supplier lists that are protectible under trade secret laws, in each instance, that are owned by a Parent Group Member immediately after the Effective Time or any other personal information or data that the Parent Group Member owner thereof would be prohibited from licensing to SpinCo under applicable Law.

 

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Licensed SpinCo Information” means information and data in written, oral, electronic or other tangible or intangible forms that, immediately after the Effective Time, is owned by a SpinCo Group Member, that, immediately prior to the Effective Time, was used or held for use in the Progressive Leasing and Vive Business as established by reasonably sufficient evidence; provided that “Licensed SpinCo Information” does not include Patents, Trademarks, personally identifiable information (except as otherwise mutually agreed to by the relevant SpinCo Group Member owner and Parent), or customer, vendor and supplier lists that are protectible under trade secret laws, in each instance, that are owned by a SpinCo Group Member immediately after the Effective Time or any information or data that the SpinCo Group Member owner thereof would be prohibited from licensing to Parent under applicable Law, and provided further that in the event any Licensed SpinCo Information would also be Licensed SpinCo Other IP (under the definition of that term), such Licensed SpinCo Information shall be deemed to be Licensed SpinCo Other IP (and not Licensed SpinCo Information).

Licensed SpinCo Other IP” means: (a) published and unpublished works of authorship and copyrights therein, and all applications, registrations, and renewals in connection therewith; (b) software, data, databases and compilations of information; and (c) inventions (whether patentable or not), invention disclosures, shop rights, formulas, processes, developments, technology, designs, trade secrets and know-how (that, immediately after the Effective Time, is owned by a SpinCo Group Member that, immediately prior to the Effective Time, was used or held for use in the Progressive Leasing and Vive Business as established by reasonably sufficient evidence; provided that “Licensed SpinCo Other IP” does not include Patents, Trademarks, personally identifiable information (except as otherwise mutually agreed to by the relevant SpinCo Group Member owner and Parent), or customer, vendor and supplier lists that are protectible under trade secret laws, in each instance, that are owned by a SpinCo Group Member immediately after the Effective Time or any other information or data that the SpinCo Group Member owner thereof would be prohibited from licensing to Parent under applicable Law.

New SpinCo Financing Arrangements” means the SpinCo Credit Facility and such additional or alternative financing arrangements and agreements with respect to indebtedness for borrowed money as shall have been agreed by Parent and entered into by SpinCo prior to or at the Effective Time.

New Parent Financing Arrangements” means the [•] and such additional or alternative financing arrangements and agreements with respect to indebtedness for borrowed money entered into by Parent prior to or at the Effective Time.

Non-Custodial Party” has the meaning set forth in Section 6.04(b)(i).

NYSE” means the New York Stock Exchange.

Other Intellectual Property” means all rights, title or interest in, under or in respect of: (a) published and unpublished works of authorship and copyrights therein, and all applications, registrations, and renewals in connection therewith; (b) software, data, databases and compilations of information; (c) inventions (whether patentable or not), invention disclosures, shop rights, formulas, processes, developments, technology, designs, trade secrets and know-how; (d) websites (including the layout, design and contents of the web pages and underlying codes); (e) sale, marketing, advertising and promotional materials; (f) social media user names, identifiers and profiles, and rights in telephone numbers; (g) rights of publicity and privacy, rights to personal information and moral rights; (h) all copies and tangible embodiments of any of the foregoing (in whatever form or medium) that are in a Party’s or its Group Member’s possession or control; (i) all rights pertaining to any of the foregoing arising under international treaties and convention rights; (j) the right and power to assert, defend and recover title to any of the foregoing; (k) all rights to assert, defend and recover for any past, present and future infringement, misuse, misappropriation, impairment, unauthorized use or other violation of any of the foregoing; and (l) all administrative rights and common law rights arising from the foregoing; provided that “Other Intellectual Property” does not include Patents or Trademarks.

 

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Other Party Marks” has the meaning set forth in Section 7.01(a).

Parent” has the meaning set forth in the preamble.

Parent Accounts” has the meaning set forth in Section 2.06(a).

Parent Action” means those Group Actions (a) primarily relating to, arising out of or resulting from the Parent Assets, the Parent Liabilities or the Progressive Leasing and Vive Business, including any shareholder derivative or securities class action primarily relating to, arising out of or resulting from the Parent Assets, the Parent Liabilities or the Progressive Leasing and Vive Business which is (i) brought by any current or former equity security holder of the publicly traded equity securities of Parent or Aaron’s and (ii) arises exclusively from any acts, omissions, disclosures, or lack of disclosure occurring prior to the Effective Time, irrespective of the facts alleged, or (b) set forth on Section 1.01(a) of the Disclosure Schedules.

Parent Assets” means any and all Assets of the Parties or their respective Subsidiaries as of the Effective Time, other than the SpinCo Assets, including:

(a) all issued and outstanding equity interests of each Parent Group Member that are owned by either Party or any members of its Group as of the Effective Time, other than, for the avoidance of doubt, the Parent Common Stock;

(b) all shares of capital stock or other equity interests held by any SpinCo Group Member in certain Business Entities that have been or shall be contributed to, or otherwise transferred, conveyed, or assigned to, the Parent Group as listed on Section 1.01(b) of the Disclosure Schedules;

(c) the Assets of either Party or its Group Members as of the Effective Time listed or described on Section 1.01(c) of the Disclosure Schedules (which for the avoidance of doubt is not a comprehensive listing of all Parent Assets and is not intended to limit the other clauses of this definition of “Parent Assets”);

(d) all Cash of either Party or its Group Members as of the Effective Time (other than the SpinCo Minimum Cash and any SpinCo Third-Party Deposited Cash);

(e) any and all other Assets that are expressly provided by this Agreement or any Ancillary Agreement as Assets to be retained by or transferred to or owned by Parent or any other Parent Group Member;

(f) any and all rights, title or interests in, and claims thereto, of either Party or any of its Group Members as of the Effective Time related to the Parent Portion of any Shared Contract;

(g) any and all rights, title or interests in, and claims thereto, of either Party or any of its Group Members as of the Effective Time under the Parent Contracts;

(h) any and all rights, title or interests in, and claims thereto, of either Party or any of its Group Members as of the Effective Time to any Parent Intellectual Property;

(i) any and all rights, title or interests in, and claims thereto, of either Party or any of its Group Members as of the Effective Time to any Domain Names listed on Section 7.02(b) of the Disclosure Schedules;

 

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(j) all other rights, title or interests in, and claims thereto, of either Party or any of their Group Members as of the Effective Time with respect to Information that is primarily related to the Parent Assets (including, for the avoidance of doubt, the Parent Intellectual Property), the Parent Liabilities, the Progressive Leasing and Vive Business or the Parent Group Members, in each case as compared to the SpinCo Assets, SpinCo Liabilities, Aaron’s Business or SpinCo Group Members;

(k) a non-exclusive license to the Licensed SpinCo Information upon the terms and subject to the conditions set out in Section 7.03(b) below;

(l) any and all rights, title or interests in, and claims thereto, of either Party or any of its Group Members as of the Effective Time to the real property listed on Section 1.01(d) of the Disclosure Schedules;

(m) the Assets of either Party or its Group Members as of the Effective Time relating to, arising out of or resulting from any Parent Action;

(n) all approvals, registrations, permits or authorizations of either Party or any its Group Members issued by any Governmental Authority as of the Effective Time (other than the SpinCo Permits).

The Parties agree that all assets transferred pursuant to Section 2.02 shall be Parent Assets for purposes of this Agreement and the Ancillary Agreements regardless of when such assets are assumed by Parent or a Parent Group Member or designee.

Parent Common Stock” means the common stock, $0.50 par value per share, of Parent.

Parent Contracts” means all contracts, agreements, arrangements, commitments or understandings to which either Party or any of its Group Members is a party or by which it or its Assets is bound, whether or not in writing, in each case immediately prior to the Effective Time (other than the SpinCo Contracts).

Parent Derivative Works” has the meaning set forth in Section 7.03(b)(iii).

Parent Disclosure Sections” means all information set forth in or omitted from the Form 10 or Information Statement and any other documents filed with the Commission to the extent relating to (a) the Parent Group, (b) the Parent Liabilities, (c) the Parent Assets or (d) the substantive disclosure set forth in the Form 10 and Information Statement relating to Parent’s board of directors’ consideration of the Spin-Off, including the section entitled “Reasons for the Separation.”

Parent Group” means (a) Parent, (b) each Business Entity identified on Section 1.01(e) of the Disclosure Schedules and (c) each other Business Entity that is or becomes a direct or indirect Subsidiary of Parent at or after the Effective Time, including in each case any such Business Entity that is formed or acquired after the date hereof or any Business Entity that is merged or consolidated with and into Parent or any Subsidiary of Parent, in each case, other than any SpinCo Group Member.

Parent Group Member” means any Group Member of the Parent Group.

Parent Indemnitees” has the meaning set forth in Section 5.02.

Parent Intellectual Property” means (a) the Patents and Trademarks set forth on Section 1.01(f) of the Disclosure Schedules and any other Patents or Trademarks owned by either Party or any of its Group Members that, as of the Effective Time, are primarily used or held for use in the Progressive Leasing and Vive Business, as compared to the Aaron’s Business; (b) the Other Intellectual Property owned by either Party or any of its Group Members that, as of the Effective Time, is primarily used or held for use in the

 

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Progressive Leasing and Vive Business, as compared to the Aaron’s Business; (c) the rights to any Patents, Trademarks, and Other Intellectual Property that are exclusively allocated to Parent or a Parent Group Member pursuant to any Ancillary Agreement; and (d) a non-exclusive license, upon the terms and subject to the conditions set forth in Section 7.03(b) below, to the Licensed SpinCo Other IP.

Parent Liabilities” means, without duplication, the following Liabilities of either Party or any of its Group Members (which for the avoidance of doubt, shall not include any Shared Action Liabilities:

(a) all Liabilities relating to, arising out of or resulting from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case before, at or after the Effective Time), of any member of the Parent Group and, prior to the Effective Time, any member of the SpinCo Group, in each case that are not SpinCo Liabilities or Shared Action Liabilities;

(b) all Liabilities relating to, arising out of or resulting from the Parent Portion of any Shared Contracts;

(c) the Liabilities listed or described on Section 1.01(g) of the Disclosure Schedules;

(d) all Liabilities that are expressly provided by this Agreement or any Ancillary Agreement as Liabilities to be assumed or retained by, or allocated to, any Parent Group Member, and all agreements, obligations and Liabilities of any Parent Group Member under this Agreement or any of the Ancillary Agreements;

(e) all Liabilities relating to, arising out of or resulting from the Existing Parent Financing Arrangements or the New Parent Financing Arrangements other than costs and expenses paid prior the Effective Time by SpinCo or a SpinCo Group Member;

(f) all Liabilities relating to, arising out of or resulting from any Parent Action;

(g) all Liabilities relating to, arising out of or resulting from any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to the Parent Disclosure Sections; and

(h) all Liabilities arising out of claims made by Third Parties (including Parent’s or SpinCo’s respective directors, officers, shareholders, employees and agents) against any member of the Parent Group or the SpinCo Group to the extent relating to, arising out of or resulting from the Parent Assets or the Progressive Leasing and Vive Business; provided, that this clause (h) shall not apply to any Shared Action Liabilities.

The Parties agree that all Liabilities transferred pursuant to Section 2.02 shall be Parent Liabilities for purposes of this Agreement and the Ancillary Agreements regardless of when such Liabilities are assumed by Parent or a Parent Group Member or designee.

Parent Licensed Purposes” has the meaning set forth in Section 7.03(b)(i).

Parent Portion” has the meaning set forth in Section 2.05(a).

Parent Transfer Documents” has the meaning set forth in Section 2.01(b).

 

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Party” has the meaning set forth in the preamble.

Patents” means (a) all national, regional and international patents and patent applications, including provisional patent applications; (b) all patent applications filed either from the patents, patent applications or provisional applications in clause (a) or from an application claiming priority from any of these, including divisionals, continuations, continuations-in-part, converted provisionals, and continued prosecution applications; (c) all patents that have issued or in the future issue from the foregoing patent applications specified in clauses (a) and (b), including utility models, petty patents, design patents, registered industrial designs, and certificates of invention; (d) all patent term extensions or restorations by existing or future extension or restoration mechanisms, including any supplementary protection certificates and the like, as well as any revalidations, reissues, re-examinations, oppositions and the like of the foregoing patents or patent applications specified in clauses (a), (b) and (c); (e) all similar rights, including so-called pipeline protection, or any importation, revalidation, confirmation or introduction patent or registration patent or patents of addition to each of such foregoing patent applications and patents; (f) the right and power to assert, defend and recover title to any of the foregoing; and (g) all rights to assert, defend and recover for any past, present and future infringement, misuse, misappropriation, impairment, unauthorized use or other violation of any of the foregoing.

Person” means any (a) individual; (b) Business Entity; or (c) Governmental Authority.

Plan of Reorganization” means the reorganization plan and structure set forth on Schedule II.

Prime Rate” means the rate that Bloomberg displays as Prime Rate by Country United States at http://www.bloomberg.com/markets/rates-bonds/key-rates/ or on a Bloomberg terminal at PRIMBB Index.

Privileged Information” means any information, in written, oral, electronic or other tangible or intangible forms, including any communications by or to attorneys (including attorney-client privileged communications), memoranda and other materials prepared by attorneys or under their direction (including attorney work product), as to which a Party or its respective Group Members would be entitled to assert or have asserted a privilege or immunity, including the attorney-client privilege and attorney work product protection.

Progressive Leasing and Vive Business” means all businesses, operations and activities (whether or not such businesses, operations or activities are or have been terminated, divested or discontinued) conducted at any time prior to the Effective Time by either Party or any of their respective Group Members, other than the Aaron’s Business.

Providing Party” has the meaning set forth in Section 6.01(a).

Record Date” means the close of business on the date to be determined by the Parent board of directors, or a duly authorized committee thereof, as the record date for determining the shareholders of Parent entitled to receive shares of SpinCo Common Stock in the Distribution, as determined in accordance with Section 4.03.

Record Holders” has the meaning set forth in Section 4.01(b)(i).

Records Facility” has the meaning set forth in Section 6.04(b)(i).

Release” shall mean any release, spill, emission, discharge, leaking, pumping, pouring, dumping, injection, deposit, disposal, dispersal, leaching or migration of Hazardous Materials into the environment (including ambient air, surface water, groundwater and surface or subsurface strata).

 

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Representative” has the meaning set forth in Section 6.09(a).

Requesting Party” has the meaning set forth in Section 6.01(a).

Retained Information” has the meaning set forth in Section 6.04(a).

Security Interest” means any mortgage, security interest, pledge, lien, charge, claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition, easement, encroachment, restriction on transfer or other encumbrance of any nature whatsoever.

Separation” means (a) the Internal Reorganization, (b) any actions to be taken pursuant to ARTICLE II and (c) any other transfers of Assets and assumptions of Liabilities, in each case, between a Group Member of one Group and a Group Member of the other Group, provided for in this Agreement or in any Ancillary Agreement.

Shared Action” means any of the following:

(a) any Third-Party Claim (i) that first arises after the Effective Time (A) and in respect of which the loss, claim, accident, occurrence, event or happening giving rise to any Third-Party Claim existed or occurred prior to the Effective Time, or (B) and relates to, arises out of or results from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to the Effective Time, including any shareholder derivative or securities class action (x) brought by any current or former equity security holder of the publicly traded equity securities of Parent or Aaron’s and (y) arising exclusively from any acts, omissions, disclosures, or lack of disclosure occurring prior to the Effective Time, irrespective of the facts alleged, and (ii) that is not a Parent Action or a SpinCo Action; and

(b) any Third-Party Claim relating to, arising out of or resulting from any Action by any Third Party, including any shareholder derivative action, asserted against any member of either Group directly based on any act or omission, or alleged act or omission, taken to effect the Distribution and the other transactions contemplated by this Agreement and the Ancillary Agreements, other than any Third-Party Claims which constitute Liabilities under clause (h) of the definition of “SpinCo Liabilities” and clause (g) of the definition of “Parent Liabilities” and

(c) any Actions set forth in Schedule III.

Shared Action Liability” means any Liabilities relating to, arising out of or resulting from any Shared Action.

Notwithstanding the foregoing, the Shared Actions Liabilities shall not include any Liabilities governed by the TMA or the EMA.

Shared Contract” means any contract or agreement of any member of either Group (a) that is set forth on Section 1.01(h) of the Disclosure Schedules, or (b)(i) that relates in any material respect to both the Progressive Leasing and Vive Business and the Aaron’s Business, and (ii) either (A) that the Parties specifically intended to amend or divide, modify, partially assign or replicate (in whole or in part) the respective rights and obligations under and in respect of such contract or agreement prior to the Effective Time, but were not able to do so prior to the Effective Time, or (B) the existence of which either Party discovers prior to the date that is eighteen (18) months after the Distribution and had the Parties given specific consideration to such contract or agreement they would have amended or divided, modified, partially assigned or replicated (in whole or in part) the respective rights and obligations under and in respect of such contract or agreement.

 

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Shared Privileges” has the meaning set forth in Section 6.08(d).

SpinCo” has the meaning set forth in the preamble.

SpinCo Accounts” has the meaning set forth in Section 2.06(a).

SpinCo Action” means those Group Actions (a) primarily relating to, arising out of or resulting from the SpinCo Assets, the SpinCo Liabilities or the Aaron’s Business, including any shareholder derivative or securities class action primarily relating to, arising out of or resulting from the SpinCo Assets, the Spinco Liabilities or the Aaron’s Business which is (i) brought by any current or former equity security holder of the publicly traded equity securities of Parent or Aaron’s and (ii) arises exclusively from any acts, omissions, disclosures, or lack of disclosure occurring prior to the Effective Time, irrespective of the facts alleged or (b) set forth on Section 1.01(i) of the Disclosure Schedules.

SpinCo Assets” means, without duplication, only the following Assets:

(a) all issued and outstanding equity interests of each SpinCo Group Member that are owned by either Party or any members of its Group as of the Effective Time, other than the SpinCo Common Stock;

(b) except with respect to any Assets constituting Cash, all Assets of either Party or its Group Members as of the Effective Time reflected as assets of SpinCo or another SpinCo Group Member on the SpinCo Balance Sheet, and all Assets acquired after the date of the SpinCo Balance Sheet that, had they been acquired on or before such date and owned as of such date, would have been included or reflected on the SpinCo Balance Sheet if prepared in accordance with GAAP applied on a consistent basis, subject to any dispositions of such Assets subsequent to the date of the SpinCo Balance Sheet; it being understood that (i) the SpinCo Balance Sheet shall be used to determine the types of, and methodologies used to determine, those Assets that are included in the definition of SpinCo Assets pursuant to this clause (c); and (ii) the amounts set forth on the SpinCo Balance Sheet with respect to any Assets shall not be treated as minimum amounts or limitations on the amount of such Assets that are included in the definition of SpinCo Assets pursuant to this clause (c);

(c) (i) the SpinCo Minimum Cash and (ii) any Cash that is restricted as to withdrawal or usage by a Third Party pursuant to a SpinCo Contract, including lease deposits with landlords (“SpinCo Third-Party Deposited Cash”);

(d) the Assets listed or described on Section 1.01(j) of the Disclosure Schedules (which for the avoidance of doubt is not a comprehensive listing of all SpinCo Assets and is not intended to limit the other clauses of this definition of “SpinCo Assets”);

(e) any and all other Assets of either Party or any of its Group Members as of the Effective Time that are expressly provided by this Agreement or any Ancillary Agreement as Assets to be retained by or assigned or allocated to SpinCo or any other SpinCo Group Member;

(f) any and all rights, title or interests in, and claims thereto, of either Party or any of its Group Members as of the Effective Time related to the SpinCo Portion of any Shared Contract;

(g) any and all rights, title or interests in, and claims thereto, of either Party or any of its Group Members as of the Effective Time under the SpinCo Contracts;

 

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(h) any and all rights, title or interests in, and claims thereto, of either Party or any of its Group Members as of the Effective Time to any SpinCo Intellectual Property;

(i) any and all rights, title or interests in, and claims thereto, of either Party or any of its Group Members as of the Effective Time to any Domain Names listed on Section 7.02(a) of the Disclosure Schedules;

(j) all other rights, title or interests in, and claims thereto, of either Party or any of their Group Members as of the Effective Time with respect to Information that is primarily related to the SpinCo Assets (including, for the avoidance of doubt, the SpinCo Intellectual Property), the SpinCo Liabilities, the Aaron’s Business or the SpinCo Group Members, in each case as compared to the Parent Assets, Parent Liabilities, Progressive Leasing and Vive Business or Parent Group Members;

(k) a non-exclusive license to the Licensed Parent Information upon the terms and subject to the conditions set out in Section 7.03(c) below;

(l) any and all rights, title or interests in, and claims thereto, of either Party or any of its Group Members as of the Effective Time to the real property described or listed on Section 1.01(k) of the Disclosure Schedules (the “SpinCo Real Property”);

(m) the Assets of either Party or its Group Members as of the Effective Time relating to, arising out of or resulting from any SpinCo Action;

(n) all approvals, registrations, permits or authorizations issued by any Governmental Authority as of the Effective Time that relate primarily to the Aaron’s Business or the SpinCo Assets, as compared to the Progressive Leasing and Vive Business or the Parent Assets (the “SpinCo Permits”); and

(o) except with respect to any Assets constituting Cash, all other Assets owned or held immediately prior to the Effective Time by Parent or any of its Subsidiaries that are determined by Parent, in good faith prior to the Distribution, to be primarily related to or primarily used in the Aaron’s Business.

The Parties agree that all assets transferred pursuant to Section 2.02 shall be SpinCo Assets for purposes of this Agreement and the Ancillary Agreements regardless of when such assets are assumed by SpinCo or a SpinCo Group Member or designee.

Notwithstanding the foregoing, the SpinCo Assets shall not in any event include any Asset referred to in clauses (a) through (m) of the definition of “Parent Assets”.

SpinCo Balance Sheet” means the pro forma combined balance sheet of the Aaron’s Business, including the notes thereto, as of September 30, 2020, included in the Information Statement.

SpinCo Common Stock” means the common stock, $0.50 par value per share, of SpinCo.

SpinCo Contract” means the following contracts, agreements, arrangements, commitments or understandings to which either Party or any of its Group Members is a party or by which it or its Assets is bound, whether or not in writing, in each case, immediately prior to the Effective Time:

(a) (i) any contract, agreement, arrangement, commitment or understanding listed on Section 1.01(l) of the Disclosure Schedules and (ii) any other contract, agreement, commitment or understanding that relates primarily to the Aaron’s Business as compared to the Progressive Leasing and Vive Business (other than Parent Assets arising under any Shared Contracts);

 

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(b) any guarantee, indemnity, representation or warranty of any SpinCo Group Member or Parent Group Member in respect of any other SpinCo Contract, any SpinCo Liability or the Aaron’s Business;

(c) any contract, agreement, arrangement, commitment or understanding that relates primarily to any SpinCo Intellectual Property or pursuant to which either Party or any of its Group Members is licensed or sublicensed an interest in any Patents, Trademarks, or Other Intellectual Property primarily used or held for use in the Aaron’s Business;

(d) any employment, change of control, retention, consulting, indemnification, termination, severance, incentive bonus or other similar agreements with any employee, contractor or consultant of SpinCo or a SpinCo Group Member, including those change of control agreements set forth on Section 1.01(m) of the Disclosure Schedules; and

(e) any other contract, agreement, arrangement, commitment or understanding or portion thereof that is otherwise expressly provided pursuant to this Agreement or any Ancillary Agreement to be assigned to SpinCo or a SpinCo Group Member;

provided, however, that: (i) such contracts, agreements, arrangements, commitments or understandings that are expressly provided to be retained by Parent or a Parent Group Member pursuant to any provision of this Agreement or any Ancillary Agreement shall not be SpinCo Contracts; (ii) such contracts, agreements, arrangements, commitments or understandings that relate to debt instruments, insurance arrangements, or employee benefit plans or programs shall be SpinCo Contracts only to the extent expressly provided for under the terms of this Agreement or any Ancillary Agreement; and (iii) the rights and obligations of Parent and the Parent Group Members under this Agreement and the Ancillary Agreements shall not be SpinCo Contracts.

SpinCo Credit Facility” means a secured or unsecured credit facility to be entered into prior to the Distribution and in connection with the Separation, by and among SpinCo, as borrower, an administrative agent, certain arrangers and each of the financial institutions from time to time party thereto, providing for a revolving credit facility in such amount as shall have been agreed by Parent.

SpinCo Derivative Works” has the meaning set forth in Section 7.03(c)(iii).

SpinCo Group” means (a) SpinCo, (b) each Business Entity identified on Section 1.01(n) of the Disclosure Schedules, (c) each Business Entity that is or becomes a direct or indirect Subsidiary of SpinCo as of the Effective Time (after giving effect to the Internal Reorganization) and (d) each Business Entity that becomes a direct or indirect Subsidiary of SpinCo after the Effective Time, including in each case any such Business Entity that is formed or acquired after the date hereof or any Business Entity that is merged or consolidated with and into SpinCo or any Subsidiary of SpinCo.

SpinCo Group Member” means any Group Member of the SpinCo Group, including for the avoidance of doubt, Aaron’s.

SpinCo Indemnitees” has the meaning set forth in Section 5.03.

SpinCo Intellectual Property” means: (a) the Patents and Trademarks set forth on Section 1.01(o) of the Disclosure Schedules, and any other Patents and Trademarks owned by either Party or any of its Group Members that, as of the Effective Time, are primarily used or held for use in the Aaron’s Business, as compared to the Progressive Leasing and Vive Business; (b) the Other Intellectual Property owned by either Party or any of its Group Members that, as of the Effective Time, is primarily used or held for use in

 

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the Aaron’s Business, as compared to the Progressive Leasing and Vive Business; (c) the rights to any Trademarks, and Other Intellectual Property that are exclusively allocated to SpinCo or a SpinCo Group Member pursuant to any Ancillary Agreement; and (d) a non-exclusive license, upon the terms and subject to the conditions set forth in Section 7.03(c) below, to the Licensed Parent Other IP.

SpinCo Liabilities” means, without duplication, the following Liabilities of either Party or any of its Group Members (which for the avoidance of doubt, shall not include any Shared Action Liabilities):

(a) all Liabilities reflected as liabilities or obligations on the SpinCo Balance Sheet, and all Liabilities arising or assumed after the date of the SpinCo Balance Sheet that, had they arisen or been assumed on or before such date and been existing obligations as of such date, would have been included or reflected on the SpinCo Balance Sheet if prepared in accordance with GAAP applied on a consistent basis, subject to any discharge of such Liabilities subsequent to the date of the SpinCo Balance Sheet; it being understood that (i) the SpinCo Balance Sheet shall be used to determine the types of, and methodologies used to determine, those Liabilities that are included in the definition of SpinCo Liabilities pursuant to this clause (a); and (ii) the amounts set forth on the SpinCo Balance Sheet with respect to any Liabilities shall not be treated as minimum amounts or limitations on the amount of such Liabilities that are included in the definition of SpinCo Liabilities pursuant to this clause (a);

(b) all Liabilities, including any Environmental Liabilities, relating to, arising out of or resulting from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case before, at or after the Effective Time), in each case, to the extent that such Liabilities relate to, arise out of or result from the Aaron’s Business or a SpinCo Asset; provided, that this clause (b) shall not apply to any Shared Action Liabilities;

(c) all Liabilities relating to, arising out of or resulting from the SpinCo Contracts, any SpinCo real property or facility, the SpinCo Intellectual Property, the SpinCo Permits, the SpinCo Real Property or the SpinCo Portion of any Shared Contract;

(d) the Liabilities listed or described on Section 1.01(p) of the Disclosure Schedules;

(e) all Liabilities that are expressly provided by this Agreement or any Ancillary Agreement as Liabilities to be assumed or retained by, or allocated to, any SpinCo Group Member, and all agreements, obligations and Liabilities of any SpinCo Group Member under this Agreement or any of the Ancillary Agreements;

(f) all Liabilities relating to, arising out of or resulting from the New SpinCo Financing Arrangements other than costs and expenses paid prior to the Effective Time by Parent or a Parent Group Member;

(g) all Liabilities relating to, arising out of or resulting from any SpinCo Action;

(h) all Liabilities relating to, arising out of or resulting from any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the Form 10 and Information Statement and any other documents filed with the Commission in connection with the Spin-Off, other than with respect to the Parent Disclosure Sections; and

 

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(i) all Liabilities arising out of claims made by Third Parties (including Parent’s or SpinCo’s respective directors, officers, shareholders, employees and agents) against any Parent Group Member or SpinCo Group Member to the extent relating to, arising out of or resulting from the SpinCo Assets, the Aaron’s Business or the other businesses, operations, activities or Liabilities referred to in clauses (a) through (h) above; provided, that this clause (i) shall not apply to any Shared Action Liabilities.

The Parties agree that all Liabilities transferred pursuant to Section 2.02 shall be SpinCo Liabilities for purposes of this Agreement and the Ancillary Agreements regardless of when such Liabilities are assumed by SpinCo or a SpinCo Group Member or designee.

SpinCo Licensed Purposes” has the meaning set forth in Section 7.03(c)(i).

SpinCo Minimum Cash” means, as of immediately before the Effective Time on the Distribution Date, an amount of Cash equal to approximately the SpinCo Minimum Cash Amount.

SpinCo Minimum Cash Amount” means the amount set forth on Schedule IV.

SpinCo Permits” has the meaning set forth in the definition of SpinCo Assets.

SpinCo Portion” has the meaning set forth in Section 2.05(a).

SpinCo Real Property” has the meaning set forth in the definition of SpinCo Assets.

SpinCo Third-Party Deposited Cash” has the meaning set forth in the definition of SpinCo Assets.

SpinCo Transfer Documents” has the meaning set forth in Section 2.01(c).

Spin-Off” means the Separation and the Distribution.

Stored Records” has the meaning set forth in Section 6.04(b)(i).

Subsidiary” means, with respect to any Person, any Business Entity of which such Person: (a) beneficially owns, either directly or indirectly, more than 50% of (i) the total combined voting power of all classes of voting securities of such Business Entity; (ii) the total combined equity interests; or (iii) the capital or profit interests, in the case of a partnership; or (b) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors or similar governing body.

TAA” means the Technology Assignment Agreement to be entered into by and between Parent (and/or a Parent Group Member) and SpinCo in connection with the Separation, the Distribution and the other transactions contemplated by this Agreement.

Tangible Information” means Information that is contained in written, electronic or other tangible forms.

Tax or Taxes” has the meaning set forth in the TMA.

Tax Law” has the meaning set forth in the TMA.

Tax Return” has the meaning set forth in the TMA.

Third Party” means a Person that is not a Parent Group Member or a SpinCo Group Member.

Third-Party Claim” means any assertion by a Third Party of any claim, or the commencement by any Third Party of any Action, against any Parent Group Member or SpinCo Group Member.

 

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Third-Party Proceeds” has the meaning set forth in Section 5.04(a).

TMA” means the Tax Matters Agreement to be entered into by and between Parent and SpinCo in connection with the Separation, the Distribution and the other transactions contemplated by this Agreement.

TSA” means the Transition Services Agreement dated as of the date of this Agreement between Parent and SpinCo.

Trademarks” means (a) all trademarks, trade names, brand names, domain names, service marks, trade dress, logos and all other source indicators, including all goodwill associated therewith, (b) the right and power to assert, defend and recover title to any of the foregoing; (c) all rights to assert, defend and recover for any past, present and future infringement, dilution, misuse, misappropriation, impairment, unauthorized use or other violation of any of the foregoing, and (d) all applications, registrations, renewals and common law rights in connection therewith.

Transfer Documents” has the meaning set forth in Section 2.01(c).

Transition Committee” has the meaning set forth in Section 2.11.

ARTICLE II

THE SEPARATION

Section 2.01. Transfer of Assets and Assumption of Liabilities.

(a) The Parties acknowledge that the Separation is intended to result in the SpinCo Group owning the SpinCo Assets and assuming the SpinCo Liabilities, and the Parent Group owning the Parent Assets and assuming the Parent Liabilities, as set forth below in this ARTICLE II and in the applicable Ancillary Agreements. Prior to the Distribution and subject to Section 2.01(e), Section 2.02 and Section 2.04, in accordance with the Internal Reorganization Documents, to the extent not previously effected prior to the date hereof pursuant to the Internal Reorganization and to the extent that the Internal Reorganization Documents do not otherwise provide:

(i) Parent shall, and shall cause any Business Entity that shall be a Parent Group Member as of or after the Effective Time to, contribute, assign, transfer, convey and deliver to SpinCo or a Business Entity designated by SpinCo that shall be a SpinCo Group Member as of or after the Effective Time, and SpinCo or such SpinCo designee shall accept from Parent and the applicable Parent Group Members, all of Parent’s and such Parent Group Members’ respective direct or indirect rights, title and interest in and to all of the SpinCo Assets held by Parent or a Parent Group Member, including all of the outstanding shares of capital stock or other ownership interests in the SpinCo Group Members (other than SpinCo), which shall result in SpinCo owning directly or indirectly all of the SpinCo Group Members (it being understood that if a SpinCo Asset shall be held by a SpinCo Group Member, unless otherwise contemplated by the Internal Reorganization Documents, such SpinCo Asset may be assigned, transferred, conveyed and delivered for all purposes hereunder as a result of the transfer of all or substantially all of the equity interests in such SpinCo Group Member to SpinCo or another SpinCo Group Member).

(ii) SpinCo or the applicable SpinCo Group Member(s) shall accept, assume and agree faithfully to perform, discharge and fulfill all of the SpinCo Liabilities held by Parent or any Parent Group Member, and SpinCo or the applicable SpinCo Group Member(s) shall be responsible for all of the SpinCo Liabilities in accordance with their respective terms (it being understood that if a SpinCo Liability shall be

 

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a Liability of a SpinCo Group Member, unless otherwise provided by the Internal Reorganization Documents, such SpinCo Liability may be assumed for all purposes hereunder as a result of the transfer of all or substantially all of the equity interests in such SpinCo Group Member by SpinCo or another SpinCo Group Member), without regard for the manner in which or circumstances under which such SpinCo Liabilities arose or against whom they are asserted. SpinCo or the applicable SpinCo Group Member(s) shall be responsible for all SpinCo Liabilities, regardless of when or where such SpinCo Liabilities arose or arise, or whether the facts on which they are based occurred prior to, at or after the Effective Time, regardless of where or against whom such SpinCo Liabilities are asserted or determined (including any such SpinCo Liabilities arising out of claims made by Parent’s or SpinCo’s respective Group Members or Affiliates or by Representatives of Parent or SpinCo or their respective Group Members or Affiliates against either Party or any of its Group Members or Affiliates) or whether asserted or determined prior to the date hereof, and regardless of whether relating to, arising out of or resulting from or alleged to relate to, arise out of or result from negligence, recklessness, violation of Law, fraud or misrepresentation by either Party or any of its Group Members or Affiliates or any of their respective Representatives.

(iii) Parent and SpinCo shall cause SpinCo and any Business Entity that shall be a SpinCo Group Member as of or after the Effective Time to contribute, assign, transfer, convey and deliver to Parent or a Business Entity designated by Parent that shall be a Parent Group Member as of or after the Effective Time, and Parent or such Parent designee shall accept from SpinCo and the applicable SpinCo Group Members, all of SpinCo’s and such SpinCo Group Member’s respective direct or indirect rights, title and interest in and to all Parent Assets held by a SpinCo Group Member, including all of the outstanding shares of capital stock or other ownership interests in the Parent Group Members (other than Parent), which shall result in Parent owning directly or indirectly (other than through SpinCo or any SpinCo Group Member) all of the Parent Group Members (it being understood that if a Parent Asset shall be held by a Parent Group Member, unless otherwise provided by the Internal Reorganization Documents, such Parent Asset may be assigned, transferred, conveyed and delivered for all purposes hereunder as a result of the transfer of all or substantially all of the equity interests in such Parent Group Member to Parent or another Parent Group Member).

(iv) Parent or the applicable Parent Group Member(s) shall accept, assume and agree faithfully to perform, discharge and fulfill, all of the Parent Liabilities held by any SpinCo Group Member, and Parent or the applicable Parent Group Member(s) shall be responsible for all of the Parent Liabilities in accordance with their respective terms (it being understood that if a Parent Liability shall be a Liability of a Parent Group Member, unless otherwise provided by the Internal Reorganization Documents, such Parent Liability may be assumed for all purposes hereunder as a result of the transfer of all or substantially all of the equity interests in such Parent Group Member by Parent or another Parent Group Member), without regard for the manner in which or circumstances under which such Parent Liabilities arose or against whom they are asserted. Parent or the applicable Parent Group Member(s) shall be responsible for all Parent Liabilities, regardless of when or where such Parent Liabilities arose or arise, or whether the facts on which they are based occurred prior to, at or after the Effective Time, regardless of where or against whom such Parent Liabilities are asserted or determined (including any such Parent Liabilities arising out of claims made by Parent’s or SpinCo’s respective Group Members or Affiliates or by Representatives of Parent or SpinCo or their respective Group Members or Affiliates against either Party or any of its Group Members or Affiliates) or whether asserted or determined prior to the date hereof, and regardless of whether relating to, arising out of or resulting from or alleged to relate to, arise out of or result from negligence, recklessness, violation of Law, fraud or misrepresentation by either Party or any of its Group Members or Affiliates or any of their respective Representatives.

(b) In furtherance of the assignment, transfer, conveyance and delivery of the SpinCo Assets and the assumption of the SpinCo Liabilities in accordance with Section 2.01(a)(i) and Section 2.01(a)(ii): (i) Parent shall execute and deliver, and shall cause the other Parent Group Members to execute and deliver,

 

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such bills of sale, deeds, stock powers, certificates of title, assignments of contracts and other instruments of transfer, conveyance and assignment (including assignments of Patents, Trademarks or domain names) as and to the extent necessary to evidence the transfer, conveyance and assignment of all of Parent’s and the other Parent Group Members’ (other than SpinCo and the other SpinCo Group Members) right, title and interest in and to the SpinCo Assets to SpinCo and the SpinCo Group Members, and (ii) SpinCo shall execute and deliver, and shall cause the other SpinCo Group Members to execute and deliver, such assumptions of contracts and other instruments of assumption as and to the extent necessary to evidence the valid and effective assumption of the SpinCo Liabilities by SpinCo and the SpinCo Group Members. All of the foregoing documents contemplated by this Section 2.01(b) shall be referred to collectively herein as the “Parent Transfer Documents.”

(c) In furtherance of the assignment, transfer, conveyance and delivery of Parent Assets and the assumption of Parent Liabilities in accordance with Section 2.01(a)(iii) and Section 2.01(a)(iv): (i) SpinCo shall execute and deliver, and shall cause the other SpinCo Group Members to execute and deliver, such bills of sale, deeds, stock powers, certificates of title, assignments of contracts and other instruments of transfer, conveyance and assignment (including assignments of Patents, Trademarks or domain names) as and to the extent necessary to evidence the transfer, conveyance and assignment of all of SpinCo’s and the other SpinCo Group Members’ right, title and interest in and to the Parent Assets to Parent and the Parent Group Members, and (ii) Parent shall execute and deliver, and shall cause the other Parent Group Members to execute and deliver, such assumptions of contracts and other instruments of assumption as and to the extent necessary to evidence the valid and effective assumption of the Parent Liabilities by Parent and the Parent Group Members. All of the foregoing documents contemplated by this Section 2.01(c) shall be referred to collectively herein as the “SpinCo Transfer Documents” and, together with the Parent Transfer Documents, the “Transfer Documents.”

(d) Except to the extent otherwise provided by Section 2.02, in the event that it is discovered after the Effective Time that there was an omission of (i) the transfer or conveyance by SpinCo (or a SpinCo Group Member) or the acceptance or assumption by Parent (or a Parent Group Member) of any Parent Asset or Parent Liability, as the case may be, or (ii) the transfer or conveyance by Parent (or a Parent Group Member) or the acceptance or assumption by SpinCo (or a SpinCo Group Member) of any SpinCo Asset or SpinCo Liability, as the case may be, the Parties shall use commercially reasonable efforts to promptly effect such transfer, conveyance, acceptance or assumption of such Asset or Liability. Any transfer, conveyance, acceptance or assumption made pursuant to this Section 2.01(d) shall be treated by the Parties for all purposes as if it had occurred immediately prior to the Effective Time, except as otherwise required by applicable Law.

(e) Except to the extent otherwise provided by Section 2.02, in the event that it is discovered after the Effective Time that there was (i) a transfer or conveyance by SpinCo (or a SpinCo Group Member) or the acceptance or assumption by Parent (or a Parent Group Member) of any SpinCo Asset or SpinCo Liability, as the case may be, or (ii) a transfer or conveyance by Parent (or a Parent Group Member) or the acceptance or assumption by SpinCo (or a SpinCo Group Member) of any Parent Asset or Parent Liability, as the case may be, the Parties shall use commercially reasonable efforts to promptly transfer or convey such Asset back to the transferring or conveying Party or to rescind any acceptance or assumption of such Liability, as the case may be. Any transfer or conveyance made or acceptance or assumption rescinded pursuant to this Section 2.01(e) shall be treated by the Parties for all purposes as if such Asset or Liability had never been originally transferred, conveyed, accepted or assumed, as the case may be, except as otherwise required by applicable Law.

 

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Section 2.02. Nonassignable Contracts and Permits.

(a) Notwithstanding anything to the contrary contained herein, this Agreement shall not constitute an agreement to assign any Asset or Liability if an assignment or attempted assignment of the same without the consent of another Person would constitute a breach thereof or in any way impair the rights of a Party thereunder or give to any Third Party any rights with respect thereto. If any such consent is not obtained or if an attempted assignment would be ineffective or would impair such party’s rights under any such Asset or Liability so that the party entitled to the benefits and responsibilities of such purported transfer (the “Intended Transferee”) would not receive all such rights and responsibilities, then (i) the party purporting to make such transfer (the “Intended Transferor”) shall use commercially reasonable efforts to provide or cause to be provided to the Intended Transferee, to the extent permitted by Law, the benefits of any such Asset or Liability and the Intended Transferor shall promptly pay or cause to be paid to the Intended Transferee when received all moneys received by the Intended Transferor with respect to any such Asset and (ii) in consideration thereof the Intended Transferee shall pay, perform and discharge on behalf of the Intended Transferor all of the Intended Transferor’s Liabilities thereunder in a timely manner and in accordance with the terms thereof which it may do without breach and, at the Intended Transferor’s request, the Intended Transferee shall promptly reimburse or prepay (at the Intended Transferor’s election) the Intended Transferor for all amounts paid or due by the Intended Transferor on behalf of the Intended Transferee with respect to such non-assignable Asset or Liability. In addition, the Intended Transferor and the Intended Transferee shall each take such other actions as may be reasonably requested by the other Party in order to place the other Party, insofar as reasonably possible, in the same position as if such Asset had been transferred as provided hereby and so all the benefits and burdens relating thereto, including possession, use, risk of loss, Liability, potential for gain and dominion, control and command, shall inure to the Intended Transferee.

(b) If and when such consents and approvals are obtained, the transfer of the applicable Asset shall be effected in accordance with the terms of this Agreement.

Section 2.03. Certain Matters Governed Exclusively by Ancillary Agreements. Each of Parent and SpinCo agrees on behalf of itself and its Group Members that, except as explicitly provided in this Agreement or any Ancillary Agreement, (a) the TMA shall exclusively govern all matters relating to Taxes between such parties (including the control of Tax related proceedings), (b) the EMA shall exclusively govern the allocation of Assets and Liabilities related to the employee and employee benefits-related matters described therein, including the existing equity plans with respect to employees and former employees of Group Members of both the Parent Group and the SpinCo Group (it being understood that any such Assets and Liabilities, as allocated pursuant to the EMA, shall constitute SpinCo Assets, SpinCo Liabilities, Parent Assets or Parent Liabilities, as applicable, hereunder and shall be subject to ARTICLE V hereof), (c) the TSA shall exclusively govern all matters relating to the provision of certain services identified therein to be provided by each Party to the other on a transitional basis following the Distribution, and (d) the TAA shall exclusively govern all matters relating to ownership of certain proprietary software identified therein. In the case of any conflict between this Agreement and the referenced agreements in relation to any matters addressed by the referenced agreements, the referenced agreements shall control.

Section 2.04. Termination of Agreements.

(a) Except as set forth in Section 2.04(b) or as otherwise provided in the Internal Reorganization Documents, in furtherance of the releases and other provisions of Section 6.01, effective immediately prior to the Effective Time, SpinCo and each other SpinCo Group Member, on the one hand, and Parent and each other Parent Group Member, on the other hand, hereby terminate any and all agreements, arrangements, commitments and understandings, oral or written, entered into prior to the Effective Time, between or among Parent and/or any other Parent Group Member, on the one hand, and SpinCo and/or any other SpinCo Group Member, on the other hand, as to which there are no Third Parties (“Intercompany Agreements”), including all intercompany accounts payable or accounts receivable

 

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between or among Parent and/or any other Parent Group Member, on the one hand, and SpinCo and/or any other SpinCo Group Member, on the other hand (“Intercompany Accounts”); provided that the provisions of this Section 2.04(a) shall not terminate any rights or obligations (i) between or among Parent and any of the Parent Group Members; or (ii) between or among SpinCo and any of the SpinCo Group Members. No such terminated Intercompany Agreement (including any provision thereof that purports to survive termination) shall be of any further force or effect after the Effective Time. Each Party shall, at the reasonable request of the other Party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing. The Parties, on behalf of their respective Group Members, hereby waive any advance notice provision or other termination requirements with respect to any Intercompany Agreement.

(b) The provisions of Section 2.04(a) shall not apply to any of the following Intercompany Agreements (or to any of the provisions thereof): (i) the Intercompany Agreements and Intercompany Accounts listed or described on Section 2.04(b) of the Disclosure Schedules; (ii) this Agreement and the Ancillary Agreements (and each other Intercompany Agreement expressly provided by this Agreement or any Ancillary Agreement to be entered into by either Party or any other Group Member of its Group or to be continued from and after the Effective Time); (iii) any Intercompany Agreements or Intercompany Accounts to which any Third Party is a party; (iv) any Shared Contracts; and (v) any other Intercompany Agreements that this Agreement or any Ancillary Agreement expressly contemplates will survive the Effective Time. To the extent that the rights and obligations of Parent or another Parent Group Member under any agreements, arrangements, commitments or understandings not terminated under this Section 2.04(b) constitute SpinCo Assets or SpinCo Liabilities, they shall be assigned or assumed by SpinCo or the applicable SpinCo Group Member or designee pursuant to this Agreement. To the extent that the rights and obligations of SpinCo or another SpinCo Group Member under any agreements, arrangements, commitments or understandings not terminated under this Section 2.04(b) constitute Parent Assets or Parent Liabilities, they shall be assigned or assumed by Parent or the applicable Parent Group Member or designee pursuant to this Agreement.

Section 2.05. Shared Contracts.

(a) The Parties shall, and shall cause their respective Group Members to, use their respective commercially reasonable efforts to work together (and, if necessary and desirable, to work with the Third Party to such Shared Contract) in an effort to divide, partially assign, modify and/or replicate (in whole or in part) the respective rights and obligations under and in respect of any Shared Contract, such that (i) a SpinCo Group Member is the beneficiary of the rights and is responsible for the obligations related to that portion of such Shared Contract relating to the Aaron’s Business (the “SpinCo Portion”), which rights shall be a SpinCo Asset and which obligations shall be a SpinCo Liability and (ii) a Parent Group Member is the beneficiary of the rights and is responsible for the obligations related to such Shared Contract not relating to the Aaron’s Business (the “Parent Portion”), which rights shall be a Parent Asset and which obligations shall be a Parent Liability. Nothing in this Agreement shall require the division, partial assignment, modification or replication of a Shared Contract unless and until any necessary Consents are obtained or made, as applicable. If the Parties, or their respective Group Members, as applicable, are not able to enter into an arrangement to formally divide, partially assign, modify and/or replicate such Shared Contract prior to the Effective Time as contemplated by the previous sentence, then the Parties shall, and shall cause their respective Group Members to, cooperate in any reasonable and permissible arrangement to provide that, following the Effective Time and until the earlier of one year after the Distribution Date and such time as the formal division, partial assignment, modification and/or replication of such Shared Contract as contemplated by the previous sentence is effected, (A) the Assets associated with the SpinCo Portion of such Shared Contract shall be enjoyed by SpinCo or another SpinCo Group Member; (B) the Liabilities associated with the SpinCo Portion of such Shared Contract shall be borne by SpinCo or another SpinCo Group Member; (C) the Assets associated with the Parent Portion of such Shared Contract shall be enjoyed by Parent or another Parent Group Member; and (D) the Liabilities associated with the Parent Portion of such Shared Contract shall be borne by Parent or another Parent Group Member.

 

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(b) Each of Parent and SpinCo shall, and shall cause its Group Members to, (i) treat for all relevant Tax purposes the portion of each Shared Contract inuring to its respective businesses as Assets owned by, and/or Liabilities of, as applicable, such Party, or its Group Members, as applicable, not later than the Effective Time, and (ii) neither report nor take any Tax position (on a Tax Return or otherwise) inconsistent with such treatment (unless required by applicable Law).

(c) Nothing in this Section 2.05 shall require any member of any Group to make any non-de minimis payment (except to the extent advanced, assumed or agreed in advance to be reimbursed by any member of the other Group), incur any non-de minimis obligation or grant any non-de minimis concession for the benefit of any member of any other Group in order to effect any transaction contemplated by this Section 2.05.

Section 2.06. Bank Accounts; Checks.

(a) Parent and SpinCo each agrees to take, or cause their respective Group Members to take, prior to the Effective Time, all actions necessary to amend all SpinCo Contracts governing each bank and brokerage account owned by any SpinCo Group Member (collectively, the “SpinCo Accounts”), so that such SpinCo Accounts, if currently linked (whether by automatic withdrawal, automatic deposit or any other authorization to transfer funds from or to, hereinafter “linked”) to any bank or brokerage account owned by Parent or another Parent Group Member (collectively, the “Parent Accounts”) are de-linked from the Parent Accounts effective at or prior to the Effective Time.

(b) With respect to any outstanding checks issued by Parent, SpinCo, or any of their respective Group Members prior to the Effective Time, such outstanding checks shall be honored following the Effective Time by the Person owning the account on which the check is drawn.

(c) As between Parent and SpinCo (and their respective Group Members) all payments and reimbursements received after the Effective Time by either Party (or any of its respective Group Members) in respect or satisfaction of a business, Asset or Liability of the other Party (or any of its respective Group Members), shall be held by such Party in trust for the use and benefit of the Party entitled thereto and, as promptly as commercially practicable or as otherwise agreed between the Parties, upon receipt by such Party of any such payment or reimbursement, such Party shall pay over, or shall cause its applicable Group Member to pay over, to the other Party the amount of such payment or reimbursement.

Section 2.07. Novation of Liabilities; Release of Guarantees.

(a) Novation of SpinCo Liabilities.

(i) Each of Parent and SpinCo, at the request of the other Party, shall use commercially reasonable efforts to obtain, or cause to be obtained, any Consent, substitution, approval or amendment required to novate or assign all SpinCo Liabilities and obtain in writing the unconditional release of Parent and each other Parent Group Member that is a party to any such arrangements, so that, in any such case, SpinCo and the designated SpinCo Group Members shall be solely responsible for such SpinCo Liabilities; provided, however, that, except as otherwise expressly provided in this Agreement or the Ancillary Agreements, neither Parent nor SpinCo (nor any of their respective Group Members) shall be obligated to contribute any capital, pay any consideration, grant any concession or incur any additional Liability to any Third Party other than ordinary and customary fees to a Governmental Authority from whom such Consents, substitutions, approvals, amendments, terminations or releases are requested.

 

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(ii) If Parent or SpinCo is unable to obtain, or to cause to be obtained, any such required Consent, substitution, approval, amendment, termination or release, Parent or the applicable Parent Group Member shall continue to be bound by such arrangement and, unless not permitted by the terms thereof or by Law, SpinCo shall, as agent or subcontractor for Parent or such Parent Group Member, as the case may be, pay, perform and discharge fully all the obligations or other Liabilities of Parent or such Parent Group Member, as the case may be, that constitute SpinCo Liabilities thereunder from and after the Effective Time. Parent shall cause each Parent Group Member without further consideration, to pay and remit, or cause to be paid or remitted, to SpinCo, promptly all money, rights and other consideration received by it or another Parent Group Member in respect of SpinCo’s performance as agent or subcontractor for Parent or such Parent Group Member, as the case may be, with respect to such Liabilities of Parent or the applicable Parent Group Member (unless any such consideration is a Parent Asset). If and when any such Consent, substitution, approval, amendment, termination or release shall be obtained or the obligations under such arrangements shall otherwise become assignable or able to be novated, Parent or the applicable Parent Group Member shall promptly assign or novate, or cause to be assigned or novated, all its obligations and other Liabilities thereunder or any obligations of Parent or a Parent Group Member to SpinCo or its designated SpinCo Group Member without payment of further consideration and SpinCo or such SpinCo Group Member shall, without the payment of any further consideration, assume such obligations.

(b) Novation of Parent Liabilities.

(i) Each of Parent and SpinCo, at the request of the other Party, shall use commercially reasonable efforts to obtain, or cause to be obtained, any Consent, substitution, approval or amendment required to novate or assign all Parent Liabilities and obtain in writing the unconditional release of SpinCo and each other SpinCo Group Member that is a party to any such arrangements, so that, in any such case, Parent and the designated Parent Group Member shall be solely responsible for such Parent Liabilities; provided, however, that, except as otherwise expressly provided in this Agreement or the Ancillary Agreements, neither Parent nor SpinCo (nor any of their respective Group Members) shall be obligated to contribute any capital, pay any consideration, grant any concession or incur any additional Liability to any Third Party other than ordinary and customary fees to a Governmental Authority from whom such Consents, substitutions, approvals, amendments, terminations or releases are requested.

(ii) If Parent or SpinCo is unable to obtain, or to cause to be obtained, any such required Consent, substitution, approval, amendment, termination or release, SpinCo or the applicable SpinCo Group Member shall continue to be bound by such arrangement and, unless not permitted by the terms thereof or by Law, Parent shall, as agent or subcontractor for SpinCo or such SpinCo Group Member, as the case may be, pay, perform and discharge fully all the obligations or other Liabilities of SpinCo or such SpinCo Group Member, as the case may be, that constitute Parent Liabilities, thereunder from and after the Effective Time. SpinCo shall cause each SpinCo Group Member without further consideration, to pay and remit, or cause to be paid or remitted, to Parent, promptly all money, rights and other consideration received by it or a SpinCo Group Member in respect of Parent’s performance as agent or subcontractor for SpinCo or such SpinCo Group Member, as the case may be, with respect to such Liabilities of SpinCo or the applicable SpinCo Group Member (unless any such consideration is a SpinCo Asset). If and when any such Consent, substitution, approval, amendment, termination or release shall be obtained or the obligations under such arrangements shall otherwise become assignable or able to be novated, SpinCo or the applicable SpinCo Group Member shall promptly assign or novate, or cause to be assigned or novated, all its obligations and other Liabilities thereunder or any obligations of SpinCo or a SpinCo Group Member to Parent or its designated Parent Group Member without payment of further consideration and Parent or such Parent Group Member shall, without the payment of any further consideration, assume such obligations.

 

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Section 2.08. Provision of Corporate Records.

(a) Without limitation of the Parties’ rights and obligations pursuant to ARTICLE VI, prior to or as promptly as reasonably practicable after the Effective Time, Parent shall deliver to SpinCo all corporate books and records of the SpinCo Group Members in its or its Group Members’ possession or control that are SpinCo Assets.

(b) Without limitation of the Parties’ rights and obligations pursuant to ARTICLE VI, prior to or as promptly as reasonably practicable after the Effective Time, SpinCo shall deliver to Parent all corporate books and records of the Parent Group Members in its or its Group Members’ possession or control that are Parent Assets period.

Section 2.09. Disclaimer of Representations and Warranties; Waiver of Bulk-Sale and Bulk-Transfer Laws.

(a) EACH OF PARENT (ON BEHALF OF ITSELF AND EACH PARENT GROUP MEMBER) AND SPINCO (ON BEHALF OF ITSELF AND EACH SPINCO GROUP MEMBER) UNDERSTANDS AND AGREES THAT, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN ANY ANCILLARY AGREEMENT, NO PARTY TO THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR OTHERWISE, IS: (X) REPRESENTING OR WARRANTING TO ANY OTHER PARTY HERETO OR THERETO IN ANY WAY AS TO (I) THE ASSETS, BUSINESSES OR LIABILITIES TRANSFERRED, LICENSED OR ASSUMED AS PROVIDED HEREBY OR THEREBY; (II) ANY APPROVALS OR NOTIFICATIONS REQUIRED IN CONNECTION HEREWITH OR THEREWITH; (III) THE VALUE OR FREEDOM FROM ANY SECURITY INTERESTS OF, OR ANY OTHER MATTER CONCERNING, ANY ASSETS OF SUCH PARTY; (IV) THE ABSENCE OR PRESENCE OF ANY DEFENSES TO OR RIGHT OF SETOFF AGAINST OR FREEDOM FROM COUNTERCLAIM WITH RESPECT TO ANY PROCEEDING OR OTHER ASSET, INCLUDING ANY ACCOUNTS RECEIVABLE, OF EITHER PARTY; OR (V) THE LEGAL SUFFICIENCY OF ANY CONVEYANCE AND ASSUMPTION INSTRUMENTS OR ANY OTHER ANCILLARY AGREEMENT TO CONVEY TITLE TO ANY ASSET OR THING OF VALUE UPON THE EXECUTION, DELIVERY AND FILING OF SUCH CONVEYANCE AND ASSUMPTION INSTRUMENTS OR SUCH OTHER ANCILLARY AGREEMENTS; OR (Y) MAKING ANY OTHER REPRESENTATIONS OR GRANTING ANY WARRANTIES, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE. EACH PARTY SPECIFICALLY DISCLAIMS ANY OTHER WARRANTIES, WHETHER WRITTEN OR ORAL, OR EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF CONDITION, QUALITY, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR USE OR PURPOSE, TITLE, VALUE, FREEDOM FROM ENCUMBRANCE OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, OR THE PRESENCE OR ABSENCE OF ANY HAZARDOUS MATERIALS IN OR ON, OR DISPOSED OR DISCHARGED FROM, SUCH ASSETS, OR ANY WARRANTY AS TO THE VALIDITY OF ANY PATENTS OR THE NON-INFRINGEMENT OF ANY PATENTS, TRADEMARKS, OR OTHER INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. EXCEPT AS MAY EXPRESSLY BE SET FORTH IN THIS AGREEMENT OR IN ANY ANCILLARY AGREEMENT, ALL SUCH ASSETS ARE BEING TRANSFERRED OR LICENSED ON AN “AS IS,” “WHERE IS” BASIS AND WITH ALL FAULTS (AND, IN THE CASE OF ANY REAL PROPERTY, BY MEANS OF A QUITCLAIM OR SIMILAR FORM OF DEED OR CONVEYANCE) AND THE RESPECTIVE TRANSFEREES OR LICENSEES SHALL BEAR THE ECONOMIC AND LEGAL RISKS THAT (A) ANY CONVEYANCE AND ASSUMPTION INSTRUMENT OR ANY OTHER ANCILLARY AGREEMENT MAY PROVE TO BE INSUFFICIENT TO VEST IN THE TRANSFEREE GOOD AND MARKETABLE TITLE, FREE AND CLEAR OF ALL SECURITY INTERESTS; AND (B) ANY NECESSARY CONSENTS ARE NOT OBTAINED OR THAT ANY REQUIREMENTS OF LAWS, AGREEMENTS, SECURITY INTERESTS OR JUDGMENTS ARE NOT COMPLIED WITH. EACH OF PARENT (ON BEHALF OF ITSELF AND EACH PARENT GROUP MEMBER) AND

 

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SPINCO (ON BEHALF OF ITSELF AND EACH SPINCO GROUP MEMBER) HEREBY NEGATES ANY RIGHTS OF THE OTHER PARTY AND ITS GROUP MEMBERS UNDER STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND ANY CLAIMS BY SUCH OTHER PARTY FOR DAMAGES BECAUSE OF REDHIBITORY VICES OR DEFECTS, WHETHER KNOWN OR UNKNOWN, IT BEING THE INTENTION OF THE PARTIES HERETO THAT ALL BUSINESSES, ASSETS, LIABILITIES AND BUSINESS ENTITIES TRANSFERRED HEREUNDER ARE TO BE ACCEPTED BY THE APPLICABLE RECEIVING PARTY HEREUNDER IN THEIR PRESENT CONDITION.

(b) SpinCo hereby waives compliance by itself and each and every other SpinCo Group Member with the requirements and provisions of any “bulk-sale” or “bulk transfer” Laws of any jurisdiction that may otherwise be applicable with respect to the transfer or sale of any or all of the SpinCo Assets to SpinCo or another SpinCo Group Member.

(c) Parent hereby waives compliance by itself and each and every other Parent Group Member with the requirements and provisions of any “bulk-sale” or “bulk transfer” Laws of any jurisdiction that may otherwise be applicable with respect to the transfer or sale of any and all of the Parent Assets to Parent or a Parent Group Member

Section 2.10. Financing Arrangements; SpinCo Minimum Cash.

(a) Prior to or effective as of the Effective Time, (a) SpinCo shall enter into the New SpinCo Financing Arrangements, (b) Parent shall repay, or cause to be repaid, in full all amounts owed by Parent or its Subsidiaries under the Existing Parent Financing Arrangements, and (c) Parent shall enter into the New Parent Financing Arrangements. Parent and SpinCo agree to take all necessary actions to assure the full release and discharge of (i) Parent and the other Parent Group Members from any obligations of Parent or any other Parent Group Member applicable to them pursuant to the New SpinCo Financing Arrangements as of no later than the Effective Time, and (ii) SpinCo and the other SpinCo Group Members from any obligations of SpinCo or any other SpinCo Group Member applicable to them pursuant to the New Parent Financing Arrangements or the Existing Parent Financing Arrangements, in each case as of no later than the Effective Time.

(b) Prior to the Effective Time, and in connection with the entrance into the New Parent Financing Arrangements, Parent shall have the right to use all available Cash of the Parent Group and the SpinCo Group for purposes of repaying in full the Existing Parent Financing Arrangements, provided, however, that as of immediately prior to the Effective Time, SpinCo and the SpinCo Group Members shall have, in the aggregate, a Cash balance equal to the SpinCo Minimum Cash. Prior to the Effective Time, SpinCo and Parent shall, or shall cause their respective Group Members to, transfer (including by one (1) or more transfers or capital contributions), to the other Party (or their respective Group Members), as the case may be, Cash such that SpinCo and the SpinCo Group Members shall have, in the aggregate, as of immediately prior to the Effective Time a Cash balance equal to, but not in excess of, the SpinCo Minimum Cash. Any remaining Cash held by the Parent Group or the SpinCo Group (other than, for the avoidance of doubt, any SpinCo Third-Party Deposit Cash), after taking into account the transfers contemplated by this Section 2.10(b) and establishing the SpinCo Minimum Cash with SpinCo, shall be deemed to be a Parent Asset as of the Effective Time.

Section 2.11. Transition Committee. Prior to or after the Effective Time, the Parties may establish a transition committee (the “Transition Committee”) consisting of an equal number of members from Parent and SpinCo. To the extent determined by the Parties, the Transition Committee shall be responsible for monitoring and managing all matters related to any of the transactions contemplated by this Agreement or any Ancillary Agreements. The Transition Committee shall have the authority to (a) establish

 

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one or more subcommittees from time to time as it deems appropriate or as may be described in this Agreement or any Ancillary Agreements, with each such subcommittee comprised of one or more members of the Transition Committee or one or more employees of either Party or any member of its respective Group, and each such subcommittee having such scope of responsibility as may be determined by the Transition Committee from time to time; (b) delegate to any such committee any of the powers of the Transition Committee; and (c) combine, modify the scope of responsibility of, and disband any such subcommittees and (d) modify or reverse any such delegations. The Transition Committee shall establish general procedures for managing the responsibilities delegated to it under this Section 2.11, and may modify such procedures from time to time. All decisions by the Transition Committee or any subcommittee thereof shall be effective only if mutually agreed by both Parties. The Parties shall utilize the procedures set forth in ARTICLE IX to resolve any matters as to which the Transition Committee is not able to reach a decision.

ARTICLE III

ACTIONS PENDING THE DISTRIBUTION

Section 3.01. Actions Prior to the Distribution. Prior to the Effective Time and subject to the to the terms and conditions set forth herein, including those specified in Section 3.02, and subject to Section 4.03, Parent and SpinCo shall take, or cause to be taken, the actions specified in this Section 3.01.

(a) Parent shall, prior to the Distribution, mail notice of Internet availability of the Information Statement or the Information Statement to the Record Holders.

(b) SpinCo shall prepare, file with the Commission and use its reasonable best efforts to cause to become effective any registration statements or amendments thereto required to effect the establishment of, or amendments to, any employee benefit and other plans necessary or appropriate in connection with the transactions contemplated by this Agreement or any of the Ancillary Agreements.

(c) Parent and SpinCo shall take all such action as may be necessary or appropriate under the securities or blue sky Laws of the states or other political subdivisions of the United States or of other foreign jurisdictions in connection with the transactions contemplated by this Agreement or any of the Ancillary Agreements.

(d) SpinCo shall prepare and file, and shall use reasonable best efforts to have approved prior to the Distribution, an application for the listing of the SpinCo Common Stock to be distributed in the Distribution on the NYSE, subject to official notice of distribution.

(e) The individuals listed in the Information Statement as members of the SpinCo board of directors who will join the board at or prior to the Effective Time shall have been duly elected or appointed as such, effective prior to or as of the Effective Time, and such individuals shall be the members of the SpinCo board of directors as of the Effective Time, and the individuals listed as officers of SpinCo in the Information Statement shall have been duly elected or appointed to hold such positions set forth in the Information Statement, effective prior to or as of the Effective Time; provided, however, that to the extent required by any Law or requirement of the NYSE or any other national securities exchange, as applicable, one or more independent directors shall be appointed by the existing board of directors of SpinCo and begin their respective term(s) prior to the date on which “when-issued” trading of the SpinCo Common Stock begins on such national securities exchange and shall serve on SpinCo’s audit committee, and nominating and executive compensation committee.

 

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(f) (i) Parent shall deliver or cause to be delivered to SpinCo resignations from SpinCo positions, effective as of the Effective Time, of each individual who will be an employee of any Parent Group Member after the Effective Time and who is an officer or director of any SpinCo Group Member immediately prior to the Effective Time and (ii) SpinCo shall deliver or cause to be delivered to Parent resignations from Parent positions, effective as of the Effective Time, of each individual who will be an employee of any SpinCo Group Member after the Effective Time and who is an officer or director of any Parent Group Member immediately prior to the Effective Time, except, in the case of each of (i) and (ii), as set forth on Section 3.01(f) of the Disclosure Schedules.

(g) Parent and SpinCo shall take all actions as may be necessary or appropriate so that, immediately prior to the Effective Time, the articles of incorporation and the bylaws of SpinCo, each in substantially the form filed as an exhibit to the Form 10, shall be in effect.

(h) Parent shall enter into a distribution agent agreement with the Agent or otherwise provide instructions to the Agent regarding the Distribution.

(i) Parent shall, to the extent possible, give the NYSE not less than ten (10) days’ advance notice of the Record Date in compliance with Rule 10b-17 under the Exchange Act, and the applicable rules and regulations of the NYSE.

(j) (i) Parent and SpinCo shall take all actions necessary such that, coincident with the Distribution, (A) SpinCo will change its name to [•] and (B) Parent will change its name to [•], and (ii) Parent shall prepare and file, and shall use its reasonable best efforts to have approved, a supplemental listing application with the NYSE to facilitate its name change.

(k) Parent and SpinCo shall take all actions as may be necessary or appropriate to approve the stock-based employee benefit plans of SpinCo (and the grants of adjusted awards over Parent stock by Parent and of awards over SpinCo stock by SpinCo) in order to satisfy the requirements of Rule 16b-3 under the Exchange Act and the applicable rules and regulations of the NYSE.

(l) Parent and SpinCo shall reasonably cooperate with King & Spalding LLP, as tax counsel to Parent, to deliver customary representation letters in connection with the tax opinion described in Section 3.02(i).

(m) (i) SpinCo shall have entered into the New SpinCo Financing Arrangements, (ii) Parent shall have repaid, or caused to be repaid, in full all amounts owed by Parent or its Subsidiaries under the Existing Parent Financing Arrangements, and (iii) Parent shall have entered into the New Parent Financing Arrangements.

(n) Parent and SpinCo shall, subject to Section 4.03, take all reasonable steps necessary and appropriate to cause the conditions set forth in Section 3.02 to be satisfied and to effect the Distribution on the Distribution Date.

(o) From the date of the Balance Sheet Date to prior to the Distribution, SpinCo shall, and shall cause the SpinCo Group Members to, make or have made capital and other expenditures, and operate its cash management, accounts payable and receivables collection systems in the ordinary course of business, in each case, consistent with prior practice except as required in connection with the transactions contemplated by this Agreement and the Ancillary Agreements.

Section 3.02. Conditions Precedent to Consummation of the Distribution. In addition to Parent’s rights under Section 4.03, the Distribution shall not occur unless each of the following conditions shall have been satisfied (or waived by Parent, in whole or in part, in its sole and absolute discretion):

 

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(a) Board Approval. This Agreement and the transactions contemplated hereby, including the declaration of the Distribution, shall have been duly approved and authorized by the Board of Directors of Parent in accordance with applicable Law and the organizational documents of Parent, and such approval shall not have been withdrawn.

(b) Completion of Internal Reorganization and Separation; Liabilities Under Financing Arrangements. Subject to Section 2.02, the Internal Reorganization shall have been completed. The Separation, and all applicable pre-Effective Time steps set forth in ARTICLE II, shall have been completed and Parent shall be satisfied, in its sole discretion, that, as of the Effective Time, (i) neither Parent nor any Parent Group Member shall have any further Liability under any of the Existing Parent Financing Arrangements or the New SpinCo Financing Arrangements and (ii) neither SpinCo nor any SpinCo Group Member shall have any further Liability under any of the Existing Parent Financing Arrangements or the New Parent Financing Arrangements.

(c) Execution of Ancillary Agreements. The Parties shall have executed and delivered or, where applicable, shall have caused their respective Group Members to execute and deliver, the Ancillary Agreements that are contemplated by this Agreement to be executed and delivered on or prior to the Effective Time.

(d) Effectiveness of Form 10; Mailing or Notice of Internet Availability of Information Statement. The Form 10 shall have been declared effective by the Commission, no stop order suspending the effectiveness of the Form 10 shall be in effect and no proceedings for such purpose shall be pending before or threatened by the Commission, and notice of Internet availability of the Information Statement or the Information Statement shall have been mailed to the Record Holders.

(e) Listing on NYSE. The SpinCo Common Stock to be distributed in the Distribution shall have been accepted for listing on the NYSE, subject to official notice of Distribution.

(f) No Injunction or Prohibition. No order, injunction or decree issued by any Governmental Authority of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Distribution or any of the other transactions related thereto, including the Separation, contemplated by this Agreement or any Ancillary Agreement shall be in effect, and no other event shall have occurred or failed to occur that prevents the consummation of the Distribution or any of the other transactions related thereto, including the Separation, contemplated by this Agreement or any Ancillary Agreement. The Distribution shall not violate or result in a breach of applicable Law or any material contract of any Party.

(g) Satisfaction of Actions Prior to Distribution. The actions set forth in Section 3.01 shall have been completed.

(h) Governmental Approvals. Parent and SpinCo shall have received all Governmental Approvals and all Consents necessary to effect the Distribution and the other transactions related thereto, including the Separation, contemplated by this Agreement or any Ancillary Agreement, and to permit the operation of the Progressive Leasing and Vive Business and the Aaron’s Business after the Distribution Date, and such Governmental Approvals and Consents shall be in full force and effect.

(i) Tax Opinion. Parent shall have received an opinion of King & Spalding LLP satisfactory to the Parent Board of Directors to the effect that the Spin-Off will qualify for the Intended Tax Treatment.

(j) Solvency Opinion. A nationally recognized valuation or accounting firm or investment bank acceptable to Parent in its sole discretion shall have delivered one or more opinions to the Parent Board of Directors at the time or times requested by the Parent Board of Directors confirming the solvency and financial viability of Parent before the consummation of the Distribution and each of Parent and SpinCo after the consummation of the Distribution, such opinions shall have been in form and substance acceptable to Parent in its sole discretion and such opinions shall not have been withdrawn or rescinded.

 

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(k) No Circumstances Making Distribution Inadvisable. No other events or developments shall exist or shall have occurred that, in the judgment of the Parent Board of Directors, in its sole and absolute discretion, makes it inadvisable to effect the Separation, the Distribution or the transactions contemplated by this Agreement or any Ancillary Agreement.

Section 3.03. Sole and Absolute Discretion. The foregoing conditions are for the sole benefit of Parent and not for the benefit of any other Person and shall not give rise to or create any duty on the part of Parent or Parent’s board of directors to waive or not waive any such condition or in any way limit the right of Parent to terminate this Agreement as set forth in ARTICLE X or alter the consequences of any such termination from those specified in such Article. Any determination made by the Parent Board of Directors prior to the Distribution concerning the satisfaction or waiver of any or all of the conditions set forth in Section 3.02 shall be conclusive and binding on the Parties. If Parent waives any material condition, it shall promptly issue a press release disclosing such fact and file a Current Report on Form 8-K with the Commission describing such waiver.

ARTICLE IV

THE DISTRIBUTION

Section 4.01. The Distribution.

(a) SpinCo shall cooperate with Parent to accomplish the Distribution and shall, at the direction of Parent, use its reasonable best efforts to promptly take any and all actions necessary or desirable to effect the Distribution. Parent shall select any investment bank or manager in connection with the Distribution, as well as any financial printer, distribution agent and financial, legal, accounting and other advisors for Parent. Parent or SpinCo, as the case may be, will provide, or cause its applicable Group Member(s) to provide, to the Agent all share certificates and any information required in order to complete the Distribution.

(b) Subject to the terms and conditions set forth in this Agreement:

(i) after completion of the Internal Reorganization and on or prior to the Distribution Date, for the benefit of and distribution to the holders of record of issued and outstanding shares of Parent Common Stock as of the close of business on the Record Date (“Record Holders”), Parent will deliver to the Agent all of the issued and outstanding shares of SpinCo Common Stock then owned by Parent and book-entry authorizations for such shares;

(ii) Parent shall instruct the Agent to distribute, as soon as practicable following the Effective Time, to each Record Holder (or such Record Holder’s bank or brokerage firm on such Record Holder’s behalf) electronically, by direct registration in book-entry form: (A) the number of whole shares of SpinCo Common Stock to which such Record Holder is entitled based on the Distribution Ratio; and (B) Cash, if applicable, in lieu of fractional shares obtained in the manner provided in Section 4.02;

(iii) The Distribution shall be effective at 11:59 p.m. Eastern Standard Time on the Distribution Date (the “Effective Time”).

 

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(iv) On or as soon as practicable after the Distribution Date, the Agent will mail to each Record Holder an account statement indicating the number of shares of SpinCo Common Stock that have been registered in book-entry form in the name of such Record Holder.

(v) SpinCo agrees to provide all book-entry transfer authorizations for shares of SpinCo Common Stock that Parent or the Agent shall require (after giving effect to Section 4.02) in order to effect the Distribution.

(c) Each share of SpinCo Common Stock distributed in the Distribution shall be validly issued, fully paid and nonassessable and free of preemptive rights.

Section 4.02. Fractional Shares.

(a) Notwithstanding anything herein to the contrary, no fractional shares of SpinCo Common Stock shall be issued in connection with the Distribution, and any such fractional share interests to which a Record Holder would otherwise be entitled shall not entitle such Record Holder to vote or to any other rights as a shareholder of SpinCo. In lieu of any such fractional shares, each Record Holder who, but for the provisions of this Section 4.02, would be entitled to receive a fractional share interest of SpinCo Common Stock pursuant to the Distribution, shall be paid Cash, without any interest thereon, as hereinafter provided. The Agent and Parent shall, as soon as practicable after the Effective Time, (i) determine the number of whole shares and fractional shares of SpinCo Common Stock allocable to each Record Holder or beneficial owner of Parent Common Stock as of the close of business on the Record Date, (ii) aggregate all such fractional shares into whole shares and sell the whole shares obtained thereby in open market transactions at then prevailing trading prices on behalf of such Record Holders or beneficial owners who would otherwise be entitled to fractional share interests and (iii) distribute to each such Record Holder, or for the benefit of such beneficial owner, such Record Holder’s or beneficial owner’s ratable share of the net proceeds of such sale, based upon the average gross selling price per share of SpinCo Common Stock after making appropriate deductions for any amount required to be withheld under applicable Tax Law and less any brokers’ charges, commissions or transfer Taxes. The Agent, in its sole discretion, will determine the timing and method of selling such fractional shares, the selling price of such fractional shares and the broker-dealer through which such fractional shares will be sold; provided, however, that the designated broker-dealer is not an Affiliate of Parent or SpinCo. Neither Parent nor SpinCo will pay any interest on the proceeds from the sale of fractional shares.

(b) Any SpinCo Common Stock or Cash in lieu of fractional shares with respect to SpinCo Common Stock that remain unclaimed by any Record Holder or beneficial owner 180 days after the Effective Time shall be delivered to SpinCo, SpinCo shall hold such SpinCo Common Stock for the account of such Record Holder or beneficial owner and the Parties agree that all obligations to provide such SpinCo Common Stock and Cash, if any, in lieu of fractional share interests shall be obligations of SpinCo, subject in each case to applicable escheat or other abandoned property Laws, and Parent shall have no Liability with respect thereto.

Section 4.03. Sole and Absolute Discretion of Parent. Parent shall, in its sole and absolute discretion, determine the Record Date, the Distribution Date and all terms of the Distribution and the Separation, including the form, structure and terms of any transactions and/or offerings to effect the Distribution and the Separation and the timing of and conditions to the consummation thereof. In addition and notwithstanding anything to the contrary set forth below, Parent may at any time and from time to time until the Distribution decide to abandon the Distribution or the Separation, or modify or change the terms of the Distribution or the Separation, including by accelerating or delaying the timing of the consummation of all or part of the Distribution or the Separation. Nothing shall in any way limit Parent’s right to terminate this Agreement or the Distribution as set forth in ARTICLE X or alter the consequences of any such termination from those specified in ARTICLE X.

 

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ARTICLE V

MUTUAL RELEASES; INDEMNIFICATION; COOPERATION; INSURANCE

Section 5.01. Release of Pre-Distribution Claims.

(a) Except as provided in Section 5.01(c) and Section 5.01(d), effective as of the Effective Time, SpinCo does hereby, for itself and each other SpinCo Group Member, their respective successors and assigns and Affiliates, and, to the extent permitted by Law, all Persons who at any time prior to the Effective Time have been shareholders, directors, officers, agents or employees of any SpinCo Group Member (in each case, in their respective capacities as such) remise, release and forever discharge (i) Parent and the other Parent Group Members, their respective successors and assigns and Affiliates, (ii) all Persons who at any time prior to the Effective Time are or have been shareholders, directors, officers, agents or employees of any Parent Group Member (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, and (iii) all Persons who at any time prior to the Effective Time are or have been shareholders, directors, officers, agents or employees of any SpinCo Group Member (in each case, in their respective capacities as such) and who are not, as of immediately following the Effective Time, directors, officers, agents or employees of SpinCo or a SpinCo Group Member, in each case from (A) all SpinCo Liabilities; (B) all Liabilities arising from or in connection with the transactions and all other activities to implement the Separation and the Distribution and (C) all Liabilities arising from or in connection with actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case before, at or after the Effective Time), in each case to the extent relating to, arising out of or resulting from the Aaron’s Business, the SpinCo Assets or the SpinCo Liabilities.

(b) Except as provided in Section 5.01(c) and Section 5.01(e), effective as of the Effective Time, Parent does hereby, for itself and each other Parent Group Member, their respective successors and assigns and Affiliates, and, to the extent permitted by Law, all Persons who at any time prior to the Effective Time have been shareholders, directors, officers, agents or employees of any Parent Group Member (in each case, in their respective capacities as such) remise, release and forever discharge (i) SpinCo and the other SpinCo Group Members, their respective successors and assigns and Affiliates, (ii) all Persons who at any time prior to the Effective Time are or have been shareholders, directors, officers, agents or employees of any SpinCo Group Member (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns in each case from (A) all Parent Liabilities; (B) all Liabilities arising from or in connection with the transactions and all other activities to implement the Separation and the Distribution and (C) all Liabilities arising from or in connection with actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case before, at or after the Effective Time), in each case to the extent relating to, arising out of or resulting from the Progressive Leasing and Vive Business, the Parent Assets or the Parent Liabilities.

(c) Nothing contained in Section 5.01(a) or Section 5.01(b) shall impair any right of any Person to enforce this Agreement, any Ancillary Agreement or any Intercompany Agreement that is specified in Section 2.04(b) as not to terminate as of the Effective Time, in each case in accordance with its terms. Nothing contained in Section 5.01(a) or Section 5.01(b) shall release any Person from:

 

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(i) any Liability provided in or resulting from any agreement among any Parent Group Member(s) or SpinCo Group Member(s) that is specified in Section 2.04(b) as not to terminate as of the Effective Time, or any other Liability specified in such Section 2.04(b) as not to terminate as of the Effective Time;

(ii) any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to the Group of which such Person is a member in accordance with, or any other Liability of any member of any Group under, this Agreement or any Ancillary Agreement;

(iii) any Liability provided in or resulting from any other agreement or understanding that is entered into after the Effective Time between one Party (and/or a member of such Party’s Group), on the one hand, and the other Party (and/or a member of such Party’s Group), on the other hand;

(iv) any Liability for the sale, lease or receipt of goods, property or services purchased, obtained or used in the ordinary course of business by a member of one Group from a member of the other Group prior to the Effective Time;

(v) any Liability that the Parties may have with respect to indemnification or contribution pursuant to this Agreement or any Ancillary Agreement or otherwise for claims brought against the Parties by Third Parties, which Liability shall be governed by the provisions of this ARTICLE V, and, if applicable, the appropriate provisions of the relevant Ancillary Agreement; or

(vi) any Liability the release of which would result in the release of any Person other than a Person released pursuant to this Section 5.01.

In addition, nothing contained in Section 5.01(a) or Section 5.01(b) shall release any Group Member from honoring its obligations existing immediately prior to the Effective Time to indemnify, or advance expenses to, any Person who was a director, officer or employee of such Group Member at or prior to the Effective Time, to the extent such Person was entitled in such capacity to such indemnification or advancement of expenses pursuant to obligations existing immediately prior to the Effective Time; provided, that if a director, officer or employee receives indemnification payments from Parent (or any Parent Group Member) or SpinCo (or any SpinCo Group Member), as the case may be, with respect to a particular Liability for which such Person is entitled to indemnification, such Person shall not be entitled to receive indemnification payments from the other Party (or any member of such Party’s Group) with respect to the same Liability to the extent of the indemnification payments previously so received by such Person, as the case may be; and provided, further, that to the extent applicable, Section 5.02 or Section 5.03 shall determine whether any Party shall be required to indemnify the other in respect of such Liability.

(d) Without limiting the rights of either Party under Section 5.04, Section 5.05 or Section 5.06, SpinCo shall not make, and shall not permit any other SpinCo Group Member to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against Parent or any other Parent Group Member, or any other Person released pursuant to Section 5.01(a), with respect to any Liabilities released pursuant to Section 5.01(a).

(e) Without limiting the rights of either Party under Section 5.04, Section 5.05 or Section 5.06, Parent shall not make, and shall not permit any other Parent Group Member to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification against SpinCo or any other SpinCo Group Member, or any other Person released pursuant to Section 5.01(b), with respect to any Liabilities released pursuant to Section 5.01(b).

 

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(f) It is the intent of each of the Parties hereto by virtue of the provisions of this Section 5.01 to provide for a full and complete release and discharge of all Liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the Effective Time between the Parent Group, on the one hand, and the SpinCo Group, on the other hand (including any contractual agreements or arrangements existing or alleged to exist between the Parties or any of their respective Group Members on or before the Effective Time), except as expressly set forth in Section 5.01(a) or Section 5.01(b). At any time, at the request of the other Party, each Party shall cause each Group Member of its respective Group to execute and deliver releases reflecting the provisions of this Section 5.01.

Section 5.02. Indemnification by SpinCo. Following the Effective Time and subject to Section 5.04, SpinCo shall, and shall cause the other SpinCo Group Members to, indemnify, defend and hold harmless Parent, each other Parent Group Member and each of their respective Affiliates, and each of their respective former and current directors, officers and employees, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the “Parent Indemnitees”), from and against any and all Liabilities of the Parent Indemnitees relating to, arising out of or resulting from, directly or indirectly, any of the following items (without duplication):

(a) any SpinCo Liability;

(b) any failure of SpinCo or any other SpinCo Group Member or any other Person to pay, perform or otherwise promptly discharge any SpinCo Liability in accordance with its terms, whether prior to, at or after the Effective Time;

(c) any breach by SpinCo or any other SpinCo Group Member of this Agreement or any Ancillary Agreement unless such Ancillary Agreement expressly provides for separate indemnification, or for no indemnification, therein (which shall be controlling); and

(d) any breach by SpinCo of any of the representations and warranties made by SpinCo on behalf of itself and the SpinCo Group Members in Section 11.01(e).

in each case, regardless of when or where the loss, claim, accident, occurrence, event or happening giving rise to the Liability took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, or reported or unreported and regardless of whether such loss, claim, accident, occurrence, event or happening giving rise to the Liability existed prior to, on or after the Effective Time or relates to, arises out of or results from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to, on or after the Effective Time.

Section 5.03. Indemnification by Parent. Following the Effective Time and subject to Section 5.04, Parent shall, and shall cause the other Parent Group Members to, indemnify, defend and hold harmless SpinCo, each other SpinCo Group Member and each of their respective former and current directors, officers and employees, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the “SpinCo Indemnitees”), from and against any and all Liabilities of the SpinCo Indemnitees relating to, arising out of or resulting from, directly or indirectly, any of the following items (without duplication):

(a) any Parent Liability;

(b) any failure of Parent or any other Parent Group Member or any other Person to pay, perform or otherwise promptly discharge any Parent Liability in accordance with its terms, whether prior to, at or after the Effective Time;

 

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(c) any breach by Parent or any other Parent Group Member of this Agreement or any Ancillary Agreement unless such Ancillary Agreement expressly provides for separate indemnification, or for no indemnification, therein (which shall be controlling); and

(d) any breach by Parent of any of the representations and warranties made by Parent on behalf of itself and the Parent Group Members in Section 11.01(e).

in each case, regardless of when or where the loss, claim, accident, occurrence, event or happening giving rise to the Liability took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, or reported or unreported and regardless of whether such loss, claim, accident, occurrence, event or happening giving rise to the Liability existed prior to, on or after the Effective Time or relates to, arises out of or results from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to, on or after the Effective Time.

Section 5.04. Indemnification Obligations Net of Insurance Proceeds and Third-Party Proceeds.

(a) The Parties intend that any Liability subject to indemnification, contribution or reimbursement pursuant to this Agreement or any Ancillary Agreement will be reduced by (i) Insurance Proceeds that actually reduce the amount of, or are paid to the applicable Indemnitee in respect of, such Liability or (ii) other amounts recovered (net of any out-of-pocket costs or expenses incurred in the collection thereof) from any Third Party that actually reduce the amount of, or are paid to the applicable Indemnitee in respect of, such Liability (“Third-Party Proceeds”). Accordingly, the amount that either Party (an “Indemnifying Party”) is required to pay to any Person entitled to indemnification or reimbursement pursuant to this Agreement (an “Indemnitee”) will be reduced by any Insurance Proceeds or Third-Party Proceeds theretofore actually recovered by or on behalf of the Indemnitee from a Third Party in respect of the related Liability. If an Indemnitee receives a payment required by this Agreement from an Indemnifying Party in respect of any Liability (an “Indemnity Payment”) and subsequently receives Insurance Proceeds or Third-Party Proceeds in respect of such Liability, then the Indemnitee will pay to the Indemnifying Party an amount equal to the excess of the Indemnity Payment received over the amount of the Indemnity Payment that would have been due if such Insurance Proceeds or Third-Party Proceeds had been received, realized or recovered before the Indemnity Payment was made.

(b) The Parties hereby agree that an insurer or any other Third Party that would otherwise be obligated to pay any claim or amount shall not be relieved of the responsibility with respect thereto or have any subrogation rights with respect thereto by virtue of any provision contained in this Agreement or any Ancillary Agreement, it being expressly understood and agreed that no insurer or any other Third Party shall be entitled to a “wind-fall” (i.e., a benefit they would not be entitled to receive in the absence of the indemnification or release provisions), and shall not be deemed to be Third Party beneficiaries, by virtue of any provision of this Agreement or any Ancillary Agreement. Parent and SpinCo shall, and shall cause each Parent Group Member and SpinCo Group Member, respectively, to, use commercially reasonable efforts to seek to collect or recover, or allow the Indemnifying Party to collect or recover, any Insurance Proceeds and any Third-Party Proceeds that may be collectible or recoverable respecting the Liabilities for which indemnification may be available pursuant to this ARTICLE V; provided, however, that any such actions by an Indemnitee will not relieve the Indemnifying Party of any of its obligations under this Agreement, including the Indemnifying Party’s obligation promptly to pay directly or reimburse the Indemnitee for costs and expenses actually incurred by the Indemnified Party. Notwithstanding the foregoing, an Indemnifying Party may not delay making any indemnification payment required under the terms of this Agreement, or otherwise satisfying any indemnification obligation, pending the outcome of any Action to collect or recover Insurance Proceeds or Third Party Proceeds, and an Indemnitee need not attempt to collect any Insurance Proceeds or Third Party Proceeds prior to making a claim for indemnification or receiving any Indemnity Payment otherwise owed to it under this Agreement or any Ancillary Agreement.

 

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Section 5.05. Procedures for Indemnification of Third-Party Claims.

(a) If an Indemnitee shall receive notice or otherwise learn of a Third-Party Claim with respect to which an Indemnifying Party may be obligated to provide indemnification to such Indemnitee pursuant to this Agreement or any Ancillary Agreement, such Indemnitee shall give such Indemnifying Party written notice thereof as soon as reasonably practicable, but no later than fifteen (15) days after becoming aware of such Third-Party Claim (or sooner if the nature of the Third-Party Claim so requires). Any such notice shall describe the Third-Party Claim in reasonable detail, or, in the alternative, include copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third-Party Claim. Notwithstanding the foregoing, the failure of any Indemnitee or other Person to give notice as provided in this Section 5.05(a) shall not relieve the related Indemnifying Party of its obligations under this ARTICLE V, except to the extent that such Indemnifying Party is actually and materially prejudiced by such failure to give notice in accordance with this Section 5.05(a).

(b) With respect to any Third-Party Claim that is not a Shared Action Liability:

(i) The Indemnifying Party shall have the right, exercisable by written notice to the Indemnitee within fifteen (15) calendar days after receipt of notice from an Indemnitee in accordance with Section 5.05(a) (or sooner, if the nature of such Third-Party Claim so requires), to assume and conduct the defense of (and seek to settle or compromise) such Third-Party Claim at its own expense and with its own counsel (which counsel shall be reasonably satisfactory to the Indemnitee) provided that the Indemnifying Party shall agree promptly to reimburse to the extent required under this ARTICLE V the Indemnitee for the full amount of any Liability resulting from such Third-Party Claim. Notwithstanding the foregoing, if the Indemnifying Party assumes such defense and, in the course of defending such Third-Party Claim, (A) the Indemnifying Party discovers that the facts presented at the time the Indemnifying Party acknowledged its indemnification obligation in respect of such Third-Party Claim were not true in all material respects and (B) such untruth provides a reasonable basis for asserting that the Indemnifying Party does not have an indemnification obligation in respect of such Third-Party Claim, then (x) the Indemnifying Party shall not be bound by such acknowledgment, (y) the Indemnifying Party shall promptly thereafter provide the Indemnitee written notice of its assertion that it does not have an indemnification obligation in respect of such Third-Party Claim and (z) the Indemnitee shall have the right to assume the defense of such Third-Party Claim.

(ii) Until such time as the Indemnifying Party has assumed the defense of such Third-Party Claim, the Indemnified Party shall have the right to control the defense of such Third-Party Claim. If the Indemnifying Party (A) elects not to assume the defense of a Third-Party Claim in accordance with this Agreement, (B) fails to notify the Indemnitee that is the subject of such Third-Party Claim, of its election to assume the defense of such Third-Party Claim within fifteen (15) days after the receipt of the notice referred to in Section 5.05(a) (or sooner if the nature of the Third-Party Claim so requires) or (C) after assuming the defense of a Third-Party Claim, fails to take reasonable steps necessary to defend diligently such Third-Party Claim within ten (10) days after receiving written notice from the Indemnitee to the effect that the Indemnifying Party has so failed, the Indemnitee shall be entitled to continue to conduct and control the defense of such Third-Party Claim at the cost and expense of the Indemnifying Party. For the avoidance of doubt, the Indemnitee’s right to indemnification for a Third-Party Claim shall not be adversely affected by assuming the defense of such Third-Party Claim.

 

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(iii) An Indemnitee that does not conduct and control the defense of any Third-Party Claim, or an Indemnifying Party that does not conduct and control the defense of any Third-Party Claim, nevertheless shall have the right to employ separate counsel (including local counsel as necessary) of its own choosing to monitor and participate in (but not control) the defense of any Third-Party Claim for which it is a potential Indemnitee or Indemnifying Party, but the fees and expenses of such counsel shall be at the expense of such Indemnitee or Indemnifying Party; provided, however, that such expense shall be the responsibility of the Indemnifying Party (A) if the Indemnifying Party and the Indemnitee are both named parties to the proceedings and the Indemnitee shall have reasonably concluded that representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interest (in which case the Indemnifying Party shall not be responsible for expenses in respect of more than one local counsel for the Indemnitee in any single jurisdiction) or (B) the Indemnitee assumes the defense of the Third-Party Claim pursuant to Section 5.05(b)(ii)(C) after the Indemnifying Party has failed, in the reasonable judgment of the Indemnitee, to diligently defend the Third-Party Claim after having elected to assume its defense. Each Party shall cooperate with the Party entitled to conduct and control the defense of such Third-Party Claim hereunder in such defense and make available to the controlling Party, at the non-controlling Party’s expense, all witnesses, information and materials in such Party’s possession or under such Party’s control relating thereto as are reasonably required by the controlling Party.

(iv) No Indemnifying Party shall settle, compromise or consent to entry of any judgment with respect to any Third-Party Claim without the prior written consent of the applicable Indemnitee or Indemnitees, which consent shall not be unreasonably withheld, delayed or conditioned; provided, however, that, subject to the immediately following provision, such Indemnitee(s) shall not withhold consent if the settlement, compromise or judgment (A) contains no finding or admission of any violation of Law or any violation of the rights of any Person, (B) is solely for monetary damages which the Indemnifying Party has agreed to pay in full and (C) includes a full, unconditional and irrevocable release of the Indemnitee; and provided, further, that in no event shall an Indemnitee be required to consent to any entry of judgment or settlement if the effect thereof is (x) to permit any injunction, declaratory judgment, other order or other nonmonetary relief to be entered, directly or indirectly, against any Indemnitee or (y) in the reasonable judgment of such Indemnitee, as reflected in a written objection delivered by such Indemnitee to the Indemnifying Party within the period of twenty one (21) days following receipt of the request for consent described above, to have a material adverse financial impact or a material adverse effect upon the ongoing operations of such Indemnitee or, if applicable, its Group Members.

(v) Except to the extent an Indemnitee has assumed the defense of a Third-Party Claim pursuant to clause (C) of the second sentence of Section 5.05(b)(ii), no Indemnitee shall settle, compromise or consent to entry of any judgment with respect to any Third-Party Claim without the prior written consent of the applicable Indemnifying Party, which consent shall not be unreasonably withheld, delayed or conditioned.

(vi) The Parties hereby agree that if a Party presents the other Party with a notice containing a proposal to settle or compromise, or consent to the entry of a judgment with respect to, a Third-Party Claim for which either Party is seeking to be indemnified hereunder and the Party receiving such proposal does not respond in any manner to the Party presenting such proposal within thirty (30) days (or within any such shorter time period that may be required by applicable Law or court order) of receipt of such proposal, then the Party receiving such proposal shall be deemed to have consented to the terms of such proposal, including for the purposes of Section 5.05(b)(iv) and Section 5.05(b)(v).

 

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Section 5.06. Direct Claims; Additional Matters.

(a) Any claim for indemnification under this Agreement or any Ancillary Agreement which does not result from a Third-Party Claim (a “Direct Claim”) must be asserted by a written notice given by the Indemnitee to the applicable Indemnifying Party; provided, that the failure by an Indemnitee to so assert any such Direct Claim shall not prejudice the ability of the Indemnitee to do so at a later time except to the extent (if any) that the Indemnifying Party is actually and materially prejudiced thereby. Such Indemnifying Party shall have a period of thirty (30) days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such thirty (30) day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to provide indemnification with respect to such claim. If such Indemnifying Party does not respond within such thirty (30) day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such Indemnitee as provided by this Agreement or the Ancillary Agreements, as applicable, without prejudice to its continuing rights to pursue indemnification or contribution hereunder.

(b) In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third-Party Claim against any claimant or plaintiff asserting such Third-Party Claim or against any other Person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right, defense or claim.

(c) In the event of an Action relating to a Liability that has been allocated to an Indemnifying Party pursuant to the terms of this Agreement or any Ancillary Agreement in which the Indemnifying Party is not a named defendant, if the Indemnifying Party shall so request, the Parties shall endeavor to substitute the Indemnifying Party for the named defendant or add the Indemnifying Party as an additional named defendant, to the extent practicable. If such substitution or addition cannot be achieved for any reason or is not requested, the named defendant shall allow the Indemnifying Party to manage the Action as set forth in, and subject to, Section 5.05 and this Section 5.06, the Indemnifying Party shall fully indemnify the named defendant against all costs of defending the Action (including court costs, sanctions imposed by a court, attorneys’ fees, experts, fees and all other external expenses), the costs of any judgment or settlement and the cost of any interest or penalties relating to any judgment or settlement.

(d) If (i) a Party incurs any Liability arising out of this Agreement or any Ancillary Agreement; (ii) an adequate legal or equitable remedy is not available for any reason against the other Party to satisfy the Liability incurred by the incurring Party; and (iii) a legal or equitable remedy may be available to the other Party against a Third Party for such Liability, then the other Party shall use its commercially reasonable efforts to cooperate with the incurring Party, at the incurring Party’s expense, to permit the incurring Party to obtain the benefits of such legal or equitable remedy against the Third Party.

(e) Indemnity Payments or contribution payments in respect of any Liabilities for which an Indemnitee is entitled to indemnification or contribution under this ARTICLE V shall be paid reasonably promptly (but in any event within sixty (60) days of the final determination of the amount that the Indemnitee is entitled to indemnification or contribution under this ARTICLE V) by the Indemnifying Party to the Indemnitee as such Liabilities are incurred upon demand by the Indemnitee, including reasonably satisfactory documentation setting forth the basis for the amount of such Indemnity Payments or contribution payments, including documentation with respect to calculations made and consideration of any Insurance Proceeds that actually reduce the amount of such Liabilities. The indemnity and contribution provisions contained in this ARTICLE V shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Indemnitee; and (ii) the knowledge by the Indemnitee of Liabilities for which it might be entitled to indemnification or contribution hereunder. THE PARTIES UNDERSTAND AND AGREE THAT THE RELEASE FROM LIABILITIES AND INDEMNIFICATION OBLIGATIONS HEREUNDER AND UNDER THE ANCILLARY AGREEMENTS MAY INCLUDE RELEASE FROM LIABILITIES AND INDEMNIFICATION FOR LOSSES RELATING TO, RESULTING FROM, OR ARISING OUT OF, DIRECTLY OR INDIRECTLY AND IN WHOLE OR IN PART, AN INDEMNITEE’S OWN NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL FAULT.

 

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(f) In the event that an Indemnity Payment pursuant to this ARTICLE V shall be denominated in a currency other than United States dollars, the amount of such payment shall be translated into United States dollars using the most recent foreign exchange rate of the applicable currency set forth in the exchange rate section of The Wall Street Journal as of the date that notice of the claim with respect to such Liability shall be given to the Indemnifying Party.

(g) The provisions of Section 5.02 through Section 5.12 hereof shall not apply with respect to Taxes or Tax matters (including the control of Tax related proceedings), which shall be governed by the TMA.

Section 5.07. Management of Certain Actions and Shared Actions. This Section 5.07 shall govern the management and direction of pending and future Actions in which members of the Parent Group or the SpinCo Group are named as parties, but shall not alter the allocation of Liabilities set forth in ARTICLE II unless otherwise expressly set forth in this Section 5.07.

(a) From and after the Distribution, the SpinCo Group shall direct the defense or prosecution of any (i) Actions set forth on Schedule V and (ii) Actions (other than Actions set forth on Schedule V) that constitute only SpinCo Liabilities or involve only SpinCo Assets. If an Action that constitutes only a SpinCo Liability or involves only SpinCo Assets is commenced after the Distribution naming a member of the Parent Group as a party thereto, then SpinCo shall use its reasonable best efforts to cause such member of the Parent Group to be removed as a party to such Action and Parent shall use reasonable best efforts to cooperate with SpinCo’s effort.

(b) From and after the Distribution, the Parent Group shall direct the defense or prosecution of any of any (i) Actions set forth on Schedule VI and (ii) Actions (other than Actions set forth on Schedule VI) that constitute only Parent Liabilities or involve only Parent Assets. If an Action that constitutes only a Parent Liability or involves only Parent Assets is commenced after the Distribution naming a member of the SpinCo Group as a party thereto, then Parent shall use its reasonable best efforts to cause such member of the SpinCo Group to be removed as a party to such Action and SpinCo shall use reasonable best efforts to cooperate with Parent’s effort.

(c) From and after the Distribution, the Parties shall separately but cooperatively manage (whether as co-defendants or co-plaintiffs) any Shared Actions. The Parties shall reasonably cooperate and consult with each other, and to the extent permissible and necessary or advisable, maintain a joint defense in a manner that would preserve for both Parties and their respective Affiliates any attorney-client privilege, joint defense or other privilege with respect to any Shared Action. Notwithstanding anything to the contrary herein, and except as set forth in Schedule III, the Parties may jointly retain counsel (in which case the cost of counsel shall be shared equally by the Parties) or retain separate counsel (in which case each Party will bear the cost of its separate counsel) with respect to any Shared Action; provided that the Parties shall bear their own discovery costs and shall share equally joint litigation costs. In any Shared Action, each of Parent and SpinCo may pursue separate defenses, claims, counterclaims or settlements to those claims relating to the Progressive Leasing and Vive Business or the Aaron’s Business, respectively; provided that each Party shall in good faith make reasonable best efforts to avoid adverse effects on the other Party. Notwithstanding anything to the contrary herein, (i) if a judgment is obtained with respect to a Shared Action, the Parties shall endeavor in good faith to allocate the Liabilities in respect of such judgment between them based on the Progressive Leasing and Vive Business and the Aaron’s Business, and otherwise shall share equally such Liabilities and (ii) if a recovery is obtained with respect to a Shared Action, the Parties shall endeavor

 

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in good faith to allocate the Assets in respect of such recovery between them based on their respective injuries, and otherwise shall share equally such Assets. A Party that is not named as a defendant in a Shared Action may elect to become a Party to such Shared Action, and the Party named in such Shared Action shall reasonably cooperate to have such first Party named in such Shared Action.

(d) No Party managing an Action pursuant to Section 5.07 shall consent to entry of any judgment or enter into any settlement of or compromise any such Action without the prior written consent of the other Party (not to be unreasonably withheld, conditioned or delayed); provided, however, that such non-managing Party shall be required to consent to such entry of judgment or to such settlement that the managing Party may recommend if the judgment or settlement (i) contains no finding or admission of any violation of Law or any violation of the rights of any Person, (ii) involves only monetary relief which the managing Party has agreed to pay and (iii) includes a full and unconditional release of the non-managing Party. Notwithstanding the foregoing, in no event shall a non-managing Party be required to consent to an entry of judgment or settlement if the effect thereof (x) is to permit any injunction, declaratory judgment, other order or other nonmonetary relief to be entered, directly or indirectly, against the non-managing Party’s Group or (y) in the reasonable judgment of such non-managing Party, as reflected in a written objection delivered by such non-managing Party to the managing Party within the period of twenty one (21) days following receipt of the request for consent described above, to have a material adverse financial impact or a material adverse effect upon the ongoing operations of such non-managing Party or, if applicable, its Group Members.

Section 5.08. Right of Contribution.

(a) If any right of indemnification contained in Section 5.02 or Section 5.03 is held unenforceable or is unavailable for any reason (other than in accordance with the terms of this Agreement, in which case this Section 5.08 shall not apply), or is insufficient to hold harmless an Indemnitee in respect of any Liability for which such Indemnitee is entitled to indemnification hereunder, then the Indemnifying Party shall contribute to the amounts paid or payable by the Indemnitees as a result of such Liability (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and its Group Members, on the one hand, and the Indemnitees entitled to contribution, on the other hand, as well as any other relevant equitable considerations.

(b) Solely for purposes of determining relative fault pursuant to this Section 5.08: (i) any fault associated with the business conducted with the Assets and Liabilities subject to Section 2.02 where such Assets and Liabilities are SpinCo Assets or SpinCo Liabilities and Parent or a Parent Group Member is the Intended Transferor with respect to such Assets or Liabilities (except for the gross negligence or intentional misconduct of Parent or a Parent Group Member) shall be deemed to be the fault of SpinCo and the other SpinCo Group Members, and no such fault shall be deemed to be the fault of Parent or any other Parent Group Member; (ii) any fault associated with the business conducted with the Assets and Liabilities subject to Section 2.02 where such Assets and Liabilities are Parent Assets or Parent Liabilities and SpinCo or a SpinCo Group Member is the Intended Transferor (except for the gross negligence or intentional misconduct of SpinCo or a SpinCo Group Member) shall be deemed to be the fault of Parent and the other Parent Group Members, and no such fault shall be deemed to be the fault of SpinCo or any other SpinCo Group Member; (iii) any fault associated with the ownership, operation or activities of the Progressive Leasing and Vive Business prior to the Effective Time shall be deemed to be the fault of Parent and the Parent Group Members, and no such fault shall be deemed to be the fault of SpinCo and the other SpinCo Group Members; and (iv) any fault associated with the ownership, operation or activities of the Aaron’s Business prior to the Effective Time shall be deemed to be the fault of SpinCo and the SpinCo Group Member, and no such fault shall be deemed to be the fault of Parent or any other Parent Group Member. The Parties agree that it would not be just and equitable if contribution were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above.

 

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(c) The provisions of Section 5.04 through Section 5.12 and Section 8.02 through Section 8.05 shall govern any contribution claims.

Section 5.09. Covenant Not to Sue. Each Party hereby covenants and agrees that none of it, its Group Members, or any Person claiming through it shall bring suit or otherwise assert any claim against any Indemnitee, or assert a defense against any claim asserted by any Indemnitee, before any court, arbitrator, neutral mediator or administrative agency anywhere in the world, alleging that: (a) the assumption or retention of any SpinCo Liabilities by SpinCo and other SpinCo Group Members on the terms and conditions set forth in this Agreement and the Ancillary Agreements is void or unenforceable for any reason; (b) the assumption or retention of any Parent Liabilities by Parent and the Parent Group Members on the terms and conditions set forth in this Agreement and the Ancillary Agreements is void or unenforceable for any reason, or (c) the provisions of this ARTICLE V are void or unenforceable for any reason.

Section 5.10. Remedies Cumulative. The remedies provided in this ARTICLE V shall be cumulative and, subject to the provisions of ARTICLE VIII, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party; provided that the procedures set forth in this ARTICLE V shall be the exclusive procedures governing any indemnity action brought under this Agreement.

Section 5.11. Survival of Indemnities. The rights and obligations of each of Parent and SpinCo and their respective Indemnitees under this Agreement, including this ARTICLE V shall survive (a) the sale or other transfer by any Party or its Affiliates of any Assets or businesses or the assignment by it of any Liabilities or (b) any merger, consolidation, business combination, sale of all or substantially all of its Assets, restructuring, recapitalization, reorganization or similar transaction involving any Parent Group Member or SpinCo Group Member.

Section 5.12. Limitation on Liability. IN NO EVENT SHALL PARENT, SPINCO OR ANY OTHER GROUP MEMBER HAVE ANY LIABILITY TO THE OTHER OR TO ANY OTHER GROUP MEMBER, OR TO ANY OTHER SPINCO INDEMNITEE OR PARENT INDEMNITEE, AS APPLICABLE, UNDER THIS AGREEMENT OR ANY ANCILLARY AGREEMENT FOR ANY SPECIAL, PUNITIVE OR EXEMPLARY DAMAGES, WHETHER OR NOT CAUSED BY OR RESULTING FROM NEGLIGENCE OR BREACH OF OBLIGATIONS HEREUNDER AND WHETHER OR NOT INFORMED OF THE POSSIBILITY OF THE EXISTENCE OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE PROVISIONS OF THIS SECTION 5.12 SHALL NOT LIMIT AN INDEMNIFYING PARTY’S INDEMNIFICATION OBLIGATIONS HEREUNDER WITH RESPECT TO ANY LIABILITY ANY INDEMNITEE MAY HAVE TO ANY THIRD PARTY FOR ANY SPECIAL, PUNITIVE OR EXEMPLARY DAMAGES, EXCEPT AS OTHERWISE PROVIDED IN THE ANCILLARY AGREEMENTS.

Section 5.13. Insurance Matters.

(a) The Parties intend by this Agreement that, to the extent permitted under the terms of any applicable occurrence-based insurance policy, each of Parent and SpinCo, their respective Group Members, and each of their respective directors, officers and employees will have and will be fully entitled to continue to exercise all rights that any of them may have as of the Effective Time as an insured, additional insured, or loss payee under any occurrence-based policy or any agreements related to such occurrence-based policies in effect before the Effective Time, with respect to events occurring before the Effective Time. The party to whom each occurrence-based insurance program is assigned at the Effective Time is specified on Section 5.13(a) of the Disclosure Schedules, and the counterparty will continue to have rights to pursue coverage under such policy(s) pursuant to the terms of this Section 5.13(a).

 

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(b) The Parties intend by this Agreement that, to the extent permitted under the terms and conditions of any applicable claims made or discovery insurance policy, each of Parent and SpinCo, their respective Group Members, and each of their respective directors, officers and employees will continue to exercise all rights that any of them may have as of the Effective Time as an insured, additional insured, or loss payee under any claims made or discovery insurance policy, or any agreements related to such claims made or discovery policies in effect before the Effective Time, with respect to events occurring before the Effective Time. The respective entity inheriting each claims made or discovery insurance program is specified on Section 5.13(b) of the Disclosure Schedules, and the counterparty will have rights to coverage under such policy(s) pursuant to the terms of this Section 5.13(b).

(c) After the Effective Time, Parent (and each other Parent Group Member) and SpinCo (and each other SpinCo Group Member) shall not, without the consent of Parent or SpinCo, respectively (such consent not to be unreasonably withheld, conditioned or delayed), provide any insurance carrier with a release or amend, modify or waive any rights under any insurance policy if such release, amendment, modification or waiver thereunder would materially adversely affect any rights of any Group Member of the other Party with respect to insurance coverage otherwise afforded to such other Party for pre-Distribution claims; provided, however, that the foregoing shall not (i) preclude any Group Member from presenting any claim or from exhausting any policy limit, (ii) require any Group Member to pay any premium or other amount or to incur any Liability or (iii) require any Group Member to renew, extend or continue any policy in force.

(d) The provisions of this Agreement are not intended to relieve any insurer of any Liability under any policy.

(e) No member of the Parent Group or any Parent Indemnitee will have any Liabilities whatsoever as a result of the insurance policies in effect at any time before the Effective Time, including as a result of (i) the level or scope of any insurance, (ii) the creditworthiness of any insurance carrier, (iii) the terms and conditions of any policy, or (iv) the adequacy or timeliness of any notice to any insurance carrier with respect to any claim or potential claim.

(f) Except to the extent otherwise provided in Section 5.13(c), in no event will Parent, any other Parent Group Member or any Parent Indemnitee have any Liability or obligation whatsoever to any SpinCo Group Member if any insurance policy is terminated by an insurer, is unavailable due to liquidation of an insurer, or inadequate to cover any Liability of any SpinCo Group Member for any reason whatsoever, or is not renewed or extended beyond the current expiration date of any such insurance policy.

(g) This Agreement shall not be considered an attempted assignment of any policy of insurance or a contract of insurance and shall not be construed to waive any right or remedy of any Parent Group Member in respect of any insurance policy or any other contract or policy of insurance.

(h) Nothing in this Agreement will be deemed to restrict any SpinCo Group Member from acquiring at its own expense any other insurance policy in respect of any Liabilities or covering any period.

(i) To the extent that any insurance policy provides for the reinstatement of policy limits, and both Parent and SpinCo desire to reinstate such limits, the cost of reinstatement will be shared by Parent and SpinCo as the Parties may agree. If either Party, in its sole discretion, determines that such reinstatement would not be beneficial, that Party shall not contribute to the cost of reinstatement and will not make any claim thereunder nor otherwise seek to benefit from the reinstated policy limits.

 

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(j) Upon the reasonable request of the other Party, each of SpinCo and Parent will share such information as is reasonably necessary in order to permit the other Party to manage and conduct its insurance matters in an orderly fashion and provide the other Party with any assistance that is reasonably necessary or beneficial in connection with such Party’s insurance matters.

Section 5.14. Guarantees, Letters of Credit and Other Obligations.

(a) On or prior to the Effective Time or as soon as practicable thereafter, Parent shall (with the reasonable cooperation of the applicable Parent Group Members) use its commercially reasonable efforts to have any SpinCo Group Members removed as guarantor of or obligor for any Parent Liability. On or prior to the Effective Time or as soon as practicable thereafter, SpinCo shall (with the reasonable cooperation of the SpinCo Group Members) use its commercially reasonable efforts to have any Parent Group Members removed as guarantor of or obligor for any SpinCo Liabilities.

(b) On or prior to the Effective Time or as soon as practicable thereafter, (i) to the extent required to obtain a release from a guarantee, letter of credit or other obligation of any SpinCo Group Member with respect to Parent Liabilities, Parent shall execute a substitute document in the form of any such existing guarantee or letter of credit, as applicable, or such other form as is agreed to by the relevant parties to such guarantee agreement, letter of credit or other obligation, except to the extent that such existing guarantee contains representations, covenants or other terms or provisions either (A) with which Parent would be reasonably unable to comply or (B) which would be reasonably expected to be breached and (ii) to the extent required to obtain a release from a guarantee, letter of credit or other obligation of any Parent Group Member with respect to SpinCo Liabilities, SpinCo shall execute a substitute document in the form of any such existing guarantee or letter of credit, as applicable, or such other form as is agreed to by the relevant parties to such guarantee agreement, letter of credit or other obligation, except to the extent that such existing guarantee contains representations, covenants or other terms or provisions either (A) with which SpinCo would be reasonably unable to comply or (B) which would be reasonably expected to be breached.

(c) If the Parties are unable to obtain, or to cause to be obtained, any such required removal as set forth in Section 5.14(a) and Section 5.14(b), (i) with respect to Parent Liabilities, (A) Parent shall, and shall cause the other Parent Group Members to, indemnify, defend and hold harmless each of the SpinCo Indemnitees from and against any Liability arising from or relating to such guarantee, letter of credit or other obligation, as applicable, and shall, as agent or subcontractor for the SpinCo Group guarantor or obligor, pay, perform and discharge fully all of the obligations or other Liabilities of such guarantor or obligor thereunder, and (B) Parent shall not, and shall cause the other Parent Group Members not to, agree to renew or extend the term of, increase any obligations under, or transfer to a third Person, any loan, guarantee, letter of credit, lease, contract or other obligation for which a SpinCo Group Member is or may be liable unless all obligations of the SpinCo Group Members with respect thereto are thereupon terminated by documentation satisfactory in form and substance to SpinCo in its sole and absolute discretion and (ii) with respect to SpinCo Liabilities, (A) SpinCo shall, and shall cause the other SpinCo Group Members to, indemnify, defend and hold harmless each of the Parent Indemnitees for any Liability arising from or relating to such guarantee, letter of credit or other obligation, as applicable, and shall, as agent or subcontractor for the applicable Parent Group guarantor or obligor, pay, perform and discharge fully all of the obligations or other Liabilities of such guarantor or obligor thereunder, and (B) SpinCo shall not, and shall cause the other SpinCo Group Members not to, agree to renew or extend the term of, increase any obligations under, or transfer to a third Person, any loan, guarantee, letter of credit, lease, contract or other obligation for which a Parent Group Member is or may be liable unless all obligations of the Parent Group Members with respect thereto are thereupon terminated by documentation satisfactory in form and substance to Parent in its sole and absolute discretion.

 

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ARTICLE VI

ACCESS TO INFORMATION; CONFIDENTIALITY

Section 6.01. Agreement for Exchange of Information; Archives.

(a) Except in the case of an adversarial Action or threatened adversarial Action by either Parent or SpinCo or a Person or Persons in its Group against the other Party or a Person or Persons in its Group, and subject to Section 6.01(b), each of Parent and SpinCo, on behalf of its respective Group (in such capacity, the “Providing Party”), shall provide, or cause to be provided, to the other Party (the “Requesting Party”), at any time after the Effective Time, as soon as reasonably practicable after written request therefor, any Information (or a copy thereof) in the possession or under the control of the Providing Party or its Group Members to the extent that (i) such Information relates to the Aaron’s Business, or any SpinCo Asset (including, for the avoidance of doubt, any SpinCo Intellectual Property) or SpinCo Liability, if SpinCo is the requesting Party, or to the Progressive Leasing and Vive Business, or any Parent Assets or Parent Liability, if Parent is the requesting Party; (ii) such Information is required by the requesting Party to comply with its obligations under this Agreement or any Ancillary Agreement; or (iii) such Information is required by the requesting Party to comply with any obligation imposed by any Governmental Authority, including the Commission; provided, however, that, in the event that the Information requested by the requesting Party is not owned by the requesting Party and the Providing Party determines that any such provision of Information could be commercially detrimental, violate any Law or agreement, or, subject to the provisions of Section 6.08, waive any attorney-client privilege or attorney work product protection or other applicable privilege or immunity, such Party shall not be required to provide access to or furnish such Information to the other Party; provided, however, that both Parent and SpinCo shall take all commercially reasonable measures to permit the compliance with this Section 6.01(a) in a manner that avoids any such harm or consequence. Both Parent and SpinCo intend that any provision of access to or the furnishing of Information pursuant to this Section 6.01 that would otherwise be within the ambit of any legal privilege shall not operate as waiver of such privilege. The Providing Party shall only be obligated to provide such Information in the form, condition and format in which it then exists and in no event shall such Providing Party be required to perform any improvement, modification, conversion, updating or reformatting of any such Information, and nothing in this Section 6.01(a) shall expand the obligations of the Parties under Section 6.04.

(b) Without limiting, and subject to, the foregoing, until the first SpinCo fiscal year end occurring after the Effective Time (and for a reasonable period of time afterwards as required for each of SpinCo and Parent to prepare consolidated financial statements or complete a financial statement audit for the fiscal year during which the Distribution Date occurs), each of SpinCo and Parent shall use its commercially reasonable efforts to cooperate with the Requesting Party’s Information requests to enable (i) the Requesting Party to meet its timetable for dissemination of its earnings releases, financial statements and management’s assessment of the effectiveness of its disclosure controls and procedures and its internal control over financial reporting in accordance with Items 307 and 308, respectively, of Regulation S-K promulgated under the Exchange Act and (ii) the Requesting Party’s auditors to timely complete their annual audit and quarterly reviews of financial statements, including, to the extent applicable, such auditor’s audit of its internal control over financial reporting and management’s assessment thereof in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the Commission’s and Public Company Accounting Oversight Board’s rules and auditing standards thereunder and any applicable Laws. As part of such efforts, to the extent requested by the Requesting Party and reasonably necessary for the purposes described in clauses (i) and (ii) of the foregoing sentence, the other Party shall authorize and direct its auditors to make

 

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available to the Requesting Party’s auditors, within a reasonable time prior to the date of the Requesting Party’s auditors’ opinion or review report, both (x) the personnel who performed or will perform the annual audits and quarterly reviews of such other Party and (y) work papers related to such annual audits and quarterly reviews, to enable the Requesting Party’s auditors to perform any procedures they consider reasonably necessary to take responsibility for the work of the Requesting Party’s auditors as it relates to the Requesting Party’s auditors’ opinion or report.

(c) Parent and SpinCo each agree that it will only process personal data provided to it by the other Group in accordance with all applicable privacy and data protection Law obligations and will implement and maintain at all times appropriate technical and organizational measures to protect such personal data against unauthorized or unlawful processing and accidental loss, destruction, damage, alteration and disclosure. In addition, each Party agrees to provide reasonable assistance to the other Party in respect of any obligations under privacy and data protection legislation affecting the disclosure of such personal data to the other Party and will not knowingly process such personal data in such a way to cause the other Party to violate any of its obligations under any applicable privacy and data protection legislation.

(d) To the extent any books or records are subject to restrictions or limitations set forth in the EMA, such restrictions and limitations shall apply to such books or records, notwithstanding any provisions of this Agreement.

(e) Notwithstanding anything in the foregoing, the Parties’ obligations to provide Information and cooperation with respect to Taxes shall be governed by the TMA, and not by this Section 6.01.

Section 6.02. Ownership of Information. The provision of any Information pursuant to Section 6.01 shall not affect the ownership of Information (which shall be determined solely in accordance with the terms of this Agreement and the Ancillary Agreements), or constitute the grant or conference of rights of license or otherwise in or to any such Information.

Section 6.03. Compensation for Providing Information. The Requesting Party agrees to reimburse the Providing Party for the reasonable costs, if any, of creating, gathering, copying, transporting and otherwise complying with the request with respect to such Information (including any reasonable costs and expenses incurred in any review of Information for purposes of protecting the Privileged Information of the Providing Party or in connection with the restoration of backup media for purposes of providing the requested Information). Except as may be otherwise specifically provided elsewhere in this Agreement or in any Ancillary Agreement, such costs shall be computed in accordance with the Providing Party’s standard methodology and procedures and if there is no such standard methodology and procedures, then on a commercially reasonable basis.

Section 6.04. Record Retention.

(a) Except as otherwise required by Law or agreed in writing, or as otherwise provided in any Ancillary Agreement, each Parent Group Member and each SpinCo Group Member shall use its commercially reasonable efforts to retain, for the retention periods set forth in Parent’s record retention policies and procedures as in effect as of the Effective Time, such other commercially reasonable policies and procedures as may be in adopted by the applicable Group after the Effective Time as provided herein, or such longer period as required by Law, this Agreement or the Ancillary Agreements, all Information in such Group Member’s possession substantially relating to the other Group or its businesses, its former businesses, its Assets or Liabilities, this Agreement or the Ancillary Agreements (the “Retained Information”). Each Parent Group Member or SpinCo Group Member may amend its record retention policy after the Effective Time so long as (i) the amended policy complies with applicable Law, (ii) the amended policy treats the Retained Information in the same manner as such Group Member’s other

 

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Information and (iii) the amended policy does not allow for the destruction of any Retained Information prior to the earliest date after the Effective Time on which such member would have been able to destroy such Retained Information under the applicable Parent Group policy in effect as of the Effective Time. If any member of either Group amends its record retention policy in compliance with the preceding sentence in a manner that reduces the retention period for any Retained Information, it shall provide SpinCo, in the case of any such amendment by a Parent Group Member, or Parent, in the case of any such amendment by a SpinCo Group Member, written notice detailing the changes to the record retention policy, and the Party receiving such notice and its Group Members shall have the opportunity to obtain any Retained Information that would be eligible for destruction under the revised policy at least ninety (90) days prior to the destruction of such Retained Information. Notwithstanding the foregoing, the TMA will govern the retention of Tax related records and the exchange of Tax related information, and the EMA will govern the retention of employment and benefits related records.

(b) Without limiting the foregoing:

(i) The Parties agree and acknowledge that it is not practicable to separate all Tangible Information belonging to the Parties, and that following the Effective Time, each Party will have some of the Tangible Information of the other Party stored at internal or Third Party records storage locations (each, a “Records Facility”). Tangible Information held in a Records Facility maintained or arranged for by the Party other than the Party that owns such Tangible Information is referred to as “Stored Records”. The Party that maintains the Records Facility where Stored Records are held is referred to as the “Custodial Party” and the Party that owns the Stored Records held in the other Party’s Records Facility is referred to as the “Non-Custodial Party”.

(ii) Each Party shall use commercially reasonable efforts: (A) to maintain the Stored Records as to which it is the Custodial Party in accordance with its regular records retention policies and procedures and the terms of this Section 6.04; and (B) to comply with the requirements of any litigation hold that relates to Stored Records as to which it is the Custodial Party that relate to (x) any Action that is pending as of the Effective Time; or (y) any Action that arises or becomes threatened or reasonably anticipated after the Effective Time as to which the Custodial Party has received a notice of the applicable litigation hold from the Non-Custodial Party.

Section 6.05. Financial Information Certifications.

(a) In order to enable the principal executive officer(s), principal financial officer(s) and principal accounting officer(s) (as such terms are defined in the rules and regulations of the Commission) of Parent to make any certifications required of them under Section 302 or 906 of the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations thereunder, SpinCo shall, within a reasonable period of time following a request from Parent in anticipation of filing such reports, provide Parent with certifications in support of the certifications of Parent’s principal executive officer(s), principal financial officer(s) and principal accounting officer(s) required under Section 302 or 906 of the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations thereunder with respect to Parent’s Quarterly Report on Form 10-Q filed with respect to the fiscal quarter during which the Distribution Date occurs (unless such quarter is the fourth fiscal quarter), each subsequent fiscal quarter through the third fiscal quarter of the year in which the Distribution Date occurs and Parent’s Annual Report on Form 10-K filed with respect to the fiscal year during which the Distribution Date occurs. Such certifications shall be provided in substantially the same form and manner as Parent officers and other key executives provided to the principal executive officer(s), principal financial officer(s) and principal accounting officer(s) of Parent prior to the Effective Time (reflecting any changes in certifications necessitated by the Spin-Off or any other transactions related thereto) or as otherwise agreed upon between Parent and SpinCo.

 

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(b) In order to enable the principal executive officer(s), principal financial officer(s) and principal accounting officer(s) (as such terms are defined in the rules and regulations of the Commission) of SpinCo to make any certifications required of them under Section 302 or 906 of the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations thereunder, Parent shall, within a reasonable period of time following a request from SpinCo in anticipation of filing such reports, provide SpinCo with certifications in support of the certifications of SpinCo’s principal executive officer(s), principal financial officer(s) and principal accounting officer(s) required under Section 302 or 906 of the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations thereunder with respect to SpinCo’s Quarterly Report on Form 10-Q filed with respect to the fiscal quarter during which the Distribution Date occurs (unless such quarter is the fourth fiscal quarter), each subsequent fiscal quarter through the third fiscal quarter of the year in which the Distribution Date occurs and SpinCo’s Annual Report on Form 10-K filed with respect to the fiscal year during which the Distribution Date occurs. Such certifications shall be provided in substantially the same form and manner as Parent officers and other key executives provided to the principal executive officer(s), principal financial officer(s) and principal accounting officer(s) of Parent prior to the Effective Time (reflecting any changes in certifications necessitated by the Spin-Off or any other transactions related thereto) or as otherwise agreed upon between Parent and SpinCo.

Section 6.06. Limitations of Liability.

(a) Each of Parent (on behalf of itself and each other member of the Parent Group) and SpinCo (on behalf of itself and each other member of the SpinCo Group) understands and agrees that neither Party is representing or warranting in any way as to the accuracy or sufficiency of any Information exchanged or disclosed under this Agreement.

(b) Neither Parent nor SpinCo shall have any Liability to the other Party in the event that any Information exchanged or provided pursuant to this Agreement that is an estimate or forecast, or that is based on an estimate or forecast, is found to be inaccurate in the absence of willful misconduct by the providing Person. Neither Parent nor SpinCo shall have any Liability to the other Party if any Information is destroyed after commercially reasonable efforts by SpinCo or Parent, as applicable, to comply with the provisions of Section 6.04.

Section 6.07. Litigation Matters; Production of Witnesses; Records; Cooperation.

(a) From and after the Effective Time, SpinCo (or an applicable member of the SpinCo Group) shall assume and, except as provided in ARTICLE V, be responsible for managing, and shall have the authority to manage, the defense or prosecution, as applicable, and resolution (including settlement) of, any SpinCo Action. From and after the Effective Time, Parent (or an applicable member of the Parent Group) shall assume and, except as provided in ARTICLE V, be responsible for managing, and shall have the authority to manage, the defense or prosecution, as applicable, and resolution (including settlement) of, any Parent Action. For the avoidance of doubt and notwithstanding anything to contrary in this Section 6.07(a) or Section 6.07(d), from and after the Effective Time, any Shared Actions and any Actions set forth on Schedule V or Schedule VI shall be managed (including settlement) in accordance with and subject to Section 8.06.

(b) At all times after the Effective Time, but only with respect to a Third-Party Claim (and to avoid doubt, not in the case of an adversarial Action by one Party or its Group Members against the other Party or its Group Members), each of Parent and SpinCo shall, and shall cause the other members of its Group to, use commercially reasonable efforts to make available, upon written request, the former, current and future directors, officers, employees, other personnel and agents of its Group Members (whether as witnesses or otherwise) and any books, records or other documents within its control or that it otherwise has the ability to make available, to the extent that such Person (giving consideration to business demands

 

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of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with any Action or threatened or contemplated Action (including preparation for such Action) in which Parent or SpinCo, as applicable, may from time to time be involved, regardless of whether such Action is a matter with respect to which indemnification may be sought hereunder. The requesting Party shall bear all reasonable out-of-pocket costs and expenses in connection therewith.

(c) Without limiting the foregoing, the Parties shall use their commercially reasonable efforts to cooperate and consult to the extent reasonably necessary with respect to any Actions or threatened or contemplated Actions against each other’s Group in respect of which both Parties (or their respective Group Members) may have Liabilities or may possess relevant Information, other than an Action by one or more Group Members against one or more Group Members of the other Group.

(d) Upon the reasonable request of Parent or SpinCo, in connection with any Action as to which cooperation contemplated by this ARTICLE VI is requested or provided, Parent and SpinCo will enter into a mutually acceptable common interest agreement so as to maintain, to the extent appropriate and practicable, any applicable attorney-client privilege or work product immunity, or other privilege, immunity or protection of any member of either Group.

Section 6.08. Privileged Matters. The Parties recognize that legal and other professional services that have been and will be provided prior to the Effective Time have been rendered for the collective benefit of each of the Parent Group and each of their respective members and the SpinCo Group and each of their respective members, and that each of the Group Members shall be deemed to be the client with respect to such services. To allocate the interests of each Party in the Privileged Information or any other Information (including, for the avoidance of doubt, any Information about Patents, Trademarks, or Other Intellectual Property) in connection with legal or other professional services that have been provided prior to the Effective Time for the collective benefit of each of the Parties and their respective Group Members, whether or not such a privilege, immunity or protection exists or the existence of which is in dispute (collectively, “Common Privileges”), the Parties hereto agree as follows:

(a) Parent shall be entitled, in perpetuity, to control the assertion or waiver of all privileges, immunities and protections in connection with Privileged Information which relates to activity prior to the Effective Time regarding the Progressive Leasing and Vive Business and, subject to Section 6.08(c), not to the Aaron’s Business, whether or not the Privileged Information is in the possession of or under the control of any Parent Group Member or any SpinCo Group Member. Parent also shall be entitled, in perpetuity, to control the assertion or waiver of all privileges, immunities and protections in connection with Privileged Information which relates to activity prior to the Effective Time regarding any pending or future Action that is, or which Parent reasonably anticipates may become, a Parent Liability and that is not also, or that Parent reasonably anticipates will not become, a SpinCo Liability or a Shared Action Liability, whether or not the Privileged Information is in the possession of or under the control of any Parent Group Member or any SpinCo Group Member.

(b) Subject to Section 6.08(c), SpinCo shall be entitled, in perpetuity, to control the assertion or waiver of all privileges, immunities and protections in connection with Privileged Information which relates to activity prior to the Effective Time regarding the Aaron’s Business and not to the Progressive Leasing and Vive Business, whether or not the Privileged Information is in the possession of or under the control of any Parent Group Member or any SpinCo Group Member. SpinCo also shall be entitled, in perpetuity, to control the assertion or waiver of all privileges, immunities and protections in connection with Privileged Information which relates to activity prior to the Effective Time regarding any pending or future Action that is, or which SpinCo reasonably anticipates may become, a SpinCo Liability and that is not also, or that SpinCo reasonably anticipates will not become, a Parent Liability or a Shared Action Liability, whether or not the Privileged Information is in the possession of or under the control of any Parent Group Member or any SpinCo Group Member.

 

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(c) If the Parties do not agree as to whether certain Information is Privileged Information, then such Information shall be treated as Privileged Information, and the Party that believes that such information is Privileged Information shall be entitled to control the assertion or waiver of all privileges, immunities and protections in connection with any such Information unless the Parties otherwise agree or until a court orders otherwise. The Parties shall use the procedures set forth in ARTICLE IX to resolve any disputes as to whether any information relates to any pending or future Action that is, or is reasonably anticipated to become, a SpinCo Liability or a Parent Liability.

(d) Subject to the restrictions in this Section 6.08, the Parties agree that they shall have equal right to assert all Common Privileges not allocated pursuant to the terms of Section 6.08(a), Section 6.08(b), or Section 6.08(c) (collectively, “Shared Privileges”), and all privileges, immunities and protections relating to any Actions or other matters that involve both Parties (or one or more of their respective Group Members) and in respect of which both Parties have Liabilities under this Agreement (including any Shared Action Liability), and that no such Shared Privilege may be waived by either Party (or any of its Group Members) without the consent of the other Party. Consent shall be in writing, or shall be deemed to be granted unless written objection is made within twenty (20) days after notice upon the other Party requesting such consent.

(e) If a dispute arises between any Parent Group Member, on the one hand, and any SpinCo Group Member, on the other hand, regarding whether a Shared Privilege should be waived to protect or advance the interests of either Party and/or their respective Group Members, each Party agrees that it shall (i) negotiate with the other Party in good faith; (ii) endeavor to minimize any prejudice to the rights of the other Party; and (iii) not unreasonably withhold consent to any request for waiver by the other Party. In the event of any Action or other dispute between or among any of the Parties, or any of their respective Group Members, either such Party may use any Privileged Information in which the other Party or its Group Members has a Shared Privilege, without obtaining the consent of the other Party; provided, that such use shall be limited to the Action or other dispute between the relevant Parties and/or the applicable Group Members, respectively, and shall not operate as or be used by either Party as a basis for asserting a waiver of the Shared Privilege with respect to Third Parties; and provided, further, that the Parties shall, and shall cause their applicable Group Members to, use reasonable efforts to maintain any such Shared Privilege with respect to Third Parties.

(f) Upon receipt by either Party hereto or by any Group Member of its Group of any subpoena, discovery or other request which arguably calls for the production or disclosure of Privileged Information or other Information subject to a Shared Privilege or as to which the other Party or a member of such other Party’s Group has the sole right hereunder to assert a privilege, immunity or protection, or if either Party obtains knowledge that any of its Group’s current or former directors, officers, agents or employees have received any subpoena, discovery or other requests which arguably call for the production or disclosure of such Privileged Information, such Party shall promptly notify the other Party of the existence of the request (which notice shall be in writing and delivered no later than seven (7) Business Days following the receipt of any such subpoena, discovery or other request) and shall provide the other Party a reasonable opportunity to review the Privileged Information or other Information and to assert any rights it or any Group Member of its Group may have under this Section 6.08 or otherwise to prevent the production or disclosure of such Privileged Information. Each Party shall bear its own expenses in connection with any such request.

(g) Any furnishing of, or access to, Information pursuant to this Agreement is made in reliance on the agreement of Parent and SpinCo, as set forth in this ARTICLE VI to maintain the confidentiality of the Privileged Information and to assert and maintain all applicable privileges, immunities and protections. The access to Privileged Information or other Information being granted and the agreement to provide

 

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witnesses herein, the furnishing of notices and documents and other cooperative efforts provided hereby, and the transfer of Privileged Information between and among the Parties hereto and of their respective Group Members pursuant hereto shall not be deemed a waiver of any privilege, immunity or protection that has been or may be asserted under this Agreement or otherwise. The Parties further agree that (i) the exchange by one Party to the other Party of any Privileged Information that should not have been transferred pursuant to the terms of this ARTICLE VI shall not be deemed to constitute a waiver of any privilege, immunity or protection that has been or may be asserted under this Agreement or otherwise with respect to such Privileged Information; and (ii) the Party receiving such Privileged Information shall promptly return such Privileged Information to the Party who has the right to assert the privilege, immunity or protection.

(h) In furtherance of, and without limitation to, the Parties’ agreement under this Section 6.08, Parent and SpinCo shall, and shall cause their applicable Group Members to, use reasonable efforts to maintain their respective separate and joint privileges, immunities and/or protections, including by executing joint defense and/or common interest agreements where necessary or useful for this purpose.

Section 6.09. Confidential Information.

(a) Subject to Section 6.09(e) and except as otherwise provided in this Agreement or any Ancillary Agreement, Parent, on behalf of itself and each of the Parent Group Members, and SpinCo, on behalf of itself and each of the SpinCo Group Members, agrees to hold, and to cause its respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives (each, a “Representative”) to hold, in strict confidence, with at least the same degree of care that applies to Parent’s confidential and proprietary information pursuant to policies in effect as of the Effective Time, all business, operations or other information, data or material (in each case whether in written, oral, electronic or other tangible or intangible form) concerning or belonging to the other Party (or its Assets, Liabilities or business) or the other Party’s Group Members (or their respective Assets, Liabilities or businesses) that is either in its possession (including such information in its possession prior to the Effective Time) or furnished by the other Party or the other Party’s Group Members or their respective Representatives at any time pursuant to this Agreement or any Ancillary Agreement (except, in each case, to the extent that such information, data or material has been: (i) in the public domain or generally available to the public, other than as a result of a disclosure by such Party or any of its Group Members or any of their respective Representatives in violation of this Agreement; (ii) later lawfully acquired from other sources by such Party or any of its Group Members, which sources are not themselves bound by a confidentiality obligation or other contractual, legal or fiduciary obligation of confidentiality with respect to such information, data or material; or (iii) independently developed or generated without reference to or use of such information, data or material of the other Party or any of its Group Members) (collectively, “Confidential Information”), and shall not use any such Confidential Information other than for such purposes as may be expressly permitted hereunder or thereunder. If any Confidential Information of one Party or any of its Group Members is disclosed to another Party or any of its Group Members in connection with providing services to such first Party or any of its Group Members under this Agreement or any Ancillary Agreement, then such disclosed Confidential Information shall be used only as required to perform such services.

(b) Each Party agrees not to release or disclose, or permit to be released or disclosed, any Confidential Information to any other Person, except its Representatives who need to know such information in their capacities as such (and who will be advised of their obligations hereunder with respect to such information), and except in compliance with Section 6.09(e).

(c) Without limiting the provision of Section 6.01(c), each Party acknowledges that it and its respective Group Members may presently have and, following the Effective Time, may gain access to or possession of confidential or proprietary information of, or personal information relating to, Third Parties (i) that was received under confidentiality or non-disclosure agreements entered into between such Third

 

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Parties, on the one hand, and the other Party or the other Party’s Group Members, on the other hand, prior to the Effective Time; or (ii) that, as between the Parties, was originally collected by the other Party or the other Party’s Group Members and that may be subject to and protected by privacy, data protection or other applicable Laws. As may be provided in more detail in an applicable Ancillary Agreement, each Party agrees that it shall hold, protect and use, and shall cause its Group Members and its and their respective Representatives to hold, protect and use, in strict confidence the confidential and proprietary information of, or personal information relating to, Third Parties in accordance with privacy, data protection or other applicable Laws and the terms of any agreements that were either entered into before the Effective Time or affirmative commitments or representations that were made before the Effective Time by, between or among the other Party or the other Party’s Group Members, on the one hand, and such Third Parties, on the other hand.

(d) Notwithstanding the limitations set forth in this Section 6.09, with respect to financial and other information related to the SpinCo Group Members for the periods during which such SpinCo Group Members were Subsidiaries of Parent, Parent shall be permitted to disclose such information in its earnings releases, investor calls, rating agency presentations and other similar disclosures to the extent such information has customarily been included by Parent in such disclosures and in its reports, statements or other documents filed or furnished with the Commission in accordance with applicable Law, rules or regulations.

(e) In the event that either Party or any of its Group Members is requested or required (by oral question, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) by any Governmental Authority or pursuant to applicable Law to disclose or provide any Confidential Information of the other Party or its Group Members, such Party shall, unless prohibited by such request or requirement of the applicable Governmental Authority or under applicable Law, provide the other Party with written notice of such request or demand as promptly as practicable under the circumstances so that such other Party shall have an opportunity to seek an appropriate protective order, and shall reasonably cooperate with such other Party in connection therewith, at such other Party’s own cost and expense. In the event that such other Party fails to receive such appropriate protective order in a timely manner and the Party receiving the request or demand reasonably determines that its failure to disclose or provide such Confidential Information shall actually prejudice the Party receiving the request or demand, then the Party that received such request or demand may thereafter disclose or provide Confidential Information to the extent required by such Law (as so advised by counsel) or by lawful process or such Governmental Authority and shall use reasonable best efforts to ensure that confidential treatment is accorded such Confidential Information.

ARTICLE VII

CERTAIN INTELLECTUAL PROPERTY MATTERS

Section 7.01. Legal Names and Other Parties Trademarks.

(a) Except as otherwise specifically provided in any Ancillary Agreement or in this ARTICLE VII, promptly after the Effective Time, each Party shall cease (and shall cause all of its respective Group Members to cease): (i) making any use of any names or Trademarks that include (A) any of the Trademarks of the other Party or such other Party’s Affiliates and (B) any names or Trademarks confusingly similar thereto or dilutive thereof, with respect to each Party, of the other Party or any of such other Party’s Affiliates ((A) and (B) collectively, in respect of each Party in reference to the other Party or such other Party’s Affiliates, the “Other Party Marks”), and (ii) holding themselves out as having any affiliation with the other Party or such other Party’s Affiliates; provided, however, that the foregoing shall not prohibit any Party or any Group Member thereof from (1) in the case of any SpinCo Group Member, making factual and

 

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accurate reference in a non-prominent manner that it was formerly affiliated with Parent or in the case of any Parent Group Member, making factual and accurate reference in a non-prominent manner that it was formerly affiliated with SpinCo, (2) making use of any Other Party Mark in a manner that would constitute “fair use” under applicable Law if any unaffiliated Third Party made such use or would otherwise be legally permissible for any unaffiliated Third Party without the consent of the Party owning such Other Party Mark, (3) in connection with publicly displaying materials in existence as of the Effective Time that are owned by a Party or any Group Member thereof immediately after the Effective Time, but that bear any Other Party Marks, for archival purposes or historical purposes (such as in a museum or museum-like display), and (4) making references in internal historical, corporate and tax records.

(b) Notwithstanding the foregoing requirements of Section 7.01(a), no Group Member shall be required to change any name including the words “Aaron’s” in any Third Party contract or license, or in property records with respect to real or personal property; provided, however, that on a prospective basis from and after the Effective Time each Group Member shall change the name in any new or amended Third Party contract or license or property record.

Section 7.02. Domain Names.

(a) At the expense of SpinCo, each of Parent and SpinCo will use commercially reasonable efforts to ensure the Domain Names in Section 7.02(a) of the Disclosure Schedules are: (i) listed with SpinCo or, on behalf of SpinCo, appropriate local counsel or other designated agent of SpinCo as the owner/registrant; (ii) managed by SpinCo in a SpinCo-controlled registrar account; and (iii) placed on SpinCo domain name servers, in each case within twelve (12) months following the Effective Time.

(b) At the expense of Parent, each of SpinCo and Parent will use commercially reasonable efforts to ensure the Domain Names in Section 7.02(b) of the Disclosure Schedules are: (i) listed with Parent or, on behalf of Parent, appropriate local counsel or other designated agent of Parent as the owner/registrant; (ii) managed by Parent in a Parent-controlled registrar account; and (iii) placed on Parent domain name servers, in each case within twelve (12) months following the Effective Time.

Section 7.03. Licenses to Information and Other Intellectual Property.

(a) Statement of Intent. It is the intent of the Parties, in granting licenses to portions of their respective Information and Other Intellectual Property, to allow: (i) Parent to continue to use Information and Other Intellectual Property that was used by Parent in the conduct of the Progressive Leasing and Vive Business as conducted as of the Effective Time but is owned by SpinCo immediately after the Effective Time, and to continue to conduct the Progressive Leasing and Vive Business as conducted prior to the Effective Time and (ii) SpinCo to use Information and Other Intellectual Property that was used by Parent in the conduct of the Aaron’s Business as conducted as of the Effective Time and is owned by Parent immediately after the Effective Time, and to conduct the Aaron’s Business as conducted by Parent prior to the Effective Time. Each Party agrees, for itself and its respective Group Members, that it will exercise the rights licensed to it under this Section 7.03 in a manner that complies with all applicable Laws.

(b) Licensed SpinCo Information and Licensed SpinCo Other IP.

(i) Subject to the terms and conditions of this Section 7.03(b) and any other applicable provisions of this Agreement, SpinCo grants to Parent (for itself and the beneficial use of the Parent Group Members), and Parent accepts from SpinCo, a non-exclusive, non-transferable (except as expressly provided herein), revocable (only to the extent set forth in Section 7.03(b)(ii)), royalty-free, fully paid-up, worldwide license (without the right to sublicense except as expressly provided below) to use, make, have made, sell, offer for sell, have sold, import, reproduce, copy, distribute, perform, display, modify, duplicate,

 

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and create derivative works and improvements of the Licensed SpinCo Information and Licensed SpinCo Other IP, only on and in connection with the conduct of the Progressive Leasing and Vive Business as conducted as of the Effective Time (the “Parent Licensed Purposes”). If any Licensed SpinCo Information or Licensed SpinCo Other IP is, or to the extent that it includes, SpinCo’s Confidential Information, Parent shall comply with the provisions of this Agreement applicable to its use and disclosure of SpinCo’s Confidential Information. Parent may sublicense the rights licensed to Parent under this Section 7.03(b) to Parent’s contractors only for purposes of providing services to Parent and only for the Parent Licensed Purposes; provided, however, that prior to sublicensing any rights in any Information or Other Intellectual Property that is, or to the extent that it includes, SpinCo’s Confidential Information, Parent shall first require the contractor to execute a binding written agreement pursuant to which such contractor agrees to be bound by provisions directed to the use and disclosure of such Confidential Information that are consistent with Parent’s obligations with respect to such Confidential Information as provided in this Agreement.

(ii) Parent’s license to the Licensed SpinCo Information and the Licensed SpinCo Other IP shall terminate thirty (30) days after its receipt of SpinCo’s written notice of Parent’s breach of any material term of this Agreement applicable to the Licensed SpinCo Information and the Licensed SpinCo Other IP, unless Parent cures such breach and notifies SpinCo in writing of such cure during such thirty (30) day period. In the event of such termination, Parent shall (A) cease any and all use of the Licensed SpinCo Information and the Licensed SpinCo Other IP, and Parent shall have no further right to use the Licensed SpinCo Information and the Licensed SpinCo Other IP anywhere, in any way, or for any purpose, whatsoever, and (B) return, or at SpinCo’s direction, destroy all copies of Licensed SpinCo Information and the Licensed SpinCo Other IP. Unless and until SpinCo terminates Parent’s license to the Licensed SpinCo Information and the Licensed SpinCo Other IP in accordance with this Section 7.03(b)(ii), such license shall be perpetual.

(iii) As between the parties, Parent shall own all derivative works of the Licensed SpinCo Information or Licensed SpinCo Other IP, including all intellectual property rights thereto, created by or on behalf of Parent or any Parent Group Member (“Parent Derivative Works”); provided, however, that to the extent Parent’s or a Parent Group Member’s use of the Parent Derivative Works would infringe, misappropriate, or otherwise violate SpinCo’s copyright or Other Intellectual Property rights in and to the Licensed SpinCo Information or Licensed SpinCo Other IP, (A) Parent (on behalf of itself and the Parent Group Members) may use such Parent Derivative Works only in connection with the Parent Licensed Purposes and only as set forth in this Agreement, and (B) Parent’s right (on behalf of itself and the Parent Group Members) to use and employ such Parent Derivative Works shall terminate upon any termination of the license granted pursuant to this Section 7.03(b).

(c) Licensed Parent Information and Licensed Parent Other IP.

(i) Subject to the terms and conditions of this Section 7.03(c) and any other applicable provisions of this Agreement, Parent hereby grants to SpinCo (for itself and the beneficial use of the SpinCo Group Members), and SpinCo accepts from Parent, a non-exclusive, non-transferable (except as expressly provided herein), revocable (only to the extent set forth in Section 7.03(c)(ii)), royalty-free, fully paid-up, worldwide license (without the right to sublicense except as expressly provided herein) to use, make, have made, sell, offer for sell, have sold, import, reproduce, copy, distribute, perform, display, modify, duplicate, and create derivative works and improvements of the Licensed Parent Information and Licensed Parent Other IP, only on and in connection with the conduct of the Aaron’s Business as conducted as of the Effective Time (the “SpinCo Licensed Purposes”) and only in accordance with this Agreement. If any Licensed Parent Information or Licensed Parent Other IP is, or to the extent that it includes Parent’s Confidential Information, SpinCo shall comply with the provisions of this Agreement applicable to its use and disclosure of Parent’s Confidential Information. SpinCo may sublicense the rights licensed to SpinCo under this Section 7.03(c) to SpinCo’s contractors only for purposes of providing services to SpinCo and

 

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only for the SpinCo Licensed Purposes; provided, however, that prior to sublicensing any rights in any Information or Other Intellectual Property that is or includes Parent’s Confidential Information, SpinCo shall first require the contractor to execute a binding written agreement pursuant to which such contractor agrees to be bound by provisions directed to the use and disclosure of such Confidential Information that are consistent with SpinCo’s obligations with respect to such Confidential Information as provided in this Agreement.

(ii) SpinCo’s license to the Licensed Parent Information and the Licensed Parent Other IP shall terminate thirty (30) days after its receipt of Parent’s written notice of SpinCo’s breach of any material term of this Agreement applicable to the Licensed Parent Information and the Licensed Parent Other IP, unless SpinCo cures such breach and notifies Parent in writing of such cure during such thirty (30) day period. In the event of such termination, SpinCo shall (A) cease any and all use of the Licensed Parent Information and the Licensed Parent Other IP, and SpinCo shall have no further right to use the Licensed Parent Information and the Licensed Parent Other IP anywhere, in any way, or for any purpose, whatsoever, and (B) return, or at Parent’s direction, destroy all copies of Licensed Parent Information and the Licensed Parent Other IP. Unless and until Parent terminates SpinCo’s license to the Licensed Parent Information and the Licensed Parent Other IP in accordance with this Section 7.03(c)(ii), such license shall be perpetual.

(iii) As between the parties, SpinCo shall own all derivative works of the Licensed Parent Information or Licensed Parent Other IP, including all intellectual property rights thereto, created by or on behalf of SpinCo or any SpinCo Group Member (“SpinCo Derivative Works”); provided, however, that to the extent SpinCo’s or a SpinCo Group Member’s use of the SpinCo Derivative Works would infringe, misappropriate, or otherwise violate Parent’s copyright or Other Intellectual Property rights in and to the Licensed Parent Information or Licensed Parent Other IP, (A) SpinCo (on behalf of itself and the SpinCo Group Members) may use such Spinco Derivative Works only in connection with the SpinCo Licensed Purposes and only as set forth in this Agreement, and (B) SpinCo’s right (on behalf of itself and the SpinCo Group Members) to use and employ such SpinCo Derivative Works shall terminate upon any termination of the license granted pursuant to this Section 7.03(c).

(d) Use by Subsidiaries.

(i) Any Subsidiary of Parent shall have the same right to use and exploit the Licensed SpinCo Information and the Licensed SpinCo Other IP as Parent. Any Subsidiary of SpinCo shall have the same right to exploit the Licensed Parent Information and the Licensed Parent Other IP as SpinCo. Each Subsidiary that exercises such right shall be bound by, and shall comply with all of the terms and conditions of, this Agreement as though it were “Parent” or “SpinCo,” as applicable, hereunder, but Parent or SpinCo, as applicable, shall at all times remain responsible for all use or other exploitation of the Licensed SpinCo Information, Licensed SpinCo Other IP, Licensed Parent Information, or Licensed Parent Other IP, as applicable, under this Agreement by such Subsidiary.

(ii) If at any time a prior Subsidiary of Parent no longer meets the definition of a Subsidiary of Parent or should cease to exist, such prior Subsidiary shall cease to have the right to use or exploit such Licensed SpinCo Information and Licensed SpinCo Other IP. If at any time a prior Subsidiary of SpinCo no longer meets the definition of a Subsidiary of SpinCo or should cease to exist, such prior Subsidiary shall cease to have the right to exploit such Licensed Parent Information and Licensed Parent Other IP.

 

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ARTICLE VIII

FURTHER ASSURANCES AND ADDITIONAL COVENANTS

Section 8.01. Further Assurances.

(a) Subject to Section 3.03 and ARTICLE IX, in addition to the actions specifically provided for elsewhere in this Agreement, each of the Parties shall, and shall cause each of its respective Group Members to, use commercially reasonable efforts, prior to and after the Effective Time, to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable Laws and agreements to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Agreements and to permit the operations of the Progressive Leasing and Vive Business and the Aaron’s Business after the Effective Time; provided, however, that neither Parent nor SpinCo (nor any of their respective Group Members) shall be obligated under this Section 8.01 to pay any consideration, grant any concession or incur any additional Liability to any Third Party other than ordinary and customary fees paid to a Governmental Authority.

(b) Without limiting the foregoing, prior to and after the Effective Time, each Party shall, and shall cause its Group Members to, cooperate with the other Party, without any further consideration, but at the expense of the requesting Party, (i) to execute and deliver, or use commercially reasonable efforts to execute and deliver, or cause to be executed and delivered, all instruments, including any instruments of conveyance, assignment and transfer as such Party may reasonably be requested to execute and deliver by the other Party, (ii) to make, or cause to be made, all filings with, and to obtain, or cause to be obtained, all Consents of any Governmental Authority or any other Person under any permit, license, agreement, indenture or other instrument, to obtain, or cause to be obtained, any Governmental Approvals or other Consents required to effect the Spin-Off, (iii) to make, or cause to be made, all filings with a Governmental Authority necessary to ensure the assignment, transfer or other modification of Governmental Approvals as may be required pursuant to any Environmental Law and (iv) to take, or cause to be taken, all such other actions as such Party may reasonably be requested to take by the other Party from time to time, in each case consistent with the terms of this Agreement and the Ancillary Agreements, in order to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements and the transfers of the Parent Assets and the SpinCo Assets and assignments and assumptions of Parent Liabilities and the SpinCo Liabilities as provided by this Agreement and the other transactions contemplated hereby.

(c) With respect to a particular Asset that (i) if primarily used or held for use in the Aaron’s Business would be a SpinCo Asset and, if not so primarily used or held for use, would be a Parent Asset or (ii) if primarily used or held for use in the Progressive Leasing and Vive Business would be a Parent Asset and, if not so primarily used or held for use, would be a SpinCo Asset, each Party shall, and shall cause its Group Members to, reasonably cooperate with the other Party, without any further consideration, but at the expense of the requesting Party, in an investigation or analysis to determine whether such Asset is a SpinCo Asset or a Parent Asset and, if such determination is made to the reasonable satisfaction of both Parties, confirm in writing the status of such Asset. Each Party hereto shall cooperate with the other Party and use its commercially reasonable efforts to set up procedures and notifications as are reasonably necessary or advisable to effectuate the determination process provided by this Section 8.01(c).

Section 8.02. Late Payments. Except as provided in any Ancillary Agreement, any amount not paid by Group Member to another Group Member when due pursuant to this Agreement or any Ancillary Agreement (and any amounts billed or otherwise invoiced or demanded and properly payable that are not paid within sixty (60) days of the date of such bill, invoice or other demand) shall accrue interest at a rate per annum equal to the Prime Rate plus 2%.

 

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Section 8.03. Inducement. SpinCo acknowledges and agrees that Parent’s willingness to cause, effect and consummate the Separation and the Distribution has been conditioned upon and induced by SpinCo’s covenants and agreements in this Agreement and the Ancillary Agreements, including SpinCo’s assumption of the SpinCo Liabilities pursuant to the Separation and the provisions of this Agreement and SpinCo’s covenants and agreements contained in ARTICLE V.

Section 8.04. Post-Effective Time Conduct. The Parties acknowledge that, after the Effective Time, each Party shall be independent of the other Party, with responsibility for its own actions and inactions and its own Liabilities relating to, arising out of or resulting from the conduct of its business, operations and activities following the Effective Time, except as may otherwise be provided in any Ancillary Agreement, and each Party shall (except as otherwise provided in ARTICLE V, including Section 5.02 and Section 5.03) use commercially reasonable efforts to prevent such Liabilities from being inappropriately borne by the other Party.

Section 8.05. Receipt of Misdirected Assets; Consumer Inquiries.

(a) Except to the extent otherwise provided in connection with Section 2.02, in the event that at any time and from time to time after the Effective Time, Parent or a Parent Group Member shall receive from a Third Party an Asset of the SpinCo Group (including any remittances from account debtors in respect of the SpinCo Group), Parent shall promptly transfer, or cause its Group Member to promptly transfer, such Asset to the appropriate SpinCo Group Member and such SpinCo Group Member shall accept such transfer.

(b) Except to the extent otherwise provided in connection with Section 2.02, in the event that at any time and from time to time after the Effective Time, SpinCo or a SpinCo Group Member shall receive from a Third Party an Asset of the Parent Group (including any remittances from account debtors in respect of the Parent Group), SpinCo shall promptly transfer, or cause its Group Member to promptly transfer, such Asset to the appropriate Parent Group Member and such Parent Group Member shall accept such transfer.

(c) In the event that at any time and from time to time after the Effective Time, Parent or any Parent Group Members shall receive any consumer or Governmental Authority inquiry or complaint relating to any product leased or sold in connection with the Aaron’s Business prior to the Effective Time, Parent shall, or shall cause its Group Member to, promptly forward such consumer or Governmental Authority inquiry or complaint to the appropriate SpinCo Group Member for handling.

(d) In the event that at any time and from time to time after the Effective Time, SpinCo or any SpinCo Group Members shall receive any consumer or Governmental Authority inquiry or complaint relating to any product leased or sold in connection with the Progressive Leasing and Vive Business prior to the Effective Time, Parent shall, or shall cause its Group Member to, promptly forward such consumer or Governmental Authority inquiry or complaint to the appropriate Parent Group Member for handling.

(e) Each Party hereto shall cooperate with the other Party and use its commercially reasonable efforts to set up procedures and notifications as are reasonably necessary or advisable to effectuate the transfers and communications contemplated by this Section 8.05.

ARTICLE IX

DISPUTE RESOLUTION

Section 9.01. Disputes. Except as otherwise specifically provided in any Ancillary Agreement, the procedures for discussion, negotiation and arbitration set forth in this ARTICLE IX shall apply to all disputes, controversies or claims (whether arising in contract, tort or otherwise) that may arise out of, relate

 

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to, arise under or in connection with, this Agreement or any Ancillary Agreement, or the transactions contemplated hereby or thereby (including, all actions taken in furtherance of the transactions contemplated hereby or thereby on or prior to the Effective Time), between or among any Parent Group Member and any SpinCo Group Member (collectively, “Disputes”). Each Party hereto agrees on behalf of itself and its respective Group Members that the procedures set forth in this ARTICLE IX shall be the sole and exclusive remedy in connection with any Dispute, controversy or claim relating to any of the foregoing matters and irrevocably waives any right to commence any Action in or before any Governmental Authority, except as expressly provided in Section 11.13 and except to the extent provided under the Arbitration Act in the case of judicial review of arbitration results or awards. EACH PARTY ON BEHALF OF ITSELF AND ITS RESPECTIVE GROUP MEMBERS IRREVOCABLY WAIVES ANY RIGHT TO ANY TRIAL IN A COURT THAT WOULD OTHERWISE HAVE JURISDICTION OVER ANY CLAIM, CONTROVERSY OR DISPUTE SET FORTH IN THE FIRST SENTENCE OF THIS SECTION 9.01.

Section 9.02. Negotiation and Mediation.

(a) The Parties hereto agree to use commercially reasonable efforts to resolve expeditiously any Dispute between them or any of their respective Group Members with respect to the matters covered hereby that may arise from time to time on a mutually acceptable negotiated basis. In furtherance of the foregoing, and if other means of resolving the Dispute are not effective, a Party hereto involved (or a Group Member of which is involved) in a Dispute, in order to pursue such Dispute further, shall deliver a notice (an “Escalation Notice”) requesting an in-person meeting involving representatives of the Parties hereto at a senior level of management of the Parties hereto (or if the Parties hereto agree, of the appropriate strategic business unit or division within each Party). A copy of any such Escalation Notice shall be given to the General Counsel, or like officer, of each Party involved in the Dispute (which copy shall state that it is an Escalation Notice pursuant to this Agreement). Any agenda, location or procedures for such discussions or negotiations between the Parties may be established by the Parties from time to time; provided, however, that the Parties shall use commercially reasonable efforts to meet within twenty (20) Business Days of the Escalation Notice.

(b) If the Parties are unable to resolve the dispute within thirty (30) Business Days after the date of the Escalation Notice, any Party hereto will have the right to begin arbitration under Section 9.03.

(c) The Parties may, by mutual consent, select a mediator to aid the Parties in their discussions and negotiations. Any opinion expressed by any such mediator shall be strictly advisory and shall not be binding on the Parties, nor shall any opinion expressed by any such mediator be admissible in any arbitration proceedings. Costs of any mediation shall be borne equally by the Parties, except that each Party shall be responsible for its own expenses. Mediation is not a prerequisite to seeking arbitration under Section 9.03.

(d) The Parties agree that all discussions and negotiations between the Parties during the foregoing proceedings will be inadmissible as evidence and without prejudice to the legal position of a Party in any subsequent Action.

Section 9.03. Arbitration.

(a) Except as otherwise set forth herein, any arbitration hereunder will be submitted to and administered by the American Arbitration Association (the “AAA”) in accordance with its Procedures for Large, Complex Commercial Disputes then prevailing (the “AAA Rules”). Unless otherwise agreed by the Parties in writing, any Dispute to be decided in arbitration hereunder shall be decided (i) before a sole arbitrator if the amount subject to such Dispute, together with all then-existing Disputes arising out of substantially the same facts, and inclusive of all claims and counterclaims, totals less than $10 million; or (ii) by an arbitral tribunal of three arbitrators if (A) the amount subject to such Dispute, together with all

 

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then-existing Disputes arising out of substantially the same facts, inclusive of all claims and counterclaims, is equal to or greater than $10 million or (B) either Party elects in writing to have such Dispute decided by three arbitrators; provided, however, that the Party that makes a request referred to in the foregoing clause (B) shall solely bear the increased costs and expenses associated with a panel of three arbitrators (i.e., the additional costs and expenses associated with the two additional arbitrators (as determined by the arbitrator)). In the event that arbitration shall be before an arbitral tribunal of three arbitrators in accordance with clause (ii) of the preceding sentence, any references to the “arbitrator” in this ARTICLE IX shall be deemed to refer to such arbitration panel or each such arbitrator or any such arbitrator, as the context indicates or requires.

(b) If the arbitration shall be before an arbitral tribunal of three independent arbitrators, the panel of three arbitrators shall be chosen as follows: (i) the AAA shall send to the Parties a list setting forth the names of fifteen (15) potential arbitrators and (ii) the Parties shall alternatively strike from the combined list until three names remain, which shall be the selected arbitrators. If the arbitration shall be before a sole arbitrator, then the sole arbitrator shall be appointed by agreement of the Parties within fifteen (15) Business Days from the date of receipt of written demand of either party. If the Parties cannot agree to a sole arbitrator, then upon written application by either party, the sole independent arbitrator shall be appointed as follows: (A) the AAA shall send to the Parties a list setting forth the names of ten (10) potential arbitrators and (B) the Parties shall alternatively strike from the combined list until one name remains, which shall be the selected arbitrators. Any arbitrator selected pursuant to this Section 9.03(b) shall be neutral and disinterested with respect to each of the Parties and the matter and shall be reasonably competent in the applicable subject matter of the Dispute, with any determinations as to whether an arbitrator satisfies such criteria to be made by the AAA.

(c) The arbitrator selected pursuant to Section 9.03(b) will set a time for the hearing of the matter, which will commence no later than 180 days after the selection of the arbitrator pursuant to Section 9.03(b). The arbitrator may extend such period at the arbitrator’s discretion pursuant to a reasoned request from either Party or on the arbitrator’s own initiative if it is necessary to do so. The arbitrator shall use the arbitrator’s best efforts to reach a final decision and render the same in writing to the Parties not later than sixty (60) days after Dispute being fully submitted to the arbitrator for decision, unless otherwise agreed by the Parties in writing. Failure of the arbitrator to do so, however, shall not be a basis for challenging the decision.

(d) The decision of the arbitrator or a majority of the arbitration panel will be final and binding on the Parties, and judgment thereon may be had and will be enforceable in any court having jurisdiction over the Parties. Arbitration awards will bear interest from the date of the award at an annual rate of the Prime Rate plus 5%. To the extent that the provisions of this Agreement and the AAA Rules conflict, the provisions of this Agreement shall govern.

(e) The Parties may obtain and take discovery as permitted by the arbitrator, in the arbitrator’s discretion, including as to the type of discovery and parameters on the timing and/or completion of such discovery, and consistent with the AAA Rules.

(f) The arbitrator shall have full power and authority to determine issues of arbitrability but shall otherwise be limited to interpreting or construing the applicable provisions of this Agreement or any Ancillary Agreement, and will have no authority or power to limit, expand, alter, amend, modify, revoke or suspend any condition or provision of this Agreement or any Ancillary Agreement; it being understood, however, that the arbitrator will have full authority to implement the provisions of this Agreement or any Ancillary Agreement and to fashion appropriate remedies for breaches of this Agreement (including interim or permanent injunctive relief); provided, however, that the arbitrator shall not have (i) any authority in excess of the authority a court having jurisdiction over the Parties and the controversy or dispute would

 

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have absent these arbitration provisions or (ii) any right or power to award special, punitive or exemplary damages, except to the extent such damages are expressly permitted by the terms of this Agreement (including Section 5.12 hereof) or any Ancillary Agreement (provided that this clause (ii) shall not limit the award of any such damages to the extent they are included in any Liabilities to Third Parties as to which the provisions of this ARTICLE IX are applicable). It is the intention of the Parties that in rendering a decision the arbitrator gives effect to the applicable provisions of this Agreement and the Ancillary Agreements and follows applicable Law (it being understood and agreed that judicial review is limited to the matters set forth in Section 9.03(i)).

(g) If a Party fails or refuses to appear at and participate in an arbitration hearing after due notice, the arbitrator may hear and determine the controversy upon evidence produced by the appearing Party. Any decision rendered under such circumstances shall be as valid and enforceable as if the Parties had appeared and participated fully at all stages.

(h) The expenses of the arbitration, including the arbitrator’s fees and expert witness fees, incurred by the Parties to the arbitration, may be awarded to the prevailing Party, in the discretion of the arbitrator, or may be apportioned between the Parties in any manner deemed appropriate by the arbitrator. Unless and until the arbitrator makes any such award or apportionment, the fees of the arbitrator and all other arbitration costs shall be borne equally by each Party involved in the matter and each Party shall be responsible for its own attorney’s fees and other costs and expenses, including the costs of witnesses selected by such Party.

(i) Any arbitration award shall be an award with a holding in favor of or against a Party on each claim and shall include a statement of the reasoning on which the award rests. The award must also be in adequate form so that a judgment of a court may be entered thereupon. Judgment upon any arbitration award hereunder may be entered in any court having jurisdiction thereof. Any award shall not be vacated or appealed except on the basis of (i) the award being procured by fraud or corruption, (ii) the arbitrator being partial or corrupt or (iii) the arbitrator exceeding the scope of the power granted to the arbitrator in this Agreement.

(j) Regardless of whether an Escalation Notice has been delivered, prior to the time at which the arbitrator is appointed pursuant to Section 9.03(b), either Party may seek one or more temporary restraining orders in a court of competent jurisdiction, subject to Section 11.12, if necessary in order to preserve and protect the status quo and/or to prevent irreparable harm. Neither the request for, nor the grant or denial of, any such temporary restraining order shall be deemed a waiver of the obligation to arbitrate as set forth herein, and the arbitrator may order the Parties to petition the court to dissolve, continue or modify any such order. Any such temporary restraining order shall remain in effect until the first to occur of the expiration of the order in accordance with its terms or the dissolution thereof.

(k) Except as required by Law, the Parties shall hold, and shall cause their respective officers, directors, employees, agents and other representatives to hold, the existence, content and result of mediation or arbitration in confidence in accordance with the provisions of ARTICLE IX and except as may be required in order to enforce any award. Each of the Parties shall request that the arbitrator comply with such confidentiality requirement.

(l) If at any time the arbitrator shall fail to serve as such for any reason, the Parties shall select a new arbitrator who shall be disinterested as to the Parties and the matter in accordance with the procedure set forth herein for the selection of the initial arbitrator. The extent, if any, to which testimony previously given shall be repeated or as to which the replacement arbitrator elects to rely on the stenographic record (if there is one) of such testimony shall be determined by the arbitrator.

 

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(m) Any arbitration proceedings hereunder shall take place in Atlanta, Georgia, unless another location is otherwise agreed to in writing by the Parties.

(n) The interpretation of the provisions of this ARTICLE IX, only insofar as they relate to the agreement to arbitrate and any procedures pursuant thereto, shall be governed by the Arbitration Act and other applicable U.S. federal Law. In all other respects, the interpretation of this Agreement shall be governed as set forth in Section 11.02.

Section 9.04. Continuity of Service and Performance. Unless otherwise agreed in writing, the Parties will continue to provide service and honor all other commitments under this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the provisions of this ARTICLE IX with respect to all matters not subject to such Dispute to the extent such Party is obligated to do so pursuant to the underlying agreement.

ARTICLE X

TERMINATION

Section 10.01. Termination. This Agreement and all Ancillary Agreements may be terminated and the Distribution may be amended, modified or abandoned at any time prior to the Effective Time by and in the sole and absolute discretion of Parent without the approval of any Person, including SpinCo. After the Effective Time, this Agreement may not be terminated except by an agreement in writing signed by a duly authorized officer of each of the Parties.

Section 10.02. Effect of Termination. In the event of such termination, this Agreement shall become null and void and no Party, nor any of its directors, officers, agents or employees, shall have any Liability of any kind to any Person by reason of this Agreement.

ARTICLE XI

MISCELLANEOUS

Section 11.01. Counterparts; Entire Agreement; Conflicts; Corporate Power.

(a) This Agreement and each Ancillary Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. Each Party acknowledges that it and the other Party may execute this Agreement and any Ancillary Agreement by manual, stamp or mechanical signature, and that delivery of an executed counterpart of a signature page to this Agreement or any Ancillary Agreement (whether executed by manual, stamp or mechanical signature) by facsimile or by email in portable document format (PDF) shall be effective as delivery of such executed counterpart of this Agreement or any Ancillary Agreement. Each Party expressly adopts and confirms a stamp or mechanical signature (regardless of whether delivered in person, by mail, by courier, by facsimile or by email in portable document format (PDF)) made in its respective name as if it were a manual signature delivered in person, agrees that it shall not assert that any such signature or delivery is not adequate to bind it to the same extent as if it were signed manually and delivered in person and agrees that, at the reasonable request of the other Party at any time, it shall as promptly as reasonably practicable cause this Agreement or Ancillary Agreement to be manually executed (any such execution to be as of the date of the initial date hereof) and delivered in person, by mail or by courier.

 

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(b) This Agreement, the Ancillary Agreements and the exhibits, Schedules and annexes hereto and thereto contain the entire agreement between the Parties with respect to the subject matter hereof, supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter and there are no agreements or understandings between the Parties other than those set forth or referred to herein or therein.

(c) It is the intention of the Parties that the Transfer Documents shall be consistent with the terms of this Agreement and the other Ancillary Agreements. In the event of any conflict or inconsistency between the Transfer Documents and this Agreement, the provisions of this Agreement shall control over the inconsistent provisions of such Transfer Documents. The Parties agree that the Transfer Documents are not intended and shall not be construed in any way to enhance, modify or decrease any of the rights or obligations of Parent, any Parent Group Member, SpinCo or any SpinCo Group Member from those contained in this Agreement and the other Ancillary Agreements.

(d) Except as otherwise expressly provided in this Agreement, and subject to the preceding paragraph (c), in the event of any conflict or inconsistency between the provisions of this Agreement and the provisions of any Ancillary Agreement other than the Transfer Documents, the provisions of such Ancillary Agreement shall control over the inconsistent provisions of this Agreement as to matters specifically addressed in the Ancillary Agreement. For the avoidance of doubt, the TMA shall govern all matters (including any indemnities and payments among the parties and each other member of their respective Groups and the allocation of any rights and obligations pursuant to agreements entered into with Third Parties) relating to Taxes or otherwise specifically addressed in the TMA.

(e) Parent represents on behalf of itself and each other Parent Group Member, and SpinCo represents on behalf of itself and each other SpinCo Group Member, as follows:

(i) each such Person has the requisite corporate or other power and authority and has taken all corporate or other action necessary in order to execute, deliver and perform each of this Agreement and each Ancillary Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby; and

(ii) this Agreement and each Ancillary Agreement to which it is a party has been (or, in the case of any Ancillary Agreement, will be on or prior to the Effective Time) duly executed and delivered by it and constitutes, or will constitute, a valid and binding agreement of it enforceable in accordance with the terms thereof.

Section 11.02. Governing Law. This Agreement, and, unless expressly proved therein, each Ancillary Agreement, (and any claims or disputes arising out of or related hereto or thereto or to the transactions contemplated hereby or thereby or to the inducement of any party to enter herein or therein, whether for breach of contract, tortious conduct or otherwise and whether predicated on common law, statute or otherwise) shall be governed by and construed and interpreted in accordance with the Laws of the State of Georgia irrespective of the choice of Laws principles of the State of Georgia, including all matters of validity, construction, effect, enforceability, performance and remedies.

Section 11.03. Assignability. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective successors and permitted assigns. Except as specifically provided in any Ancillary Agreement, none of this Agreement, any of the Ancillary Agreements or any of the rights, interests or obligations hereunder or thereunder may be assigned or delegated, in whole or in part, by operation of Law or otherwise, by any party without the prior written consent of the other party to the agreement being so assigned or delegated, and any such assignment without such prior written consent shall be null and void. Except as specifically provided in any Ancillary Agreement, no such consent shall be required for the assignment of a party’s rights and obligations under this Agreement or the Ancillary Agreements if: (a) any party to this Agreement or any Ancillary Agreement (or any of its successors or

 

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permitted assigns) (i) shall consolidate with or merge into any other Person and shall not be the continuing or surviving Business Entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and/or Assets to any Person; and (b) in any such case, the resulting, surviving or assignee Person expressly assumes all of the obligations of the relevant party (or its successors or permitted assigns, as applicable) under this Agreement and all applicable Ancillary Agreements. No assignment permitted by this Section 11.03 shall release the assigning party from Liability for the full performance of its obligations under this Agreement or such Ancillary Agreement(s).

Section 11.04. Third-Party Beneficiaries. Except for the indemnification and contribution rights under this Agreement of any Parent Indemnitee or SpinCo Indemnitee in their respective capacities as such under ARTICLE V and for the releases under Section 5.01 of any Person provided therein, and for the rights of insureds pursuant to Section 5.13, (a) the provisions of this Agreement and each Ancillary Agreement are solely for the benefit of the Parties hereto and their respective Group Members, after giving effect to the Distribution, and their permitted successors and assigns, and are not intended to confer upon any Person except the Parties and their respective Group Members, after giving effect to the Distribution, and their permitted successors and assigns, any rights or remedies hereunder and (b) there are no third-party beneficiaries of this Agreement or any Ancillary Agreement and neither this Agreement nor any Ancillary Agreement shall provide any other Third Party with any remedy, claim, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement or any Ancillary Agreement.

Section 11.05. Notices. All Notices shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service, by electronic mail transmission (return receipt requested) or by registered or certified mail (postage prepaid, return receipt requested) to the respective Parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section 11.05):

If to Parent, to:

[•]

[•]

[•]

Attn: [•]

Email: [•]

with a copy to:

[•]

[•]

[•]

Attn: [•]

Email: [•]

If to SpinCo to:

[•]

[•]

[•]

Attn: [•]

Email: [•]

 

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Either Party may, by notice to the other Party, change the address to which such notices are to be given.

Section 11.06. Severability. In the event that any one or more of the terms or provisions of this Agreement or any Ancillary Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or any Ancillary Agreement, or the application of such term or provision to Persons or circumstances or in jurisdictions other than those as to which it has been determined to be invalid, illegal or unenforceable, and the Parties shall use their commercially reasonable efforts to substitute one or more valid, legal and enforceable terms or provisions into this Agreement (or the applicable Ancillary Agreement) which, insofar as practicable, implement the purposes and intent of the Parties. Any term or provision of this Agreement or any Ancillary Agreement held invalid or unenforceable only in part, degree or within certain jurisdictions shall remain in full force and effect to the extent not held invalid or unenforceable to the extent consistent with the intent of the parties as reflected by this Agreement. To the extent permitted by applicable Law, each party waives any term or provision of Law which renders any term or provision of this Agreement to be invalid, illegal or unenforceable in any respect.

Section 11.07. Publicity. From and after the Effective Time, each of Parent and SpinCo shall consult with the other prior to issuing, and shall, subject to the requirements of Section 6.09, provide the other Party the opportunity to review and comment upon, that portion of any press releases or other public statements in connection with the Spin-Off or any of the other transactions contemplated hereby or by any Ancillary Agreement and prior to making any filings with any Governmental Authority or national securities exchange with respect thereto (including the Information Statement, the Parties’ respective Current Reports on Form 8-K to be filed on the Distribution Date, the Parties’ respective Quarterly Reports on Form 10-Q filed with respect to the fiscal quarter during which the Distribution Date occurs, or if such quarter is the fourth fiscal quarter, the Parties’ respective Annual Reports on Form 10-K filed with respect to the fiscal year during which the Distribution Date occurs, each such Quarterly Report on Form 10-Q or Annual Report on Form 10-K, a “First Post-Distribution SEC Report”). Each Party’s obligations pursuant to this Section 11.07 shall terminate on the date on which such Party’s First Post-Distribution SEC Report is filed with the Commission.

Section 11.08. Expenses. Except as expressly set forth in this Agreement or in any Ancillary Agreement, (a) all Third Party fees, costs and expenses incurred by either the Parent Group or the SpinCo Group in connection with effecting the Spin-Off prior to or on the Distribution Date, whether payable prior to, on or following the Distribution Date, will be borne and paid by Parent (but excluding for the avoidance of doubt, Liabilities under clause (f) of the definition of “SpinCo Liabilities”) and (b) all Third Party fees, costs and expenses incurred by either the Parent Group or the SpinCo Group in connection with the Spin-Off following the Distribution Date, will be borne and paid by the Party incurring such fee, cost or expense; provided, that any costs and expenses incurred in obtaining any Consent or novation from a Third Party in connection with the assignment to and assumption by a Party or any of its Group Members of any contracts, commitments or understandings in connection with the Separation shall be borne by the Party or Group Member to which such contract, commitment or understanding is being assigned. For the avoidance of doubt, this Section 11.08 shall not affect each Party’s responsibility to indemnify Parent Liabilities or SpinCo Liabilities, as applicable, arising from the transactions contemplated by the Distribution.

Section 11.09. Headings. The article, section and paragraph headings contained in this Agreement and the Ancillary Agreements are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement or any Ancillary Agreement.

 

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Section 11.10. Survival of Agreements. Except as expressly set forth in this Agreement or any Ancillary Agreement, the representations, warranties, covenants and agreements in this Agreement and each Ancillary Agreement and the Liabilities for the breach of any obligations contained herein or therein shall survive the Effective Time and shall remain in full force and effect thereafter.

Section 11.11. Waivers of Default. No failure or delay of any Party (or its applicable Group Members) in exercising any right or remedy under this Agreement or any Ancillary Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such right or power, or any course of conduct, preclude any other or further exercise thereof or the exercise of any other right or power. Waiver by any Party of any default by the other Party of any provision of this Agreement shall not be deemed a waiver by the waiving Party of any subsequent or other default, nor shall it prejudice the rights of the waiving Party.

Section 11.12. Consent to Jurisdiction. Subject to the provisions of ARTICLE IX, each of the Parties irrevocably submits to the exclusive jurisdiction of (a) the Georgia State-Wide Business Court, and (b) the United States District Court for the Northern District of Georgia (the “Georgia Courts”), for the purposes of any suit, action or other proceeding to compel arbitration or for provisional relief in aid of arbitration in accordance with ARTICLE IX or for provisional relief to prevent irreparable harm, and to the non-exclusive jurisdiction of the Georgia Courts for the enforcement of any award issued thereunder. Each of the Parties further agrees that service of any process, summons, notice or document by United States registered mail to such Party’s respective address set forth in Section 11.05 shall be effective service of process for any action, suit or proceeding in the Georgia Courts with respect to any matters to which it has submitted to jurisdiction in this Section 11.12. Each of the Parties irrevocably and unconditionally waives any objection to any Georgia Court’s exercise of personal jurisdiction over the Parties and the laying of venue of any action, suit or proceeding arising out of this Agreement, any Ancillary Agreement or the transactions contemplated hereby or thereby in the Georgia Courts, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum.

Section 11.13. Specific Performance. The Parties agree that irreparable damage would occur in the event that the provisions of this Agreement were not performed in accordance with their specific terms. Accordingly, it is hereby agreed that the Parties shall be entitled to (a) an injunction or injunctions issued in any arbitration in accordance with ARTICLE IX to enforce specifically the terms and provisions hereof, (b) provisional or temporary injunctive relief in accordance with Section 9.03(j) in any Georgia Court, and (c) enforcement of any such award of an arbitral tribunal or a Georgia Court in any court of the United States, or any other any court or tribunal sitting in any state of the United States or in any foreign country that has jurisdiction, this being in addition to any other remedy or relief to which they may be entitled.

Section 11.14. Amendments. No provisions of this Agreement or any Ancillary Agreement shall be deemed waived, amended, supplemented or modified unless such waiver, amendment, supplement or modification is in writing and signed by an authorized representative of both Parties and their relevant Group Members, as the case may be.

Section 11.15. Interpretation. In this Agreement and in any Ancillary Agreement, (a) words in the singular shall be deemed to include the plural and vice versa and words of one gender shall be deemed to include the other gender as the context requires; (b) the terms “hereof,” “herein” and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement (or the applicable Ancillary Agreement) as a whole (including all of the Schedules hereto and thereto) and not to any particular provision of this Agreement (or such Ancillary Agreement); (c) Article, Section or Schedule references are to the Articles, Sections and Schedules of or to this Agreement (or the applicable Ancillary Agreement), unless otherwise specified; (d) unless otherwise stated, all references to any agreement

 

66


(including this Agreement and each Ancillary Agreement) shall be deemed to include the schedules, exhibits and annexes to such agreement; (e) any capitalized terms used in any Schedule to this Agreement (or to any Ancillary Agreement) but not otherwise defined therein shall have the meaning as defined in this Agreement (or the applicable Ancillary Agreement) to which such Schedule is attached, as applicable; (f) any reference herein to this Agreement or any Ancillary Agreement, unless otherwise stated, shall be construed to refer to this Agreement or such Ancillary Agreement as amended, supplemented or otherwise modified from time to time, in accordance with the terms thereof; (g) the word “including” and words of similar import when used in this Agreement (or the applicable Ancillary Agreement) means “including, without limitation,” unless otherwise specified; (h) unless otherwise specified, the word “or” shall not be exclusive; (i) unless otherwise specified in a particular case, the word “days” refers to calendar days; and (j) unless expressly stated to the contrary in this Agreement or in any Ancillary Agreement, all references to “the date hereof”, “the date of this Agreement”, “hereby” and “hereupon” and words of similar import shall all be references to [__].

Section 11.16. Group Members. Parent shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by a Parent Group Member and SpinCo shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by a SpinCo Group Member.

Section 11.17. Force Majeure. Neither Party shall be deemed in default of this Agreement or, unless otherwise expressly provided therein, any Ancillary Agreement for failure to fulfill any obligation so long as and to the extent to which any delay or failure in the fulfillment of such obligations is prevented, frustrated, hindered or delayed as a consequence of circumstances of Force Majeure. In the event of any such excused delay, the time for performance shall be extended for a period equal to the time lost by reason of the delay. A Party claiming the benefit of this provision shall, as soon as reasonably practicable after the occurrence of any such event: (a) provide notice to the other Party of the nature and extent of any such Force Majeure condition; and (b) use commercially reasonable efforts to remove any such causes and resume performance under this Agreement or any Ancillary Agreement as soon as reasonably practicable; provided, that, prior to any Party invoking the benefit of this provision as a result of a Force Majeure with respect to the COVID-19 pandemic, such Party shall use commercially reasonable efforts to mitigate the impact of the COVID-19 pandemic with respect to its failure or potential failure to fulfill any obligation under this Agreement or any Ancillary Agreement.

Section 11.18. Mutual Drafting. This Agreement and the Ancillary Agreements shall be deemed to be the joint work product of the Parties and any rule of construction that a document shall be interpreted or construed against a drafter of such document shall not be applicable.

Section 11.19. No Reliance on Other Party. The Parties hereto represent to each other that this Agreement is entered into with full consideration of any and all rights which the Parties hereto may have. The Parties hereto have relied upon their own knowledge and judgment and have conducted such investigations they and their in-house counsel have deemed appropriate regarding this Agreement and the Ancillary Agreements and their rights in connection with this Agreement and the Ancillary Agreements. The Parties hereto are not relying upon any representations or statements made by any other Party, or any such other Party’s employees, agents, representatives or attorneys, regarding this Agreement, except to the extent such representations are expressly set forth or incorporated in this Agreement. The Parties hereto are not relying upon a legal duty, if one exists, on the part of any other Party (or any such other Party’s employees, agents, representatives or attorneys) to disclose any information in connection with the execution of this Agreement or its preparation, it being expressly understood that no Party hereto shall ever assert any failure to disclose information on the part of any other Party as a ground for challenging this Agreement or any provision hereof.

 

67


Section 11.20. Limited Liability. Notwithstanding any other provision of this Agreement, no individual who is a shareholder, director, employee, officer, agent or representative of Parent or SpinCo, or any of their respective Group Members, in such individual’s capacity as such, shall have any Liability in respect of or relating to the covenants or obligations of Parent or SpinCo, as applicable, under this Agreement or any Ancillary Agreement or in respect of any certificate delivered with respect hereto or thereto and, to the fullest extent legally permissible, each Parent and SpinCo, for itself and its respective Group Members and its and their respective shareholders, directors, employees and officers, waives and agrees not to seek to assert or enforce any such Liability that any such Person otherwise might have pursuant to applicable Law.

Section 11.21. No Set-Off. Except as expressly set forth in any Ancillary Agreement or as otherwise mutually agreed to in writing by the Parties, none of the Parties nor any member of their respective Groups shall have any right of set-off or other similar rights with respect to (a) any amounts received pursuant to this Agreement or any Ancillary Agreement; or (b) any other amounts claimed to be owed to the other Parties or any member of their respective Groups arising out of this Agreement or any Ancillary Agreement.

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the Parties have caused this Separation and Distribution Agreement to be executed by their duly authorized representatives.

 

AARON’S HOLDINGS COMPANY, INC.
By:  

                 

  Name:
  Title:
AARON’S SPINCO, INC.
By:  

 

  Name:
  Title:

 

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Exhibit 3.1

FORM OF

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

OF

AARON’S SPINCO, INC.

I.

The name of the corporation is Aaron’s SpinCo, Inc. (the “Corporation”).

II.

The Corporation is organized pursuant to the provisions of the Georgia Business Corporation Code (the “Code”).

III.

The Corporation shall have perpetual duration.

IV.

The Corporation is organized for the following purposes:

To buy, sell, rent and lease office and residential furniture and accessories and other personal property of all kinds; to manufacture, sell and deliver furniture of any kind whatsoever; and generally to manufacture, produce, assemble, fabricate, import, purchase or otherwise acquire, invest in, own, hold, use, maintain, service or repair, sell, rent, lease, pledge, mortgage, exchange, export, distribute, assign and otherwise dispose of and to trade and deal in and with, at wholesale or retail, goods, wares, merchandise, commodities, articles of commerce and property of every kind and description; and to engage in, conduct and carry on a general manufacturing, importing and exporting, merchandising, leasing, mercantile and trading business in any and all branches thereof.

To do each and every thing necessary, suitable or proper for the accomplishment of any of the purposes or the attainment of any one or more of the objects herein enumerated, or which shall at any time appear conducive to or expedient for the protection or benefit of the Corporation.

IN FURTHERANCE OF AND NOT IN LIMITATION of the general powers conferred by the laws of the State of Georgia and the objects and purposes herein set forth, it is expressly provided that to such extent as a corporation organized under the Code may now or hereafter lawfully do, the Corporation shall have the power to do, either as principal or agent and either alone or in connection with other corporations, firms or individuals, all and anything necessary, suitable, convenient or proper for, or in connection with, or incident to, the accomplishment of any of the purposes or the attainment of any one or more of the objects herein enumerated, or designed directly or indirectly to promote the interests of the Corporation or to enhance the value of its properties; and in general to do any and all things and exercise any and all powers, rights and privileges which a corporation may now or hereafter be authorized to do or to exercise under the Code or under any act amendatory thereof, supplemental thereto or substituted therefor.

The foregoing provisions of this Article IV shall be construed both as purposes and powers and each as an independent purpose and power. The foregoing enumeration of specific purposes and powers herein specified shall, except when otherwise provided in this Article IV, be in no wise limited or restricted by referenced to, or inference from, the terms of any provision of this or any other Article of these Amended and Restated Articles of Incorporation.


V.

The Corporation shall have authority to issue shares of capital stock consisting of [•] ([•]) shares of Common Stock, par value $0.50 per share (“Common Stock”), and [•] ([•]) shares of Preferred Stock, par value $1.00 per share (“Preferred Stock”).

The Corporation may purchase its own shares of capital stock out of unreserved and unrestricted earned surplus and capital surplus available therefor and as otherwise provided by law. Shares so acquired shall become treasury shares of the Corporation. The Board of Directors of the Corporation (the “Board of Directors”) may from time to time distribute to shareholders out of capital surplus of the Corporation a portion of its assets, in cash or in property.

Section 1. Terms of the Common Stock. The powers, preferences and rights of the Common Stock, and the qualifications, limitations or restrictions thereof, shall be as follows:

 

  (a)

Voting. At each annual or special meeting of shareholders, each holder of Common Stock shall be entitled to one (1) vote in person or by proxy for each share of Common Stock standing in such person’s name on the stock transfer records of the Corporation in connection with the election of directors and all other actions submitted to a vote of shareholders.

 

  (b)

Dividends and Other Distributions. The record holders of the Common Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the Corporation as may be declared thereon by the Board of Directors out of funds legally available therefor.

Section 2. Terms of the Preferred Stock. The following are the designations, powers, preferences and rights of the preferred stock and the qualifications, limitations and restrictions thereof:

 

  (a)

Except as otherwise provided by applicable law, or by the resolution or resolutions of the Board of Directors providing for the issue of any series of a Preferred Stock, the holders of shares of Preferred Stock, as such holders, (i) shall not have any right to vote, and are hereby specifically excluded from the right to vote, in the election of directors or for any other purpose, and (ii) shall not be entitled to notice of any meeting of shareholders.

 

  (b)

Before any sum or sums shall be set aside or applied to the purchase of any outstanding shares of Stock, and before any dividend shall be declared or paid or any distribution ordered or made upon the Stock (other than a dividend payable in shares of Stock), the Corporation shall have complied with the dividend and sinking fund requirements (if any) set forth in any resolution or resolutions of the Board of Directors with respect to the issue of any series of Preferred Stock of which any shares shall at the time be outstanding.

 

  (c)

Subject to the provisions of the immediately preceding paragraph, and to such other limitations as may be specified in any resolution or resolutions of the Board of Directors providing for the issue of any series of Preferred Stock, the holders of outstanding shares of Stock shall be entitled to the exclusion of the holders of shares of Preferred Stock of any and all series, to receive such dividends payable with respect to the Stock as may be declared by the Board of Directors from time to time.

 

  (d)

In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment shall have been made to the holders of shares of Preferred Stock of the full amount to which any series of the Preferred Stock is entitled as set forth in the resolution or resolutions of the Board of Directors providing for the issue thereof, the holders of outstanding shares of Stock shall be entitled, to the exclusion of the holders of shares of Preferred Stock of any and all series, to share in all remaining assets of the Corporation available for distribution to its shareholders ratably according to the number of shares of Stock held by them. Neither the merger nor consolidation of the Corporation with or into any other corporation or corporations, nor the merger or consolidation of any other corporation or corporations into or with the Corporation, nor the sale, transfer, mortgage, pledge or lease by the Corporation of all or any part of its assets shall be deemed to be a liquidation, dissolution or winding up of the Corporation.


  (e)

The Preferred Stock may be issued from time to time in one or more series of any number of shares, except that the aggregate number of shares issued and not canceled of any and all such series shall not exceed the total number of shares of Preferred Stock hereinabove authorized. Each series of Preferred Stock shall be distinctively designated by number, letter or descriptive words.

 

  (f)

Authority is hereby expressly granted to and vested in the Board of Directors to issue the Preferred Stock at any time, or from time to time, as Preferred Stock of any one or more series, and, in connection with the establishment of each such series, to fix by resolution or resolutions providing for the issue of the shares thereof the voting powers, if any, and the designation, preferences and relative rights of each such series of Preferred Stock to the full extent now or hereafter permitted by these Amended and Restated Articles of Incorporation and the laws of the State of Georgia, including, without limiting the generality of the foregoing, all of the following matters which may vary between each series:

 

  (1)

The distinctive designation of such series and the number of shares which constitute such series, which number may be increased or decreased either before or subsequent to the issuance of any shares of such series (but not below the number of shares of such series then outstanding), from time to time by action of the Board of Directors;

 

  (2)

The dividend rate of such series, the dates of payment thereof, and any limitations, restrictions or conditions on the payment of dividends, including whether dividends shall be cumulative and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on the shares of each series;

 

  (3)

The price or prices at which, and the terms, times and conditions on which, the shares of such series may be redeemed at the option of the Corporation or at the option of the holders of such shares;

 

  (4)

The amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment to the holders of shares of each series;

 

  (5)

Whether or not the shares of such series shall be entitled to the benefit of a purchase, retirement or sinking fund to be applied to the redemption or purchase of such series, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which the shares of such series may be redeemed or purchased through the application of such fund;

 

  (6)

Whether or not the shares of such series shall be made convertible into, or exchangeable for, shares of any other class or classes of stock of the Corporation, or the shares of any other series of Preferred Stock, and, if made so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange;

 

  (7)

Whether or not the shares of such series shall have any voting rights, and, if voting rights are so granted, the extent of such voting rights and the terms and conditions under which such voting rights may be exercised.

 

  (8)

Whether or not the issue of any additional shares of such series or of any future series in addition to such series shall be subject to restrictions in addition to the restrictions, if any, on the issue of additional shares imposed in the resolution or resolutions fixing the terms of any outstanding series of Preferred Stock theretofore issued pursuant to this Section 2(f), and, if subject to additional restrictions, the extent of such additional restrictions; and


  (9)

Whether or not the shares of such series shall be entitled to the benefit of limitations restricting the purchase of, the payment of dividends on, or the making of other distributions in respect of stock of any class of the Corporation, and the terms of any such restrictions; provided, however, that such restrictions shall not include any prohibition on the payment of dividends or with respect to distributions in the event of voluntary or involuntary liquidation established for any outstanding series of Preferred Stock theretofore issued.

VI.

None of the holders of any capital stock of the Corporation of any kind, class or series now or hereafter authorized shall have preemptive rights with respect to any shares of capital stock of the Corporation of any kind, class or series now or hereafter authorized.

VII.

Section 1. Number of Directors. Subject to any rights granted to holders of shares of any class or series of Preferred Stock then outstanding, the number of directors which shall constitute the Board of Directors shall be fixed from time to time by resolution adopted by the affirmative vote of a majority of the total number of directors then in office; provided that the number of directors that shall constitute the whole Board of Directors shall be at least three and no decrease in the size of the Board of Directors shall have the effect of shortening the term of an incumbent director.

Section 2. Classes. From the effective date of these Amended and Restated Articles of Incorporation until the election of the directors at the 2024 annual meeting of shareholders, the Board of Directors shall be divided into three classes, each class to be as nearly equal in number as possible, designated Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the 2021 annual meeting of shareholders, the term of office of the initial Class II directors shall expire at the 2022 annual meeting of shareholders and the term of office of the initial Class III directors shall expire at the 2023 annual meeting of shareholders. Each Class I director elected at the 2021 annual meeting of shareholders, each Class II director elected at the 2022 annual meeting of shareholders and each Class III director elected at the 2023 annual meeting of shareholders shall hold office until the 2024 annual meeting of shareholders and, in each case, until his or her respective successor shall have been duly elected and qualified or until his or her earlier resignation or removal. Commencing with the 2024 annual meeting of shareholders, each director shall be elected annually and shall hold office until the next annual meeting of shareholders and until his or her respective successor shall have been duly elected and qualified or until his or her earlier resignation or removal. Pursuant to such procedures, effective as of the conclusion of the 2024 annual meeting of shareholders (the “Declassification Time”), the Board of Directors will no longer be staggered under Section 14-2-806 of the Code and directors shall no longer be divided into three classes. Prior to the Declassification Time, any increase or decrease in the number of directors shall be so apportioned among the classes as to make all classes as nearly equal in number as practicable.

VIII.

No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of his duty of care or other duty as a director; provided, that this provision shall eliminate or limit the liability of a director only to the extent permitted from time to time by the Code or any successor law or laws.


IX.

These Amended and Restated Articles of Incorporation contain amendments requiring shareholder approval and were duly adopted in accordance with the applicable provisions of Section 14-2-1003 of the Code by the Board of Directors of the Corporation on [•] and by the shareholders of the Corporation on [•].

IN WITNESS WHEREOF, AARON’S SPINCO, INC., has caused these Amended and Restated Articles of Incorporation to be executed by its duly authorized officer on this [•] day of [•], 2020.

 

AARON’S SPINCO, INC.
By:  

 

  Name:
  Title:

Exhibit 3.2

FORM OF

AMENDED AND RESTATED BYLAWS

OF

AARON’S SPINCO, INC.

ARTICLE I

OFFICES

Section 1. Registered Office. The registered office shall be in the State of Georgia, County of Gwinnett.

Section 2. Other Offices. The corporation may also have offices at such other places both within and without the State of Georgia as the board of directors may from time to time determine and the business of the corporation may require or make desirable.

ARTICLE II

SHAREHOLDERS MEETINGS

Section 1. Annual Meetings. The annual meeting of shareholders of the corporation shall be held at the principal office of the corporation or at such other place in the United States as may be determined by the board of directors, at 10:00 a.m. on the last business day of the fifth month following the close of each fiscal year or at such other time and date following the close of the fiscal year as shall be determined by the board of directors, for the purpose of electing directors and transacting such other business as may properly be brought before the meeting.

Section 2. Special Meetings.

(a)    Special meetings of shareholders of one or more classes or series of the corporation’s shares shall be called by the chief executive officer or the secretary (i) when so directed by the chairman or by a majority of the entire board of directors; or (ii) upon the demand of holders of at least twenty-five percent (25%) of all votes entitled to be cast on each issue to be considered at a proposed special meeting of shareholders. The business that may be transacted at any special meeting of shareholders shall be limited to that proposed in the notice of the special meeting given in accordance with Section 3 (including related or incidental matters that may be necessary or appropriate to effectuate the proposed business).

(b)    Promptly after the date of receipt of written shareholder demands (the “Demand Date”) purporting to comply with the provisions of the Georgia Business Corporation Code, as amended from time to time (the “Code”), and these bylaws, the chief executive officer or the secretary of the corporation shall determine the validity of the demand. If the demand is valid, the chief executive officer or the secretary of the corporation shall call a special shareholders meeting by mailing notice within 20 days of the Demand Date.


(c)    The time, date and place of any special shareholders meeting shall be determined by the board of directors and shall be set forth in the notice of meeting.

Section 3. Participation in Meetings by Remote Communication. The board of directors, acting in its sole discretion, may establish guidelines and procedures in accordance with applicable provisions of the Code and any other applicable law for the participation by shareholders and proxyholders in a meeting of shareholders by means of remote communications, and may determine that any meeting of shareholders will not be held at any place but will be held solely by means of remote communication. Shareholders and proxyholders complying with such procedures and guidelines and otherwise entitled to vote at a meeting of shareholders shall be deemed present in person and entitled to vote at a meeting of shareholders, whether such meeting is to be held at a designated place or solely by means of remote communication.

Section 4. Notice of Meetings. Written notice of every meeting of shareholders, stating the place, date and hour of the meeting (and the means of remote communications, if any, by which shareholders and proxyholders may be deemed to be present in person and vote at such meeting), shall be given personally or by mail to each shareholder of record not less than 10 nor more than 60 days before the date of the meeting. Such notice may be given in any manner permitted by, and shall be deemed to be effectively given at the times as provided in, the Georgia Business Corporation Code. A shareholder’s attendance at a meeting waives objection to lack of notice or defective notice of such meeting, unless the shareholder at the beginning of the meeting objects to the holding of the meeting or transacting business at the meeting, and waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. A shareholder may waive notice of a meeting before or after the date and time stated in the notice, which waiver must be in writing, signed by the shareholder entitled to such notice and be delivered to the corporation for inclusion in the minutes or filing with the corporate records.

Section 5. Quorum. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of shareholders except as otherwise provided by statute, by the articles of incorporation, or by these bylaws. If a quorum is not present or represented at any meeting of shareholders, a majority of the shareholders entitled to vote thereat, present in person or represented by proxy, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned

 

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meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting (and the means of remote communications, if any, by which shareholders and proxyholders may be deemed to be present in person and vote at such meeting) shall be given to each shareholder of record entitled to vote at the meeting.

Section 6. Voting. When a quorum is present at any meeting, action on a matter brought before such meeting is approved if the votes cast favoring the action exceed the votes cast opposing the action, unless the matter is one upon which by express provision of law, these bylaws or of the articles of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of the question. Each shareholder shall at every meeting of shareholders be entitled to one vote, in person or by proxy, for each share of the capital stock having voting power registered in his or her name on the books of the corporation, but no proxy shall be voted or acted upon after 11 months from its date, unless otherwise provided in the proxy.

Section 7. Shareholder Proposals.

(a)    No shareholder proposal or resolution (each a “Shareholder Proposal”), whether purporting to be binding or nonbinding on the corporation or its board of directors, shall be considered at any annual or special meeting of shareholders unless:

 

  (i)

If such Shareholder Proposal relates solely to the nomination and election of directors, it satisfies the requirements of Article III, Section 3; or

 

  (ii)

With respect to any Shareholder Proposal to be considered at a special shareholders meeting called pursuant to Article II, Section 2, subsection (a)(i), the shareholder(s) proposing to make such Shareholder Proposal provided the information set forth in subsection (b) of this Section 7 to the board of directors within 14 days after the date of the notice calling such special shareholders meeting (or if less than 21 days notice of the meeting is given to shareholders, such information was delivered to the president not later than the close of the seventh day following the date on which the notice of the shareholders’ meeting was mailed); or

 

  (iii)

With respect to any Shareholder Proposal to be considered at a special shareholders meeting called pursuant to Article II, Section 2, subsection (a)(ii), the shareholder(s) proposing to make such Shareholder Proposal provided the information set forth in subsection (b) of this Section 7 to the board of directors concurrently with the filing of the initial demand by shareholders relating to such special shareholders meeting; or

 

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  (iv)

With respect to any Shareholder Proposal to be considered at any regular meeting of shareholders, other than as described in clause (i) hereof, the shareholder(s) proposing to make such Shareholder Proposal provided the information set forth in subsection (b) of this Section 7 to the board of directors between 90 to 120 days prior to the regular meeting at which they wish the Shareholder Proposal to be considered. For the purposes of determining whether information was provided at the times or within the specified periods, the date of the applicable meeting shall be as set forth in the notice of meeting given by the corporation, and such times and periods will be determined without regard to any postponements, deferrals or adjournments of such meeting to a later date.

(b)    The following information must be provided to the board of directors, within or at the times specified in subsection (a) above, in order for the Shareholder Proposal to be considered at the applicable shareholders meeting:

 

  (i)

The Shareholder Proposal, as it will be proposed, in full text and in writing;

 

  (ii)

The purpose(s) for which the Shareholder Proposal is desired and the specific meeting at which such proposal is proposed to be considered;

 

  (iii)

The name(s), address(es), and number of shares held of record by the shareholder(s) making such Shareholder Proposal (or owned beneficially and represented by a nominee certificate on file with the corporation);

 

  (iv)

The number of shares that have been solicited with regard to the Shareholder Proposal and the number of shares the holders of which have agreed (in writing or otherwise) to vote in any specific fashion on said Shareholder Proposal; and

 

  (v)

A written statement by said shareholder(s) that they intend to continue ownership of such voting shares through the date of the meeting at which said Shareholder Proposal is proposed to be considered.

(c)    Failure to fully comply with the provisions of this Section 7 shall bar discussion of and voting on the Shareholder Proposal at the applicable regular or special shareholders meeting. Any Shareholder Proposal that does not comply with the requirements of this Section 7 shall be

 

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disregarded by the chairman of the meeting, and any votes cast in support of the Shareholder Proposal, unless the Shareholder Proposal has been validly submitted by another shareholder, shall be disregarded by the chairman of such meeting.

(d)    The provisions of this Section 7 shall be read in accordance with and so as not to conflict with the rules and regulations promulgated by the Securities and Exchange Commission and any stock exchange or quotation system upon which the corporation’s shares are traded. Nothing in these bylaws shall be deemed to require the consideration at any meeting of shareholders of any Shareholder Proposal that, pursuant to law, the corporation may refuse to permit consideration thereof.

Section 8. Consent of Shareholders. Any action required or permitted to be taken at any meeting of shareholders may be taken without a meeting if all of the shareholders consent thereto in writing, setting forth the action so taken. Such consent shall have the same force and effect as a unanimous vote of shareholders.

Section 9. List of Shareholders; Inspection of Records.

(a)    The corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving their names and addresses and the number, class and series, if any, of the shares held by each. The officer who has charge of the stock transfer books of the corporation shall prepare and make, before every meeting of shareholders or any adjournment thereof, a complete list of the shareholders entitled to vote at the meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number and class and series, if any, of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder during the whole time of the meeting for the purposes thereof. The said list may be the corporation’s regular record of shareholders if it is arranged in alphabetical order or contains an alphabetical index.

(b)    Shareholders are entitled to inspect the corporate records as and to the extent provided by the Code; provided, however, that only shareholders owning more than two percent (2%) of the outstanding shares of any class of the corporation’s stock shall be entitled to inspect (1) the minutes from any board, board committee or shareholders meeting (including any records of action taken thereby without a meeting); (2) the accounting records of the corporation; or (3) any record of the shareholders of the corporation.

 

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ARTICLE III

DIRECTORS

Section 1. Powers. Except as otherwise provided by any legal agreement among shareholders, the property, affairs and business of the corporation shall be managed and directed by its board of directors, which may exercise all powers of the corporation and do all lawful acts and things which are not by law, by any legal agreement among shareholders, by the articles of incorporation or by these bylaws directed or required to be exercised or done by the shareholders.

One member of the board of directors shall be selected by the board to serve as chairman. The chairman shall preside at all meetings of shareholders and the board and shall have such other powers and duties as may be assigned by the board of directors and as otherwise may be set forth herein. Except where by law the signature of the chief executive officer is required, the chairman shall possess the same power as the chief executive officer to sign all certificates representing shares of the corporation and all bonds, mortgages and other contracts requiring a seal, under the seal of the corporation.

Section 2. Number and Election . The number of directors constituting the entire board and the term of office for each director shall be as provided for in the articles of incorporation. The directors shall be elected by a majority of the votes cast at the annual meeting of shareholders at which a quorum is present; provided, however that directors shall be elected by a plurality of the votes cast at such meeting for which (a) the president receives a notice that a shareholder has nominated a candidate for election to the board of directors in compliance with the advance notice requirements for shareholder nominees for director set forth in Article III, Section 3; and (b) such nomination has not been withdrawn by such shareholder on or prior to the tenth (10th) day preceding the date that the corporation first mails its notice of meeting for such meeting to the shareholders. A majority of the votes cast means that the number of votes cast “for” a director’s election exceeds the number of votes cast “against” that director’s election. The following shall not be a vote cast: (1) a share otherwise present at the meeting but for which there is an abstention and (2) a share otherwise present at the meeting as to which a shareholder gives no authority or discretion, including “broker nonvotes.”

In the event an incumbent director fails to receive a majority of the votes cast (unless, pursuant to the immediately preceding paragraph, the director election standard is a plurality of the votes cast), the incumbent director shall promptly tender his or her resignation to the board of directors. The Nominating and Corporate Governance Committee of the board of directors will make a recommendation to the board of directors on whether to accept or reject the resignation, or whether other action should be taken. The board of directors, taking into account the recommendation of

 

6


the Nominating and Corporate Governance Committee, will determine whether to accept or reject such resignation, or what other action should be taken, within 100 days from the date of the certification of election results. Directors shall be natural persons who have attained the age of 18 years, but need not be residents of the State of Georgia.

Section 3. Nominations.

(a)    If any shareholder intends to nominate or cause to be nominated any candidate for election to the board of directors (other than any candidate to be sponsored by and proposed at the instance of the management), such shareholder shall notify the president by first class registered mail sent not later than the close of business on the sixtieth (60th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the preceding year’s annual meeting (provided, however, that in the event that (i) the date of the annual meeting is more than thirty (30) days before or more than seventy (70) days after such anniversary date, or (ii) no annual meeting was held during the preceding year, notice by the shareholder must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later on the sixtieth (60th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the corporation). Such notification shall contain the following information with respect to each nominee, to the extent known to the shareholder giving such notification:

 

  (i)

Name, address and principal present occupation;

 

  (ii)

To the knowledge of the shareholder who proposed to make such nomination, the total number of shares that may be voted for such proposed nominee;

 

  (iii)

The names and address of the shareholders who propose to make such nomination, and the number of shares of the corporation owned by each of such shareholders; and

 

  (iv)

The following additional information with respect to each nominee: age, past employment, education, beneficial ownership of shares in the corporation, past and present financial standing, criminal history (including any convictions, indictments or settlements thereof), involvement in any past or pending litigation or administrative proceedings (including threatened involvement), relationship to and agreements (whether or not in writing) with the shareholder(s) (and their relatives, subsidiaries and affiliates) intending to make such nomination, past and present relationships

 

7


  or dealings with the corporation or any of its subsidiaries, affiliates, directors, officers or agents, plans or ideas for managing the affairs of the corporation (including, without limitation, any termination of employees, any sales of corporate assets, any proposed merger, business combination or recapitalization involving the corporation, and any proposed dissolution or liquidation of the corporation), such individual’s written consent to being named in a proxy statement as a nominee and to serving as director if elected and all additional information relating to such person that would be required to be disclosed, or otherwise required, pursuant to Sections 13 or 14 of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), and the rules and regulations promulgated thereunder, in connection with any acquisition of shares by such nominee or in connection with the solicitation of proxies by such nominee for his or her election as a director, regardless of the applicability of such provisions of the Exchange Act

(b)    Any nominations not in accordance with the provisions of this Section 3 may be disregarded by the chairman of the meeting, and upon instruction by the chairman, votes cast for each such nominee shall be disregarded. In the event, however, that a person should be nominated by more than one shareholder, and if one such nomination complies with the provisions of this Section 3, such nomination shall be honored, and all shares voted for such nominee shall be counted.

Section 4. Vacancies. All vacancies, including vacancies resulting from any increase in the number of directors or from removal of a director, shall be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director. If there are no directors in office, then vacancies shall be filled through election by the shareholders. Any director elected to fill a vacancy shall serve the unexpired term of his or her predecessor and until his or her successor is duly elected and qualified; provided that any director filling a vacancy by reason of an increase in the number of directors, where such vacancy is filled by the directors, shall serve until the next annual meeting of shareholders and until his or her successor is duly elected and qualified.

Section 5. Meetings and Notice. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Georgia. Regular meetings of the board of directors may be held without notice at such time and place as shall from time to time be determined by resolution of the board. Special meetings of the board may be called by the chairman of the board or chief executive officer or by any two directors on one day’s oral, telegraphic or written notice duly given or served on each director personally, or three days’ notice deposited, first class postage prepaid, in the United States mail. Such notice shall state a reasonable

 

8


time, date and place of meeting, but the purpose need not be stated therein. A director may waive any notice required by the Code, the articles of incorporation, or these bylaws before or after the date and time of the matter to which the notice relates, by a written waiver signed by the director and delivered to the corporation for inclusion in the minutes or filing with the corporate records. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting and waiver of all objections to the place and time of the meeting, or the manner in which it has been called or convened except when the director states, at the beginning of the meeting, any such objection or objections to the transaction of business.

Section 6. Quorum. At all meetings of the board a majority of directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board, except as may be otherwise specifically provided by law, by the articles of incorporation, or by these bylaws. If a quorum shall not be present at any meeting of the board, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

Section 7. Conference Telephone Meeting. Unless the articles of incorporation or these bylaws otherwise provide, members of the board of directors, or any committee designated by such board, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person.

Section 8. Consent of Directors. Unless otherwise restricted by the articles of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, setting forth the action so taken, and the writing or writings are delivered to the corporation for inclusion in the minutes or filing with the corporate records. Such consent shall have the same force and effect as a unanimous vote of the board.

Section 9. Committees. The board of directors may, by resolution passed by a majority of the whole board, designate from among its members one or more committees, each committee to consist of two or more directors. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of such committee. Any such committee, to the extent provided in the resolution, shall have and may exercise all of the authority of the board of directors in the management of the business and affairs of the corporation except that it shall have no authority with respect to (1) amending the articles

 

9


of incorporation or these bylaws; (2) adopting a plan of merger or consolidation; (3) the sale, lease, exchange or other disposition of all or substantially all of the property and assets of the corporation; (4) a voluntary dissolution of the corporation or a revocation thereof; and (5) any other action limited by law. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. A majority of each committee may determine its action and may fix the time and place of its meetings, unless otherwise provided by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required.

Section 10. Removal of Directors. At any shareholders meeting with respect to which notice of such purpose has been given, any director may be removed from office, with cause, by the vote of shareholders representing a majority of the issued and outstanding capital stock entitled to vote for the election of directors, and any vacancy created by such removal shall be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and a director so chosen shall hold office until the next annual meeting and until his or her successor is duly elected and qualified unless sooner displaced.

Section 11. Compensation of Directors. Directors shall be entitled to such reasonable compensation for their services as directors or members of any committee of the board as shall be fixed from time to time by resolution adopted by the board, and shall also be entitled to reimbursement for any reasonable expenses incurred in attending any meeting of the board or any such committee.

ARTICLE IV

OFFICERS

Section 1. Number. The officers of the corporation shall be chosen by the board of directors, which shall include a chief executive officer, a president, a chief financial officer and a secretary, and which may include one or more vice presidents (any one or more of whom may be given an additional designation of rank or function), assistant officers, and such other officers as the board of directors shall deem appropriate. Any number of offices may be held by the same person.

Section 2. Compensation. The salaries of all officers shall be fixed by the board of directors or a committee or officer appointed by the board.

Section 3. Term of Office. Unless otherwise provided by resolution of the board of directors, the principal officers shall be chosen annually by the board at the first meeting of the board following the annual meeting of shareholders of the corporation, or as soon thereafter as is conveniently possible. Subordinate officers may be elected from time to time. Each officer shall serve until his or her successor shall have been chosen and qualified, or until his or her death, resignation or removal.

 

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Section 4. Removal. Any officer may be removed from office at any time, with or without cause, by the board of directors whenever in its judgment the best interest of the corporation will be served thereby.

Section 5. Vacancies. Any vacancy in an office resulting from any cause may be filled by the board of directors.

Section 6. Powers and Duties. The officers shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the board of directors. In addition, the following officers shall each have the powers and duties set forth below:

(a)    Chief Executive Officer. The chief executive officer shall be the chief executive officer of the corporation and shall, in the absence of the chairman of the board, preside at all meetings of shareholders, and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Except where by law the signature of the president is required, the chief executive officer shall possess the same power as the president to sign all certificates representing shares of the corporation and all bonds, mortgages and other contracts requiring a seal, under the seal of the corporation.

(b)    President. The president shall, in the absence of the chairman of the board and the chief executive officer, preside at all meetings of shareholders. The president shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. The president shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required by law to be otherwise signed and executed.

(c)    Chief Financial Officer. The chief financial officer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the corporation and shall deposit or cause to be deposited, in the name of the corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by or under authority of the board of directors. The chief financial officer shall keep or cause to be kept full and accurate records of all receipts and disbursements in books of the corporation.

(d)    Vice President. In the absence of the president or in the event of the president’s inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice president in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.

 

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(e)    Secretary. The secretary shall cause minutes of all meetings of the board of directors and shareholders to be recorded and kept and shall perform like duties for the standing committees when required. The secretary shall give, or cause to be given, notice of all meetings of shareholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision the secretary shall be. The secretary shall have custody of the corporate seal of the corporation and the secretary, or an assistant secretary, shall have authority to affix the same to the instrument requiring it and when so affixed, it may be attested by the secretary’s signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by such officer’s signature.

(f)    Assistant Officers. Any assistant officer of the corporation shall have such duties and authority as the officer such assistant officer assists and, in addition, such other duties and authority as the board of directors or chief executive officer shall from time to time assign.

(g)    Other Officers. Any other officer of the corporation shall have such duties and authority as the board of directors or chief executive officer shall from time to time assign.

Section 7. Voting Securities of Corporation. Unless otherwise directed by the board of directors, the chief executive officer shall have full power and authority on behalf of the corporation to attend and to act and vote at any meetings of security holders of corporations in which the corporation may hold securities, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the corporation might have possessed and exercised if it had been present. The board of directors by resolution from time to time may confer like powers upon any other person or persons.

ARTICLE V

CAPITAL STOCK

Section 1. No Certificates for Shares. Shares of the corporation’s stock will be issued without certificates as “Book Entry” shares and entered on the books of the corporation and registered as they are issued. Within a reasonable time after the issuance or transfer of shares without certificates, the corporation’s transfer agent shall send the shareholder a written notification of the information required on certificates by applicable law, rule or regulation.

 

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Section 2. Transfers.

(a)    Transfers of shares of the capital stock of the corporation shall be made only on the books of the corporation by the registered holder thereof, or by his or her duly authorized attorney, or with a transfer clerk or transfer agent appointed as provided in Section 4 of this Article upon the presentation proper evidence of authority to transfer by the record holder, and the payment of all taxes thereon.

(b)    The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and for all other purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law.

(c)    Shares of capital stock may be transferred upon receipt of proper transfer instructions from the registered owner of such Book Entry shares, or from a duly authorized agent or attorney. No transfer shall affect the right of the corporation to pay any dividend upon the stock to the holder of record as the holder in fact thereof for all purposes, and no transfer shall be valid, except between the parties thereto, until such transfer shall have been made upon the books of the corporation as herein provided.

(d)    The board may, from time to time, make such additional rules and regulations as it may deem expedient, not inconsistent with these bylaws, the articles of incorporation or applicable law, rule or regulation, concerning the issue, transfer and registration of shares of the capital stock of the corporation.

Section 3. Record Date. In order that the corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than 70 days and, in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of and to vote at any meeting of shareholders, the record date shall be at the close of business on the day next preceding the day on which the notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. If no record date is fixed for other purposes, the record date shall be at the close of business on the day next preceding the day on which the board of directors adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the board of directors shall fix a new record date for the adjourned meeting.

 

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Section 4. Transfer Agent and Registrar. The board of directors may appoint one or more transfer agents or one or more transfer clerks and one or more registrars.

ARTICLE VI

GENERAL PROVISIONS

Section 1. Distributions. Distributions upon the capital stock of the corporation, subject to the provisions of the articles of incorporation, if any, may be declared by the board of directors at any regular or special meetings, pursuant to law. Distributions may be paid in cash, in property, or in shares of the corporation’s capital stock, subject to the provisions of the articles of incorporation. Before payment of any distribution, there may be set aside out of any funds of the corporation available for distributions such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing distributions, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.

Section 2. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the board of directors.

Section 3. Seal. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words “Corporate Seal” and “Georgia”. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. In the event it is inconvenient to use such a seal at any time, the signature of the corporation followed by the word “Seal” enclosed in parentheses shall be deemed the seal of the corporation.

Section 4. Savings Clause. To the extent these bylaws conflict with any provision of any state or federal law as such laws may be amended from time to time, these bylaws shall be construed so as not to conflict with said law, and any discretionary actions made hereunder shall be made in accordance with applicable law.

 

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ARTICLE VII

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 1. Indemnification of Directors and Officers. To the fullest extent permitted by law, the corporation shall indemnify, defend and hold harmless any person (an “Indemnified Person”) who is or was a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether formal or informal (a “Proceeding”) (other than an action or suit by or in the right of the corporation) by reason of the fact that he or she is or was a director or officer of the corporation, or, while a director or officer of the corporation, is or was serving in another Corporate Status (as defined below) against all expenses (including, but not limited to, attorneys’ fees and disbursements, court costs and expert witness fees) (collectively, “Expenses”), and against all judgments, fines, penalties and amounts paid in settlement (including any excise tax assessed with respect to an employee benefit plan) (collectively, “Liabilities”) that may be imposed upon or incurred by him or her in connection with or resulting from such Proceeding, if he or she acted in good faith and, in the case of conduct in his or her official capacity, in a manner he or she reasonably believed to be in the best interests of the corporation, and in all other cases, in a manner he or she reasonably believed to not be opposed to the best interests of the corporation, and with respect to any criminal Proceeding, had no reasonable cause to believe his or her conduct was unlawful. “Corporate Status” describes (a) the status of a person who is or was a director or officer of the corporation or an individual who, while a director or officer of the corporation, is or was serving at the corporation’s request as a director, officer, partner, trustee, employee, administrator or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, entity, or other enterprise, and (b) a person’s service in connection with an employee benefit plan at the corporation’s request if such person’s duties to the corporation also impose duties on, or otherwise involve services by, such person to the plan or to participants in or beneficiaries of the plan.

Section 2. Indemnification of Directors and Officers for Derivative Actions. The corporation shall indemnify, defend and hold harmless any Indemnified Person who is or was a party, or is threatened to be made a party, to any threatened, pending or completed Proceeding by or in the right of the corporation, by reason of the fact that he or she is or was a director or officer of the corporation, or, while a director or officer of the corporation, is or was serving in another Corporate Status (a) to the fullest extent permitted by law, against all Expenses that may be imposed upon or incurred by him or her in connection with or resulting from such Proceeding, if he or she acted in good faith and, in the case of conduct in his or her official capacity, in a manner he or she reasonably believed to be in the best interests of the corporation and in all other cases, in a manner he or she reasonably believed to not be opposed to the best interests of the corporation, and with

 

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respect to any criminal Proceeding, had no reasonable cause to believe his or her conduct was unlawful, and (b) to the fullest extent permitted by law (including through a determination by a court of competent jurisdiction pursuant to Section 14-2-854 of the Code) against all Expenses and Liabilities that may be imposed upon or incurred by him or her in connection with or resulting from such Proceeding.

Section 3. Indemnification Upon Successful Defense on Merits, Etc. Notwithstanding any other provision of this Article VII, to the extent that an Indemnified Person is, by reason of his or her Corporate Status, a party to and is successful on the merits or otherwise in any Proceeding, the Indemnified Person shall be indemnified against Expenses imposed upon or incurred by him or her in connection with the Proceeding, regardless of whether the Indemnified Person has met the standards set forth in the Code or in this Article VII and without any further action or determination by the board of directors of the corporation or otherwise. If an Indemnified Person is not wholly successful in such Proceeding but is successful on the merits or otherwise as to one or more but less than all claims, issues or matters in such Proceeding, the corporation shall indemnify the Indemnified Person against all Expenses imposed upon or incurred by him or her in connection with each claim, issue or matter with respect to which the Indemnified Person was successful. For the purposes of this Section 3 and without limiting the foregoing, (a) the termination of any claim, issue or matter in any such Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter, and (b) a decision by any government, regulatory or self-regulatory authority, agency or body not to commence or pursue any investigation, civil or criminal enforcement matter or case or in any civil suit, shall be deemed to be a successful result as to such claim, issue or matter. If an Indemnified Person is entitled under any provision of the Code or this Article VII to indemnification by the corporation for some or a portion of the Expenses or Liabilities imposed upon or incurred by him or her in connection with the investigation, defense, appeal or settlement of a Proceeding covered by this Article VII, but is not entitled to indemnification for the total amount thereof, the corporation shall nevertheless indemnify the Indemnified Person for the portion of such Expenses and Liabilities imposed upon or incurred by him or her to which the Indemnified Person is entitled.

Section 4. Indemnification and Advancement of Expenses for Directors and Officers When Acting as a Witness, Etc. To the fullest extent permitted by law, any Indemnified Person who acts as a witness or other participant in any Proceeding, shall be indemnified by the corporation against all Expenses imposed upon or incurred by the Indemnified Person in connection therewith.

Section 5. Indemnification of Employees and Agents. The board of directors shall have the power to cause the corporation to provide to any person who is or was an employee or agent of the corporation all or any part of the right to indemnification and other rights of the type provided

 

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under Sections 1, 2, 3, 4, 7 and 12 of this Article VII (subject to the conditions, limitations, obligations and other provisions specified herein), upon a resolution to that effect identifying such employee or agent (by position or name) and specifying the particular rights provided, which may be different for each employee or agent identified. Each employee or agent of the corporation so identified shall be an “Indemnified Person” for purposes of the provisions of this Article VII.

Section 6. Effectuation of Rights. Sections 1, 2, 3, 4 and 7 of this Article VII are intended to, and shall be deemed to, satisfy the requirements for authorization referred to in Section 14-2-859(a) of the Code or any successor provision and any other requirements of applicable law such that the corporation shall be obligated to the maximum extent possible to provide such indemnification and advancement of Expenses without any further requirements for authorization or action referred to in Sections 14-2-853(c) or 14-2-855(c) of the Code or any successor provision, or otherwise. The corporation shall act in good faith and expeditiously take all actions necessary or appropriate to make available the indemnification, advancement of Expenses and other rights provided for Indemnified Persons in this Article VII, and shall expeditiously take all actions necessary or appropriate to remove any impediments or obstacles to such indemnification, advancement of Expenses and other rights. To the extent any determination of entitlement to indemnification is required for purposes of the Code or this Article VII, at the request of the Indemnified Person, such determination shall be made by Special Legal Counsel (as defined below) proposed by the Indemnified Person and reasonably acceptable to the corporation. In the event of any dispute as to whether an Indemnified Person is entitled to indemnification or advancement of Expenses under the Code or this Article VII, the Indemnified Person shall be entitled to an expeditious and final adjudication in the Georgia State-Wide Business Court (the “Business Court”), which the corporation agrees shall be the exclusive venue for any court action to determine whether the Indemnified Person is entitled to such indemnification or advancement of Expenses. The corporation shall seek expedited resolution of the matter and agrees that the Business Court may summarily determine the corporation’s obligation to advance Expenses. The corporation irrevocably waives trial by jury with respect to the determination whether an Indemnified Person is entitled to indemnification or advancement of Expenses. If an Indemnified Person, pursuant to this Section 6, seeks a judicial adjudication of his or her rights under this Article VII, the Indemnified Person shall be entitled to recover from the corporation, and shall be indemnified by the corporation against, any and all Expenses actually and reasonably incurred by him of her in such judicial adjudication, but only if he or she prevails therein.

If it shall be determined in such judicial adjudication that the Indemnified Person is entitled to receive part but not all of the indemnification or advancement of expenses sought, the Expenses incurred by the Indemnified Person in connection with such judicial adjudication shall be

 

17


appropriately prorated. As used in this Section 6, “Special Legal Counsel” means an attorney with an active membership in good standing in the State Bar of Georgia who is experienced in matters of corporate law and neither he or she, nor his or her law firm, presently is, nor in the past five years has been, retained to represent: (i) the corporation or the Indemnified Person in any other matter material to either such party; or (ii) any other party to the Proceeding giving rise to a claim for indemnification, provided that the term “Special Legal Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the corporation or the Indemnified Person in an action to determine the Indemnified Person’s rights under the Code or this Article VII.

Section 7. Advances. Expenses imposed upon or incurred by an Indemnified Person in defending any Proceeding of the kind described in Sections 1, 2 and 3 hereof shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding as set forth herein. The corporation shall promptly pay the amount of such Expenses to the Indemnified Person, but in no event later than ten days following the Indemnified Person’s delivery to the corporation of a written request for an advance pursuant to this Section 7, together with a reasonable accounting of such expenses; provided, however, that the Indemnified Person shall furnish the corporation a written affirmation of his or her good faith belief that he or she has met the standard of conduct set forth in the Code or that the proceeding involves conduct for which liability has been eliminated under a provision of the articles of incorporation, as authorized by paragraph (4) of subsection (b) of Section 14-2-202 of the Code or any successor provision, and a written undertaking and agreement, executed personally or on his or her behalf, to repay to the corporation any advances made pursuant to this Section 7 if it shall be ultimately determined that the Indemnified Person is not entitled to be indemnified by the corporation for such amounts. The corporation shall make the advances contemplated by this Section 7 regardless of the Indemnified Person’s financial ability to make repayment. Any advances and undertakings to repay pursuant to this Section 7 shall be unsecured and interest-free.

Section 8. Non-Exclusivity. Subject to any applicable limitation imposed by the Code or the articles of incorporation, the indemnification and advancement of expenses provided by or granted pursuant to this Article VII shall not be exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under applicable law or any bylaw, resolution or agreement, including as may be approved by the corporation’s shareholders.

Section 9. Insurance. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or who, while a director, officer, employee, or agent of the corporation, is or was serving as a director, officer, trustee, general partner, employee or agent of a Subsidiary or, at the request of the

 

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corporation, of any other organization or in any other Corporate Status, against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of this Article VII.

Section 10. Security. The corporation may designate certain of its assets as collateral, provide self-insurance or otherwise secure its obligations under this Article VII, or under any indemnification agreement or plan of indemnification adopted and entered into in accordance with the provisions of this Article VII, as the board of directors deems appropriate.

Section 11. Amendment. Any amendment to this Article VII that limits or otherwise adversely affects the right of indemnification, advancement of expenses, or other rights of any Indemnified Person hereunder shall, as to such Indemnified Person, apply only to claims, actions, suits or proceedings based on actions, events or omissions (collectively, “Post Amendment Events”) occurring after such amendment and after delivery of notice of such amendment to the Indemnified Person so affected. Any Indemnified Person shall, as to any claim, action, suit or proceeding based on actions, events or omissions occurring prior to the date of receipt of such notice, be entitled to the right of indemnification, advancement of expenses and other rights under this Article VII to the same extent as if such provisions had continued as part of the bylaws of the corporation without such amendment. This Section 11 cannot be altered, amended or repealed in a manner effective as to any Indemnified Person (except as to Post Amendment Events) without the prior written consent of such Indemnified Person.

Section 12. Agreements. In addition to the rights provided in this Article VII, the corporation shall have the power, upon authorization by the board of directors, to enter into an agreement or agreements providing to any person who is or was a director, officer, employee or agent of the corporation indemnification rights substantially similar to, or greater than, those provided in this Article VII.

Section 13. Continuing Benefits. The indemnification and advancement of expenses provided by or granted pursuant to this Article VII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the spouse, heirs, devisees, executors, administrators and other legal representatives of such a person.

Section 14. Successors. For purposes of this Article VII, the terms “the corporation” or “this corporation” shall include any corporation, joint venture, trust, partnership or unincorporated business association that is the successor to all or substantially all of the business or assets of this corporation, as a result of merger, consolidation, sale, liquidation or otherwise, and any such successor shall be liable to the persons indemnified under this Article VII on the same terms and conditions and to the same extent as this corporation.

 

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Section 15. Severability. Each of the sections of this Article VII, and each of the clauses set forth herein, shall be deemed separate and independent, and should any part of any such section or clause be declared invalid or unenforceable by any court of competent jurisdiction, such invalidity or unenforceability shall in no way render invalid or unenforceable any other part thereof or any other separate section or clause of this Article VII that is not declared invalid or unenforceable. If any section, clause or part of this Article VII is determined to be invalid or unenforceable, the corporation in good faith shall expeditiously take all necessary or appropriate action to provide the Indemnified Persons with rights under this Article VII (including with respect to indemnification, advancement of Expenses and other rights) that effect the original intent of this Article VII as closely as possible.

Section 16. Additional Indemnification. In addition to the specific indemnification rights set forth herein, the corporation shall indemnify each of its directors and officers and advance expenses to its directors and officers to the full extent permitted by action of the board of directors without shareholder approval under the Code or other laws of the State of Georgia as in effect from time to time.

ARTICLE VIII

AMENDMENTS

The board of directors shall have power to alter, amend or repeal the bylaws by majority vote of all of the directors, but any bylaws adopted by the board of directors may be altered, amended or repealed and new bylaws adopted, by the shareholders by majority vote of all of the shares having voting power.

ARTICLE IX

FORUM FOR ADJUDICATION OF DISPUTES

Unless the corporation consents in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for any shareholder (including a beneficial owner) to bring (a) any derivative action or proceeding brought on behalf of the corporation, (b) any action asserting a claim of breach of a fiduciary or legal duty owed by any current or former director, officer, employee, shareholder, or agent of the corporation to the corporation or the corporation’s shareholders, including a claim alleging the aiding and abetting of any such breach of fiduciary duty, (c) any action asserting a claim against the corporation, its current or former directors, officers, employees, shareholders, or agents arising pursuant to any provision of the Code or the corporation’s articles of incorporation or bylaws (as either may be amended from time to time), (d) any action asserting a claim against the corporation, its current or former directors, officers, employees, shareholders, or agents governed by the internal affairs doctrine, or (e) any action against the corporation, its current or former directors, officers, employees, shareholders, or agents asserting a claim identified in O.C.G.A. § 15-5A-3 shall be the Georgia State-Wide Business Court (the “Chosen Court”).

To the fullest extent permitted by law, if any action the subject matter of which is within the scope of the preceding paragraph is filed in a court (a “Foreign Court”) other than the Chosen Court (a “Foreign Action”) in the name of any shareholder, such shareholder shall be deemed to have consented to (i) the personal jurisdiction of the Chosen Court in connection with any action brought in any such Foreign Court to enforce the preceding sentence and (ii) having service of process made upon such shareholder in any such action by service upon such shareholder’s counsel in the Foreign Action as agent for such shareholder. This Article IX shall not apply to any action asserting claims arising under the Exchange Act or under the Securities Act of 1933, as amended.

 

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Exhibit 10.1

FORM OF

TRANSITION SERVICES AGREEMENT

By and Between

AARON’S HOLDINGS COMPANY, INC.

and

AARON’S SPINCO, INC.

Dated as of [•], 2020

 


TABLE OF CONTENTS

 

ARTICLE I DEFINITIONS

   1

Section 1.01.

  Definitions    1

ARTICLE II SERVICES

   5

Section 2.01.

  Services    5

Section 2.02.

  Additional Services    5

Section 2.03.

  Performance of Services    6

Section 2.04.

  Changes in the Performance of Services    7

Section 2.05.

  Transitional Nature of Services    7

Section 2.06.

  Subcontracting    7

Section 2.07.

  Contract Manager    8

ARTICLE III SERVICE CHARGES

   8

Section 3.01.

  Charges for Services    8

Section 3.02.

  Reimbursement for Out-of-Pocket Costs and Expenses    9

ARTICLE IV BILLING; TAXES

   9

Section 4.01.

  Billing and Payment    9

Section 4.02.

  Late Payments    9

Section 4.03.

  Taxes    9

Section 4.04.

  No Set-Off    10

ARTICLE V TERM AND TERMINATION

   10

Section 5.01.

  Term    10

Section 5.02.

  Early Termination    10

Section 5.03.

  Reduction of Services    11

Section 5.04.

  Interdependencies    11

Section 5.05.

  Effect of Termination    11

Section 5.06.

  Information Transmission    11

ARTICLE VI ACCESS; SYSTEM SECURITY

   12

Section 6.01.

  Access    12

Section 6.02.

  System Security    12

ARTICLE VII CONFIDENTIALITY; PROTECTIVE ARRANGEMENTS

   13

Section 7.01.

  Confidentiality    13

Section 7.02.

  Privacy and Data Protection Laws    13

 

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ARTICLE VIII LIMITED LIABILITY AND INDEMNIFICATION

     13  

Section 8.01.

  Limitations on Liability      13  

Section 8.02.

  Obligation to Re-Perform; Liabilities      14  

Section 8.03.

  Third-Party Claims      14  

Section 8.04.

  Provider Indemnity      14  

Section 8.05.

  Indemnification Procedures      14  

Section 8.06.

  Liability for Payment Obligations      15  

Section 8.07.

  Exclusions of Other Remedies      15  

ARTICLE IX MISCELLANEOUS

     15  

Section 9.01.

  Further Assurances      15  

Section 9.02.

  Title to Intellectual Property      15  

Section 9.03.

  Independent Contractors      15  

Section 9.04.

  Group Members      16  

Section 9.05.

  Counterparts; Entire Agreement; Corporate Power      16  

Section 9.06.

  Governing Law      16  

Section 9.07.

  Assignability      17  

Section 9.08.

  Third-Party Beneficiaries      17  

Section 9.09.

  Notices      17  

Section 9.10.

  Severability      18  

Section 9.11.

  Force Majeure      18  

Section 9.12.

  Headings      19  

Section 9.13.

  Survival of Covenants      19  

Section 9.14.

  Waivers of Default      19  

Section 9.15.

  Dispute Resolution      19  

Section 9.16.

  Specific Performance      20  

Section 9.17.

  Amendments      20  

Section 9.18.

  Precedence of Schedules      20  

Section 9.19.

  Interpretation      21  

Section 9.20.

  Mutual Drafting      21  

 

 

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TRANSITION SERVICES AGREEMENT

This TRANSITION SERVICES AGREEMENT (this “Agreement”) is entered into as of [•], 2020 between Aaron’s Holdings Company, Inc., a Georgia corporation (“RemainCo”), and Aaron’s SpinCo, Inc., a Georgia corporation (“SpinCo”). RemainCo and SpinCo are sometimes referred to herein, individually, as a “Party,” and, collectively, as the “Parties.” Capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to such terms in Article I hereof.

R E C I T A L S:

WHEREAS, the Board of Directors of RemainCo has determined that it is appropriate, desirable and in the best interests of RemainCo and its shareholders to effectuate the Separation and the Distribution as described in the Separation and Distribution Agreement between RemainCo and SpinCo dated as of [•], 2020 (the “Separation Agreement”);

WHEREAS, the Separation Agreement provides, among other things, subject to the terms and conditions thereof, for the Separation and the Distribution and for the execution and delivery of certain other agreements, including this Agreement; and

WHEREAS, in order to facilitate and provide for an orderly transition in connection with the Separation and the Distribution, the Parties desire to enter into this Agreement to set forth the terms and conditions pursuant to which each of the Parties shall provide Services to the other Party for a transitional period.

NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:

ARTICLE I

DEFINITIONS

Section 1.01. Definitions. For purposes of this Agreement (including the recitals hereof), the following terms have the following meanings, and capitalized terms used but not otherwise defined herein shall have the meaning ascribed to them in the Separation Agreement:

Accessing Party” has the meaning set forth in Section 6.02(a).

Action” means any claim, demand, action, suit, countersuit, arbitration, inquiry, subpoena, discovery request, proceeding or investigation of any nature (whether criminal, civil, legislative, administrative, regulatory, prosecutorial or otherwise) by or before any Governmental Authority or any federal, state, local, foreign or international arbitration or mediation tribunal.

Additional Services” has the meaning set forth in Section 2.02.


Affiliate” has the meaning set forth in the Separation Agreement.

Agreement” has the meaning set forth in the Preamble.

Ancillary Agreements” has the meaning set forth in the Separation Agreement.

Business Entity” has the meaning set forth in the Separation Agreement.

Charge” and “Charges” have the meaning set forth in Section 3.01.

Confidential Information” means all Information that is either confidential or proprietary.

Contract Manager” has the meaning set forth in Section 2.07.

Dispute” has the meaning set forth in Section 9.15(a).

Distribution” has the meaning set forth in the Separation Agreement.

Distribution Date” means the date on which the Distribution is consummated.

e-mail” has the meaning set forth in Section 9.09.

Effective Time” means 11:59 Eastern Standard Time on the Distribution Date.

Force Majeure” means, with respect to a Party, an event beyond the control of such Party (or any Person acting on its behalf), which by its nature could not reasonably have been foreseen by such Party (or such Person), or, if it could reasonably have been foreseen, was unavoidable, and includes acts of God, unusually severe weather conditions, floods, riots, fires, explosions, sabotage, civil commotion or civil unrest, interference by civil or military authorities, cyberattacks, epidemics, pandemics, acts of war (declared or undeclared) or armed hostilities, other regional, national or international calamities or acts of terrorism, strikes, labor stoppages, or slowdowns or other industrial disturbances; or failures of energy sources or distribution or transportation facilities. Notwithstanding the foregoing, the receipt by a Party of an unsolicited takeover offer or other acquisition proposal, even if unforeseen or unavoidable, and such Party’s response thereto shall not be deemed an event of Force Majeure.

Governmental Authority” means any supranational, international, national, federal, state, provincial or local court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority, including the New York Stock Exchange or any similar self-regulatory body under applicable securities Laws.

Group” means either the RemainCo Group or the SpinCo Group.

Group Member” means any Business Entity that is a part of either the RemainCo Group or the SpinCo Group, as the context requires.

 

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Information” means information in written, oral, electronic or other tangible or intangible forms, including studies, reports, records, books, contracts, instruments, surveys, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts, data, marketing plans, customer names, Privileged Information, and other technical, financial, employee or business information or data; provided that “Information” does not include Patents, Trademarks, or Other Intellectual Property.

Initial Services” has the meaning set forth in Section 2.01(b).

Interest Payment” has the meaning set forth in Section 4.02.

Law” has the meaning set forth in the Separation Agreement.

Liabilities” has the meaning set forth in the Separation Agreement.

Party” or “Parties” has the meaning set forth in the Preamble.

Payment Date” has the meaning set forth in Section 4.01.

Person” means any (a) individual; (b) Business Entity; or (c) Governmental Authority.

Provider” means, with respect to any Service, the Party providing (or causing its other Group Members to provide) such Service under this Agreement.

Provider Indemnitees” has the meaning set forth in Section 8.03.

Recipient” means, with respect to any Service, the Party receiving (either directly or through its other Group Members) such Service under this Agreement.

Recipient Indemnitees” has the meaning set forth in Section 8.04.

RemainCo” has the meaning set forth in the Preamble.

RemainCo Business” means the “Progressive Leasing and Vive Business” as defined in the Separation Agreement.

RemainCo Group” means the “Parent Group” as defined in the Separation Agreement.

RemainCo Group Member” means “Parent Group Member” as defined in the Separation Agreement.

Representatives” means, with respect to any Person, any of such Person’s directors, officers, employees, agents, accountants, counsel, and other advisors or representatives.

Security Regulations” has the meaning set forth in Section 6.02(a).

Separation” has the meaning set forth in the Separation Agreement.

Separation Agreement” has the meaning set forth in the Recitals.

 

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Service Period” means, with respect to any Service, the period commencing on the later of (a) the Effective Time and (b) the date on which any Additional Service becomes a “Service” pursuant to the terms of this Agreement, and ending on the earlier of (i) the date that a Party terminates the provision of such Service pursuant to Section 5.02, and (ii) the termination date specified with respect to such Service set forth on Schedule A or Schedule B hereto.

Services” means the Initial Services and any Additional Services agreed to by the Parties in accordance with Section 2.02.

SpinCo” has the meaning set forth in the Preamble.

SpinCo Business” means the “Aaron’s Business” as defined in the Separation Agreement.

SpinCo Group” has the meaning set forth in the Separation Agreement.

Subsidiary” means, with respect to any Person, any Business Entity of which such Person: (a) beneficially owns, either directly or indirectly, more than 50% of (i) the total combined voting power of all classes of voting securities of such Business Entity; (ii) the total combined equity interests; or (iii) the capital or profit interests, in the case of a partnership; or (b) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors or similar governing body.

Systems” has the meaning set forth in Section 6.02(a).

Tax” has the meaning set forth in the Separation Agreement.

Taxing Authority” means, with respect to any Tax, the governmental entity or political subdivision thereof that imposes such Tax and the agency (if any) charged with the collection of such Tax for such entity or subdivision.

Termination Charges” shall mean, with respect to the termination of any Service pursuant to Section 5.02(a)(i), the sum of (a) any and all costs, fees and expenses (other than any severance or retention costs) payable by the Provider of such Service to a Third Party principally because of the early termination of such Service; provided, however, that the Provider shall use reasonable efforts to minimize any costs, fees or expenses payable to any Third Party in connection with such early termination of such Service and credit any such reductions against the Termination Charges payable by Recipient; and (b) any additional severance and retention costs, if any, because of the early termination of such Service that the Provider of such terminated Service incurs to employees who had been retained primarily to provide such terminated Service (it being agreed that the costs set forth in this clause (b) shall only be the amount, if any, in excess of the severance and retention costs that such Provider would have paid to such employees if the Service had been provided for the full period during which such Service would have been provided hereunder but for such early termination).

Third Party” means any Person other than the Parties or any of their respective Affiliates.

 

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Third-Party Claim” means any assertion by a Third Party of any claim, or the commencement by any Third Party of any Action, against any Party or any of its respective Affiliates.

ARTICLE II

SERVICES

Section 2.01. Services.

(a) Commencing as of the Effective Time, SpinCo shall use commercially reasonable efforts to provide (or cause another applicable member of the SpinCo Group to provide) to RemainCo (or another applicable member of the RemainCo Group) the services set forth on Schedule A.

(b) Commencing as of the Effective Time, RemainCo shall use commercially reasonable efforts to provide (or cause another applicable member of the RemainCo Group to provide) to SpinCo (or another applicable member of the SpinCo Group) the services set forth on Schedule B (collectively with the services set forth on Schedule A, the “Initial Services”).

Section 2.02. Additional Services.

(a) After the Effective Time and at any time prior to the twelve-month anniversary of the Distribution Date, each of RemainCo and SpinCo may request the other Party to (i) provide additional (including as to volume, amount, level or frequency, as applicable) or different services which the other Party is not expressly obligated to provide under this Agreement if such services are of the type and scope provided between the RemainCo Group and the SpinCo Group, in each case during the twelve months preceding the Distribution Date, (ii) expand the scope of any Service or (iii) expand the duration for which any Service is provided (such additional or expanded services, the “Additional Services”). The Party receiving such request for Additional Services shall consider such request in good faith and shall notify the requesting Party as promptly as practicable as to whether it will or will not provide the Additional Services; provided, however, that neither Party shall be obligated to provide any Additional Service if it does not, in its commercially reasonable judgment, have adequate resources to provide such Additional Service or if the provision of such Additional Service would significantly disrupt the operation of such Party’s or its Group Members’ businesses.

(b) If a Party agrees to provide Additional Services pursuant to Section 2.02(a), then the Parties shall in good faith attempt to negotiate the terms of a supplement to Schedule A and/or Schedule B, as applicable, which will describe in reasonable detail the service or service category, as applicable, project scope, term, price and payment terms to be charged for such Additional Services; it being understood, however, that the Service Provider shall not be required to provide any Additional Services if the Parties are unable to reach agreement on the terms thereof. If and to the extent agreed to in writing, the supplement to Schedule A and/or Schedule B, as applicable, shall be deemed part of this Agreement as of such date and the Additional Services shall be deemed “Services” provided hereunder, in each case subject to the terms and conditions of this Agreement.

 

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Section 2.03. Performance of Services.

(a) Subject to Section 2.06, Provider shall perform, or cause to be performed (through one (1) or more of its applicable Group Members, or through a Third-Party service provider in accordance herewith), all Services in a manner that is substantially similar in all material respects to the analogous services provided by or on behalf of Provider or any of its Subsidiaries to its applicable functional group or Subsidiary prior to the Effective Time and that in any event, conforms in all material respects with the terms of Schedule A and/or Schedule B. It is understood and agreed that the Service Provider is not a professional provider of the types of services included in the Services and that Provider personnel performing Services have other responsibilities and will not be dedicated full-time to performing Services hereunder.

(b) Nothing in this Agreement shall require Provider to perform or cause to be performed any Service to the extent that the manner of such performance would constitute a violation of any applicable Law or any existing contract, agreement or permit with a Third Party. If Provider is or becomes aware of any such potential violation, Provider shall use commercially reasonable efforts to promptly advise Recipient of such potential violation, and Provider and Recipient will mutually seek an alternative that addresses such potential violation. The Parties agree to cooperate in good faith and use commercially reasonable efforts to obtain any necessary Third Party consents required under any existing contract, agreement or permit with a Third Party to allow Provider to perform, or cause to be performed, all Services to be provided hereunder in accordance with the standards set forth in this Section 2.03. Recipient shall reimburse Provider for all reasonable out-of-pocket costs and expenses (if any) incurred by Provider or any of its Group Members in connection with obtaining any such Third-Party consent that is required to allow Provider to perform or cause to be performed such Services. If, with respect to a Service, the Parties, despite the use of such commercially reasonable efforts, are unable to obtain a required Third-Party consent, or the performance of such Service by Provider would constitute a violation of any applicable Law, the Provider shall, to the extent reasonably practicable, use commercially reasonable efforts in good faith to provide alternative services that are substantially similar to the applicable Services for which consent was not obtained, or the performance of which would constitute a violation of any applicable Law; provided, that nothing in this Section 2.03(b) shall obligate any Provider (or any Subsidiary of a Provider) to violate any applicable Law or breach any of its contractual obligations to a Third Party in connection with the provision of such alternative Services.

(c) It is the intent of the Provider to plan and staff such that the Provider can properly perform the Services that Provider has agreed to perform under this Agreement, and the Provider does not anticipate the need for any rationing or limitation of Services. Notwithstanding the foregoing, the Recipient acknowledges and agrees that the Provider shall have the right to establish reasonable priorities between the needs of the Provider, on the one hand, and the needs of the Recipient, on the other hand, as to the provision of any Service if the Provider determines that such priorities are necessary to avoid any adverse effect on the Provider. If any such priorities are established, the Provider shall advise the Recipient as soon as possible of any Service that will be materially delayed as a result of such prioritization, and will use commercially reasonable efforts to minimize the duration and impact of such delays.

(d) Neither Provider nor any of its Subsidiaries shall be required to perform or cause to be performed any of the Services for the benefit of any Third Party or any other Person other than Recipient and its Group Members.

 

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(e) EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 2.03 OR SECTION 8.04, EACH PARTY ACKNOWLEDGES AND AGREES, ON ITS OWN BEHALF AND ON BEHALF OF ITS GROUP MEMBERS, THAT ALL SERVICES (AND ANY RELATED PRODUCTS) PROVIDED UNDER THIS AGREEMENT ARE PROVIDED ON AN “AS-IS” BASIS, THAT RECIPIENT ASSUMES ALL RISK AND LIABILITY ARISING FROM OR RELATING TO ITS USE OF AND RELIANCE UPON THE SERVICES, AND THAT PROVIDER MAKES NO OTHER REPRESENTATIONS OR GRANTS ANY WARRANTIES, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, WITH RESPECT TO THE SERVICES. PROVIDER SPECIFICALLY DISCLAIMS ANY OTHER WARRANTIES, WHETHER WRITTEN OR ORAL, OR EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF QUALITY, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR USE OR PURPOSE OR THE NON-INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.

(f) Each Party shall be responsible for its own compliance with any and all Laws applicable to its performance under this Agreement. No Party shall knowingly take any action in violation of any such applicable Law that results in Liability being imposed on the other Party.

Section 2.04. Changes in the Performance of Services. Subject to the performance standards for Services set forth in this Article II, Provider may make changes from time to time in the manner of performing the Services if Provider is making similar changes in performing analogous services for itself and if Provider furnishes to Recipient reasonable prior written notice (in content and timing) of such changes; provided, that if such change shall adversely affect the timeliness or quality of, or increase the Charges for, the applicable Service, the Parties shall cooperate in good faith to agree on modifications to such Services as are commercially reasonable in consideration of the circumstances.

Section 2.05. Transitional Nature of Services. The Parties acknowledge the transitional nature of the Services and agree to cooperate in good faith and to use commercially reasonable efforts to avoid a disruption in the transition of the Services from Provider to Recipient (or its designee).

Section 2.06. Subcontracting. Provider may not hire or engage any Third Parties to perform any of the Services on its behalf except (a) for those Services specifically designated on Schedule A or Schedule B, as applicable (collectively, the “Subcontracting Services”) or (b) as mutually agreed in writing by the Parties. If Provider hires or engages any Third Parties to perform any Subcontracting Service, then (a) Provider shall use the same degree of care (but at least reasonable care) in selecting each such Third Party as it would if such Third Party was being retained to provide similar services to Provider and (b) Provider shall in all cases remain responsible (as primary obligor) for all of its obligations under this Agreement with respect to the scope of such Subcontracting Services, the performance standard for such Subcontracting Services set forth in this Article II and the content of the Subcontracting Services provided to Recipient. Provider shall be liable for any breach of its obligations under this Agreement by any Third-Party service provider engaged by Provider to provide any Subcontracting Service. Subject to the confidentiality provisions set forth in Article VII, Provider shall, and shall cause

 

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its Affiliates to, provide, upon fifteen (15) Business days’ prior written notice, any Information within Provider’s or its Affiliates’ control that Recipient reasonably requests in connection with any Subcontracting Services being provided to Recipient by a Third Party, including any applicable invoices, agreements documenting the arrangements between such Third Party and Provider and other supporting documentation; provided, further, that Recipient may make no more than three request(s) per Third Party during any calendar quarter.

Section 2.07. Contract Manager.

(a) Each Party shall appoint an individual to act as its primary point of operational contact for the administration and operation of this Agreement (each, a “Contract Manager”) who shall have overall responsibility for coordinating all activities undertaken by such Party hereunder, for acting as a day-to-day contact with the other Party, and for making available to the other Party the data, facilities, resources and other support services required for the performance of the services in accordance with the terms of this Agreement; provided that for each Service, the Contract Manager shall be permitted to delegate the foregoing responsibilities for such Service to an individual identified on the Schedules, and such representative shall be deemed to be the Contract Manager with respect to such Service. The initial Contract Managers for the Parties are set forth on Schedule A and Schedule B. The Parties may change their respective Contract Managers from time to time upon notice to the other Party in accordance herewith.

(b) Prior to performing any Service, the Contract Managers will use reasonable efforts to cooperate with each other to agree on the scope of the Service if such scope is not otherwise designated in Schedule A or Schedule B, as applicable. In the event that either Provider, or its Contract Manager, anticipate or become aware that the work to be performed for any Service will either (i) exceed the estimates provided on Schedule A or Schedule B, if applicable, for such Service or (ii) result in a material deviation from the scope of such Service, including a material increase in hours and/or related Charges to perform the Service that would exceed estimates or budgets, then, prior to commencing further work on the Service, the Provider’s Contract Manager will provide notice to the Recipient’s Contract Manager (which notice need not be provided in compliance with Section 9.09) and such Contract Managers will use reasonable efforts to cooperate with each other to determine and discuss the matter and appropriate next steps. Notwithstanding anything to the contrary in this Agreement, Provider shall not be in breach of this Agreement for any delay in the performance of any Service as a result of Provider complying with its obligations under this Section 2.07(b).

ARTICLE III

SERVICE CHARGES

Section 3.01. Charges for Services. The compensation to be received by Provider for each Service provided under this Agreement will be the fees or charges set forth in or calculated in the manner set forth in Schedule A or Schedule B, as applicable, relating to the particular Service, subject to any escalation, reduction or other modifications specifically provided for in such Schedule (each fee constituting a “Charge” and, collectively, “Charges”). During the term of this Agreement, the amount of a Charge for any Service may be modified to the extent of (a) any adjustments mutually agreed to by the Parties; (b) any Charges applicable to any Additional

 

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Services; and (c) any adjustment in the rates or charges imposed by any Third-Party provider that is providing Services; provided that Provider will notify Recipient in writing of any such change in rates at least thirty (30) days prior to the effective date of such rate change. In consideration for the provision of a Service, Recipient shall pay to Provider, in the manner set forth in Article IV, the Charge for such Service as set forth in or calculated in the manner set forth in Schedule A or Schedule B, as applicable.

Section 3.02. Reimbursement for Out-of-Pocket Costs and Expenses. Recipient shall reimburse Provider for reasonable out-of-pocket costs and expenses incurred by Provider or any member of its Group in connection with providing the Services (including reasonable travel-related expenses) to the extent that such costs and expenses are not reflected in the Charges for such Services; provided, however, that any such cost or expense in excess of two-thousand dollars ($2,000) that is not consistent with historical practice between the Parties for any individual Service (including business travel and related expenses) shall require advance written approval of Recipient; provided, further, that if Recipient does not provide such advance written approval and the incurrence of such cost or expense is reasonably necessary for Provider to provide such Service in accordance with the standards set forth in this Agreement, Provider shall not be required to perform such Service. Any authorized travel-related expenses incurred in performing the Services shall be charged to Recipient in accordance with Provider’s then-applicable business travel policies.

ARTICLE IV

BILLING; TAXES

Section 4.01. Billing and Payment. Within twenty-five (25) calendar days after the end of each month during the term of this Agreement, Provider will invoice Recipient for the applicable Charges (along with any expenses for which Provider is entitled to reimbursement pursuant to this Agreement, if known at that time) on a monthly basis, in arrears, for the prior month then ended. The invoice shall set forth in reasonable detail for the period covered by such invoice (a) the Services rendered, and (b) the Charges for such month for each type of Service provided, calculated in accordance with Schedule A or Schedule B, as applicable, and shall be accompanied by any applicable third party invoices and other documentation reasonably necessary for the Recipient to evaluate the invoiced amounts. Upon the Recipient’s request, Provider shall provide to Recipient reasonable additional detail and supporting documentation regarding invoiced amounts. All amounts due and payable hereunder shall be paid in U.S. dollars by wire transfer of immediately available funds to an account or accounts designated in writing from time to time by Provider within thirty (30) days after the receipt of such invoice (the “Payment Date”). In the event of any billing dispute, Recipient shall promptly pay any undisputed amount.

Section 4.02. Late Payments. Invoiced amounts not paid when due (including any undisputed amounts) shall accrue interest at a rate per annum equal to five percent (5%) calculated from the applicable Payment Date (the “Interest Payment”).

Section 4.03. Taxes. Without limiting any provisions of this Agreement, Recipient shall bear any and all Taxes and other similar charges (and any related interest and penalties) imposed on, or payable with respect to, any fees or charges, including any Charges, payable by it pursuant

 

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to this Agreement, including all sales, use, value-added, and similar Taxes, but excluding any Taxes on Provider’s income. Notwithstanding anything to the contrary in the previous sentence or elsewhere in this Agreement, Recipient shall be entitled to withhold from any payments to Provider any such Taxes that Recipient is required by applicable Law to withhold and shall pay such Taxes to the applicable Taxing Authority.

Section 4.04. No Set-Off. Except as mutually agreed in writing by the Parties, no Party nor any member of its Group shall have any right of set-off or other similar rights with respect to (a) any amounts received pursuant to this Agreement or (b) any other amounts claimed to be owed to the other Party or any of member of its Group arising out of this Agreement.

ARTICLE V

TERM AND TERMINATION

Section 5.01. Term. This Agreement shall commence at the Effective Time and shall terminate upon the earliest to occur of (a) the last date on which either Party is obligated to provide any Service to the other Party in accordance with the terms of this Agreement; and (b) the mutual written agreement of the Parties to terminate this Agreement in its entirety. Unless otherwise terminated pursuant to Section 5.02, this Agreement shall terminate with respect to each Service as of 11:59 p.m. Eastern Time on the last day of the Service Period for such Service. Prior to the termination date for any Service, the Parties may, by mutual written consent extend the Service Period for such Service as mutually agreed by the Parties. To the extent that Provider’s ability to provide a Service is dependent on the continuation of a specified Service, Provider’s obligation to provide such dependent Service shall terminate automatically with the termination of such supporting Service.

Section 5.02. Early Termination.

(a) Without prejudice to Recipient’s rights with respect to Force Majeure, Recipient may from time to time terminate this Agreement with respect to the entirety of any Service (but not any portion thereof) (i) for any reason or no reason, upon the giving of at least thirty (30) days’ prior written notice to Provider; provided, however, that such termination shall be subject to the obligation to pay any applicable Termination Charges pursuant to Section 5.05, or (ii) if Provider has failed to perform any of its material obligations under this Agreement with respect to such Service, and such failure shall continue to be uncured by Provider for a period of at least thirty (30) days after receipt by Provider of written notice of such failure from Recipient; provided, however, that Recipient shall not be entitled to terminate this Agreement with respect to the applicable Service if, as of the end of such period, there remains a good faith Dispute between the Parties (undertaken in accordance with the terms of Section 9.15) as to whether Provider has cured the applicable breach.

(b) Provider may terminate this Agreement with respect to the entirety of any Service (but not any portion thereof) at any time upon prior written notice to Recipient, if Recipient has failed to perform any of its material obligations under this Agreement with respect to such Service, including making payment of Charges when due, and such failure shall continue to be uncured by Recipient for a period of at least thirty (30) days after receipt by Recipient of a written notice of such failure from Provider; provided, however, that Provider shall not be entitled to terminate this Agreement with respect to the applicable Service if, as of the end of such period, there remains a good faith Dispute between the Parties (undertaken in accordance with the terms of Section 9.15) as to whether Recipient has cured the applicable breach.

 

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Section 5.03. Reduction of Services. Recipient may from time to time request a reduction in part of the scope of any Service. If requested to do so by Recipient, the Parties shall discuss in good faith appropriate adjustments to the relevant Charges. If, after such discussions, the Parties do not mutually agree on any requested reduction of the scope of any Service and the relevant Charges in connection therewith, then (a) there shall be no change to the Charges under this Agreement and (b) unless the Parties otherwise agree in writing, there shall be no change to the scope of any Services under this Agreement. If, after such discussions, the Parties mutually agree to any reduction of Service, Schedule A and/or Schedule B, as applicable, shall be appropriately supplemented to reflect such reduction in Service.

Section 5.04. Interdependencies. The Parties acknowledge that there may be interdependencies among the Services being provided under this Agreement that may not be identified on Schedule A or Schedule B, as applicable, and agree that, if the Service Provider’s ability to provide a particular Service in accordance with this Agreement is materially and adversely affected by the termination of another Service in accordance with Section 5.02, then the Parties shall negotiate in good faith (prior to such termination) to amend Schedule A or Schedule B, as applicable, relating to such affected continuing Service and (ii) if after such negotiation, the Parties are unable to agree on such amendment, Provider’s obligation to provide such affected continuing Service shall, instead, terminate automatically with the termination of another Service in accordance with Section 5.02.

Section 5.05. Effect of Termination. Upon the termination of any Service pursuant to this Agreement, Provider shall have no further obligation to provide the terminated Service, and Recipient shall have no obligation to pay any future Charges or other amounts relating to such Service provided, however, that Recipient shall remain obligated to Provider for (a) the Charges and any other amounts owed and payable in respect of Services provided prior to the effective date of termination for such Service and (b) solely in the case of when Recipient terminates any Service pursuant to Section 5.02(a)(i), any applicable Termination Charges. In the event that any Service is terminated other than at the end of a month, and the Charge associated with such Service is determined on a monthly basis, Provider shall bill Recipient on a pro rata basis based on the number of days in the current calendar month that Recipient used such Service. In connection with the termination of any Service, the provisions of this Agreement not relating solely to such terminated Service shall survive any such termination, and in connection with a termination of this Agreement, Article I, this Article V, Article VII, and Article VIII and all Liability for all due and unpaid Charges and other amounts and Termination Charges shall continue to survive indefinitely.

Section 5.06. Information Transmission. Provider, on behalf of itself and its Group Members, shall use commercially reasonable efforts to provide or make available, or cause to be provided or made available, to Recipient, in accordance with Section 6.01 of the Separation Agreement, any Information received or computed by Provider for the benefit of Recipient concerning the relevant Service during the Service Period; provided, however, that, except as otherwise agreed in writing by the Parties, (a) Provider and its Subsidiaries shall be reimbursed

 

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for their reasonable costs in accordance with Section 6.03 of the Separation Agreement for creating, gathering, copying, transporting and otherwise providing such Information and (b) Provider shall use commercially reasonable efforts to maintain any such Information in accordance with Section 6.04 of the Separation Agreement.

ARTICLE VI

ACCESS; SYSTEM SECURITY

Section 6.01. Access.

(a) Recipient shall provide (or cause any applicable member of its Group to provide) to Provider (or any applicable member of its Group to provide) such reasonable access, during regular business hours, to the employees, representatives, facilities and books and records of Recipient (or such member of its Group) as Provider (or such member of its Group) shall reasonably request in order to enable Provider (or such member of its Group) to provide any applicable Services required under this Agreement. Provider shall (and shall cause any applicable member of its Group to) conform with and abide by the confidentiality and security provisions in Section 6.02 and Article VII, as applicable, in connection with such access.

(b) Each Party shall (and shall cause the members of its Group and its personnel and the personnel of its Affiliates and Sub-Contractors providing or receiving Services to), when on the property of the other Party or any of its Group Members, or when given access to any facilities, infrastructure or personnel of the other Party or any of its Group Members, follow applicable Laws and all of the other Party’s policies and procedures concerning health, safety, conduct and security which are made known to the Party receiving such access from time to time.

Section 6.02. System Security.

(a) If any Party or any of its Group members is given access to the other Party’s (or such other Party’s Group Members) computer systems or software (collectively, the “Systems”) in connection with provision of any Services, the Party and/or its Group Members given access (the “Accessing Party”) shall comply with all of the other Party’s system security policies, procedures and requirements that have been provided to the Accessing Party in advance and in writing (collectively, “Security Regulations”), and shall not tamper with, compromise or circumvent any security or audit measures employed by such other Party (or such other Party’s Group Members). The Accessing Party shall access and use only those Systems of the other Party (or such other Party’s Group Members) or only the component, module, area or portion of any such system, where applicable, to which it has been granted the right of access and use.

(b) Each Party shall use commercially reasonable efforts to ensure that only those of its personnel (or the personnel of such Party’s Group Members) who are specifically authorized to have access to the Systems of the other Party (or such other Party’s Group Members) gain such access, and use commercially reasonable efforts to prevent unauthorized access, use, destruction, alteration or loss of information contained therein, including notifying its personnel of the restrictions set forth in this Agreement and of the Security Regulations.

 

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(c) If, at any time, the Accessing Party determines that any of its personnel has sought to circumvent, or has circumvented, the Security Regulations, that any unauthorized Accessing Party personnel has accessed the Systems, or that any of its personnel has engaged in activities that may lead to the unauthorized access, use, destruction, alteration or loss of data, information or software of the other Party (or such other Party’s Group Members), the Accessing Party shall promptly terminate any such Person’s access to the Systems and immediately notify the other Party. In addition, in such case such other Party shall have the right to deny personnel of the Accessing Party access to its Systems upon written notice to the Accessing Party. The Accessing Party shall use commercially reasonable efforts to cooperate with the other Party in investigating any apparent unauthorized access to such other Party’s Systems.

ARTICLE VII

CONFIDENTIALITY; PROTECTIVE ARRANGEMENTS

Section 7.01. Confidentiality. Each Party agrees that the specific terms and conditions of this Agreement and any information conveyed or otherwise received by or on behalf of a Party in conjunction herewith shall be Confidential Information subject to the confidentiality provisions (and exceptions thereto) set forth in Section 6.09 of the Separation Agreement.

Section 7.02. Privacy and Data Protection Laws. Each Party shall comply in all material respects with all applicable state, federal and foreign privacy and data protection Laws that are applicable to the provision of the Services under this Agreement.

ARTICLE VIII

LIMITED LIABILITY AND INDEMNIFICATION

Section 8.01. Limitations on Liability.

(a) THE LIABILITIES OF PROVIDER AND ITS GROUP MEMBERS AND THEIR RESPECTIVE REPRESENTATIVES, COLLECTIVELY, UNDER THIS AGREEMENT FOR ANY ACT OR FAILURE TO ACT IN CONNECTION HEREWITH (INCLUDING THE PERFORMANCE OR BREACH OF THIS AGREEMENT), OR FROM THE SALE, DELIVERY, PROVISION OR USE OF ANY SERVICES PROVIDED UNDER OR CONTEMPLATED BY THIS AGREEMENT, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE AND STRICT LIABILITY) OR OTHERWISE, SHALL NOT EXCEED THE AGGREGATE AMOUNT OF CHARGES PAID AND PAYABLE TO SUCH PROVIDER FOR ALL SERVICES BY THE RECIPIENT PURSUANT TO THIS AGREEMENT.

(b) IN NO EVENT SHALL EITHER PARTY, ANY MEMBER OF ITS GROUP OR ANY OF THEIR RESPECTIVE REPRESENTATIVES HAVE ANY LIABILITY TO THE OTHER PARTY OR ANY MEMBER OF ITS GROUP OR ANY OF THEIR RESPECTIVE REPRESENTATIVES UNDER THIS AGREEMENT FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE, EXEMPLARY, REMOTE, SPECULATIVE OR SIMILAR DAMAGES IN EXCESS OF COMPENSATORY DAMAGES OF THE OTHER PARTY (INCLUDING LOST PROFITS OR LOST REVENUES) IN CONNECTION WITH THE SALE, DELIVERY, PROVISION OR USE OF OR FAILURE TO

 

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PROVIDE SERVICES PROVIDED UNDER OR CONTEMPLATED BY THIS AGREEMENT (OTHER THAN ANY SUCH LIABILITY WITH RESPECT TO A THIRD-PARTY CLAIM), AND EACH PARTY HEREBY WAIVES ON BEHALF OF ITSELF, ITS GROUP MEMBERS AND ITS REPRESENTATIVES ANY CLAIM FOR SUCH DAMAGES, WHETHER ARISING IN CONTRACT, TORT OR OTHERWISE.

(c) The limitations in Section 8.01(a) and Section 8.01(b) shall not apply in respect of any Liability arising out of or in connection with (i) either Party’s Liability for breaches of confidentiality under Article VII, (ii) the Parties’ respective obligations under Section 8.03 or 8.04 or (iii) the willful misconduct, gross negligence or fraud of or by the Party to be charged.

Section 8.02. Obligation to Re-Perform; Liabilities. In the event of any breach of this Agreement by Provider with respect to the provision of any Services (with respect to which Provider can reasonably be expected to re-perform in a commercially reasonable manner), Provider shall, at the request of Recipient, promptly correct in all material respects such error, defect or breach or re-perform in all material respects such Services at the sole cost and expense of Provider. The remedy set forth in this Section 8.02 shall be the sole and exclusive remedy of Recipient for any such breach of this Agreement with respect to the provision of such Services; provided, however, that the foregoing shall not prohibit Recipient from exercising its right to terminate this Agreement in accordance with the provisions of Section 5.02(a)(ii) or to seek specific performance in accordance with Section 9.16 or to seek and obtain indemnification under Section 8.04. Any request for re-performance in accordance with this Section 8.02 by Recipient must be in writing and specify in reasonable detail the particular error, defect or breach, and such request must be made no more than thirty (30) days from the later of (a) the date on which such breach occurred and (b) the date on which such breach was reasonably discovered by Recipient.

Section 8.03. Third-Party Claims. Recipient shall indemnify, defend and hold harmless Provider, its Group Members and each of their respective Representatives, and each of the successors and assigns of any of the foregoing (collectively, the “Provider Indemnitees”), from and against any and all claims of Third Parties relating to, arising out of or resulting from Recipient’s use or receipt of the Services provided by Provider hereunder, other than Third-Party Claims arising out of Provider’s breaches of its obligations under Article VII or the gross negligence, willful misconduct or fraud of any Provider Indemnitee.

Section 8.04. Provider Indemnity. Provider shall indemnify, defend and hold harmless Recipient, its Group Members and each of their respective Representatives, and each of the successors and assigns of any of the foregoing (collectively, the “Recipient Indemnitees”), from and against any and all Liabilities relating to, arising out of or resulting from the sale, delivery or provision of any Services provided by Provider hereunder, but only to the extent that such Liability relates to, arises out of or results from Provider’s breaches of its obligations under Articles VII, gross negligence, willful misconduct or fraud.

Section 8.05. Indemnification Procedures. The procedures for indemnification set forth in Sections 5.05, 5.06 and 5.07 of the Separation Agreement shall govern claims for indemnification under this Agreement.

 

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Section 8.06. Liability for Payment Obligations. Nothing in this Article VIII shall be deemed to eliminate or limit, in any respect, any Party’s express obligation in this Agreement to pay Charges, Termination Charges or other specified reimbursements for Services rendered in accordance with this Agreement.

Section 8.07. Exclusions of Other Remedies. Without limiting the rights under Section 9.16, the provisions of Sections 8.02, 8.03 and 8.04 shall, to the maximum extent permitted by applicable Law, be the sole and exclusive remedies of the Provider Indemnitees and the Recipient Indemnitees, as applicable, for any Liability, whether arising from statute, principle of common or civil law, principles of strict liability, tort, contract or otherwise under this Agreement.

ARTICLE IX

MISCELLANEOUS

Section 9.01. Further Assurances. Subject to the limitations or other provisions in this Agreement, each of the Parties shall, and shall cause each of its respective Group Members to, use commercially reasonable efforts, to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable Laws and agreements to consummate and make effective the transactions contemplated by this Agreement; provided, however, that neither Party (nor any of their respective Group Members) shall be obligated under this Section 9.01 to pay any consideration, grant any concession or incur any additional Liability to any Third Party.

Section 9.02. Title to Intellectual Property. Except as expressly provided for under the terms of this Agreement or the Separation Agreement, Recipient acknowledges that it shall acquire no right, title or interest (including any license rights or rights of use) in any intellectual property that is owned or licensed by Provider, by reason of the provision of the Services hereunder. Recipient shall not remove or alter any copyright, trademark, confidentiality or other proprietary notices that appear on any intellectual property owned or licensed by Provider, and Recipient shall reproduce any such notices on any and all copies thereof. Recipient shall not attempt to decompile, translate, reverse engineer or make excessive copies of any intellectual property owned or licensed by Provider, and Recipient shall promptly notify Provider of any such attempt, regardless of whether by Recipient or any Third Party, of which Recipient becomes aware.

Section 9.03. Independent Contractors. The Parties each acknowledge and agree that they are separate entities, each of which has entered into this Agreement for independent business reasons. The relationships of the Parties hereunder are those of independent contractors and nothing contained herein shall be deemed to create a joint venture, partnership or any other relationship between the Parties. Employees performing Services hereunder do so on behalf of, under the direction of, and as employees of, Provider, and Recipient shall have no right, power or authority to direct such employees, unless otherwise specified with respect to a particular Service on the Schedules hereto.

 

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Section 9.04. Group Members. SpinCo shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by a SpinCo Group Member and RemainCo shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by a RemainCo Group Member.

Section 9.05. Counterparts; Entire Agreement; Corporate Power.

(a) This Agreement may be executed in one (1) or more counterparts, all of which shall be considered one (1) and the same agreement, and shall become effective when one (1) or more counterparts have been signed by each of the Parties and delivered to the other Party. Each Party acknowledges and agrees that delivery of an executed counterpart of a signature page to this Agreement (whether executed by manual, stamp or mechanical signature) by facsimile or by email in portable document format (PDF) shall be effective as delivery of such executed counterpart of this Agreement or any Ancillary Agreement. Each Party expressly adopts and confirms a stamp or mechanical signature (regardless of whether delivered in person, by mail, by courier, by facsimile or by email in portable document format (PDF)) made in its respective name as if it were a manual signature delivered in person, agrees that it shall not assert that any such signature or delivery is not adequate to bind it to the same extent as if it were signed manually and delivered in person and agrees that, at the reasonable request of the other Party at any time, it shall as promptly as reasonably practicable cause this Agreement to be manually executed (any such execution to be as of the date of the initial date hereof) and delivered in person, by mail or by courier.

(b) This Agreement, the Separation Agreement and the other Ancillary Agreements and the Exhibits, Schedules and annexes hereto and thereto contain the entire agreement between the Parties with respect to the subject matter hereof, supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter, and there are no agreements or understandings between the Parties other than those set forth or referred to herein or therein.

(c) Parent represents on behalf of itself and, to the extent applicable, each other Parent Group Member, and SpinCo represents on behalf of itself and, to the extent applicable, each other SpinCo Group Member, as follows:

(i) each such Person has the requisite corporate or other power and authority and has taken all corporate or other action necessary in order to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby; and

(ii) this Agreement has been duly executed and delivered by it and constitutes a valid and binding agreement of it and is enforceable in accordance with the terms hereof.

Section 9.06. Governing Law. This Agreement (and any claims or disputes arising out of or related hereto or to the transactions contemplated hereby or to the inducement of any Party to enter herein, whether for breach of contract, tortious conduct or otherwise and whether predicated on common law, statute or otherwise) shall be governed by and construed and interpreted in accordance with the Laws of the State of Georgia, irrespective of the choice of Laws principles of the State of Georgia, including all matters of validity, construction, effect, enforceability, performance and remedies.

 

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Section 9.07. Assignability. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective successors and permitted assigns. Neither this Agreement or any of the rights, interests, or obligations hereunder or thereunder may be assigned or delegated, in whole or in part, by operation of Law or otherwise, by any Party without the prior written consent of the other Party, and any such assignment without such prior written consent shall be null and void. No such consent shall be required for the assignment of a Party’s rights and obligations under this Agreement if: (a) any Party (or any of its successors or permitted assigns) (i) shall consolidate with or merge into any other Person and shall not be the continuing or surviving Business Entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and/or Assets to any Person, and (b) in any such case, the resulting, surviving or assignee Person expressly assumes all of the obligations of the relevant party (or its successors or permitted assigns, as applicable) under this Agreement. No assignment permitted by this Section 9.07 shall release the assigning party from any Liability for the full performance of its obligations under this Agreement.

Section 9.08. Third-Party Beneficiaries. Except as provided in Article VIII with respect to the Provider Indemnitees and the Recipient Indemnitees in their respective capacities as such, (a) the provisions of this Agreement are solely for the benefit of the Parties and are not intended to confer upon any other Person except the Parties any rights or remedies hereunder; and (b) there are no other third-party beneficiaries of this Agreement and this Agreement shall not provide any other Third Party with any remedy, claim, Liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement.

Section 9.09. Notices. Except as specifically set forth in this Agreement, all notices, requests, claims, demands or other communications under this Agreement shall be in writing and shall be given or made (and except as provided herein shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service, by certified mail, return receipt requested, by facsimile, or by electronic mail (“e-mail”), so long as confirmation of receipt of such e-mail is requested, to the respective Parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section 9.09):

If to RemainCo, to:

[•]

[•]

[•]

Attn: [•]

Email: [•]

 

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with a copy to:

[•]

[•]

[•]

Attn: [•]

Email: [•]

If to SpinCo to:

[•]

[•]

[•]

Attn: [•]

Email: [•]

with a copy to:

[•]

[•]

[•]

Attn: [•]

Email: [•]

Either Party may, by notice to the other Party, change the address to which such notices are to be given.

Section 9.10. Severability. If any provision of this Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement, or the application of such term or provision to Persons or circumstances or in jurisdictions other than those as to which it has been determined to be invalid, illegal or unenforceable, and the Parties shall use their commercially reasonable efforts to substitute one or more valid, legal and enforceable terms or provisions into this Agreement which, insofar as practicable, implement the purposes and intent of the Parties. Any term or provision of this Agreement held invalid or unenforceable only in part, degree or within certain jurisdictions shall remain in full force and effect to the extent not held invalid or unenforceable to the extent consistent with the intent of the Parties as reflected by this Agreement. To the extent permitted by applicable Law, each Party waives any term or provision of Law which renders any term or provision of this Agreement to be invalid, illegal or unenforceable in any respect.

Section 9.11. Force Majeure. No Party shall be deemed in default of this Agreement for any delay or failure to fulfill any obligation hereunder so long as and to the extent to which any delay or failure in the fulfillment of such obligations is prevented, frustrated, hindered or delayed as a consequence of circumstances of Force Majeure. Without limiting the termination rights contained in this Agreement, in the event of any such excused delay, the time for performance shall be extended for a period equal to the time lost by reason of the delay. A Party claiming the

 

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benefit of this provision shall, as soon as reasonably practicable after the occurrence of any such Force Majeure, (a) provide written notice to the other Party of the nature and extent of such Force Majeure condition; and (b) use commercially reasonable efforts to remove any such causes and resume performance under this Agreement as soon as reasonably practicable, unless this Agreement has previously been terminated under Article V or this Section 9.11; provided, that, prior to any Party invoking the benefit of this provision as a result of a Force Majeure with respect to the COVID-19 pandemic, such Party shall use commercially reasonable efforts to mitigate the impact of the COVID-19 pandemic with respect to its failure or potential failure to fulfill any obligation under this Agreement. Recipient shall be (i) relieved of the obligation to pay Charges for the affected Service(s) throughout the duration of such Force Majeure and (ii) entitled to permanently terminate such Service(s) if the delay or failure in providing such Services because of a Force Majeure shall continue to exist for more than thirty (30) consecutive days (it being understood that Recipient shall not be required to provide any advance notice of such termination to Provider).

Section 9.12. Headings. The Article, Section and Paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

Section 9.13. Survival of Covenants. Except as expressly set forth in this Agreement, the covenants, representations and warranties and other agreements contained in this Agreement, and Liability for the breach of any obligations contained herein, shall survive the Separation and Distribution and shall remain in full force and effect thereafter.

Section 9.14. Waivers of Default. No failure or delay of any Party in exercising any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such right or power, or any course of conduct, preclude any other or further exercise thereof or the exercise of any other right or power. Waiver by any Party of any default by the other Party of any provision of this Agreement shall not be deemed a waiver by the waiving Party of any subsequent or other default, nor shall it prejudice the rights of the waiving Party.

Section 9.15. Dispute Resolution.

(a) In the event of any controversy, dispute or claim (a “Dispute”) arising out of or relating to any Party’s rights or obligations under this Agreement (whether arising in contract, tort or otherwise), calculation or allocation of the costs of any Service or otherwise arising out of or relating in any way to this Agreement (including the interpretation or validity of this Agreement), such Dispute shall be resolved by submitting such Dispute first to the relevant Contract Manager of each Party, and the Contract Managers shall seek to resolve such Dispute through informal good faith negotiation. In the event that the Contract Managers fail to meet or, if they meet and fail to resolve a Dispute within twenty (20) Business Days, then either Party may pursue the remedy set forth in Section 9.15(b).

(b) If the procedures set forth in Section 9.15(a) have been followed with respect to a Dispute and such Dispute remains unresolved, such Dispute shall be resolved in accordance with the dispute resolution process referred to in Article XI of the Separation Agreement.

 

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(c) In any Dispute regarding the amount of a Charge or a Termination Charge, if such Dispute is finally resolved pursuant to the dispute resolution process set forth or referred to in Sections 9.15(a) and (b) and it is determined that the Charge or the Termination Charge, as applicable, that Provider has invoiced Recipient, and that Recipient has paid to Provider, is greater or less than the amount that the Charge or the Termination Charge, as applicable, should have been, then (i) if it is determined that Recipient has overpaid the Charge or the Termination Charge, as applicable, Provider shall within ten (10) calendar days after such determination reimburse Recipient an amount of cash equal to such overpayment, plus the Interest Payment, accruing from the date of payment by Recipient to the time of reimbursement by Provider; and (ii) if it is determined that Recipient has underpaid the Charge or the Termination Charge, as applicable, Recipient shall within ten (10) calendar days after such determination reimburse Provider an amount of cash equal to such underpayment, plus the Interest Payment, accruing from the date such payment originally should have been made by Recipient to the time of payment by Recipient.

Section 9.16. Specific Performance. Subject to Section 9.15, in the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the Party or Parties who are, or are to be, thereby aggrieved shall have the right to specific performance and injunctive or other equitable relief (on an interim or permanent basis) in respect of its rights or their rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The Parties agree that the remedies at law for any breach or threatened breach are inadequate compensation for any loss and that any defense in any Action for specific performance that a remedy at law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are hereby waived by each of the Parties. Unless otherwise agreed in writing, Provider shall continue to provide Services and the Parties shall honor all other commitments under this Agreement during the course of dispute resolution pursuant to the provisions of Section 9.15 and this Section 9.16 with respect to all matters not subject to such Dispute; provided, however, that this obligation shall only exist during the term of this Agreement.

Section 9.17. Amendments. No provisions of this Agreement shall be deemed waived, amended, supplemented or modified by a Party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the Party against whom enforcement of such waiver, amendment, supplement or modification is sought.

Section 9.18. Precedence of Schedules. Each Schedule attached to or referenced in this Agreement is hereby incorporated into and shall form a part of this Agreement; provided, however, that the terms contained in such Schedule shall only apply with respect to the Services provided under that Schedule. In the event of a conflict between the terms contained in an individual Schedule and the terms in the body of this Agreement, the terms in the Schedule shall take precedence with respect to the Services under such Schedule only. No terms contained in individual Schedules shall otherwise modify the terms of this Agreement.

 

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Section 9.19. Interpretation. In this Agreement, (a) words in the singular shall be deemed to include the plural and vice versa and words of one gender shall be deemed to include the other gender as the context requires; (b) the terms “hereof,” “herein” and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement as a whole (including all of the Schedules hereto) and not to any particular provision of this Agreement; (c) Article, Section or Schedule references are to the Articles, Sections and Schedules of or to this Agreement, unless otherwise specified; (d) unless otherwise stated, all references to any agreement (including this Agreement) shall be deemed to include the schedules, exhibits and annexes to such agreement; (e) any capitalized terms used in any Schedule to this Agreement but not otherwise defined therein shall have the meaning as defined in this Agreement; (f) any reference herein to this Agreement, unless otherwise stated, shall be construed to refer to this Agreement as amended, supplemented or otherwise modified from time to time, in accordance with the terms thereof; (g) the word “including” and words of similar import when used in this Agreement means “including, without limitation,” unless otherwise specified; (h) unless otherwise specified, the word “or” shall not be exclusive; (i) unless otherwise specified in a particular case, the word “days” refers to calendar days; and (j) unless expressly stated to the contrary in this Agreement, all references to “the date hereof”, “the date of this Agreement”, “hereby” and “hereupon” and words of similar import shall all be references to [__].

Section 9.20. Mutual Drafting. This Agreement shall be deemed to be the joint work product of the Parties and any rule of construction that a document shall be interpreted or construed against a drafter of such document shall not be applicable to this Agreement.

[Remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above.

 

AARON’S HOLDINGS COMPANY, INC.
By:  

 

  Name:   [•]
  Title:   [•]
AARON’S SPINCO, INC.
By:  

 

  Name:   [•]
  Title:   [•]

[Signature Page to Transition Services Agreement]

Exhibit 10.2

TAX MATTERS AGREEMENT

By and Among

AARON’S HOLDINGS COMPANY, INC.

and

AARON’S SPINCO, INC.

 


TABLE OF CONTENTS

 

 

         Page  
ARTICLE I DEFINITION OF TERMS      2  
ARTICLE II PREPARATION AND FILING OF TAX RETURNS      10  

Section 2.1

  Consolidated Returns      10  

Section 2.2

  Separate Entity Tax Returns      10  

Section 2.3

  Tax Reporting Practices      11  

Section 2.4

  Right to Review Tax Returns      11  

Section 2.5

  Carrybacks and Amended Tax Returns      13  

Section 2.6

  Apportionment of Tax Attributes      14  

Section 2.7

  Coordination      14  
ARTICLE III ALLOCATION OF TAX LIABILITIES      15  

Section 3.1

  General Rule      15  

Section 3.2

  Attribution of Taxes      15  
ARTICLE IV TAX PAYMENTS      16  

Section 4.1

  Payment of Amounts Due      16  

Section 4.2

  Treatment of Indemnification and Other Payments      17  
ARTICLE V TAX REFUNDS      17  

Section 5.1

  Tax Refunds      17  
ARTICLE VI DEDUCTION AND REPORTING OF EMPLOYEE AWARDS      18  

Section 6.1

  HoldCo and SpinCo Income Tax Deductions in Respect of Certain Equity Awards and Compensation      18  
ARTICLE VII TAX-FREE STATUS      18  

Section 7.1

  Representations and Warranties      18  

Section 7.2

  Restrictions on SpinCo      19  

Section 7.3

  Opinions and Rulings      20  

Section 7.4

  Procedures Regarding Opinions and Rulings      20  

Section 7.5

  Protective 336(e) Election.      20  
ARTICLE VIII REPORTING, COOPERATION AND RECORD RETENTION      21  

Section 8.1

  Assistance and Cooperation      21  

Section 8.2

  Return Information      22  

Section 8.3

  Non-Performance      22  

Section 8.4

  Costs      22  

Section 8.5

  Retention of Tax Records      22  

Section 8.6

  Access to Tax Records      23  
ARTICLE IX TAX PROCEEDINGS      23  

Section 9.1

  Notice      23  

Section 9.2

  Control of Tax Proceedings      23  

 

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ARTICLE X INTEREST PAYMENTS

     25  

Section 10.1

  Interest Under This Agreement      25  

ARTICLE XI DISAGREEMENTS

     25  

Section 11.1

  Interaction with Article IX of the Separation Agreement      25  

Section 11.2

  Discussion      26  

Section 11.3

  Referral to Independent Arbiter      26  

ARTICLE XII TERM AND COSTS

     27  

Section 12.1

 

Effective Date; Prior Agreements

     27  

Section 12.2

  Survival      27  

Section 12.3

  Expenses      27  

Section 12.4

  Payments      27  

Section 12.5

  Interest      27  

ARTICLE XIII GENERAL PROVISIONS

     28  

Section 13.1

  Counterparts; Entire Agreement; Conflicts; Corporate Power      28  

Section 13.2

  Governing Law      28  

Section 13.3

  Assignability      28  

Section 13.4

  Third-Party Beneficiaries.      29  

Section 13.5

  Notices      29  

Section 13.6

  Severability      30  

Section 13.7

  Headings      30  

Section 13.8

  Waivers of Default      30  

Section 13.9

  Consent to Jurisdiction      30  

Section 13.10

  Specific Performance      31  

Section 13.11

  Amendments      31  

Section 13.12

  Interpretation      31  

Section 13.13

  Group Members      32  

Section 13.14

  Force Majeure      32  

Section 13.15

  Mutual Drafting      32  

Section 13.16

  No Reliance on Other Party      32  

Section 13.17

  Limited Liability      32  

Section 13.18

  No Set-Off      33  

Section 13.19

  Waiver of Trial      33  

Section 13.20

  HoldCo or SpinCo Affiliates      33  

 

 

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TAX MATTERS AGREEMENT

This TAX MATTERS AGREEMENT (this “Agreement”) is made and entered into as of [•], by and among Aaron’s Holdings Company, Inc., a Georgia corporation (“HoldCo”), and Aaron’s SpinCo, Inc., a Georgia corporation and a wholly owned subsidiary of Holdco (“SpinCo” and together with HoldCo, the “Parties,” and each a “Party”). Any capitalized term used herein without definition shall have the meaning given to it in the Separation Agreement, dated as of the date hereof, by and between Aaron’s, Inc., a Georgia corporation, HoldCo and SpinCo (as such agreement may be amended from time to time, the “Separation Agreement”).

RECITALS

WHEREAS, the Board of Directors of HoldCo has determined that it is in the best interests of HoldCo and its shareholders to separate the SpinCo Business from the Progressive Business and to divest the SpinCo Business in the manner contemplated by the Separation Agreement;

WHEREAS, contemporaneously with this Agreement, HoldCo, Aaron’s, Inc., a Georgia corporation, and SpinCo are entering into the Separation Agreement;

WHEREAS, prior to the Distribution Time, and subject to the terms and conditions set forth in the Separation Agreement, HoldCo will consummate the SpinCo Contribution, and following the SpinCo Contribution, HoldCo will distribute (the “Distribution”) all of the issued and outstanding shares of SpinCo’s common stock, $0.50 par value per share (“SpinCo Common Stock”), to holders of HoldCo’s common stock, $0.50 par value per share (“HoldCo Common Stock”);

WHEREAS, subject to the terms and conditions of the Separation Agreement, the Distribution shall be made without consideration, by way of a pro rata dividend;

WHEREAS, it is the intention of the Parties that the SpinCo Contribution and the Distribution, taken together, qualify as a reorganization described in Sections 368(a)(1)(D) and 355 of the Internal Revenue Code of 1986, as amended (the “Code”); and

WHEREAS, the Parties wish to (i) provide for the payment of Tax liabilities and entitlement to refunds thereof, allocate responsibility for, and cooperation in, the filing and defense of Tax Returns, and provide for certain other matters relating to Taxes and (ii) set forth certain covenants and indemnities relating to the preservation of the intended tax treatment of certain transactions contemplated hereby and by the other Transaction Documents.


NOW, THEREFORE, in consideration of these premises, and of the representations, warranties, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

ARTICLE I

DEFINITION OF TERMS

For purposes of this Agreement (including the recitals hereof), the following terms have the following meanings:

Action” means any claim, action, suit, arbitration, investigation or other Proceeding, in each case, by any Person or Governmental Authority before any Governmental Authority.

Active Business” means each of the Progressive Business and the SpinCo Business.

Affiliate” has the meaning set forth in the Separation Agreement.

AIC” means Aaron’s Investment Company, a Delaware limited liability company (which converted from a corporation to a limited liability company in connection with the Separation).

Ancillary Agreement” has the meaning set forth in the Separation Agreement.

Business Day” means a day other than a Saturday, a Sunday or a day on which banking institutions located in Atlanta, Georgia are authorized or obligated by Law or executive order to close.

Capital Stock” means all classes or series of capital stock of a Person, including (i) common stock, (ii) all options, warrants and other rights to acquire such capital stock and (iii) all instruments properly treated as stock in such Person for U.S. federal income tax purposes.

Combined Group” means any group that filed or was required to file (or will file or be required to file) a Tax Return on an affiliated, consolidated, combined, unitary, fiscal unity or other group basis under any applicable Tax Law.

Combined Income Tax Return” means any Tax Return filed in respect of U.S. federal, state, local or non-U.S. Income Taxes for a Combined Group.

Distribution Date” means the date on which the Distribution is consummated.

Distribution Tax-Related Losses” means (a) all Distribution Taxes imposed pursuant to any settlement, Final Determination, judgment or otherwise and (b) all reasonable accounting, legal and other professional fees and court costs incurred in connection with such Distribution Taxes, in each case, resulting from the failure of the Spin-Off to qualify for the Intended Tax Treatment.

Distribution Taxes” means any and all Taxes required to be paid by or imposed on HoldCo or any of its Affiliates resulting from, or directly arising in connection with, the failure of the Spin-Off to qualify for the Intended Tax Treatment.

 

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Distribution Time” means the time established by HoldCo as the effective time of the Distribution, Eastern Time, on the Distribution Date.

Due Date” means (a) with respect to a Tax Return, the date (taking into account all valid extensions) on which such Tax Return is required to be filed under applicable Law and (b) with respect to a payment of Taxes, the date on which such payment is required to be made, which shall in any case be no later than the payment date required to avoid the incurrence of interest, penalties and additions to Tax.

Extraordinary Transaction” means any action that is not in the ordinary course of business, but shall not include any action expressly required or permitted by the Separation Agreement or any other Transaction Document or that is undertaken pursuant to the Spin-Off.

Final Determination” means the final resolution of liability for any Tax, which resolution may be for a specific issue or adjustment or for a taxable period, (a) by IRS Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the taxpayer, or by a comparable form under the laws of a state, local, or non-U.S. taxing jurisdiction, except that a Form 870 or 870-AD or comparable form shall not constitute a Final Determination to the extent that it reserves (whether by its terms or by operation of law) the right of the taxpayer to file a claim for refund or the right of the Tax Authority to assert a further deficiency in respect of such issue or adjustment or for such taxable period (as the case may be); (b) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (c) by a closing agreement or accepted offer in compromise under Sections 7121 or 7122 of the Code, or a comparable agreement under the laws of a state, local, or non-U.S. taxing jurisdiction; (d) by any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) by the jurisdiction imposing such Tax; (e) by a final settlement resulting from a treaty-based competent authority determination; or (f) by any other final disposition, including by reason of the expiration of the applicable statute of limitations or by mutual agreement of the Parties.

Force Majeure” has the meaning set forth in the Separation Agreement.

Group” means the HoldCo Group or the SpinCo Group or both such Groups, as the context requires.

HoldCo Consolidated Return” means any Combined Income Tax Return that includes any member of the HoldCo Group.

HoldCo Consolidated Taxes” means any U.S. federal Income Taxes attributable to any HoldCo Consolidated Return.

Holdco Entity” means any Subsidiary of HoldCo from and after the Distribution Time.

HoldCo Group” means, individually or collectively, as the case may be, HoldCo and any HoldCo Entities.

 

3


HoldCo Tainting Act” means (a) any action (or the failure to take any action) within its control by HoldCo or any member of the HoldCo Group (including entering into any agreement, understanding or arrangement or any negotiations with respect to any transaction or series of transactions), (b) any event (or series of events) involving the Capital Stock of HoldCo, any assets of HoldCo or any assets of any member of the HoldCo Group, or (c) any breach by HoldCo or any member of the HoldCo Group of any representation, warranty or covenant made by such Person in this Agreement, in each case, that would affect the Intended Tax Treatment or otherwise cause the Spin-Off to fail to qualify for the Intended Tax Treatment, other than, in each case, any action required by the Separation Agreement or any other Transaction Document or undertaken pursuant to the Distribution.

HoldCo Taxes” means, without duplication, and after accounting for any adjustment pursuant to a Final Determination, (a) any HoldCo Consolidated Taxes, (b) any Income Taxes of (i) SpinCo or any member of the SpinCo Group for (A) any Pre-Distribution Period and (B) to the extent attributable to assets or activities of the Progressive Business, as determined pursuant to Section 3.2, any Post-Distribution Period or (ii) HoldCo or a member of the HoldCo Group, but excluding in either case any Taxes included in clause (a)(i) of the definition of SpinCo Taxes, (c) any Other Taxes of (i) SpinCo or any member of the SpinCo Group attributable to assets or activities of the Progressive Business, as determined pursuant to Section 3.2, or (ii) HoldCo or a member of the HoldCo Group, but excluding in either case any Taxes included in clause (b)(i) of the definition of SpinCo Taxes, (d) any Taxes imposed on SpinCo or any member of the SpinCo Group under Treasury Regulations Section 1.1502-6 (or any equivalent provision of other Tax Law) as a result of SpinCo or any member of the SpinCo Group being or having been included as part of, or ceasing to be part of or owned by, a Combined Group with any Person that is not a member of the SpinCo Group on or prior to the Distribution Date, (e) subject to Section 3.1(c), any Taxes attributable to a HoldCo Tainting Act, (f) any Taxes of HoldCo or any Subsidiary of HoldCo or former Subsidiary of HoldCo, including members of the SpinCo Group (each, immediately prior to the Distribution Time) attributable to the Spin-Off (including the settlement of any intercompany transactions), and (g) any Transfer Taxes; provided, that HoldCo Taxes shall not include any Taxes included in clauses (c), (d) and (e) of the definition of SpinCo Taxes.

HoldCo Tax Opinion” means the tax opinion of the Tax Advisor, described in Section 3.02(i) of the Separation Agreement, to the effect that the Spin-Off will qualify for the Intended Tax Treatment.

Income Tax Returns” means all Tax Returns that relate to Income Taxes.

Income Taxes” means all Taxes based upon, measured by, or calculated with respect to (i) net income or profits (including any capital gains tax), (ii) multiple bases (including corporate franchise and business Taxes) if one or more bases upon which such Tax is determined is described in clause (i) above, and (iii) in each case, any such Tax that is a minimum Tax.

Intended Tax Treatment” means that (i) the Spinco Contribution and Distribution, taken together, will qualify as a “reorganization” under Section 368(a)(1)(D) of the Code; (ii) no income, gain or loss will be recognized by HoldCo or SpinCo on the SpinCo Contribution and the Distribution, or otherwise in connection with the Spin-Off, under Section 355, 361 or 1032 of

 

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the Code, as applicable, other than intercompany items or excess loss accounts taken into account pursuant to Treasury Regulations promulgated pursuant to Section 1502 of the Code; and (iii) no income, gain or loss will be recognized by any holder of HoldCo Common Stock upon the receipt of SpinCo Common Stock in the Distribution (except with respect to the receipt of cash in lieu of fractional share of SpinCo Common Stock, if any) under Section 355 of the Code.

IRS” means the United States Internal Revenue Service.

Law” means any U.S. or non-U.S. federal, national, supranational, state, provincial, local or similar statute, law, ordinance, regulation, rule, code, administrative pronouncement, treaty, order, requirement or rule of law (including common law).

Mixed Business Tax Return” means any Separate Entity Tax Return that reflects or reports Taxes that relate to at least one asset or activity that is part of the Progressive Business, on the one hand, and at least one asset or activity that is part of the SpinCo Business, on the other hand.

Other Taxes” means Taxes other than Income Taxes.

Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof, without regard to whether any entity is treated as disregarded for U.S. federal income tax purposes.

Post-Distribution Period” means any Tax Period beginning after the Distribution Date, and, in the case of any Straddle Period, the portion of such Straddle Period beginning the day after the Distribution Date.

Pre-Distribution Period” means any Tax Period ending on or before the Distribution Date, and, in the case of any Straddle Period, the portion of such Straddle Period ending on the Distribution Date.

Privilege” means any privilege that may be asserted under applicable Law, including, any privilege arising under or relating to the attorney-client relationship (including the attorney-client and work product privileges), the accountant-client privilege and any privilege relating to internal evaluation processes.

Progressive Business” has the meaning assigned to the term “Progressive Leasing and Vive Business” in the Separation Agreement.

Proposed Acquisition Transaction” means a transaction or series of transactions (or any agreement, understanding or arrangement, within the meaning of Section 355(e) of the Code and Treasury Regulations Section 1.355-7, or any other regulations promulgated thereunder, to enter into a transaction or series of transactions), whether such transaction is supported by management or shareholders of SpinCo, is a hostile acquisition, or otherwise, as a result of which SpinCo would merge or consolidate with any other Person or as a result of which one or more Persons would (directly or indirectly) acquire, or have the right to acquire, from SpinCo and/or

 

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one or more holders of outstanding shares of SpinCo Capital Stock (or the Capital Stock of any direct or indirect parent thereof), a number of shares of such Capital Stock that would, when combined with any other direct or indirect changes in ownership of such Capital Stock pertinent for purposes of Section 355(e) of the Code, comprise fifty percent (50%) or more of (i) the value of all outstanding shares of such Capital Stock as of the date of such transaction, or in the case of a series of transactions, the date of the last transaction of such series, or (ii) the total combined voting power of all outstanding shares of voting stock of SpinCo (or any direct or indirect parent thereof) as of the date of such transaction, or in the case of a series of transactions, the date of the last transaction of such series. Notwithstanding the foregoing, a Proposed Acquisition Transaction shall not include (A) the adoption by SpinCo of a shareholder rights plan or (B) issuances by SpinCo that satisfy Safe Harbor VIII (relating to acquisitions in connection with a person’s performance of services) or Safe Harbor IX (relating to acquisitions by a retirement plan of an employer) of Treasury Regulations Section 1.355-7(d). For purposes of determining whether a transaction constitutes an indirect acquisition, any recapitalization resulting in a shift of voting power or any redemption of shares of stock shall be treated as an indirect acquisition of shares of stock by the non-exchanging shareholders. This definition, and the application thereof, is intended to monitor compliance with Section 355(e) of the Code and shall be interpreted accordingly. Any clarification of, or change in, the statute or regulations promulgated under Section 355(e) of the Code shall be incorporated in this definition and its interpretation, subject to the reasonable review of HoldCo and its Tax Advisors in consultation with SpinCo and its Tax Advisors.

Refund” means any refund (or credit in lieu thereof) of Taxes (including any overpayment of Taxes that can be refunded or, alternatively, applied to other Taxes payable) or other reduction or offset of Taxes otherwise payable, including any interest paid on or with respect to such refund of Taxes. The amount of any Refund shall be determined net of any Taxes actually imposed by any Tax Authority on the Party receiving the refund, after accounting for the provisions of Section 5.1.

Restricted Period” means the period beginning at the Distribution Time and ending on the two (2)-year anniversary of the day after the Distribution Date.

Separate Entity Tax Return” means any Tax Return, other than any HoldCo Consolidated Return, relating to the Progressive Business, the SpinCo Business, or both the Progressive Business and SpinCo Business.

Separation” has the meaning set forth in the Separation Agreement and, for the avoidance of doubt, includes the SpinCo Contribution.

SpinCo Active Business Entity” means any entity conducting the SpinCo Business as of the Distribution Date.

SpinCo Business” has the meaning assigned to the term “Aaron’s Business” in the Separation Agreement.

SpinCo Consolidated Return” means any Combined Income Tax Return that includes SpinCo or any SpinCo Entity that is not a HoldCo Consolidated Return.

 

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SpinCo Contribution” has the meaning assigned to the term “Contribution” in the Separation Agreement.

SpinCo Entity” means any Subsidiary of SpinCo from and after the Distribution Time.

SpinCo Group” means, individually or collectively, as the case may be, SpinCo and any SpinCo Entities.

SpinCo Tainting Act” means (a) any action (or the failure to take any action) within its control by SpinCo or any member of the SpinCo Group (including entering into any agreement, understanding or arrangement or any negotiations with respect to any transaction or series of transactions), (b) any event (or series of events) involving the SpinCo Capital Stock (or the Capital Stock of any direct or indirect parent thereof), any assets of SpinCo or any assets of any member of the SpinCo Group, or (c) any breach by SpinCo or any member of the SpinCo Group of any representation, warranty or covenant made by such Person in this Agreement, in each case, that would affect the Intended Tax Treatment or otherwise cause the Spin-Off to fail to qualify for the Intended Tax Treatment; provided, that, SpinCo Tainting Act shall not include any action required by the Separation Agreement or any other Transaction Document or undertaken pursuant to the Distribution.

SpinCo Taxes” means, without duplication, and after accounting for any adjustment pursuant to a Final Determination, (a) any Income Taxes (other than HoldCo Consolidated Taxes) for any Post-Distribution Period of (i) HoldCo or any member of the HoldCo Group attributable to assets or activities of the SpinCo Business, as determined pursuant to Section 3.2, or (ii) SpinCo or a member of the SpinCo Group, but excluding in either case any Taxes included in clauses (b)(i)(B), (d) and (f) of the definition of HoldCo Taxes, (b) any Other Taxes of (i) HoldCo or any member of the HoldCo Group attributable to assets or activities of the SpinCo Business, as determined pursuant to Section 3.2, and (ii) SpinCo or a member of the SpinCo Group, but excluding in either case any Taxes included in clauses (c)(i), (f) and (g) of the definition of HoldCo Taxes, (c) any Income Taxes of AIC for any taxable period, (d) subject to Section 3.1(c), any Taxes attributable to a SpinCo Tainting Act, and (e) any Taxes attributable to an Extraordinary Transaction effected after the Distribution on the Distribution Date by SpinCo or a member of the SpinCo Group; provided, that SpinCo Taxes shall not include any Taxes included in clause (e) of the definition of HoldCo Taxes.

Spin-Off” means the Separation and the Distribution.

Straddle Period” means any Tax Period that begins on or before and ends after the Distribution Date.

Subsidiary” means, with respect to any Person (a) a corporation more than fifty percent (50%) of the voting or capital stock of which is owned, directly or indirectly, by such Person or (b) a partnership, joint venture, association, joint stock company, trust, unincorporated organization or other entity in which such Person, directly or indirectly, owns any of the equity economic interests thereof or for which such Person, directly or indirectly, has the power to elect or direct the election of any of the members of the governing body or with respect to which such Person otherwise has control (e.g., as the managing partner or managing member of a partnership or limited liability company, as the case may be).

 

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Tax” means (a) all taxes, charges, fees, duties, levies, imposts, or other similar assessments, imposed by any governmental authority or political subdivision thereof, including, but not limited to, net income, gross income, gross receipts, excise, real property, personal property, sales, use, service, service use, license, lease, capital stock, transfer, recording, franchise, business organization, occupation, premium, windfall profits, profits, customs, duties, payroll, wage, withholding, social security, employment, unemployment, insurance, severance, workers compensation, excise, stamp, alternative minimum, estimated, value added, ad valorem, import, export, unclaimed property, escheat and other taxes, charges, fees, duties, levies, imposts, or other similar assessments, or any interest, penalties or additions to tax, or additional amounts, in respect of any of the foregoing and (b) all liabilities in respect of any items described in clause (a) payable by reason of transferee or successor liability, contract, operation of Law, or Treasury Regulations Section 1.1502-6(a) (or any predecessor or successor thereof or any analogous provision of Tax Law).

Tax Advisor” means a tax counsel or accountant of recognized standing in the relevant jurisdiction that is reasonably acceptable to the Parties, provided that, with respect to the HoldCo Tax Opinion, Tax Advisor shall mean King & Spalding LLP.

Tax Attribute” means a net operating loss, net capital loss, investment credit, foreign tax credit, excess charitable contribution, general business credit or any other Tax Item that could reduce a Tax or create a Tax Benefit.

Tax Authority” means, with respect to any Tax, the governmental entity or political subdivision thereof that imposes such Tax and the agency (if any) charged with the collection of such Tax for such entity or subdivision.

Tax Benefit” means any refund, credit, or other reduction in Tax payments, in each case, as determined on a “with and without” basis, that is actually received or recognized by a Party or any member of its Group. For the avoidance of doubt, the term “Tax Benefit” shall include any such benefit actually received or recognized as a result of a step-up in Tax basis or an increase in any Tax Attribute.

Tax Item” means any item of income, gain, loss, deduction, expense, or credit, or other attribute that may have the effect of increasing or decreasing any Tax.

Tax Law” means any Law relating to any Tax.

Tax Period” means, with respect to any Tax, the period for which the Tax is reported as provided under the Code or other applicable Tax Law.

Tax Proceeding” means an audit, review, examination, or any other administrative or judicial proceeding with the purpose or effect of re-determining Taxes (including any administrative or judicial review of any claim for refund).

 

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Tax Records” means any Tax Returns, Tax Return work papers, documentation relating to any Tax Proceedings, and any other books of account or records (whether or not in written, electronic or other tangible or intangible forms and whether or not stored on electronic or any other medium) required to be maintained under the Code or other applicable Tax Laws or under any record retention agreement with any Tax Authority.

Tax Representation Letter” means the representation letter(s) delivered by HoldCo and SpinCo to the Tax Advisor in connection with the rendering by the Tax Advisor of the HoldCo Tax Opinion.

Tax Return” means any report of Taxes due, any claim for refund of Taxes paid, any information return with respect to Taxes, or any other similar report, statement, declaration, or document required to be filed under the Code or other Tax Law, including any attachments, exhibits, or other materials submitted with any of the foregoing, and including any amendments or supplements to any of the foregoing.

Transaction Documents” means the Separation Agreement and the Ancillary Agreements.

Transfer Tax” means any sales, use, privilege, transfer (including real property transfer), intangible, recordation, registration, documentary, stamp, duty or similar Tax imposed with respect to the Spin-Off.

Treasury Regulations” means the regulations promulgated from time to time under the Code.

Unqualified Tax Opinion” means an unqualified “will” opinion of a Tax Advisor, on which each of the Parties may rely to the effect that a transaction will not affect the Intended Tax Treatment or otherwise cause the Spin-Off to fail to qualify for its Intended Tax Treatment. Any such opinion must assume that the Spin-Off would have qualified for the Intended Tax Treatment if the transaction in question did not occur and may assume the accuracy of, and may rely upon, customary assumptions, representations and undertakings reasonably satisfactory to HoldCo and SpinCo contained in certificates delivered by an officer of HoldCo or SpinCo, as the case may be.

INDEX OF DEFINED TERMS

 

Term

  

Section

Agreement    Preamble
Carryback    2.5(a)
Code    Recitals
Distribution    Recitals
HoldCo    Preamble
Indemnified Party    4.2(a)
Indemnifying Party    4.2(a)
Independent Arbiter    11.2
Notified Action    7.4
Parties    Preamble

 

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Term

  

Section

Party    Preamble
Past Practice    2.3(a)
Post-Distribution Ruling    7.3(a)
Refund Party    5.1(a)
Retention Date    8.5
Section 336(e) Election    7.5
Separation Agreement    Preamble
SpinCo    Preamble
SpinCo Common Stock    Recitals

ARTICLE II

PREPARATION AND FILING OF TAX RETURNS

Section 2.1 Consolidated Returns.

(a) HoldCo shall prepare and file all HoldCo Consolidated Returns, and shall, subject to Section 4.1(a), pay all Taxes shown to be due and payable on such Tax Returns.

(b) SpinCo shall prepare and file all SpinCo Consolidated Returns, and shall, subject to Section 4.1(a), pay all Taxes shown to be due and payable on such Tax Returns.

Section 2.2 Separate Entity Tax Returns.

(a) HoldCo shall prepare and file (or shall cause to be prepared and filed) any Separate Entity Tax Returns required to be filed by, or with respect to, any member of the HoldCo Group, and shall, subject to Section 4.1(a), pay, or cause the applicable HoldCo Entity to pay, all Taxes shown to be due and payable on such Tax Returns.

(b) Except as set forth in Section 2.2(c), SpinCo shall prepare and file (or shall cause to be prepared and filed) any Separate Entity Tax Returns required to be filed by, or with respect to, any member of the SpinCo Group and shall, subject to Section 4.1(a), pay, or cause the applicable SpinCo Entity to pay, all Taxes shown to be due and payable on such Tax Returns.

(c) HoldCo shall (or shall cause a HoldCo Entity to) prepare any Tax Return required to be filed by, or with respect to, any member of the SpinCo Group for any Tax Period that ends before the Distribution Date and may elect to prepare (or cause a HoldCo Entity to prepare) any Tax Return required to be filed by, or with respect to, any member of the SpinCo Group for any Straddle Period. At SpinCo’s timely prior written request and expense, HoldCo shall (or shall cause a HoldCo Entity to) prepare any other Tax Return required to be filed by, or with respect to, any member of the SpinCo Group for any Straddle Period. SpinCo shall file, or cause the applicable SpinCo Entity to file, any such Tax Returns and, subject to Section 4.1(a), pay, or cause the applicable SpinCo Entity to pay, all Taxes shown to be due and payable on such Tax Returns.

 

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(d) Notwithstanding anything in this Section 2.2 to the contrary, SpinCo shall prepare and file all Income Tax Returns required to be filed by AIC, and shall pay all Taxes shown to be due and payable on such Tax Returns.

Section 2.3 Tax Reporting Practices.

(a) Past Practices. With respect to any Tax Return for which a Party is responsible for preparing such Tax Return in accordance with the terms of this Agreement (unless the items reported on such Tax Return could not reasonably be expected to affect Tax Items reported on any Tax Return filed by the other Party or members of its Group), such Tax Return shall be prepared in accordance with the practices, accounting methods, elections or conventions applied in respect of any applicable Tax Item for Pre-Distribution Periods, as modified by the remainder of this Section 2.3(a) (“Past Practice”). To the extent any Tax Items are not covered by Past Practice, or the Parties jointly determine that variance from Past Practice is required by applicable Tax Law (including as a result of a determination that there is not “substantial authority” for such position if reported in accordance with Past Practice), subject to the review rights described in Section 2.4, the Tax Return shall be prepared in the manner reasonably determined by the Party responsible for preparing such Tax Return in accordance with the terms of this Agreement, following good faith consultation with the other Party.

(b) Reporting of Spin-Off. The Tax treatment of the Spin-Off reported on any Tax Return (whether such Tax Return is for a Pre-Distribution Period or a Post-Distribution Period) shall be consistent with the Intended Tax Treatment. The Tax treatment of the Spin-Off reported on any Tax Return for which SpinCo is responsible for preparing in accordance with the terms of this Agreement shall be consistent with that on any Tax Return filed or to be filed by HoldCo or any member of the HoldCo Group or caused or to be caused to be filed by HoldCo, to the extent that SpinCo has knowledge of such reporting. In furtherance of the foregoing, HoldCo shall, at least thirty (30) Business Days prior to the Due Date of any applicable Tax Return, provide to SpinCo, to the extent HoldCo has not previously made available, such information with respect to the Intended Tax Treatment and otherwise with respect to the intended tax treatment of the Spin-Off as will enable SpinCo to file any Tax Return it is responsible for preparing in accordance with the terms of this Agreement. If SpinCo determines, in consultation with HoldCo and their respective Tax Advisors that there is no “substantial authority” for such reporting position, such disputed item (or items) shall be referred for resolution in accordance with Article XI. In the event that the resolution of such disputed item (or items) with respect to a Tax Return is inconsistent with such Tax Return as filed, the Parties shall, as promptly as practicable, amend the applicable Tax Returns to properly reflect the final resolution of the disputed item (or items).

Section 2.4 Right to Review Tax Returns.

(a) Review of HoldCo-Prepared Tax Returns with Separate SpinCo Tax Liability. Except with respect to HoldCo Consolidated Returns, which shall be governed by Section 2.4(d), HoldCo shall, at least thirty (30) Business Days prior to the Due Date for such Tax Return, or as soon thereafter as reasonably practical, submit to SpinCo a draft of any Tax Return HoldCo is required or permitted to file under this Article II to the extent such Tax Return reflects a Tax liability reasonably expected to be borne by SpinCo (or a member of the SpinCo

 

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Group). HoldCo shall consider in good faith any reasonable changes to such Tax Return submitted by SpinCo, provided that such changes are submitted no later than fifteen (15) Business Days after HoldCo’s submission to SpinCo of such Tax Return (or, in the case of a draft Tax Return delivered later than fifteen (15) Business Days prior to the Due Date, as soon thereafter as reasonably practical, but in no event later than five (5) Business Days prior to the Due Date), and the Parties shall negotiate in good faith to resolve any disputed items relating to any such Tax Return prior to the filing thereof.

(b) Review of SpinCo-Prepared Tax Returns with Separate HoldCo Tax Liability. Except with respect to SpinCo Consolidated Returns, which shall be governed by Section 2.4(d), SpinCo shall, at least thirty (30) Business Days prior to the Due Date for such Tax Return, or as soon thereafter as reasonably practical, submit to HoldCo a draft of each Tax Return it is required or permitted to file under this Article II to the extent such Tax Return reflects a Tax liability reasonably expected to be borne by HoldCo. SpinCo shall consider in good faith any reasonable changes to such Tax Return submitted by HoldCo, provided that such changes are submitted no later than fifteen (15) Business Days after SpinCo’s submission to HoldCo of such Tax Return (or, in the case of a draft Tax Return delivered later than fifteen (15) Business Days prior to the Due Date, as soon thereafter as reasonably practical, but in no event later than five (5) Business Days prior to the Due Date), and the Parties shall negotiate in good faith to resolve any disputed items relating to any such Tax Return prior to the filing thereof.

(c) Dispute Mechanics. In the event the Parties are unable to resolve through good faith negotiations any disputed items with respect to any Tax Return described in Section 2.4(a) or Section 2.4(b), the applicable Tax Return shall be filed or caused to be filed as prepared by the Party responsible for preparing such Tax Return in accordance with the terms of this Agreement prior to the Due Date, and such disputed item (or items) shall be referred for resolution in accordance with Article XI. In the event that the resolution of such disputed item (or items) with respect to a Tax Return is inconsistent with such Tax Return as filed, the Party responsible for preparing the applicable Tax Return in accordance with the terms of this Agreement (with cooperation from the other Party) shall, as promptly as practicable, amend such Tax Return to properly reflect the final resolution of the disputed item (or items). In the event that the amount of Taxes shown to be due and owing on a Tax Return is adjusted pursuant to applicable dispute resolution procedures, proper adjustment shall be made to the amounts previously paid or required to be paid in a manner that reflects such resolution.

(d) Review of Consolidated Returns. With respect to all HoldCo Consolidated Returns and SpinCo Consolidated Returns for the taxable year which includes the Distribution Date, HoldCo or SpinCo, as applicable shall use the closing of the books method under Treasury Regulation Section 1.1502-76, unless otherwise agreed by HoldCo and SpinCo, with respect to the determination of any Tax liability. HoldCo shall provide a draft, prepared in a manner that is consistent with Past Practice, of the portions of any HoldCo Consolidated Return that reflects a Tax liability reasonably expected to be borne by SpinCo (or a member of the SpinCo Group) to SpinCo for its review and comment at least thirty (30) Business Days prior to the Due Date for such HoldCo Consolidated Return; provided, however, that nothing herein shall prevent HoldCo from timely filing any such HoldCo Consolidated Return; provided, further, HoldCo shall not be required to provide such draft if it determines in its sole discretion to waive any liability SpinCo may have in respect of such Tax liability and agrees such Tax shall not be treated as a SpinCo

 

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Tax. SpinCo shall provide a draft, prepared in a manner that is consistent with Past Practice, of the portions of any SpinCo Consolidated Return that reflects a Tax liability reasonably expected to be borne by HoldCo (or a member of the HoldCo Group) to HoldCo for its review and comment at least thirty (30) Business Days prior to the Due Date for such SpinCo Consolidated Return, provided, however, that nothing herein shall prevent SpinCo from timely filing any such SpinCo Consolidated Return; provided, further, SpinCo shall not be required to provide such draft if it determines in its sole discretion to waive any liability HoldCo may have in respect of such Tax liability and agrees such Tax shall not be treated as a HoldCo Tax. Any disputes that the Parties are unable to resolve shall be resolved pursuant to Article XI. In the event that any dispute is not resolved prior to the Due Date for the filing of any HoldCo Consolidated Return or SpinCo Consolidated Return, such HoldCo Consolidated Return or SpinCo Consolidated Return, as applicable, shall be timely filed by the relevant Party, and the Parties agree to amend such HoldCo Consolidated Return or SpinCo Consolidated Return, as applicable, as necessary to reflect the resolution of such dispute in a manner consistent with such resolution.

Section 2.5 Carrybacks and Amended Tax Returns.

(a) Carrybacks. Except to the extent otherwise consented to by HoldCo in writing or prohibited by applicable Law, SpinCo (or the appropriate member of the SpinCo Group) shall elect to relinquish, waive or otherwise forgo the carryback of any loss, credit or other Tax Attribute from any Post-Distribution Period to any Pre-Distribution Period or Straddle Period with respect to members of the SpinCo Group (a “Carryback”). In the event that SpinCo (or the appropriate member of the SpinCo Group) is prohibited by applicable Law to relinquish, waive or otherwise forgo a Carryback (or HoldCo consents to a Carryback), HoldCo shall cooperate with SpinCo, at SpinCo’s expense, in seeking from the appropriate Tax Authority such Refund as reasonably would result from such Carryback, to the extent that such Refund is directly attributable to such Carryback, and shall pay over to SpinCo the amount of such Refund within ten (10) Business Days after such Refund is received; provided, however, that SpinCo shall indemnify and hold the members of the HoldCo Group harmless from and against any and all collateral Tax consequences resulting from or caused by any such Carryback, including, without limitation, the loss or postponement of any benefit from the use of Tax Attributes generated by a member of the HoldCo Group if (i) such Tax Attributes expire unutilized, but would have been utilized but for such Carryback, or (ii) the use of such Tax Attributes is postponed to a later taxable period than the taxable period in which such Tax Attributes would have been utilized but for such Carryback. Notwithstanding the foregoing, the second sentence of this Section 2.5(a) shall not apply to any Refund of HoldCo Consolidated Taxes.

(b) Amended Tax Returns. Except as provided in Section 2.3(b), Section 2.4(c) or Section 2.4(d) to reflect the resolution of any dispute pursuant to Article XI, any amended Tax Return with respect to any member of the SpinCo Group, or any Mixed Business Tax Return, may be made only (i) with respect to any Income Tax Return which includes Pre-Distribution Periods or any Tax Return if the applicable original Tax Return was filed before the Distribution Date, by HoldCo and (ii) with respect to any other Tax Return, by the Party responsible for preparing the applicable Tax Return in accordance with the terms of this Agreement. Such Party shall not file or cause to be filed any such amended Tax Return without the prior written consent of the other Party, if such filing, assuming it is accepted, could reasonably be expected to change the Tax liability of such other Party (or any member of its

 

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Group) for any Tax Period, which consent shall not be unreasonably withheld, conditioned or delayed. If any Party permitted to make an amended Tax Return under this Section 2.5(b) is not permitted to file such amended Tax Return under applicable Law, such Party shall provide the amended Tax Return to the other Party which shall file (or cause to be filed) such amended Tax Return as promptly as reasonably practicable thereafter.

Section 2.6 Apportionment of Tax Attributes.

(a) Tax Attributes arising in a Pre-Distribution Period will be allocated to (and the benefits and burdens of such Tax Attribute will inure to) the members of the HoldCo Group and the members of the SpinCo Group in accordance with HoldCo’s historical practice (except as otherwise required by applicable Tax Law), the Code, Treasury Regulations, and any applicable state, local and non-U.S. Law, as determined by HoldCo in its reasonable discretion and consistent with Past Practice, as applicable.

(b) HoldCo shall in good faith (and without being required to undertake an attribute or similar study) advise SpinCo in writing of the portion, if any, of Tax Attributes, or other consolidated, combined or unitary attribute, which shall be allocated or apportioned to the members of the SpinCo Group under applicable Law. HoldCo shall consult in good faith with SpinCo regarding such allocation of Tax Attributes and determinations as to basis and valuation, and shall consider in good faith any reasonable comments timely received from SpinCo. In the event that SpinCo disagrees with any such determination, HoldCo and SpinCo shall endeavor in good faith to resolve such disagreement, and, failing that, the allocations and apportionments under this Section 2.6(b) shall be determined in accordance with the dispute resolution provisions of Article XI as promptly as practicable. To the extent applicable Law requires any member of the HoldCo Group to make a payment to a member of the SpinCo Group, or any member of the SpinCo Group to make a payment to a member of the HoldCo Group, with respect to any Tax Attribute, or other consolidated, combined or unitary attribute, as a result of the Spin-Off, such payment shall be made in accordance with the provisions of this Agreement.

(c) All members of the HoldCo Group and SpinCo Group shall prepare all Tax Returns and compute all Taxes for Post-Distribution Periods in accordance with the final allocation of Tax Attributes delivered under Section 2.6(b), except as otherwise required by a Final Determination. In the event of an adjustment to any Tax Attribute as a result of a Final Determination, HoldCo or SpinCo, as applicable, shall promptly notify the other Party in writing of such adjustment, and the reduction or increase in Tax Attributes shall be allocated to the Party to which such Tax Attribute was initially allocated pursuant to this Section 2.6 and, if necessary, an appropriate adjustment payment shall be made by the applicable Party, consistent with the other provisions of this Agreement.

(d) For the avoidance of doubt, HoldCo shall not be liable to any member of the SpinCo Group for any failure of any determination under this Section 2.6 to be accurate under applicable Tax Law, provided such determination was made in good faith.

Section 2.7 Coordination. Nothing in this Article II (including a Party’s timely payment of Taxes, or filing of a Tax Return, pursuant to the provisions hereof) shall limit a Party’s right to indemnification under the provisions of Article III of this Agreement.

 

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ARTICLE III

ALLOCATION OF TAX LIABILITIES

Section 3.1 General Rule.

(a) HoldCo Liability. HoldCo shall be liable for, and shall indemnify and hold harmless each member of the SpinCo Group from and against, without duplication, (i) all HoldCo Taxes, (ii) all Taxes incurred by a member of the SpinCo Group resulting from the breach by a member of the HoldCo Group of any of its representations, warranties or covenants hereunder, and (iii) any costs and expenses related to the foregoing (including reasonable attorneys’ fees and expenses).

(b) SpinCo Liability. SpinCo shall be liable for, and shall indemnify and hold harmless each member of the HoldCo Group from and against, without duplication, (i) all SpinCo Taxes, (ii) all Taxes incurred by a member of the HoldCo Group by reason of the breach by a member of the SpinCo Group of any of its representations, warranties or covenants hereunder and (iii) any costs and expenses related to the foregoing (including reasonable attorneys’ fees and expenses).

(c) Notwithstanding Section 3.1(a) and (b), any liability for any Taxes attributable to both a HoldCo Tainting Act and a SpinCo Tainting Act shall be shared by HoldCo and SpinCo according to relative fault.

Section 3.2 Attribution of Taxes.

(a) General. For all purposes of this Agreement, a Tax and any Tax Items shall be considered attributable to the SpinCo Business on the one hand and the Progressive Business on the other (but not both) to the extent that such Tax and/or Tax Item would result if such Tax Return were prepared on a separate basis taking into account only the operations and assets of the SpinCo Business on the one hand and only the operations and assets of the Progressive Business on the other hand (but not both), as applicable, which allocation shall, in respect of Income Taxes, be jointly determined by HoldCo and SpinCo in good faith and subject to dispute resolution under Article XI, (i) using Past Practices and (ii) applying the highest applicable statutory marginal corporate income Tax rate in effect for the applicable Tax Period. With respect to any other Tax Items, HoldCo and SpinCo shall jointly determine in good faith consistent with Past Practices and subject to dispute resolution under Article XI, which Tax Items are properly attributable to assets or activities of the SpinCo Business and Progressive Business, respectively (and in the case of a Tax Item that is properly attributable to both the SpinCo Business and the Progressive Business, the allocation of such Tax Item between the SpinCo Business and the Progressive Business).

(b) Straddle Period Tax Allocation. HoldCo and SpinCo shall take all actions necessary or appropriate to close the taxable year of SpinCo and each member of the SpinCo Group for all Tax purposes as of the close of the Distribution Date to the extent permissible or required under applicable Law. If applicable Law does not require or permit SpinCo or any SpinCo Entity, as the case may be, to close its taxable year on the Distribution Date, then the

 

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allocation of Tax Items required to determine any Taxes or other amounts attributable to the portion of the Straddle Period ending on, or beginning after, the Distribution Date shall be made by means of a closing of the books and records of SpinCo or the applicable member of the SpinCo Group as of the close of the Distribution Date; provided that exemptions, allowances or deductions that are calculated on an annual or periodic basis shall be allocated between such portions in proportion to the number of days in each such portion; provided, further, that real property and other property or similar periodic Taxes shall be apportioned on a per diem basis.

(c) Extraordinary Transactions. Notwithstanding anything to the contrary in this Agreement, the Parties shall report any Extraordinary Transactions taking place on the Distribution Date after the Distribution Time as occurring on the day after the Distribution Date pursuant to Treasury Regulations Section 1.1502-76(b)(1)(ii)(B) or any similar or analogous provision of state, local or non-U.S. Law.

ARTICLE IV

TAX PAYMENTS

Section 4.1 Payment of Amounts Due.

(a) Payment of Liability with Respect to Tax Due. Each Party allocated Taxes shown on a Tax Return to be filed in accordance with Article II and responsible for the payment of such Taxes under this Agreement shall, at least two (2) Business Days prior to the Due Date for filing any such Tax Return, pay such amount to the Party responsible for filing such Tax Return in accordance with the terms of this Agreement. For the avoidance of doubt, however, the obligation described under this Section 4.1(a) shall not commence prior to the date the other Party first was given the opportunity to exercise any review rights available to it with respect to the relevant Tax Return (whether under Article II or otherwise) or the date any dispute with respect to such Tax Return is resolved pursuant to Section 2.4(c), nor shall interest accrue during any such time period.

(b) Adjustments Resulting in Underpayments. In the case of any adjustment pursuant to a Final Determination with respect to any Tax Return, the Party responsible for filing the applicable Tax Return in accordance with the terms of this Agreement shall pay (or cause to be paid) to the applicable Tax Authority when due any additional Tax due with respect to such Tax Return required to be paid as a result of such adjustment pursuant to such Final Determination. Such Party shall compute the amount attributable to the SpinCo Group or the HoldCo Group (as the case may be) in accordance with this Agreement and SpinCo shall pay to HoldCo any amount due HoldCo (or HoldCo shall pay SpinCo any amount due SpinCo) under this Agreement no later than the later of (i) two (2) Business Days prior to the Due Date for payment and (ii) ten (10) Business Days after the date of receipt of a written notice and demand from such Party for payment of the amount due, accompanied by a statement detailing the Taxes paid and describing in reasonable detail the particulars relating thereto. For the avoidance of doubt, however, the obligation described under this Section 4.1(b) shall not commence to the extent the other Party was not previously notified of the potential adjustment under the provisions of Article X, in which case the obligation shall accrue on the date of the other Party’s receipt of written notice and demand under clause (ii) of this Section 4.1(b), and interest shall accrue only from such later date.

 

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(c) Discharge of Indemnity. A Party (or any member of its Group) seeking indemnity under Article III shall provide written notice of, and a reasonable basis for, its claim to the other Party (or Parties, or any member of their respective Groups) from which it is seeking indemnification, and such other Party (or Parties, or the applicable member of their respective Groups) shall discharge its (or their) indemnification obligations, subject to Section 4.1(b), by paying the relevant amount within ten (10) Business Days of demand therefor. If any Party (or any member of its Group) disputes in good faith the fact or the amount of its indemnification obligation, then no payment of the amount in dispute shall be required until any such good faith dispute is resolved in accordance with Article XI, but interest shall accrue from the date payment would otherwise have been due.

Section 4.2 Treatment of Indemnification and Other Payments.

(a) Any Tax indemnity payment required to be made by a Party responsible to make an indemnification payment pursuant to this Agreement (the “Indemnifying Party”) shall be reduced by any corresponding Tax Benefit to the indemnified Party (the “Indemnified Party”) actually realized or recognized during or prior to the taxable year in which the indemnification payment is made or during the two (2) subsequent taxable years. For the avoidance of doubt, a Tax Benefit is treated as corresponding to a Tax indemnity payment to the extent the Tax Benefit realized is directly attributable to the same Tax Item (or adjustment of such Tax Item pursuant to a Final Determination) that gave rise to the Tax indemnity payment.

(b) To the extent permitted by applicable Tax Law, HoldCo and SpinCo agree to treat (and to cause each member of their respective Group to treat) any payment required by this Agreement (other than payments with respect to interest accruing after the Distribution Date) as either a contribution by HoldCo to SpinCo or a distribution by SpinCo to HoldCo, as the case may be, occurring immediately prior to the Distribution.

ARTICLE V

TAX REFUNDS

Section 5.1 Tax Refunds.

(a) Each Party (and its Affiliates) shall be entitled to, and the other Party shall, at the written request and expense of the first Party (such Party, the “Refund Party”), use commercially reasonable efforts to claim, all Refunds that relate to Taxes for which the Refund Party (or its Affiliates) is liable under Article III. To the extent that a particular Refund of Taxes may be allocable to a Tax Period or reflected on a Tax Return with respect to which the Parties may share liability under this Agreement, the portion of such Refund to which each Refund Party will be entitled shall be determined by comparing the relative liability of such Refund Party for the Taxes shown on the applicable Tax Return, taking into account the facts as utilized for purposes of claiming such Refund. Any Refund to which a Refund Party is entitled that is received by the other Party shall be paid to such Refund Party within ten (10) days of, in the case of a cash Refund, such other Party’s actual receipt of the Refund from the applicable Tax Authority or, in the case of any Refund that reduces or offsets Taxes otherwise payable by such other Party, the earlier of the Due Date for such Tax liability or the date such Tax liability is actually paid.

 

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(b) To the extent that the amount of any Refund under this Section 5.1 is later reduced by a Tax Authority or pursuant to a Final Determination in a Tax Proceeding, such reduction shall be allocated to the Refund Party and, if necessary, an appropriate adjustment payment shall be made to the other Party, consistent with the other provisions of this Agreement.

ARTICLE VI

DEDUCTION AND REPORTING OF EMPLOYEE AWARDS

Section 6.1 HoldCo and SpinCo Income Tax Deductions in Respect of Certain Equity Awards and Compensation. Unless otherwise required by applicable Law, solely the member of the Group for which the relevant individual is currently employed or, if such individual is not currently employed by a member of the Group, was most recently employed at the time of the vesting, exercise, disqualifying disposition, payment or other relevant taxable event, as appropriate, in respect of equity awards and other compensation shall be entitled to claim any Income Tax deduction in respect of such equity awards and other compensation on its respective Tax Return associated with such event.

ARTICLE VII

TAX-FREE STATUS

Section 7.1 Representations and Warranties.

(a) SpinCo. SpinCo hereby represents and warrants, or covenants and agrees, as appropriate, that the statements and representations made in the Tax Representation Letter, to the extent they relate to SpinCo or the SpinCo Group are, or, as applicable, will be, from the time presented or made (and, if applicable, through and including the Distribution Time (and thereafter as relevant)) true, correct and complete in all respects.

(b) HoldCo. HoldCo hereby represents and warrants, or covenants and agrees, as appropriate, that the statements and representations made in the Tax Representation Letter, to the extent relating to HoldCo or the HoldCo Group are, or, as applicable, will be, from the time presented or made (and, if applicable, through and including the Distribution Time (and thereafter as relevant)), true, correct and complete in all respects.

(c) No Contrary Plan. Each of HoldCo and SpinCo represents and warrants that neither it, nor any of its Subsidiaries, has any plan or intent to take any action which is inconsistent with any statements or representations made in the Tax Representation Letter.

 

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Section 7.2 Restrictions on SpinCo.

(a) During the Restricted Period, SpinCo shall not (other than as expressly required under the Separation Agreement):

(i) enter into any Proposed Acquisition Transaction, approve any Proposed Acquisition Transaction for any purpose, or facilitate in any manner or allow any Proposed Acquisition Transaction to occur with respect to SpinCo;

(ii) merge or consolidate with any other Person or liquidate or partially liquidate, including any action that is treated as a liquidation for U.S. federal Income Tax purposes;

(iii) approve or allow the discontinuance, cessation, or sale or other transfer (to an Affiliate or otherwise) of, or a material change in, any Active Business;

(iv) approve or allow the sale, issuance, or other disposition (to an Affiliate or otherwise), directly or indirectly, of any share of, or other equity interest or an instrument convertible into an equity interest in, any SpinCo Active Business Entity;

(v) in the case of the SpinCo Group (including any successors to any member of the SpinCo Group), sell or otherwise dispose of more than thirty-five percent (35%) of its consolidated gross assets, or approve or allow the sale or other disposition (including in any transaction treated for U.S. federal income Tax purposes as a sale, transfer or disposition) (to an Affiliate or otherwise) of more than thirty-five percent (35%) of its consolidated gross assets or more than thirty-five percent (35%) of the consolidated gross assets of any SpinCo Active Business Entity (whether to an Affiliate or otherwise), in each case, excluding (A) sales in the ordinary course of business and measured based on fair market values as of the Distribution Date and (B) any transfers to a Person that is a disregarded entity separate from the transferor for federal income tax purposes (provided, that for purposes of this Section 7.2(a), a merger of SpinCo or one of its Subsidiaries with and into any Person that is not a wholly owned Subsidiary of SpinCo shall constitute a disposition of all of the assets of SpinCo or such Subsidiary);

(vi) amend its certificate of incorporation (or other organizational documents), or take any other action or approve or allow the taking of any action, whether through a stockholder vote or otherwise, affecting the voting rights of SpinCo stock (including through the conversion of any Capital Stock into another class of Capital Stock);

(vii) purchase, directly or through any Affiliate, any of its outstanding stock, except to the extent such purchases satisfy Section 4.05(1)(b) of Revenue Procedure 96-30 (as in effect prior to the amendment by Revenue Procedure 2003-48);

(viii) with respect to the Distribution, take any action or fail to take any action, or permit any member of the SpinCo Group to take any action or fail to take any action, that is inconsistent with any representation or covenant made in the Tax Representation Letter; or

(ix) take any action or permit any other member of the SpinCo Group to take any action (including any transactions with a third-party or any transaction with any Affiliate) that is inconsistent with, or individually or in the aggregate (taking into account other transactions described in this Section 7.2) would be reasonably likely to adversely affect, the Intended Tax Treatment.

 

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Section 7.3 Opinions and Rulings. SpinCo and its Affiliates shall be permitted to take the actions described in Section 7.2, if, prior to taking any such actions:

(a) SpinCo notifies HoldCo that it desires to seek a private letter ruling from the IRS, or a ruling from another applicable Tax Authority that confirms that such action or actions will not adversely affect the Intended Tax Treatment, taking into account such actions and any other relevant transactions in the aggregate (a “Post-Distribution Ruling”), and HoldCo consents in writing to the pursuit of such Post-Distribution Ruling, which consent shall not be unreasonably withheld, conditioned or delayed, and which ruling (and any representations on which it is based) shall, once received, be in form and substance satisfactory to HoldCo in its discretion, which discretion shall be reasonably exercised in good faith to prevent the imposition on HoldCo, or responsibility for payment by HoldCo, of Distribution Taxes; or

(b) SpinCo shall have received an Unqualified Tax Opinion that confirms that such action or actions will not adversely affect the Intended Tax Treatment, taking into account such actions and any other relevant transactions in the aggregate, in form and substance satisfactory to HoldCo in its discretion, which discretion shall be reasonably exercised in good faith to prevent the imposition on HoldCo, or responsibility for payment by HoldCo, of Distribution Taxes (including any representations or assumptions that may be included in such Unqualified Tax Opinion).

(c) HoldCo’s evaluation of a Post-Distribution Ruling or Unqualified Tax Opinion may consider, among other factors, the appropriateness of any underlying assumptions, representations, and covenants made in connection with such Post-Distribution Ruling or Unqualified Tax Opinion. SpinCo shall (i) bear all costs and expenses of securing any such Post-Distribution Ruling or Unqualified Tax Opinion and (ii) reimburse HoldCo for all reasonable out-of-pocket costs and expenses that HoldCo may incur in good faith in pursuing or evaluating any such Post-Distribution Ruling or Unqualified Tax Opinion. Except as provided in this Section 7.3, following the Distribution Time, neither SpinCo nor any of its Subsidiaries shall seek any guidance from, initiate any communication with, the IRS or any other Tax Authority (whether written, verbal or otherwise) at any time concerning the Spin-Off (including the impact of any transaction on the tax treatment of the Spin-Off) without the prior approval of HoldCo (such approval not to be unreasonably withheld, conditioned or delayed).

Section 7.4 Procedures Regarding Opinions and Rulings. If SpinCo notifies HoldCo that it desires to take one of the actions described in Section 7.2 (a “Notified Action”), HoldCo shall, at SpinCo’s sole expense, cooperate with SpinCo and use its reasonable best efforts to seek to obtain a Post-Distribution Ruling or permit SpinCo to obtain an Unqualified Tax Opinion for the purpose of permitting SpinCo to take the Notified Action unless HoldCo shall have waived the requirement to obtain such ruling or opinion.

Section 7.5 Protective 336(e) Election. Pursuant to Treasury Regulation Sections 1.336-2(h)(1)(i) and 1.336-2(j), if and to the extent determined by HoldCo, HoldCo shall make a timely protective election under Section 336(e) of the Code and the Treasury Regulations issued thereunder and any similar provision of state or local Tax Law (and any related elections as determined by HoldCo) with respect to the Distribution (collectively, a “Section 336(e) Election”). If and to the extent that the Intended Tax Treatment does not apply with respect to the

 

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Spin-Off and HoldCo is liable for any resulting Distribution Tax-Related Losses (including any Taxes attributable to the Section 336(e) Election), then, to that extent, HoldCo will be entitled to annual payments from SpinCo of the Tax Benefit of the SpinCo Group arising from the step-up in Tax basis resulting from the Section 336(e) Election, determined using a with and without methodology (treating any deductions attributable to the step-up in tax basis resulting from the Section 336(e) Election as the last items claimed for any taxable period including after the utilization of any available Tax Attributes) and assuming for this purpose that the SpinCo Group is subject to federal income tax at a rate of 21% and state income tax at a rate of 4.57%.

ARTICLE VIII

REPORTING, COOPERATION AND RECORD RETENTION

Section 8.1 Assistance and Cooperation.

(a) The Parties shall cooperate (and cause the members of their respective Groups to cooperate) with each other and with each other’s representatives, including accounting firms and legal counsel, in connection with Tax matters relating to the Parties and their respective Groups including (i) preparation and filing of Tax Returns, (ii) determining the liability for and amount of any Taxes due (including estimated Taxes) or the right to and amount of any Refund, (iii) examinations of Tax Returns, and (iv) any Tax Proceeding. Such cooperation shall include making all information and documents in such Party’s possession relating to the other Party and the members of its Group available to such other Party as provided in this Article VIII and the execution of any document (including the grant of any power of attorney or similar document) reasonably requested by another Party in connection with the filing of a Tax Return or a Refund claim of the Parties or any of the members of their respective Groups or any Tax Proceeding of any of the Parties or the members of their respective Groups. Each Party shall make its employees, advisors, and facilities available, without charge (except as otherwise provided in the TSA), on a reasonable and mutually convenient basis in connection with the foregoing matters in a manner that does not interfere with the ordinary business operations of such Party. The Parties shall use commercially reasonable efforts to provide any information or documentation requested by the other Party in a manner that permits the other Party (or its Affiliates) to comply with Tax Return filing deadlines or other applicable timing requirements.

(b) Any information or documents provided under this Section 8.1 shall be kept confidential by the Party receiving the information or documents, except as may otherwise be necessary in connection with the filing of Tax Returns or in connection with any administrative or judicial proceedings relating to Taxes. Notwithstanding any other provision of this Agreement or any other agreement, (i) no Party nor any of its Affiliates shall be required to provide another Party or any Affiliate thereof or any other Person access to or copies of any information or procedures (including the proceedings of any Tax Proceeding) other than information or procedures that reasonably relate to the Taxes (including any Taxes for which the first Party is liable under this Agreement), business or assets of the first Party or any of its Affiliates or are necessary to prepare Tax Returns for which the first Party is responsible for preparing the applicable Tax Return in accordance with the terms of this Agreement and (ii) in no event shall any Party or its Affiliates be required to provide another Party, any of its Affiliates or any other Person access to or copies of any information if such action could reasonably be

 

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expected to result in the waiver of any Privilege. In addition, in the event that a Party determines that the provision of any information to another Party or any of its Affiliates could be commercially detrimental, violate any Law or agreement or waive any Privilege, the first Party shall use reasonable best efforts to permit compliance with its obligations under this Section 8.1 in a manner that avoids any such harm or consequence.

Section 8.2 Return Information. SpinCo and HoldCo acknowledge that time is of the essence in relation to any request for information, assistance or cooperation made by HoldCo or SpinCo pursuant to Section 8.1 or this Section 8.2. Each Party shall provide to the other Parties information and documents relating to its Group reasonably required by the other Parties to prepare Tax Returns. Any information or documents a Party responsible for preparing a Tax Return in accordance with the terms of this Agreement requires to prepare such Tax Returns shall be provided in such form as such Party reasonably requests and in sufficient time for such Party to prepare such Tax Returns on a timely basis.

Section 8.3 Non-Performance. If a Party (or any of its Affiliates) fails to comply with any of its obligations set forth in this Article VIII upon reasonable request and notice by the other Party (or any of its Affiliates) and such failure results in the imposition of additional Taxes, the non-performing Party shall be liable in full for such additional Taxes.

Section 8.4 Costs. Each Party shall devote the personnel and resources necessary in order to carry out this Article VIII and shall make its employees available on a mutually convenient basis to provide explanations of any documents or information provided hereunder. Each Party shall carry out its responsibilities under this Article VIII at its own cost and expense.

Section 8.5 Retention of Tax Records. Each Party shall preserve and keep all Tax Records exclusively relating to the assets and activities of its Group for Pre-Distribution Periods, and HoldCo shall preserve and keep all other Tax Records relating to Taxes of the Groups for Pre-Distribution Periods, for so long as the contents thereof may become material in the administration of any matter under the Code or other applicable Tax Law, but in any event until the later of (i) the expiration of any applicable statutes of limitations, or (ii) seven (7) years after the Distribution Date (such later date, the “Retention Date”). After the Retention Date, each Party may dispose of such Tax Records upon ninety (90) Business Days’ prior written notice to the other Party. If, prior to the Retention Date, a Party reasonably determines that any Tax Records which it would otherwise be required to preserve and keep under this Section 8.5 are no longer material in the administration of any matter under the Code or other applicable Tax Law and the other Party agrees, then such first Party may dispose of such Tax Records upon ninety (90) Business Days’ prior notice to the other Party. The notified Party shall have the opportunity, at its cost and expense, to copy or remove, within such ninety (90) Business Day period, all or any part of such Tax Records. If, at any time prior to the Retention Date, a Party determines to decommission or otherwise discontinue any computer program or information technology system used to access or store any Tax Records, then such Party may decommission or discontinue such program or system upon ninety (90) Business Days’ prior notice to the other Party and the other Party shall have the opportunity, at its cost and expense, to copy, within such ninety (90) Business Day period, all or any part of the underlying data relating to the Tax Records accessed by or stored on such program or system.

 

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Section 8.6 Access to Tax Records. The Parties and their respective Affiliates shall make available to each other for inspection and copying during normal business hours upon reasonable notice all Tax Records (and, for the avoidance of doubt, any pertinent underlying data accessed or stored on any computer program or information technology system) in their possession and shall permit the other Party and its Affiliates, authorized agents and representatives and any representative of a Tax Authority or other Tax auditor direct access during normal business hours upon reasonable notice to any computer program or information technology system used to access or store any Tax Records, in each case to the extent reasonably required by the other Party in connection with the preparation of Tax Returns or financial accounting statements, audits, litigation, or the resolution of items under this Agreement. To the extent any Tax Records are required to be or are otherwise transferred by the Parties or their respective Affiliates to any person other than an Affiliate, the Party or its respective Affiliate shall transfer such records to the other Party at such time.

ARTICLE IX

TAX PROCEEDINGS

Section 9.1 Notice. Within ten (10) Business Days after an Indemnified Party becomes aware of the commencement of a Tax Proceeding that may give rise to Taxes for which an Indemnifying Party is responsible pursuant to Article III, such Indemnified Party shall notify the Indemnifying Party of such Tax Proceeding, and thereafter shall promptly forward or make available to the Indemnifying Party copies of notices and communications relating to such Tax Proceeding. The failure of the Indemnified Party to notify the Indemnifying Party of the commencement of any such Tax Proceeding within such ten (10) Business Day period or promptly forward any further notices or communications shall not relieve the Indemnifying Party of any obligation which it may have to the Indemnified Party under this Agreement except to the extent that the Indemnifying Party is materially prejudiced by such failure.

Section 9.2 Control of Tax Proceedings.

(a) HoldCo Income Tax Returns.

(i) HoldCo shall be entitled to contest, compromise and settle in its sole discretion any adjustment to any Tax Item that is proposed, asserted or assessed in connection with any Tax Proceeding with respect to (A) any HoldCo Consolidated Return or (B) any Separate Entity Tax Return that relates solely to Taxes for which HoldCo is liable under this Agreement.

(ii) If SpinCo Taxes are asserted in any Tax Proceeding otherwise controlled by HoldCo under this Section 9.2(a), HoldCo shall (i) keep SpinCo timely informed of the actions proposed to be taken by HoldCo with respect to such assertion in such Tax Proceeding, (ii) permit SpinCo to participate (at SpinCo’s cost and expense) in the aspects of such Tax Proceeding that relate solely to such SpinCo Taxes and (iii) not settle any aspect of such Tax Proceeding that relates to such SpinCo Taxes without the prior written consent of SpinCo, which consent shall not be unreasonably withheld, delayed or conditioned.

 

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(b) SpinCo Income Tax Returns.

(i) SpinCo shall be entitled to contest, compromise and settle in its sole discretion any adjustment to any Tax Item that is proposed, asserted or assessed in connection with any Tax Proceeding with respect to (A) any SpinCo Consolidated Return or (B) any Separate Entity Tax Return that relates solely to Taxes for which SpinCo is liable under this Agreement.

(ii) If HoldCo Taxes are asserted in any Tax Proceeding otherwise controlled by SpinCo under this Section 9.2(b), SpinCo shall (i) keep HoldCo timely informed of the actions proposed to be taken by SpinCo with respect to such assertion in such Tax Proceeding, (ii) permit HoldCo to participate (at HoldCo’s cost and expense) in the aspects of such Tax Proceeding that relate solely to such HoldCo Taxes, and (iii) not settle any aspect of such Tax Proceeding that relates to such HoldCo Taxes without the prior written consent of HoldCo, which consent shall not be unreasonably withheld, delayed or conditioned.

(c) Separate Entity Tax Returns.

(i) Except as set forth in Section 9.2(a) and Section 9.2(b), HoldCo shall be entitled to contest, compromise and settle any adjustment to any Tax Item that is proposed, asserted or assessed in connection with any Tax Proceeding with respect to any Separate Entity Tax Return prepared by HoldCo or a HoldCo Entity pursuant to Section 2.2; provided, that to the extent that any aspect of such Tax Proceeding relates to SpinCo Taxes or would reasonably be expected to materially adversely affect the Tax position of SpinCo or any SpinCo Entity, HoldCo shall (i) keep SpinCo informed in a timely manner of the actions proposed to be taken by HoldCo with respect to such aspects of such Tax Proceeding, (ii) permit SpinCo to participate (at SpinCo’s cost and expense) in such aspects of such Tax Proceeding, and (iii) not settle any such aspect of such Tax Proceeding without the prior written consent of SpinCo, which shall not be unreasonably withheld, delayed or conditioned.

(ii) Except as set forth in Section 9.2(a) and Section 9.2(b), SpinCo shall be entitled to contest, compromise and settle any adjustment to any Tax Item that is proposed, asserted or assessed in connection with any Tax Proceeding with respect to any Separate Entity Tax Return prepared by SpinCo or a SpinCo Entity pursuant to Section 2.2; provided, that to the extent that any aspect of such Tax Proceeding relates to HoldCo Taxes or would reasonably be expected to materially adversely affect the Tax position of HoldCo or any HoldCo Entity, SpinCo shall (i) keep HoldCo informed in a timely manner of the actions proposed to be taken by SpinCo with respect to such aspects of such Tax Proceeding, (ii) permit HoldCo to participate (at HoldCo’s cost and expense) in such aspects of such Tax Proceeding, and (iii) not settle any such aspect of such Tax Proceeding without the prior written consent of HoldCo, which shall not be unreasonably withheld, delayed or conditioned.

(d) Distribution Taxes. Notwithstanding the other provisions of this Section 9.2, HoldCo shall be entitled to contest, compromise and settle any Tax Proceeding relating to the Intended Tax Treatment or that would otherwise give rise to Distribution Taxes; provided, that to the extent that any aspect of such Tax Proceeding (i) would reasonably be expected to materially adversely affect the Tax position of SpinCo or a SpinCo Entity, or (ii) SpinCo has

 

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previously acknowledged its potential liability under this Agreement for any Distribution Tax-Related Losses arising out of such Tax Proceeding in writing, HoldCo shall (A) keep SpinCo informed in a timely manner of the actions proposed to be taken by HoldCo with respect to such aspects of such Tax Proceeding, (B) permit SpinCo to participate (at SpinCo’s cost and expense) in such aspects of such Tax Proceeding, and (C) not settle any such aspect of such Tax Proceeding without the prior written consent of SpinCo, which shall not be unreasonably withheld, delayed or conditioned.

(e) Non-Income Tax Returns. The Party responsible for preparing the applicable Tax Return in accordance with the terms of this Agreement shall be entitled to contest, compromise and settle any adjustment that is proposed, asserted or assessed pursuant to any Tax Proceeding with respect to any Tax Return other than an Income Tax Return, provided, that to the extent that any aspect of such Tax Proceeding relates to Taxes for which the other Party is liable under this Agreement or would reasonably be expected to materially adversely affect the Tax position of the other Party, the first Party shall (i) keep the other Party informed in a timely manner of the actions proposed to be taken by the first Party with respect to such aspects of such Tax Proceeding, (ii) permit the other Party to participate (at such other Party’s cost and expense) in such aspects of such Tax Proceeding, and (iii) not settle any such aspect of such Tax Proceeding without the prior written consent of the other Party, which shall not be unreasonably withheld, delayed or conditioned.

ARTICLE X

INTEREST PAYMENTS

Section 10.1 Interest Under This Agreement. Anything herein to the contrary notwithstanding, to the extent an Indemnifying Party makes a payment of interest to an Indemnified Party under this Agreement with respect to the period from the date that the Indemnified Party made a payment of Tax to a Tax Authority to the date that the Indemnifying Party reimbursed the Indemnified Party for such Tax payment, the interest payment shall be treated as interest expense to the Indemnifying Party (deductible to the extent provided by law) and as interest income by the Indemnified Party (includible in income to the extent provided by law). The amount of the payment shall not be adjusted to take into account any associated Tax Benefit to the Indemnifying Party or increase in Tax to the Indemnified Party.

ARTICLE XI

DISAGREEMENTS

Section 11.1 Interaction with Article IX of the Separation Agreement.    In the event of any dispute between the Parties as to any matter covered by this Agreement, the Parties shall agree as to whether such dispute shall be governed by the procedures set forth in Section 11.2 and Section 11.3 of this Agreement or in Article IX of the Separation Agreement. If the Parties cannot agree within thirty (30) days from the time such dispute arises as to which procedure will govern such dispute, such disagreement shall be resolved pursuant to Article IX of the Separation Agreement. For the avoidance of doubt, Section 11.2 and Section 11.3 of this Agreement shall not apply to any dispute that is governed by Article IX of the Separation Agreement.

 

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Section 11.2 Discussion. The Parties mutually desire that collaboration will continue between them. Accordingly, the Parties will, and will cause the respective members of their Groups to, use reasonable efforts to resolve via bilateral discussion all disagreements in respect of their respective rights and obligations under this Agreement. In furtherance thereof, in the event of any dispute or disagreement between any member of the HoldCo Group and any member of the SpinCo Group as to the interpretation of any provision of this Agreement or the performance of the other Party’s obligations hereunder, representatives of each of the Parties, including members of their respective Tax departments, shall negotiate in good faith to resolve such dispute. With respect to any dispute governed by Section 11.2 and Section 11.3 of this Agreement, the Parties agree that the dispute resolution procedures specified in this Section 11.2 and Section 11.3 shall be the sole and exclusive procedures for the resolution of disputes; provided, however, that any Party may seek a preliminary injunction or other preliminary judicial relief in aid of arbitration before any court of competent jurisdiction if such action is necessary to avoid irreparable damage. Despite such action, the Parties shall continue to participate in good faith in the procedures specified in this Section 11.2 and Section 11.3.

Section 11.3 Referral to Independent Arbiter. In the event any dispute governed by Section 11.2 and this Section 11.3 is not resolved by bilateral discussion, the Parties shall appoint, with respect to any matter requiring the determination of the Parties’ rights and obligations under this Agreement, a U.S. law firm of national standing or, with respect to any other matter, an internationally recognized independent public accounting firm (in each case, the “Independent Arbiter”) to resolve such dispute. In this regard, the Independent Arbiter shall make determinations with respect to the disputed items based solely on representations made by HoldCo and SpinCo and their respective representatives, and not by independent review, and shall function only as an expert and not as an arbitrator. The Parties shall require the Independent Arbiter to resolve all disputes no later than thirty (30) days after the submission of such dispute to the Independent Arbiter, and agree that all decisions by the Independent Arbiter with respect thereto shall be final and conclusive and binding on the Parties. The Independent Arbiter shall resolve all disputes in a manner consistent with this Agreement and, to the extent not inconsistent with this Agreement, in a manner consistent with Past Practices, except as otherwise required by applicable Law. The Parties shall require the Independent Arbiter to render all determinations in writing and to set forth, in reasonable detail, the basis for such determination. The fees and expenses of the Independent Arbiter shall be borne by the Parties based on the inverse of the percentage that the Independent Arbiter’s resolution of the disputed items (before such allocation) bears to the total amount of the disputed items as originally submitted to the Independent Arbiter (for example, if the total amount of the disputed items as originally submitted to the Independent Arbiter equals $1,000 and the Independent Arbiter awards $600 in favor of the first Party’s position, sixty percent (60%) of the fees and expenses of the Independent Arbiter would be borne by the other Party and forty percent (40%) of the fees and expenses of the Independent Arbiter would be borne by the first Party); provided, that if the matters referred to the Independent Arbiter cannot reasonably be reduced to monetary amounts (e.g., if such matters relate to the Parties’ rights and obligations under this Agreement) the Independent Arbiter shall make a good faith allocation of such fees and expenses based on the foregoing principle.

 

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ARTICLE XII

TERM AND COSTS

Section 12.1 Effective Date; Prior Agreements.

(a) Except as expressly set forth in this Agreement, this Agreement shall become effective as of the Distribution Time.

(b) As of the date hereof, (i) all prior intercompany Tax allocation agreements or arrangements between one or more members of the HoldCo Group, on the one hand, and one or more members of the SpinCo Group, on the other hand, shall be terminated; and (ii) amounts due under such agreements as of the date hereof shall be settled as of the date hereof. Upon such termination and settlement, no further payments by or to HoldCo or by or to SpinCo, with respect to such agreements shall be made, and all other rights and obligations resulting from such agreements between the Parties and their Affiliates shall cease at such time.

Section 12.2 Survival. The representations and warranties set forth in this Agreement shall each survive the Distribution. The covenants and agreements set forth in this Agreement shall each survive until the full performance of all covenants and agreements set forth herein, in accordance with their terms. Notwithstanding anything in this Agreement to the contrary, this Agreement shall remain in effect and its provisions shall survive for one year after the full period of all applicable statutes of limitation (giving effect to any extension, waiver or mitigation thereof) and, with respect to any claim hereunder initiated prior to the end of such period, until such claim has been satisfied or otherwise resolved.

Section 12.3 Expenses. Except as otherwise provided in this Agreement or the TSA, each Party and its Affiliates shall bear their own expenses incurred in connection with preparation of Tax Returns, Tax Proceedings, and other matters related to Taxes under the provisions of this Agreement.

Section 12.4 Payments. Except as otherwise specified herein, any payment required to be made pursuant to this Agreement shall be made within sixty (60) days of notice thereof (including the reasonable basis of the demand therefor). All payments required to be made between the Parties under this Agreement shall be made in immediately available funds.

Section 12.5 Interest. Any payment required to be made under this Agreement shall bear interest at the rate equal to the “prime” rate as published in the Wall Street Journal, Eastern Edition, for the period from and including the Due Date (in the case of any amount relating to payment of Taxes or filing of a Tax Return), or otherwise the date immediately following the date the obligation originally accrued (after accounting for any grace period), through and including the date of payment.

 

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ARTICLE XIII

GENERAL PROVISIONS

Section 13.1 Counterparts; Entire Agreement; Conflicts; Corporate Power.

(a) This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. Each Party acknowledges that it and the other Party may execute this Agreement by manual, stamp or mechanical signature, and that delivery of an executed counterpart of a signature page to this Agreement (whether executed by manual, stamp or mechanical signature) by facsimile or by email in portable document format (PDF) shall be effective as delivery of such executed counterpart of this Agreement. Each Party expressly adopts and confirms a stamp or mechanical signature (regardless of whether delivered in person, by mail, by courier, by facsimile or by email in portable document format (PDF)) made in its respective name as if it were a manual signature delivered in person, agrees that it shall not assert that any such signature or delivery is not adequate to bind it to the same extent as if it were signed manually and delivered in person and agrees that, at the reasonable request of the other Party at any time, it shall as promptly as reasonably practicable cause this Agreement to be manually executed (any such execution to be as of the date of the initial date hereof) and delivered in person, by mail or by courier.

(b) The Separation Agreement, this Agreement and the other Ancillary Agreements, and any exhibits, schedules or annexes hereto and thereto, contain the entire agreement between the Parties with respect to the subject matter hereof, supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter and there are no agreements or understandings between the Parties other than those set forth or referred to herein or therein.

(c) HoldCo represents on behalf of itself and each other member of the HoldCo Group, and SpinCo represents on behalf of itself and each other member of the SpinCo Group, as follows:

(i) each such Person has the requisite corporate or other power and authority and has taken all corporate or other action necessary in order to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby; and

(ii) this Agreement has been duly executed and delivered by it and constitutes, or will constitute, a valid and binding agreement of it enforceable in accordance with the terms thereof.

Section 13.2 Governing Law. This Agreement (and any claims or disputes arising out of or related hereto or to the transactions contemplated hereby or to the inducement of any party to enter herein, whether for breach of contract, tortious conduct or otherwise and whether predicated on common law, statute or otherwise) shall be governed by and construed and interpreted in accordance with the Laws of the State of Georgia irrespective of the choice of Laws principles of the State of Georgia, including all matters of validity, construction, effect, enforceability, performance and remedies.

Section 13.3 Assignability. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective successors and permitted assigns. None of this Agreement or any of the rights, interests or obligations hereunder may be assigned or delegated, in whole or in part, by operation of Law or otherwise, by any Party without the prior written consent of the other Party to this Agreement being so assigned or delegated, and any such assignment without such

 

28


prior written consent shall be null and void. No such consent shall be required for the assignment of a Party’s rights and obligations under this Agreement if: (a) any party to this Agreement (or any of its successors or permitted assigns) (i) shall consolidate with or merge into any other Person and shall not be the continuing or surviving business entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and/or assets to any Person; and (b) in any such case, the resulting, surviving or assignee Person expressly assumes all of the obligations of the relevant party (or its successors or permitted assigns, as applicable) under this Agreement. No assignment permitted by this Section 13.3 shall release the assigning party from liability for the full performance of its obligations under this Agreement.

Section 13.4 Third-Party Beneficiaries. The provisions of this Agreement are solely for the benefit of the Parties hereto and their respective group members and their permitted successors and assigns, and are not intended to confer upon any Person except the Parties and their respective Group members and their permitted successors and assigns, any rights or remedies hereunder and there are no third-party beneficiaries of this Agreement and this Agreement shall not provide any other third party with any remedy, claim, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement.

Section 13.5 Notices. All notices shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service, by electronic mail transmission (return receipt requested) or by registered or certified mail (postage prepaid, return receipt requested) to the respective Parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section 13.5):

If to HoldCo, then to:

Aaron’s Holdings Company, Inc.

[Address]

Attention: [•]

E-mail:     [•]

with a copy to:

[•]

[Address]

Attention: [•]

E-mail:     [•]

If to SpinCo, then to:

Aaron’s SpinCo, Inc.

[Address]

Attention: [•]

E-mail:     [•]

 

29


with a copy to:

[•]

[Address]

Attention: [•]

Email:      [•]

Either Party may, by notice to the other Party, change the address to which such notices are to be given.

Section 13.6 Severability. In the event that any one or more of the terms or provisions of this Agreement the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement, or the application of such term or provision to Persons or circumstances or in jurisdictions other than those as to which it has been determined to be invalid, illegal or unenforceable, and the Parties shall use their commercially reasonable efforts to substitute one or more valid, legal and enforceable terms or provisions into this Agreement which, insofar as practicable, implement the purposes and intent of the Parties. Any term or provision of this Agreement held invalid or unenforceable only in part, degree or within certain jurisdictions shall remain in full force and effect to the extent not held invalid or unenforceable to the extent consistent with the intent of the parties as reflected by this Agreement. To the extent permitted by applicable Law, each party waives any term or provision of Law which renders any term or provision of this Agreement to be invalid, illegal or unenforceable in any respect.

Section 13.7 Headings. The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

Section 13.8 Waivers of Default. No failure or delay of any Party (or its applicable Group members) in exercising any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such right or power, or any course of conduct, preclude any other or further exercise thereof or the exercise of any other right or power. Waiver by any Party of any default by the other Party of any provision of this Agreement shall not be deemed a waiver by the waiving Party of any subsequent or other default, nor shall it prejudice the rights of the waiving Party.

Section 13.9 Consent to Jurisdiction. Subject to the provisions of ARTICLE IX of the Separation Agreement and Article XI of this Agreement, each of the Parties irrevocably submits to the exclusive jurisdiction of (a) the Georgia State-Wide Business Court, and (b) the United States District Court for the Northern District of Georgia (the “Georgia Courts”), for the purposes of any suit, action or other proceeding to compel arbitration or for provisional relief in aid of arbitration in accordance with ARTICLE IX of the Separation Agreement or Article XI of this Agreement, as applicable, or for provisional relief to prevent irreparable harm, and to the non-exclusive jurisdiction of the Georgia Courts for the enforcement of any award issued thereunder or

 

30


hereunder. Each of the Parties further agrees that service of any process, summons, notice or document by United States registered mail to such Party’s respective address set forth in Section 13.5 shall be effective service of process for any action, suit or proceeding in the Georgia Courts with respect to any matters to which it has submitted to jurisdiction in this Section 13.9. Each of the Parties irrevocably and unconditionally waives any objection to any Georgia Court’s exercise of personal jurisdiction over the Parties and the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby in the Georgia Courts, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum.

Section 13.10 Specific Performance. The Parties agree that irreparable damage would occur in the event that the provisions of this Agreement were not performed in accordance with their specific terms. Accordingly, it is hereby agreed that the Parties shall be entitled to (a) an injunction or injunctions issued in any arbitration in accordance with ARTICLE IX of the Separation Agreement to enforce specifically the terms and provisions hereof, (b) provisional or temporary injunctive relief in accordance with Section 9.03(j) of the Separation Agreement in any Georgia Court, and (c) enforcement of any such award of an arbitral tribunal or a Georgia Court in any court of the United States, or any other any court or tribunal sitting in any state of the United States or in any foreign country that has jurisdiction, this being in addition to any other remedy or relief to which they may be entitled.

Section 13.11 Amendments. No provisions of this Agreement shall be deemed waived, amended, supplemented or modified unless such waiver, amendment, supplement or modification is in writing and signed by an authorized representative of both Parties and their relevant Group members, as the case may be.

Section 13.12 Interpretation. In this Agreement, (a) words in the singular shall be deemed to include the plural and vice versa and words of one gender shall be deemed to include the other gender as the context requires; (b) the terms “hereof,” “herein” and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement as a whole (including all of the Schedules hereto) and not to any particular provision of this Agreement; (c) Article, Section or Schedule references are to the Articles, Sections and Schedules of or to this Agreement, unless otherwise specified; (d) unless otherwise stated, all references to any agreement (including this Agreement) shall be deemed to include the schedules, exhibits and annexes to such agreement; (e) any capitalized terms used in any Schedule to this Agreement but not otherwise defined therein shall have the meaning as defined in this Agreement; (f) any reference herein to this Agreement, unless otherwise stated, shall be construed to refer to this Agreement as amended, supplemented or otherwise modified from time to time, in accordance with the terms thereof; (g) the word “including” and words of similar import when used in this Agreement means “including, without limitation,” unless otherwise specified; (h) unless otherwise specified, the word “or” shall not be exclusive; (i) unless otherwise specified in a particular case, the word “days” refers to calendar days; and (j) unless expressly stated to the contrary in this Agreement, all references to “the date hereof”, “the date of this Agreement”, “hereby” and “hereupon” and words of similar import shall all be references to [__].

 

31


Section 13.13 Group Members. HoldCo shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by a member of the HoldCo Group and SpinCo shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by a member of the SpinCo Group.

Section 13.14 Force Majeure. Neither Party shall be deemed in default of this Agreement for failure to fulfill any obligation so long as and to the extent to which any delay or failure in the fulfillment of such obligations is prevented, frustrated, hindered or delayed as a consequence of circumstances of Force Majeure. In the event of any such excused delay, the time for performance shall be extended for a period equal to the time lost by reason of the delay. A Party claiming the benefit of this provision shall, as soon as reasonably practicable after the occurrence of any such event: (a) provide notice to the other Party of the nature and extent of any such Force Majeure condition; and (b) use commercially reasonable efforts to remove any such causes and resume performance under this Agreement as soon as reasonably practicable; provided, that, prior to any Party invoking the benefit of this provision as a result of a Force Majeure with respect to the COVID-19 pandemic, such Party shall use commercially reasonable efforts to mitigate the impact of the COVID-19 pandemic with respect to its failure or potential failure to fulfill any obligation under this Agreement.

Section 13.15 Mutual Drafting. This Agreement shall be deemed to be the joint work product of the Parties and any rule of construction that a document shall be interpreted or construed against a drafter of such document shall not be applicable.

Section 13.16 No Reliance on Other Party. The Parties hereto represent to each other that this Agreement is entered into with full consideration of any and all rights which the Parties hereto may have. The Parties hereto have relied upon their own knowledge and judgment and have conducted such investigations they and their in-house counsel have deemed appropriate regarding this Agreement and their rights in connection with this Agreement. The Parties hereto are not relying upon any representations or statements made by any other Party, or any such other Party’s employees, agents, representatives or attorneys, regarding this Agreement, except to the extent such representations are expressly set forth or incorporated in this Agreement. The Parties hereto are not relying upon a legal duty, if one exists, on the part of any other Party (or any such other Party’s employees, agents, representatives or attorneys) to disclose any information in connection with the execution of this Agreement or its preparation, it being expressly understood that no Party hereto shall ever assert any failure to disclose information on the part of any other Party as a ground for challenging this Agreement or any provision hereof.

Section 13.17 Limited Liability. Notwithstanding any other provision of this Agreement, no individual who is a shareholder, director, employee, officer, agent or representative of HoldCo or SpinCo, or any of their respective Group members, in such individual’s capacity as such, shall have any liability in respect of or relating to the covenants or obligations of HoldCo or SpinCo, as applicable, under this Agreement or in respect of any certificate delivered with respect hereto and, to the fullest extent legally permissible, each HoldCo and SpinCo, for itself and its respective Group members and its and their respective shareholders, directors, employees and officers, waives and agrees not to seek to assert or enforce any such liability that any such Person otherwise might have pursuant to applicable Law.

 

32


Section 13.18 No Set-Off. Except as otherwise mutually agreed to in writing by the Parties, none of the Parties nor any member of their respective Groups shall have any right of set-off or other similar rights with respect to (a) any amounts received pursuant to this Agreement; or (b) any other amounts claimed to be owed to the other Parties or any member of their respective Groups arising out of this Agreement.

Section 13.19 Waiver of Trial. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND ANY OF THE TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (II) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (III) IT MAKES SUCH WAIVERS VOLUNTARILY AND (IV) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 13.19.

Section 13.20 HoldCo or SpinCo Affiliates. If, at any time, HoldCo or SpinCo acquires or forms one or more Affiliates that are includable in the HoldCo Group or SpinCo Group, as the case may be, such entities shall be subject to this Agreement and all references to the HoldCo Group or SpinCo Group, as the case may be, herein shall thereafter include a reference to such Affiliates.

IN WITNESS WHEREOF, each Party has caused this Agreement to be executed on its behalf by a duly authorized officer on the date first set forth above.

 

AARON’S HOLDINGS COMPANY, INC.
By:  

 

Name:  
Title:  
AARON’S SPINCO, INC.
By:  

 

Name:  
Title:  

 

33

Exhibit 10.3

FORM OF

EMPLOYEE MATTERS AGREEMENT

between

AARON’S HOLDINGS COMPANY, INC.

and

AARON’S SPINCO, INC.

dated as of

_____________________, 2020


TABLE OF CONTENTS

 

     Page  

ARTICLE I DEFINITIONS

     1  

Section 1.1 Definitions

     1  

Section 1.2 Interpretation

     6  

ARTICLE II ASSIGNMENT OF EMPLOYEES

     6  

Section 2.1 Active Employees

     6  

Section 2.2 Former Employees

     7  

Section 2.3 Employment Law Obligations

     7  

Section 2.4 Employee Records

     8  

ARTICLE III EQUITY AND INCENTIVE COMPENSATION PLANS

     10  

Section 3.1 General Principles

     10  

Section 3.2 Tax Reporting and Withholding; Payment of Option Exercise Price

     11  

Section 3.3 .Restricted Stock Units

     13  

Section 3.4 Stock Options

     16  

Section 3.5 Employee Stock Purchase Plan

     18  

Section 3.6 Section 16(b) of the Exchange Act; Code Section 409A

     18  

Section 3.7 Certain Bonus Payments

     18  

Section 3.8 Employment Treatment

     19  

ARTICLE IV GENERAL PRINCIPLES FOR ALLOCATION OF LIABILITIES

     19  

Section 4.1 General Principles

     19  

Section 4.2 Sponsorship and/or Establishment of SpinCo Plans

     21  

Section 4.3 Service Credit

     21  

Section 4.4 Plan Administration

     22  

ARTICLE V RETIREMENT PLAN

     23  

Section 5.1 General Principles

     23  

Section 5.2 Retirement Plan Transfer

     23  

Section 5.3 RemainCo Common Stock Fund

     24  

Section 5.4 Transfer of Accounts

     24  

ARTICLE VI DEFERRED COMPENSATION PLAN

     24  

Section 6.1 Establishment of the Deferred Compensation Plan

     24  

Section 6.2 Assumption of Liabilities from RemainCo

     24  

Section 6.3 Transfer of Rabbi Trust Assets

     25  

Section 6.4 Cooperation for Annual Enrollment

     26  

ARTICLE VII WELFARE PLANS

     26  

Section 7.1 Establishment of RemainCo Welfare Plans

     26  

Section 7.2 Transitional Matters Under SpinCo Welfare Plans

     26  

Section 7.3 Continuity of Benefits, Benefit Elections and Beneficiary Designations

     28  

Section 7.4 Insurance Contracts

     28  

 

i


Section 7.5 Third-Party Vendors

     29  

Section 7.6 Claims Experience

     29  

Section 7.7 Allocation of Demutualization Proceeds

     29  

Section 7.8 Transition Services Agreement

     29  

ARTICLE VIII BENEFIT ARRANGEMENTS

     29  

ARTICLE IX WORKERS’ COMPENSATION AND UNEMPLOYMENT COMPENSATION

     29  

Section 9.1 General Principles

     29  

Section 9.2 Crossover Claims

     30  

Section 9.3 Additional Details

     30  

ARTICLE X EMPLOYMENT, SEVERANCE AND OTHER MATTERS

     31  

Section 10.1 Employment, Severance, Change-in-Control and Retention Agreements

     31  

Section 10.2 Severance Plan

     31  

Section 10.3 Accrued Time Off

     31  

Section 10.4 Leaves of Absence

     32  

Section 10.5 Director Programs

     32  

Section 10.6 Restrictive Covenants in Employment and Other Agreements

     32  

Section 10.7 Non-Solicitation

     33  

ARTICLE XI GENERAL PROVISIONS

     33  

Section 11.1 Preservation of Rights to Amend

     33  

Section 11.2 Confidentiality

     34  

Section 11.3 Administrative Complaints/Litigation

     34  

Section 11.4 Reimbursement and Indemnification

     35  

Section 11.5 Costs of Compliance with Agreement

     35  

Section 11.6 Fiduciary Matters

     35  

Section 11.7 Form S-8

     35  

Section 11.8 Entire Agreement

     35  

Section 11.9 Binding Effect; No Third-Party Beneficiaries; Assignment

     36  

Section 11.10 Amendment

     36  

Section 11.11 Failure or Indulgence Not Waiver; Remedies Cumulative

     36  

Section 11.12 Notices

     36  

Section 11.13 Counterparts

     36  

Section 11.14 Severability

     37  

Section 11.15 Governing Law

     37  

Section 11.16 Dispute Resolution

     37  

Section 11.17 Performance

     37  

Section 11.18 Construction

     38  

Section 11.19 Effect if Distribution Does Not Occur

     38  

 

ii


EMPLOYEE MATTERS AGREEMENT

This EMPLOYEE MATTERS AGREEMENT is entered into as of _____________, 2020 between Aaron’s Holdings Company, Inc., a Georgia corporation (“RemainCo”), and Aaron’s SpinCo, Inc., a Georgia corporation (“SpinCo”). RemainCo and SpinCo are sometimes referred to herein, individually, as a “Party,” and, collectively, as the “Parties.” Capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to such terms in Article I hereof.

RECITALS

WHEREAS, SpinCo is a wholly owned subsidiary of RemainCo;

WHEREAS, the Board of Directors of RemainCo has determined that it is appropriate, desirable and in the best interests of RemainCo and its shareholders to effectuate the Distribution as described in the Separation and Distribution Agreement between RemainCo and SpinCo dated as of [__________], 2020 (the “Separation Agreement”);

WHEREAS, the Separation Agreement provides, among other things, subject to the terms and conditions thereof, for the Distribution and for the execution and delivery of certain other agreements, including this Agreement, in order to facilitate and provide for the separation of SpinCo from RemainCo; and

WHEREAS, in order to ensure an orderly transition under the Separation Agreement, it will be necessary for the Parties to allocate between them assets, liabilities and responsibilities with respect to certain employee compensation, benefit plans and programs, and certain employment matters.

NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Parties, intending to be legally bound, agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1 Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1.1:

Additional RemainCo Stock Award” has the meaning set forth in Section 3.3(b)(i).

Additional SpinCo Stock Award” has the meaning set forth in Section 3.3(a)(ii).

Affiliate” has the meaning set forth in the Separation Agreement.

Agreement” means this Employee Matters Agreement together with all Schedules hereto and all amendments, modifications and changes hereto and thereto entered into in accordance with Section 11.10.


Ancillary Agreements” has the meaning set forth in the Separation Agreement.

Benefit Arrangement” means any contract, agreement, policy, practice, program, plan, trust or arrangement (other than any Welfare Plan, RemainCo Retirement Plan, RemainCo Deferred Compensation Plan, SpinCo Retirement Plan, SpinCo Deferred Compensation Plan or any bonus, stock-based compensation or other form of incentive compensation), providing for benefits, perquisites or compensation of any nature to any Employee, or to any family member, dependent or beneficiary of any such Employee, including, travel and accident, tuition reimbursement, vacation, sick, personal or bereavement days, and holidays.

COBRA” means the U.S. Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, as codified at Part 6 of Subtitle B of Title I of ERISA and at Code Section 4980B and any similar applicable state law.

Code” means the U.S. Internal Revenue Code of 1986, as amended.

Confidential Information” has the meaning set forth in the Separation Agreement.

Crossover Claim” has the meaning set forth in Section 9.2.

Distribution” has the meaning set forth in the Separation Agreement.

Distribution Date” has the meaning set forth in the Separation Agreement.

Employee” means any RemainCo Employee, Former RemainCo Employee, SpinCo Employee or Former SpinCo Employee.

Employee Transfer Date” means the Distribution Date.

ERISA” means the U.S. Employee Retirement Income Security Act of 1974, as amended.

Former RemainCo Employee” has the meaning set forth in Section 2.2(b).

Former SpinCo Employee” has the meaning set forth in Section 2.2(c).

NYSE” means the New York Stock Exchange.

Parent Group Member has the meaning set forth in the Separation Agreement.

Participating RemainCo Employers” has the meaning set forth in Section 7.1.

Party” or “Parties” has the meaning set forth in the preamble to this Agreement.

Person” has the meaning set forth in the Separation Agreement.

Post-Distribution RemainCo Share Price” means the simple average of the volume weighted average per share price of RemainCo Common Stock trading on the NYSE on each of the first three trading days following the Distribution Date.

 

2


Post-Distribution SpinCo Share Price” means the simple average of the volume weighted average per share price of SpinCo Common Stock trading on the NYSE on each of the first three trading days following the Distribution Date.

Pre-Distribution RemainCo Share Price” means the volume weighted average per share price of RemainCo Common Stock trading “regular way” on the NYSE on the Distribution Date.

Privacy Contract” means any contract entered into in connection with applicable privacy protection laws or regulations.

Registration Statement Effectiveness Date” means the first date on which the registration statement on Form S- 8 (or other appropriate form) contemplated by Section 11.7 shall be effective under the Securities Act of 1933.

RemainCo” has the meaning set forth in the preamble to this Agreement.

RemainCo Benefit Arrangement” means any Benefit Arrangement sponsored or maintained by a member of the RemainCo Group on the Employee Transfer Date.

RemainCo Business” means the “Progressive Leasing and Vive Business” as defined in the Separation Agreement.

RemainCo Common Stock” means the common stock of RemainCo, par value $0.50 per share.

RemainCo Deferred Compensation Plan” means the Aaron’s, Inc. Deferred Compensation Plan, 2020 Restatement, as it may be amended from time to time.

RemainCo Employee” means any individual who is employed by a member of the RemainCo Group on the Employee Transfer Date

RemainCo Equity Compensation Award” means each RemainCo RSA, RemainCo RSU, RemainCo PSU, RemainCo Option, Additional RemainCo Stock Award and Replacement RemainCo Option.

RemainCo ESPP” means the Aaron’s, Inc. Employee Stock Purchase Plan, 2020 Restatement, as it may be amended from time to time.

RemainCo Equity Plan” means any equity plan sponsored or maintained by a member of the RemainCo Group immediately prior to the Distribution Date, including the Aaron’s Rents, Inc. 2001 Stock Option and Incentive Award Plan and the Aaron’s, Inc. Amended and Restated 2015 Equity and Incentive Award Plan, 2020 Restatement, as it may be amended from time to time.

RemainCo Group” means RemainCo and its Subsidiaries, other than any SpinCo Group Members.

RemainCo Options” means options to purchase shares of RemainCo Common Stock granted pursuant to any of the RemainCo Equity Plans before the Distribution Date.

 

3


RemainCo Option Exercise Price Ratio” means, with respect to a RemainCo Option, the quotient obtained by dividing (i) the per share exercise price of such RemainCo Option immediately prior to the Distribution Date, by (ii) the Pre-Distribution RemainCo Share Price.

RemainCo PSUs” means all outstanding performance share units issued under any of the RemainCo Equity Plans before the Distribution Date.

RemainCo PSU (Employee Method)” means unvested performance share units issued under any of the RemainCo Equity Plans in 2018 or 2019, which a RemainCo Employee, RemainCo Retiree or SpinCo Employee has elected (whether affirmatively or by default) to be adjusted in connection with the Distribution in accordance with Section 3.3(a)(ii)(A) or Section 3.3(b)(ii)(A), as applicable.

RemainCo PSU (Shareholder Method)” means unvested performance share units issued under any of the RemainCo Equity Plans in 2018 or 2019, which a RemainCo Employee, RemainCo Retiree or SpinCo Employee has elected (whether affirmatively or by default) to be adjusted in connection with the Distribution in accordance with Section 3.3(a)(ii)(B) or 3.3(b)(ii)(B), as applicable.

RemainCo Retirees” means the holders of one or more RemainCo RSUs, RemainCo PSUs, RemainCo RSAs or RemainCo Options under any of the RemainCo Equity Plans who will not be a RemainCo Employee or a SpinCo Employee and will not, as of the Distribution Date, be a member of the Board of Directors of either RemainCo or SpinCo, including those listed on Schedule 1.1(b).

RemainCo Retirement Plan” means Aaron’s, Inc. Employees Retirement Plan as it may be amended from time to time.

RemainCo RSAs” means all outstanding restricted stock awards granted under any of the RemainCo Equity Plans before the Distribution Date.

RemainCo RSA (Employee Method)” means unvested restricted stock awards issued under any of the RemainCo Equity Plans in 2018 and 2019 which a RemainCo Employee, RemainCo Retiree or SpinCo Employee has elected (whether affirmatively or by default) to be adjusted in connection with the Distribution in accordance with Section 3.3(a)(ii)(A) or Section 3.3(b)(ii)(A), as applicable.

RemainCo RSA (Shareholder Method)” means unvested restricted stock awards issued under any of the RemainCo Equity Plans in 2018 or 2019 which a RemainCo Employee, RemainCo Retiree or SpinCo Employee has elected (whether affirmatively or by default) to be adjusted in connection with the Distribution in accordance with Section 3.3(a)(ii)(B) or 3.3(b)(ii)(B), as applicable.

RemainCo RSUs” means restricted stock units issued under any of the RemainCo Equity Plans before the Distribution Date that are not subject to performance conditions.

RemainCo Stock Awards” means RemainCo RSUs, RemainCo PSUs and RemainCo RSAs granted under any of the RemainCo Equity Plans.

 

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RemainCo Welfare Plan” means any Welfare Plan sponsored or maintained by any one or more members of the RemainCo Group on the Employee Transfer Date.

RemainCo Welfare Plan Participants” has the meaning set forth in Section 7.1.

Replacement RemainCo Option” has the meaning set forth in Section 3.4(b).

Replacement SpinCo Option” has the meaning set forth in Section 3.4(a).

Replacement SpinCo Stock Award” has the meaning set forth in Section 3.3(a)(i).

Separation Agreement” has the meaning set forth in the recitals to this Agreement.

SpinCo” has the meaning set forth in the preamble to this Agreement.

SpinCo Benefit Arrangement” means any Benefit Arrangement sponsored or maintained by a member of the SpinCo Group on the Employee Transfer Date.

SpinCo Business” means the “Aaron’s Business” as defined in the Separation Agreement.

SpinCo Common Stock” means the common stock of SpinCo, par value $___ per share.

SpinCo Deferred Compensation Plan” means the deferred compensation plan adopted by SpinCo and approved by RemainCo, as sole shareholder of SpinCo prior to the Distribution.

SpinCo Employee” means any individual who is employed by a member of the SpinCo Group on the Employee Transfer Date.

SpinCo Equity Compensation Award” means each Replacement SpinCo Stock Award, Additional SpinCo Stock Awards and Replacement SpinCo Option.

SpinCo Equity Plan” means the equity and incentive plan adopted by SpinCo and approved by RemainCo, as sole shareholder of SpinCo prior to the Distribution under which the SpinCo stock-based awards described in Article III shall be issued.

SpinCo ESPP” means the employee stock purchase plan adopted by SpinCo and approved by RemainCo, as sole shareholder of SpinCo prior to the Distribution.

SpinCo Group” has the meaning set forth in the Separation Agreement.

SpinCo Group Member” has the meaning set forth in the Separation Agreement.

SpinCo Retirement Plan” means a defined contribution retirement plan intended to be qualified under Code Section 401(a) that is sponsored by any member of the SpinCo Group on the Employee Transfer Date.

SpinCo Welfare Plan” means any Welfare Plan sponsored or maintained by any one or more members of the SpinCo Group on the Employee Transfer Date.

 

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Subsidiary” has the meaning set forth in the Separation Agreement.

TSA” has the meaning set forth in the Separation Agreement.

WARN” means the U.S. Worker Adjustment and Retraining Notification Act, and any applicable state or local law equivalent.

Welfare Plan” means a “welfare plan” as defined in ERISA Section 3(1) and also means a cafeteria plan under Code Section 125 and any benefits offered thereunder, including pre-tax premium conversion benefits, a dependent care assistance program, contribution funding toward a health savings account and flex or cashable credits.

Section 1.2 Interpretation. In this Agreement, (a) words in the singular shall be deemed to include the plural and vice versa and words of one gender shall be deemed to include the other gender as the context requires; (b) the terms “hereof,” “herein” and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement as a whole (including all of the Schedules hereto) and not to any particular provision of this Agreement; (c) Article, Section or Schedule references are to the Articles, Sections and Schedules of or to this Agreement, unless otherwise specified; (d) unless otherwise stated, all references to any agreement (including this Agreement) shall be deemed to include the schedules, exhibits and annexes to such agreement; (e) any capitalized terms used in any Schedule to this Agreement but not otherwise defined therein shall have the meaning as defined in this Agreement; (f) any reference herein to this Agreement, unless otherwise stated, shall be construed to refer to this Agreement as amended, supplemented or otherwise modified from time to time, in accordance with the terms thereof; (g) the word “including” and words of similar import when used in this Agreement means “including, without limitation,” unless otherwise specified; (h) unless otherwise specified, the word “or” shall not be exclusive; (i) unless otherwise specified in a particular case, the word “days” refers to calendar days; and (j) unless expressly stated to the contrary in this Agreement, all references to “the date hereof”, “the date of this Agreement”, “hereby” and “hereupon” and words of similar import shall all be references to [__].

ARTICLE II

ASSIGNMENT OF EMPLOYEES

Section 2.1 Active Employees.

(a) SpinCo Employees. Except as otherwise set forth in this Agreement, effective as of the Employee Transfer Date, the employment of the SpinCo Employees will commence with, or be continued by, a member of the SpinCo Group. Each of the Parties agrees to execute, and to seek to have the applicable employees execute, such documentation as may be necessary to reflect such assignments and transfers.

(b) RemainCo Employees. Except as otherwise set forth in this Agreement, effective as of the Employee Transfer Date, the employment of the RemainCo Employees will commence with, or be continued by, a member of the RemainCo Group. Each of the Parties agrees to execute, and to seek to have the applicable employees execute, such documentation as may be necessary to reflect such assignments and transfers.

 

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(c) At-Will Status. Notwithstanding the above or any other provision of this Agreement, nothing in this Agreement shall create any obligation on the part of any member of the RemainCo Group or any member of the SpinCo Group to continue the employment of any employee for any period following the date of this Agreement or the Distribution or to change the employment status of any employee from “at will” to the extent such employee is an “at will” employee under applicable law.

(d) Severance. The Distribution and the assignment, transfer or continuation of the employment of employees as contemplated by this Section 2.1 shall not be deemed a severance of employment or separation from service of any employee for purposes of this Agreement and, any plan, policy, practice or arrangement of any member of the RemainCo Group or any member of the SpinCo Group.

(e) Change of Control/Change in Control. Neither the completion of the Distribution nor any transaction in connection with the Distribution shall be deemed a “change of control” or “change in control” for purposes of any plan, policy, practice or arrangement relating to directors, employees or consultants of any member of the RemainCo Group or any member of the SpinCo Group.

Section 2.2 Former Employees.

(a) General Principles. Except as otherwise provided in this Agreement, each former employee of any member of the RemainCo Group or any member of the SpinCo Group as of the Employee Transfer Date will be considered a former employee of the RemainCo Group or the SpinCo Group based on his employer as of his last day of employment with any Parent Group Member or SpinCo Group Member.

(b) Former RemainCo Employees. For purposes of this Agreement, former employees of the RemainCo Group shall be deemed to include all employees who, as of their last day of employment, were employed by the RemainCo Group and will not be either a SpinCo Employee or a RemainCo Employee and the individuals listed on Schedule 2.2(b) (collectively, the “Former RemainCo Employees”).

(c) Former SpinCo Employees. For purposes of this Agreement, former employees of the SpinCo Group shall be deemed to include all employees who, as of their last day of employment, were employed by the SpinCo Group and will not be either a SpinCo Employee or a RemainCo Employee (collectively, the “Former SpinCo Employees”).

Section 2.3 Employment Law Obligations.

(a) WARN Act. Effective as of the Employee Transfer Date, (i) the RemainCo Group shall be responsible for providing any necessary WARN notice (and meeting any similar state law notice requirements) with respect to any termination of any RemainCo Employee and (ii) the SpinCo Group shall be responsible for providing any necessary WARN notice (and meeting any similar state law notice requirements) with respect to any termination of any SpinCo Employee.

 

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(b) Compliance With Employment Laws. Effective as of the Employee Transfer Date, (i) each member of the RemainCo Group shall be responsible for adopting and maintaining any policies or practices, and for all other actions and inactions, necessary to comply with employment-related laws and requirements relating to the employment of its RemainCo Employees and the treatment of any applicable Former RemainCo Employees in respect of their former employment, and (ii) each member of the SpinCo Group shall be responsible for adopting and maintaining any policies or practices, and for all other actions and inactions, necessary to comply with employment-related laws and requirements relating to the employment of its SpinCo Employees and the treatment of any applicable Former SpinCo Employees in respect of their former employment.

Section 2.4 Employee Records. The following provisions shall apply, except as may be otherwise provided in the TSA:

(a) Records Relating to RemainCo Employees and Former RemainCo Employees. All records and data in any form relating to RemainCo Employees and Former RemainCo Employees shall be the property of the RemainCo Group, except that records and data pertaining to such an employee and relating to any period that such employee was (i) employed by any member of the SpinCo Group or (ii) covered under any employee benefit plan sponsored by any member of the SpinCo Group (to the extent that such records or data relate to such coverage) prior to the Employee Transfer Date shall be jointly owned by those members of the SpinCo Group and the RemainCo Group.

(b) Records Relating to SpinCo Employees and Former SpinCo Employees. All records and data in any form relating to SpinCo Employees and Former SpinCo Employees shall be the property of the SpinCo Group, except that records and data pertaining to such an employee and relating to any period that such employee was (i) employed by any member of the RemainCo Group or (ii) covered under any employee benefit plan sponsored by any member of the RemainCo Group (to the extent that such records or data relate to such coverage) prior to the Employee Transfer Date shall be jointly owned by those members of the RemainCo Group and the SpinCo Group.

(c) Sharing of Records. The Parties shall use their respective commercially reasonable efforts to provide the other Party such employee-related records and information as necessary or appropriate to carry out their respective obligations under applicable law (including any relevant privacy protection laws or regulations in any applicable jurisdictions or Privacy Contract), this Agreement, any other Ancillary Agreement or the Separation Agreement, and for the purposes of administering their respective employee benefit plans and policies. All information and records regarding employment, personnel and employee benefit matters of RemainCo Employees and Former RemainCo Employees shall be accessed, retained, held, used, copied and transmitted on and after the Employee Transfer Date by members of the RemainCo Group in accordance with all applicable laws, policies and Privacy Contracts relating to the collection, storage, retention, use, transmittal, disclosure and destruction of such records. All information and records regarding employment, personnel and employee benefit matters of SpinCo Employees and Former SpinCo Employees shall be accessed, retained, held, used, copied and transmitted on and after the Employee Transfer Date by members of the SpinCo Group in accordance with all applicable laws, policies and Privacy Contracts relating to the collection, storage, retention, use, transmittal, disclosure and destruction of such records.

 

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(d) Access to Records. To the extent not inconsistent with this Agreement and any applicable privacy protection laws or regulations or Privacy Contracts, access to such records on and after the Employee Transfer Date will be provided to members of the RemainCo Group and members of the SpinCo Group in accordance with the Separation Agreement. In addition, notwithstanding anything to the contrary, the RemainCo Group shall be provided reasonable access to those records necessary for their administration of any plans or programs on behalf of RemainCo Employees and Former RemainCo Employees on and after the Employee Transfer Date as permitted by any applicable privacy protection laws or regulations or Privacy Contracts. The RemainCo Group shall also be permitted to retain copies of all restrictive covenant agreements with any SpinCo Employee or Former SpinCo Employee in which any member of the RemainCo Group has a valid business interest. In addition, the SpinCo Group shall be provided reasonable access to those records necessary for their administration of any plans or programs on behalf of SpinCo Employees and Former SpinCo Employees on and after the Employee Transfer Date as permitted by any applicable privacy protection laws or regulations or Privacy Contracts. The SpinCo Group shall also be permitted to retain copies of all restrictive covenant agreements with any RemainCo Employee or Former RemainCo Employee in which any member of the SpinCo Group has a valid business interest.

(e) Maintenance of Records. With respect to retaining, destroying, transferring, sharing, copying and permitting access to all such information, RemainCo and SpinCo shall (and shall cause their respective Subsidiaries to) comply with all applicable laws, regulations, Privacy Contracts and internal policies, and shall indemnify and hold harmless each other from and against any and all liability, claims, actions, and damages that arise from a failure (by the indemnifying party or its Subsidiaries or their respective agents) to so comply with all applicable laws, regulations, Privacy Contracts and internal policies applicable to such information.

(f) No Access to Computer Systems or Files. Except as set forth in the Separation Agreement or any Ancillary Agreement, no provision of this Agreement shall give (i) any member of the RemainCo Group direct access to the computer systems or other files, records or databases of any member of the SpinCo Group or (ii) any member of the SpinCo Group direct access to the computer systems or other files, records or databases of any member of the RemainCo Group, unless specifically permitted by the owner of such systems, files, records or databases.

(g) Relation to Separation Agreement. The provisions of this Section 2.4 shall be in addition to, and not in derogation of, the provisions of the Separation Agreement governing Confidential Information, including Section 6.09 of the Separation Agreement.

(h) Confidentiality. Except as otherwise set forth in this Agreement, all records and data relating to Employees shall, in each case, be subject to the confidentiality provisions of the Separation Agreement and any other applicable agreement and applicable law.

(i) Cooperation. Each Party shall use commercially reasonable efforts to cooperate to share, retain and maintain data and records that are necessary or appropriate to further the purposes of this Section 2.4 and for each Party to administer its respective benefit plans to the extent consistent with this Agreement and applicable law, and each Party agrees to cooperate as long as is reasonably necessary to further the purposes of this Section 2.4. Except as provided under any Ancillary Agreement, no Party shall charge another Party a fee for such cooperation.

 

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ARTICLE III

EQUITY AND INCENTIVE COMPENSATION PLANS

Section 3.1 General Principles.

(a) For the avoidance of doubt, the provisions of this Article III shall not apply unless the Distribution takes place. RemainCo and SpinCo shall take any and all reasonable action as shall be necessary and appropriate to further the provisions of this Article III.

(b) Where an award granted under one of the RemainCo Equity Plans is replaced by an award under the SpinCo Equity Plan in accordance with the provisions of this Article III, such award generally shall be on terms which are in all material respects identical to the terms of the award which it replaces (including any requirements of continued employment) but subject to any necessary changes to take into account (i) that the award relates to SpinCo Common Stock, (ii) that the SpinCo Equity Plan is administered by SpinCo, (iii) if applicable, that the grantee under the award is employed or affiliated with a new employer or plan sponsor, and (iv) the adjustments required by this Article III. Where an award granted under one of the RemainCo Equity Plans is adjusted in accordance with the provisions of this Article III, such award shall otherwise continue to retain the same terms and conditions of the original award, subject to any necessary changes to take into account that the grantee under the award is employed or affiliated with a new employer or plan sponsor, if applicable, and the adjustments required by this Article III.

(c) Subject to Section 3.8, following the Distribution, a grantee who has outstanding awards under one or more of the RemainCo Equity Plans and/or replacement or additional awards under the SpinCo Equity Plan shall be considered to have been employed by the applicable plan sponsor before and after the Distribution for purposes of (i) vesting and (ii) determining the date of termination of employment as it applies to any such award.

(d) No award described in this Article III, whether outstanding or to be issued, adjusted, substituted or cancelled by reason of or in connection with the Distribution, shall be adjusted, settled, cancelled, or exercisable, until in the judgment of the administrator of the applicable plan or program such action is consistent with all applicable law, including federal securities laws. Any period of exercisability will not be extended on account of a period during which such an award is not exercisable in accordance with the preceding sentence.

(e) Except as otherwise expressly provided in this Article III, from and after the Distribution Date, (i) SpinCo shall have sole responsibility for the administration of the SpinCo Equity Plan and the settlement of the SpinCo Equity Compensation Awards, and no member of the RemainCo Group shall have any liability or responsibility therefor, and (ii) RemainCo shall have sole responsibility for the administration of the RemainCo Equity Plans and the settlement of the RemainCo Equity Compensation Awards, and no member of the SpinCo Group shall have any liability or responsibility therefor. Notwithstanding the foregoing, SpinCo and its designees shall have exclusive authority and discretion with respect to all employment-related determinations or decisions required or permitted to be made by the applicable sponsor, administrator or employer entity under the terms of the RemainCo Equity Plans with respect to RemainCo Equity Compensation Awards held by SpinCo Employees, and RemainCo and its designees shall have

 

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exclusive authority and discretion with respect to all employment-related determinations or decisions required or permitted to be made by the applicable sponsor, administrator or employer entity under the terms of the SpinCo Equity Plan with respect to SpinCo Equity Compensation Awards held by RemainCo Employees. RemainCo and SpinCo agree to administer the RemainCo Equity Compensation Awards and SpinCo Equity Compensation Awards, respectively, in accordance with any determination or decision made by the other Party in accordance with the preceding sentence upon reasonable notice of such determination or decision.

(f) Notwithstanding Section 3.1(e), in the case of any outstanding RemainCo Equity Compensation Awards or SpinCo Equity Compensation Awards with respect to which (i) the award is vested as of the Distribution Date (or to the extent partially vested as of the Distribution Date) and (ii) a valid deferral election is in effect as of the Distribution Date, (x) RemainCo (or one or more members of the RemainCo Group, as designated by RemainCo) shall have sole responsibility for the settlement of those SpinCo Equity Compensation Awards held by RemainCo Employees, RemainCo Retirees or, as of the Distribution Date, members of the Board of Directors of RemainCo and (y) SpinCo (or one or more members of the SpinCo Group, as designated by SpinCo) shall have sole responsibility for the settlement of those RemainCo Equity Compensation Awards held by SpinCo Employees or, as of the Distribution Date, members of the Board of Directors of SpinCo.

(g) No fractional shares of Common Stock shall be issued or delivered pursuant to operation of Sections 3.3 or 3.4, and any fractional share otherwise payable shall be forfeited.

(h) Following the Distribution Date, (i) RemainCo shall be responsible for the payment of any dividend payable with respect to RemainCo RSAs and (ii) SpinCo shall be responsible for the payment of any dividend payable with respect to Additional SpinCo Stock Awards that are restricted stock awards.

Section 3.2 Tax Reporting and Withholding; Payment of Option Exercise Price.

(a) SpinCo (or one or more members of the SpinCo Group, as designated by SpinCo) shall be responsible for (i) the satisfaction of all tax reporting and withholding requirements in respect of the issuance, vesting or settlement, on or after the Distribution Date, of RemainCo Equity Compensation Awards and SpinCo Equity Compensation Awards held by SpinCo Employees and, as of the Distribution Date, members of the Board of Directors of SpinCo and (ii) remitting the appropriate tax or withholding amounts to the appropriate taxing authorities in respect of the distribution and vesting of all such awards.

(b) RemainCo (or one or more members of the RemainCo Group, as designated by RemainCo) shall be responsible for (i) the satisfaction of all tax reporting and withholding requirements in respect of the issuance, vesting or settlement, on or after the Distribution Date, of RemainCo Equity Compensation Awards and SpinCo Equity Compensation Awards held by RemainCo Retirees, RemainCo Employees and, as of the Distribution Date, members of the Board of Directors of RemainCo and (ii) remitting the appropriate tax or withholding amounts to the appropriate taxing authorities in respect of the distribution and vesting of all such awards.

 

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(c) Upon the exercise of a Replacement RemainCo Option or a Replacement SpinCo Option, the exercise price of such stock option will be remitted in cash by the option administrator to the issuer of the option (the appropriate member of the RemainCo Group or the SpinCo Group, as applicable) and the applicable withholding taxes of such stock option will be remitted in cash by the option administrator to the entity (the appropriate member of the RemainCo Group or the SpinCo Group, as applicable) responsible for payroll taxes, withholding and reporting with respect to the option pursuant to this Section 3.2. Upon vesting or payment, as applicable, of RemainCo Stock Awards, Replacement SpinCo Stock Awards, Additional SpinCo Stock Awards and Additional RemainCo Stock Awards, the applicable withholding will be remitted in cash by the administrator to the entity (the appropriate member of the RemainCo Group or the SpinCo Group, as applicable) responsible for payroll taxes, withholding and reporting with respect to such awards pursuant to this Section 3.2. To the extent necessary to provide the withholding amount in cash to the entity responsible for payroll taxes, withholding, and reporting (e.g., in the case of share withholding), the issuer of the applicable award will provide the withholding amount in cash. If shares of SpinCo Common Stock or RemainCo Common Stock is withheld to satisfy tax withholding obligations in respect of the exercise, vesting or settlement of a RemainCo Equity Compensation Award or a SpinCo Equity Compensation Award, to the extent a Party is not responsible pursuant to this Section 3.2 for satisfying the applicable tax withholding and remittance requirements, such Party shall cooperate with the other Party and remit to the responsible Party cash in an amount sufficient to satisfy such requirements. Notwithstanding the foregoing, the method of remittance of the exercise price of any stock option or any applicable withholding taxes may vary for legal or administrative reasons.

(d) Any U.S. Federal, state and local income tax deduction arising as a result of the exercise, vesting or settlement of any RemainCo Equity Compensation Awards or SpinCo Equity Compensation Awards shall, in each case, be claimed (as permitted by applicable law and accounting principles) by the Party (or one of its Subsidiaries) that employs the individual with respect to whom such compensation deduction arises at the time that it arises or, if such individual is not then employed by any Party or a Subsidiary of a Party, by the Party that most recently employed such individual.

(e) Each Party shall use commercially reasonable efforts to cooperate to share, retain and maintain data and records that are necessary or appropriate to further the purposes of this Section 3.2, and each Party agrees to cooperate as long as is reasonably necessary to further the purposes of this Section 3.2. Without limiting the generality of the preceding sentence, the Parties shall reasonably cooperate so that the tax benefit of any deductions may be transferred to the other Party if it is determined by the Parties to be reasonable and appropriate and complies with applicable law and accounting principles. Except as provided under any Ancillary Agreement, no Party shall charge another Party a fee for such cooperation.

 

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Section 3.3 Restricted Stock Units, Restricted Stock and Performance Stock Units.

(a) SpinCo Holders.

(i) 2020 Stock Awards to SpinCo Employees and RemainCo Retirees. Each grantee under any of the RemainCo Equity Plans (A) who will be a SpinCo Employee or a RemainCo Retiree and (B) in each case, who holds, as of the Distribution Date, one or more unvested RemainCo Stock Awards that were granted on or after January 1, 2020, shall receive, effective as of the Distribution Date and immediately prior to the Distribution, as a replacement award in substitution for each such RemainCo Stock Award (which shall be cancelled), a number of shares of restricted stock, restricted or deferred stock units or performance share units, as applicable, with respect to and payable in shares of SpinCo Common Stock (“Replacement SpinCo Stock Award”) under the SpinCo Equity Plan having a value immediately after the Distribution Date equal to the value of the shares of RemainCo Common Stock subject to the RemainCo Stock Award (calculated using the Pre-Distribution RemainCo Share Price), as calculated pursuant to the following provisions. In each case, the number of Replacement SpinCo Stock Award shall be equal to (C) divided by (D), where (C) is the Pre-Distribution RemainCo Share Price multiplied by the number of RemainCo Stock Awards that are being cancelled and replaced pursuant to this Section 3.3(a)(i), and (D) is the Post-Distribution SpinCo Share Price, with the resulting number of shares subject to the Replacement SpinCo Stock Award being rounded down to the nearest whole share or unit. Except as provided in the foregoing provisions of this Section 3.3(a)(i), Replacement SpinCo Stock Awards shall be granted on terms which are in all material respects identical (including with respect to vesting) to the terms of the applicable RemainCo Stock Awards which they replace.

(ii) Pre-2020 Stock Awards to SpinCo Employees.

(A) Employee Method Election. Each SpinCo Employee or RemainCo Retiree who holds, as of the Distribution Date, a RemainCo RSA (Employee Method) and/or RemainCo PSU (Employee Method) shall receive, effective as of the Distribution Date and immediately prior to the Distribution, as a replacement award in substitution for each such a RemainCo RSA (Employee Method) and/or RemainCo PSU (Employee Method) (which shall be cancelled), a Replacement SpinCo Stock Award under the SpinCo Equity Plan having a value immediately after the Distribution Date equal to the value of the shares of RemainCo Common Stock subject to the RemainCo RSA (Employee Method) and/or RemainCo PSU (Employee Method) (calculated using the Pre-Distribution RemainCo Share Price), as calculated pursuant to the following provisions. In each case, the number of Replacement SpinCo Stock Award shall be equal to (C) divided by (D), where (C) is the Pre-Distribution RemainCo Share Price multiplied by the number of RemainCo RSA (Employee Method) and/or RemainCo PSU (Employee Method) that are being cancelled and replaced pursuant to this Section 3.3(a)(ii)(A), and (D) is the Post-Distribution SpinCo Share Price, with the resulting number of shares subject to the Replacement SpinCo Stock Award being rounded down to the nearest whole share or unit. Except as provided in the foregoing provisions of this Section 3.3(a)(ii)(A), Replacement SpinCo Stock Awards shall be granted on terms which are in all material respects identical (including with respect to vesting) to the terms of the applicable RemainCo RSA (Employee Method) and/or RemainCo PSU (Employee Method) which they replace.

 

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(B) Shareholder Method Election; Vested Stock Awards. Each SpinCo Employee or RemainCo Retiree who holds, as of the Distribution Date, (A) a RemainCo RSA (Shareholder Method) and/or RemainCo PSU (Shareholder Method) or (B) a vested RemainCo Stock Award that has not been settled as of the Distribution Date shall receive, effective as of the Distribution Date and immediately prior to the Distribution, for each such RemainCo Stock Award, an additional number of shares of restricted stock, restricted or deferred stock units or performance share units, as applicable, with respect to and payable in shares of SpinCo Common Stock (the “Additional SpinCo Stock Awards”) under the SpinCo Equity Plan. In each case, the number of shares of SpinCo Common Stock subject to an award of Additional SpinCo Stock Awards shall be equal to the number of shares of SpinCo Common Stock that would have been distributed in the Distribution with respect to the number of shares of RemainCo Common Stock subject to the grantee’s RemainCo Stock Awards, with the resulting number of shares subject to the Additional SpinCo Stock Award being rounded down to the nearest whole share or unit. Except as provided in the foregoing provisions of this Section 3.3(a)(ii)(B). Additional SpinCo Stock Awards shall be granted on terms which are in all material respects identical (including with respect to vesting) to the terms of the RemainCo Stock Awards with respect to which they are granted.

(iii) Stock Awards to SpinCo Directors. Each grantee under any of the RemainCo Equity Plans (A) who will not be a SpinCo Employee but will serve on the Board of Directors of SpinCo immediately after the Distribution Date and (B) who holds, as of the Distribution Date, one or more unvested RemainCo Stock Awards or vested RemainCo Stock Awards that have not been settled as of the Distribution Date shall receive, effective as of the Distribution Date and immediately prior to the Distribution, for each such RemainCo Stock Awards, an Additional SpinCo Stock Award under the SpinCo Equity Plan. In each case, the number of shares of SpinCo Common Stock subject to an award of Additional SpinCo Stock Awards shall be equal to the number of shares of SpinCo Common Stock that would have been distributed in the Distribution with respect to the number of shares of RemainCo Common Stock subject to the grantee’s RemainCo Stock Award, with the resulting number of shares subject to the Additional SpinCo Stock Award being rounded down to the nearest whole share or unit. Except as provided in the foregoing provisions of this Section 3.3(a)(iii). Additional SpinCo Stock Awards shall be granted on terms which are in all material respects identical (including with respect to vesting) to the terms of the RemainCo Stock Awards with respect to which they are granted.

(b) RemainCo Holders.

(i) 2020 Stock Awards to RemainCo Employees. Each grantee under any of the RemainCo Equity Plans (A) who will be a RemainCo Employee and (B) who holds, as of the Distribution Date, one or more unvested RemainCo Stock Awards that were granted on or after January 1, 2020, shall receive, effective as of the Distribution Date and immediately prior to the Distribution, for each such RemainCo Stock Award (in lieu of receiving any SpinCo restricted stock, restricted or deferred stock units or performance share units, as applicable, in connection with such RemainCo Stock Award), a number of additional restricted stock, restricted or deferred stock units or performance share units, as applicable, with respect to and payable in RemainCo Common Stock (the “Additional RemainCo Stock Awards”), under one of the RemainCo Equity Plans. In each case, the number of shares of RemainCo Common Stock subject to an Additional RemainCo Stock

 

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Award shall be equal to the product of (C) and (D), where (C) is the number of shares of RemainCo Common Stock covered by the original RemainCo Stock Award and (D) is equal to (x) the Pre-Distribution RemainCo Share Price minus the Post-Distribution RemainCo Share Price, divided by (y) the Post-Distribution RemainCo Share Price, with the resulting number of shares subject to the Additional RemainCo Stock Award being rounded down to the nearest whole share or unit. Except as provided in the foregoing provisions of this Section 3.3(b)(i), Additional RemainCo Stock Awards shall be granted on such terms which are in all material respects identical (including with respect to vesting) to the terms of the RemainCo Stock Awards with respect to which they are granted.

(ii) Pre-2020 Stock Awards to RemainCo Employees.

(C) Employee Method Election. Each RemainCo Employee who holds, as of the Distribution Date, a RemainCo RSA (Employee Method) and/or RemainCo PSU (Employee Method) shall receive, effective as of the Distribution Date and immediately prior to the Distribution, for each such RemainCo RSA (Employee Method) and/or RemainCo PSU (Employee Method) (in lieu of receiving any SpinCo restricted stock or performance share units, as applicable, in connection with such RemainCo RSA and/or RemainCo PSU (Employee Method)), an Additional RemainCo Stock Award, under one of the RemainCo Equity Plans. In each case, the number of shares of RemainCo Common Stock subject to an Additional RemainCo Stock Award shall be equal to the product of (C) and (D), where (C) is the number of shares of RemainCo Common Stock covered by the original RemainCo RSA (Employee Method) and/or RemainCo PSU (Employee Method) and (D) is equal to (x) the Pre-Distribution RemainCo Share Price minus the Post-Distribution RemainCo Share Price, divided by (y) the Post-Distribution RemainCo Share Price, with the resulting number of shares subject to the Additional RemainCo Stock Award being rounded down to the nearest whole share or unit. Except as provided in the foregoing provisions of this Section 3.3(b)(ii)(A), Additional RemainCo Stock Awards shall be granted on such terms which are in all material respects identical (including with respect to vesting) to the terms of the RemainCo Stock Awards with respect to which they are granted.

(D) Shareholder Method Election. Each RemainCo Employee who holds, as of the Distribution Date, a RemainCo RSA (Shareholder Method) and/or RemainCo PSU (Shareholder Method) shall receive, effective as of the Distribution Date and immediately prior to the Distribution, for each such RemainCo RSA (Shareholder Method) and RemainCo PSU (Shareholder Method), an Additional SpinCo Stock Award under the SpinCo Equity Plan. In each case, the number of shares of SpinCo Common Stock subject to an award of Additional SpinCo Stock Awards shall be equal to the number of shares of SpinCo Common Stock that would have been distributed in the Distribution with respect to the number of shares of RemainCo Common Stock subject to the grantee’s RemainCo RSA (Shareholder Method) or RemainCo PSU (Shareholder Method), as applicable, with the resulting number of shares subject to the Additional SpinCo Stock Award being rounded down to the nearest whole share or unit. Except as provided in the foregoing provisions of this Section 3.3(b)(ii)(B), Additional SpinCo Stock Awards shall be granted on terms which are in all material respects identical (including with respect to vesting) to the terms of the RemainCo RSA (Shareholder Method) or RemainCo PSU (Shareholder Method) with respect to which they are granted.

 

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(iii) Stock Awards to RemainCo Directors. Each grantee under any of the RemainCo Equity Plans (A) who will not be a RemainCo Employee but will serve on the Board of Directors of RemainCo immediately after the Distribution Date and (B) who holds, as of the Distribution Date, one or more unvested RemainCo Stock Awards or vested RemainCo Stock Awards that have not been settled as of the Distribution Date shall receive, effective as of the Distribution Date and immediately prior to the Distribution, for each such RemainCo Stock Award, an Additional SpinCo Stock Award under the SpinCo Equity Plan. In each case, the number of shares of SpinCo Common Stock subject to an award of Additional SpinCo Stock Awards shall be equal to the number of shares of SpinCo Common Stock that would have been distributed in the Distribution with respect to the number of shares of RemainCo Common Stock subject to the grantee’s RemainCo Stock Award, with the resulting number of shares subject to the Additional SpinCo Stock Award being rounded down to the nearest whole share or unit. Except as provided in the foregoing provisions of this Section 3.3(b)(ii), Additional SpinCo Stock Awards shall be granted on terms which are in all material respects identical (including with respect to vesting) to the terms of the RemainCo Stock Awards with respect to which they are granted.

(c) Any dividend with respect to an unvested RemainCo RSA that is accrued but unpaid as of the Distribution Date shall be adjusted consistent with the manner in which the RemainCo RSA to which such dividend relates is adjusted in accordance with this Section 3.3.

Section 3.4 Stock Options.

(a) SpinCo Holders. Each grantee under any of the RemainCo Equity Plans who will be a SpinCo Employee immediately after the Distribution Date shall receive, effective as of the Distribution Date and immediately prior to the Distribution, as a replacement award in substitution for each unvested and vested but unexercised RemainCo Option (which shall be cancelled), an option to purchase a number of shares of SpinCo Common Stock with respect to a number of shares of SpinCo Common Stock, as applicable, under the SpinCo Equity Plan (a “Replacement SpinCo Option”) in accordance with the following provisions:

(i) The number of shares of SpinCo Common Stock subject to a Replacement SpinCo Option shall be equal to the product of (i) the number of shares of RemainCo Common Stock subject to a RemainCo Option as of the Distribution Date and (ii) fraction, the numerator of which is the Pre-Distribution RemainCo Share Price and the denominator of which is the Post-Distribution SpinCo Share Price, with the resulting number of shares subject to the Replacement SpinCo Option being rounded down to the nearest whole share.

(ii) The per share exercise price of such Replacement SpinCo Option (rounded up to the nearest cent) shall be equal to the product obtained by multiplying (A) the Post-Distribution SpinCo Share Price, by (B) the RemainCo Option Exercise Price Ratio of the corresponding RemainCo Option.

 

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Replacement SpinCo Options shall not be exercisable until the Registration Statement Effectiveness Date. Except as provided in the foregoing provisions of this Section 3.4(a), Replacement SpinCo Options granted under this Section 3.4(a) shall be granted on terms which are in all material respects identical (including with respect to vesting) to the terms of the RemainCo Options which they replace.

(b) RemainCo Holders. Each grantee under any of the RemainCo Equity Plans who will be a RemainCo Retiree or RemainCo Employee immediately after the Distribution Date, and who holds as of the Distribution Date one or more unvested or vested but unexercised RemainCo Options shall receive, effective as of the Distribution Date and immediately prior to the Distribution, in substitution for each such RemainCo Option (which shall be cancelled), an option to purchase a number of shares of RemainCo Common Stock with respect to a number of shares of RemainCo Common Stock, as applicable, under one of the RemainCo Equity Plans (a “Replacement RemainCo Option”) in accordance with the following provisions:

(i) The number of shares of RemainCo Common Stock subject to a Replacement RemainCo Option shall be equal to the product of (i) the number of shares of RemainCo Common Stock subject to a RemainCo Option as of the Distribution Date and (ii) a fraction, the numerator of which is the Pre-Distribution RemainCo Share Price and the denominator of which is the Post-Distribution RemainCo Share Price, with the resulting number of shares subject to the Replacement RemainCo Option being rounded down to the nearest whole share.

(ii) The per share exercise price of such Replacement RemainCo Option (rounded up to the nearest cent) shall be equal to the product obtained by multiplying (x) the Post-Distribution RemainCo Share Price, by (y) the RemainCo Option Exercise Price Ratio of the corresponding RemainCo Option.

Except as provided in the foregoing provisions of this Section 3.4(b), Replacement RemainCo Options shall be granted on terms which are in all material respects identical (including with respect to vesting) to the terms of the RemainCo Options which they replace.

(c) Notwithstanding anything to the contrary in this Section 3.4, the exercise price, the number of shares of RemainCo Common Stock and SpinCo Common Stock subject to each Replacement RemainCo Option and Replacement SpinCo Option, and the terms and conditions of exercise of such options shall be determined in a manner consistent with the requirements of Section 409A of the Code. For purposes of Section 409A of the Code, the Pre-Distribution RemainCo Share Price shall be treated as the fair market value of a share of RemainCo Common Stock immediately prior to the substitutions described in this Section 3.4 and the Post-Distribution RemainCo Share Price and the Post-Distribution SpinCo Share Price shall be treated as the fair market value of a share of RemainCo Common Stock and the fair market value of a share of SpinCo Common Stock, respectively, immediately after such substitutions.

 

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Section 3.5 Employee Stock Purchase Plan.

(a) The last purchase for all eligible Employees under the RemainCo ESPP for calendar year 2020 shall be with respect to the November 13, 2020 pay period. From and after such date, SpinCo Employees shall cease to be eligible to participate in the RemainCo ESPP, other than with respect to any final purchase to be made with respect to such last pay period. Notwithstanding the forgoing, the administrator of the RemainCo ESPP may establish an alternate date for (i) the cessation of SpinCo Employees’ participation in the RemainCo ESPP, and/or (ii) the last purchase for calendar year 2020 under the RemainCo ESPP, as it determines to be necessary or advisable to accommodate the operation and administration of the RemainCo ESPP.

(b) Effective on the Distribution Date, SpinCo shall adopt the SpinCo ESPP under which the options to purchase SpinCo Common Stock shall be granted to eligible SpinCo Employees, which SpinCo ESPP may have terms that are comparable to those in effect, as of immediately prior to the Distribution Date, under the RemainCo ESPP, including with such changes as are necessary and appropriate to reflect the Distribution and such other changes, modifications or amendments to the SpinCo ESPP as may be required by applicable law.

Section 3.6 Section 16(b) of the Exchange Act; Code Section 409A.

(a) By approving the adoption of this Agreement, the respective boards of directors of RemainCo and SpinCo intend to exempt from the short-swing profit recovery provisions of Section 16(b) of the Exchange Act, by reason of the application of Rule 16b-3 thereunder, all acquisitions and dispositions of equity incentive awards by directors and executive officers of each of RemainCo and SpinCo, and the respective boards of directors of RemainCo and SpinCo also intend to expressly approve, in respect of any stock-based award, the use of any method for the payment of an exercise price and the satisfaction of any applicable tax withholding (specifically including the actual or constructive tendering of shares in payment of an exercise price and the withholding of option shares from delivery in satisfaction of applicable tax withholding requirements) to the extent such method is permitted under the applicable equity incentive plan and award agreement.

(b) Notwithstanding anything in this Agreement to the contrary (including the treatment of supplemental and deferred compensation plans, outstanding long-term incentive awards and annual incentive awards as described herein), RemainCo and SpinCo agree to negotiate in good faith regarding the need for any treatment different from that otherwise provided herein to ensure that, to the extent deemed desirable by RemainCo and SpinCo, the treatment of such supplemental or deferred compensation or long-term incentive award, annual incentive award or other compensation does not cause the imposition of a tax under Code Section 409A.

Section 3.7 Certain Bonus Payments.

(a) The Compensation Committee of the Board of Directors of RemainCo shall determine the annual incentive bonuses in respect of 2020 payable to eligible RemainCo Employees, Former RemainCo Employees, SpinCo Employees and Former SpinCo Employees prior to the Distribution Date, which annual incentive bonuses shall be paid at the time such bonuses are normally paid in accordance with the applicable bonus plans and the bonus pools.

 

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(b) SpinCo shall assume responsibility for the payment of bonuses to SpinCo Employees, Former SpinCo Employees and the individuals listed on Schedule 3.7(b) earned under RemainCo’s annual incentive plan. RemainCo shall retain responsibility for the payment of bonuses to RemainCo Employees and Former RemainCo Employees earned under RemainCo’s annual incentive plan.

Section 3.8 Employment Treatment.

(a) Continuous employment with the SpinCo Group and the RemainCo Group following the Distribution Date will be deemed to be continuing service for purposes of vesting and exercisability for the SpinCo Equity Compensation Awards and the RemainCo Equity Compensation Awards. However, in the event that a SpinCo Employee terminates employment after the Distribution Date and becomes employed by the RemainCo Group, for purposes of Article III, the SpinCo Employee will be deemed terminated and the terms and conditions of the applicable equity plan under which grants were made will apply. Similarly, in the event that a RemainCo Employee terminates employment after the Distribution Date and becomes employed by the SpinCo Group, for purposes of Article III, the RemainCo Employee will be deemed terminated and the terms and conditions of the applicable equity plan under which grants were made will apply. In addition, a non-employee member of the Board of Directors of RemainCo or SpinCo will be treated in a similar manner to that described in this Section 3.8.

(b) If, after the Distribution Date, RemainCo or SpinCo identifies an administrative error in the individuals identified as holding RemainCo Equity Compensation Awards and SpinCo Equity Compensation Awards, the amount of such awards so held, the vesting level of such awards, or any other similar error, RemainCo and SpinCo will mutually cooperate in taking such actions as are necessary or appropriate to place, as nearly as reasonably practicable, the individual and RemainCo and SpinCo in the position in which they would have been had the error not occurred.

ARTICLE IV

GENERAL PRINCIPLES FOR ALLOCATION OF LIABILITIES

Section 4.1 General Principles.

(a) (i) Each member of the RemainCo Group and each member of the SpinCo Group shall take any and all reasonable action as shall be necessary or appropriate so that active participation in the RemainCo Retirement Plan and RemainCo Deferred Compensation Plan by all SpinCo Employees and Former SpinCo Employees shall terminate in connection with the Distribution as and when provided under this Agreement (or if not specifically provided under this Agreement, as of 11:59 p.m. on the day before the Employee Transfer Date). Each member of the SpinCo Group shall cease to be a participating employer under the terms of the RemainCo Retirement Plan as of such time. Each member of the SpinCo Group shall cease to be an active participating employer under the terms of the RemainCo Deferred Compensation Plan as of such time, but, consistent with clause (iii) below, shall continue to have obligations to pay benefits to SpinCo Employees and Former SpinCo Employees under such plan and shall continue to be grantors under the rabbi trust established for such plan with respect to assets attributable to the SpinCo Employees’ and Former SpinCo Employees’ benefits, until such time as the liabilities under the RemainCo Deferred Compensation Plan and the assets under such plan’s rabbi trust are transferred to the SpinCo Deferred Compensation Plan and such plan’s rabbi trust, respectively.

 

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(ii) Each member of the SpinCo Group and each member of the RemainCo Group shall take any and all reasonable action as shall be necessary or appropriate so that active participation in the SpinCo Welfare Plans and SpinCo Benefit Arrangements by all RemainCo Employees and Former RemainCo Employees shall terminate in connection with the Distribution as and when provided under this Agreement (or if not specifically provided under this Agreement, as of 11:59 p.m. on the day before the Employee Transfer Date), and each member of the RemainCo Group shall cease to be a participating employer under the terms of such SpinCo Welfare Plans and SpinCo Benefit Arrangements as of such time.

(iii) Except as otherwise provided in this Agreement, one or more members of the SpinCo Group (as designated by SpinCo) shall continue to be responsible for or assume, effective as of the Employee Transfer Date, all employee benefits liabilities for SpinCo Employees and Former SpinCo Employees, and any assets relating to such employee benefits for SpinCo Employees and Former SpinCo Employees shall be transferred to, or continue to be held by, one or more members of the SpinCo Group (as designated by SpinCo); and one or more members of the RemainCo Group (as designated by RemainCo) shall continue to be responsible for or assume, effective as of the Employee Transfer Date, all employee benefits liabilities for RemainCo Employees and Former RemainCo Employees, and any assets relating to such employee benefits for RemainCo Employees and Former RemainCo Employees shall be transferred to, or continue to be held by, one or more members of the RemainCo Group (as designated by RemainCo).

(b) Except as otherwise provided in this Agreement, effective as of the Employee Transfer Date, one or more members of the SpinCo Group (as determined by SpinCo) shall assume or continue the sponsorship of, and no member of the RemainCo Group shall have any further liability for or under, the following agreements, obligations and liabilities, and SpinCo shall indemnify each member of the RemainCo Group, and the officers, directors, and employees of each member of the RemainCo Group, and hold them harmless with respect to such agreements, obligations or liabilities:

(i) any and all individual agreements entered into between any member of the RemainCo Group and any SpinCo Employee or Former SpinCo Employee;

(ii) any and all agreements entered into between any member of the RemainCo Group and any individual who is an independent contractor providing services primarily for the business activities of the SpinCo Group;

(iii) any and all wages, salaries, incentive compensation (as the same may be modified by this Agreement), commissions and bonuses payable to any SpinCo Employees or Former SpinCo Employees after the Employee Transfer Date, without regard to when such wages, salaries, incentive compensation, commissions and bonuses are or may have been earned;

 

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(iv) any and all moving expenses and obligations related to relocation, repatriation, transfers or similar items incurred by or owed to any SpinCo Employees or Former SpinCo Employees, whether or not accrued as of the Employee Transfer Date (other than such expenses and obligations incurred by RemainCo prior to the Employee Transfer Date as a result of which there is an existing liability as of the day before the Employee Transfer Date, all of which shall remain RemainCo’s obligation);

(v) any and all immigration-related, visa, work application or similar rights, obligations and liabilities related to any SpinCo Employees or Former SpinCo Employees; and

(vi) any and all liabilities and obligations whatsoever with respect to claims made by or with respect to any SpinCo Employees or Former SpinCo Employees in connection with any employee benefit plan, program or policy not otherwise retained or assumed by any member of the RemainCo Group pursuant to this Agreement, including such liabilities relating to actions or omissions of or by any member of the SpinCo Group or any officer, director, employee or agent thereof prior to the Employee Transfer Date.

(c) Except as otherwise provided in this Agreement, effective as of the Employee Transfer Date, no member of the SpinCo Group shall have any further liability for, and RemainCo shall indemnify each member of the SpinCo Group, and the officers, directors, and employees of each member of the SpinCo Group, and hold them harmless with respect to any and all liabilities and obligations whatsoever with respect to, claims made by or with respect to any RemainCo Employees or Former RemainCo Employees in connection with any employee benefit plan, program or policy not otherwise retained or assumed by any member of the SpinCo Group pursuant to this Agreement, including such liabilities relating to actions or omissions of or by any member of the RemainCo Group or any officer, director, employee or agent thereof prior to the Employee Transfer Date.

Section 4.2 Sponsorship and/or Establishment of SpinCo Plans. Welfare Plans in which both (i) RemainCo Employees or Former RemainCo Employees and (ii) SpinCo Employees or Former SpinCo Employees participate shall be divided into two separate plans, with one covering RemainCo Employees and Former RemainCo Employees sponsored by a member of the RemainCo Group, and the other covering SpinCo Employees and Former SpinCo Employees sponsored by a member of the SpinCo Group.

Section 4.3 Service Credit.

(a) Service for Eligibility and Vesting Purposes. Except as otherwise provided in any other provision of this Agreement, for purposes of eligibility and vesting under the SpinCo Retirement Plan, SpinCo Deferred Compensation Plan, SpinCo Welfare Plans and SpinCo Benefit Arrangements, SpinCo shall, and shall cause each member of the SpinCo Group to, credit each SpinCo Employee and Former SpinCo Employee with service for any period of employment with any member of the RemainCo Group prior to the Employee Transfer Date to the same extent such service would be credited if it had been performed for a member of the SpinCo Group.

 

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(b) Service for Benefit Purposes. Except as otherwise provided in any other provision of this Agreement, and except to the extent the following would result in a duplication of benefits, (i) for purposes of benefit levels and accruals and benefit commencement entitlements under the SpinCo Retirement Plan, SpinCo Deferred Compensation Plan, SpinCo Welfare Plans and SpinCo Benefit Arrangements, SpinCo shall, and shall cause each member of the SpinCo Group to, credit each SpinCo Employee and Former SpinCo Employee with service for any period of employment with any member of the RemainCo Group prior to the Employee Transfer Date to the same extent that such service is taken into account pursuant to the terms of the RemainCo Retirement Plan, RemainCo Deferred Compensation Plan, SpinCo Welfare Plans and SpinCo Benefit Arrangements, and (ii) for purposes of benefit levels and accruals and benefit commencement entitlements under the RemainCo Retirement Plan, RemainCo Deferred Compensation Plan, SpinCo Welfare Plans and SpinCo Benefit Arrangements, RemainCo shall, and shall cause each member of the RemainCo Group to, credit each RemainCo Employee and Former RemainCo Employee with service for any period of employment with any member of the SpinCo Group prior to the Employee Transfer Date to the same extent such service would be credited if it had been performed for a member of the RemainCo Group.

(c) Evidence of Prior Service. Notwithstanding anything to the contrary, but subject to applicable law and the TSA, if applicable, upon reasonable request by one Party to the other Party, the first Party will provide to the other Party copies of any records available to the first Party to document such service, plan participation and membership of such Employees and cooperate with the first Party to resolve any discrepancies or obtain any missing data for purposes of determining benefit eligibility, participation, vesting and calculation of benefits with respect to any Employee.

Section 4.4 Plan Administration.

(a) Administration. SpinCo shall use its best efforts to, and shall cause each member of the SpinCo Group to use its best efforts to, administer its benefit plans in a manner that does not jeopardize the tax-favored status of the tax-favored benefit plans maintained by any member of the RemainCo Group. RemainCo shall use its best efforts to, and shall cause each member of the RemainCo Group to use its best efforts to, administer its benefit plans in a manner that does not jeopardize the tax-favored status of the tax-favored benefit plans maintained by any member of the SpinCo Group.

(b) Participant Elections and Beneficiary Designations. All participant elections and beneficiary designations made under any plan sponsored by a member of the RemainCo Group or SpinCo Group prior to the effective date as of which assets or liabilities relating to that plan are transferred or allocated to a member of the SpinCo Group or RemainCo Group, as applicable, shall continue in effect under any plan maintained by any member of the SpinCo Group or RemainCo Group, as applicable, to which liabilities are transferred or allocated pursuant to this Agreement until such time as any applicable participant changes his elections or beneficiary designations in accordance with the procedures of the relevant plan, as the case may be, including deferral, investment, and payment form elections, dividend elections, coverage options and levels, beneficiary designations and the rights of alternate payees under qualified domestic relations orders.

 

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ARTICLE V

RETIREMENT PLAN

Section 5.1 General Principles. Aaron’s, Inc. shall establish and adopt the SpinCo Retirement Plan effective as of November 6, 2020, for the benefit of the individuals employed in the SpinCo Business, and such individuals shall cease active participation in the RemainCo Retirement Plan as of that date. The SpinCo Retirement Plan shall continue to be maintained and sponsored by a member of the SpinCo Group on and after the Employee Transfer Date, and the RemainCo Retirement Plan shall continue to be maintained and sponsored by a member of the RemainCo Group on and after the Employee Transfer Date. The RemainCo Group and the SpinCo Group shall each be responsible for the funding of their respective retirement plans on and after the Employee Transfer Date.

Section 5.2 Retirement Plan Transfer. The SpinCo Retirement Plan shall contain provisions that will provide, among other things, benefits for each SpinCo Employee and Former SpinCo Employee, who is a participant with a remaining account balance in the RemainCo Retirement Plan immediately prior to the effective date of transfer of assets and liabilities from the RemainCo Retirement Plan to the SpinCo Retirement Plan (and each beneficiary and alternate payee of such person) (the “SpinCo Retirement Plan Beneficiaries”) substantially identical (except as provided in this Article V, and except that the SpinCo Retirement Plan may provide only a frozen RemainCo Common Stock fund and a frozen SpinCo Common Stock fund (i.e., a stock fund that will not allow new purchases of RemainCo Common Stock or SpinCo Common Stock (including any employer matching contributions in SpinCo Common Stock), respectively, but will allow participants to sell RemainCo Common Stock or SpinCo Common Stock, respectively) unless and until SpinCo otherwise determines, upon satisfaction of the requirements of applicable law, to allow purchases of SpinCo Common Stock in the SpinCo Common Stock fund) to those in effect for the SpinCo Retirement Plan Beneficiaries under the RemainCo Retirement Plan. Each SpinCo Employee who was an active participant in the RemainCo Retirement Plan on the day prior to the effective date of the SpinCo Retirement Plan shall participate in the SpinCo Retirement Plan effective from and after the effective date of the SpinCo Retirement Plan. SpinCo Employees and Former SpinCo Employees shall not make or receive additional contributions under the RemainCo Retirement Plan on and after the effective date of the SpinCo Retirement Plan, unless any such SpinCo Employee or Former SpinCo Employee shall become employed by any member of the RemainCo Group after such date and such member participates in the RemainCo Retirement Plan. A RemainCo Employee or Former RemainCo Employee shall not make or receive contributions under the SpinCo Retirement Plan unless any such RemainCo Employee or Former RemainCo Employee shall become employed by any member of the SpinCo Group on and after the effective date of the SpinCo Retirement Plan and such member participates in the SpinCo Retirement Plan. In the event a participant (other than a SpinCo Employee or RemainCo Employee) or his or her alternate payee or beneficiary has a remaining account balance in the RemainCo Retirement Plan immediately prior to the effective date of the transfer of assets from the RemainCo Retirement Plan to the SpinCo Retirement Plan in accordance with Section 5.4 and it cannot be determined prior to such effective date whether such participant is a Former SpinCo Employee or a Former RemainCo Employee, such participant shall be deemed to be a Former RemainCo Employee for purposes of this Article V.

 

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Section 5.3 RemainCo Common Stock Fund. The RemainCo Retirement Plan may be amended, on or prior to the Distribution Date, to the extent determined to be necessary and appropriate by the sponsor of the RemainCo Retirement Plan, to provide that, following the Distribution and, if the transfer of assets described in Section 5.4 has not yet occurred, until such transfer: (i) the RemainCo Common Stock fund will hold the assets of the accounts of the SpinCo Retirement Plan Beneficiaries invested in the RemainCo Common Stock fund; (ii) the SpinCo Retirement Plan Beneficiaries will be prohibited from increasing their holdings in the RemainCo Common Stock fund; and (iii) the SpinCo Retirement Plan Beneficiaries may elect to liquidate their holdings in the RemainCo Common Stock fund and invest those monies in any other investment fund offered under the RemainCo Retirement Plan . RemainCo shall cause the RemainCo Retirement Plan to provide that SpinCo Retirement Plan Beneficiaries shall participate in the RemainCo Retirement Plan in respect of their accounts thereunder; provided, however, the sponsor of the RemainCo Retirement Plan may in its discretion provide that the RemainCo Common Stock fund shall no longer be offered as an investment alternative under the RemainCo Retirement Plan.

Section 5.4 Transfer of Accounts. As soon as administratively practicable after the effective date of the SpinCo Retirement Plan with a target transfer date of December 8, 2020, RemainCo will cause to be transferred from the trust under the RemainCo Retirement Plan to the trust under the SpinCo Retirement Plan the aggregate amount credited to the accounts of the SpinCo Retirement Plan Beneficiaries . The transfer shall, to the extent reasonably possible, be an in-kind transfer, subject to the reasonable consent of the trustee of the SpinCo Retirement Plan trust, and shall include the transfer of the aggregate assets held in the accounts relating to each SpinCo Retirement Plan Beneficiary under the RemainCo Retirement Plan and any participant loan notes held under such plan.

ARTICLE VI

DEFERRED COMPENSATION PLAN

Section 6.1 Establishment of the Deferred Compensation Plan. Effective as of the Distribution Date, SpinCo shall establish the SpinCo Deferred Compensation Plan, which shall have substantially the same terms as the RemainCo Deferred Compensation Plan as of such effective date. Notwithstanding the foregoing, SpinCo may make such changes, modifications or amendments to the SpinCo Deferred Compensation Plan as may be required by applicable law or as are necessary and appropriate to reflect the Distribution. Under the SpinCo Deferred Compensation Plan, SpinCo shall assume and honor the terms of all QDROs and any other domestic relations orders in effect under the RemainCo Deferred Compensation Plan in respect of SpinCo Employees immediately prior to the Distribution Date.

Section 6.2 Assumption of Liabilities from RemainCo. Effective as of the Distribution Date, SpinCo shall under the SpinCo Deferred Compensation Plan assume all liabilities under the RemainCo Deferred Compensation Plan for the benefit of SpinCo Employees and Former SpinCo Employees determined as of, or immediately prior to, the Distribution Date; and the RemainCo Deferred Compensation Plan shall be relieved of all liabilities for

 

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those benefits. RemainCo shall retain all liabilities under the RemainCo Deferred Compensation Plan for the benefit of RemainCo Employees and Former RemainCo Group Employees. From and after the Distribution Date, SpinCo Employees and Former SpinCo Employees shall cease to be participants in the RemainCo Deferred Compensation Plan.

Section 6.3 Transfer of Rabbi Trust Assets. Effective as of the Distribution Date (or as soon as administratively practicable thereafter), RemainCo shall cause assets held in the rabbi trust for the RemainCo Deferred Compensation Plan to be transferred to the rabbi trust that SpinCo shall establish for the SpinCo Deferred Compensation Plan. Assuming the total value of the assets held in the RemainCo rabbi trust as of the Distribution Date is equal to the value of the total benefit liabilities under the RemainCo Deferred Compensation Plan as of the Distribution Date, the total value of the assets transferred to the SpinCo rabbi trust will be equal to the benefit liabilities assumed by the SpinCo Deferred Compensation Plan. If the total value of the assets held in the RemainCo rabbi trust as of the Distribution Date is greater than the value of the total benefit liabilities under the RemainCo Deferred Compensation Plan as of the Distribution Date, any excess asset value will be divided between the RemainCo rabbi trust and the SpinCo rabbi trust in proportion to the benefit liabilities of the RemainCo Deferred Compensation Plan and the SpinCo Deferred Compensation Plan, respectively, following the transfer of liabilities as provided in Section 6.2. If the total value of the assets held in the RemainCo rabbi trust is less than the value of the total benefit liabilities under the RemainCo Deferred Compensation Plan as of the Distribution Date, the asset value will be divided between the RemainCo rabbi trust and the SpinCo rabbi trust in proportion to the benefit liabilities of the RemainCo Deferred Compensation Plan and the SpinCo Deferred Compensation Plan, respectively. The assets transferred from the RemainCo rabbi trust to the SpinCo rabbi trust will be transferred in kind, and RemainCo and SpinCo shall agree on the division of specific assets with the understanding that corporate owned life insurance policies in the RemainCo rabbi trust on the lives of SpinCo Employees shall be transferred to the SpinCo rabbi trust; to the extent the asset allocation formula above permits, corporate owned life insurance policies in the RemainCo rabbi trust on the lives of Former SpinCo Employees also shall be transferred to the SpinCo rabbi trust; and to the extent the asset allocation formula above permits, assets other than corporate owned life insurance policies shall remain in the RemainCo rabbi trust.

 

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Section 6.4 Cooperation for Annual Enrollment. The Parties agree that, until the end of the first enrollment period after the Distribution Date or such earlier or later date as mutually agreed by RemainCo and SpinCo, they will work cooperatively to utilize the existing administrative structure and service providers for the RemainCo Deferred Compensation Plan to engage in an annual enrollment process for all eligible SpinCo Employees and RemainCo Employees, consistent with past practice, regardless of whether such enrollment process has concluded as of the Distribution Date.

ARTICLE VII

WELFARE PLANS

Section 7.1 Establishment of RemainCo Welfare Plans.

(a) Except as provided below, the members of the RemainCo Group who had previously adopted a SpinCo Welfare Plan and were participating employers therein on the day before the Employee Transfer Date (“Participating RemainCo Employers”) will, at 11:59 p.m. on that date, withdraw from such participation, and, effective as of the Employee Transfer Date, one or more of the Participating RemainCo Employers has assumed sponsorship, under newly established welfare plans, of the coverage and benefits which were offered under such plans to the RemainCo Employees and the Former RemainCo Employees (and their eligible spouses and dependents as the case may be) of the Participating RemainCo Employers (collectively, the “RemainCo Welfare Plan Participants”). Such coverage and benefits shall then be provided to the RemainCo Welfare Plan Participants on an uninterrupted basis under the newly established RemainCo Welfare Plans which shall contain substantially the same benefit provisions as in effect under the corresponding SpinCo Welfare Plan on the day before the Employee Transfer Date. Except as provided below, effective as of the Employee Transfer Date, liabilities relating to the RemainCo Welfare Plan Participants shall be spun off from each SpinCo Welfare Plan and allocated to the corresponding new RemainCo Welfare Plan.

(b) As a result of withdrawal from participation in the SpinCo Welfare Plans by the Participating RemainCo Employers, the RemainCo Welfare Plan Participants ceased to be eligible for coverage under the SpinCo Welfare Plans at 11:59 p.m. on the day before the Employee Transfer Date, RemainCo Welfare Plan Participants shall not participate in any SpinCo Welfare Plans on and after the Employee Transfer Date, unless they shall become employed after such date by any member of the SpinCo Group that participates in such plans and meet the terms and conditions of participation thereunder. SpinCo Employees and Former SpinCo Employees shall not participate in any RemainCo Welfare Plans, unless they shall become employed on and after the Employee Transfer Date by any member of the RemainCo Group that participates in such plans and meet the terms and conditions of participation thereunder.

Section 7.2 Transitional Matters Under SpinCo Welfare Plans.

(a) Treatment of Claims Incurred.

(i) Self-Insured Benefits. RemainCo has assumed and is responsible for the funding of payment for any unpaid covered claim and eligible expense:

 

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(E) Incurred by any RemainCo Welfare Plan Participant prior to the Employee Transfer Date under a SpinCo Welfare Plan that is not described in section 7.2(a)(ii) below, to the extent such participant has coverage under such plan as, or through, an employee or former employee of a Participating RemainCo Employer on the date such claim or expense is incurred; or

(F) Incurred by any RemainCo Employee or Former RemainCo Employee prior to the Employee Transfer Date under a SpinCo Benefit Arrangement that is not described in section 7.2(a)(ii) below. No member of the SpinCo Group shall be responsible for any liability with respect to any such claims or expenses.

(ii) Insured Benefits. With respect to benefits that, prior to the Employee Transfer Date, were provided for under the SpinCo Welfare Plans through the purchase of insurance, SpinCo shall cause the SpinCo Welfare Plans to fully perform, pay and discharge all claims of RemainCo Welfare Plan Participants that were incurred prior to the Employee Transfer Date.

(iii) Claims Incurred. Effective on the Distribution Date, RemainCo shall be responsible for the stop loss contract maintained by it immediately prior to the Distribution Date and SpinCo shall be responsible for the stop loss contract maintained by it immediately prior to the Distribution Date. For purposes of this Section 7.2(a), a claim or liability is deemed to be incurred prior to the Distribution Date shall continue to be covered under the applicable stop loss contract of RemainCo or SpinCo.

(b) Credit for Deductibles and Other Limits. With respect to each RemainCo Welfare Plan Participant, the RemainCo Welfare Plans will give credit for the plan year which includes the Distribution Date for any amount paid, number of services obtained or visits provided under the comparable type SpinCo Welfare Plan by such RemainCo Welfare Plan Participant in such plan year toward deductibles, out-of-pocket maximums, limits on number of services or visits, or other similar limitations to the extent such amounts are taken into account under the comparable type SpinCo Welfare Plan. For purposes of any life-time maximum benefit limit payable to a RemainCo Welfare Plan Participant under any RemainCo Welfare Plan, the RemainCo Welfare Plans will recognize any expenses paid or reimbursed by a SpinCo Welfare Plan with respect to such participant prior to the Employee Transfer Date to the same extent such expense payments or reimbursements would be recognized in respect of an active plan participant under that SpinCo Welfare Plan.

(c) COBRA. Effective as of the Employee Transfer Date, SpinCo has assumed and will satisfy all requirements under COBRA with respect to all SpinCo Employees and Former SpinCo Employees and their qualified beneficiaries, including for individuals who are already receiving benefits as of such date under COBRA.

 

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Section 7.3 Continuity of Benefits, Benefit Elections and Beneficiary Designations.

(a) Benefit Elections and Designations. As of the Employee Transfer Date (or such other date provided for under this Agreement), RemainCo has caused the RemainCo Welfare Plans to recognize and give effect to all elections and designations (including all coverage and contribution elections and beneficiary designations) made by each RemainCo Welfare Plan Participant under, or with respect to, the corresponding SpinCo Welfare Plan for plan year which includes the Distribution Date.

(b) Health Savings Accounts and Flexible Spending Accounts. Before the Distribution Date, RemainCo shall, or shall cause a member of the RemainCo Group to, establish a Welfare Plan that will provide health savings account and flexible spending account benefits to RemainCo Employees on and after the Distribution Date (a “RemainCo Plan”). It is the intention of the Parties that all activity under a RemainCo Employee’s health savings account and flexible spending account under a SpinCo Welfare Plan (a “SpinCo Plan”) for the year in which the Distribution Date occurs be treated instead as activity under the corresponding account under the RemainCo health savings account and flexible spending account , such that (i) any period of participation by a RemainCo Employee in a SpinCo Plan during the year in which the Distribution Date occurs will be deemed a period when such RemainCo Employee participated in the corresponding RemainCo Plan; (ii) all expenses incurred during such period will be deemed incurred while such RemainCo Employee’s coverage was in effect under the corresponding SpinCo Plan; (iii) all elections and reimbursements made with respect to such period under the SpinCo Plan will be deemed to have been made with respect to the corresponding RemainCo Plan; and (iv) for purposes of determining the total annual employer contribution made on behalf of a RemainCo Employee, employer contributions made with respect to such period under the SpinCo Plan will be deemed to have been made with respect to the corresponding RemainCo Plan. The Parties shall use commercially reasonable efforts to ensure that as of the Distribution Date any health or dependent care flexible spending accounts of RemainCo Employees (whether positive or negative) (the “Transferred Account Balances”) under SpinCo Welfare Plans that are health or dependent care flexible spending account plans are transferred to the extent deemed necessary or appropriate by the administrator of the SpinCo Welfare Plans, as soon as administratively practicable after the Distribution Date, from the SpinCo Welfare Plans to the corresponding RemainCo Welfare Plans. Such RemainCo Welfare Plans shall assume responsibility as of the Distribution Date for all outstanding health or dependent care claims under the corresponding SpinCo Welfare Plans of each RemainCo Employee for the year in which the Distribution Date occurs and shall assume and agree to perform the obligations of the corresponding SpinCo Welfare Plans from and after the Distribution Date.

Section 7.4 Insurance Contracts. To the extent any SpinCo Welfare Plan is funded through the purchase of an insurance contract or is subject to any stop loss contract, RemainCo and SpinCo will cooperate and use their commercially reasonable efforts to replicate such insurance contracts for RemainCo (except to the extent changes are required under applicable state insurance laws) and to maintain any pricing discounts or other preferential terms for both RemainCo and SpinCo for a reasonable term. Neither Party shall be liable for failure to obtain such pricing discounts or other preferential terms for the other Party. Each Party shall be responsible for any additional premiums, charges or administrative fees that such Party may incur pursuant to this Section 7.4.

 

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Section 7.5 Third-Party Vendors. Except as provided below, to the extent any SpinCo Welfare Plan is administered by a third-party vendor, RemainCo and SpinCo will cooperate and use their commercially reasonable efforts to replicate any contract with such third-party vendor for SpinCo and to maintain any pricing discounts or other preferential terms for both RemainCo and SpinCo for a reasonable term. Neither Party shall be liable for failure to obtain such pricing discounts or other preferential terms for the other Party. Each Party shall be responsible for any additional premiums, charges or administrative fees that such Party may incur pursuant to this Section 7.5.

Section 7.6 Claims Experience. Notwithstanding the foregoing, RemainCo and SpinCo shall use commercially reasonable efforts to ensure that any claims experience under the SpinCo Welfare Plans attributable to RemainCo Welfare Beneficiaries shall be available to the RemainCo Welfare Plans, as permitted by any applicable privacy protection laws or regulations or Privacy Contracts.

Section 7.7 Allocation of Demutualization Proceeds. To the extent demutualization or similar proceeds were paid or credited to the SpinCo Group or a SpinCo Welfare Plan prior to the Employee Transfer Date with respect to an insurance contract that funded a SpinCo Welfare Plan covering RemainCo Welfare Plan Participants and such proceeds remain unallocated as of the Employee Transfer Date, SpinCo shall transfer to RemainCo as soon as practicable following the Employee Transfer Date a pro rata portion of such proceeds, according to the proportion of the total number of RemainCo Employees and Former RemainCo Employees participating in such plan as of the day before the Employee Transfer Date to the total number of employees participating in such plan as of the day before the Employee Transfer Date.

Section 7.8 Transition Services Agreement. The Parties acknowledge that the RemainCo Group or the SpinCo Group may provide administrative services for certain of the other Party’s benefit programs for a transitional period under the terms of the TSA. The Parties agree to enter into a business associate agreement (if required by applicable health information privacy laws) in connection with the TSA. Further, notwithstanding anything in this Agreement to the contrary, the requirements set forth in this Article VII shall be subject to the terms and conditions of the TSA between the RemainCo Group and the SpinCo Group.

ARTICLE VIII

BENEFIT ARRANGEMENTS

Except as otherwise provided under this Agreement, effective as of the Employee Transfer Date, RemainCo Employees and Former RemainCo Employees are no longer eligible to participate in any SpinCo Benefit Arrangement.

ARTICLE IX

WORKERS’ COMPENSATION AND UNEMPLOYMENT COMPENSATION

Section 9.1 General Principles. Subject to Section 9.2, effective as of the Employee Transfer Date, (a) SpinCo shall have (and, to the extent it has not previously had such obligations, assume) the obligations for all claims and liabilities relating to workers’ compensation and unemployment compensation benefits for all SpinCo Employees and Former SpinCo Employees and (b) RemainCo shall have (and, to the extent it has not previously had such obligations, assume) the obligations for all claims and liabilities relating to workers’ compensation and unemployment compensation benefits for all RemainCo Employees and Former RemainCo Employees.

 

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Section 9.2 Crossover Claims. Section 9.1 shall not apply to a workers’ compensation claim of a SpinCo Employee, Former SpinCo Employee, RemainCo Employee or Former RemainCo Employee attributable to or arising in connection with work or services by such employee or former employee prior to the Employee Transfer Date and which (a) arises in connection with (i) both (A) work or services performed for the RemainCo Business and (B) work or services performed for the SpinCo Business or (ii) work or services performed for both the RemainCo Business and the SpinCo Business, (b) arises in connection with work or services performed by a SpinCo Employee or Former SpinCo Employee on behalf of a member of the RemainCo Group in the normal course of such employee’s duties, or (c) arises in connection with work or services performed by a RemainCo Employee or Former RemainCo Employee on behalf of a member of the SpinCo Group in the normal course of such employee’s duties (any such claim in (a), (b) or (c), a “Crossover Claim”). With respect to any Crossover Claim, effective as of the Employee Transfer Date, (i) SpinCo shall have (and to the extent it has not previously had such obligations, assume) the obligations for all Crossover Claims for which the last injurious exposure occurred at a location owned or operated by an SpinCo Group Member, and (ii) RemainCo shall have (and to the extent it has not previously had such obligations, assume) the obligations for all Crossover Claims for which the last injurious exposure occurred at a location owned or operated by a Parent Group Member. In the event that ownership or operation of such a location is not known with respect to a Crossover Claim, responsibility for the claim will be allocated to SpinCo if the employee was employed by an SpinCo Group Member at the time of last injurious exposure and to RemainCo if the employee was employed by a Parent Group Member at the time of last injurious exposure.

Section 9.3 Additional Details. SpinCo and RemainCo shall use commercially reasonable efforts to provide that workers’ compensation and unemployment insurance costs are not adversely affected for either of them by reason of the Distribution. For the avoidance of doubt, the obligations for a workers’ compensation claim will be allocated between the Parties in accordance with Section 9.1 or 9.2, as applicable, even if the claim is registered or becomes registered by the state workers’ compensation authority in the name of a Party (or the Affiliate of a Party) other than the Party to which the claim is allocated in accordance with Section 9.1 or 9.2, as applicable. The Party to which a workers’ compensation claim is allocated pursuant to Sections 9.1 and 9.2 shall be responsible for all related costs and expenses, including compensation payments, medical payments, Disabled Workers’ Relief Fund payments, self-insured assessments, legal fees and expenses, administration costs and expenses, and violations of specific safety requirement assessments/fines.

 

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ARTICLE X

EMPLOYMENT, SEVERANCE AND OTHER MATTERS

Section 10.1 Employment, Severance, Change-in-Control and Retention Agreements.

(a) SpinCo Obligations. Effective as of the Employee Transfer Date, RemainCo hereby assigns to SpinCo, and SpinCo hereby accepts such assignment and assumes, RemainCo’s rights and obligations arising under the employment, severance, change-in-control, retention and similar agreements listed on Schedule 10.1(a)(i) (the “SpinCo Obligations”), and SpinCo agrees to honor the terms and conditions of those agreements applicable to SpinCo as a successor under the terms of such agreements. Except for SpinCo’s assumption of such agreements as described above, the terms of such agreements shall in all other respects be unaffected. The Parties agree that the SpinCo Employees who are covered by the employment, severance, change-in-control, retention and similar agreements described above are express beneficiaries of this Section 10.1(a). To the extent any of the SpinCo Obligations are paid by RemainCo, SpinCo shall promptly reimburse RemainCo for all such payments made pursuant to the agreements listed on Schedule 10.1(a)(ii), including RemainCo’s share of the related payroll taxes, but in no event later than 30 days following SpinCo’s receipt of RemainCo’s written notice of such payments.

(b) RemainCo Obligations. RemainCo shall continue to be responsible for and remain obligated under the employment, severance, change-in-control, retention and similar agreements described in Schedule 10.1(b) and agrees to honor the terms and conditions of those agreements.

(c) Additional Obligations. SpinCo and RemainCo shall each be solely responsible for any other employment arrangement entered into by any member of the SpinCo Group or any member of the RemainCo Group, respectively, and that are not otherwise allocated by this Agreement to a member of either the RemainCo Group or the SpinCo Group.

(d) Effect on Equity Awards. Notwithstanding any provision of this Article X, and except as otherwise provided in Article III, RemainCo shall remain responsible for administering and settling the RemainCo Equity Compensation Awards, and SpinCo shall remain responsible for administering and settling the SpinCo Equity Compensation Awards. Any provision in an employment, severance, change-in-control, retention and similar agreements described in Schedule 10.1(a) or 10.1(b) which provides for the accelerated vesting of equity awards shall apply in accordance with its terms to RemainCo Equity Compensation Awards and SpinCo Equity Compensation Awards on and after the Employee Transfer Date.

Section 10.2 Severance Plan. On and after the Employee Transfer Date, (i) RemainCo shall have no liability or obligation under any RemainCo severance plan or policy with respect to SpinCo Employees, Former SpinCo Employees and those individuals listed on Schedule 10.2(i), including under the RemainCo Group’s Executive Severance Pay Plan and (ii) SpinCo shall have no liability or obligation under any SpinCo severance plan or policy with respect to RemainCo Employees, Former RemainCo Employees and those individuals listed on Schedule 10.2(ii), including under the SpinCo Group’s Executive Severance Pay Plan. Except as otherwise provided in this Agreement, effective on and after the Employee Transfer Date, SpinCo shall assume and shall be responsible for administering all payments and benefits under the applicable RemainCo severance policies or any termination agreements with Former SpinCo Employees whose employment terminated prior to the Employee Transfer Date for an eligible reason under such policies or in accordance with such agreements.

Section 10.3 Accrued Time Off. SpinCo shall recognize and assume all liability for all vacation, holiday, sick leave, flex days, personal days and paid-time off with respect to SpinCo Employees, and SpinCo shall credit each SpinCo Employee with such accrual effective as of the Employee Transfer Date.

 

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Section 10.4 Leaves of Absence. SpinCo will continue to apply the appropriate leave of absence policies applicable to inactive SpinCo Employees who are on an approved leave of absence as of the Employee Transfer Date. Leaves of absence taken by SpinCo Employees prior to the Employee Transfer Date shall be deemed to have been taken as employees of a member of the SpinCo Group.

Section 10.5 Director Programs. RemainCo shall retain responsibility for the payment of any fees payable in respect of service on the RemainCo Board of Directors that are payable but not yet paid as of the Employee Transfer Date, including responsibility for the fees payable under the Amended and Restated Compensation Plan for Non-Employee Directors, and SpinCo shall not have any responsibility for any such payments. Until the first annual meeting of RemainCo following the Distribution Date, RemainCo shall continue to maintain the Amended and Restated Compensation Plan for Non-Employee Directors on the substantially the same terms and conditions as in effect immediately prior to the Distribution Date, except for such modifications that are required to comply with applicable law or necessary and appropriate to reflect the Distribution.    Until the first annual meeting of SpinCo following the Distribution Date, SpinCo shall maintain a non-employee director compensation plan containing terms and conditions substantially the same as RemainCo’s Amended and Restated Plan for Non-Employee Directors as in effect immediately prior to the Distribution Date, except for such modifications that are required to comply with applicable law or necessary and appropriate to reflect the Distribution.

Section 10.6 Restrictive Covenants in Employment and Other Agreements.

(a) To the fullest extent permitted by the agreements described in this Section 10.6(a) and applicable law, RemainCo hereby assigns, or shall cause a member of the RemainCo Group to assign, to SpinCo or a member of the SpinCo Group, as designated by SpinCo, all agreements containing restrictive covenants (including confidentiality and non-competition provisions) between a member of the RemainCo Group and a SpinCo Employee or Former SpinCo Employee, with such assignment effective as of the Employee Transfer Date. To the extent that assignment of such agreements is not permitted, effective as of the Employee Transfer Date, each member of the SpinCo Group shall be considered to be a successor to each member of the RemainCo Group for purposes of, and a third-party beneficiary with respect to, all agreements containing restrictive covenants (including confidentiality and non-competition provisions) between a member of the RemainCo Group and a SpinCo Employee or Former SpinCo Employee whom SpinCo reasonably determines have substantial knowledge of the business activities of the SpinCo Group, such that each member of the SpinCo Group shall enjoy all the rights and benefits under such agreements (including rights and benefits as a third-party beneficiary), with respect to the business operations of the SpinCo Group; provided, however, that in no event shall RemainCo be permitted to enforce such restrictive covenant agreements against SpinCo Employees or Former SpinCo Employees for action taken in their capacity as employees of a member of the SpinCo Group.

(b) To the fullest extent permitted by the agreements described in this Section 10.6(b) and applicable law, SpinCo hereby assigns, or shall cause a member of the SpinCo Group to assign, to RemainCo or a member of the RemainCo Group, as designated by RemainCo, all agreements containing restrictive covenants (including confidentiality and non-competition provisions) between a member of the SpinCo Group and a RemainCo Employee or Former RemainCo Employee, with such assignment effective as of the Employee Transfer Date. To the extent that

 

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assignment of such agreements is not permitted, effective as of the Employee Transfer Date, each member of the RemainCo Group shall be considered to be a successor to each member of the SpinCo Group for purposes of, and a third-party beneficiary with respect to, all agreements containing restrictive covenants (including confidentiality and non-competition provisions) between a member of the SpinCo Group and a RemainCo Employee or Former RemainCo Employee whom RemainCo reasonably determines have substantial knowledge of the business activities of the RemainCo Group, such that RemainCo and each member of the RemainCo Group shall enjoy all the rights and benefits under such agreements (including rights and benefits as a third-party beneficiary), with respect to the business operations of the RemainCo Group; provided, however, that in no event shall SpinCo be permitted to enforce such restrictive covenant agreements against RemainCo Employees or Former RemainCo Employees for action taken in their capacity as employees of a member of the RemainCo Group.

Section 10.7 Non-Solicitation.

(a) During the 18 month period commencing on the Distribution Date (“Non-Solicitation Period”), RemainCo will not, directly or indirectly, on its own behalf or in conjunction with any person or legal entity, recruit, solicit, or induce, or attempt to recruit, solicit or induce, or hire SpinCo’s Chief Executive Officer or any of those employees reporting directly to SpinCo’s Chief Executive Officer at any time during the Non-Solicitation Period to terminate their employment relationship with the SpinCo Group. The foregoing restriction does not include the placement of general advertisements for employment with the RemainCo Group in the same types of print or electronic publications used by the RemainCo Group to advertise for employment prior to the Distribution Date and consistent with RemainCo Group practice prior to the Distribution Date or hiring any individual who responds to such general advertisements. RemainCo will advise any third parties recruiting on RemainCo’s behalf of the obligation set forth in this Section 10.7 and will direct those third parties to comply with that obligation.

(b) During the Non-Solicitation Period, SpinCo will not, directly or indirectly, on its own behalf or in conjunction with any person or legal entity, recruit, solicit, or induce, or attempt to recruit, solicit or induce, or hire RemainCo’s Chief Executive Officer or any of those employees reporting directly to RemainCo’s Chief Executive Officer at any time during the Non-Solicitation Period to terminate their employment relationship with the RemainCo Group. The foregoing restriction does not include the placement of general advertisements for employment with the SpinCo Group in the same types of print or electronic publications used by the SpinCo Group to advertise for employment prior to the Distribution Date and consistent with SpinCo Group practice prior to the Distribution Date or hiring any individual who responds to such general advertisements. SpinCo will advise any third parties recruiting on SpinCo’s behalf of the obligation set forth in this Section 10.7 and will direct those third parties to comply with that obligation.

ARTICLE XI

GENERAL PROVISIONS

Section 11.1 Preservation of Rights to Amend. The rights of each member of the RemainCo Group and each member of the SpinCo Group to amend, waive, or terminate any plan, arrangement, agreement, program, or policy referred to herein shall not be limited in any way by this Agreement.

 

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Section 11.2 Confidentiality. Each Party agrees that any information conveyed or otherwise received by or on behalf of a Party in conjunction herewith that is not otherwise public through no fault of such Party is confidential and is subject to the terms of the confidentiality provisions set forth in the Separation Agreement.

Section 11.3 Administrative Complaints/Litigation.

(a) Except as otherwise provided in this Agreement, on and after the Employee Transfer Date, SpinCo shall assume, and be solely liable for, the handling, administration, investigation and defense of actions, including ERISA, occupational safety and health, employment standards, union grievances, wrongful dismissal, discrimination or human rights and unemployment compensation claims asserted at any time against RemainCo or any member of the RemainCo Group by any SpinCo Employee or Former SpinCo Employee (including any dependent or beneficiary of any such Employee) or any other person, to the extent such actions or claims arise out of or relate to employment or the provision of services (whether as an employee, contractor, consultant or otherwise) to or with respect to the business activities of any member of the SpinCo Group, whether or not such employment or services were performed before or after the Distribution.

(b) Except as otherwise provided in this Agreement, on and after the Employee Transfer Date, RemainCo shall assume, and be solely liable for, the handling, administration, investigation and defense of actions, including ERISA, occupational safety and health, employment standards, union grievances, wrongful dismissal, discrimination or human rights and unemployment compensation claims asserted at any time against SpinCo or any member of the SpinCo Group by any RemainCo Employee or Former RemainCo Employee (including any dependent or beneficiary of any such Employee) or any other person, to the extent such actions or claims arise out of or relate to employment or the provision of services (whether as an employee, contractor, consultant or otherwise) to or with respect to the business activities of any member of the RemainCo Group, whether or not such employment or services were performed before or after the Distribution.

(c) To the extent that any legal action relates to a putative or certified class of plaintiffs, which includes both RemainCo Employees (or Former RemainCo Employees) and SpinCo Employees (or Former SpinCo Employees) and such action involves employment or benefit plan related claims, reasonable costs and expenses incurred by the Parties in responding to such legal action shall be allocated among the Parties equitably in proportion to a reasonable assessment of the relative proportion of Employees included in or represented by the putative or certified plaintiff class. The procedures contained in the indemnification and related litigation cooperation provisions of the Separation Agreement shall apply with respect to each Party’s indemnification obligations under this Section 11.3.

 

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Section 11.4 Reimbursement and Indemnification. Except as otherwise provided in the TSA, RemainCo and SpinCo hereto agrees to reimburse the other Party, within 60 days of receipt from the other Party of reasonable verification, for all costs and expenses which the other Party may incur on its behalf as a result of any of the respective RemainCo and SpinCo Retirement Plans, Deferred Compensation Plans Welfare Plans, and Benefit Arrangements. All liabilities retained, assumed or indemnified against by SpinCo pursuant to this Agreement, and all liabilities retained, assumed or indemnified against by RemainCo pursuant to this Agreement, shall in each case be subject to the indemnification provisions of the Separation Agreement. Notwithstanding anything to the contrary, (i) no provision of this Agreement shall require any member of the SpinCo Group to pay or reimburse to any member of the RemainCo Group any benefit-related cost item that a member of the SpinCo Group has previously paid or reimbursed to any member of the RemainCo Group; and (ii) no provision of this Agreement shall require any member of the RemainCo Group to pay or reimburse to any member of the SpinCo Group any benefit-related cost item that a member of the RemainCo Group has previously paid or reimbursed to any member of the SpinCo Group.

Section 11.5 Costs of Compliance with Agreement. Except as otherwise provided in this Agreement or any other Ancillary Agreement, each Party shall pay its own expenses in fulfilling its obligations under this Agreement.

Section 11.6 Fiduciary Matters. RemainCo and SpinCo each acknowledge that actions required to be taken pursuant to this Agreement may be subject to fiduciary duties or standards of conduct under ERISA or other applicable law, and no Party shall be deemed to be in violation of this Agreement if it fails to comply with any provisions hereof based upon its good faith determination (as supported by advice from counsel experienced in such matters) that to do so would violate such a fiduciary duty or standard. Each Party shall be responsible for taking such actions as are deemed necessary and appropriate to comply with its own fiduciary responsibilities and shall fully release and indemnify the other Party for any liabilities caused by the failure to satisfy any such responsibility.

Section 11.7 Form S-8. Before the Distribution or as soon as reasonably practicable thereafter and subject to applicable law, SpinCo shall prepare and file with the SEC a registration statement on Form S-8 (or another appropriate form) registering under the Securities Act of 1933 the offering of a number of shares of SpinCo Common Stock at a minimum equal to the number of shares subject to the SpinCo Equity Compensation Awards. SpinCo shall use commercially reasonable efforts to cause any such registration statement to be kept effective (and the current status of the prospectus or prospectuses required thereby shall be maintained) as long as any SpinCo Equity Compensation Awards may remain outstanding.

Section 11.8 Entire Agreement. This Agreement, together with the documents referenced herein (including the Separation Agreement, the Ancillary Agreements and the plans and agreements referenced herein), constitutes the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof and there are no agreements or understandings between the Parties other than those set forth or referred to herein or therein. To the extent any provision of this Agreement conflicts with the provisions of the Separation Agreement, the provisions of this Agreement shall be deemed to control with respect to the subject matter hereof.

 

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Section 11.9 Binding Effect; No Third-Party Beneficiaries; Assignment. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective successors and permitted assigns. This Agreement is solely for the benefit of the Parties and should not be deemed to confer upon any third parties any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. Nothing in this Agreement is intended to amend any employee benefit plan or affect the applicable plan sponsor’s right to amend or terminate any employee benefit plan pursuant to the terms of such plan. The provisions of this Agreement are solely for the benefit of the Parties, and no current or former Employee, officer, director or independent contractor or any other individual associated therewith shall be regarded for any purpose as a third-party beneficiary of this Agreement. None of this Agreement or any of the rights, interests or obligations hereunder may be assigned or delegated, in whole or in part, by operation of law or otherwise, by any Party without the prior written consent of the other Party to this Agreement being so assigned or delegated, and any such assignment without such prior written consent shall be null and void. No such consent shall be required for the assignment of a Party’s rights and obligations under this Agreement if: (a) any party to this Agreement (or any of its successors or permitted assigns) (i) shall consolidate with or merge into any other Person and shall not be the continuing or surviving business entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and/or assets to any Person; and (b) in any such case, the resulting, surviving or assignee Person expressly assumes all of the obligations of the relevant party (or its successors or permitted assigns, as applicable) under this Agreement. No assignment permitted by this Section 11.9 shall release the assigning party from liability for the full performance of its obligations under this Agreement.

Section 11.10 Amendment. No provisions of this Agreement shall be deemed waived, amended, supplemented or modified by a Party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the Party against whom enforcement of such waiver, amendment, supplement or modification is sought.

Section 11.11 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay of any Party (or its applicable Group members) in exercising any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such right or power, or any course of conduct, preclude any other or further exercise thereof or the exercise of any other right or power. Waiver by any Party of any default by the other Party of any provision of this Agreement shall not be deemed a waiver by the waiving Party of any subsequent or other default, nor shall it prejudice the rights of the waiving Party. All rights and remedies existing under this Agreement or the Schedules attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available.

Section 11.12 Notices. All notices or other communications under this Agreement shall be in writing and shall be deemed to be duly given when delivered or mailed in accordance with the provisions of the Separation Agreement.

Section 11.13 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. Each Party acknowledges that it and the other Party may execute this Agreement by manual, stamp or mechanical signature, and that delivery of an executed counterpart of a signature page to this

 

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Agreement (whether executed by manual, stamp or mechanical signature) by facsimile or by email in portable document format (PDF) shall be effective as delivery of such executed counterpart of this Agreement. Each Party expressly adopts and confirms a stamp or mechanical signature (regardless of whether delivered in person, by mail, by courier, by facsimile or by email in portable document format (PDF)) made in its respective name as if it were a manual signature delivered in person, agrees that it shall not assert that any such signature or delivery is not adequate to bind it to the same extent as if it were signed manually and delivered in person and agrees that, at the reasonable request of the other Party at any time, it shall as promptly as reasonably practicable cause this Agreement to be manually executed (any such execution to be as of the date of the initial date hereof) and delivered in person, by mail or by courier.

Section 11.14 Severability. In the event that any one or more of the terms or provisions of this Agreement the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement, or the application of such term or provision to Persons or circumstances or in jurisdictions other than those as to which it has been determined to be invalid, illegal or unenforceable, and the Parties shall use their commercially reasonable efforts to substitute one or more valid, legal and enforceable terms or provisions into this Agreement which, insofar as practicable, implement the purposes and intent of the Parties. Any term or provision of this Agreement held invalid or unenforceable only in part, degree or within certain jurisdictions shall remain in full force and effect to the extent not held invalid or unenforceable to the extent consistent with the intent of the parties as reflected by this Agreement. To the extent permitted by applicable Law, each party waives any term or provision of Law which renders any term or provision of this Agreement to be invalid, illegal or unenforceable in any respect.

Section 11.15 Governing Law. This Agreement (and any claims or disputes arising out of or related hereto or to the transactions contemplated hereby or to the inducement of any party to enter herein, whether for breach of contract, tortious conduct or otherwise and whether predicated on common law, statute or otherwise) shall be governed by and construed and interpreted in accordance with the laws of the State of Georgia irrespective of the choice of laws principles of the State of Georgia, including all matters of validity, construction, effect, enforceability, performance and remedies.

Section 11.16 Dispute Resolution. Except as specifically provided in this Agreement, in the event of any controversy, dispute or claim (a “Dispute”) arising out of or relating to any Party’s rights or obligations under this Agreement (whether arising in contract, tort or otherwise), such Dispute shall be resolved in accordance with the dispute resolution process referred to in Article XI of the Separation Agreement.

Section 11.17 Performance. Each of RemainCo and SpinCo shall cause to be performed, and hereby guarantees the performance of all actions, agreements and obligations set forth herein to be performed by any member of the RemainCo Group and any member of the SpinCo Group, respectively. The Parties each agree to take such further actions and to execute, acknowledge and deliver, or to cause to be executed, acknowledged and delivered, all such further documents as are reasonably requested by the other for carrying out the purposes of this Agreement or of any document delivered pursuant to this Agreement.

 

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Section 11.18 Construction. This Agreement shall be construed as if jointly drafted by the Parties and no rule of construction or strict interpretation shall be applied against any Party.

Section 11.19 Effect if Distribution Does Not Occur. Notwithstanding anything in this Agreement to the contrary, if the Separation Agreement is terminated prior to the Distribution Date, this Agreement shall be of no further force and effect.

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed in their names by a duly authorized officer as of the date first written above.

 

AARON’S HOLDINGS COMPANY, INC.

By:                                        
 

Name:

 

Title:

AARON’S SPINCO, INC.

By:    
 

Name:

 

Title:

 

38

Exhibit 10.4

FORM OF INDEMNIFICATION AGREEMENT

This INDEMNIFICATION AGREEMENT is made and executed effective as of the ____ day of _____________, 2020 by and between Aaron’s SpinCo, Inc., a Georgia corporation (the “Company”), and ______________, an individual resident of the State of ______________ (“Indemnitee”).

WHEREAS, the Company is aware that, in order to induce highly competent persons to serve the Company as directors or in other capacities, the Company must provide such persons with adequate protection through exculpation of directors from personal liability (as set forth in the Company’s Amended and Restated Articles of Incorporation (“Articles”)), the Company’s Amended and Restated By-Laws (“Bylaws”), directors and officers liability insurance, advancement of expenses and indemnification against risks of claims and actions against them, and against damage to their professional or personal reputations resulting from allegations, claims, actions and investigations, arising out of or relating to their service to and activities on behalf of the Company;

WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company’s shareholders that the Company act to assure such persons that there will be increased certainty of such protection in the future;

WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify and advance the expenses of such persons to the fullest extent permitted by applicable law and to guarantee such persons would realize the benefit of any subsequent changes in applicable law relating to indemnification or advancement of expenses so that they will continue to serve the Company free from undue concern that they will not be so indemnified, thereby ensuring that the decisions of such persons for or on behalf of the Company will be independent, objective and in the best interests of the Company’s shareholders;

WHEREAS, it is reasonable, prudent and necessary for the Company to provide such persons with the specific contractual assurance that the exculpation from personal liability for directors, the right to directors and officers liability insurance and the rights to indemnification and advancement of expenses provided to them remain available regardless of, among other things, any amendment to or revocation of the indemnification or advancement of expenses provisions in the Articles or the Bylaws or any change in composition or philosophy of the Company’s Board of Directors such as might occur following an acquisition or Change in Control of the Company; and

WHEREAS, to the extent requested, Indemnitee is willing to serve, continue to serve, and take on additional service for or on behalf of the Company on the condition that he or she be so indemnified.

NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Indemnitee do hereby agree as follows:

1. Indemnification. The Company hereby agrees to hold harmless and indemnify Indemnitee if Indemnitee is or was a party to, or is threatened to be made a party to, a Proceeding by reason of Indemnitee’s Corporate Status to the fullest extent permitted by the Georgia Business Corporation Code, as amended (“GBCC”), as the same now exists or may hereafter be amended (but only to the extent any such amendment permits the Company to provide broader Indemnification rights than the GBCC permitted the Company to provide prior to such amendment), whether the actions or omissions (or alleged actions or omissions) of Indemnitee giving rise to such Indemnification (including the advancing of Expenses) occurs or occurred before or after the Effective Date; provided, however, that, except as provided in Sections 6, 8 and 10 of this Agreement, Indemnitee shall not be entitled to Indemnification or advancement of Expenses in connection with a Proceeding initiated by Indemnitee (other than in a Corporate Status capacity) against the Company or any director or officer of the Company unless the Company has joined in or consented in writing to the initiation of such Proceeding.

2. Indemnification for Expenses When Acting as a Witness, Etc. To the extent that Indemnitee acts as a witness or other participant in any Proceeding, Indemnitee shall be indemnified by the Company against all Expenses imposed upon or incurred by Indemnitee in connection therewith, without any further authorization, determination or action under the GBCC, the Articles, the Bylaws, this Agreement or otherwise.


3. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is or was, by reason of Indemnitee’s Corporate Status, a party to and is successful on the merits or otherwise in any Proceeding, Indemnitee shall be indemnified against Expenses imposed upon or incurred by Indemnitee in connection with the Proceeding, regardless of whether Indemnitee has met the standards set forth in the GBCC and without any further authorization, determination or action under the GBCC, the Articles, the Bylaws, this Agreement or otherwise. If Indemnitee is not wholly successful in such Proceeding but is successful on the merits or otherwise as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses imposed upon or incurred by or on behalf of Indemnitee in connection with each claim, issue or matter with respect to which Indemnitee was successful. For the purposes of this Section 3 and without limiting the foregoing, (a) the termination of any claim, issue or matter in any such Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter, and (b) a decision by any government, regulatory or self-regulatory authority, agency or body not to commence or pursue any investigation, civil or criminal enforcement matter or case or in any civil suit, shall be deemed to be a successful result as to such claim, issue or matter.

4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to Indemnification by the Company for some or a portion of the Expenses, judgments, fines, claims, losses, liabilities and amounts paid in settlement imposed upon or incurred by Indemnitee in connection with the investigation, defense, appeal or settlement of a Proceeding covered by Section 1 of this Agreement, but is not entitled to Indemnification for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses, judgments, fines, claims, losses, liabilities and amounts paid in settlement imposed upon or incurred by Indemnitee to which Indemnitee is entitled.

5. Notification of Proceeding and Defense of Claims Against Indemnitee.

(a) To obtain Indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to Indemnification; provided that the failure to so notify the Company will not relieve the Company from any liability that it may have to Indemnitee under this Agreement or otherwise to the extent the failure or delay does not materially prejudice the Company. Any Expenses incurred by Indemnitee in connection with Indemnitee’s request for Indemnification shall be borne by the Company. Notwithstanding Section 10(e) of this Agreement, the Company hereby indemnifies and agrees to hold Indemnitee harmless for any Expenses incurred by Indemnitee under the immediately preceding sentence irrespective of the outcome of the determination of Indemnitee’s entitlement to Indemnification.

(b) The Company shall be entitled to participate in the defense of any Proceeding to which Indemnitee is or was a party by reason of Indemnitee’s Corporate Status or to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee, provided, however, if Indemnitee concludes in good faith that (a) the use of counsel chosen by the Company to represent Indemnitee would present such counsel with an actual or potential conflict, (b) the named parties in the Proceeding include both Indemnitee and the Company and Indemnitee concludes that there may be one or more legal defenses available to Indemnitee that are different from or in addition to those available to the Company, (c) any representation by such counsel would be precluded under the applicable standards of professional conduct then prevailing, or (d) following a Change in Control, the Company fails to engage counsel reasonably satisfactory to Indemnitee, then Indemnitee shall be entitled to retain separate counsel (but not more than one law firm plus, if applicable, local counsel) at the Company’s expense.

(c) The Company shall not be liable to Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding effected without the Company’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed, provided, however, that the Company shall be deemed to have consented to any settlement if the Company does not object to such settlement within 30 days after receipt by the Company of a written request for consent to such settlement. The Company shall be required to obtain the consent of Indemnitee to settle any Proceeding in which Indemnitee is named as a party or has potential liability exposure, unless such settlement solely involves the payment of money and includes a complete and unconditional release of Indemnitee from all liability on any claims that are the subject matter of the Proceeding.

 

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(d) The Company will promptly notify its relevant insurers as soon as practicable after the receipt of a notice of a claim for Indemnification in accordance with the procedures and requirements of such policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies.

6. Procedures for Determination of Entitlement to Indemnification. The parties agree that the following procedures shall apply in the event of any question as to whether Indemnitee is entitled to Indemnification under this Agreement (provided; however, in the event the procedures for determination of entitlement to Indemnification as currently set forth in the GBCC are amended to create any material inconsistency between such procedures in the GBCC and the procedures set forth below, the procedures set forth below shall also be deemed to be amended in the same manner to the extent necessary to remove the inconsistency without any further action on the part of the Company or Indemnitee):

(a) The Corporate Secretary of the Company (or in the absence of the Corporate Secretary, the Chief Financial Officer of the Company) shall, promptly upon receipt of a claim for Indemnification from Indemnitee as set forth in Section 5 of this Agreement, advise the Board of Directors in writing that Indemnitee has requested Indemnification.

(b) Sections 1, 2, 3, 4 and 8 of this Agreement are intended to, and shall be deemed to, satisfy the requirements for authorization referred to in Section 14-2-859(a) of the GBCC or any successor provision and any other requirements of applicable law such that the Company shall be obligated to the maximum extent possible to provide such indemnification and advancement of Expenses without any further requirements for authorization or action referred to in Sections 14-2-853(c) or 14-2-855(c) of the Code or any successor provision, the Articles, the Bylaws, this Agreement, or otherwise. The Company shall act in good faith and expeditiously take all actions necessary or appropriate to make available the Indemnification, advancement of Expenses and other rights provided for Indemnitee in this Agreement, and shall expeditiously take all actions necessary or appropriate to remove any impediments or obstacles to such Indemnification, advancement of Expenses and other rights. If, notwithstanding the foregoing, a court of competent jurisdiction determines that any further determination or action is required, then, at the request of Indemnitee, such determination or action shall be made by Independent Counsel proposed by the Indemnitee and reasonably acceptable to the Company. Independent Counsel shall determine as promptly as practicable whether and to what extent Indemnitee is entitled to Indemnification under this Agreement and applicable law and shall render a written opinion to the Company and to Indemnitee to such effect. The Company agrees to be bound by, and not contest, appeal or seek reconsideration of, such opinion of Independent Counsel. The Company further agrees to pay the reasonable fees and expenses of Independent Counsel within 20 days after Independent Counsel’s statement for professional services rendered is submitted to the Company, and to fully indemnify Independent Counsel against any and all expenses, claims, liabilities and damages arising out of or relating to this Section 6 or its engagement pursuant hereto.

(c) Indemnitee shall reasonably cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to Indemnification, including providing to such person, persons or entity upon reasonable advance request such documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, members of the Board of Directors, or shareholders of the Company shall act reasonably and in good faith in making a determination under the Agreement of Indemnitee’s entitlement to Indemnification. Any Expenses incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to Indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

7. Presumptions and Effects of Certain Proceedings.

(a) In making a determination with respect to entitlement to Indemnification or other rights under this Agreement, the person, persons or entity making such determination shall presume that Indemnitee is entitled to Indemnification or such other rights under this Agreement and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to the presumption. Neither the failure of the Company (including by its Board of Directors or Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this

 

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Agreement that Indemnification is proper, or other rights are available, in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its Board of Directors or Independent Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

(b) To the extent such determination is required, if the person, persons or entity empowered or selected under Section 6(b) of this Agreement to determine whether Indemnitee is entitled to Indemnification or other rights are available shall not have made a determination within 30 days after receipt by the Company of the request therefor, the requisite determination shall be deemed to have been made and Indemnitee shall be entitled to such Indemnification or other rights, absent (i) actual fraud in the request for Indemnification or such other rights, or (ii) prohibition of such Indemnification or other rights under applicable law; provided, however, that such 30-day period may be extended for a reasonable time, not to exceed an additional 20 days, if the person, persons or entity making the determination with respect to entitlement to Indemnification in good faith require(s) such additional time for the obtaining or evaluating of documentation and/or information relating thereto.

(c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not of itself adversely affect the right of Indemnitee to Indemnification or create a presumption that Indemnitee did not act in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his or her conduct was unlawful.

(d) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected by the Enterprise. The provisions of this Section 7(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed or found to have met the applicable standard of conduct set forth in this Agreement.

(e) The knowledge and/or actions, or failure to act, of any other director, officer, trustee, partner, managing member, fiduciary, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to Indemnification under this Agreement.

8. Advancement of Expenses.

(a) All Expenses actually incurred by Indemnitee as a party, witness or other participant by reason of Indemnitee’s Corporate Status in connection with any Proceeding (including a Proceeding by or on behalf of the Company) shall be paid by the Company in advance of the final disposition of such Proceeding, if so requested by Indemnitee, within 30 days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances. Indemnitee may submit such statements from time to time.

(b) Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee in connection therewith; provided, however, that, following a Change in Control or in the event of a Proceeding brought by or in the name of the Company, the Company agrees that Indemnitee shall be required to submit to the Company only summary statements and invoices, and that, in connection with such submissions, Indemnitee shall have the right to withhold or redact any documents or information that are protected by the attorney-client privilege or the attorney work product doctrine.

(c) Indemnitee’s submission of statements and requests for payment of Expenses pursuant to this Section 8 shall include or be accompanied by: (i) a written affirmation by Indemnitee of Indemnitee’s good faith belief that Indemnitee has met the standard of conduct necessary for Indemnification under the GBCC or that the Proceeding involves conduct for which liability has been eliminated under a provision of the Articles as authorized by Section 14-2-202(b)(4) of the GBCC, and (ii) a written undertaking, executed personally or on behalf of Indemnitee, to repay any such amounts if it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company pursuant to this Agreement or otherwise. Such undertaking must be an unlimited general obligation of Indemnitee, but need not be secured and shall be accepted without reference to the financial ability of Indemnitee to make repayment.

 

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(d) The Company shall make advance payment of Expenses to Indemnitee, without regard to Indemnitee’s ability to repay the Expenses and without regard to Indemnitee’s ultimate entitlement to Indemnification under the other provisions of this Agreement.

(e) Indemnitee’s entitlement to advancement of Expenses under this Section 8 shall continue until such time as a final determination of the Proceeding for which advancement or Indemnification is sought hereunder.

(f) Indemnitee’s entitlement to the advancement of Expenses under this Agreement shall include those incurred in connection with any Proceeding by Indemnitee, including any Proceeding, or court application or arbitration to enforce this Agreement pursuant to Section 10 of this Agreement.

(g) Any advances or undertakings to repay pursuant to this Section 8 shall be unsecured and interest free.

9. The Company’s Obligation to Pay Indemnification Amounts. The Company agrees to pay to or for the benefit of Indemnitee all amounts due and owing under its Indemnification obligations as determined pursuant to Section 6 of this Agreement within 10 days after such determination has been made and delivered to the Company. All written opinions of Independent Counsel and all statements, invoices, judgments and/or settlement agreements subject to the Company’s Indemnification obligations under this Agreement shall be submitted to the Company at the address provided pursuant to Section 26 of this Agreement, and shall be deemed received by the Company on the date of mailing or overnight delivery, the date of transmission by electronic means, or the date of delivery by hand (as the case may be).

10. Remedies of Indemnitee in Cases of Determination not to Indemnify or to Advance Expenses or Refusal of the Company to Pay Indemnification Amounts.

(a) In the event that a determination is made that Indemnitee is not entitled to Indemnification hereunder or if the payment has not been timely made following a determination of entitlement to Indemnification pursuant to Section 6, or if Expenses are not advanced pursuant to Section 8, Indemnitee shall be entitled to an expeditious and final adjudication in the Georgia State-wide Business Court, which shall be the exclusive venue for any court action to determine whether Indemnitee is entitled to such Indemnification or advance. The parties shall seek expedited resolution of the matter and agree that the Georgia State-wide Business Court may summarily determine the Company’s obligation to advance expenses (including attorneys’ fees). The parties further agree to waive trial by jury with respect to the determination whether Indemnitee is entitled to advancement or Indemnification. Alternatively, Indemnitee may, at Indemnitee’s option, seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association, such award to be made within 60 days following the filing of the demand for arbitration. The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration. Any such adjudication or arbitration shall be limited to the Company’s obligations to Indemnitee under this Agreement, and the Company, therefore, shall not assert in such adjudication or arbitration any counterclaim against Indemnitee whatsoever, and shall not assert in such adjudication or arbitration, by counterclaim, defense, avoidance or otherwise, any contractual, legal or equitable right of recoupment, setoff, contribution, indemnification, release, waiver, estoppel, repudiation or breach of any express or implied covenant of Indemnitee; provided, however, that this sentence shall not prohibit the Company from asserting in such adjudication or arbitration that Indemnitee did not meet any relevant standard of conduct required by applicable law for Indemnification. In the event that a determination has been made in a final adjudication or arbitration pursuant to this Section 10(a) that Indemnitee is entitled to any such Indemnification or advancement of Expenses, the Company shall pay interest on the amount awarded to Indemnitee. Interest shall accrue on such amount from the date such amount was required to be paid pursuant to this Agreement until the date of payment at a rate per annum equal to three (3) percent plus the prime interest rate published in The Wall Street Journal on the date such interest begins accruing.

 

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(b) In the event that a determination has been made pursuant to Section 6 that Indemnitee is not entitled to Indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 10 shall be conducted in all respects as a de novo trial on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section, the Company shall have the burden of proving that Indemnitee is not entitled to Indemnification or advancement of Expenses, as the case may be.

(c) If a determination has been made or deemed to have been made pursuant to Section 6 that Indemnitee is entitled to Indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 10, and shall be precluded from asserting that such determination has not been made or that the procedure for which such determination was made is not valid, binding and enforceable, absent (i) actual fraud in the request for Indemnification, or (ii) prohibition of such Indemnification under applicable law.

(d) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 10 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement.

(e) In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication or arbitration of his or her rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the kinds described in the definition of Expenses) actually and reasonably incurred by him of her in such judicial adjudication or arbitration, but only if he or she prevails therein. If it shall be determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the Indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

11. Other Rights to Indemnification and Advancement of Expenses. The rights to Indemnification and advancement of Expenses provided by this Agreement are cumulative, and not exclusive, and are in addition to any other rights to which Indemnitee may now or in the future be entitled under any provision of the Bylaws or Articles, any vote of shareholders or Disinterested Directors, any provision of law or otherwise. Except as required by applicable law, the Company shall not adopt any amendment to its Bylaws or Articles, the effect of which would be to deny, diminish or encumber Indemnitee’s rights to Indemnification and advancement of Expenses under this Agreement.

12. Director and Officer Liability Insurance.

(a) The Company shall use commercially reasonable efforts to obtain and maintain a policy or policies of liability insurance, including broad form individual non-indemnifiable loss coverage (with difference-in-condition feature), with reputable insurance companies providing Indemnitee with coverage for losses from wrongful acts, including Expenses, and to ensure the Company’s performance of its Indemnification and advancement of Expenses obligations under this Agreement. Such coverage shall not be on terms of coverage or amounts less favorable to Indemnitee than those of the policies in effect on the date of this Agreement.

(b) The Company further agrees that all of the provisions of this Agreement shall remain in effect regardless of whether liability or other insurance coverage is at any time obtained or retained by the Company; except that any payments made to, or on behalf of, Indemnitee under an insurance policy shall reduce the obligations of the Company hereunder.

13. Subrogation. In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee. Following receipt of Indemnification payments pursuant to this Agreement, as further assurance, Indemnitee shall execute all papers required and take all action reasonably necessary to secure such rights, including execution of such documents as are reasonably necessary to enable the Company to bring suit to enforce such rights.

 

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14. Spousal Indemnification and Advancement of Expenses. The Company shall provide Indemnitee’s spouse to whom Indemnitee is legally married at any time Indemnitee is covered under the Indemnification provided in this Agreement (even if Indemnitee did not remain married to him or her during the entire period of coverage) against any Proceeding for the same period, to the same extent and subject to the same standards, limitations, obligations and conditions under which Indemnitee is provided Indemnification herein, if Indemnitee’s spouse (or former spouse) becomes involved in a Proceeding solely by reason of his or her status as Indemnitee’s spouse, including, without limitation, any Proceeding that seeks damages recoverable from marital community property, jointly-owned property or property purported to have been transferred from Indemnitee to his/her spouse (or former spouse). Indemnitee’s spouse or former spouse also shall be entitled to advancement of Expenses to the same extent that Indemnitee is entitled to advancement of Expenses provided under Section 8 of this Agreement. The Company may maintain insurance to cover its obligations hereunder with respect to Indemnitee’s spouse (or former spouse) or set aside assets in a trust or escrow fund for that purpose; provided, however, that the Company agrees that the provisions of this Agreement shall remain in effect regardless of whether such liability or other insurance coverage is at any time obtained or retained by the Company; except that any payments made to, or on behalf of, Indemnitee’s spouse under such an insurance policy shall reduce the obligations of the Company hereunder.

15. Intent. This Agreement shall be in addition to any other rights Indemnitee may have under the Articles, Bylaws, applicable law or otherwise. To the extent that a change in applicable law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Company’s Articles, Bylaws, applicable law or this Agreement, it is the intent of the parties that Indemnitee enjoy by this Agreement the greater benefits so afforded by such change.

16. Effective Date. The provisions of this Agreement shall cover claims, actions, suits or proceedings whether now pending or hereafter commenced and shall be retroactive to cover acts or omissions or alleged acts or omissions which heretofore have taken place. The Company shall be liable under this Agreement, to the extent specified in Sections 1, 2, 3, 4, 8 and 14 of this Agreement, for all acts and omissions of Indemnitee while serving as a director, notwithstanding the termination of Indemnitee’s service, if such act was performed or omitted to be performed during the term of Indemnitee’s service to the Company.

17. Duration of Agreement. This Agreement shall survive and continue even though Indemnitee may have terminated his or her service as a director, agent or fiduciary of the Company or as a director, officer, partner, employee, agent or fiduciary of any other entity, including, but not limited to another corporation, partnership, limited liability company, employee benefit plan, joint venture, trust or other enterprise or by reason of any act or omission by Indemnitee in any such capacity. This Agreement shall be binding upon the corporation and its successors and assigns, including, without limitation, any Company or other entity which may have acquired all or substantially all of the Company’s assets or business or into which the Company may be consolidated or merged, and shall inure to the benefit of Indemnitee and his/her spouse, successors, assigns, heirs, devisees, executors, administrators or other legal representatives. The Company shall require any successor or assignee (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by written agreement in form and substance reasonably satisfactory to the Company and Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place.

18. Disclosure of Payments. Except as required by any federal or state securities laws or other federal or state law, neither party shall disclose any payments under this Agreement unless prior approval of the other party is obtained.

19. Time of the Essence. The parties expressly agree time is of the essence with respect to all provisions of this Agreement.

20. Severability. If any provision or provisions of this Agreement shall be held invalid, illegal or unenforceable for any reason whatsoever, (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, but not limited to, all portions of any Sections of this Agreement containing any such provision held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (b) to the fullest extent possible, the provisions of this Agreement (including, but not limited to, all portions of any Section

 

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of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifest by the provision held invalid, illegal or unenforceable. If any section, clause or part of this Agreement is determined to be invalid or unenforceable, the Company in good faith shall expeditiously take all necessary or appropriate action to provide the Indemnitee with rights under this Agreement (including with respect to Indemnification, advancement of Expenses and other rights) that effect the original intent of this Agreement as closely as possible.

21. Counterparts. This Agreement may be executed by one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement.

22. Captions. The captions and headings used in this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

23. Security. To the extent requested by Indemnitee and approved by the Company’s Board of Directors, the Company may at any time and from time to time provide security to Indemnitee for the Company’s obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to Indemnitee, may not be revoked or released without the prior written consent of Indemnitee.

24. Definitions. For purposes of this Agreement:

(a) “Change in Control” shall mean shall mean (1) an acquisition by a person of beneficial ownership of 25% or more of the combined voting power of the Company’s then outstanding voting securities, provided that any such securities acquired directly from the Company shall be excluded from the determination of such person’s beneficial ownership (but shall be included in calculating total outstanding securities); or (2) the individuals who are members of the Incumbent Board cease for any reason to constitute two-thirds of the Board of Directors; or (3) (i) a merger or consolidation involving the Company if the shareholders of the Company, immediately before such merger or consolidation, do not own, immediately following such merger or consolidation, more than 80% of the combined voting power of the outstanding voting securities of the resulting corporation in substantially the same proportion as their ownership of voting securities immediately before such merger or consolidation or (ii) a complete liquidation or dissolution of the Company or sale or other disposition of more than 50% of the assets of the Company and its subsidiaries.

(b) “Corporate Status” describes the status of a person who is or was a director of the Company or an individual who, while a director of the Company, is or was serving at the Company’s request as a director, officer, partner, trustee, employee, administrator or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, entity, or other enterprise. Corporate Status also describes a person’s service in connection with an employee benefit plan at the Company’s request if such person’s duties to the Company also impose duties on, or otherwise involve services by, such person to the plan or to participants in or beneficiaries of the plan. Corporate Status includes, in reference to a particular person unless the context requires otherwise, the estate or personal representative of such person.

(c) “Disinterested Director” shall mean a director of the Company who is not and was not a party to the Proceeding in respect of which Indemnification is being sought by Indemnitee.

(d) “Effective Date” means as of [•].

(e) “Enterprise” shall mean the Company and any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, trustee, general partner, managing member, agent or fiduciary.

(f) “Expenses” shall include, without limitation, all attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating or being or preparing to be a witness in any Proceeding, in each case to the extent reasonable.

 

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(g) “Incumbent Board” includes the individuals who as of [•], 2020 are members of the Board of Directors and any individual becoming a director subsequent to [•], 2020 whose election, or nomination for election by the corporation’s shareholders was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board; provided, however, that notwithstanding the foregoing, no individual shall be considered a member of the Incumbent Board if such individual initially assumed office (1) as a result of either an actual or threatened “election contest” (within the meaning of Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors (a “Proxy Contest”) or (2) with the approval of the other members of the Board of Directors, but by reason of any agreement intended to avoid or settle an actual or threatened Proxy Contest.

(h) “Indemnification” shall mean the indemnification obligation provided under Sections 1, 2, 3, 4 and 14 of this Agreement.

(i) “Independent Counsel” shall mean an attorney with an active membership in good standing in the State Bar of Georgia who is experienced in matters of corporate law and neither he or she, nor his or her law firm, presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any other matter material to either such party; or (ii) any other party to the Proceeding giving rise to a claim for Indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(j) “Proceeding” shall include, without limitation, any actual, threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened, pending or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil (including intentional or unintentional tort claims), criminal, administrative or investigative in nature, and whether formal or informal, in which Indemnitee was, is, may be or will be involved as a party, witness or otherwise, by reason of Indemnitee’s status as a director of the Company, by reason of any action taken by Indemnitee or of any inaction on Indemnitee’s part while acting as a director of the Company, or by reason of Indemnitee’s service at the request of the Company as a director, officer, general partner, managing member, fiduciary, employee or agent of any other Enterprise (in each case whether or not he or she is acting or serving in any such capacity or has such status at the time any liability or expense is incurred for which Indemnification or advancement of Expenses can be provided under this Agreement), or any foreign equivalent of the foregoing, except one initiated by an Indemnitee pursuant to Section 10 of this Agreement to enforce his rights under this Agreement.

25. Entire Agreement, Modification and Waiver. This Agreement constitutes the entire agreement and understanding of the parties hereto regarding the subject matter hereof, and no supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. No supplement, modification or amendment of this Agreement shall limit or restrict any right of Indemnitee under this Agreement in respect of any act or omission of Indemnitee prior to the effective date of such supplement, modification or amendment unless expressly provided therein.

26. Notices. All notices, requests, demands or other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand with receipt acknowledged by the party to whom said notice or other communication shall have been directed or if (ii) mailed by certified or registered mail, return receipt requested with postage prepaid, on the date shown on the return receipt:

(a) If to Indemnitee to:

                                                     

                                                     

                                                     

 

9


(b) If to the Company, to:

Aaron’s SpinCo, Inc.

400 Galleria Parkway S.E.

Suite 300

Atlanta, Georgia 30339-3182

Attention: General Counsel

with a copy to:

[●]

or to such other address as may be furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

27. Governing Law. The parties hereto agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Georgia, applied without giving effect to any conflicts-of-law principles. Notwithstanding the above, the parties agree that decisions of Delaware courts interpreting and applying the similar indemnification and advancement provisions of Section 145 of the Delaware General Corporation law shall be persuasive authority in the absence of Georgia appellate decisions interpreting the indemnification and advancement provisions of the GBCC.

 

10


IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement on the day and year first above written.

 

AARON’S SPINCO, INC.
By  

 

Name:  
Title:  
INDEMNITEE
By  

 

Name:  

Exhibit 21.1

SUBSIDIARIES OF AARON’S SPINCO, INC.

 

Subsidiary Name

   Jurisdiction of
Incorporation
   Percentage of
Control
 

Aaron Investment Company

   Delaware      100

99LTO, LLC

   Georgia      100

Woodhaven Furniture Industries, LLC

   Georgia      100

Aaron’s Canada, ULC

   Canada      100

Aaron’s Procurement Company, LLC

   Georgia      100

Aaron’s Logistics, LLC

   Georgia      100

Aaron’s Strategic Services, LLC

   Georgia      100

Aaron’s Business Real Estate Holdings, LLC

   Georgia      100
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Exhibit 99.1

[●], 2020

Dear Aaron’s Holdings Company, Inc. Shareholder:

In July of this year, we announced our intention to separate our Aaron’s Business segment from our Progressive Leasing segment. The separation will occur by means of a spin-off of a newly formed company named Aaron’s SpinCo, Inc. (“Aaron’s SpinCo”), which will own our Aaron’s Business segment. Aaron’s Holdings Company, Inc. (“Parent”), the existing publicly traded company in which you currently own common stock, will continue to own and operate the Progressive Leasing and Vive business segments.    

Upon completion of the spinoff, the shareholders of Parent will own substantially all of the outstanding shares of common stock of Aaron’s SpinCo and will continue to own 100% of the outstanding shares of common stock of Parent. Aaron’s SpinCo will be a new, publicly traded company, which is expected to be traded on the New York Stock Exchange, and will continue to engage in the sale and lease ownership and specialty retailing of furniture, home appliances, electronics and other products and accessories through its approximately 1,400 company-operated and franchised stores in 47 states, Canada and Puerto Rico, as well as its e-commerce platform, Aarons.com. Parent will continue to operate as a virtual lease-to-own company, under the Progressive Leasing brand, providing lease-purchase solutions through approximately 19,000 retail locations, owned and operated by other companies, in 46 states and the District of Columbia, including e-commerce merchants.

We believe the spin-off is in the best interests of Parent, its shareholders and other constituents, as it will result in two publicly traded companies, each of which we expect to have improved strategic focus, strong free cash flow generation and well capitalized balance sheets, enabling each company to unlock substantial value creation opportunities.

The spin-off will be effected by means of a pro rata distribution of 100% of the outstanding shares of Aaron’s SpinCo common stock to holders of Parent common stock. Each Parent shareholder will receive [●] share[s] of Aaron’s SpinCo common stock for every share of Parent common stock held as of the close of business on [●], the record date for the distribution, with cash being paid in lieu of fractional shares.

We expect the separation and distribution will be generally tax-free for U.S. federal income tax purposes to Parent shareholders.

No vote of Parent shareholders is required for the distribution. You do not need to take any action to receive shares of Aaron’s SpinCo common stock to which you are entitled as a Parent shareholder, and you do not need to pay any consideration or surrender or exchange your Parent common stock.

We encourage you to read the attached information statement, which is being provided to all Parent shareholders who held shares on the record date of the distribution. The information statement describes the separation in detail and contains important business and financial information about Aaron’s SpinCo, as well as information about the risks associated with Aaron’s SpinCo.

Sincerely,

 

LOGO

John W. Robinson III

President and Chief Executive Officer

Aaron’s Holdings Company, Inc.


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LOGO

[●], 2020

Dear Aaron’s SpinCo Shareholder:

On behalf of Aaron’s SpinCo, it is my privilege to welcome you as a shareholder of our company. Following our separation, we will operate as an independent, publicly traded company with a proven track record of delivering shareholder value. For over 65 years, Aaron’s has built a reputation of serving our customers with respect and giving back to the communities where they live and we operate. While our business has evolved over the years, the Company’s mission of providing customers with access to household products through affordable lease-to-own and purchase options remains the same.

Aaron’s SpinCo serves a large base of potential customers comprising approximately one-third of the U.S. population with a value proposition that is both compelling and difficult to replicate. We offer our customers a broad assortment of high-quality products, competitive monthly payments and total cost of ownership, free in-home product set up and returns, convenient service and product repair or replacement, and best-in-class customer support delivered by our [●] plus team members.

Following the separation, Aaron’s SpinCo will be comprised of our Aaron’s Business segment, including: 1,085 company-operated and 315 franchised stores in 47 states, Canada and Puerto Rico; the Aarons.com e-commerce platform; and the Woodhaven manufacturing division. With this foundation, we intend to pursue a growth strategy that includes investing in our digital platforms to continue to improve the customer experience and leveraging advanced analytics to better align our store footprint to our customer opportunity. As part of these initiatives, we have recently launched a new store concept and operating model which is achieving attractive unit economics through a combination of improved branding, redesigned showrooms, innovative technologies, and enhanced merchandising strategies.

We are a leader in digital innovation in the lease-to-own industry, driven by Aarons.com, our end-to-end e-commerce platform, which has accounted for approximately 12% of our lease revenue year-to-date in 2020. We believe the combination of our strong brand and physical presence in over 700 markets, industry-leading technology and analytics, management teams with deep industry experience and customer relationships, last-mile and reverse logistics and refurbishment capabilities, and in-house upholstered furniture and bedding manufacturing will enable us to continue delivering unparalleled value to our customers and shareholders.

We invite you to learn more about our company by reading the enclosed information statement, which details our strategy, and outlines our plans for near and long-term growth to generate value for our shareholders. We are excited about our future as an independent company, and we look forward to your support as an Aaron’s SpinCo shareholder as we begin this new and exciting chapter.

Sincerely,

 

LOGO

Douglas Lindsay

Chief Executive Officer

Aaron’s SpinCo, Inc.


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the United States Securities and Exchange Commission under the United States Securities Exchange Act of 1934, as amended.

 

Preliminary and Subject to Completion, Dated October 30, 2020

INFORMATION STATEMENT

Aaron’s SpinCo, Inc.

Distribution of Common Stock

 

 

This information statement is being furnished in connection with the distribution by Aaron’s Holdings Company, Inc. (“Parent”) to its shareholders of all of the outstanding shares of common stock of Aaron’s SpinCo, Inc., a Georgia corporation (“Aaron’s SpinCo,” “we,” “us,” “our,” or “the Company”), currently a wholly-owned subsidiary of Parent, that will hold directly or indirectly the assets and liabilities historically associated with Parent’s Aaron’s Business segment (the “Aaron’s Business”). To implement the distribution, Parent will distribute all of the shares of Aaron’s SpinCo common stock on a pro rata basis to Parent shareholders in a transaction that is intended to qualify as tax-free for United States federal income tax purposes, except with respect to any cash received in lieu of fractional shares. The distribution is subject to certain conditions, as described in this information statement. You should consult your tax advisor as to the particular consequences of the distribution to you, including the applicability and effect of any U.S. federal, state and local and non-U.S. tax laws.

For every share of common stock of Parent held of record by you as of the close of business on [●], the record date for the distribution, you will receive [●] share[s] of Aaron’s SpinCo common stock. You will receive cash in lieu of any fractional shares of Aaron’s SpinCo common stock that you would have received after application of the above ratio. As discussed under “The Separation and Distribution—Trading Between the Record Date and Distribution Date,” if you sell your shares of Parent common stock in the “regular-way” market after the record date and before the distribution date, you also will be selling your right to receive shares of Aaron’s SpinCo common stock in connection with the distribution. We expect the shares of Aaron’s SpinCo common stock to be distributed by Parent to you at [●], Eastern Time, on [●]. We refer to the date of the distribution of the Aaron’s SpinCo common stock as the “distribution date.”

No vote of Parent shareholders is required for the distribution. Therefore, you are not being asked for a proxy and you are not requested to send Parent a proxy in connection with the distribution. You do not need to pay any consideration, exchange or surrender your existing shares of Parent common stock or take any other action to receive your shares of Aaron’s SpinCo common stock.

There is no current trading market for Aaron’s SpinCo common stock, although we expect that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution, and we expect “regular-way” trading of Aaron’s SpinCo common stock to begin on the first trading day following the completion of the distribution. Aaron’s SpinCo intends to have its common stock authorized for listing on the New York Stock Exchange (“NYSE”) under the symbol “[●]”. Parent expects to change its stock symbol from “AAN” to “[●]” upon completion of the separation.

 

 

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 17.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

 

 

The date of this information statement is [].

This information statement will be made publicly available at www.materialnotice.com beginning [], 2020, and notices of this information statement’s availability will be first sent to Parent shareholders on or about [], 2020.


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Index to Financial Statements

TABLE OF CONTENTS

 

INFORMATION STATEMENT SUMMARY

     1  

SUMMARY OF RISK FACTORS

     4  

SUMMARY HISTORICAL COMBINED FINANCIAL DATA

     8  

QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

     10  

RISK FACTORS

     17  

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     38  

THE SEPARATION AND DISTRIBUTION

     40  

DIVIDEND POLICY

     47  

CAPITALIZATION

     48  

SELECTED HISTORICAL COMBINED FINANCIAL DATA OF AARON’S SPINCO, INC.

     49  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     51  

BUSINESS

     57  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     68  

MANAGEMENT

     95  

DIRECTORS

     95  

COMPENSATION DISCUSSION AND ANALYSIS

     101  

EXECUTIVE COMPENSATION

     118  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     130  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     136  

DESCRIPTION OF MATERIAL INDEBTEDNESS AND GUARANTEES

     140  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     143  

DESCRIPTION OF OUR CAPITAL STOCK

     143  

WHERE YOU CAN FIND MORE INFORMATION

     149  

 

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Presentation of Information

Unless the context otherwise requires or we specifically indicate otherwise, references in this information statement to “Parent” refer to Aaron’s, Inc. prior to the completion of the holding company formation transaction described herein, and to Aaron’s Holdings Company, Inc. following completion of the holding company formation transaction described herein. Unless the context otherwise requires or we specifically indicate otherwise, references in this information statement to “Aaron’s SpinCo,” “we,” “us,” “our,” “our Company” and “the Company” refer to Aaron’s SpinCo, Inc., currently a wholly-owned subsidiary of Parent, that will hold directly or indirectly the assets and liabilities historically associated with Parent’s Aaron’s Business segment (the “Aaron’s Business”) as of the distribution. References in this information statement to the “separation” refer to the separation of the Aaron’s Business from Parent’s other businesses and the creation, as a result of the distribution, of an independent, publicly traded company, Aaron’s SpinCo, to hold the assets and liabilities historically associated with the Aaron’s Business after the distribution. References in this information statement to the “distribution” refer to the distribution of all of Aaron’s SpinCo’s issued and outstanding shares of common stock to Parent shareholders as of the close of business on the record date for the distribution.

We describe in this information statement the business to be held by us after the separation as if it were a standalone business for all historical periods described. However, we were not a standalone separate entity with independently conducted operations before the separation. References in this information statement to our historical assets, liabilities, products, business or activities generally refer to the historical assets, liabilities, products, businesses or activities of the Aaron’s Business as it was conducted as part of Parent before the separation that will be held directly or indirectly by Aaron’s SpinCo immediately following the separation and distribution transaction described herein.

Unless the context otherwise requires or we specifically indicate otherwise, the information included in this information statement about Aaron’s SpinCo assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution.

Except as otherwise indicated or unless the context otherwise requires, all references to Aaron’s SpinCo’s per share data assume a distribution ratio of [●] share[s] of Aaron’s SpinCo common stock for every share of Parent common stock.

Holding Company Formation

On October 16, 2020, Aaron’s, Inc. completed the previously announced holding company formation (the “holding company formation”). In the holding company formation, Aaron’s, Inc. became a direct, wholly owned subsidiary of Aaron’s Holdings Company, Inc. and thereafter converted to a limited liability company. The holding company formation was effected through a merger pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated May 1, 2020, among Aaron’s, Inc., Aaron’s Holdings Company, Inc. and Aaron’s Merger Sub, Inc., a Georgia corporation and wholly owned subsidiary of Aaron’s Holdings Company, Inc. (“Merger Sub”). Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into Aaron’s, Inc. and the separate existence of Merger Sub ceased, with Aaron’s, Inc. as the surviving corporation in the merger and continuing its existence as a direct, wholly owned subsidiary of Aaron’s Holdings Company, Inc. As a result of the holding company formation, on October 16, 2020, the New York Stock Exchange (“NYSE”) suspended trading of Aaron’s, Inc. shares and on October 19, 2020, Aaron’s Holdings Company, Inc. shares commenced trading on the NYSE under the symbol “AAN”.

Trademarks

Aaron’s SpinCo and its affiliates own or have the rights to various trademarks, logos, service marks and trade names that we use in connection with the operation of our business. Solely for convenience, certain of our

 

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trademarks, service marks and trade names referred to in this Information Statement are listed without the or ® symbols, but such references do not constitute a waiver of any rights that might be associated with the respective trademarks, service marks and trade names included or referred to in this Information Statement, regardless of whether such marks have been registered with the United States Patent and Trademark Office, or any state governmental entities. Each trademark or trade name of any other company appearing in this information statement is, to our knowledge, owned by such other company.

Industry Information

Unless indicated otherwise, the information concerning our industry contained in this information statement is based on Aaron’s SpinCo’s general knowledge of and expectations concerning the industry. Aaron’s SpinCo’s market position, market share and industry market size are based on estimates using Aaron’s SpinCo’s internal data and estimates, based on data from various industry analyses, our internal research and adjustments and assumptions that we believe to be reasonable. Aaron’s SpinCo has not independently verified data from industry analyses and cannot guarantee their accuracy or completeness. In addition, Aaron’s SpinCo believes that data regarding the industry, market size and its market position and market share within such industry provide general guidance but are inherently imprecise. Further, Aaron’s SpinCo’s estimates and assumptions involve risks and uncertainties and are subject to change based on various factors, including those discussed in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in the estimates and assumptions.

 

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INFORMATION STATEMENT SUMMARY

This summary highlights some of the information in this information statement relating to Aaron’s SpinCo, our separation from Parent and the distribution of our common stock by Parent to its shareholders. This summary may not contain all of the details concerning the separation or other information that may be important to you. To better understand the separation and our business and financial condition, you should carefully review this entire information statement.

Our Company

We are a leading, technology-enabled, omni-channel provider of lease-to-own (“LTO”) solutions focused on serving the large, credit-challenged segment of the population. Through our portfolio of 1,400 stores and our Aarons.com e-commerce platform, we provide consumers with LTO and purchase solutions for the products they need and want, including furniture, appliances, electronics, computers and a variety of other products and accessories. We focus on providing our customers with unparalleled customer service and an attractive value proposition, including low monthly payments and total cost of ownership, high in-store approval rates , lease term flexibility, a wide product selection, free same or next-day delivery and setup, service and product returns, and the ability to pause, cancel or resume lease contracts at any time, with no additional costs to the customer.

Our management team is committed to executing against a core set of strategic priorities to further transform and grow the business:

 

   

Promote our Value Proposition to Attract New Customers to our Brand

 

   

Enhance the Customer Experience Through Technology

 

   

Align our Store Footprint to our Customer Opportunity

 

   

Maintain a Well-Capitalized Balance Sheet

We have developed an LTO industry-leading, omni-channel platform that allows the Aaron’s Business to engage customers in ways that are convenient and preferable for them, including digitally streamlined shopping, servicing and payment options. Our e-commerce platform, Aarons.com, offers best-in-class, end-to-end technology with on-line-to-doorstep capabilities, allowing customers to seamlessly browse for merchandise, qualify for a lease, complete the lease transaction, and schedule delivery of their merchandise from any digital device. As a result of our technology-enabled omni-channel strategy, we are attracting more new and younger customers to our brand, with over half of Aarons.com transactions coming from individuals who previously had not shopped at Aaron’s.

We are committed to providing our customers with an exceptional in-store and on-line shopping experience. By leveraging our investments in technology, including Aarons.com, data-enabled lease decisioning, and our omni-channel customer service and payment platforms, we believe that we can serve our existing markets through a more efficient store portfolio while continuing to provide the high level of service our customers expect. We have identified a number of markets where we believe overall store counts can be meaningfully reduced and market economics improved. Concurrent with that optimization strategy, we have begun to roll-out a new Aaron’s Business store concept, which features larger showrooms and/or re-engineered and remodeled store layouts, an increased merchandise selection, technology-enabled shopping and checkout, and a refined operating model. Over the long-term, we believe our new store concept and our market optimization strategy will contribute to earnings growth and better cash flow margins.

With decades of customer lease performance data and recent advancements in analytics, we have developed a proprietary lease approval process with respect to our U.S. company-operated store customers.



 

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This process includes an algorithm-enabled, centralized digital decisioning platform, which is designed to improve our customer experience by streamlining and standardizing the lease decisioning process, shortening transaction times, and establishing appropriate lease payment amounts given the customer’s profile. Customers receive lease approval amounts either on-line or in our stores through a quick, convenient process that enables them to shop on Aarons.com or at one of our 1,085 company-operated retail locations. We expect our new lease decisioning process to result in better lease performance with fewer delinquencies or defaults.

Our core customer base is principally comprised of consumers in the United States and Canada with limited access to traditional credit sources. According to Fair Isaacs Corporation, more than 100 million people in the United States either have no credit score or have a score below 650. Historically, during economic downturns, our customer base expands due to tightened credit underwriting by banks and credit card issuers, as well as employment-related factors which may impact customers’ ability to otherwise purchase products from traditional retailers using cash or traditional financing sources. We have stores strategically located in approximately 700 markets across the United States and Canada and are within five miles of 43% of households. Our stores are designed and merchandised to appeal to customers across different types of markets, including urban, suburban and rural markets.

 

LOGO    LOGO

Competitive Assets

We have a unique set of physical and intangible assets developed over decades in the LTO business, which are difficult, expensive, and time consuming to replicate. We have developed a comprehensive strategy to leverage these assets that we expect will drive long-term cash flow and earnings growth. Specifically, the assets we expect to leverage include:

 

   

Our brand and physical presence in over 700 markets

With over 65 years in business, the Aaron’s Business is recognized nationwide as a leader in the LTO marketplace. This brand recognition has led to a 70% repeat customer rate for the new leases we enter into, and as of June 30, 2020, we had 1.1 million customers with active leases. The versatility of our business model enables us to successfully serve diverse markets including rural, suburban and urban markets, helping mitigate the impact of local economic disruptions resulting from specific industry economic cycles, weather, and other disruptive events.

 

   

Industry leading technology and analytics

The Aaron’s Business has invested in technology to improve the customer experience and its operational execution. These investments include platforms for enhanced data analytics, algorithm-led lease approval decisioning, digital customer onboarding, centralized payment processing and a fully transactional e-commerce



 

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website. Our technology-enabled platforms simplify the transaction and provide customers with enhanced transparency and flexibility throughout their lease, and provide management with information needed to optimize the financial performance of the business.

 

   

Management teams with deep industry experience and customer relationships

The Aaron’s Business stores are managed by a group of tenured managers and multi-unit leaders who have deep knowledge of the lease-to-own transaction and operations, as well as experience with our credit challenged customer base. Our high levels of customer service are enhanced by years of relationship building and LTO industry experience that is hard to replicate. Our average management tenure is as follows: 8 years for store managers; 10 years for regional managers; 15 years for divisional vice presidents; and 22 years for our head of stores.

 

   

Last-mile, reverse logistics and refurbishment capabilities

We have approximately 2,300 delivery trucks located throughout our network enabling us to provide last-mile and reverse logistics capabilities in our markets. All Aaron’s Business stores have a dedicated logistics team and infrastructure that enable us to offer our customers complimentary same or next-day delivery, in-home set-up, product repair or replacement services, and reverse logistics for the products our customers obtain from us. Our stores also include refurbishment operations, allowing us to provide pre-leased products for lease or sales in our stores and maximize inventory utilization.

 

   

In-house upholstered furniture and bedding manufacturing

Under our Woodhaven Furniture Industries (“Woodhaven”) manufacturing division, we have the capacity to manufacture approximately 1.5 million units per year of furniture and bedding, utilizing over 800,000 square feet of manufacturing capacity in two primary furniture facilities and seven mattress locations. In-house manufacturing provides control over quality and construction, fast response to changing customer tastes and market trends, reduced inventory fulfillment lead times, and mitigation of inventory supply disruptions.

Strategic Priorities

We have developed several strategic priorities that will leverage our competitive strengths and assets, which we expect will lead to a superior customer experience, enhanced market position, and long-term cash flow and earnings growth. Specifically, these strategies are:

 

   

Promote our value proposition to attract new customers to our brand

We plan to develop innovative marketing campaigns that better illustrate our value proposition to new, existing and previous Aaron’s Business customers. We will utilize traditional and digital marketing communications aimed at educating our target customer about our key competitive advantages. Those advantages include low monthly payments and total cost of ownership, high in-store approval rates, lease term flexibility, a wide product selection, free same or next-day delivery and setup, service and product returns, and the ability to pause, cancel or resume lease contracts at any time with no additional costs to the customer. We believe this value proposition, supported by our advanced omni-channel capabilities and existing infrastructure, differentiates us from competitors and will drive new customers to our e-commerce and in-store platforms.

 

   

Enhance the customer experience through technology

We intend to further enhance the customer experience by developing new technologies that will give the customer more control over the lease transaction. These technologies include advanced mobile applications, delivery management services and payment platforms that increase flexibility and customization for the



 

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customer. These initiatives are designed to provide our customers with the ability to transact, schedule deliveries, request service and manage the payment process though their digital devices. We expect these initiatives to increase repeat business, reduce our customer acquisition cost, improve the performance of our customer lease portfolio, and enhance profitability.

 

   

Align the store footprint to our customer opportunity

We intend to reduce our 1,085 company-operated stores in existing markets by approximately 300 stores over the next 3-4 years. Through a strategic review of our real estate portfolio, we expect that we can increase profitability and continue to successfully serve our markets through a combination of (a) repositioning, remodeling and consolidating our existing stores and (b) utilizing our growing Aarons.com shopping and servicing platform. We expect this strategy, together with our increased use of technology to better serve our customers, will enable us to reduce store count while retaining a significant portion of our existing customer relationships, attracting new customers and generating positive free cash flow. In addition, we believe there are opportunities to expand to new markets in the future.

In addition to the optimization of our store portfolio, we have also successfully tested a new Aaron’s Business store concept, which features larger showrooms and/or re-engineered and remodeled store layouts, an increased merchandise selection, technology-enabled shopping and checkout, and a refined operating model. We currently have 18 new concept stores open, and they are collectively achieving increased revenue, more new customers, and higher profitability than our legacy stores. We expect to have nearly 100 new concept stores open by the end of 2021.

 

   

Maintain a well-capitalized balance sheet

At the effective time of the distribution, we expect that we will have cash of $[●] million, with additional liquidity through a $200 million senior unsecured revolving credit facility of which no amounts will be drawn upon. Aaron’s SpinCo expects to utilize this flexible capital structure and independent and low-leverage balance sheet to execute its strategies and deliver sustainable, long-term growth. In addition to balance sheet flexibility, we expect to generate strong excess cash flow that will allow the Company to fund its operations, pursue strategic acquisitions or other strategic relationships, and return capital to shareholders.

SUMMARY OF RISK FACTORS

An investment in our Company is subject to a number of risks, including risks relating to our business, risks related to the separation and risks related to ownership of our common stock. Set forth below are some, but not all, of these risks. Please read the information in the section captioned “Risk Factors,” beginning on page 17 of this information statement, for a more thorough description of these and other risks.

Risks Related to Our Business

 

   

The COVID-19 pandemic may adversely impact our business, results of operations, financial condition, liquidity and/or cash flow in future periods.

 

   

Federal and state regulatory authorities are increasingly focused on our industry, and in addition to being subject to various existing federal and state laws and regulations, we may be subject to new or additional federal and state laws and regulations (or changes in interpretations of existing laws and regulations) that could expose us to government investigations, pricing restrictions, fines, penalties or other government-required payments by us, significant additional costs or compliance-related burdens that could force us to change our business practices in a manner that may be materially adverse to our business, results of operations or financial condition.

 

   

We continue to implement a strategic plan within our business that has changed, and is expected to continue to change, significant aspects of how our business has been operated historically, and there is



 

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no guarantee that it will be successful. For example, we may not be successful in our attempts to attract new customers to our brand, develop the technology needed to further enhance our customers’ experiences with us, or align our store footprint with market opportunities due to an inability to secure new store locations, or otherwise.

 

   

We face many challenges which could materially and adversely affect our overall results of operations, including the commoditization of certain product categories, increasing competition from a growing variety of sources, a decentralized, high-fixed-cost operating model, adverse consequences to our supply chain function from decreased procurement volumes and from the COVID-19 pandemic, increasing costs for labor and transportation, and lower lease volumes, and thus, less recurring revenues written into our customer lease portfolio.

 

   

If we do not maintain the privacy and security of customer, employee or other confidential information, due to cybersecurity-related “hacking” attacks, intrusions into our systems by unauthorized parties or otherwise, we could incur significant costs, litigation, regulatory enforcement actions and damage to our reputation, any one of which could have a material adverse impact on our business, results of operations and financial condition.

 

   

Given the nature of the COVID-19 pandemic, including the significant job losses caused by the pandemic, and uncertainty regarding how many unemployed workers will return to their jobs, and when they may do so, our proprietary algorithms and customer lease decisioning tools used to approve customers could no longer be indicative of our customers’ ability to perform under their lease agreements with us.

 

   

The geographic concentration of our store locations may have an adverse impact on our financial performance due to economic downturns and serious weather events in regions where we have a high concentration of our stores.

Risks Related to the Separation and Distribution

 

   

We have not operated as an independent company since before the 2014 acquisition of the Progressive Leasing business segment by our parent entities, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

 

   

We may not achieve some or all of the expected benefits of the separation, and the separation may materially and adversely affect our business, results of operations and financial condition.

Risks Related to Ownership of our Common Stock

 

   

We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation and, following the separation, our stock price may fluctuate significantly.

 

   

A significant number of shares of our common stock may be sold following the distribution, which may cause our stock price to decline.

The Separation and Distribution

On July 29, 2020, Parent announced its intent to separate the Aaron’s Business. The separation will occur by means of a pro rata distribution to the Parent shareholders of 100% of the shares of common stock of Aaron’s SpinCo, which holds the Aaron’s Business.

On [●], 2020, the Parent board of directors (the “Parent Board of Directors”) approved the distribution of all of Aaron’s SpinCo’s issued and outstanding shares of common stock on the basis of [●] share[s] of Aaron’s



 

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SpinCo common stock for every share of Parent common stock held as of the close of business on [●], 2020, the record date for the distribution, subject to the satisfaction or waiver of the conditions to the distribution as described in this information statement. For a more detailed description of these conditions, see “The Separation and Distribution—Conditions to the Distribution.”

Aaron’s SpinCo’s Post-Separation Relationship with Parent

After the distribution, Parent and Aaron’s SpinCo will be separate companies with separate management teams and separate boards of directors. Prior to the distribution, Aaron’s SpinCo will enter into a separation and distribution agreement with Parent, which is referred to in this information statement as the “separation agreement” or the “separation and distribution agreement.” In connection with the separation, we expect to enter into various other agreements to effect the separation and provide a framework for our relationship with Parent after the separation, such as a transition services agreement, a tax matters agreement and an employee matters agreement. These agreements, together with the documents and agreements by which the internal reorganization will be effected, will provide for the allocation between Aaron’s SpinCo and Parent of Parent’s assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after our separation from Parent and will govern certain relationships between Aaron’s SpinCo and Parent after the separation.

For additional information regarding the separation agreement and other transaction agreements and the transactions contemplated thereby, see the sections entitled “Risk Factors—Risks Related to the Separation and Distribution,” “The Separation and Distribution” and “Certain Relationships and Related Party Transactions.”

Reasons for the Separation

The Parent Board of Directors believes, after consultation with management of Parent and Parent’s third-party legal, financial and other advisors, that separating the Aaron’s Business from the remaining businesses of Parent is in the best interests of Parent and its shareholders for a number of reasons, including:

 

   

Improved Strategic Focus. The separation will allow Aaron’s SpinCo to more effectively pursue and implement its operating initiatives and will enhance management and the Board’s focus and oversight regarding the Company’s strategic priorities. Those priorities include promoting the Company’s value proposition to attract new customers to our brand, enhancing our customers’ experience through technology, better aligning the Company’s store footprint with its market opportunity, and maintaining a well-capitalized balance sheet and financial profile.

 

   

Distinct Investment Identity. The separation will give investors greater visibility into the individual operational and financial characteristics of Aaron’s SpinCo and allow market participants to value, invest in, and gain direct exposure to the financial profile that they desire. As a result, we believe that we have the potential to attract new shareholders as well as increased investment from existing Parent shareholders.

 

   

More Efficient Capital Allocation. Through the separation, Aaron’s SpinCo will be able to more efficiently allocate capital according to its strategic priorities, including technology to enhance the omni-channel customer experience and real estate to optimize our market footprint.

 

   

Well Capitalized Balance Sheet. At the effective time of the distribution, we expect that we will have cash of $[●] million, with additional liquidity through a $200 million senior unsecured revolving credit facility of which no amounts will be drawn upon. Aaron’s SpinCo expects to utilize this flexible capital structure and independent and low-leverage balance sheet to execute its strategies and deliver sustainable, long-term growth.

The Parent Board of Directors also considered a number of potentially negative factors in evaluating the separation, including the increased administrative costs, potential business disruptions resulting from the time



 

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and effort required of management to separate the businesses, increased costs resulting from operating as an independent, publicly traded company, one-time costs related to the separation, risk of increased competition from virtual LTO companies, risks relating to a failure to achieve the anticipated benefits of the separation and potential volatility in our stock price immediately following the separation. In determining to pursue the separation, the Parent Board of Directors concluded that the potential benefits of the separation significantly outweighed these costs and risks and determined that the separation provided the best opportunity to enhance shareholder value. For additional information, see the sections entitled “Risk Factors” and “The Separation and Distribution—Reasons for the Separation” included elsewhere in this information statement.

Corporate Information

Aaron’s SpinCo was incorporated in Georgia for the purpose of holding the Aaron’s Business in connection with the separation and distribution described herein. Prior to the contribution of the Aaron’s Business to us by Parent, which will be completed prior to the distribution, Aaron’s SpinCo will have no operations. The address of our principal executive offices will be 400 Galleria Parkway, S.E. Suite 300, Atlanta, Georgia 30339. Our telephone number after the distribution will be [●]. We will continue to maintain an Internet site at www.aarons.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in making an investment decision.

Reason for Furnishing this Information Statement

This information statement is being furnished solely to provide information to Parent shareholders who will receive shares of Aaron’s SpinCo common stock in the distribution. It is not and is not to be construed as an inducement or encouragement to buy or sell any of Aaron’s SpinCo’s securities. We believe the information contained in this information statement to be accurate as of the date set forth on the cover of this information statement. Changes may occur after that date and neither Parent nor Aaron’s SpinCo will undertake any obligation to update such information except in the normal course of their respective disclosure obligations and practices, or as required by applicable law.



 

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SUMMARY HISTORICAL COMBINED FINANCIAL DATA

The following table sets forth certain selected combined financial data of Aaron’s SpinCo as of and for each of the years in the five-year period ended December 31, 2019 and as of September 30, 2020 and for the nine months ended September 30, 2020 and 2019. We derived the selected combined statement of earnings data for the nine months ended September 30, 2020 and 2019, and the selected combined balance sheet data as of September 30, 2020 from our Unaudited Condensed Combined Financial Statements, which are included herein. We derived the selected combined statement of earnings data for the years ended December 31, 2019, 2018 and 2017 and the selected combined balance sheet data as of December 31, 2019 and 2018 from our audited combined financial statements, which are included herein. We derived the selected combined statement of earnings data for the years ended December 31, 2016 and 2015 and the selected combined balance sheets data as of December 31, 2017, 2016 and 2015 from the unaudited underlying financial records of Parent, which are not included in this information statement. The historical results set forth below may not be indicative of Aaron’s SpinCo’s future performance as a stand-alone company following the separation and distribution. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Combined Financial Statements,” and the Combined Financial Statements and the accompanying notes included in the “Index to Financial Statements” section of this information statement.

 

    Nine Months Ended
September 30,
    Year Ended December 31,  

(Dollar Amounts in Thousands)

  2020     2019     2019     2018     2017     2016     2015  

OPERATING RESULTS

             

Revenues:

             

Lease and Retail Revenues

  $ 1,190,903   $ 1,220,475   $ 1,608,832   $ 1,540,800   $ 1,460,815   $ 1,572,645   $ 1,667,375

Non-Retail Sales

    94,710     102,190     140,950     207,262     270,253     309,446     390,137

Franchise Royalties and Other Revenues

    19,134     26,860     34,695     46,654     50,834     63,948     69,718
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,304,747     1,349,525     1,784,477     1,794,716     1,781,902     1,946,039     2,127,230
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of Revenues:

             

Cost of Lease and Retail Revenues

    412,009     425,640     559,232     533,974     517,946     577,395     600,908

Non-Retail Cost of Sales

    82,006     83,057     113,229     174,180     241,356     276,608     351,777
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    494,015     508,697     672,461     708,154     759,302     854,003     952,685
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    810,732     840,828     1,112,016     1,086,562     1,022,600     1,092,036     1,174,545

Gross Profit %

    62.1     62.3     62.3     60.5     57.4     56.1     55.2

Operating Expenses:

             

Personnel Expenses

    351,905     378,991     499,993     482,712     460,606     480,879     517,758

Other Operating Expenses, Net

    324,156     336,935     426,774     431,158     382,853     402,731     432,382

Provision for Lease Merchandise Write-Offs

    47,478     70,068     97,903     68,970     59,621     63,871     62,483

Restructuring Expenses, Net

    33,318     37,535     39,990     2,750     17,145     20,218     —    

Impairment of Goodwill

    446,893     —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,203,750     823,529     1,064,660     985,590     920,225     967,699     1,012,623
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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    Nine Months Ended
September 30,
    Year Ended December 31,  

(Dollar Amounts in Thousands)

  2020     2019     2019     2018     2017     2016     2015  

Operating (Loss) Profit

    (393,018     17,299     47,356     100,972     102,375     124,337     161,922

Interest Expense

    (8,625     (13,247     (16,967     (16,440     (18,151     (20,688     (22,809

Impairment of Investment

                —         (20,098     —         —         —    

Other Non-Operating Income (Expense), Net

    887     2,835     3,881     (866     5,416     (864     518
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Earnings Before Income Tax Expense (Benefit)

    (400,756     6,887     34,270     63,568     89,640     102,785     139,631

Income Tax Expense (Benefit)

    (131,969     (690     6,171     12,915     (53,278     34,350     49,778
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Earnings

  $ (268,787   $ 7,577   $ 28,099   $ 50,653   $ 142,918   $ 68,435   $ 89,853
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AT YEAR END (unaudited)

             

Store Count:

             

Company-operated Stores

    1,086     1,163     1,167     1,312     1,175     1,165     1,305

Franchised Stores

    308     341     335     377     551     699     734
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Systemwide Stores

    1,394       1,504       1,502       1,689       1,726       1,864       2,039  

Lease Agreements in Effect1

    1,295,000     1,405,600     1,383,400     1,534,900     1,483,600     1,473,000     1,627,900

Number of Employees1

    9,000     10,600     10,100     10,800     10,200     10,200     11,400

 

1

Excludes franchised operations.

 

    Nine Months Ended
September 30,
    Year Ended December 31,  

(Dollar Amounts in Thousands)

  2020     2019     2018     2017     2016     2015  

FINANCIAL POSITION

           

Cash and Cash Equivalents

  $ 432,862   $ 48,773   $ 12,006   $ 33,760   $ 283,113   $ 9,321

Lease Merchandise, Net

    661,522     781,598     807,457     720,319     683,486     870,345

Property, Plant and Equipment, Net

    194,970     207,301     202,753     183,968     189,513     206,508

Total Assets1

    1,676,747     1,940,331     1,632,812     1,528,140     1,588,143     1,693,513

Debt

    285,123     341,030     424,752     368,798     450,527     565,133

Invested Capital

    727,129     837,800     782,996     736,793     670,737     607,540

 

1

In accordance with the adoption of ASC 842, Aaron’s SpinCo, as a lessee, is required to recognize substantially all of its operating leases on the balance sheet as operating lease right-of-use assets and operating lease liabilities. For periods prior to the year ended December 31, 2019, Aaron’s SpinCo’s operating lease right-of-use assets and liabilities are not included on the balance sheet.



 

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QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

 

What is Aaron’s SpinCo and why is Parent separating the Aaron’s Business and distributing Aaron’s SpinCo stock?

Aaron’s SpinCo, which is currently a wholly-owned subsidiary of Aaron’s, Inc. was formed to own and operate the Aaron’s Business following the separation. The separation of the Aaron’s Business from Parent and the distribution of Aaron’s SpinCo common stock are intended to provide you with equity ownership in two separate publicly traded companies that will be able to focus exclusively on each of their respective businesses. Parent and Aaron’s SpinCo expect that the separation will result in enhanced long-term performance of each business for the reasons discussed in the sections entitled “The Separation and Distribution—Reasons for the Separation.”

 

Why am I receiving this document?

Parent is delivering this document to you because you are a holder of shares of Parent common stock. If you are a holder of shares of Parent common stock as of the close of business on [●], 2020, the record date of the distribution, you will be entitled to receive [●] share[s] of Aaron’s SpinCo common stock for every share of Parent common stock that you hold at the close of business on such date. This document will help you understand how the separation and distribution will affect your post-separation ownership in Parent and Aaron’s SpinCo, respectively. It will also help you better understand the operations and financial condition of the Company, including the risk factors related to (a) it’s business, (b) the separation and distribution and (c) ownership of its common stock.

 

How will the separation of the Aaron’s Business from Parent work?

As part of the separation, and prior to the distribution, Parent and its subsidiaries expect to complete an internal reorganization in order to transfer the Aaron’s Business to Aaron’s SpinCo. To accomplish the separation, Parent will distribute all of the outstanding shares of Aaron’s SpinCo common stock to Parent shareholders on a pro rata basis in a distribution intended to be generally tax-free for U.S. federal income tax purposes. For every share of common stock of Parent held of record by you as of the close of business on [●], the record date for the distribution, you will receive [●] share[s] of Aaron’s SpinCo common stock. You will receive cash in lieu of any fractional shares of Aaron’s SpinCo common stock that you would have received after application of the above distribution ratio. As a result of the distribution, Aaron’s SpinCo will become a separate public company. The number of shares of Parent common stock you own will not change as a result of the separation and distribution.

 

What is the record date for the distribution?

The record date for the distribution will be [●], 2020.

 

When will the distribution occur?

We expect that all of the shares of Aaron’s SpinCo common stock will be distributed by Parent at [●], Eastern Time, on [●], 2020, to holders of record of shares of Parent common stock at the close of business on [●], 2020, the record date for the distribution.

 

What do shareholders need to do to participate in the distribution?

Shareholders of Parent as of the record date for the distribution will not be required to take any action to receive Aaron’s SpinCo common



 

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stock in the distribution, but you are urged to read this entire information statement carefully. No shareholder approval of the distribution is required. You are not being asked for a proxy. You do not need to pay any consideration, exchange or surrender your existing shares of Parent common stock or take any other action to receive your shares of Aaron’s SpinCo common stock. Please do not send in your Parent stock certificates. The distribution will not affect the number of outstanding shares of Parent common stock or any rights of Parent shareholders, although it will affect the market value of each outstanding share of Parent common stock.

 

How will shares of Aaron’s SpinCo common stock be issued?

You will receive shares of Aaron’s SpinCo common stock through the same channels that you currently use to hold or trade shares of Parent common stock, whether through a brokerage account or other channel.

 

  Receipt of Aaron’s SpinCo shares will be documented for you in the same manner that you typically receive shareholder updates, such as monthly broker statements.

 

  If you own shares of Parent common stock as of the close of business on [●], 2020, the record date for the distribution, including shares owned in certificate form, Parent, with the assistance of Computershare Trust Company, N.A., the distribution agent (“Computershare”), will electronically distribute shares of Aaron’s SpinCo common stock to you or to your brokerage firm on your behalf in book-entry form. Computershare will mail you a book-entry account statement that reflects your shares of Aaron’s SpinCo common stock, or your bank or brokerage firm will credit your account for the shares.

 

How many shares of Aaron’s SpinCo common stock will I receive in the distribution?

Parent will distribute to you [●] share[s] of Aaron’s SpinCo common stock for every share of Parent common stock held by you as of close of business on the record date for the distribution. Based on approximately [●] shares of Parent common stock outstanding as of [●], 2020, a total of approximately [●] shares of Aaron’s SpinCo common stock will be distributed to holders of record of Parent common stock at the close of business on [●], 2020. For additional information on the distribution, see “The Separation and Distribution.”

 

Will Aaron’s SpinCo issue fractional shares of its common stock in the distribution?

No. Aaron’s SpinCo will not issue fractional shares of its common stock in the distribution. Fractional shares that Parent shareholders would otherwise have been entitled to receive, after application of the above ratio, will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of these sales will be distributed pro rata (based on the fractional share such holder would otherwise be entitled to receive) to those shareholders who would otherwise have been entitled to receive fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.


 

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What are the conditions to the distribution?

The distribution is subject to the satisfaction (or waiver by Parent in its sole and absolute discretion) of a number of conditions, including, among others:

 

   

the internal reorganization shall be completed and the transfer of assets and liabilities from Parent to Aaron’s SpinCo shall be completed in accordance with the separation agreement that we will enter into with Parent prior to the distribution;

 

   

the separation agreement and transactions contemplated thereby shall have been approved by the board of directors of Parent in accordance with applicable law and the organizational documents of Parent, and such approval has not been withdrawn;

 

   

Parent shall have received an opinion of tax counsel satisfactory to the Parent Board of Directors, regarding the qualification of the distribution, together with certain related transactions, as transactions that are generally tax-free under Section 355 and Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”);

 

   

an independent appraisal firm acceptable to Parent shall have delivered one or more opinions to the Parent Board of Directors at the time or times requested by the Parent Board of Directors confirming the solvency and financial viability of Parent before the consummation of the distribution and each of Parent and Aaron’s SpinCo after the consummation of the distribution, such opinions shall have been acceptable to Parent in form and substance in Parent’s sole discretion and such opinions shall not have been withdrawn or rescinded;

 

   

the SEC shall have declared effective our registration statement on Form 10, of which this information statement forms a part, and this information statement shall have been made available to Parent shareholders;

 

   

all actions and filings necessary or appropriate under applicable U.S. federal, U.S. state or other securities laws shall have been taken and, where applicable, have become effective or been accepted by the applicable governmental authority;

 

   

the transaction agreements relating to the separation that Parent and we will enter into prior to the distribution shall have been duly executed and delivered by the parties;

 

   

no order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, distribution or any of the related transactions shall be in effect and the distribution shall not violate or result in a breach of any applicable Law or any material contract of any party to the separation;

 

   

the shares of Aaron’s SpinCo common stock to be distributed shall have been approved for listing on the NYSE, subject to official notice of distribution;



 

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we shall have entered into the financing transactions described in this information statement that are contemplated to occur on or prior to the date of the separation and distribution; and

 

   

no event or development shall have occurred or exist that, in the judgment of the Parent Board of Directors, in its sole and absolute discretion, makes it inadvisable to effect the separation, the distribution and other related transactions.

 

  Parent and Aaron’s SpinCo cannot assure you that any or all of these conditions will be met, or that the separation will be consummated even if all of the conditions are met. In addition, Parent can decide at any time not to go forward with the separation. Parent may also waive any of the conditions to the distribution. For a complete discussion of the conditions to the distribution, see “The Separation and Distribution—Conditions to the Distribution.”

 

What is the expected date of completion of the distribution?

The completion and timing of the distribution are dependent upon a number of conditions. It is expected that the shares of Aaron’s SpinCo common stock will be distributed by Parent at [●], Eastern Time, on [●], 2020, to holders of record of shares of Parent common stock at the close of business on [●], 2020, the record date for the distribution. However, no assurance can be provided as to the timing of the distribution or that all conditions to the distribution will be met, by [●], 2020 or at all.

 

Can Parent decide to cancel the distribution of Aaron’s SpinCo common stock even if all the conditions have been met?

Yes. The distribution is subject to the satisfaction or waiver of certain conditions. See the section entitled “The Separation and Distribution—Conditions to the Distribution.” Until the distribution has occurred, Parent has the right to not effect the distribution, even if all of the conditions are satisfied.

 

What if I want to sell my Parent common stock or my Aaron’s SpinCo common stock?

If you sell your shares of Parent common stock prior to or on the distribution date, you may also be selling your right to receive shares of Aaron’s SpinCo common stock. See “The Separation and Distribution—Trading Between the Record Date and Distribution Date.” You are encouraged to consult with your financial advisors, such as your stockbroker, bank or tax advisor, regarding the specific implications of selling your Parent common stock prior to or on the distribution date.

 

What is “regular-way” and “ex-distribution” trading of Parent common stock?

Beginning on or shortly before the record date for the distribution and continuing up to and through the distribution date, it is expected that there will be two markets in Parent common stock: a “regular-way” market and an “ex-distribution” market. Parent common stock that trades in the “regular-way” market will trade with an entitlement to shares of Aaron’s SpinCo common stock distributed pursuant to the distribution. Shares that trade in the “ex-distribution” market will trade without an entitlement to Aaron’s SpinCo common stock distributed pursuant to the distribution. If you hold shares of Parent common stock on the record date and then decide to sell any shares of



 

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Parent common stock before the distribution date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your Parent common stock with or without your entitlement to Aaron’s SpinCo common stock pursuant to the distribution.

 

Where will I be able to trade shares of Aaron’s SpinCo common stock?

Aaron’s SpinCo intends to apply for authorization to list its common stock on the NYSE under the symbol “[●].” Aaron’s SpinCo anticipates that trading in shares of its common stock will begin on a “when-issued” basis on or shortly before the record date for the distribution and will continue up to and through the distribution date, and that “regular-way” trading in Aaron’s SpinCo common stock will begin on the first trading day following the completion of the distribution. If trading begins on a “when-issued” basis, you may purchase or sell Aaron’s SpinCo common stock up to and through the distribution date, but your transaction will not settle until after the distribution date. Aaron’s SpinCo cannot predict the trading prices for its common stock before, on or after the distribution date.

 

What will happen to the listing of Parent common stock?

Parent common stock will continue to trade on the NYSE after the distribution and expects to change its stock symbol from “AAN” to “[●]” upon completion of the separation.

 

Will the number of shares of Parent common stock that I own change as a result of the distribution?

No. The number of shares of Parent common stock that you own will not change as a result of the distribution.

 

 

Will the distribution affect the market price of my Parent common stock?

Yes. As a result of the distribution, Parent expects the trading price of shares of Parent common stock immediately following the distribution to be lower than the “regular-way” trading price of such shares immediately prior to the distribution because the trading price will no longer reflect the value of the Aaron’s Business. There can be no assurance that the aggregate market value of shares of Parent common stock and Aaron’s SpinCo common stock following the distribution will be higher than the market value of Parent common stock if the separation and distribution did not occur. This means, for example, that the combined trading prices of one share of Parent common stock and [●] share[s] of Aaron’s SpinCo common stock after the distribution may be equal to, greater than or less than the trading price of one share of Parent common stock before the distribution.

 

What are the material U.S. federal income tax consequences of the separation and the distribution?

It is a condition to the completion of the separation that Parent obtains an opinion of counsel satisfactory to the Parent Board of Directors regarding the qualification of the distribution, together with certain related transactions, as transactions that are generally tax-free under Sections 355 and 368(a)(1)(D) of the Code. Assuming the distribution, together with certain related transactions, so qualifies, you will not recognize any gain or loss, and no amount will be included in your income, upon your receipt of Aaron’s SpinCo



 

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common stock pursuant to the distribution, except with respect to any cash received in lieu of fractional shares. You should consult your own tax advisor as to the particular consequences of the distribution to you, including the applicability and effect of any U.S. federal, state and local tax laws, as well as foreign tax laws. For more information regarding the material U.S. federal income tax consequences of the distribution, see the section entitled “Material U.S. Federal Income Tax Consequences.”

 

What will happen to my tax basis in my Parent stock?

If you do not sell your Parent stock in advance of the distribution, your tax basis will be adjusted and the aggregate tax basis of the Parent common stock and Aaron’s SpinCo common stock received in the distribution (including any fractional share interest in Aaron’s SpinCo common stock for which cash is received) will equal the aggregate tax basis of Parent common stock immediately prior to the distribution, allocated between the Parent common stock and Aaron’s SpinCo common stock (including any fractional share interest in Aaron’s SpinCo common stock for which cash is received) in proportion to the relative fair market value of each on the date of the distribution. You should carefully read the section entitled “Material U.S. Federal Income Tax Consequences” and should consult your own tax advisor about the particular consequences of the distribution to you, including the application of U.S. federal, state and local and non-U.S. tax laws.

 

What will Aaron’s SpinCo’s relationship be with Parent following the separation and distribution?

Parent will enter into a separation agreement with Aaron’s SpinCo to effect the separation and distribution and provide a framework for Aaron’s SpinCo’s relationship with Parent after the separation and distribution and we will enter into certain other agreements, including a transition services agreement, a tax matters agreement and an employee matters agreement. These agreements, together with the documents and agreements by which the internal reorganization will be effected, will provide for the separation between Aaron’s SpinCo and Parent of the assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) of Parent and its subsidiaries attributable to periods prior to, at and after Aaron’s SpinCo’s separation from Parent and will govern the relationship between Aaron’s SpinCo and Parent subsequent to the completion of the separation. For additional information regarding the separation agreement and other transaction agreements, see the sections entitled “Risk Factors—Risks Related to the Separation and Distribution” and “Certain Relationships and Related Party Transactions.” For additional information regarding the internal reorganization, see the section entitled, “The Separation and Distribution—Formation of Aaron’s SpinCo and Internal Reorganization.”

 

Who will manage Aaron’s SpinCo after the separation?

Aaron’s SpinCo will benefit from a management team with deep knowledge of the Aaron’s Business and our industry. Our management team will be led by Douglas Lindsay, who will be Aaron’s SpinCo’s Chief Executive Officer, and Steve Olsen, who will be Aaron’s SpinCo’s President. In addition, John Robinson will be the



 

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Chairman of Aaron’s SpinCo’s Board of Directors after the separation. For more information regarding Aaron’s SpinCo’s directors and management, see “Management” and “Directors.”

 

Are there risks associated with owning Aaron’s SpinCo common stock?

Yes. Ownership of Aaron’s SpinCo common stock is subject to both general and specific risks relating to our business, the industry in which we operate, our ongoing contractual relationships with Parent and our status as a separate, publicly traded company. Ownership of Aaron’s SpinCo common stock is also subject to risks relating to the separation and distribution. These risks are described in the “Risk Factors” section of this information statement, beginning on page 17. We encourage you to read that section carefully.

 

Does Aaron’s SpinCo plan to pay dividends?

After the distribution, we expect that Aaron’s SpinCo will initially pay a regular quarterly cash dividend. However, the timing, declaration, amount and payment of any dividends in the future by Aaron’s SpinCo will be subject to the sole discretion of our Board of Directors and will depend on many factors. See “Dividend Policy.”

 

Will Aaron’s SpinCo incur any new indebtedness prior to or at the time of the distribution?

No. Aaron’s SpinCo anticipates that its direct subsidiary after completion of the internal reorganization prior to the separation, Aaron’s, LLC, will have approximately $200 million of indebtedness available to borrow upon completion of the separation under a $200 million senior unsecured revolving credit facility. Aaron’s SpinCo will be a guarantor for this facility. On the separation date, Aaron’s SpinCo anticipates having no amounts drawn under the revolving credit facility. See “Description of Material Indebtedness and Guarantees” and “Risk Factors—Risks Related to the Separation and Distribution.”

 

Who will be the distribution agent for the distribution and transfer agent and registrar for Aaron’s SpinCo common stock?

The distribution agent, transfer agent and registrar for the Aaron’s SpinCo common stock will be Computershare. For questions relating to the transfer or mechanics of the stock distribution, you should contact Computershare toll free at [●].

 

Where can I find more information about Parent and Aaron’s SpinCo?

Before the distribution, if you have any questions relating to Parent’s business performance, you should contact:

 

  Aaron’s Holdings Company, Inc.

400 Galleria Parkway, S.E.

Suite 300

Atlanta, Georgia 30339

Attention: Investor Relations

 

  After the distribution, our shareholders who have any questions relating to our business performance should contact us at:

 

  Aaron’s SpinCo, Inc.

400 Galleria Parkway, S.E.

Suite 300

Atlanta, Georgia 30339

Attention: Investor Relations

 

  The Aaron’s SpinCo investor website (www.aarons.com) will continue to be operational after the distribution.


 

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RISK FACTORS

You should carefully consider the following risks and other information in this information statement in evaluating Aaron’s SpinCo and Aaron’s SpinCo common stock. Any of the following risks and uncertainties could materially adversely affect our business, results of operations or financial condition. The risk factors generally have been separated into three groups: risks related to our business, risks related to the separation and distribution and risks related to ownership of our common stock.

Risks Related to Our Business

The COVID-19 pandemic may adversely impact our business, results of operations, financial condition, liquidity and/or cash flow in future periods.

The COVID-19 pandemic may adversely impact our business, results of operations, financial condition, liquidity and/or cash flow in future periods. As the virus continues to unfold in the United States, or if other pandemics, epidemics or similar public health threats (or fears of such events) were to occur, our business, results of operations and financial condition may be materially and adversely affected. The extent to which the COVID-19 pandemic ultimately impacts us will depend on a number of factors and developments that we are not able to predict or control, including, among others:

 

   

the duration and severity of the outbreak, including, for example, localized outbreaks and whether there is a “second wave” outbreak of COVID-19 cases or other additional periods of increases or spikes in the number of COVID-19 cases in future periods in some or all of the regions where our stores operate, and how widespread any such additional wave of infections may become;

 

   

the impact of any such outbreaks on our customers, suppliers and employees; governmental, business and other actions in response to such outbreaks, including the possibility of additional state or local emergency or executive orders, including any stay-at-home orders, that, unlike recent governmental orders of that nature, may not deem our businesses to be essential, and thus, exempt from all or some portion of such orders;

 

   

the health of and the effect of the pandemic on our workforce; whether there will be additional rounds of government stimulus and supplemental unemployment benefits in response to the COVID-19 pandemic, as well as the nature, timing and amount of such stimulus or unemployment payments; supply chain disruptions, including the inability of certain of our suppliers to timely fill their orders for merchandise; and

 

   

the potential effects on our internal controls including those over financial reporting as a result of changes in working environments such as work-from-home or other remote working arrangements that are applicable to our associates.

In addition, if the pandemic creates disruptions or turmoil in the credit markets, it could adversely affect our ability to access capital on favorable terms, or at all, and continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted.

In response to the COVID-19 pandemic, local, state and federal governmental authorities issued various forms of stay-at-home orders. Aaron’s SpinCo has been classified as a provider of essential products in most jurisdictions, and thus, its store showrooms generally were not required to close. Despite such exemption, beginning in mid-March 2020, we largely shifted to e-commerce and curbside service for our company-operated stores to protect the health and safety of our customers and associates, except where such curbside service was prohibited by governmental authorities. Additionally, we have experienced disruptions in our supply chain which have impacted product availability in some of our stores and, in some situations, required us to procure inventory from alternative sources at higher costs.

While we have since reopened nearly all of our store showrooms, there can be no assurances that these operations will continue to remain open if, for example, there are localized increases or “second waves” in the

 

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number of COVID-19 cases and, in response, governmental authorities issue orders requiring such closures or limitations on operations, or we voluntarily close our showrooms or otherwise limit their operations to protect the health and safety of our customers and associates. Such governmental requirements or voluntary action could adversely impact future financial performance. In addition, factors that will negatively impact our ability to successfully resume full operations during the current outbreak of COVID-19 or another pandemic, epidemic or similar public health threat include:

 

   

the ability to attract customers to store showrooms given the risks, or perceived risks, of gathering in public places;

 

   

the ability to retain and reinstate furloughed associates to assist in the re-openings of showrooms and fulfillment centers;

 

   

supply chain delays and disruptions due to closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas, or other pandemic-related risk mitigation limitations and restrictions; and

 

   

fluctuations in regional and local economies, including the impact on regional and local retail markets and consumer confidence and spending.

Beginning in March 2020, we temporarily suspended our royalty fee of 6% of weekly cash revenue collections required to be paid by Company franchisees. Although we reinstated the franchise royalty fee during the second quarter of 2020, there can be no assurance that we will not reinstitute such a royalty suspension in future periods if we believe circumstances warrant that approach. We have offered, and are continuing to offer, programs to support our customers, including payment deferrals, which may negatively impact our business, results of operations and financial condition in the near term. Notwithstanding these customer support programs, a continuation or worsening of current economic conditions may result in lower consumer confidence and our customers not entering into new lease agreements with us or lease modifications, or refraining from continuing to pay their lease obligations at all, which may adversely affect our business and results more substantially over a longer period.

The extent of the impact of the outbreak of COVID-19 on our business, results of operations and financial condition will depend largely on future developments, including the severity and duration of the outbreak in the U.S., whether there are “second waves” or other meaningful increases in the number of COVID-19 cases in future periods, whether there will be additional rounds of government stimulus and/or supplemental unemployment payments and the amounts and durations of any such government stimulus, the related impact on consumer confidence and spending and when, or if, we will be able to resume normal operations, all of which are highly uncertain and cannot be predicted. COVID-19 presents material uncertainty and risk with respect to our business going forward and our future results of operations and financial condition.

Federal and state regulatory authorities are increasingly focused on our industry, and in addition to being subject to various existing federal and state laws and regulations, we may be subject to new or additional federal and state laws and regulations (or changes in interpretations of existing laws and regulations) that could expose us to government investigations, pricing restrictions, fines, penalties or other government-required payments by us, significant additional costs or compliance-related burdens that could force us to change our business practices in a manner that may be materially adverse to our business, results of operations or financial condition.

Federal regulatory authorities such as the Federal Trade Commission (the “FTC”) are increasingly focused on the subprime financial marketplace in which the lease-to-own industry operates, and any of these federal agencies, as well as state regulatory authorities, may propose and adopt new regulations, or interpret existing regulations in a manner, that could result in significant adverse changes in the regulatory landscape for businesses such as ours. In addition, we believe, with increasing frequency, federal and state regulators are holding businesses like ours to higher standards of monitoring, disclosure and reporting, regardless of whether new laws or regulations governing our industry have been adopted. Regulators and courts may apply laws or regulations to our businesses in

 

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inconsistent or unpredictable ways that may make compliance more difficult, expensive and uncertain. This increased attention at the federal and state levels, as well as the potential for scrutiny by certain municipal governments, could increase our compliance costs significantly and materially and adversely impact the manner in which we operate. For more information, see “Business—Government Regulation.”

Nearly every state, the District of Columbia, Puerto Rico, and most provinces in Canada specifically regulate lease-to-own transactions. Furthermore, certain aspects of our business, such as the content of our advertising and other disclosures to customers about our lease-to-own transactions; and our collection practices (as well as those of third parties), the manner in which we contact our customers, our decisioning process regarding whether to lease merchandise to customers, any credit reporting practices we may decide to engage in, and the manner in which we process and store certain customer, employee and other information are subject to federal and state laws and regulatory oversight. For example, the California Consumer Privacy Act of 2018 (the “CCPA”), which became effective on January 1, 2020, has changed the manner in which our transactions with California residents are regulated with respect to the manner in which we collect, store and use consumer data, which will result in increased regulatory oversight and litigation risks and increase our compliance-related costs in California. Moreover, other states may adopt privacy-related laws whose restrictions and requirements differ from those of the CCPA, requiring us to design, implement and maintain different types of state-based, privacy-related compliance controls and programs simultaneously in multiple states, thereby further increasing the complexity and cost of compliance.

Many of these laws and regulations are evolving, unclear and inconsistent across various jurisdictions, and complying with them is difficult, expensive and uncertain. Furthermore, legislative or regulatory proposals regarding our industry, or interpretations of them, may subject us to “headline risks” that could negatively impact our business in a particular market or in general and, therefore, may adversely affect our share price.

We have incurred and will continue to incur substantial costs to comply with federal and state laws and regulations. In addition to compliance costs, we may continue to incur substantial expenses to respond to federal and state government investigations and enforcement actions, proposed fines and penalties, criminal or civil sanctions, and private litigation, including those arising out of our or our franchisees’ alleged violations of existing laws and/or regulations.

Further, certain political candidates for various offices have from time-to-time indicated a desire to increase the level of regulation and regulatory scrutiny applicable to lease-to-own and similar subprime financial services providers. If elected, these candidates may propose new laws and regulations (or appoint individuals who could reinterpret existing regulations) that, if adopted, would adversely impact our current operations and the regulatory landscape for businesses such as ours.

Additionally, as we execute on our strategic plans, we may continue to expand into complementary businesses that engage in financial, banking or lending services, or lease-to-own or rent-to-rent transactions involving products that we do not currently offer our customers, all of which may be subject to a variety of statutes and regulatory requirements in addition to those regulations currently applicable to our legacy operations, which may impose significant costs, limitations or prohibitions on the manner in which we currently conduct our businesses as well as those we may acquire in the future.

We continue to implement a strategic plan within our business that has changed, and is expected to continue to change, significant aspects of how our business has been operated historically, and there is no guarantee that it will be successful.

Our strategic plan for our business includes a number of key initiatives to improve profitability, including centralizing key processes, rationalizing and repositioning real estate, and enhancing our e-commerce platform. There is no guarantee that these initiatives will be successful. For example, we may not be successful in our attempts to attract new customers to our brand, develop the technology needed to further enhance our customers’

 

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experiences with us, or align our store footprint with market opportunities due to an inability to secure new store locations, or otherwise.

With respect to centralizing key processes, we have recently implemented a centralized customer lease decisioning process in all of our company-operated stores, and have started implementing that centralized decisioning tool in our franchised stores as well. We may not execute the procedural and operational changes and systems necessary to successfully implement the centralized decisioning initiative, and it is possible that centralized customer lease decisioning will not be as effective or accurate as the decentralized, store-based decisioning process we historically used in our business.

Regarding our real estate strategy, the buildout of our new store concept and operating model includes geographically repositioning a significant number of our store locations into larger buildings and/or into different geographic locations that we believe will be more advantageous, and also re-engineering and remodeling certain existing stores, to provide for larger selections of merchandise and other more complex features. We expect to incur significant capital costs, including build-out or remodeling costs for this new store concept and operating model and exit costs from the termination of current leases and sale of current properties. In addition, we have not historically managed or operated stores with larger footprints or more complex, re-engineered stores and operating models, and thus, we expect that our management team and store associates for those locations will need to adjust to managing and operating larger, more complex stores, and there can be no assurances that those stores will be successful.

There can be no assurance that the real estate component of our strategy will be successful. For example, we may not be successful in transitioning the customers of our stores that are closed or repositioned to other stores that remain open or to our new store concept and operating model, and thus, could experience a reduction in revenue and profits associated with such a loss of customers. In addition, we may not be able to identify and secure a sufficient number of store locations that are able to support our new store concept, at reasonable lease rates and terms, or at all.

Our e-commerce platform also is a significant component of our strategic plan and we believe it will drive future growth of this segment. However, to promote our products and services and allow customers to transact on-line and reach new customers, we must effectively maintain, improve and grow our e-commerce platform. Many of the traditional, virtual and “big-box” retailers and other companies with whom we compete have more robust e-commerce platforms and logistics networks than ours, and have more resources to dedicate to improving and growing their e-commerce platforms. There can be no assurance that we will be able to effectively compete against those companies’ e-commerce platforms and logistics networks, or maintain, improve or grow our e-commerce platform in a profitable manner.

There can be no guarantee that our current strategy for our business, and our current or future business improvement initiatives related thereto, will yield the results we currently anticipate (or results that will exceed those that might be obtained under prior or other strategies). We may fail to successfully execute on one or more elements of our current strategy, even if we successfully implement one or more other components. In addition, the estimated costs and charges associated with these initiatives may vary materially and adversely based upon various factors.

If we cannot address these challenges successfully, or overcome other critical obstacles that may emerge as we continue to pursue our current strategy, it may adversely impact our business, results of operations or financial condition.

 

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We face many challenges which could materially and adversely affect our overall results of operations, including the commoditization of certain product categories, increasing competition from a growing variety of sources, a decentralized, high-fixed-cost operating model, adverse consequences to our supply chain function from decreased procurement volumes and from the COVID-19 pandemic, increasing costs for labor and transportation, and lower lease volumes, and thus, less recurring revenues written into our customer lease portfolio.

Our business currently faces and may face new challenges relating to the commoditization of certain product categories. For example, due to an increasing supply of electronics, and retail strategies that include implementing frequent price-lowering sales and using certain electronics as “loss leaders” to increase customer traffic in stores, there is significant price-based competition or “commoditization” of electronics, particularly for televisions. We do not expect the commoditization of the electronics category to subside and it may expand to other product categories with increasing frequency in the future, including appliances and furniture. We also face competition from a growing variety of sources, including traditional and on-line lease-to-own and rent-to-rent companies, traditional and “big-box” retailers, the continued expansion of digital retail, which includes a wide array of e-commerce retailers that have established far larger digital operations than our Aarons.com e-commerce platform has been able to achieve to date, traditional and on-line providers of used goods, and indirectly from financing companies, such as payday and title loan companies, who provide customers with loans that enable them to shop at traditional retailers. This increasing competition from these sources may reduce our market share as well as our operating margins, and may materially and adversely affect our overall results of operations. Many of the competitors discussed above have more advanced and modern e-commerce, logistics and other technology applications and systems that offer them a competitive advantage in attracting and retaining customers for whom we compete for, especially with respect to younger customers. In addition, those competitors may offer a larger selection of products and more competitive prices.

We believe the significant increase in the amount and type of competition, as discussed above, may result in our customers curtailing entering into sales and lease ownership agreements for the types of merchandise we offer, or entering into agreements that generate less revenue for us, resulting in lower same store sales, revenue and profits, or entering into lease agreements with our competitors. For example, our stores experienced flat same store revenues in fiscal year 2019 and a decline of 1.5% in 2018. We calculate same store revenues growth, which is impacted by the amount of recurring lease revenues written into and churned out of our customer lease portfolio in current and prior periods and by the amount of that revenue we collect from our customers, by comparing revenues for comparable periods for stores open during the entirety of those periods. A number of factors have historically affected our same store revenues for our business, including:

 

   

changes in competition;

 

   

general economic conditions;

 

   

economic challenges faced by our customer base;

 

   

new product introductions;

 

   

consumer trends;

 

   

changes in our merchandise mix;

 

   

timing of promotional events;

 

   

our ability to execute our business strategy effectively; and

 

   

the favorable impact of government stimulus and supplemental unemployment benefits on our collections, during the COVID-19 pandemic.

Our business has a decentralized, high fixed cost operating model due to, among other factors, our significant labor related to our selling and collections functions, the costs associated with our last-mile delivery, our fulfillment centers and related logistics functions, and our manufacturing operations. That model may result in negative operating leverage in a declining revenue environment, as we may not be able to reduce or

 

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“deleverage” those fixed costs in proportion to any reduction in the revenues of our business, if at all, and our failure to do so may adversely affect our overall results of operations.

In addition, our supply chain function and financial performance may suffer adverse consequences related to the decreases we have experienced, and may continue to experience, in the volume of merchandise we purchase from third party suppliers, due to, among other factors, our store closures, declining sales of merchandise to franchisees, and lower lease volumes. Those consequences may include, for example, smaller discounts from our vendors, or the elimination of discount programs previously offered to us, which may have an adverse impact on our results of operations. Declining merchandise purchase volumes have caused us to rationalize and consolidate, and may result in us further rationalizing and consolidating, vendors for certain product categories, and we may not effectively implement those vendor consolidation initiatives, which could lead to disruptions to our supply chain, including delivery delays or unavailability of certain types of merchandise for our stores and our franchisees’ stores.

We have experienced and may continue to experience increases in the costs we incur to purchase certain merchandise that we offer to sale or lease to our customers, due to tariffs, increases in prices for certain commodities, COVID-19 related supply chain disruptions, and increases in the costs of shipping the merchandise to our distribution centers and store locations. We have limited or no control over many of these inflationary forces on our costs. In addition, we may not be able to recover all or even a portion of such cost increases by increasing our merchandise prices, fees, or otherwise, and even if we are able to increase merchandise prices or fees, those cost increases to our customers could result in the customers curtailing entering into sales and lease ownership agreements for the types of merchandise we offer, or entering into agreements that generate less revenue for us, resulting in lower same store sales, revenue and profits.

If we are unable to successfully address these challenges, our overall business, results of operations and financial condition may be materially and adversely affected as well.

The transactions offered to consumers by our business may be negatively characterized by consumer advocacy groups, the media and certain federal, state and local government officials, and if those negative characterizations become increasingly accepted by consumers, demand for our services and the transactions we offer could decrease and our business, results of operations and financial condition could be materially adversely affected.

Certain consumer advocacy groups, media reports, federal and state regulators, and certain candidates for political offices have asserted that laws and regulations should be broader and more restrictive regarding lease-to-own transactions. The consumer advocacy groups and media reports generally focus on the total cost to a consumer to acquire an item, which is often alleged to be higher than the interest typically charged by banks or similar lending institutions to consumers with better credit histories. This “cost-of-rental” amount, which is generally defined as lease fees paid in excess of the “retail” price of the goods, is from time to time characterized by consumer advocacy groups and media reports as predatory or abusive without discussing benefits associated with our lease-to-own programs or the lack of viable alternatives for our customers’ needs. Although we strongly disagree with these characterizations, if the negative characterization of these types of lease-to-own transactions becomes increasingly accepted by consumers, demand for our services could significantly decrease, which could have a material adverse effect on our business, results of operations and financial condition. Additionally, if the negative characterization of these types of transactions is accepted by regulators and legislators, or if political candidates who have a negative view of the lease-to-own industry are ultimately elected, we could become subject to more restrictive laws and regulations and more stringent enforcement of existing laws and regulations, any of which could have a material adverse effect on our business, results of operations and financial condition. The vast expansion and reach of technology, including social media platforms, has increased the risk that our reputation could be significantly impacted by these negative characterizations in a relatively short amount of time. If we are unable to quickly and effectively respond to such characterizations, we may experience declines in customer loyalty and traffic, which could have a material adverse effect on our business, results of operations and financial condition. Additionally, any failure by our competitors, including smaller, regional competitors, for

 

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example, to comply with the laws and regulations applicable to the traditional and/or e-commerce models, or any actions by those competitors that are challenged by consumers, advocacy groups, the media or governmental agencies or entities as being abusive or predatory could result in our business being mischaracterized, by implication, as engaging in similar unlawful or inappropriate activities or business practices, merely because we operate in the same general industries as such competitors.

From time to time we are subject to regulatory and legal proceedings which seek material damages or seek to place significant restrictions on our business operations. These proceedings may be negatively perceived by the public and materially and adversely affect our business.

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, and/or divert our management’s attention from other business issues and opportunities and from our ongoing strategic plan to improve our performance. We cannot assure you that we will not incur material damages or penalties in a lawsuit or other proceeding in the future and/or significant defense costs related to such lawsuits or regulatory proceedings. 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 present or 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.

Certain judicial or regulatory decisions may restrict or eliminate the enforceability of certain types of contractual provisions, such as mandatory arbitration clauses, designed to limit costly litigation, including class actions, as a dispute resolution method.

To attempt to limit costly and lengthy consumer, employee and other litigation, including class actions, we require customers and employees to sign arbitration agreements and class action waivers, many of which offer opt-out provisions. Recent judicial and regulatory actions have attempted to restrict or eliminate the enforceability of such agreements and waivers. If we are not permitted to use arbitration agreements and/or class action waivers, or if the enforceability of such agreements and waivers is restricted or eliminated, we could incur increased costs to resolve legal actions brought by customers, employees and others, as it would be forced to participate in more expensive and lengthy dispute resolution processes.

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 and highly fluid, particularly in light of the sweeping new regulatory environment we are witnessing from regulators such as the FTC, among others, as discussed above.

Our competitors include national, regional and local operators of lease-to-own stores, virtual lease-to-own companies that offer lease-to-own options through traditional independent and “big-box” retailers, traditional and on-line providers of used goods and merchandise, traditional, “big-box” and e-commerce retailers (including retailers who offer layaway programs) and various types of consumer finance companies, including installment, payday and title loan companies, that may enable our customers to shop at traditional or on-line retailers, as well as rental stores that do not offer their customers a purchase option. 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. Some competitors may be willing to offer competing products on an unprofitable basis in an effort to

 

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gain market share, which could compel us to match their pricing strategy or lose business. In addition, some of our competitors may be willing to lease certain types of products that we will not agree to lease, enter into customer leases that have services, as opposed to goods, as a significant portion of the lease value, or engage in other practices related to pricing, compliance, and other areas that we will not, in an effort to gain market share at our expense.

If we do not maintain the privacy and security of customer, employee or other confidential information, due to cybersecurity-related “hacking” attacks, intrusions into our systems by unauthorized parties or otherwise, we could incur significant costs, litigation, regulatory enforcement actions and damage to our reputation, any one of which could have a material adverse impact on our business, results of operations and financial condition.

Our business involves the collection, processing, transmission and storage of customers’ personal and confidential information, including social security numbers, dates of birth, banking information, credit and debit card information, data we receive from consumer reporting companies, including credit report information, as well as confidential information about our employees, among others. Much of this data constitutes confidential personally identifiable information (“PII”) which, if unlawfully accessed, either through a “hacking” attack or otherwise, could subject us to significant liabilities as further discussed below.

Companies like us that possess significant amounts of PII and/or other confidential information have experienced a significant increase in cyber security risks in recent years from increasingly aggressive and sophisticated cyberattacks, including hacking, computer viruses, malicious or destructive code, ransomware, social engineering attacks (including phishing and impersonation), denial-of-service attacks and other attacks and similar disruptions from the unauthorized use of or access to information technology (“IT”) systems. Our IT systems are subject to constant attempts to gain unauthorized access in order to disrupt our business operations and capture, destroy or manipulate various types of information that we rely on, including PII and/or other confidential information. In addition, various third parties, including employees, contractors or others 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. Any significant compromise or breach of our data security, whether external or internal, or misuse of PII and/or other confidential information may result in significant costs, litigation and regulatory enforcement actions and, therefore, may have a material adverse impact on our business, results of operations and financial condition. Further, if any such compromise, breach or misuse is not detected quickly, the effect could be compounded.

While we have implemented network security systems and processes (including engagement of third-party data security services) to protect against unauthorized access to or use of secured data and to prevent data loss and theft, there is no guarantee that these procedures are adequate to safeguard against all data security breaches or misuse of the data. We maintain private liability insurance intended to help mitigate the financial risks of such incidents, but there can be no guarantee that insurance will be sufficient to cover all losses related to such incidents, and our exposure resulting from any serious unauthorized access to, or use of, secured data, or serious data loss or theft, could far exceed the limits of our insurance coverage for such events. Further, a significant compromise of PII and/or other confidential information could result in regulatory penalties and harm our reputation with our customers and others, potentially resulting in a material adverse impact on our business, results of operations and financial condition.

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. For example, the CCPA, which became effective in January 2020, has changed the manner in which our transactions with California residents are regulated with respect to the manner in which we collect, store and use consumer and employee data; expose our operations in California to increased regulatory oversight and litigation risks; and increase our compliance-related costs. These costs, including others relating to increased regulatory oversight and compliance, could be substantial and adversely impact our business, results of operations or financial condition.

 

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We also believe successful data breaches or cybersecurity incidents at other companies, whether or not we are involved, could lead to a general loss of customer confidence that could negatively affect us, including harming the market perception of the effectiveness of our security measures or financial technology in general.

Given the nature of the COVID-19 pandemic, including the significant job losses caused by the pandemic, and uncertainty regarding how many unemployed workers will return to their jobs, and when they may do so, our proprietary algorithms and customer lease decisioning tools used to approve customers could no longer be indicative of our customers’ ability to perform under their lease agreements with us.

As a result of the shift in operations driven by the COVID-19 pandemic, we accelerated the rollout of similar centralized lease decisioning processes and tools in all of our company-operated stores in the United States as of April 30, 2020 and finalized the rollout during the second quarter of 2020. We assume behavior and attributes observed for prior customers, among other factors, are indicative of performance by future customers. Unexpected changes in behavior caused by macroeconomic conditions, including, for example, the U.S. economy experiencing a prolonged recession and job losses related to the COVID-19 pandemic and changes in consumer behavior relating thereto, could lead to increased incidence and costs related to lease merchandise write-offs. Due to the nature and novelty of the pandemic, our decisioning process will likely require frequent adjustments and the application of greater management judgment in the interpretation and adjustment of the results produced by our decisioning tools and we may be unable to accurately predict and respond to the impact of a prolonged economic downturn or changes to consumer behaviors, which in turn may limit our ability to manage risk, avoid lease merchandise write-offs and could result in our accounts receivable allowance being insufficient.

We could lose our access to data sources, including, for example, those sources that provide us with data that we use as inputs into our centralized decisioning tools, which could cause us competitive harm and have a material adverse effect on our business, results of operations and financial condition.

We are heavily dependent on data provided by third-party providers such as customer attribute data provided by external sources, including for use as inputs in our centralized decisioning tools. Our centralized decisioning tools rely on these third-party data providers for data inputs that are a critical part of our centralized decisioning processes. Our data providers could experience outages or otherwise stop providing data, provide untimely, incorrect or incomplete data, or increase the costs for their data for a variety of reasons, including a perception that our systems are insecure as a result of a data security breach, regulatory concerns or for competitive reasons. We could also become subject to increased legislative, regulatory or judicial restrictions or mandates on the collection, disclosure or use of such data, in particular if such data is not collected by our providers in a way that allows us to legally use the data. If we were to lose access to this external data or if our access or use were restricted or were to become less economical or desirable, our business, and our centralized decisioning processes in particular, would be negatively impacted, which would adversely affect our business, results of operations and financial condition. We cannot provide assurance that we will be successful in maintaining our relationships with these external data source providers or that we will be able to continue to obtain data from them on acceptable terms or at all. Furthermore, we cannot provide assurance that we will be able to obtain data from alternative sources if our current sources become unavailable.

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 carry out our in-store and e-commerce applicant decisioning process and to process transactions with our customers, including tracking lease payments on merchandise, and other important functions of our business. Failures of our systems, such as “bugs,” crashes, internet failures and outages, operator error, or catastrophic events, could seriously impair our ability to operate our business, and our business continuity and contingency plans related to such information technology failures may not be adequate to prevent that type of serious impairment. If our information technology systems are

 

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impaired, our business (and that of our franchisees) could be interrupted, our reputation could be harmed, we may experience lost revenues or sales, including due to an interruption to our centralized lease decisioning and collection functions, and we could experience increased costs and expenses to remediate the problem. As we continue to centralize more of our operations, the risks and potential unfavorable impacts of systems failures will become more significant, and there can be no assurances that we can successfully mitigate such heightened risks.

We may engage in, or be subject to, litigation with our franchisees.

Although we believe we generally enjoy a positive working relationship with 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 documents, including claims based on financial information contained in those documents. Engaging in such litigation may be costly, time-consuming and may distract management and materially adversely affect our relationships with franchisees. Any negative outcome of these or any other claims could materially adversely affect our business, results of operations or financial condition 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.

We must successfully order and manage our inventory to reflect customer demand and anticipate changing consumer preferences and buying trends or our revenue and profitability will be adversely affected.

The success of our business depends upon our ability to successfully manage our inventory and to anticipate and respond to merchandise trends and customer demands in a timely manner. We cannot always accurately predict consumer preferences and they may change over time. We must order certain types of merchandise, such as electronics, well in advance of seasonal increases in customer demand for those products. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing product trends or changes in prices. If we misjudge either the market for our merchandise, our customers’ product preferences or our customers’ leasing habits, our revenue may decline significantly and we may not have sufficient quantities of merchandise to satisfy customer demand or we may be required to mark down excess inventory, either of which would result in lower profit margins. In addition, our level of profitability and success in our business depends on our ability to successfully re-lease or sale our inventory of merchandise that we take back from our customers or the customers return to us, due to them being unwilling or unable to continue making their lease payments, or otherwise.

We depend on hiring an adequate number of hourly employees to run our business and are subject to government laws and regulations concerning these and our other employees, including wage and hour regulations. Our inability to recruit and retain qualified employees or violations by us of employment or wage and hour laws or regulations could have an adverse impact on our business, results of operations and financial condition.

Our workforce is comprised primarily of employees who work on an hourly basis. To grow our operations and meet the needs and expectations of our customers, we must attract, train, and retain a large number of hourly associates, while at the same time controlling labor costs. These positions have historically had high turnover rates, which can lead to increased training, retention and other costs. In certain areas where we operate, there is significant competition for employees, including from retailers and restaurants. In addition, any ongoing or future supplemental unemployment benefits paid during the COVID-19 pandemic may make it more difficult for us to attract candidates for our open hourly positions, depending on the amount and duration of those benefits. The lack of availability of an adequate number of hourly employees, or our inability to attract and retain them, or an increase in wages and

 

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benefits to attract and maintain current employees could adversely affect our business, results of operations and financial condition. We are subject to applicable rules and regulations relating to our relationship with our employees, including wage and hour regulations, health benefits, unemployment and payroll taxes, overtime and working conditions and immigration status. Accordingly, federal, state or local legislated increases in the minimum wage, as well as increases in additional labor cost components such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines, would increase our labor costs, which could have a material adverse effect on our business, results of operations and financial condition.

The geographic concentration of our store locations may have an adverse impact on our financial performance due to economic downturns and serious weather events in regions where we have a high concentration of our stores.

The concentration of our stores in one region or a limited number of markets may expose us to risks of adverse economic developments that are greater than if our store portfolio were more geographically diverse.

In addition, our store operators are subject to the effects of adverse acts of nature, such as winter storms, hurricanes, hail storms, strong winds, earthquakes and tornadoes, which have in the past caused damage such as flooding and other damage to our stores in specific geographic locations, including in Florida and Texas, two of our large markets, and may, depending upon the location and severity of such events, unfavorably impact our business continuity.

The loss of the services of our key executives, or our inability to attract and retain key talent 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. Further, we believe that the unexpected loss of certain key talent in the future could adversely affect our business and operations. We do not carry key man life insurance on any of our personnel. The inability to attract and retain qualified individuals, or a significant increase in the costs to do so, would materially adversely affect our operations.

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, or experience significant business or financial difficulties, which could slow our growth, reduce our franchise revenues, damage our reputation, expose us to regulatory enforcement actions or private litigation and/or cause us to incur additional costs. If our franchisees experience business or financial difficulties, including, for example, in connection with the COVID-19 pandemic, we could suffer a loss of franchisee fees, royalties, and revenue and profits derived from our sales of merchandise to franchisees, and could suffer write-downs of outstanding receivables those franchisees owe us if they fail to make those payments to us. If we fail to adequately mitigate any such future losses, our business, results of operations and financial condition could be materially adversely impacted.

We are subject to laws that regulate franchisor-franchisee relationships. Our ability to enforce our rights against our 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 FTC, state laws and certain Canadian provincial laws regulating the offer and sale of franchises. 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 or enforce contractual duties or rights we believe we have with respect to our franchisees.

 

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Changes to 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, 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 have a material adverse effect on our business, results of operations or financial condition.

We are subject to sales, income and other taxes, which can vary from state-to-state and be difficult and complex to calculate due to the nature of our business. A failure to correctly calculate and pay such taxes could result in substantial tax liabilities and a material adverse effect on our results of operations.

The application of indirect taxes, such as sales tax, is a complex and evolving issue, particularly with respect to the Aarons.com business. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the e-commerce or virtual lease-to-own industry and, therefore, in many cases it is not clear how existing statutes apply to us. In addition, governments are increasingly looking for ways to increase revenues, which has resulted in discussions about tax reform and other legislative action to increase tax revenues, including through indirect taxes. This also could result in other adverse changes in or interpretations of existing sales, income and other tax regulations. For example, from time to time, some taxing authorities in the United States have notified us that they believe we owe them certain taxes imposed on transactions with our customers. Although these notifications have not resulted in material tax liabilities to date, there is a risk that one or more jurisdictions may be successful in the future, which could have a material adverse effect on our results of operations.

Employee misconduct could harm us by subjecting us to monetary loss, significant legal liability, regulatory scrutiny and reputational harm.

Our reputation is critical to maintaining and developing relationships with our existing and potential customers and third parties with whom we do business. There is a risk that our employees could engage in misconduct that adversely affects our reputation and business. For example, if one of our employees engages in discrimination or harassment in the workplace, or if an employee were to engage in, or be accused of engaging in, illegal or suspicious activities including fraud or theft of our customers’ information, we could suffer direct losses from the activity and, in addition, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial condition, customer relationships and ability to attract future customers. Employee misconduct could prompt regulators to allege or to determine based upon such misconduct that we have not established adequate supervisory systems and procedures to inform employees of applicable rules or to detect violations of such rules. The precautions that we take to detect and prevent misconduct may not be effective in all cases. Misconduct by our employees who are directly or indirectly associated with our business, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our reputation and our business.

 

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Product safety and quality control issues, including product recalls, could harm our reputation, divert resources, reduce sales and increase costs.

The products we lease through our business are subject to regulation by the U.S. Consumer Product Safety Commission and similar state regulatory authorities. Such products could be subject to recalls and other actions by these authorities. Such recalls and voluntary removal of products can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service costs, which could have a material adverse effect on our business, results of operations or financial condition. In addition, given the terms of our lease agreements with our customers, in the event of such a product quality or safety issue, our customers who have leased the defective merchandise from us could terminate their lease agreements for that merchandise and/or not renew those lease arrangements, which could have a material adverse effect on our business, results of operations or financial condition, if we are unable to recover those losses from the vendor who supplied the defective merchandise.

Risks Related to the Separation and Distribution

We have not operated as an independent company since before the 2014 acquisition of the Progressive Leasing business segment by our parent entities, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

The historical information about Aaron’s SpinCo in this information statement refers to Aaron’s SpinCo’s business as operated by and integrated with Parent. Our historical and pro forma financial information included in this information statement is derived from the consolidated financial statements and accounting records of Parent. Accordingly, the historical and pro forma financial information included in this information statement does not necessarily reflect the financial condition or results of operations that we would have achieved as a separate, publicly traded company during the periods presented or those that we will achieve in the future primarily as a result of the factors described below:

 

   

Until the distribution, our business will be operated by Parent as part of its broader corporate organization, rather than as an independent company. Parent or one of its affiliates performed various corporate functions for us, such as legal, treasury, accounting, auditing, human resources, investor relations, public affairs and finance. Our historical and pro forma financial results reflect allocations of corporate expenses from Parent for such functions, which may be less than the expenses we would have incurred had we operated as a separate publicly traded company.

 

   

Currently, our business is integrated with the other businesses of Parent. We have shared economies of scope and scale in costs, employees, and certain vendor relationships. Although we expect to enter into a transition services agreement with Parent, these arrangements will be limited in duration and may not fully capture the benefits that we have enjoyed as a result of being integrated with Parent and may result in us paying higher charges than in the past for these services. This could have a material adverse effect on our business, results of operations, financial condition and the completion of the distribution.

 

   

Generally, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, have in the past been satisfied as part of the corporate-wide cash management policies of Parent. Following the completion of the separation, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements, which may or may not be available and may be more costly.

 

   

After the completion of the separation, the cost of capital for our business may be higher than Parent’s cost of capital prior to the separation.

 

   

Our historical financial information does not reflect the debt that we expect to have on our balance sheet after completion of the separation and distribution

 

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Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate from Parent. For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial statements and the unaudited pro forma condensed combined financial statements, see “Selected Historical Combined Financial Data of Aaron’s SpinCo, Inc.,” “Unaudited Pro Forma Condensed Combined Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included elsewhere in this information statement.

We may not achieve some or all of the expected benefits of the separation, and the separation may materially and adversely affect our business, results of operations and financial condition.

We may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. The separation is expected to provide the benefits described in “The Separation and Distribution—Reasons for the Separation.” If we fail to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, it could have a material adverse effect on our business, results of operations and financial condition.

We may not achieve these and other anticipated benefits for a variety of reasons, including, among others: (a) the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business; (b) following the separation and distribution, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of Parent; (c) following the separation and distribution, as a standalone company, our business will be less diversified than Parent’s business prior to the separation and distribution; and (d) the other actions required to separate the Progressive Leasing and Vive business segments and the Aaron’s Business could disrupt our operations.

In addition, our Progressive Leasing business developed and has historically maintained the centralized lease decisioning tool used in the Progressive Leasing business, in our Aarons.com e-commerce offering and in our company-operated stores. After the separation, we expect that this centralized lease decisioning tool will continue to be a key element of our operating model. As a standalone company, we may not be successful in maintaining, operating and revising the systems and procedures necessary to operate and utilize this centralized lease decisioning tool, and this decisioning tool may not be as predictive of our customers’ or applicants’ ability to satisfy their payment obligations to us once it is maintained, operated and revised by us as a separate, standalone company.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could materially and adversely affect us.

As a public company, we will become subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), the Sarbanes-Oxley Act and the Dodd-Frank Act and will be required to prepare our financial statements according to the rules and regulations required by the SEC. In addition, the Exchange Act requires that we file annual, quarterly and current reports. Our failure to prepare and disclose this information in a timely manner or to otherwise comply with applicable law could subject us to penalties under federal securities laws, expose us to lawsuits and restrict our ability to access financing. In addition, the Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting and disclosure purposes. Internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. We cannot assure you that our internal control over financial reporting will be effective in the future or that a material weakness will not be discovered with respect to a prior period for which we had previously believed that internal controls were effective. If we are not able to maintain or document effective internal control over financial reporting, our independent registered public accounting firm will not be able to certify as to the effectiveness of our internal control over financial reporting. While we have been adhering to these laws and

 

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regulations as a subsidiary of Parent, after the distribution we will need to demonstrate our ability to manage our compliance with these corporate governance laws and regulations as an independent, public company.

Matters affecting our internal controls may cause us to be unable to report our financial information on a timely basis, or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, violations of applicable stock exchange listing rules, and litigation brought by our shareholders and others. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements could also suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could have a material and adverse effect on us by, for example, leading to a decline in our share price and impairing our ability to raise additional capital, and also could result in litigation brought by our shareholders and others.

No vote of Parent shareholders is required in connection with the separation and distribution.

No vote of Parent shareholders is required in connection with the separation and distribution. Accordingly, if this transaction occurs and you do not want to receive Aaron’s SpinCo common stock in the distribution, your only recourse will be to divest yourself of your Parent common stock prior to the record date for the distribution or to sell your Parent common stock in the “regular way” market in between the record date and the distribution date. There can be no assurance that the price at which you would sell your Parent common stock in any such situation would be an attractive price or that you would recover your investment in the stock or what you paid for the stock.

The combined post-separation value of a share of Parent common stock and [] share[s] of Aaron’s SpinCo common stock may not equal or exceed the pre-distribution value of a share of Parent common stock.

As a result of the distribution, Parent expects the trading price of shares of Parent common stock immediately following the distribution to be lower than the “regular-way” trading price of such shares immediately prior to the distribution because the trading price will no longer reflect the value of the Aaron’s Business held by Aaron’s SpinCo. There can be no assurance that the aggregate market value of a share of Parent common stock and a share of Aaron’s SpinCo common stock following the separation will be higher than the market value of a share of Parent common stock if the separation did not occur.

In connection with our separation from Parent, Parent will indemnify us for certain liabilities, and we will indemnify Parent for certain liabilities. If we are required to make payments to Parent under these indemnities, our financial results could be negatively impacted. The Parent indemnity may not be sufficient to hold us harmless from the full amount of liabilities for which Parent will be allocated responsibility, and Parent may not be able to satisfy its indemnification obligations in the future.

Pursuant to the separation agreement and certain other agreements with Parent, Parent will agree to indemnify us for certain liabilities, and we will agree to indemnify Parent for certain liabilities, in each case for uncapped amounts, as discussed further in “Certain Relationships and Related Party Transactions.” Third parties could also seek to hold us responsible for any of the liabilities that Parent has agreed to retain. Any amounts we are required to pay pursuant to these indemnification obligations and other liabilities could require us to divert cash that would otherwise have been used in furtherance of operating our business and implementing our strategic plan. Further, the indemnity from Parent may not be sufficient to protect us against the full amount of such liabilities, and Parent may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Parent any amounts for which we are held liable, we may be temporarily required to bear those losses ourselves. Each of these risks could negatively affect our business, results of operations and financial condition.

 

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If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax free for U.S. federal income tax purposes, Parent, Aaron’s SpinCo and Parent shareholders could be subject to significant tax liabilities and, in certain circumstances, Aaron’s SpinCo could be required to indemnify Parent for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.

It is a condition to the distribution that Parent receives an opinion of counsel, satisfactory to the Parent Board of Directors, regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. The opinion of counsel will be based upon and rely on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of Parent and Aaron’s SpinCo, including those relating to the past and future conduct of Parent and Aaron’s SpinCo. If any of these representations, statements or undertakings are, or become, inaccurate or incomplete, or if Parent or Aaron’s SpinCo breaches any of its covenants in the separation documents, the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized.

Notwithstanding the opinion of counsel, the Internal Revenue Service (“IRS”) could determine that the distribution, together with certain related transactions, should be treated as a taxable transaction if it determines that any of the representations, assumptions or undertakings upon which the opinion of counsel was based are false or have been violated, or if it disagrees with the conclusions in the opinion of counsel. The opinion of counsel is not binding on the IRS and there can be no assurance that the IRS will not assert a contrary position.

If the distribution, together with certain related transactions, fails to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code, in general, Parent would recognize taxable gain as if it had sold the Aaron’s SpinCo common stock in a taxable sale for its fair market value and Parent shareholders who receive Aaron’s SpinCo shares in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares. For more information, see “Material U.S. Federal Income Tax Consequences.”

Under the tax matters agreement that Parent will enter into with Aaron’s SpinCo, Aaron’s SpinCo may be required to indemnify Parent against any additional taxes and related amounts resulting from (a) an acquisition of all or a portion of the equity securities or assets of Aaron’s SpinCo, whether by merger or otherwise (and regardless of whether Aaron’s SpinCo participated in or otherwise facilitated the acquisition), (b) other actions or failures to act by Aaron’s SpinCo or (c) any of Aaron’s SpinCo’s representations or undertakings in connection with the separation and the distribution being incorrect or violated. Any such indemnity obligations, including the obligation to indemnify Parent for taxes resulting from the distribution and certain related transactions not qualifying as tax-free, could be material. For a more detailed discussion, see “Certain Relationships and Related Party Transactions—Tax Matters Agreement.”

U.S. federal income tax consequences may restrict our ability to engage in certain desirable strategic or capital-raising transactions after the separation.

Under current law, a separation can be rendered taxable to the parent corporation and its shareholders as a result of certain post-separation acquisitions of shares or assets of the spun-off corporation. For example, a separation may result in taxable gain to the parent corporation under Section 355(e) of the Code if the separation were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, shares representing a 50 percent or greater interest (by vote or value) in the spun-off corporation. To preserve the U.S. federal income tax treatment of the separation and distribution, and in addition to our indemnity obligation described above, the tax matters agreement will restrict us, for the two-year period following the distribution, except in specific circumstances, from:

 

   

entering into any transaction pursuant to which all or a portion of Aaron’s SpinCo common stock or assets would be acquired, whether by merger or otherwise;

 

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issuing equity securities in a transaction (or series of related transactions) that could result in a 50% or greater acquisition of our stock (as determined under applicable tax rules);

 

   

repurchasing shares of our capital stock other than in certain open-market transactions;

 

   

ceasing to actively conduct certain aspects of our business; and/or

 

   

taking or failing to take any other action that would jeopardize the expected U.S. federal income tax treatment of the distribution and certain related transactions.

These restrictions may limit our ability to pursue certain strategic transactions or other transactions that we may believe to be in the best interests of our shareholders or that might increase the value of our business.

After the distribution, certain members of management, directors and shareholders will hold stock in both Parent and Aaron’s SpinCo, and as a result may face actual or potential conflicts of interest.

After the distribution, the management and directors of each of Parent and Aaron’s SpinCo may own both Parent common stock and Aaron’s SpinCo common stock. This ownership overlap could create, or appear to create, potential conflicts of interest when our management and directors and Parent management and directors face decisions that could have different implications for us and Parent. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between Parent and us regarding the terms of the agreements governing the distribution and our relationship with Parent thereafter. We expect these agreements to include a separation agreement, tax matters agreement, employee matters agreement, transition services agreement, and any other commercial agreements between the parties or their affiliates. Potential conflicts of interest may also arise out of any commercial arrangements that we or Parent may enter into in the future.

As an independent, publicly traded company, we may not enjoy the same benefits that were available to us as a segment of Parent. It may be more costly for us to separately obtain or perform the various corporate functions that Parent performed for us prior to the separation, such as legal, treasury, accounting, auditing, human resources, investor relations, public affairs, finance and cash management services.

Historically, our business has been operated as one of Parent’s business segments, and Parent performed certain of the corporate functions for our operations. Following the distribution, Parent will provide support to us with respect to certain of these functions on a transitional basis. We will need to replicate certain systems, infrastructure and personnel to which we will no longer have access after the distribution and will likely incur capital and other costs associated with developing and implementing our own support functions in these areas. Such costs could be material.

As an independent, publicly traded company, we may become more susceptible to market fluctuations and other adverse events than we would have been were we still a part of Parent. As part of Parent, we have been able to enjoy certain benefits from Parent’s operating diversity and available capital for investments and other uses. As an independent, publicly traded company, we will not have similar operating diversity and may not have similar access to capital markets, which could have a material adverse effect on our business, results of operations and financial condition.

We or Parent may fail to perform certain transitional services under various transaction agreements that will be executed as part of the separation or we may fail to have necessary systems and services in place when certain of the transaction agreements covering those services expire.

In connection with the separation and prior to the distribution, we and Parent will enter into a separation agreement and will also enter into various other agreements, including a transition services agreement, a tax matters agreement and an employee matters agreement. The separation agreement, the tax matters agreement and the employee matters agreement will determine the allocation of assets and liabilities between the companies

 

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following the separation for those respective areas and will include any necessary indemnifications related to liabilities and obligations. The transition services agreement will provide for the performance of certain services by Parent for the benefit of us for a limited period of time after the separation. We will rely on Parent to satisfy its obligations under these agreements. If Parent is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties or losses. Upon expiration of the transition services agreement, each of the services that are covered in such agreement will have to be provided internally or by third parties, and providing them internally or having third parties perform them may be at a higher cost to us than when they were provided to us by Parent, or we may not be able to perform or obtain the performance of such services at all. If we do not have agreements with other providers of these services once certain transaction agreements expire or terminate, we may not be able to operate our business effectively, which may have a material adverse effect on our business, results of operations and financial condition.

Until the separation occurs, Parent has sole discretion to change the terms of the separation and distribution in ways which may be unfavorable to us.

Until the separation and distribution occurs, we will continue to be a subsidiary of Parent. Accordingly, Parent will have the sole and absolute discretion to determine and change the terms of the separation and distribution, including the establishment of the record date for the distribution and the distribution date. These changes could be unfavorable to us. In addition, Parent may decide at any time not to proceed with the separation and distribution.

Transfer or assignment to us of certain contracts and other assets may require the consent of third parties. If such consents are not given, we may not be entitled to the benefit of such contracts, and other assets in the future.

Transfer or assignment of certain of the contracts and other assets in connection with our separation from Parent require the consent of third parties to the transfer or assignment. In addition, in some circumstances, we are joint beneficiaries of contracts, and we will need to enter into a new agreement with the third party to replicate the existing contract or assign to us the portion of the existing contract related to our business. Some parties may use the consent requirement to seek assignment fees or more favorable contractual terms from us, which we expect would primarily take the form of price increases, which may require us to expend additional resources in order to obtain the services or assets previously provided under the contract, or to seek arrangements with new third parties. If we are unable to obtain such consents on commercially reasonable and satisfactory terms, we may be unable to obtain some of the benefits, assets and contractual commitments that are intended to be allocated to us as part of our separation from Parent, and we may be required to seek alternative arrangements to obtain the distribution, wholesale, retail, legal, accounting, auditing, administrative and other services and assets that we would otherwise have had under such agreements. In addition, where we do not intend to obtain consent from third-party counterparties based on our belief that no consent is required, the third-party counterparties may challenge an assignment of contracts or a transfer of assets to us on the basis that the terms of the applicable commercial arrangements require their consent. We may incur substantial litigation and other costs in connection with any such claims and, if we do not prevail, our ability to use these assets could be adversely impacted.

The distribution may not be completed on the terms or timeline currently contemplated, if at all.

While we are actively engaged in planning for the distribution, unanticipated developments could delay or negatively affect the distribution, including those related to the filing and effectiveness of appropriate filings with the SEC, the listing of our common stock on a trading market and receiving any required regulatory approvals. In addition, until the distribution has occurred, the Parent Board of Directors has the right not to proceed with the distribution, even if all of the conditions are satisfied. Therefore, the distribution may not be completed on the terms or timeline currently contemplated, if at all.

 

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Risks Related to Ownership of Our Common Stock

We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation and, following the separation, our stock price may fluctuate significantly.

A public market for our common stock does not currently exist. We anticipate that on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue through the distribution date. However, we cannot guarantee that an active trading market will develop or be sustained for our common stock after the separation. Nor can we predict the price of our common stock after the separation. Similarly, we cannot predict the effect of the separation on the trading prices of our common stock or whether the combined market value of [●] share[s] of our common stock and one share of Parent common stock will be less than, equal to or greater than the market value of a share of Parent common stock prior to the distribution.

Until the market has fully evaluated Parent’s remaining businesses without us, the price of Parent common stock may fluctuate more significantly than might otherwise be typical, even with other market conditions, including general volatility, held constant. Similarly, until the market has fully evaluated our business as a standalone entity, the price of our common stock may fluctuate more significantly than might otherwise be typical, even with other market conditions, including general volatility, held constant. The increased volatility of our stock price following the distribution may have a material adverse effect on our business, results of operations and financial condition.

The market price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:

 

   

actual or anticipated fluctuations in our operating results;

 

   

the operating and stock price performance of comparable companies;

 

   

changes in our shareholder base due to the separation;

 

   

changes to the regulatory and legal environment under which we operate;

 

   

unfavorable impacts on our business and operations arising from the COVID-19 pandemic and governmental or self-imposed responses thereto, including limitations or restrictions on our operations; and

 

   

domestic and worldwide economic conditions, including unfavorable conditions arising from the COVID-19 pandemic.

A significant number of shares of our common stock may be sold following the distribution, which may cause our stock price to decline.

Any sales of substantial amounts of our common stock in the public market or the perception that such sales might occur, in connection with the distribution or otherwise, may cause the market price of our common stock to decline. Upon completion of the distribution, we expect that we will have an aggregate of approximately [●] shares of our common stock issued and outstanding. These shares will be freely tradeable without restriction or further registration under the U.S. Securities Act of 1933, as amended (the “Securities Act”), unless the shares are owned by one of our “affiliates,” as that term is defined in Rule 405 under the Securities Act. We are unable to predict whether large amounts of our common stock will be sold in the open market following the distribution. We are also unable to predict whether a sufficient number of buyers of our common stock to meet the demand to sell shares of our common stock at attractive prices would exist at that time.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for Aaron’s SpinCo common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain

 

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research coverage for Aaron’s SpinCo common stock. If there is no research coverage of Aaron’s SpinCo common stock, the trading price for shares of Aaron’s SpinCo common stock may be negatively impacted. If we obtain research coverage for Aaron’s SpinCo common stock and if one or more of the analysts downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of the analysts ceases coverage of Aaron’s SpinCo common stock or fails to publish reports on us regularly, demand for Aaron’s SpinCo common stock could decrease, which could cause Aaron’s SpinCo’s common stock price or trading volume to decline.

Your percentage of ownership in Aaron’s SpinCo may be diluted in the future.

In the future, your percentage ownership in Aaron’s SpinCo may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we will be granting to our directors, officers and employees. Our employees will have stock-based awards that correspond to shares of our common stock after the distribution as a result of conversion of their Parent stock-based awards. We anticipate that our compensation committee will grant additional stock-based awards to our employees after the distribution. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock. From time to time, we may issue additional stock-based awards to our employees under our employee benefits plans.

In addition, our amended and restated articles of incorporation will authorize us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as our Board of Directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of our common stock. See “Description of Our Capital Stock.”

We cannot guarantee the timing, amount or payment of dividends on our common stock.

Although we expect to initially pay a regular quarterly cash dividend following the separation, the timing, declaration, amount and payment of future dividends to shareholders will fall within the discretion of our Board of Directors. Parent has historically had sufficient liquidity that enabled it to pay dividends for 32 consecutive years; however, there can be no assurance that, as a stand-alone company, Aaron’s SpinCo will have sufficient liquidity to continue to pay cash dividends. Our Board of Directors’ decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, opportunities to retain future earnings for use in the operation of our business and to fund future growth, capital requirements, debt service obligations, corporate strategy, regulatory constraints, industry practice, statutory and contractual restrictions applying to the payment of dividends and other factors deemed relevant by our Board of Directors. For more information, see “Dividend Policy.” Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividend if we commence paying dividends.

Our amended and restated bylaws designate the Georgia State-Wide Business Court in the State of Georgia as the exclusive forum for certain litigation, which may limit our shareholders’ ability to choose a judicial forum for disputes with us.

Pursuant to our amended and restated bylaws, as will be in effect upon the completion of the Separation, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for any shareholder (including a beneficial owner) to bring (a) any derivative action or proceeding brought on behalf of Aaron’s SpinCo, (b) any action asserting a claim of breach of a fiduciary or legal duty owed by any current or former director, officer, employee, shareholder, or agent of Aaron’s Spinco to Aaron’s SpinCo or the Aaron’s SpinCo shareholders, including a claim alleging the aiding and abetting of any such breach of fiduciary duty, (c) any action asserting a claim against Aaron’s SpinCo, its current or former

 

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directors, officers, employees, shareholders, or agents arising pursuant to any provision of the Georgia Business Code or our articles of incorporation or bylaws (as either may be amended from time to time), (d) any action asserting a claim against us, our current or former directors, officers, employees, shareholders, or agents governed by the internal affairs doctrine, or (e) any action against us, our current or former directors, officers, employees, shareholders, or agents asserting a claim identified in O.C.G.A. § 15-5A-3 shall be the Georgia State-Wide Business Court. Our amended and restated bylaws also provide that, to the fullest extent permitted by law, if any action the subject matter of which is within the scope of the foregoing exclusive forum provisions is filed in a court other than the Georgia State-Wide Business Court, such shareholder shall be deemed to have consented to (i) the personal jurisdiction of the Georgia State-Wide Business Court in connection with any action brought in any such foreign court to enforce these exclusive forum provisions and (ii) having service of process made upon such shareholder in any such action by service upon such shareholder’s counsel in the foreign action as agent for such shareholder. Our amended and restated bylaws also provide that the foregoing exclusive forum provisions do not apply to any action asserting claims under the Exchange Act or the Securities Act. These exclusive forum provisions will require our shareholders to bring certain types of actions or proceedings in the Georgia State-Wide Business Court in the State of Georgia and therefore may prevent our shareholders from bringing such actions or proceedings in another court that a shareholder may view as more convenient, cost-effective, or advantageous to the shareholder or the claims made in such action or proceeding, and may discourage the actions or proceedings covered by these exclusive forum provisions. See “Description of Capital Stock—Exclusive Forum.”

Certain provisions in our articles of incorporation and bylaws, and of Georgia law, may deter or delay an acquisition of us.

Our articles of incorporation and bylaws, and Georgia law, contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids more expensive to the acquiror and to encourage prospective acquirors to negotiate with our Board of Directors rather than to attempt a hostile takeover. These provisions include rules regarding how shareholders may present proposals or nominate directors for election at shareholder meetings and the right of our Board of Directors to issue preferred stock without shareholder approval. Georgia law also imposes some restrictions on mergers and other business combinations between any holder of 10 percent or more of our outstanding common stock and us. For more information, see “Description of Our Capital Stock—Anti-Takeover Effects of our Articles of Incorporation and Bylaws and Georgia Law.”

We believe that these provisions will help to protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some shareholders and could deter or delay an acquisition that our Board of Directors determines is not in our best interests or the best interests of our shareholders. Accordingly, in the event that our Board of Directors determines that a potential business combination transaction is not in the best interests of us and our shareholders but certain shareholders believe that such a transaction would be beneficial to us and our shareholders, such shareholders may elect to sell their shares in us and the trading price of Aaron’s SpinCo common stock could decrease.

In addition, an acquisition or further issuance of our stock could trigger the application of Section 355(e) of the Code. For a discussion of Section 355(e), see “Material U.S. Federal Income Tax Consequences.” Under the tax matters agreement, Aaron’s SpinCo would be required to indemnify Parent for the resulting tax, and this indemnity obligation might discourage, delay or prevent a change of control that you may consider favorable.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This information statement and other materials we and Parent have filed or will file with the SEC contain, or will contain, certain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. The words “believe,” “expect,” “expectation,” “anticipate,” “may,” “could,” “should”, “intend,” “belief,” “estimate,” “plan,” “target,” “project,” “likely,” “will,” “forecast,” “outlook,” or other similar words or phrases, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. In particular, information included under “Risk Factors,” “The Separation and Distribution,” “Capitalization,” “Unaudited Pro Forma Condensed Combined Financial Statements,” “Business” and “Managements Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Whether any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control. Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring after the date of this information statement. Factors, risks, trends and uncertainties that could cause actual results or events to differ materially from those anticipated include the matters described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in addition to the following other factors, risks, trends and uncertainties:

 

   

the effect on our business from the COVID-19 pandemic and related measures taken by governmental or regulatory authorities to combat the pandemic, including the impact of the pandemic and such measures on: (a) demand for the lease-to-own products offered by Aaron’s SpinCo, (b) increases in lease merchandise write-offs and the provision for returns and uncollectible renewal payments, (c) our suppliers’ ability to provide us with the merchandise we need to obtain from them, (d) our associates, (e) our labor needs, including our ability to adequately staff our operations, (f) our revenue and overall financial performance and (g) the manner in which we are able to conduct our operations;

 

   

changes in the enforcement of existing laws and regulations and the adoption of new laws and regulations that may unfavorably impact our business;

 

   

our strategic plan, including the Aaron’s Business real estate repositioning and consolidation components of that plan, failing to deliver the benefits and outcomes we expect, with respect to improving our Aaron’s Business in particular;

 

   

increased competition from traditional and virtual lease-to-own competitors, as well as from traditional and on-line retailers and other competitors;

 

   

financial challenges faced by our franchisees, which we believe may be exacerbated by the COVID-19 pandemic and related governmental or regulatory measures to combat the pandemic;

 

   

weakening general market and economic conditions, especially as they may affect retail sales, unemployment and consumer confidence or spending levels;

 

   

uncertainties as to the timing of the separation and whether it will be completed;

 

   

the risk that the Aaron’s Business and Progressive Leasing business segments will not be separated successfully, or such separation may be more difficult, time-consuming and/or costly than expected;

 

   

the possibility that various closing conditions for the separation may not be satisfied;

 

   

the possibility that the operational, strategic and shareholder value creation opportunities from the separation can be achieved;

 

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the failure of the separation to qualify for the expected tax treatment;

 

   

cybersecurity breaches, disruptions or failures in our information technology systems and our failure to protect the security of personal information about our customers;

 

   

our ability to attract and retain key personnel;

 

   

compliance with, or violation of, laws and regulations, including consumer protection laws;

 

   

our ability to maintain and improve market share in the categories in which we operate despite heightened competitive pressure;

 

   

our ability to improve operations and realize cost savings;

 

   

our ability to access capital markets or raise capital, if needed;

 

   

our ability to protect our intellectual property and other material proprietary rights;

 

   

changes in our services or products;

 

   

our ability to acquire and integrate businesses, and to realize the projected results of acquisitions;

 

   

negative reputational and financial impacts resulting from future acquisitions or strategic transactions;

 

   

restrictions contained in our debt agreements; and

 

   

other factors described in this information statement and from time to time in documents that we file with the SEC.

You should read this information statement completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this information statement are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this information statement, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.

Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.

 

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THE SEPARATION AND DISTRIBUTION

Overview

On July 29, 2020, Parent announced its intention to separate its Aaron’s Business. The separation will occur by means of a pro rata distribution to Parent shareholders of 100% of the shares of common stock of Aaron’s SpinCo, which was formed to hold the Aaron’s Business. In connection with such distribution, we expect that Parent will change its name to “[●]” and Aaron’s SpinCo will change its name to “[●]”.

On [●], 2020, the Parent Board of Directors approved the distribution of all of Aaron’s SpinCo’s issued and outstanding shares of common stock on the basis of [●] share[s] of Aaron’s SpinCo common stock for every share of Parent common stock held as of the close of business on [●], 2020, the record date for the distribution, subject to the satisfaction or waiver of the conditions to the distribution as described in this information statement.

At [●], Eastern Time on [●], 2020, the distribution date, each Parent shareholder will receive [●] share[s] of Aaron’s SpinCo common stock for every share of Parent common stock held at the close of business on the record date for the distribution, as described below. Parent shareholders will receive cash in lieu of any fractional shares of Aaron’s SpinCo common stock that they would have received after application of this ratio. Parent shareholders will not be required to make any payment, surrender or exchange their shares of Parent common stock or take any other action to receive their shares of Aaron’s SpinCo common stock in the distribution. The distribution of Aaron’s SpinCo common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. For a more detailed description of these conditions, see “—Conditions to the Distribution.”

Reasons for the Separation

The Parent Board of Directors believes, after consultation with management of Parent and Parent’s third-party legal, financial and other advisors, that separating the Aaron’s Business from the remaining businesses of Parent is in the best interests of Parent and its shareholders for a number of reasons, including:

 

   

Improved Strategic Focus. The separation will allow Aaron’s SpinCo to more effectively pursue and implement its operating initiatives and will enhance management and the Board’s focus and oversight regarding the Company’s strategic priorities. Those priorities include promoting the Company’s value proposition to attract new customers to our brand, enhancing our customers’ experience through technology, better aligning the Company’s store footprint with its market opportunity, and maintaining a well-capitalized balance sheet and financial profile.

 

   

Distinct Investment Identity. The separation will give investors greater visibility into the individual operational and financial characteristics of Aaron’s SpinCo and allow market participants to value, invest in, and gain direct exposure to the financial profile that they desire. As a result, we believe that we have the potential to attract new shareholders as well as increased investment from existing Parent shareholders.

 

   

More Efficient Capital Allocation. Through the separation, Aaron’s SpinCo will be able to more efficiently allocate capital according to its strategic priorities, including technology to enhance the omni-channel customer experience and real estate to optimize our market footprint.

 

   

Well Capitalized Balance Sheet. At the effective time of the distribution, we expect that we will have cash of $[●] million, with additional liquidity through a $200 million senior unsecured revolving credit facility of which no amounts will be drawn upon. Aaron’s SpinCo expects to utilize this flexible capital structure and independent and low-leverage balance sheet to execute its strategies and deliver sustainable, long-term growth.

 

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The Parent Board of Directors also considered a number of potentially negative factors in evaluating the separation, including the increased administrative costs, potential business disruptions resulting from the time and effort required of management to separate the businesses, increased costs resulting from operating as an independent, publicly traded company, one-time costs related to the separation, risk of increased competition from virtual LTO companies, risks relating to a failure to achieve the anticipated benefits of the separation and potential volatility in our stock price immediately following the separation. In determining to pursue the separation, the Parent Board of Directors concluded that the potential benefits of the separation significantly outweighed these costs and risks and determined that the separation provided the best opportunity to enhance shareholder value. For additional information, see the section entitled “Risk Factors” included elsewhere in this information statement.

Formation of Aaron’s SpinCo and Internal Reorganization

Aaron’s SpinCo was formed in Georgia on August 10, 2020 for the purpose of holding the Aaron’s Business. As part of the plan to separate the Aaron’s Business from the remainder of its businesses, and in connection with the internal reorganization, Parent plans to transfer the equity interests of certain entities that operate the Aaron’s Business and the assets and liabilities of the Aaron’s Business to us prior to the distribution.

Following the completion of the internal reorganization and immediately prior to the distribution, Aaron’s SpinCo will be the parent company of the entities that operate the Aaron’s Business, including our Woodhaven subsidiary, which manufactures a significant portion of the bedding and upholstered furniture that we lease and sell through our company-operated and franchised stores and our Aarons.com e-commerce platform. Parent (through subsidiaries other than Aaron’s SpinCo and its subsidiaries) will remain the parent company of the entities that operate the Progressive Leasing and Vive business segments.

The diagram below shows the simplified current structure of Parent:

 

LOGO

This diagram has been simplified for illustrative purposes and does not set forth all affiliated entities, including intermediate subsidiaries.

 

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The diagram below shows what we expect will be the simplified structure of each of Aaron’s SpinCo and Parent after completion of the internal reorganization, the separation and the distribution, and the expected name changes of Aaron’s SpinCo to “[●]” and Parent to “[●].”

 

LOGO

This diagram has been simplified for illustrative purposes and does not set forth all affiliated entities, including intermediate subsidiaries.

When and How You Will Receive the Distribution

With the assistance of Computershare, the distribution agent for the distribution, Parent expects to distribute Aaron’s SpinCo common stock at [●], Eastern Time on [●], 2020, the distribution date, to all holders of outstanding Parent common stock as of the close of business on [●], 2020, the record date for the distribution. Computershare, which currently serves as the transfer agent and registrar for Parent common stock, will serve as the settlement and distribution agent in connection with the distribution and the transfer agent and registrar for Aaron’s SpinCo common stock.

If you own Parent common stock as of the close of business on the record date for the distribution, the shares of Aaron’s SpinCo common stock that you are entitled to receive in the distribution will be issued electronically, as of the distribution date, to you in direct registration form or to your bank or brokerage firm on your behalf. If you are a registered holder, Computershare will then mail you a direct registration account statement that reflects your shares of Aaron’s SpinCo common stock. If you hold your Parent shares through a bank or brokerage firm, your bank or brokerage firm will credit your account for the Aaron’s SpinCo shares. Direct registration form refers to a method of recording share ownership when no physical share certificates are issued to shareholders, as is the case in this distribution. If you sell Parent common stock in the “regular-way” market up to and including the distribution date, you will be selling your right to receive shares of Aaron’s SpinCo common stock in the distribution.

Commencing on or shortly after the distribution date, if you hold physical share certificates that represent your Parent common stock and you are the registered holder of the shares represented by those certificates, the distribution agent will mail to you an account statement that indicates the number of shares of Aaron’s SpinCo common stock that have been registered in book-entry form in your name.

Most Parent shareholders hold their common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm is said to hold the shares in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your Parent common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the Aaron’s SpinCo common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares held in “street name,” please contact your bank or brokerage firm.

 

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Transferability of Shares You Receive

Shares of Aaron’s SpinCo common stock distributed to holders in connection with the distribution will be transferable without registration under the Securities Act, except for shares received by persons who may be deemed to be our affiliates. Persons who may be deemed to be our affiliates after the distribution generally include individuals or entities that control, are controlled by or are under common control with us, which may include certain of our executive officers, directors or principal shareholders. Securities held by our affiliates will be subject to resale restrictions under the Securities Act. Our affiliates will be permitted to sell shares of Aaron’s SpinCo common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.

Number of Shares of Aaron’s SpinCo Common Stock You Will Receive

For every share of Parent common stock that you own at the close of business on [●], 2020, the record date for the distribution, you will receive [●] share[s] of Aaron’s SpinCo common stock on the distribution date. Parent will not distribute any fractional shares of Aaron’s SpinCo common stock to its shareholders. Instead, if you are a registered holder, Computershare, the distribution agent, will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds (net of discounts and commissions) of the sales pro rata (based on the fractional share such holder would otherwise be entitled to receive) to each holder who otherwise would have been entitled to receive a fractional share in the distribution. The distribution agent, in its sole discretion, without any influence by Parent or Aaron’s SpinCo, will determine when, how, and through which broker-dealer and at what price to sell the whole shares. Any broker-dealer used by the distribution agent will not be an affiliate of either Parent or Aaron’s SpinCo and the distribution agent is not an affiliate of either Parent or Aaron’s SpinCo. Neither Aaron’s SpinCo nor Parent will be able to guarantee any minimum sale price in connection with the sale of these shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

The aggregate net cash proceeds of these sales of fractional shares will be taxable for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Consequences” for an explanation of the material U.S. federal income tax consequences of the distribution. If you hold physical certificates for shares of Parent common stock and are the registered holder, you will receive a check from the distribution agent in an amount equal to your pro rata share of the aggregate net cash proceeds of the sales. We estimate that it will take approximately two weeks from the distribution date for the distribution agent to complete the payment of the aggregate net cash proceeds. If you hold your shares of Parent common stock through a bank or brokerage firm, your bank or brokerage firm will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales and will electronically credit your account for your share of such proceeds.

Treatment of Equity Based Compensation

Information regarding the treatment of equity-based compensation is included in the section entitled “Compensation Discussion and Analysis — Treatment of Outstanding Parent Equity Compensation in the Separation”.

Results of the Distribution

After the distribution, Aaron’s SpinCo will be an independent, publicly traded company. The actual number of shares to be distributed will be determined at the close of business on [●], 2020, the record date for the distribution, and will reflect any exercise of Parent options between the date the Parent Board of Directors declares the distribution and the record date for the distribution. The distribution will not affect the number of outstanding shares of Parent common stock or any rights of Parent shareholders. Parent will not distribute any fractional shares of Aaron’s SpinCo common stock.

 

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We will enter into a separation agreement and other related agreements with Parent before the distribution to effect the separation and provide a framework for our relationship with Parent after the separation. These agreements will provide for the allocation between Parent and Aaron’s SpinCo of Parent assets, liabilities and obligations (including employee benefits, intellectual property, and tax-related assets and liabilities) associated with the Aaron’s Business and will govern the relationship between Parent and Aaron’s SpinCo after the separation. For a more detailed description of these agreements, see “Certain Relationships and Related Party Transactions.”

Market for Aaron’s SpinCo Common Stock

There is currently no public trading market for Aaron’s SpinCo common stock. Aaron’s SpinCo intends to apply to list its common stock on the NYSE under the symbol “[●].” Parent expects to change its stock symbol from “AAN” to “[●]” upon completion of the separation. Aaron’s SpinCo has not and will not set the initial price of its common stock. The initial price will be established by the public markets.

We cannot predict the price of Aaron’s SpinCo common stock after the distribution. In fact, the combined trading prices, after the distribution, of the shares of Aaron’s SpinCo common stock that each Parent shareholder will receive in the distribution and shares of Parent common stock held at the record date for the distribution may not equal the “regular-way” trading price of the Parent common stock immediately prior to the distribution. The price at which Aaron’s SpinCo common stock trades may fluctuate significantly, particularly until an orderly public market develops. Trading prices for Aaron’s SpinCo common stock will be determined in the public markets and may be influenced by many factors. See “Risk Factors—Risks Related to Ownership of Our Common Stock.”

Incurrence of Debt

Aaron’s SpinCo does not intend to incur new indebtedness prior to or concurrent with the separation. For more information, see “Description of Material Indebtedness and Guarantees.”

Trading Between the Record Date and Distribution Date

Beginning on or about the record date for the distribution and continuing up to and including the distribution date, Parent expects that there will be two markets for shares of Parent common stock: a “regular-way” market and an “ex-distribution” market. Shares of Parent common stock that trade on the “regular-way” market will trade with an entitlement to shares of Aaron’s SpinCo common stock to be distributed pursuant to the separation. Shares of Parent common stock that trade on the “ex-distribution” market will trade without an entitlement to shares of Aaron’s SpinCo common stock to be distributed pursuant to the distribution. Therefore, if you sell shares of Parent common stock in the “regular-way” market up to and including through the distribution date, you will be selling your right to receive shares of Aaron’s SpinCo common stock in the distribution. If you own Parent common stock at the close of business on the record date and sell those shares on the “ex-distribution” market up to and including the distribution date, you will receive the shares of Aaron’s SpinCo common stock that you are entitled to receive pursuant to your ownership of shares of Parent common stock as of the record date.

Furthermore, beginning on or about the record date for the distribution and continuing up to and including the distribution date, we expect that there will be a “when-issued” market in shares of Aaron’s SpinCo common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of Aaron’s SpinCo common stock that will be distributed to holders of shares of Parent common stock on the distribution date. If you owned Parent common stock at the close of business on the record date for the distribution, you would be entitled to shares of Aaron’s SpinCo common stock distributed pursuant to the distribution. You may trade this entitlement to shares of Aaron’s SpinCo common stock, without trading shares of Parent common stock you

 

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own, on the “when-issued” market, but your transaction will not settle until after the distribution date. On the first trading day following the distribution date, “when-issued” trading with respect to shares of Aaron’s SpinCo common stock will end, and “regular-way” trading will begin.

Conditions to the Distribution

The distribution will be effective at [●], Eastern Time on [●], 2020 which is the distribution date, provided that the conditions set forth in the separation agreement have been satisfied (or waived by Parent in its sole and absolute discretion), including, among others:

 

   

the internal reorganization shall be completed and the transfer of assets and liabilities from Parent to Aaron’s SpinCo shall be completed in accordance with the separation agreement that Parent and we will enter into prior to the distribution;

 

   

the separation agreement and transactions contemplated thereby shall have been approved by the board of directors of Parent in accordance with applicable law and the organizational documents of Parent, and such approval has not been withdrawn;

 

   

Parent shall have received an opinion of tax counsel satisfactory to the Parent Board of Directors regarding the qualification of the distribution, together with certain related transactions, as transactions that are generally tax-free under Section 355 and Section 368(a)(1)(D) of the Code;

 

   

an independent appraisal firm acceptable to Parent shall have delivered one or more opinions to the Parent Board of Directors at the time or times requested by the Parent Board of Directors confirming the solvency and financial viability of Parent before the consummation of the distribution and each of Parent and Aaron’s SpinCo after the consummation of the distribution, such opinions shall have been acceptable to Parent in form and substance in Parent’s sole discretion and such opinions shall not have been withdrawn or rescinded;

 

   

the SEC shall have declared effective our registration statement on Form 10, of which this information statement forms a part, and this information statement shall have been made available to Parent shareholders;

 

   

all actions and filings necessary or appropriate under applicable U.S. federal, U.S. state or other securities laws shall have been taken and, where applicable, have become effective or been accepted by the applicable governmental authority;

 

   

the transaction agreements relating to the separation that Parent and we will enter into prior to the distribution shall have been duly executed and delivered by the parties;

 

   

no order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, distribution or any of the related transactions shall be in effect, and the distribution shall not violate or result in a breach of any applicable Law or any material contract of any party to the separation;

 

   

the shares of Aaron’s SpinCo common stock to be distributed shall have been approved for listing on the NYSE, subject to official notice of distribution;

 

   

we shall have entered into the financing transactions described in this information statement that are contemplated to occur on or prior to the date of the separation and distribution; and

 

   

no event or development shall have occurred or exist that, in the judgment of Parent Board of Directors, in its sole and absolute discretion, makes it inadvisable to effect the separation, the distribution and other related transactions.

We cannot assure you that any or all of these conditions will be met. Parent will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the distribution and, to the extent

 

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it determines to so proceed, to determine the record date for the distribution and the distribution date, and the distribution ratio. Parent will also have sole and absolute discretion to waive any of the conditions to the distribution. Parent does not intend to notify its shareholders of any modifications to the terms of the separation or distribution that, in the judgment of its Board of Directors, are not material. To the extent that the Parent Board of Directors determines that any modifications by Parent materially change the material terms of the distribution, Parent will notify Parent shareholders in a manner reasonably calculated to inform them about the modification as may be required by law, by, for example, publishing a press release, filing a current report on Form 8-K, or circulating a supplement to this information statement.

No Appraisal Rights

Under the Georgia Business Corporation Code (the “Georgia Business Code”), Parent shareholders will not have appraisal rights in connection with the distribution.

 

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DIVIDEND POLICY

We expect that, following the separation, we will initially pay a regular quarterly cash dividend. Notwithstanding these current expectations regarding our dividend policy, the declaration, timing, amount and payment of future dividends to holders of Aaron’s SpinCo common stock following the separation will be at the discretion of our Board of Directors and will depend on many factors, including, but not limited to, our financial condition, earnings, opportunities to retain future earnings for use in the operation of our business and to fund future growth, capital requirements, debt service obligations, corporate strategy, regulatory constraints, industry practice, statutory and contractual restrictions applying to the payment of dividends and other factors deemed relevant by our Board of Directors.

The following table summarizes cash dividends declared by the Board of Directors of Parent to its shareholders for the periods presented.

Quarter Ended

   Parent Cash Dividend
Declared per Share of
Common Stock
 

2017

  

March 31

   $ 0.0275  

June 30

     0.0275  

September 30

     0.0275  

December 31

     0.03  

2018

  

March 31

   $ 0.03  

June 30

     0.03  

September 30

     0.03  

December 31

     0.035  

2019

  

March 31

   $ 0.035  

June 30

     0.035  

September 30

     0.035  

December 31

     0.04  

2020

  

March 31

   $ 0.04  

June 30

     0.04  

Although we expect to initially pay a regular cash dividend, future dividends of Aaron’s SpinCo may differ from historical dividends of Parent due to, among other matters, changes in the level of cash generated by Aaron’s SpinCo’s operations and changes in Aaron’s SpinCo’s capital needs. Parent has historically had sufficient liquidity that enabled it to pay dividends for 32 consecutive years; however, there can be no assurance that, as a stand-alone company, Aaron’s SpinCo will have sufficient liquidity to continue to pay cash dividends.

The terms of our indebtedness may also restrict us from paying dividends, or may restrict our subsidiaries from paying dividends to us. Under Georgia law, dividends may not be payable if, after giving effect to the dividends, the corporation would not be able to pay its debts as they become due, or the corporation’s total assets would be less than the sum of its total liabilities plus (unless the articles of incorporation permit otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. See “Description of Material Indebtedness and Guarantees” and “Description of Our Capital Stock—Common Stock.” Moreover, if we determine to pay any dividend in the future, there can be no assurance that we will continue to pay such dividends or the amount of such dividends.

 

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CAPITALIZATION

The following table provides our capitalization as of September 30, 2020, on a historical combined basis and on a pro forma basis to give effect to the pro forma adjustments included in our unaudited pro forma financial information. The information below is not necessarily indicative of what our capitalization would have been had the separation and distribution been completed as of September 30, 2020 and is not indicative of our future capitalization. This table should be read in conjunction with our “Unaudited Pro Forma Condensed Combined Financial Statements,” “Selected Historical Combined Financial Data of Aaron’s SpinCo, Inc.,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our Combined Financial Statements and notes thereto included in the “Index to Financial Statements” of this information statement.

 

     As of September 30, 2020
(Unaudited)
 

(In Thousands)

   Actual      Pro Forma  

Cash and Cash Equivalents1

   $ 432,862      $ [●]  
  

 

 

    

 

 

 

Indebtedness:

     

Current Maturities2

     83,218      1,020  

Long-Term Debt3

     201,905        135  
  

 

 

    

 

 

 

Total Indebtedness

     285,123        1,155  
  

 

 

    

 

 

 

Equity:

     

Common Stock, Par Value $0.50 Per Share: [●] Shares Authorized, [●] Shares Issued and Outstanding, Pro Forma4

     —          [●]  

Additional Paid-in Capital4

     —          [●]  

Invested Capital4

     727,129       

Accumulated Other Comprehensive Loss

     (1,244      (1,244
  

 

 

    

 

 

 

Total Equity

   $ 725,885    $ [●]  
  

 

 

    

 

 

 

Total Capitalization

   $ 1,011,008    $ [●]  
  

 

 

    

 

 

 

 

1 

Reflects an expected cash amount of $[●] million at separation following expected cash transfer to Aaron’s SpinCo.

2 

Actual current maturities as of September 30, 2020 reflect $83.5 million of outstanding principal amounts due, including amounts due under finance leases, less $0.3 million of unamortized debt issuance costs. At separation, Aaron’s SpinCo expects to have a $200.0 million revolving credit facility in place and does not expect to have any immediate outstanding borrowings under the credit facility, with the exception of its remaining finance leases.

3 

Actual long-term debt as of September 30, 2020 reflects $202.6 million of outstanding principal amounts due, including amounts due under finance leases, less $0.7 million of unamortized debt issuance costs. At separation, Aaron’s SpinCo expects to have a $200.0 million revolving credit facility in place and does not expect to have any immediate outstanding borrowings under the credit facility, with the exception of its remaining finance leases.

4 

At the time of separation, Parent’s net investment in Aaron’s SpinCo will be eliminated to reflect the distribution of Aaron’s SpinCo common stock to the shareholders of Parent. Aaron’s SpinCo shares will be distributed at a ratio of [●] shares of Aaron’s SpinCo common stock for every share of Parent common stock.

Aaron’s SpinCo has not yet finalized its capitalization following the separation and distribution. Pro forma financial information reflecting the capitalization of Aaron’s SpinCo following the separation and distribution will be provided in an amendment to this information statement.

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA OF

AARON’S SPINCO, INC.

The following table sets forth certain selected combined financial data of Aaron’s SpinCo as of and for each of the years in the five-year period ended December 31, 2019 and as of September 30, 2020 and for the nine months ended September 30, 2020 and 2019. We derived the selected combined statement of earnings data for the nine months ended September 30, 2020 and 2019, and the selected combined balance sheet data as of September 30, 2020 from our Unaudited Condensed Combined Financial Statements, which are included herein. We derived the selected combined statement of earnings data for the years ended December 31, 2019, 2018 and 2017 and the selected combined balance sheet data as of December 31, 2019 and 2018 from our audited combined financial statements, which are included herein. We derived the selected combined statement of earnings data for the years ended December 31, 2016 and 2015 and the selected combined balance sheets data as of December 31, 2017, 2016 and 2015 from the unaudited underlying financial records of Parent, which are not included in this information statement. The historical results set forth below may not be indicative of Aaron’s SpinCo’s future performance as a stand-alone company following the separation and distribution. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Combined Financial Statements,” and the Combined Financial Statements and the accompanying notes included in the “Index to Financial Statements” section of this information statement.

 

    Nine Months Ended
September 30,
    Year Ended December 31,  

(Dollar Amounts in Thousands)

  2020     2019     2019     2018     2017     2016     2015  

OPERATING RESULTS

             

Revenues:

             

Lease and Retail Revenues

  $ 1,190,903   $ 1,220,475   $ 1,608,832   $ 1,540,800   $ 1,460,815   $ 1,572,645   $ 1,667,375

Non-Retail Sales

    94,710     102,190     140,950     207,262     270,253     309,446     390,137

Franchise Royalties and Other Revenues

    19,134     26,860     34,695     46,654     50,834     63,948     69,718
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,304,747     1,349,525     1,784,477     1,794,716     1,781,902     1,946,039     2,127,230
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of Revenues:

             

Cost of Lease and Retail Revenues

    412,009     425,640     559,232     533,974     517,946     577,395     600,908

Non-Retail Cost of Sales

    82,006     83,057     113,229     174,180     241,356     276,608     351,777
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    494,015     508,697     672,461     708,154     759,302     854,003     952,685
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    810,732     840,828     1,112,016     1,086,562     1,022,600     1,092,036     1,174,545

Gross Profit %

    62.1     62.3     62.3     60.5     57.4     56.1     55.2

Operating Expenses:

             

Personnel Expenses

    351,905     378,991     499,993     482,712     460,606     480,879     517,758

Other Operating Expenses, Net

    324,156     336,935     426,774     431,158     382,853     402,731     432,382

Provision for Lease Merchandise Write-Offs

    47,478     70,068     97,903     68,970     59,621     63,871     62,483

Restructuring Expenses, Net

    33,318     37,535     39,990     2,750     17,145     20,218     —    

Impairment of Goodwill

    446,893     —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,203,750     823,529     1,064,660     985,590     920,225     967,699     1,012,623
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (Loss) Profit

    (393,018     17,299     47,356     100,972     102,375     124,337     161,922

Interest Expense

    (8,625     (13,247     (16,967     (16,440     (18,151     (20,688     (22,809

Impairment of Investment

    —         —         —         (20,098     —         —         —    

Other Non-Operating Income (Expense), Net

    887     2,835     3,881     (866     5,416     (864     518
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Earnings Before Income Tax Expense (Benefit)

    (400,756     6,887     34,270     63,568     89,640     102,785     139,631

Income Tax Expense (Benefit)

    (131,969     (690     6,171     12,915     (53,278     34,350     49,778
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Earnings

  $ (268,787   $ 7,577   $ 28,099   $ 50,653   $ 142,918   $ 68,435   $ 89,853
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Nine Months Ended
September 30,
    Year Ended December 31,  

(Dollar Amounts in Thousands)

  2020     2019     2019     2018     2017     2016     2015  

AT YEAR END (unaudited)

             

Store Count:

             

Company-operated Stores

    1,086     1,163     1,167     1,312     1,175     1,165     1,305

Franchised Stores

    308     341     335     377     551     699     734
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Systemwide Stores

    1,394       1,504       1,502       1,689       1,726       1,864       2,039  

Lease Agreements in Effect1

    1,295,000     1,405,600     1,383,400     1,534,900     1,483,600     1,473,000     1,627,900

Number of Employees1

    9,000     10,600     10,100     10,800     10,200     10,200     11,400
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1

Excludes franchised operations.

 

    Nine Months Ended
September 30,
    Year Ended December 31,  

(Dollar Amounts in Thousands)

  2020     2019     2018     2017     2016     2015  

FINANCIAL POSITION

           

Cash and Cash Equivalents

  $ 432,862   $ 48,773   $ 12,006   $ 33,760   $ 283,113   $ 9,321

Lease Merchandise, Net

    661,522     781,598     807,457     720,319     683,486     870,345

Property, Plant and Equipment, Net

    194,970     207,301     202,753     183,968     189,513     206,508

Total Assets1

    1,676,747     1,940,331     1,632,812     1,528,140     1,588,143     1,693,513

Debt

    285,123     341,030     424,752     368,798     450,527     565,133

Invested Capital

    727,129     837,800     782,996     736,793     670,737     607,540

 

1

In accordance with the adoption of ASC 842, Aaron’s SpinCo, as a lessee, is required to recognize substantially all of its operating leases on the balance sheet as operating lease right-of-use assets and operating lease liabilities. For periods prior to the year ended December 31, 2019, Aaron’s SpinCo’s operating lease right-of-use assets and liabilities are not included on the balance sheet.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements are based on the historical audited combined annual and unaudited combined interim financial statements of Aaron’s SpinCo included in this information statement and have been adjusted to give effect to the proposed separation and distribution transaction. The combined financial statements of Aaron’s SpinCo include financial information for Aaron’s SpinCo and all of its subsidiaries which generally comprise the historical Aaron’s Business and the historical subsidiaries of Parent that supported that business. The unaudited pro forma condensed combined statements of earnings for the nine months ended September 30, 2020 and the year ended December 31, 2019 give effect to the transaction, described under the section entitled “The Separation and Distribution” as if it had occurred on January 1, 2019; and the unaudited pro forma condensed combined balance sheet gives effect to the transaction as if it had occurred as of September 30, 2020.

The historical audited combined annual and unaudited combined interim financial statements of Aaron’s SpinCo have been adjusted to give effect to pro forma events that are (a) directly attributable to the separation and distribution transaction; (b) factually supportable; and (c) with respect to the combined statements of earnings, are expected to have a continuing effect on Aaron’s SpinCo’s results of operations. The pro forma adjustments to reflect the separation and distribution include:

 

   

the distribution of Aaron’s SpinCo common stock to holders of Parent common stock;

 

   

the anticipated settlement of all historical outstanding indebtedness excluding finance lease obligations;

 

   

the anticipated entry into a new senior unsecured revolving credit facility;

 

   

the anticipated entry into a new franchise loan facility;

 

   

transaction costs specifically related to the separation and distribution; and

 

   

the impact of, and transactions contemplated by, the separation and distribution agreement, employee matters agreement and certain other agreements related to the separation and distribution transaction between Aaron’s SpinCo and Parent.

The historical combined financial statements include corporate allocations for expenses related to activities that are provided on a centralized basis within Parent, which are primarily expenses related to executive management, finance, treasury, tax, audit, legal, information technology, human resources and risk management functions and the related benefit cost associated with such functions, including stock-based compensation. Immediately following the separation and distribution transaction, we will assume responsibility for all of these functions and related costs. These costs may not be representative of the future costs we will incur as an independent, standalone public company. Any change in costs or expenses associated with operating as a standalone company would constitute projected amounts based on estimates and, therefore, are not considered factually supportable and have not been included as adjustments for purposes of the unaudited pro forma condensed combined financial statements. Incremental costs and expenses associated with operating as a standalone company are not practical to estimate as of the date of this filing.

The unaudited pro forma condensed combined financial statements are subject to the assumptions and adjustments described in the accompanying notes. Management believes the assumptions and adjustments are reasonable under the circumstances given the information available at this time. However, these adjustments are subject to change as we finalize the terms of the separation and distribution transaction and the agreements related to the transaction.

These unaudited pro forma condensed combined financial statements, which were prepared in accordance with Article 11 of Regulation S-X, are for illustrative and informational purposes only and do not represent what our financial position or results of operations would have been had the proposed separation and distribution transaction occurred on the dates indicated above, and do not purport to estimate, and should not be considered representative of, our future financial position or results of operations. The unaudited pro forma condensed combined financial statements should be read in conjunction with our historical audited combined financial statements and the related notes as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement.

 

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AARON’S SPINCO, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

 

    September 30, 2020  
    Historical     Pro Forma Adjustments         Pro
Forma
 
          (In Thousands)            

ASSETS:

       

Cash and Cash Equivalents

  $ 432,862       [●]       (a)     [●]    

Accounts Receivable

    32,368       —           32,368  

Lease Merchandise

    661,522       —           661,522  

Property, Plant and Equipment, Net

    194,970       —           194,970  

Operating Lease Right-of-Use Assets

    248,272       —           248,272  

Goodwill

    2,645       —           2,645  

Other Intangibles, Net

    9,503       —           9,503  

Income Tax Receivable

    5,290       (3,824   (b)     1,466  

Prepaid Expenses and Other Assets

    89,315       (5,679   (b)(c)     83,636  
 

 

 

   

 

 

     

 

 

 

Total Assets

  $ 1,676,747       [●]           [●]    
 

 

 

   

 

 

     

 

 

 

LIABILITIES & EQUITY:

       

Accounts Payable and Accrued Expenses

  $ 253,036     $ (7,068   (b)(c)   $ 245,968  

Deferred Income Taxes Payable

    73,640       —           73,640  

Customer Deposits and Advance Payments

    49,711       —           49,711  

Operating Lease Liabilities

    289,352       —           289,352  

Debt

    285,123       (283,968   (c)     1,155  
 

 

 

   

 

 

     

 

 

 

Total Liabilities

    950,862       (291,036       659,826  

EQUITY:

       

Common Stock, par value $0.50 per share, [●] shares authorized and [●] shares issued and outstanding on a pro forma basis

      [●]       (d)     [●]    

Additional Paid-in Capital

      [●]       (a)(b)(c)(d)     [●]    

Invested Capital

    727,129       (727,129   (d)     —    

Accumulated Other Comprehensive Loss

    (1,244     —           (1,244
 

 

 

   

 

 

     

 

 

 

Total Equity

    725,885       [●]           [●]    
 

 

 

   

 

 

     

 

 

 

Total Liabilities & Equity

  $ 1,676,747       [●]           [●]    
 

 

 

   

 

 

     

 

 

 

See the accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements, which are an integral part of the financial statements.

 

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AARON’S SPINCO, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

 

     Nine Months Ended September 30, 2020  
     Historical     Pro Forma
Adjustments
          Pro
Forma
 
           (In Thousands, Except Per Share Data)        

REVENUES:

        

Lease and Retail Revenues

   $ 1,190,903       —         $ 1,190,903  

Non-Retail Sales

     94,710       —           94,710  

Franchise Royalties and Other Revenues

     19,134       —           19,134  
  

 

 

   

 

 

     

 

 

 
     1,304,747       —           1,304,747  

COST OF REVENUES:

        

Cost of Lease and Retail Revenues

     412,009       —           412,009  

Non-Retail Cost of Sales

     82,006       —           82,006  
  

 

 

   

 

 

     

 

 

 
     494,015       —           494,015  
  

 

 

   

 

 

     

 

 

 

GROSS PROFIT

     810,732           810,732  

OPERATING EXPENSES

        

Personnel Costs

     351,905       (1,734     (e     350,171  

Other Operating Expenses, Net

     324,156       —           324,156  

Provision for Lease Merchandise Write-Offs

     47,478       —           47,478  

Restructuring Expenses, Net

     33,318       —           33,318  

Impairment of Goodwill

     446,893       —           446,893  
  

 

 

   

 

 

     

 

 

 
     1,203,750       (1,734       1,202,016  
  

 

 

   

 

 

     

 

 

 

OPERATING LOSS

     (393,018     1,734         (391,284

Interest Expense

     (8,625     7,874       (f     (751

Other Non-Operating Income, Net

     887       —           887  
  

 

 

   

 

 

     

 

 

 

LOSS BEFORE INCOME TAX EXPENSE

     (400,756     9,608         (391,148

INCOME TAX BENEFIT

     (131,969     2,362       (g     (129,607
  

 

 

   

 

 

     

 

 

 

NET LOSS

   $ (268,787   $ 7,246       $ (261,541
  

 

 

   

 

 

     

 

 

 

EARNINGS PER SHARE

         (h     [●]  

EARNINGS PER SHARE ASSUMING DILUTION

         (i     [●]  

Weighted Average Shares Outstanding—Basic

         (h     [●]  

Weighted Average Shares Outstanding—Diluted

         (i     [●]  

See the accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements, which are an integral part of the financial statements.

 

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AARON’S SPINCO, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

 

     Year Ended December 31, 2019  
       Historical       Pro Forma Adjustments          Pro
Forma
 
    

  (In Thousands, Except Per Share Data)  

     

REVENUES:

         

Lease and Retail Revenues

   $ 1,608,832       —          $ 1,608,832  

Non-Retail Sales

     140,950       —            140,950  

Franchise Royalties and Other Revenues

     34,695       —            34,695  
  

 

 

   

 

 

      

 

 

 
     1,784,477       —            1,784,477  

COST OF REVENUES:

         

Cost of Lease and Retail Revenues

     559,232       —            559,232  

Non-Retail Cost of Sales

     113,229       —            113,229  
  

 

 

   

 

 

      

 

 

 
     672,461       —            672,461  
  

 

 

   

 

 

      

 

 

 

GROSS PROFIT

     1,112,016       —            1,112,016  

OPERATING EXPENSES

         

Personnel Costs

     499,993       —            499,993  

Other Operating Expenses, Net

     426,774       —            426,774  

Provision for Lease Merchandise Write-Offs

     97,903       —            97,903  

Restructuring Expenses, Net

     39,990       —            39,990  
  

 

 

   

 

 

      

 

 

 
     1,064,660       —            1,064,660  
  

 

 

   

 

 

      

 

 

 

OPERATING PROFIT

     47,356            47,356  

Interest Expense

     (16,967     15,603      (f)     (1,364

Other Non-Operating Income, Net

     3,881       —            3,881  
  

 

 

   

 

 

      

 

 

 

EARNINGS BEFORE INCOME TAX EXPENSE

     34,270       15,603          49,873  

INCOME TAX EXPENSE

     6,171       3,840      (g)     10,011  
  

 

 

   

 

 

      

 

 

 

NET EARNINGS

   $ 28,099     $ 11,763        $ 39,862  
  

 

 

   

 

 

      

 

 

 

EARNINGS PER SHARE

        (h)     [●]  

EARNINGS PER SHARE ASSUMING DILUTION

        (i)     [●]  

Weighted Average Shares Outstanding—Basic

        (h)     [●]  

Weighted Average Shares Outstanding—Diluted

        (i)     [●]  

See the accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements, which are an integral part of the financial statements.

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

(a)

Reflects adjustment to present the cash and cash equivalents balance of $[●] million pursuant to the terms of the separation and distribution agreement after the expected repayment of outstanding indebtedness as further described in (c) below. The pro forma adjustments are summarized below:

 

(In Thousands)    September 30,
2020
 

Repayment of outstanding indebtedness

     (286,700

Transfer to Parent

       [●]  
  

 

 

 

Total pro forma adjustment to cash and cash equivalents

     $[●]  
  

 

 

 

 

(b)

Represents the adjustment of certain assets and liabilities reflected in our historical combined financial statements, which are not being distributed to Aaron’s SpinCo upon separation.

 

(c)

Prior to the separation and distribution transaction, we expect to settle all outstanding indebtedness, excluding finance lease obligations described in Note 8 to the accompanying audited combined financial statements. We also anticipate entering into a $200.0 million senior unsecured revolving credit facility, which is expected to be undrawn at the date of the distribution and we have assumed to be undrawn during the pro forma periods presented. Accordingly, the adjustment reflects the removal of the aggregate principal of $285.0 million, net of debt issuance costs of $1.0 million, and accrued and unpaid interest of $0.7 million. The adjustment also reflects the removal of debt issuance costs of $2.2 million from prepaid expenses and other assets related to the historical revolving credit facility, and the recognition of $1.3 million of debt issuance costs expected to be incurred in connection with the new senior unsecured revolving credit facility.

 

(d)

Reflects the reclassification of invested capital into additional paid-in-capital and common stock based on the issuance of [●] million shares of our common stock with a par value of $0.50 per share pursuant to the separation and distribution agreement. We have assumed the number of outstanding shares of our common stock based on 67,557,018 shares of Parent common stock outstanding on September 30, 2020 and a distribution ratio of one share of our common stock for every [●] shares of Parent common stock. The actual number of shares issued will not be known until the record date for the distribution. This adjustment also reflects the impact of the other pro forma adjustments described above reflected within the balance sheet. The adjustments are summarized below:

 

(In Thousands)    September 30,
2020
 

Common stock

       [●]  

Invested Capital

     727,129  

Impact of pro forma adjustments

       [●]  
  

 

 

 

Total pro forma adjustment to additional paid-in-capital

     $[●]  
  

 

 

 

 

(e)

Reflects the removal of non-recurring transaction costs incurred during the historical period not expected to continue to be incurred subsequent to the separation and distribution transaction.

 

(f)

Reflects the removal of the historical interest expense related to the outstanding indebtedness expected to be repaid and the pro forma interest expense from the new senior unsecured revolving credit facility. The pro forma interest expense assumes no outstanding borrowings on the $200.0 million senior unsecured revolving credit facility and $13.0 million outstanding letters of credit during pro forma periods presented. The new interest expense was calculated based on an

 

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  expected commitment fee of 0.25% based on the expected pro-forma leverage ratio as of September 30, 2020, as well as an interest rate of 1.875% on outstanding letters of credit. Interest expense includes the amortization of $0.8 million and $1.0 million of debt issuance costs associated with the new senior unsecured revolving credit facility for the nine months ended September 30, 2020 and year ended December 31, 2019, respectively. Actual interest expense may be higher in future periods if we borrow under the new senior unsecured revolving credit facility.

 

     For the nine
months ended
    September 30,    
     For the year
ended
    December 31,    
 
(In Thousands)    2020      2019  

Interest expense on new senior unsecured revolving credit facility

     (563      (751

Amortization of new debt issuance costs

     (188      (250

Removal of historical interest expense, excluding finance lease obligations

     8,625        16,604  
  

 

 

 

Total pro forma adjustment to interest expense

   $ 7,874      $ 15,603  
  

 

 

 

 

(g)

Reflects the income tax impact of the pro forma adjustments, using a blended statutory tax rate of 24.6% for the nine months ended September 30, 2020 and the year ended December 31, 2019. This does not reflect Aaron’s SpinCo’s effective tax rate, which will include other tax items such as state and other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact Aaron’s SpinCo.

 

(h)

Pro forma basic earnings per share (EPS) and pro forma basic weighted average number of shares outstanding are based on the number of Parent basic weighted average shares outstanding for the nine months ended September 30, 2020 and the year ended December 31, 2019, respectively, adjusted for a distribution ratio of one share of our common stock for every [●] shares of Parent common stock.

 

(i)

Pro forma diluted EPS and pro forma diluted weighted average number of shares outstanding are based on the number of basic shares of our common stock as described in Note (h) above. The actual dilutive effect following the completion of the distribution will depend on various factors, including each employee’s election related to the conversion of existing stock-based compensation arrangements, which is not required to be made until the date of distribution. We cannot fully estimate the dilutive effects at this time.

 

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BUSINESS

The Lease to Own Business Model

The “lease-to-own” (“LTO”) model offers customers an attractive alternative to traditional methods of purchasing home furnishings, electronics, appliances, computers and other consumer goods and accessories. In a standard LTO transaction, the customer has the option to acquire ownership of merchandise over a fixed term, usually 12 to 24 months, typically by making weekly, semi-monthly, or monthly lease payments. The customer also has the option to cancel the agreement at any time without penalty by returning the merchandise to the lessor and only making payments required for the accrued lease period. If the customer leases the item through the completion of the full term, they then obtain ownership of the item. In addition, LTO transactions typically include early ownership options, free delivery and in-home set-up of the merchandise, free repairs when needed, and other benefits.

An LTO agreement provides flexibility, an attractive upfront payment and no long-term commitment, and is available to all customers who qualify, including those who are credit challenged. Other consumers who find the LTO model appealing are those who have a temporary need for merchandise, those who want to try a product at home before committing to the full cost of ownership, and those who, despite access to credit, do not wish to incur additional debt. We believe the LTO value proposition results in high customer loyalty and repeat purchase behavior, which reduces customer acquisition costs and improves customer lifetime value.

LTO businesses benefit from relatively stable, recurring revenues and predictable cash flows provided by pools of lease agreements originated in prior periods. Our recurring revenue streams help insulate the business in times of macro-economic disruption and reduce reliance on current period sales and customer traffic for cash flows as compared to other retailing models. In the calendar year ended December 2019, approximately 88% of the Aaron’s Business’s lease revenue was generated from recurring revenue streams related to our contracted lease payments.

Our Company

We are a leading, technology-enabled, omni-channel provider of LTO and purchase solutions focused on serving the large, credit-challenged segment of the population. Through our portfolio of 1,400 stores and our Aarons.com e-commerce platform, we provide consumers with LTO solutions for the products they need and want, including furniture, appliances, electronics, computers and a variety of other products and accessories. We focus on providing our customers with unparalleled customer service and an attractive value proposition, including low monthly payments and total cost of ownership, high in-store approval rates, lease term flexibility, a wide product selection, free same or next-day delivery and setup, service and product returns, and the ability to pause, cancel or resume lease contracts at any time, with no additional costs to the customer.

Our management team is committed to executing against a core set of strategic priorities to further transform and grow the business:

 

   

Promote our Value Proposition to Attract New Customers to our Brand

 

   

Enhance the Customer Experience Through Technology

 

   

Align our Store Footprint to our Customer Opportunity

 

   

Maintain a Well-Capitalized Balance Sheet

Aaron’s SpinCo Store and Omni-Channel Operations

We currently have stores located in 47 states and Canada, and our portfolio is comprised of 1,085 company-operated locations and 315 franchised locations, which are owned and operated by independent franchisees on a licensed basis. We have developed a distinctive store concept including specific merchandising standards, store

 

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designs, and flexible pricing terms, all designed to appeal to our customer base. Our typical store layout is a combination of showroom and warehouse space, generally comprising 6,000 to 15,000 square feet. Most stores have at least two trucks for same or next-day last-mile delivery, service and return of product.

We have developed an LTO industry-leading, omni-channel platform that allows the Aaron’s Business to engage customers in ways that are convenient and preferable for them, including digitally streamlined shopping, servicing and payment options. Our e-commerce platform, Aarons.com, offers best-in-class, end-to-end technology with on-line-to-doorstep capabilities, allowing customers to seamlessly browse for merchandise, qualify for a lease, complete the lease transaction, and schedule delivery of their merchandise from any digital device. As a result of our technology-enabled omni-channel strategy, we are attracting more new and younger customers to our brand, with over half of Aarons.com transactions coming from individuals who previously had not shopped at Aaron’s.

We are committed to providing our customers with an exceptional in-store and on-line shopping experience. By leveraging our investments in technology, including Aarons.com, data-enabled lease decisioning, and our omni-channel customer service and payment platforms, we believe that we can serve our existing markets through a more efficient store portfolio while continuing to provide the high level of service our customers expect. We have identified a number of markets where we believe overall store counts can be meaningfully reduced and market economics improved. Concurrent with that optimization strategy, we have begun to roll-out a new Aaron’s Business store concept, which features larger showrooms and/or re-engineered and remodeled store layouts, an increased merchandise selection, technology-enabled shopping and checkout, and a refined operating model. Over the long-term, we believe our new store concept and our market optimization strategy will contribute to earnings growth and better cash flow margins.

With decades of customer lease performance data and recent advancements in analytics, we have developed a proprietary lease approval process with respect to our U.S. company-operated store customers. This process includes an algorithm-enabled, centralized digital decisioning platform, which is designed to improve our customer experience by streamlining and standardizing the lease decisioning process, shortening transaction times, and establishing appropriate lease payment amounts given the customer’s profile. Customers receive lease approval amounts either on-line or in our stores through a quick, convenient process that enables them to shop on Aarons.com or at one of our 1,085 company-operated retail locations. We expect the benefits of our new lease decisioning process to result in better lease performance with fewer delinquencies or defaults.

Our Market Opportunity

Our core customer base is principally comprised of consumers in the United States and Canada with limited access to traditional credit sources. According to Fair Isaacs Corporation, more than 100 million people in the United States either have no credit score or have a score below 650. Historically, during economic downturns, our customer base expands due to tightened credit underwriting by banks and credit card issuers, as well as employment-related factors which may impact customers’ ability to otherwise purchase products from traditional retailers using cash or traditional financing sources. We have stores strategically located in approximately 700 markets across the United States and Canada and are within five miles of 43% of households. Our stores are designed and merchandised to appeal to customers across different types of markets, including urban, suburban and rural markets.

 

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LOGO    LOGO

Competitive Assets

We have a unique set of physical and intangible assets developed over decades in the LTO business, which are difficult, expensive, and time consuming to replicate. We have developed a comprehensive strategy to leverage these assets that we expect will drive long-term cash flow and earnings growth. Specifically, the assets we expect to leverage include:

 

   

Our brand and physical presence in over 700 markets

With over 65 years in business, the Aaron’s Business is recognized nationwide as a leader in the LTO marketplace. This brand recognition has led to a 70% repeat customer rate for the new leases we enter into, and as of June 30, 2020, we had 1.1 million customers with active leases. The versatility of our business model enables us to successfully serve diverse markets including rural, suburban and urban markets, helping mitigate the impact of local economic disruptions resulting from specific industry economic cycles, weather, and other disruptive events.

 

   

Industry leading technology and analytics

The Aaron’s Business has invested in technology to improve the customer experience and its operational execution. These investments include platforms for enhanced data analytics, algorithm-led lease approval decisioning, digital customer onboarding, centralized payment processing and a fully transactional e-commerce website. Our technology-enabled platforms simplify the transaction and provide customers with enhanced transparency and flexibility throughout their lease, and provide management with information needed to optimize the financial performance of the business.

 

   

Management teams with deep industry experience and customer relationships

The Aaron’s Business stores are managed by a group of tenured managers and multi-unit leaders who have deep knowledge of the LTO transaction and operations, as well as experience with our credit challenged customer base. Our high levels of customer service are enhanced by years of relationship building and lease-to-own industry experience that is hard to replicate. Our average management tenure is as follows: 8 years for store managers; 10 years for regional managers; 15 years for divisional vice presidents; and 22 years for our head of stores.

 

   

Last-mile, reverse logistics and refurbishment capabilities

We have approximately 2,300 delivery trucks located throughout our network enabling us to provide last-mile and reverse logistics capabilities in our markets. All Aaron’s Business stores have a dedicated logistics team and infrastructure that enable us to offer our customers complimentary same or next-day delivery, in-home set-up, product repair or replacement services, and reverse logistics for the products our customers obtain from us. Our stores also include refurbishment operations, allowing us to provide pre-leased products for lease or sales in our stores and maximize inventory utilization.

 

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In-house upholstered furniture and bedding manufacturing

Under our Woodhaven Furniture Industries (“Woodhaven”) manufacturing division, we have the capacity to manufacture approximately 1.5 million units per year of furniture and bedding, utilizing over 800,000 square feet of manufacturing capacity in two primary furniture facilities and seven mattress locations. In-house manufacturing provides control over quality and construction, fast response to changing customer tastes and market trends, reduced inventory fulfillment lead times, and mitigation of inventory supply disruptions.

Strategic Priorities

We have developed several strategic priorities that will leverage our competitive strengths and assets, which we expect will lead to a superior customer experience, enhanced market position, and long-term cash flow and earnings growth. Specifically, these strategies are:

 

   

Promote our value proposition to attract new customers to our brand

We plan to develop innovative marketing campaigns that better illustrate our value proposition to new, existing and previous Aaron’s Business customers. We will utilize traditional and digital marketing communications aimed at educating our target customer about our key competitive advantages. Those advantages include low monthly payments and total cost of ownership, high in-store approval rates, lease term flexibility, a wide product selection, free same or next-day delivery and setup, service and product returns, and the ability to pause, cancel or resume lease contracts at any time with no additional costs to the customer. We believe this value proposition, supported by our advanced omni-channel capabilities and existing infrastructure, differentiates us from competitors and will drive new customers to our e-commerce and in-store platforms.

 

   

Enhance the customer experience through technology

We intend to further enhance the customer experience by developing new technologies that will give the customer more control over the lease transaction. These technologies include advanced mobile applications, delivery management services and payment platforms that increase flexibility and customization for the customer. These initiatives are designed to provide our customers with the ability to transact, schedule deliveries, request service and manage the payment process though their digital devices. We expect these initiatives to increase repeat business, reduce our customer acquisition cost, improve the performance of our customer lease portfolio, and enhance profitability.

 

   

Align the store footprint to our customer opportunity

We intend to reduce our 1,085 company-operated stores in existing markets by approximately 300 stores over the next 3-4 years. Through a strategic review of our real estate portfolio, we expect that we can increase profitability and continue to successfully serve our markets through a combination of (a) repositioning, remodeling and consolidating our existing stores and (b) utilizing our growing Aarons.com shopping and servicing platform. We expect this strategy, together with our increased use of technology to better serve our customers, will enable us to reduce store count while retaining a significant portion of our existing customer relationships, attracting new customers and generating positive free cash flow. In addition, we believe there are opportunities to expand to new markets in the future.

In addition to the optimization of our store portfolio, we have also successfully tested a new Aaron’s Business store concept, which features larger showrooms and/or re-engineered and remodeled store layouts, an increased merchandise selection, technology-enabled shopping and checkout, and a refined operating model. We currently have 18 new concept stores open, and they are collectively achieving increased revenue, more new customers, and higher profitability than our legacy stores. We expect to have nearly 100 new concept stores open by the end of 2021.

 

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Maintain a well-capitalized balance sheet

At the effective time of the distribution, we expect that we will have cash of $[●] million, with additional liquidity through a $200 million senior unsecured revolving credit facility of which no amounts will be drawn upon. Aaron’s SpinCo expects to utilize this flexible capital structure and independent and low-leverage balance sheet to execute its strategies and deliver sustainable, long-term growth. In addition to balance sheet flexibility, we expect to generate strong excess cash flow that will allow the Company to fund its operations, pursue strategic acquisitions or other strategic relationships, and return capital to shareholders.

Merchandising Strategy

We employ a merchandising strategy that spans three key product categories: furniture, home appliances and electronics. We have long-term relationships with many well-known and aspirational brands, including Samsung®, GE®, HP®, JBL®, LG®, Simmons®, Lane® and Ashley®. We purchase merchandise directly from manufacturers and local distributors at competitive prices. One of our largest suppliers is our own Woodhaven Furniture Industries manufacturing division, which supplies the majority of the bedding and a significant portion of the upholstered furniture we lease or sell. In recent years, we have strategically focused on growing the revenue contribution of furniture and appliances to align with macro-economic expansion in these categories and attract new customers. In addition, we have expanded our product offerings through expanded aisle capabilities on Aarons.com and our in-store digital shopping platforms. We expect to test potential new products and categories to introduce into our stores and/or our digital and e-commerce platforms, as part of our “test and learn” merchandising strategy. We expect this strategic focus on our existing lines and new products to enhance top line growth and profitability.

The following tables show the percentage of our revenues attributable to different merchandise categories:

 

     Nine Months Ended September 30,  
Aaron’s Business Merchandise Category    2020     2019  

Furniture

     44     43

Home appliances

     29     27

Electronics

     24     27

Other

     3     3

 

            Year Ended December 31,         
Aaron’s Business Merchandise Category    2019     2018     2017  

Furniture

     44     44     45

Home appliances

     27     25     24

Electronics

     26     28     29

Other

     3     3     2

Franchise Strategy

Currently, we have 71 franchisees, who operate a total of 315 franchised store locations. We have existing agreements with our current franchisees to govern the operations of franchised stores. Our standard agreement is for a term of ten years, with one ten-year renewal option, and requires our franchisees to operate in compliance with our policies and procedures. In collaboration with our franchisees, we are able to refine, further develop and test operating standards, marketing concepts and product and pricing strategies that we believe will ultimately benefit our company-operated stores. Franchisees are obligated to remit to us royalty payments of 6% of the weekly cash revenue collections from their stores.

From time to time, we may enter into franchise agreements with new franchisees or purchase store locations from our franchisees. We have purchased 287 store locations from our franchisees since January 1, 2017. We have

 

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not entered into a franchise agreement with a new franchisee in more than five years. We will continue to assess opportunities to both acquire existing franchise locations and franchise new markets that we wish to develop.

Manufacturing Strategy

Woodhaven Furniture Industries, our domestic manufacturing division, was established in 1982. Woodhaven consists of two furniture and seven bedding manufacturing facilities totaling approximately 800,000 square feet of manufacturing space. Our in-house manufacturing capabilities help to ensure that during periods of supply chain volatility, we are better positioned to provide our stores with suitable inventory to meet customer demand. Substantially all the items Woodhaven produces continues to be leased or sold through our stores, including franchised stores. However, we also manufacture and sell furniture products to other retailers.

Woodhaven 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 produced by our integrated manufacturing operations incorporates features that we believe result in enhanced durability and improved shipping processes, as compared to furniture we would otherwise purchase from third parties. These features include (a) standardized components, (b) reduced number of parts and features susceptible to wear or damage, (c) more resilient foam, (d) durable fabrics and sturdy frames that translate to longer life and higher residual value and (e) 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, so that our stores can continue to offer that furniture to our customers at a relatively lower price point. Furthermore, Woodhaven is also able to generate ancillary income and right-size production by selling furniture to third parties, including large, national retailers. In 2018 and 2019, approximately 15% of Woodhaven’s revenue was generated from sales to third parties.

Operations

Operating Strategy

We have various levels of executive leadership, area directors, and regional managers that oversee our business operations. At the individual store level, the general manager is primarily responsible for managing and supervising all aspects of store operations, including (a) customer relations and account management, (b) deliveries and pickups, (c) warehouse and inventory management, (d) merchandise selection, (e) employment decisions, including hiring, training and terminating store employees and (f) certain marketing initiatives. Store managers also administer the process of returning merchandise including making determinations with respect to inspection, product repair or replacement, sales, reconditioning and subsequent leasing.

Our business philosophy emphasizes safeguarding of our assets, strict cost containment and financial controls. All personnel are expected to monitor expenses to contain costs. All material invoices are approved and paid utilizing Parent’s centralized accounts payable process to enhance financial accountability. That function will remain centralized through our corporate offices following the separation. We believe that careful monitoring of lease merchandise as well as operational expenses enables us to maintain financial stability and profitability.

We use management information systems to facilitate customer orders, collections, merchandise returns and inventory monitoring. 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 (a) tracking merchandise on the showroom floor and warehouse, (b) minimizing delivery times, (c) assisting with product purchasing and (d) matching customer needs with available inventory. That network system will remain in place and continue to be used by us following the separation.

 

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Lease Agreement Approval, Renewal and Collection

We have a proprietary lease approval process with respect to our U.S. company-operated store customers through our algorithm-enabled, centralized digital decisioning platform, which is designed to improve our customer experience by streamlining and standardizing the lease decisioning process, shortening transaction times, and establishing appropriate lease payment amounts given the customer’s profile. We believe our use of our centralized digital decisioning platform will provide improved long-term profitability and predictability by aligning the customer’s ability to pay with their payment obligation. In addition to utilizing that decisioning platform, our stores may occasionally complete the lease approval process by verifying the applicant’s employment, or other reliable sources of income, and using personal references, which was the approval method used by our stores prior to the implementation of our centralized digital decisioning platform. Generally, our in-store and e-commerce lease agreements require payments in advance, and the merchandise normally is returned if a payment is significantly in arrears.

One of the factors in the success of our operations is timely collections, which are monitored by store managers and employees, and our call center associates. Customers who miss payments are contacted within a few days after their lease payment due dates to encourage them to keep their agreement current. Careful attention to collections is particularly important in lease-to-own operations, where the customer typically has the option to cancel the agreement at any time and each contractually due payment is generally considered a renewal of the agreement. Approximately 83% of the payments that we collect are via a payment card, which reduces our transaction costs and increases our efficiency. We continue to encourage customers to take advantage of the convenience of enrolling in our automatic payment program, as approximately 44% of our customers have done. In addition, we continue to emphasize collections-related compliance training, monitoring, and improvement initiatives, to ensure compliance with federal and state laws and regulations and our internal policies.

Customer Service

A critical component of the success in our operations is our commitment to developing good relationships with our customers. Our goal, therefore, is for our customers to develop a positive experience with us and with our products, service and support from the moment they enter our showrooms or visit our Aarons.com website. We consistently monitor consumer interests and trends to ensure that our business model is aligned with our customers’ needs. We believe that building a relationship with the customer that ensures customer satisfaction is critical because our customers have the option of returning merchandise they lease from us at any time without penalty. We demonstrate our commitment to superior customer service by providing customers with access to products through multiple channels, including Aarons.com and our store-based operations, and through our value proposition which includes high in-store approval rates, wide product selections, fast and free delivery and set-up and customer-focused lease flexibility. We also have demonstrated that commitment through our investments in technology that improve the customer experience, such as centralized lease decisioning, which significantly reduces customer transaction times, and our automatic payment program, which provides our customers with the convenience of not having to come into our stores to make their lease payments.

We believe our strong focus on customer satisfaction generates repeat business and long-lasting relationships with our customers. Our customers receive multiple complimentary service benefits. These benefits vary according to applicable state law but generally include early purchase options, free relocation of product to a new address within a specified geographic area, reinstatement options, product repair or replacement, and other discounts and benefits. To increase leasing transactions, we foster relationships with our existing customers to attract recurring business, and many new agreements are attributable to repeat customers. In 2019, for example, approximately 70% of the new lease agreements we entered into were with repeat customers.

Our store-based operations offer customers the option to obtain a membership in the Aaron’s Club Program (the “Club Program”). The benefits to customers of the Club Program are separated into three general categories: (a) product protection benefits; (b) health & wellness discounts; and (c) dining, shopping and consumer savings.

 

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The product protection benefits provide Club Program members with lease payment waivers for up to four months or a maximum of $1,000 on active customer lease agreements if the customer becomes unemployed or ill; replacement of the product if the product is stolen or damaged by an act of God; waiver of remaining lease payments on lease agreements where any member named on the lease agreement dies; and/or product repair or replacement for an extended period after the customer takes ownership. For 2019, approximately one-fourth of our customers elected to participate in our optional Club Program offering.

Our emphasis on customer service at our store-based operations requires that we develop skilled, effective employees who value our customers and who possess and project a genuine desire to serve our customers’ needs. To meet this requirement, we have created and implemented a comprehensive associate development program for both new and tenured associates.

Our associate development program is designed to train our associates to provide a compliant, consistent and enhanced customer service experience. The primary focus of the associate development program is to equip all associates with the knowledge and skills needed to build strong relationships with our customers and to service customers in a manner that complies with applicable laws, regulations and our Company policies. Our learning and development coaches provide live, interactive instruction via webinars. In addition, associates are provided training through an Intranet-based learning management system that can be accessed at any time. Additionally, we have a management development program for current and future store managers and a leadership development program for our multi-unit managers. Also, we produce and post video-based communications regarding important initiatives on our intranet site.

Distribution for our Store-Based Operations

Our store-based operations utilize our 16 fulfillment centers to control merchandise and offer our customers a wide product assortment. These centers average approximately 124,000 square feet, giving us approximately 2.0 million square feet of logistical capacity, outside of our network of stores.

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 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 efforts target potential new customers as well as current and previous customers. We feature brand name furniture, appliance and electronics products which are all available through our lease ownership plans. We reach our customer demographics through a variety of traditional and digital media channels including on-line search, TV, radio, digital video, and direct mail, with a combination of brand and promotional messaging. We continue to test new ways to engage potential customers and identify audience segments that find the lease-to-own solution appealing.

With our fast-growing e-commerce business, we focus heavily on digital marketing including search, display, and social to help drive traffic to both stores and our e-commerce website. Our e-commerce marketing is dynamically managed on a daily basis and is growing as a share of spend relative to traditional marketing channels.

 

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We continue to refine and expand our overall contact strategy to grow our customer base. We test various types of advertising and marketing campaigns and strategies, analyze the results of those tests and, then based on our learnings, refine those campaigns and strategies to attempt to maximize their effectiveness with current and potential customers. By understanding optimal offers and products to promote to current and former customers, along with potential prospects, we look to continue improvements in marketing return on investment. With respect to existing customers, direct mail, email and text messages serve as the primary tools we utilize in our marketing strategies. With respect to marketing to potential customers, our primary tools currently include digital and traditional broadcasting, and search advertising.

Competition

We operate in a highly competitive market with competition from national, regional and local operators of lease-to-own stores, virtual lease-to-own companies, traditional and e-commerce retailers (including many that offer layaway programs and title or installment lending), traditional and on-line sellers of used merchandise, and various types of consumer finance companies that may enable our customers to shop at traditional or on-line retailers, 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 product selection and availability, customer service and lease rates, store location and terms.

Working Capital

Our lease to own model results in us remaining the owner of merchandise on lease; therefore, our most significant working capital asset is merchandise inventory on lease. Our store-based and e-commerce operations also require us to maintain significant levels of merchandise inventory available for lease to provide the service levels 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. We believe our cash on hand, operating cash flows, credit availability under our financing agreements and other sources of financing will be adequate to meet our normal liquidity requirements.

Raw Materials

The principal raw materials we use in furniture manufacturing at Woodhaven 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 have a diverse base of suppliers; therefore, we are not dependent on any single supplier. The sourcing of raw materials from our suppliers is not overly dependent on any particular country. While we have not had any material interruptions in our manufacturing operations due to COVID-19 related shortages of raw materials, there can be no assurances that disruptions to our supply of raw materials will not become more significant going forward due to the adverse impacts of the pandemic.

Seasonality

Our revenue mix is moderately seasonal. Adjusting for growth, 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 expect these trends to continue in future periods.

Government Regulation

Our operations are extensively regulated by and subject to the requirements of various federal, state and local laws and regulations, and are subject to oversight by various government agencies. In general, such laws regulate applications for leases, pricing, late charges and other fees, lease disclosures, the content of advertising materials, and certain collection procedures.

 

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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, earnings or financial condition.

A summary of certain 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.

Federal regulatory authorities are increasingly focused on the subprime financial marketplace in which the lease-to-own industry operates, and any of these agencies may propose and adopt new regulations, or interpret existing regulations, in a manner that could result in significant adverse changes in the regulatory landscape for businesses such as ours. In addition, with increasing frequency, federal and state regulators are holding businesses like ours to higher standards of training, monitoring and compliance.

From time to time, federal regulatory agencies and state attorneys general have directed investigations or regulatory initiatives toward our industry, or toward certain companies within the industry. For example, in April 2019, we, along with other lease-to-own companies, received a Civil Investigative Demand (“CID”) from the FTC focused on certain transactions involving the contingent purchase and sale of customer lease agreements with other lease-to-own companies, and whether such transactions violated the FTC Act. Although we believe those transactions did not violate any laws and we have not admitted any wrongdoing, in August 2019, the Company reached an agreement with the FTC to resolve the issues raised in that CID. The consent agreement, which was approved and became final on May 12, 2020, prohibits such contingent purchases and sales of customer lease portfolios in the future, but does not require any fine or other payments to the FTC.

In addition to federal regulatory oversight, currently, nearly every state and most provinces in Canada specifically regulate lease-to-own transactions via state or provincial statutes, including states in which we currently operate our stores. Most state LTO laws require lease-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 LTO laws limit the retail price for an item, the total amount that a customer may be charged for an item, or regulate the “cost-of-rental” amount that lease-to-own companies may charge on lease-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 LTO transactions as a matter of good business ethics and customer service. We believe we are in material compliance with the various state LTO laws. At the present time, no federal law specifically regulates the lease-to-own transaction. Federal legislation to regulate the transaction has been proposed from time to time. In addition, certain elements of the business including matters such as collections activity, marketing disclosures to customers and customer contact may be subject to federal laws and regulation.

There has been increased legislative and regulatory attention in the United States, at both the federal and state levels, on financial services products offered to near-prime and subprime consumers in general, which may result in an increase in legislative regulatory efforts directed at the lease-to-own industry. We cannot predict whether any such legislation or regulations will be enacted and what the impact would be on us.

Additional regulations are being developed, as the attention placed on the True Lender Doctrine and consumer debt transactions has grown significantly. We believe we are in material compliance with all applicable laws and regulations. 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 business or other operations.

 

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Employees

At [●], Aaron’s SpinCo had approximately [●] employees. None of our employees are covered by a collective bargaining agreement, and we believe that our relations with employees are good. We believe in being an inclusive workplace for all of our employees and are committed to having a diverse workforce that is representative of the customers that choose to shop with us in-store or on-line, and the communities in which we operate our businesses. A variety of perspectives enriches our culture, leads to innovative solutions for our business and enables us to better meet the needs of a diverse customer base and reflects the communities we serve. Our aim is to develop inclusive leaders and an inclusive culture, while also recruiting, developing, mentoring, training, and retaining a diverse workforce, including a diverse group of management-level employees. As of December 31, 2019, for the employees that disclosed this information, 32% of our total workforce was female, 23% of management (which we define as manager level employees and higher) was female, 25% of our workforce was comprised of people of color and 32% of management was comprised of people of color.

Our Properties

We lease warehouse and retail store space for most of our store-based operations, call center space, and management and information technology space for corporate functions under operating leases expiring at various times through 2033. 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 have leased properties for bedding manufacturing, fulfillment centers, and service centers across the United States.

Our principal executive office is located at 400 Galleria Parkway SE, Suite 300, Atlanta, Georgia 30339. Below is a list of our principal facilities that are operational as of the date of this information statement. We believe that our facilities are adequate to support our business, and our properties and equipment have been well maintained.

 

Location

  

Primary Use and How Held

  

Sq. Ft.

Atlanta, Georgia

   Executive/Administrative Offices – Leased    72,000

Kennesaw, Georgia

   Administrative Offices – Leased    115,000
Various properties in Cairo and Coolidge, Georgia    Furniture Manufacturing, Furniture Parts Warehouse, Administration and Showroom – Primarily Owned    738,000

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, results of operations or financial condition. However, an adverse resolution of a number of these items may have a material adverse impact on our business, results of operations or financial condition.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion is a summary of the key factors management considers necessary in reviewing Aaron’s SpinCo’s historical-basis results of operations, operating segment results, and liquidity and capital resources. Statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) that are not historical may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

You should read the following MD&A in conjunction with the audited Combined Financial Statements and corresponding notes, the Unaudited Condensed Combined Financial Statements and corresponding notes and the Unaudited Pro Forma Condensed Combined Financial Statements and corresponding notes included elsewhere in this information statement. This MD&A contains forward-looking statements and the matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Unless the context otherwise requires or we specifically indicate otherwise, references to “Parent” refer to Aaron’s, Inc. prior to the completion of the holding company formation transaction described herein and to Aaron’s Holdings Company, Inc. following completion of the holding company formation transaction described herein. References to “Aaron’s SpinCo,” “we,” “us,” “our,” “our Company,” and “the Company” refer to Aaron’s SpinCo, Inc., currently a wholly-owned subsidiary of Parent, that will hold directly or indirectly the assets and liabilities historically associated with Parent’s Aaron’s Business segment (the “Aaron’s Business”) as of the separation and distribution date, and for which historical amounts herein include revenues and costs directly attributable to Aaron’s SpinCo and an allocation of expenses related to certain Parent corporate functions.

We describe in this MD&A the business to be held by us after the separation as if it were our business for all historical periods described. However, we are an entity that will not have independently conducted operations before the separation. References in this MD&A to our historical assets, liabilities, products, business or activities generally refer to the historical assets, liabilities, products, businesses or activities of the Aaron’s Business as it was conducted as part of Parent before the separation that will be held directly or indirectly by Aaron’s SpinCo immediately following the separation and distribution transaction described herein. Unless the context otherwise requires or we specifically indicate otherwise, the information included in this MD&A about Aaron’s SpinCo assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution.

Description of Holding Company Formation and Spin-off Transaction

On October 16, 2020, management of Aaron’s, Inc. finalized the formation of a new holding company structure in anticipation of the separation and distribution transaction described below. Under the holding company structure, Aaron’s, Inc. became a direct, wholly owned subsidiary of a newly formed company, Aaron’s Holdings Company, Inc. and thereafter converted to a limited liability company (“Aaron’s, LLC”). Upon completion of the holding company formation, Aaron’s Holdings Company, Inc. became the publicly traded parent company of the Progressive Leasing, Aaron’s Business, and Vive segments.

On July 29, 2020, Parent announced its intention to separate its Aaron’s Business segment from its Progressive Leasing and Vive segments which would result in two separate companies via a spin-off of a newly formed company, Aaron’s SpinCo, Inc., a Georgia corporation. Upon completion of the separation and distribution transaction, Aaron’s SpinCo, Inc. (“Aaron’s SpinCo”) will be a new, publicly traded company, that is

 

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expected to be traded on the NYSE and will be comprised of the existing Aaron’s Business segment. Parent will continue to be traded on the NYSE and will be comprised of the existing Progressive Leasing and Vive segments.

Business Overview

Aaron’s SpinCo is a leading omnichannel provider of lease-to-own (“LTO”) solutions that is focused on serving the credit-challenged segment of the population. We provide consumers with LTO and purchase solutions for the products they need and want including furniture, appliances, electronics, computers and a variety of other products and accessories through our company-operated and franchised stores in the United States, Canada and Puerto Rico, as well as through our e-commerce platform, Aarons.com. We focus on providing our customers with unparalleled customer service, a compelling value proposition and flexible leasing options, including the ability to pause, cancel or resume lease contracts at any time, at no additional cost. Our operations also include Woodhaven, which manufactures and supplies the majority of the bedding and a significant portion of the upholstered furniture leased and sold through our stores, including franchised stores.

Recent Restructuring Programs and Franchisee Acquisitions

As a result of our real estate repositioning strategy and other cost-reduction initiatives, we initiated restructuring programs in 2019 and 2020 to optimize our company-operated store base portfolio. These restructuring programs have resulted or will result in the announced and/or actual closure, consolidation or relocation of 278 company-operated stores throughout 2019 and 2020. We also further rationalized our home office and field support staff, which resulted in a reduction in employee headcount in those areas to more closely align with current business conditions. Throughout 2016, 2017, and 2018, we closed and consolidated 139 underperforming company-operated stores under similar restructuring initiatives. We will continue to evaluate our company-operated store portfolio to determine if we will further rationalize and reposition our store base to better align with marketplace demand. Under the real estate repositioning and optimization restructuring program, the Company’s current strategic plan is to remodel, reposition and consolidate our company-operated store footprint over the next 3-4 years. We believe that such strategic actions will allow the Company to continue to successfully serve our markets while continuing to utilize our growing Aarons.com shopping and servicing platform. Management expects that this strategy, along with our increased use of technology, will enable us to reduce store count while retaining a significant portion of our existing customer relationships as well as attracting new customers. To the extent that management executes on its long-term strategic plan, additional restructuring charges will likely result from our real estate repositioning and optimization initiatives, primarily related to operating lease right-of-use asset and fixed asset impairments. However, the extent of future restructuring charges is not estimable at this time, as specific store locations to be closed and/or consolidated have not yet been identified by management.

During 2017, 2018 and 2019, we acquired substantially all of the assets of the store operations of 111, 152, and 18 franchised stores, respectively. The acquisitions are benefiting our omnichannel platform through added scale, strengthening our presence in certain geographic markets, enhancing operational control, including compliance, and enabling us to execute our business transformation initiatives on a broader scale.

Estimated Separation and Distribution Costs

Parent is incurring incremental costs to evaluate, plan and execute the separation. Parent estimates those total incremental costs through the effective date of the separation will be in the range of approximately $[●] to $[●], of which approximately $[●] to $[●] will be incurred by Aaron’s SpinCo. Included in that range of incremental costs are debt breakage fees of approximately $[●], which will be incurred by Aaron’s SpinCo, as a result of the [●] notice of prepayment to the holders of certain of Parent’s outstanding notes. Also included in this range are new debt issuance costs in the range of approximately $[●] to $[●], all of which will be allocated to Aaron’s SpinCo. These new debt issuance costs are expected to be incurred in conjunction with a new revolving credit agreement that Aaron’s SpinCo is expected to enter into prior to or concurrent with the separation

 

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transaction described herein. These estimates of incremental costs related to the separation transaction are based on currently known facts and may change materially as future cost-impacting decisions are made. These estimates do not include costs related to potential tax related charges or potential capital expenditures which may be incurred in connection with the proposed separation transaction. These additional costs could be significant. For the nine months ended September 30, 2020, Parent has incurred $10.8 million in incremental, pre-tax costs related to the separation and distribution transactions described herein, of which $1.7 million were recorded in personnel costs within Aaron’s SpinCo’s condensed combined statements of earnings and comprehensive income.

Recent Developments and Operational Measures Taken by Us in Response to the COVID-19 Pandemic

As a result of the COVID-19 pandemic, we temporarily closed our showrooms in March 2020 and shifted to e-commerce and curbside service only for all of our company-operated stores to protect the health and safety of our customers and associates, except where such curbside service was prohibited by governmental authorities. Since that time, we have reopened nearly all of our store showrooms, but there can be no assurance that those showrooms will not be closed in future months, or have their operations limited, if, for example, there are localized increases or “second waves” in the number of COVID-19 cases in the areas where our stores are located and, in response, governmental authorities issue orders requiring such closures or limitations on operations, or we voluntarily close our showrooms or limit their operations to protect the health and safety of our customers and associates. Furthermore, we are experiencing disruptions in our supply chain which have impacted product availability in some of our stores and, in some situations, we are procuring inventory from alternative sources at higher costs. These developments had an unfavorable impact on Aaron’s SpinCo’s generation of lease agreements during the first, second and third quarters of 2020.

The COVID-19 pandemic may adversely impact our business, results of operations, financial condition, liquidity and/or cash flow in future periods. The extent of any such adverse impacts likely would depend on several factors, including (a) the length and severity of the outbreak, including, for example, localized outbreaks or a “second wave” outbreak of COVID-19 cases; (b) the impact of any such outbreaks on our customers, suppliers, and employees; (c) the nature of any government orders issued in response to such outbreaks, including whether we would be deemed essential, and thus, exempt from all or some portion of such orders; (d) whether there is one or more additional rounds of government stimulus in response to the COVID-19 outbreak, as well as the nature, timing and amount of any such stimulus payments; and (e) supply chain disruptions for our business.

The following summarizes significant developments and operational measures taken by us in response to the COVID-19 pandemic:

 

   

We understand many of our customers may be experiencing significant family, health, and/or financial challenges. We continue to provide various payment deferment options and/or other alternative payment schedules to customers who are unable to make their lease payments on normal terms.

 

   

In conjunction with the operational adjustments made at our company-operated stores, we accelerated the national rollout of our centralized digital decisioning platform, which is an algorithm-driven lease decisioning tool used in our company-operated stores that is designed to improve our customers’ experiences by streamlining and standardizing the lease application decisioning process, shortening transaction times, and establishing appropriate transaction sizes and lease payment amounts, given the customer’s profile. We completed the national rollout during the second quarter of 2020, and that decisioning platform is now being utilized in all of our company-operated stores in the United States.

 

   

To assist the franchisees of our business who were facing adverse impacts to their businesses, we offered a royalty fee abatement from March 8, 2020 until May 16, 2020 and modified payment terms on outstanding accounts receivable owed to us by franchisees. In addition, payment terms were temporarily modified for the franchise loan facility under which certain franchisees have outstanding borrowings that are guaranteed by us.

 

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The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

In response to the global impacts of COVID-19 on U.S. companies and citizens, the government enacted the CARES Act on March 27, 2020. We believe a significant portion of our customers have received stimulus payments and/or federally supplemented unemployment payments, pursuant to the CARES Act, which have enabled them to continue making payments to us under their lease-to-own or credit card agreements, despite the economically challenging times resulting from the COVID-19 pandemic.

The CARES Act also included several tax relief options for companies, which resulted in the following provisions available to the Company:

 

   

The Company has elected to carryback its 2018 net operating losses of $242.2 million to 2013, thus generating a refund of $84.4 million, which was received in July 2020, and a discrete income tax benefit of $34.2 million recognized during the three months ended March 31, 2020. The discrete tax benefit is the result of the federal income tax rate differential between the current statutory rate of 21% and the 35% rate applicable to 2013.

 

   

The Company will defer all payroll taxes that it is permitted to defer under the CARES Act, which generally applies to Social Security taxes otherwise due, with 50% of the tax payable on December 31, 2021 and the remaining 50% payable on December 31, 2022.

 

   

Certain wages and benefits that were paid to furloughed employees may be eligible for an employee retention credit of up to 50% of wages paid to eligible associates.

Separate from the CARES Act, the IRS extended the due dates for estimated tax payments for the first and second quarters of 2020 to July 15, 2020. Additionally, many states are offering similar deferrals. The Company has taken advantage of all such extended due dates.

Highlights for the Nine Months ended September 30, 2020

The following summarizes significant highlights from the nine months ended September 30, 2020:

 

   

We reported revenues of $1.3 billion in the nine months ended September 30, 2020, a decrease of 3.3% compared to the same period in 2019. This decrease is primarily due to the reduction of 251 company-operated stores during 2019 and the first nine months of 2020, partially offset by a 1.2% increase in same store revenues. The increase in same store revenues was driven by strong customer payment activity, an increase in early buyouts and higher retail sales, all of which we believe were due in part to government stimulus payments and supplemental federal unemployment benefits received by a significant portion of our customers during the pandemic.

 

   

Losses before income taxes were $400.8 million during the nine months ended September 30, 2020 compared to earnings before income taxes of $6.9 million in the prior year period. Losses before income taxes during the nine months ended September 30, 2020 includes a goodwill impairment charge of $446.9 million, a $14.1 million charge related to an early termination fee for a sales and marketing agreement, and restructuring charges of $33.3 million related to the closure and consolidation of company-operated stores in 2020 and changes in estimates of future sublease activity of vacant closed store properties. We also recognized $5.7 million of incremental allowances for lease merchandise write-offs, franchisee accounts receivable, and reserves on the franchise loan guarantees due to the potential adverse impacts of the COVID-19 pandemic. These decreases were partially offset by strong customer payment activity and lower lease merchandise write-offs during the nine months ended September 30, 2020.

 

   

We generated cash from operating activities of $337.2 million for the nine months ended September 30, 2020 compared to $163.7 million for the comparable period in 2019.

 

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Fiscal Year 2019 Highlights

The following summarizes significant highlights from the year ended December 31, 2019:

 

   

We reported revenues of $1.8 billion in 2019, which was nearly flat compared to 2018. Key factors impacting revenue trends year-over-year include the net reduction of 145 company-operated stores during 2019, offset by the acquisitions of various franchisees in 2018. Same store revenues were flat in 2019 compared to 2018.

 

   

Earnings before income taxes decreased to $34.3 million compared to $63.6 million in 2018. Earnings before income taxes during 2019 includes restructuring charges of $40.0 million related to the closure and consolidation of stores, $7.4 million in gains from the sale of various real estate properties and gains on insurance recoveries of $4.5 million.

Also contributing to the decrease in earnings before income taxes was a higher provision for lease merchandise write-offs as a percentage of lease revenues and fees, which increased to 6.2% in 2019 compared to 4.6% in 2018. The increase was due to lower collections activity resulting from the redeployment of store labor towards enhanced sales activities, an increase in the number and type of promotional offerings, higher ticket leases, store closure activity and an increasing mix of e-commerce as a percentage of revenues.

 

   

We generated cash from operating activities of $186.0 million in 2019 compared to $186.5 million in 2018.

Key Metrics

Company-operated and franchised store activity (unaudited) is summarized as follows:

 

     Nine Months Ended
September 30,
    Years Ended December 31,  
     2020     2019     2018     2017  

Company-operated stores

        

Company-operated stores open, beginning of period

     1,167       1,312     1,175       1,165  

Opened

     1       —       —         —    

Added through acquisition

     6       18     152       110  

Closed, sold or merged

     (88     (163     (15     (100
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated stores open, end of period

     1,086       1,167     1,312       1,175  
  

 

 

   

 

 

   

 

 

   

 

 

 

Franchised stores

        

Franchised stores open, beginning of period

     335       377     551       699  

Opened

     —         —       2       1  

Purchased from the Company

     —         —       —         —    

Purchased by the Company

     (6     (18     (152     (111

Closed, sold or merged

     (21     (24     (24     (38
  

 

 

   

 

 

   

 

 

   

 

 

 

Franchised stores open, end of period

     308       335     377       551  
  

 

 

   

 

 

   

 

 

   

 

 

 

Same Store Revenues. We believe that changes in same store revenues are a key performance indicator of Aaron’s SpinCo.

For the nine months ended September 30, 2020, we calculated this amount by comparing revenues for the nine months ended September 30, 2020 to revenues for the comparable period in 2019 for all stores open for the entire 24-month period ended September 30, 2020, excluding stores that received lease agreements from other acquired, closed or merged stores. Same store revenues increased 1.2% during the nine month period ended September 30, 2020 compared to the prior period.

 

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For the year ended December 31, 2019, we calculated this amount by comparing revenues for the year ended December 31, 2019 to revenues for the year ended December 31, 2018 for all stores open for the entire 24-month period ended December 31, 2019, excluding stores that received lease agreements from other acquired, closed or merged stores. Same store revenues were flat in 2019 compared to 2018.

Key Components of Earnings Before Income Taxes

In this management’s discussion and analysis section, we review our condensed combined results. The combined financial statements were prepared on a standalone basis and are derived from the consolidated financial statements and accounting records of Parent. The combined financial statements include all revenues and costs directly attributable to Aaron’s SpinCo and an allocation of expenses related to certain corporate functions. These expenses have been allocated to Aaron’s SpinCo based on direct usage or benefit where specifically identifiable, with the remaining expenses allocated primarily on a pro rata basis using an applicable measure of revenues, headcount or other relevant measures. Aaron’s SpinCo considers these allocations to be a reasonable reflection of the utilization of services or the benefit received. The combined financial statements include assets and liabilities specifically attributable to Aaron’s SpinCo. All intercompany transactions and balances within Aaron’s SpinCo have been eliminated. Transactions between Aaron’s SpinCo and Parent have been included as invested capital within the combined financial statements.

For the years ended December 31, 2019 and the comparable prior year periods, some of the key revenue, cost and expense items that affected earnings before income taxes were as follows:

Revenues. We separate our total revenues into three components: (a) lease and retail revenues; (b) non-retail sales; and (c) franchise royalties and other revenues. Lease and retail revenues primarily include all revenues derived from lease agreements at our company-operated stores and e-commerce platform, the sale of both new and returned lease merchandise from our company-operated stores and revenues from our Aaron’s Club program. Lease and retail revenues are recorded net of a provision for uncollectible accounts receivable related to lease renewal payments from lease agreements with customers. Non-retail sales primarily represent new merchandise sales to our franchisees. Franchise royalties and other revenues primarily represent fees from the sale of franchise rights and royalty payments from franchisees, as well as other related income from our franchised stores. Franchise royalties and other revenues also include revenues from leasing company-owned real estate properties to unrelated third parties, as well as other miscellaneous revenues.

Cost of Lease and Retail Revenues. Cost of lease and retail revenues is primarily comprised of the depreciation expense associated with depreciating merchandise held for lease and leased to customers by our company-operated stores and through our e-commerce platform. Cost of lease and retail revenues also includes the depreciated cost of merchandise sold through our company-operated stores as well as the costs associated with the Aaron’s Club program.

Non-Retail Cost of Sales. Non-retail cost of sales primarily represents the cost of merchandise sold to our franchisees.

Personnel Costs. Personnel costs represents total compensation costs incurred for services provided by employees of Aaron’s SpinCo as well as an allocation of personnel costs for Parent’s corporate and shared function employees.

Other Operating Expenses, Net. Other operating expenses, net includes occupancy costs (including rent expense, store maintenance and depreciation expense related to non-manufacturing facilities), shipping and handling, advertising and marketing, intangible asset amortization expense, professional services expense, bank and credit card related fees, an allocation of Parent general corporate expenses and other miscellaneous expenses. Other operating expenses, net also includes gains or losses on sales of company-operated stores and delivery vehicles, fair value adjustments on assets held for sale, gains or losses on other transactions involving property, plant and equipment, and gains related to property damage and business interruption insurance claim recoveries.

 

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Provision for Lease Merchandise Write-offs. Provision for lease merchandise write-offs represents charges incurred related to estimated lease merchandise write-offs.

Restructuring Expenses, Net. Restructuring expenses, net primarily represent the cost of real estate optimization efforts and cost reduction initiatives related to the Aaron’s SpinCo home office and field support functions. Restructuring expenses, net are comprised principally of closed store operating lease right-of-use asset impairment and operating lease charges, the impairment of other vacant properties, including the closure of one of our store support buildings, workforce reductions, fixed asset impairment charges and reversals of previously recorded restructuring charges.

Interest Expense. Interest expense consists primarily of interest incurred on Parent’s fixed and variable rate debt. All of the interest expense for Parent’s debt obligations has been included within Aaron’s SpinCo’s combined financial statements because Aaron’s, LLC, as the primary obligor for the external debt agreements, is one of the legal entities forming the basis of Aaron’s SpinCo.

Impairment of Investment. Impairment of investment consists of an other-than-temporary loss to fully impair Aaron’s SpinCo’s investment in PerfectHome, a rent-to-own company operating in the United Kingdom.

Impairment of Goodwill. Impairment of goodwill is the full write-off of our goodwill balance that was recorded in the first quarter of 2020. Refer to Note 1 of these condensed combined financial statements for further discussion of the interim goodwill impairment assessment and resulting impairment charge.

Other Non-Operating Income (Expense), Net. Other non-operating income (expense), net includes gains and losses resulting from changes in the cash surrender value of company-owned life insurance related to the Parent deferred compensation plan and the impact of foreign currency remeasurement. This activity also includes earnings on cash and cash equivalent investments, as well as the accrual of interest income on Aaron’s SpinCo’s investment in PerfectHome prior to its full impairment.

 

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Results of Operations

Results of Operations—Nine months ended September 30, 2020 and 2019

 

     Nine Months Ended
September 30,
    Change  

(In Thousands)

   2020     2019     $     %  

REVENUES:

        

Lease and Retail Revenues

   $ 1,190,903   $ 1,220,475   $ (29,572     (2.4 )% 

Non-Retail Sales

     94,710     102,190     (7,480     (7.3

Franchise Royalties and Other Revenues

     19,134     26,860     (7,726     (28.8
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,304,747     1,349,525     (44,778     (3.3

COSTS OF REVENUES:

        

Cost of Lease and Retail Revenues

     412,009     425,640     (13,631     (3.2

Non-Retail Cost of Sales

     82,006     83,057     (1,051     (1.3
  

 

 

   

 

 

   

 

 

   

 

 

 
     494,015     508,697     (14,682     (2.9
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

     810,732     840,828     (30,096     (3.6

Gross Profit %

     62.1     62.3    

OPERATING EXPENSES

        

Personnel Costs

     351,905     378,991     (27,086     (7.1

Other Operating Expenses, Net

     324,156     336,935     (12,779     (3.8

Provision for Lease Merchandise Write-Offs

     47,478     70,068     (22,590     (32.2

Restructuring Expenses, Net

     33,318     37,535     (4,217     (11.2

Impairment of Goodwill

     446,893     —         446,893     nmf  
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,203,750     823,529     380,221     46.2
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING (LOSS) PROFIT

     (393,018     17,299     (410,317     nmf  

Interest Expense

     (8,625     (13,247     4,622     34.9  

Other Non-Operating Income

     887     2,835     (1,948     (68.7
  

 

 

   

 

 

   

 

 

   

 

 

 

(LOSS) EARNINGS BEFORE INCOME TAXES

     (400,756     6,887     (407,643     nmf  

INCOME TAX BENEFIT

     (131,969     (690     (131,279     nmf  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (LOSS) EARNINGS

     (268,787     7,577     (276,364     nmf  
  

 

 

   

 

 

   

 

 

   

 

 

 

nmf—Calculation is not meaningful

Revenues

The following table presents revenue by source for the nine months ended September 30, 2020 and 2019:

 

     Nine Months Ended
September 30,
     Change  

(In Thousands)

   2020      2019      $     %  

Lease Revenues and Fees

   $ 1,153,799    $ 1,189,914    $ (36,115     (3.0 )% 

Retail Sales

     37,104      30,561      6,543     21.4  

Non-Retail Sales

     94,710      102,190      (7,480     (7.3

Franchise Royalties and Fees

     18,168      25,899      (7,731     (29.9

Other

     966      961      5     0.5  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues

   $ 1,304,747    $ 1,349,525    $ (44,778     (3.3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Lease revenues and fees decreased during the nine months ended September 30, 2020 primarily due to a decrease of $44.6 million of lease revenues and fees related to the reduction of 251 company-operated stores

 

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during 2019 and the first nine months of 2020, partially offset by a 1.2% increase in same store revenues, inclusive of lease revenues and fees and retail sales, during the 24-month period ended September 30, 2020. The increase in same store revenues was driven by strong customer payment activity, an increase in early buyouts and higher retail sales, all of which we believe were due in part to government stimulus payments and supplemental federal unemployment benefits received by a significant portion of our customers during the pandemic.

The decrease in non-retail sales is primarily due to a $8.2 million decrease related to the reduction of 69 franchised stores throughout 2019 and the first nine months of 2020. Franchise royalties and fees decreased by $4.7 million as a result of the temporary royalty fee abatement offered by the Company from March 2020 through May 16, 2020 in response to the pandemic.

In March 2020, the Company voluntarily closed the showrooms for all of its company-operated stores, and moved to an e-commerce and curbside only service model, to protect the health and safety of our customers and associates, while continuing to provide our customers with the essential products they need such as refrigerators, freezers, mattresses and computers. Since that time, we have reopened nearly all of our store showrooms. There can be no assurances that some portion or all of those showrooms will not be closed in the future, whether due to pandemic-related government orders or voluntarily by us where we determine that such closures are necessary to protect the health and safety of our customers and associates during the pandemic. Any such closures or restrictions may have an unfavorable impact on the revenues and earnings in future periods, and could also have an unfavorable impact on the Company’s liquidity, as discussed below in the “—Liquidity and Capital Resources” section. Although almost all of the showrooms of company-operated stores had reopened by the end of the second quarter of 2020, changing consumer behavior, such as consumers voluntarily refraining from shopping in-person at those store locations during the pandemic, and ongoing supply chain disruptions, particularly in appliance, furniture and electronics, are expected to continue to challenge new lease originations in future periods.

Cost of Revenues and Gross Profit

Cost of lease and retail revenues. Information about the components of the cost of lease and retail revenues is as follows:

 

     Nine Months Ended
September 30,
     Change  

(In Thousands)

   2020      2019      $     %  

Depreciation of Lease Merchandise and Other Lease Revenue Costs

   $ 388,289    $ 405,615    $ (17,326     (4.3 )% 

Retail Cost of Sales

     23,720      20,025      3,695     18.5  

Non-Retail Cost of Sales

     82,006      83,057      (1,051     (1.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Costs of Revenues

   $ 494,015    $ 508,697    $ (14,682     (2.9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Depreciation of lease merchandise and other lease revenue costs. Depreciation of lease merchandise and other lease revenue costs decreased primarily due to the closure of 251 company-operated stores during 2019 and the first nine months of 2020.

Gross profit for lease revenues and fees was $765.5 million and $784.3 million during 2020 and 2019, respectively, which represented a gross profit percentage of 66.3% and 65.9% for the respective periods. The improvement in gross profit was primarily driven by strong customer payment activity in 2020 compared to 2019.

Retail cost of sales. Retail cost of sales increased due to an increase in retail sales primarily driven by government stimulus and unemployment benefits received by a significant portion of our customers during the

 

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pandemic, partially offset by the closure and consolidation of 251 company-operated stores during 2019 and 2020. Gross profit for retail sales was $13.4 million and $10.5 million during 2020 and 2019, respectively, which represented a gross profit percentage of 36.1% and 34.5% for the respective periods. The improvement in gross profit is primarily due to a favorable mix shift to retail sales of new versus returned lease merchandise during 2020 as compared to 2019.

Non-retail cost of sales. The decline in non-retail cost of sales in 2020 compared to 2019 is primarily attributable to the reduction in the number of franchise stores and lower product purchases by franchisees.

Gross profit for non-retail sales was $12.7 million and $19.1 million during 2020 and 2019, respectively, which represented a gross profit percentage of 13.4% and 18.7% for the respective periods. The decline in gross profit was driven by higher inventory purchase costs as compared to the respective prior year periods.

Gross Profit

As a percentage of total revenues, gross profit declined slightly to 62.1% for the nine months ended September 30, 2020 from 62.3% in the comparable prior year period. The factors impacting the change in gross profit are discussed above.

Operating Expenses

Personnel costs. Personnel costs decreased by $27.1 million due primarily to the reduction of store support center and field support staff as part of our restructuring programs in 2019 and 2020 and cost cutting measures taken in response to the COVID-19 pandemic, including furloughing or terminating associates, as well as instituting temporary salary reductions for executive officers.

Provision for lease merchandise write-offs. The provision for lease merchandise write-offs as a percentage of lease revenues and fees decreased to 4.1% during the nine months ended September 30, 2020 from 5.9% in the prior year comparable period. This decrease was primarily driven by strong customer payment activity and a decrease in promotional offerings, partially offset by an incremental provision of $2.5 million recognized due to potential adverse impacts of the COVID-19 pandemic and an increasing mix of e-commerce as a percentage of revenues, which typically results in higher charge-off rates than in-store lease agreements.

Restructuring expenses, net. We incurred restructuring expenses of $33.3 million for the nine months ended September 30, 2020, which were primarily comprised of $22.7 million of operating lease right-of-use asset and fixed asset impairment for company-operated stores identified for closure during the first nine months of 2020, $4.3 million of continuing variable maintenance charges and taxes incurred related to closed stores, $5.7 million of severance charges related to workforce reductions and $0.6 million of other restructuring related charges.

Impairment of goodwill. During the first quarter of 2020, we recorded a loss of $446.9 million to fully write-off our goodwill balance. Refer to Note 1 of the condensed combined financial statements for further discussion of the interim goodwill impairment assessment and resulting impairment charge.

 

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Other Operating Expenses, Net

Information about certain significant components of other operating expenses, net is as follows:

 

     Nine Months Ended
September 30,
    Change  

(In Thousands)

   2020     2019     $     %  

Occupancy Costs

     130,939     144,221     (13,282     (9.2

Shipping and Handling

     48,099     56,121     (8,022     (14.3

Advertising Costs

     32,158     34,082     (1,924     (5.6

Intangible Amortization

     5,114     11,100     (5,986     (53.9

Professional Services

     26,392     9,788     16,604     nmf  

Bank and Credit Card Related Fees

     14,223     14,397     (174     (1.2

Gains on Insurance Recoveries

     —         (4,527     4,527     nmf  

Gains on Asset and Store Dispositions and Assets Held For Sale, net

     (796     (318     (478     nmf  

Other Miscellaneous Expenses, net

     68,027     72,071     (4,044     (5.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Operating Expenses, net

   $ 324,156   $ 336,935   $ (12,779     (3.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

nmf—Calculation is not meaningful

As a percentage of total revenues, other operating expenses, net decreased to 24.8% in 2020 from 25.0% in 2019.

Occupancy costs declined due to a $10.5 million decrease in rent resulting from the closure and consolidation of 251 stores in 2019 and the first nine months of 2020 as part of our restructuring actions, as well as the $1.9 million impact of various rent concessions that were negotiated with the landlords of company-operated stores in response to the economic uncertainty created by the COVID-19 pandemic.

Shipping and handling costs decreased primarily due to a 15% decrease in deliveries during the first nine months of 2020 compared to the same period in 2019 resulting from the temporary closure of all our store showrooms as a result of the COVID-19 pandemic.

Advertising costs decreased during the nine months ended September 30, 2020 primarily due to a significant reduction in marketing initiatives as a result of the Company’s cost cutting measures in response to the COVID-19 pandemic.

Intangible amortization expense decreased due to intangible assets that became fully amortized.

Professional services increased primarily due to an early termination fee of $14.1 million for a sales and marketing agreement.

During the nine months ended September 30, 2019, other operating expenses, net included gains on insurance recoveries of $4.5 million related to payments received from insurance carriers for Hurricanes Harvey and Irma property and business interruption claims in excess of the related property insurance receivables. There was no similar activity during the nine months ended September 30, 2020.

Interest expense. Interest expense decreased to $8.6 million in 2020 from $13.2 million in 2019 due primarily to lower average interest rates on the revolving credit and term loan facility and a decrease in interest expense incurred on the lower outstanding balance of the senior unsecured notes.

Other non-operating income. Other non-operating income includes the impact of foreign currency remeasurement, as well as net gains and losses resulting from changes in the cash surrender value of company-

 

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owned life insurance related to the Parent deferred compensation plan. Foreign exchange remeasurement gains and losses were not significant during the nine months ended September 30, 2020 or 2019. The changes in the cash surrender value of Company-owned life insurance resulted in net losses of $0.4 million during the nine months ended September 30, 2020 and net gains of $1.5 million during the nine months ended September 30, 2019.

Income Tax Benefit

The Company recorded a net income tax benefit of $132.0 million for the nine months ended September 30, 2020 compared to a net income tax benefit of $0.7 million for the same period in 2019. The net income tax benefit recognized in 2020 was primarily the result of losses before income taxes of $400.8 million as well as discrete income tax benefits generated by the provisions of the CARES Act. The CARES Act, among other things, (i) waived the 80% taxable income limitation on the use of net operating losses which was previously set forth under the Tax Cuts and Jobs Act of 2017 and (ii) provided that net operating losses arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 may be treated as a carryback to each of the five preceding taxable years. These CARES Act provisions resulted in $34.2 million of net tax benefits driven by the rate differential on the carryback of net operating losses previously recorded at 21% where the benefit is recognized at 35%. The effective tax rate increased to 32.9% in 2020 due primarily to the impact of the discrete income tax benefits described above. The effective tax rate of (10.0)% for 2019 was driven by a $2.4 million discrete income tax benefit related to stock-based compensation partially offset by tax expense calculated on year-to-date pre-tax book income.

Results of Operations

Results of Operations—Years Ended December 31, 2019, 2018 and 2017

 

                      Change  
    Year Ended December 31,     2019 vs. 2018     2018 vs. 2017  

(In Thousands)

  2019     2018     2017     $     %     $     %  

REVENUES:

             

Lease and Retail Revenues

  $ 1,608,832   $ 1,540,800   $ 1,460,815   $ 68,032     4.4   $ 79,985     5.5

Non-Retail Sales

    140,950     207,262     270,253     (66,312     (32.0     (62,991     (23.3

Franchise Royalties and Other Revenues

    34,695     46,654     50,834     (11,959     (25.6     (4,180     (8.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,784,477     1,794,716     1,781,902     (10,239     (0.6     12,814     0.7

COSTS OF REVENUES:

             

Cost of Lease and Retail Revenues

    559,232     533,974     517,946     25,258     4.7     16,028     3.1

Non-Retail Cost of Sales

    113,229     174,180     241,356     (60,951     (35.0     (67,176     (27.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    672,461     708,154     759,302     (35,693     (5.0     (51,148     (6.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

    1,112,016     1,086,562     1,022,600     25,454     2.3     63,962     6.3

Gross Profit %

    62.3     60.5     57.4        

OPERATING EXPENSES

             

Personnel Costs

    499,993     482,712     460,606     17,281     3.6     22,106     4.8

Other Operating Expenses, Net

    426,774     431,158     382,853     (4,384     (1.0     48,305     12.6

Provision for Lease Merchandise Write-Offs

    97,903     68,970     59,621     28,933     42.0     9,349     15.7

Restructuring Expenses, Net

    39,990     2,750     17,145     37,240     nmf       (14,395     (84.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,064,660     985,590     920,225     79,070     8.0     65,365     7.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING PROFIT

    47,356     100,972     102,375     (53,616     (53.1     (1,403     (1.4

Interest Expense

    (16,967     (16,440     (18,151     (527     (3.2     1,711     (9.4

 

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                       Change  
    Year Ended December 31,     2019 vs. 2018     2018 vs. 2017  

(In Thousands)

  2019      2018     2017     $     %     $     %  

Impairment of Investment

    —          (20,098     —         20,098     nmf       (20,098     nmf  

Other Non-Operating Income (Expense), Net

    3,881      (866     5,416     4,747     nmf       (6,282     nmf  
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAX EXPENSE (BENEFIT)

    34,270      63,568     89,640     (29,298     (46.1     (26,072     (29.1

INCOME TAX EXPENSE (BENEFIT)

    6,171      12,915     (53,278     (6,744     (52.2     66,193     nmf  
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS

  $ 28,099    $ 50,653   $ 142,918   $ (22,554     (44.5 )%    $ (92,265     (64.6 )% 
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

nmf—Calculation is not meaningful

Revenues

The following table presents revenue by source for the years ended December 31, 2019, 2018 and 2017:

 

                          Change  
     Year Ended December 31,      2019 vs. 2018     2018 vs. 2017  

(In Thousands)

   2019      2018      2017      $     %     $     %  

Lease Revenues and Fees

   $ 1,570,358    $ 1,509,529    $ 1,433,350    $ 60,829     4.0   $ 76,179     5.3

Retail Sales

     38,474      31,271      27,465      7,203     23.0       3,806     13.9

Non-Retail Sales

     140,950      207,262      270,253      (66,312     (32.0     (62,991     (23.3

Franchise Royalties and Fees

     33,432      44,815      48,278      (11,383     (25.4     (3,463     (7.2

Other

     1,263      1,839      2,556      (576     (31.3     (717     (28.1
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

   $ 1,784,477    $ 1,794,716    $ 1,781,902    $ (10,239     (0.6 )%    $ 12,814     0.7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2019 Versus Year Ended December 31, 2018

Lease revenues and fees and retail sales increased during 2019 compared to 2018 primarily due to $111.3 million of incremental revenue derived from franchisee acquisitions completed during 2018, partially offset by a decrease of $36.7 million related to the closure and consolidation of 163 company-operated stores in 2019 related to store repositioning and optimization initiatives. E-commerce revenues were approximately 9% and 7% of total lease revenues and fees during the years ended December 31, 2019 and 2018, respectively. Same store revenues during the 24-month period ended December 31, 2019 were relatively flat.

The decrease in non-retail sales and franchise royalties and fees during 2019 is primarily due to the reduction of 42 and 174 franchised stores during the year ended December 31, 2019 and 2018, respectively, and less product demand from franchisees in 2019.

Year Ended December 31, 2018 Versus Year Ended December 31, 2017

Lease revenues and fees and retail sales increased in 2018 compared to 2017 primarily due to $146.2 million of incremental revenue derived from franchisee acquisitions completed in 2017 and 2018, partially offset by a decrease of $40.1 million related to the closure and consolidation of 115 company-operated stores during 2017 and 2018 related to store repositioning and optimization initiatives. Lease revenues and fees also declined due to a 1.5% decrease in same store revenues during the 24-month period ended December 31, 2018.

The decrease in non-retail sales during 2018 was primarily due to the reduction of franchised stores during the 24-month period ended December 31, 2018. This reduction was primarily driven by the acquisition of various franchisees throughout 2017 and 2018 resulting in $60.6 million less non-retail sales for the year ended December 31, 2018 as compared to the same period in 2017.

 

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The decrease in franchise royalties and fees in 2018 was primarily due to a decrease of $10.0 million resulting from franchised stores acquired in 2018 and 2017, as discussed above, partially offset by an increase of $7.2 million related to the new presentation of the advertising fees charged to franchisees. Under the new presentation, those fees are reported as revenue in the combined statements of earnings as a result of our adoption of ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), on January 1, 2018, rather than being reported as a reduction to other operating expenses, net, which was the presentation used in 2017 in accordance with ASC 605—Revenue Recognition.

Cost of Revenues and Gross Profit

Cost of lease and retail revenues. Information about the components of the cost of lease and retail revenues is as follows:

 

                          Change  
     Year Ended December 31,      2019 vs. 2018     2018 vs. 2017  

(In Thousands)

   2019      2018      2017      $     %     $     %  

Depreciation of Lease Merchandise and Other Lease Revenue Costs

   $ 535,208    $ 514,155    $ 500,368    $ 21,053     4.1   $ 13,787     2.8

Retail Cost of Sales

     24,024      19,819      17,578      4,205     21.2     2,241     12.7

Non-Retail Cost of Sales

     113,229        174,180        241,356        (60,951     (35.0     (67,176     (27.8
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Costs of Revenues

   $ 672,461    $ 708,154    $ 759,302    $ (35,693 )     (5.0 )%    $ (51,148 )     (6.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2019 Versus Year Ended December 31, 2018

Depreciation of lease merchandise and other lease revenue costs. Depreciation of lease merchandise and other lease revenue costs increased due to our acquisitions of 152 franchised stores in 2018, which resulted in $34.3 million of incremental depreciation of lease merchandise and other lease revenue costs. This increase was offset by lower inventory purchase cost in 2019.

Gross profit for lease revenues and fees was $1.0 billion and $995.4 million during 2019 and 2018, respectively, which represented a gross profit percentage of 65.9% for both periods.

Retail cost of sales. The franchisee acquisitions completed in 2018 resulted in a $2.7 million increase in retail cost of sales and an increase of $0.8 million related to the closure and consolidation of 145 company-operated stores during 2019.

Gross profit for retail sales was $14.5 million and $11.5 million during 2019 and 2018, respectively, which represented a gross profit percentage of 37.6% and 36.6% for the respective periods. The improvement in gross profit for retail sales is primarily due to lower inventory purchase cost during 2019 as compared to 2018, partially offset by higher sales price discounting of pre-leased merchandise during 2019.

Non-retail cost of sales. The franchisee acquisitions completed in 2018 resulted in a $33.1 million decrease in non-retail cost of sales. The remaining decrease in non-retail cost of sales is due to less product demand from franchisees.

Gross profit for non-retail sales was $27.7 million and $33.1 million during 2019 and 2018, respectively, which represented a gross profit percentage of 19.7% and 16.0% for the respective periods. The improvement in the gross profit percentage for non-retail sales was driven by lower inventory purchase costs in 2019 as compared to the prior year.

 

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Year Ended December 31, 2018 Versus Year Ended December 31, 2017

Depreciation of lease merchandise and other lease revenue costs. Depreciation of lease merchandise and other lease revenue costs increased due to the acquisition of 111 franchised stores in 2017 and 152 franchised stores during 2018, resulting in $46.2 million of incremental depreciation of lease merchandise and other lease revenue costs. This increase was partially offset by a decrease of $17.1 million of depreciation and other lease revenue costs due to the closure and consolidation of 115 company-operated stores during 2017 and 2018 and lower inventory purchase cost during 2018 as compared to 2017. Depreciation of lease merchandise and other lease revenue costs also declined due to a 1.5% decrease in same store revenues during the 24-month period ended December 31, 2018.

Gross profit for lease revenues and fees was $995.4 million and $933.0 million during 2018 and 2017, respectively, which represented a gross profit percentage of 65.9% and 65.1% for the respective periods. The improvement in gross profit was primarily driven by changes in merchandising and pricing strategies in 2018 compared to the prior year period.

Retail cost of sales. The franchisee acquisitions completed in 2017 and 2018 resulted in a $2.2 million increase in retail cost of sales.

Gross profit for retail sales was $11.5 million and $9.9 million during 2018 and 2017, respectively, which represented a gross profit percentage of 36.6% and 36.0% for the respective periods. The improvement in gross profit is primarily due to lower inventory purchase cost during 2018 as compared to 2017.

Non-retail cost of sales. The franchisee acquisitions completed in 2017 resulted in a $55.5 million decrease in non-retail cost of sales. The remaining decrease in non-retail cost of sales is primarily due to lower inventory purchase cost during 2018 as compared to 2017.

Gross profit for non-retail sales was $33.1 million and $28.9 million during 2018 and 2017, respectively, which represented a gross profit percentage of 16.0% and 10.7% for the respective periods. The improvement in the gross profit percentage was driven by lower inventory purchase costs in 2018 as compared to the prior year.

Gross Profit

As a percentage of total revenues, gross profit improved sequentially to 62%, 61% and 57% in 2019, 2018 and 2017, respectively. The factors impacting the change in gross profit are discussed above.

Operating Expenses

Year Ended December 31, 2019 Versus Year Ended December 31, 2018

Personnel costs. The $17.3 million increase in personnel costs is due to an increase of $25.0 million due to the acquisition of 152 franchised stores during 2018. The remaining change is primarily due to a net decrease of $7.3 million related to the closure and consolidation of underperforming stores, a reduction of home office and field support staff from our restructuring programs in 2018 and 2019, as well as additional hiring to support strategic operating and business improvement initiatives.

Provision for lease merchandise write-offs. The provision for lease merchandise write-offs as a percentage of lease revenues and fees increased to 6.2% in 2019 compared to 4.6% in 2018. This increase in 2019 is due to the lower collections activity resulting from the redeployment of store labor towards enhanced sales activities, an increase in the number and type of promotional offerings, higher ticket leases, store closure activity and an increasing mix of e-commerce as a percentage of revenues.

Restructuring expenses, net. Restructuring activity for the year ended December 31, 2019 resulted in expenses of $39.9 million, which were primarily comprised of $33.6 million of impairments as a result of

 

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operating lease right-of-use assets and operating lease charges on closed stores and the impairment of vacant store properties, including the closure of one of our store support buildings. Total restructuring charges for the year ended December 31, 2019 also include $3.4 million of charges related to workforce reductions and $2.9 million of other restructuring related charges.

Year Ended December 31, 2018 Versus Year Ended December 31, 2017

Personnel costs. The $22.1 million increase in personnel costs is due to an increase of $36.0 million due to the acquisitions of 111 franchised stores during 2017 and 152 franchised stores during 2018. The remaining change is primarily due to a net decrease of $12.5 million related to the closure and consolidation of underperforming stores, a reduction of home office and field support staff from our restructuring programs in 2017 and 2018, as well as additional hiring to support strategic operating and business improvement initiatives.

Provision for lease merchandise write-offs. The provision for lease merchandise write-offs as a percentage of lease revenues increased to 4.6% in 2018 compared to 4.2% in 2017.

Restructuring expenses, net. In connection with the closure and consolidation of underperforming company-operated stores and workforce reductions in our field support operations, net restructuring charges of $2.8 million and $17.1 million were incurred during the years ended December 31, 2018 and December 31, 2017, respectively. Restructuring activity during 2018 was primarily comprised of $2.1 million related to changes in estimates to our store contractual lease obligations for closed stores and $0.6 million related to workforce reductions. Restructuring activity during 2017 was primarily comprised of $13.4 million related to contractual lease obligations for closed stores, $2.7 million related to workforce reductions, and $1.4 million primarily related to the write-down to fair value, less estimated selling costs, of land and buildings from stores closed under the restructuring program and impairment of store property, plant and equipment.

Other Operating Expenses, Net

Information about certain significant components of other operating expenses, net is as follows:

 

                      Change  
    Year Ended December 31,     2019 vs. 2018     2018 vs. 2017  

(In Thousands)

  2019     2018     2017     $     %     $     %  

Occupancy Costs

    188,874     186,897     166,794     1,977     1.1       20,103     12.1

Shipping and Handling

    74,264     75,211     67,299     (947     (1.3     7,912     11.8

Advertising Costs

    37,056     33,312     28,720     3,744     11.2       4,592     16.0

Intangible Amortization

    13,294     10,722     3,878     2,572     24.0       6,844     nmf  

Professional Services

    22,357     21,745     20,823     612     2.8       922     4.4

Bank and Credit Card Related Fees

    16,961     17,206     15,091     (245     (1.4     2,115     14.0

Gains on Insurance Recoveries

    (4,520     (1,094     —         (3,426     nmf       (1,094     nmf  

Gains on Asset and Store Dispositions and Assets Held For Sale, net

    (7,714     (439     (694     (7,275     nmf       255     36.7

Other Miscellaneous Expenses, net

    86,202     87,598     80,942     (1,396     (1.6     6,656     8.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Operating Expenses, net

  $ 426,774   $ 431,158   $ 382,853   $ (4,384     (1.0 )%    $ 48,305     12.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

nmf—Calculation is not meaningful

Year Ended December 31, 2019 Versus Year Ended December 31, 2018

As a percentage of total revenues, other operating expenses, net decreased to 23.9% in 2019 from 24.0% in 2018.

 

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The $1.9 million increase in occupancy costs is due to a $13.1 million increase related to the acquisitions of franchised stores and an increase of $2.9 million related to various other occupancy related costs, partially offset by a $14.2 million decrease resulting from the closure and consolidation of underperforming stores.

Advertising costs increased during 2019 due to our rebranding campaign and direct response marketing initiatives.

Intangible amortization expense increased primarily due to additional intangible assets recorded as a result of the acquisitions of 152 franchised stores during 2018.

In 2019, other operating expenses, net included gains from the sale and subsequent leaseback of various real estate properties of $7.4 million, as well as gains on insurance recoveries of $4.5 million related to payments received from insurance carriers for Hurricanes Harvey and Irma property and business interruption claims in excess of the related property insurance receivables. In 2018, other operating expenses, net included gains on insurance recoveries of $1.1 million related primarily to damages we incurred in 2017 from Hurricanes Harvey and Irma.

Year Ended December 31, 2018 Versus Year Ended December 31, 2017

As a percentage of total revenues, other operating expenses, net increased to 24.0% in 2018 from 21.5% in 2017.

The $20.1 million increase in occupancy costs is due to $17.3 million in additional occupancy costs related to the acquisition of franchised stores during 2017 and 2018 as well as a $2.8 million increase in occupancy costs related to expansion and improvement initiatives in the Company’s home office and field support centers.

Shipping and handling expense increased due to a shortage of trucking labor in relation to marketplace demand and higher fuel costs.

Advertising costs increased primarily due to the new presentation of $8.6 million in advertising fees charged to franchisees beginning in 2018 resulting from our adoption of Topic 606. Under that new presentation, those fees are to be reported on a gross basis as revenue and as advertising costs in the combined statements of earnings, rather than being reported as a net reduction to other operating expenses, net, which was the presentation used in 2017 in accordance with ASC 605—Revenue Recognition.

Intangible amortization expense increased primarily due to additional intangible assets recorded as a result of the acquisitions of 111 franchised stores during 2017 and 152 franchised stores during 2018.

In 2018, other operating expenses, net included gains on insurance recoveries of $1.1 million related primarily to damages incurred in 2017 from Hurricanes Harvey and Irma.

Operating Profit

Interest expense. Interest expense increased to $17.0 million in 2019 from $16.4 million in 2018 due primarily to a higher outstanding debt balance during 2019. Interest expense decreased to $16.4 million in 2018 from $18.2 million in 2017 due primarily to an average lower outstanding debt balance throughout 2018.

Impairment of investment. During the year ended December 31, 2018, we recorded an other-than-temporary loss of $20.1 million to impair our remaining outstanding investment in PerfectHome, a rent-to-own company in the United Kingdom.

Other non-operating income (expense), net. Other non-operating income (expense), net includes (a) the impact of foreign currency remeasurement; (b) net gains and losses resulting from changes in the cash surrender

 

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value of company-owned life insurance related to the Parent deferred compensation plan; and (c) interest income consisting primarily of earnings on cash and cash equivalent investments, as well as the accrual of interest income on Aaron’s SpinCo’s investment in PerfectHome prior to its full impairment. Foreign currency remeasurement net losses resulting from changes in the value of the U.S. dollar against the British pound and Canadian dollar were not significant in 2019 or 2018 and resulted in gains of $2.1 million during 2017. The changes in the cash surrender value of Company-owned life insurance resulted in net gains of $2.1 million and $1.5 million during 2019 and 2017, respectively, and net losses of $1.2 million during 2018. Interest income increased to $1.8 million in 2019 from $0.5 million in 2018 due to higher cash and cash equivalent balances through 2019. Interest income decreased to $0.5 million in 2018 from $1.8 million in 2017 primarily due to the discontinuation of accruing interest income related to the PerfectHome Notes effective April 1, 2017 and also due to lower cash and cash equivalent balances throughout 2018.

Income Tax Expense

Year Ended December 31, 2019 Versus Year Ended December 31, 2018

Income tax expense decreased to $6.2 million for the year ended December 31, 2019 compared to $12.9 million for 2018 due to a decrease in earnings before income taxes and a decrease in the effective tax rate to 18.0% in 2019 from 20.3% in 2018. The decrease in the effective tax rate was primarily driven by the impact of federal tax credits on earnings before income taxes.

Year Ended December 31, 2018 Versus Year Ended December 31, 2017

The Company recorded income tax expense of $12.9 million for 2018, which resulted in an effective tax rate of 20.3%. The Company recorded a net income tax benefit of $53.3 million for 2017, which was the result of the Tax Cuts and Jobs Act signed into law on December 22, 2017 (the “Tax Act”). The Tax Act, among other things, (a) lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018; (b) provided for 100% expense deduction of certain qualified depreciable assets, including lease merchandise inventory, purchased after September 27, 2017 (but would be phased down starting in 2023); and (c) failed to extend the manufacturing deduction that expired in 2017 under the terms of previous tax law. The remeasurement of the Company’s net deferred tax liabilities, in connection with the lower U.S. corporate income tax rate under the Tax Act, resulted in an $83.7 million non-cash income tax benefit recorded during the year ended December 31, 2017.

Overview of Financial Position

The primary changes in the condensed combined balance sheets from December 31, 2019 to September 30, 2020, include:

 

   

Cash and cash equivalents increased $384.1 million to $432.9 million at September 30, 2020. For additional information, refer to the “—Liquidity and Capital Resources” section below.

 

   

Lease merchandise decreased $120.1 million due primarily to lower lease merchandise purchases as a result of store closures and related initiatives.

 

   

Goodwill decreased to $2.6 million at September 30, 2020 due to an impairment charge of $446.9 million to recognize a full impairment of our goodwill during the first quarter of 2020. For additional information, refer to Note 1 to these condensed combined financial statements.

 

   

Operating lease right-of-use assets decreased $57.0 million due to impairment charges recorded in connection with restructuring actions, as well as regularly scheduled amortization of right-of-use assets.

 

   

Debt decreased $55.9 million due primarily to the scheduled April 2020 repayment of $60.0 million on our outstanding senior unsecured notes, which was partially offset by additional borrowings of $5.6 million under our term loan and revolving credit agreement in January 2020. Refer to the “—Liquidity and Capital Resources” section below for further details regarding financing arrangements.

 

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The primary changes in the combined balance sheets from December 31, 2018 to December 31, 2019, include:

 

   

Cash and cash equivalents increased $36.8 million to $48.8 million at December 31, 2019. For additional information, refer to the “—Liquidity and Capital Resources” section below.

 

   

Lease merchandise decreased $25.9 million due primarily to the impacts of the 2019 store closures.

 

   

As a result of the adoption of ASC 842 as of January 1, 2019, the Company has operating lease right-of-use assets and operating lease liabilities of $305.3 million and $335.8 million, respectively, as of December 31, 2019.

 

   

Accounts payable and accrued expenses decreased $21.8 million. This decrease is primarily due to the transition to ASC 842, which resulted in the remaining balances of the Company’s deferred rent, lease incentives, and closed store reserve, which were previously recorded within accounts payable and accrued expenses, being reclassified as a reduction to the operating lease right-of-use asset in the accompanying combined balance sheets.

 

   

Debt decreased $83.7 million to $341.0 million at December 31, 2019 due primarily to scheduled repayments of $60.0 million on our unsecured notes and net repayments of $21.6 million on our term loan and revolving credit facility. Refer to the “—Liquidity and Capital Resources” section below for further details regarding the Company’s financing arrangements.

Liquidity and Capital Resources

Liquidity Considerations Related to the COVID-19 Pandemic

The Company intends to continue to closely monitor its liquidity position and capital requirements as the impacts of the COVID-19 pandemic on the economy and the Company’s businesses and financial position continue to unfold in the coming periods. The Company may experience a temporary decrease in its liquidity position in future periods due primarily to the combination of: (i) a reduction in future revenue attributable to the decrease in the number of new customer lease agreements generated during 2020 as a result of temporary store closures and/or reduced operations, as well as the impact of supply chain disruptions resulting in shortages of available products; (ii) an increase in cash outflows to purchase and manufacture inventory before there has been a meaningful increase in cash inflows derived from newly generated customer leases and (iii) the various forms of payment deferment options we are providing our customers that are experiencing hardships.

General

Our primary capital requirements consist of (a) buying merchandise; (b) purchases of property, plant and equipment, including leasehold improvements for our new store concept and operating model; (c) expenditures for acquisitions, including franchisee acquisitions; (d) expenditures related to corporate operating activities; (e) personnel expenditures; (f) income tax payments; and (g) servicing outstanding debt obligations. Our capital requirements have been financed through:

 

  1.

cash flows from operations;

 

  2.

private debt offerings;

 

  3.

bank debt; and

 

  4.

Parent’s stock offerings.

As of September 30, 2020, Aaron’s SpinCo had $432.9 million of cash and $486.2 million of availability under the Aaron’s, LLC. revolving credit facility.

 

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Liquidity and Capital Resources—Nine months ended September 30, 2020 and 2019

Cash Provided by Operating Activities

Cash provided by operating activities was $337.2 million and $163.7 million during the nine months ended September 30, 2020 and 2019, respectively. The $173.5 million increase in operating cash flows was primarily driven by (i) improved lease portfolio performance resulting from strong customer payment activity, (ii) a reduction of lease merchandise purchases of $96.7 million, (iii) net income tax refunds of $65.1 million during the nine months ended September 30, 2020 compared to net income tax refunds of $4.3 million in the same period in 2019, and (iv) $41.1 million positive cash flows resulting from changes in accounts payable and accrued expenses, partially offset by (v) declining lease agreements resulting from the closure and consolidation of company-operated stores. Other changes in cash provided by operating activities are discussed above in our discussion of results for the nine months ended September 30, 2020.

Cash Used in Investing Activities

Cash used in investing activities was $44.4 million and $64.8 million during the nine months ended September 30, 2020 and 2019, respectively. The $20.4 million decrease in investing cash outflows was primarily due to (i) $13.0 million less cash outflows related to the purchase of property, plant and equipment and leasehold improvements in 2020 as compared to 2019 and (ii) cash outflows of $2.9 million for the acquisitions of businesses and contracts throughout 2020 as compared to cash outflows of $12.9 million for the acquisitions of businesses and contracts throughout 2019.

Cash Provided by Financing Activities

Cash provided by financing activities was $91.3 million and $33.4 million during the nine months ended September 30, 2020 and 2019, respectively. The $57.9 million increase in financing cash inflows was primarily due to (i) net transfers from Parent of $148.2 million in 2020 as compared to net transfers from Parent of $111.7 million in 2019 and (ii) $22.4 million of lower net repayments of outstanding debt in 2020 as compared to 2019.

Debt Financing

All of Aaron’s, LLC debt obligations as of September 30, 2020 have been included within Aaron’s SpinCo’s combined financial statements because Aaron’s, LLC, as the primary obligor for the external debt agreements, is one of the legal entities forming the basis of Aaron’s SpinCo. As of September 30, 2020, $225.0 million in term loans were outstanding under the revolving credit and term loan agreement (the “Credit Agreement”), under which Aaron’s, LLC is the borrower. The total available credit under that revolving credit facility as of September 30, 2020 was $486.2 million.

Liquidity and Capital Resources—Years Ended December 31, 2019, 2018 and 2017

Cash Provided by Operating Activities

Cash provided by operating activities was $186.0 million, $186.5 million and $110.2 million during the years ended December 31, 2019, 2018 and 2017, respectively.

The $0.6 million decrease in operating cash flows in 2019 as compared to 2018 was primarily driven by net income tax refunds of $4.6 million during 2019 compared to net income tax refunds of $46.3 million in 2018, offset by lower lease merchandise purchases during 2019 as compared to 2018.

The $76.4 million increase in operating cash flows in 2018 as compared to 2017 was primarily driven by net tax refunds of $46.3 million during the year ended December 31, 2018 compared to net tax payments of

 

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$58.8 million during the year ended December 31, 2017. The Tax Act changed previous tax laws by providing for 100% expense deduction of the Company’s lease merchandise inventory purchased by the Company after September 27, 2017. As a result of the Tax Act not being enacted until December 22, 2017, the Company made more than the required estimated federal tax liability payments throughout 2017 and therefore qualified for and received a refund related to 2017 income tax payments during the year ended December 31, 2018.

Other changes in cash provided by operating activities are discussed above in our discussion of results for the years ended December 31, 2019, 2018 and 2017.

Cash Used in Investing Activities

Cash used in investing activities was $76.2 million, $246.0 million and $177.4 million during the years ended December 31, 2019, 2018 and 2017, respectively.

The $169.8 million decrease in investing cash outflows in 2019 as compared to 2018 was primarily due to: (a) cash outflows of $14.3 million for the acquisitions of businesses and contracts throughout 2019 as compared to cash outflows of $189.9 million for the acquisitions of businesses and contracts throughout 2018 and (b) $7.0 million of higher proceeds from the sale of property, plant and equipment in 2019 as compared to 2018; partially offset by (c) $12.8 million of additional cash outflows related to the purchase of property, plant and equipment and leasehold improvements in 2019 as compared to 2018.

The $68.6 million increase in investing cash outflows in 2018 as compared to 2017 was primarily due to: (a) cash outflows of $189.9 million for the acquisitions of businesses and contracts throughout 2018 as compared to cash outflows of $145.6 million for the acquisitions of businesses and contracts through 2017 and (b) $18.8 million higher cash outflows for purchases of property, plant and equipment and leasehold improvements in 2018 as compared to 2017.

Cash (Used in) Provided by Financing Activities

Cash used in financing activities was $73.1 million and $182.2 million during the years ended December 31, 2019 and 2017, respectively, as compared to cash provided by financing activities of $37.9 million during the year ended December 31, 2018.

The $111.0 million change in financing cash flows in 2019 as compared to 2018 was primarily due to net repayments of outstanding debt of $84.5 million in 2019 as compared to net borrowings of $55.9 million in 2018, partially offset by net transfers from Parent of $11.4 million in 2019 as compared to net transfers to Parent of $17.5 million in 2018.

The $220.1 million change in financing cash flows in 2018 as compared to 2017 was primarily due to net borrowings of $55.9 million in 2018 as compared to net repayments of outstanding debt of $87.5 million in 2017 and $74.0 million in lower transfers to Parent in 2018 as compared to 2017.

Debt Financing

All of Parent’s debt obligations as of December 31, 2019 have been included within Aaron’s SpinCo’s combined financial statements because Aaron’s, Inc., as the primary obligor for the external debt agreements, is one of the legal entities forming the basis of Aaron’s SpinCo. As of December 31, 2019, $219.4 million in term loans were outstanding under the revolving credit and term loan agreement (the “Credit Agreement”), under which Parent is the borrower. The total available credit under that revolving credit facility as of December 31, 2019 was $386.2 million.

 

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Commitments

Income Taxes

During the nine months ended September 30, 2020, we received net tax refunds of $65.1 million. Within the next three months, we anticipate making estimated cash payments of $9.0 million for U.S. federal income taxes and $2.0 million for state income taxes.

The Tax Act, which was enacted in December 2017, provides for 100% expense deduction of certain qualified depreciable assets, including lease merchandise inventory, purchased by the Company after September 27, 2017 (but would be phased down starting in 2023). Because of our sales and lease ownership model, in which the Company remains the owner of merchandise on lease, we benefit more from bonus depreciation, relatively, than traditional furniture, electronics and appliance retailers.

We estimate the deferred tax liability associated with bonus depreciation from the Tax Act and the prior tax legislation is approximately $144.0 million as of December 31, 2019, of which approximately 76% is expected to reverse as a deferred income tax benefit in 2020 and most of the remainder during 2021. These amounts exclude bonus depreciation the Company will receive on qualifying expenditures after December 31, 2019.

Franchise Loan Guaranty

We have guaranteed the borrowings of certain independent franchisees under a franchise loan agreement with one of the banks that is a party to our Credit Agreement, under which the maximum facility commitment amount under the franchisee loan program was $25.0 million as of September 30, 2020. At September 30, 2020, the total amount that we might be obligated to repay in the event franchisees defaulted was $18.6 million, which would be due in full within 75 days of the event of default. However, due to franchisee borrowing limits, we believe any losses associated with defaults would be substantially mitigated through recovery of lease merchandise and other assets. Since the inception of the franchise loan program in 1994, Aaron’s SpinCo’s losses associated with the program have been immaterial. However, due to the uncertainty related to the impact of the COVID-19 pandemic and possible related governmental measures to control the pandemic, there can be no assurance that Aaron’s SpinCo will not incur future losses on outstanding franchisee borrowings under the franchise loan facility in the event of defaults or impending defaults by franchisees. We record a liability related to estimated future losses from repaying the franchisees’ outstanding debt obligations upon any possible future events of default, which is included in accounts payable and accrued expenses in the condensed combined balance sheets. That liability was $2.4 million and $0.4 million as of September 30, 2020 and December 31, 2019, respectively.

Contractual Obligations and Commitments

As part of our ongoing operations, we enter into various arrangements that obligate us to make future payments, including debt agreements, operating leases, and other purchase obligations. The future cash commitments owed under these arrangements generally fluctuate in the normal course of business as we, for example, borrow on or pay down our revolving lines of credit, make scheduled payments on other debt, leases or purchase obligations and renegotiate arrangements or enter into new arrangements. Other than the $300.0 million temporary draw on the revolving credit facility within the Credit Agreement, which was repaid on April 30, 2020, there were no material changes outside the normal course of business in our material cash commitments and contractual obligations from those reported in the table below.

Leases. We lease warehouse and retail store space for most of our store-based operations, call center space, and management and information technology space for corporate functions under operating leases expiring at various times through 2033, and our stores have an average remaining lease term of approximately three years. Most of the leases contain renewal options for additional periods ranging from one to 20 years. We also lease transportation

 

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vehicles under operating and finance leases which generally expire during the next three years. We expect that most real-estate-related leases will be renewed or replaced by other leases in the normal course of business, with the exception of those leases of stores that are included in the real estate repositioning strategy. 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, 2019 are shown in the table set forth below under “—Contractual Obligations and Commitments.”

Contractual Obligations and Commitments. The following table shows the approximate contractual obligations, including interest, and commitments to make future payments of Aaron’s SpinCo as of December 31, 2019:

 

(In Thousands)

   Total      Period Less
Than 1 Year
     Period 1-3
Years
     Period
3-5
Years
     Period Over
5 Years
 

Debt, Excluding Finance Leases1

   $ 339,375    $ 82,500    $ 256,875    $ —      $ —  

Finance Leases

     2,670      1,821      849      —          —    

Interest Obligations

     21,274      10,837      10,437      —          —    

Operating Leases

     366,333      102,857      150,233      70,549      42,694

Purchase Obligations

     23,851      13,379      10,472      —          —    

Severance and Retirement Obligations

     829      769      24      24      12
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Cash Obligations

   $ 754,332    $ 212,163    $ 428,890    $ 70,573    $ 42,706
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

See “Description of Material Indebtedness and Guarantees” for additional information regarding Aaron’s SpinCo’s anticipated indebtedness following completion of the separation and distribution.

For future interest payments on variable-rate debt, which are based on the adjusted London Interbank Overnight (“LIBO”) rate plus a margin ranging from 1.25% to 2.25% or the administrative agent’s prime rate plus a margin ranging from 0.25% to 1.25%, as specified in the agreement, we used the variable rate in effect at December 31, 2019 to calculate these payments. The variable rate debt of Parent at December 31, 2019 consisted of term loan borrowings under the Credit Agreement. Future interest payments related to the Credit Agreement are based on the borrowings outstanding at December 31, 2019 through the maturity date, assuming such borrowings are outstanding at that time. The variable rate for the term loan borrowings under the Parent Credit Agreement was 3.05% at December 31, 2019. Future interest payments may be different depending on future borrowing activity and interest rates.

Operating lease obligations represent fixed amounts scheduled to be paid through the remaining lease term for real estate, vehicle, and equipment lease contracts. These amounts do not include estimated or actual future sublease receipts.

Purchase obligations are primarily related to certain consulting agreements, advertising programs, marketing programs, software licenses, hardware and software maintenance and support and telecommunications services. The table above includes only those purchase obligations for which the timing and amount of payments is certain. 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.

Severance and retirement obligations represent primarily future severance payments to former employees under our various restructuring programs as well as future payments to be made related to the retirement of a former executive officer.

Deferred income tax liabilities as of December 31, 2019 were approximately $157.4 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

 

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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 necessarily relate to liquidity needs.

Critical Accounting Policies

We discuss our most critical accounting policies below. For a discussion of Aaron’s SpinCo’s significant accounting policies, see Note 1 in the accompanying combined financial statements. Accounting policies herein have also been updated as applicable to describe the impacts of the COVID-19 pandemic.

Revenue Recognition

Lease payments from the customers of Aaron’s SpinCo are due in advance of when the lease revenues are earned. Lease revenues net of related sales taxes are recognized in the statement of earnings in the month they are earned. Lease payments received prior to the month earned are recorded as deferred lease revenue, and this amount is included in customer deposits and advance payments in the accompanying condensed combined balance sheets. Lease payments due but not received prior to month end are recorded as accounts receivable in the accompanying condensed combined balance sheets.

Our revenue recognition accounting policy matches the lease revenue with the corresponding costs, mainly depreciation, associated with lease merchandise. At September 30, 2020 and December 31, 2019, we had deferred revenue representing cash collected in advance of being due or otherwise earned totaling $48.5 million and $46.4 million, respectively, and leases accounts receivable, net of an allowance for doubtful accounts based on historical collection rates, of $4.1 million and $7.9 million, respectively. Our accounts receivable allowance is estimated using one year of historical write-off and collection experience. Other qualitative factors, such as seasonality and current business trends, including, but not limited to, the potential unfavorable impacts of the COVID-19 pandemic on our business, are considered in estimating the allowance. For customer agreements that are past due, our policy is to write-off lease receivables after 60 days. We record the provision for returns and uncollected payments as a reduction to lease and retail revenues in the condensed combined statements of earnings.

Revenues from the retail sale of merchandise to customers are recognized at the point of sale. Generally, the transfer of control occurs near or at the point of sale for retail sales. Revenues for the non-retail sale of merchandise to franchisees are recognized when control transfers to the franchisee, which is upon delivery of the merchandise.

Lease Merchandise

We begin depreciating merchandise at the earlier of 12 months and one day from our purchase of the merchandise or when the item is leased to a customer. We depreciate merchandise on a straight-line basis to a 0% salvage value over the lease agreement period when on lease, generally 12 to 24 months, and generally 36 months when not on lease. Depreciation is accelerated upon the early payout of a lease.

All lease merchandise is available for lease and sale, excluding merchandise determined to be missing, damaged or unsalable. For merchandise on lease, we record a provision for write-offs using the allowance method. The allowance for lease merchandise write-offs estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period. The Company estimates its allowance for lease merchandise write-offs using one year of historical write-off experience. Other qualitative factors, such as seasonality and current business trends, including, but not limited to, the potential unfavorable impacts of the COVID-19 pandemic on our business, are considered in estimating the allowance. For customer agreements that

 

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are past due, the Company’s policy is to write-off lease merchandise after 60 days. As of September 30, 2020 and December 31, 2019, the allowance for lease merchandise write-offs was $12.2 million and $13.8 million, respectively. The provision for lease merchandise write-offs was $47.5 million and $70.1 million for the nine months ended September 30, 2020 and 2019, respectively, and is included in provision for lease merchandise write-offs in the accompanying condensed combined statements of earnings.

For merchandise not on lease, our policies generally require weekly merchandise counts at our store-based operations, which include write-offs for unsalable, damaged, or missing merchandise inventories. In addition to monthly cycle counting, full physical inventories are generally taken at our fulfillment and manufacturing facilities annually, and appropriate provisions made for missing, damaged and unsalable merchandise. In addition, we monitor merchandise levels and mix by division, store and fulfillment center, as well as the average age of merchandise on hand. If obsolete merchandise cannot be returned to vendors, its carrying amount is adjusted to net realizable value or written off.

Goodwill and Other Intangible Assets

Intangible assets are classified as either intangible assets with definite lives subject to amortization or goodwill. For intangible assets with definite lives, tests for impairment must be performed if conditions exist that indicate the carrying amount may not be recoverable. For goodwill, tests for impairment must be performed at least annually, and sooner if events or circumstances indicate that an impairment may have occurred. Factors which could necessitate an interim impairment assessment include a sustained decline in Parent’s stock price, prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results. As an alternative to this annual impairment testing for goodwill, management may perform a qualitative assessment for impairment if it believes it is not more likely than not that the carrying amount of a reporting unit’s net assets exceeds the reporting unit’s fair value. Management has deemed Aaron’s SpinCo to be its sole reporting unit due to the fact that the components included within the operating segment have similar economic characteristics.

The following table presents the carrying amount of goodwill and other intangible assets, net:

 

(In Thousands)

   September 30,
2020
     December 31,
2019
 

Goodwill

   $ 2,645      $ 447,781

Definite-Lived Intangible Assets, Net

     9,503        14,234
  

 

 

    

 

 

 

Goodwill and Other Intangibles, Net

   $ 12,148      $ 462,015
  

 

 

    

 

 

 

We performed our annual goodwill impairment testing as of October 1, 2019. We, with the assistance of a third-party valuation specialist, performed a quantitative assessment for the goodwill of Aaron’s SpinCo, which entailed an assessment of Aaron’s SpinCo’s fair value relative to the carrying value that was derived using a combination of both income and market approaches. The fair value measurement involved significant unobservable inputs (Level 3 inputs). Our income approach utilized the discounted future expected cash flows, which required assumptions about short-term and long-term revenue growth rates, operating margins, capital requirements, and a weighted-average cost of capital. Our income approach reflects assumptions and estimates of future cash flows related to our strategy to reposition and reinvest in our new store concept and operating model to adapt to our changing competitive environment.

Our market approach, which includes the guideline public company method, utilized pricing multiples derived from an analysis of comparable publicly traded companies. We believe the comparable companies we evaluated as marketplace participants served as an appropriate reference when calculating fair value because those companies have similar risks, participate in similar markets, provide similar products and services for their customers and compete with us directly.

 

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Based on testing as of October 1, 2019, the fair value of Aaron’s SpinCo exceeded its carrying value by a substantial amount and thus, goodwill was not impaired. The short-term and long-term revenue growth rates, operating margins, capital requirements and weighted-average cost of capital are the assumptions that are most sensitive and susceptible to change as they require significant management judgment. Management determined that there were no events that occurred or circumstances that changed in the fourth quarter of 2019 that would more likely than not reduce the fair value of Aaron’s SpinCo below its carrying amount.

As of March 31, 2020, we determined the Aaron’s SpinCo goodwill was fully impaired and recorded a goodwill impairment loss of $446.9 million during the three months ended March 31, 2020. Refer to Note 1 to Aaron’s SpinCo’s condensed combined financial statements included elsewhere within this registration statement for further discussion.

Leases and Right-of-Use Asset Impairment

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. For operating leases which contain escalating payments, we record the related lease expense on a straight-line basis over the lease term. We generally do not obtain significant amounts of lease incentives or allowances from landlords. Any incentive or allowance amounts we receive are recorded as reductions of the operating lease right-of-use asset within the condensed combined balance sheets and are amortized within other operating expenses, net over the lease term in the condensed combined statements of earnings.

As a result of our real estate repositioning strategy and other cost-reduction initiatives, we closed, consolidated, or relocated 243 company-operated stores throughout 2019 and the first nine months of 2020, and we currently expect to close and consolidate 35 additional stores over the next three to six months. Throughout 2016, 2017, and 2018, we also closed and consolidated 139 underperforming company-operated stores under similar restructuring initiatives. Our primary costs associated with closing stores are the future lease payments and related commitments. Prior to the 2019 adoption of ASC 842, we recorded 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 savings from lease buyouts or terminations and sublease receipts based upon historical experience. As of December 31, 2018, this amount was $10.7 million and was recorded as a liability in accounts payable and accrued expenses on the combined balance sheets. Upon the 2019 adoption of ASC 842, this amount was reclassified to a reduction of operating lease right-of-use assets. Effective January 1, 2019, we began recording estimates of future lease payment obligations related to closed stores as described above as impairments of the right-of-use asset for all subsequent store closures.

Due to changes in market conditions, our estimates related to future sublease receipts may change. Excluding actual and estimated sublease receipts, our future obligations related to closed stores on an undiscounted basis were $35.6 million and $36.5 million as of September 30, 2020 and December 31, 2019, respectively.

Insurance Programs

We maintain insurance contracts to fund workers compensation, vehicle liability, general liability and group health insurance claims, some of which relate to Parent policies that indirectly benefit the Progressive and Vive segments. 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. Our gross estimated liability for workers compensation insurance claims, vehicle liability, and general liability was $44.7 million and $43.3 million at September 30, 2020 and December 31, 2019, respectively, which was recorded within accounts payable and

 

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accrued expenses in our condensed combined balance sheets. In addition, we have prefunding balances on deposit and other insurance receivables with the insurance carriers of $21.2 million and $22.5 million at September 30, 2020 and December 31, 2019, respectively, which were recorded within prepaid expenses and other assets in our condensed combined balance sheets.

If we resolve insurance claims for amounts that are in excess of our current estimates, we will be required to pay additional amounts beyond those accrued at September 30, 2020.

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.

Corporate Expense Allocations And Other Intercompany Transactions

Aaron’s SpinCo’s operating model includes a combination of standalone and combined business functions with Parent. The condensed combined financial statements include corporate allocations for expenses related to activities that are provided on a centralized basis within Parent, which are primarily expenses related to executive management, finance, treasury, tax, audit, legal, information technology, human resources and risk management functions. These expenses have been allocated to Aaron’s SpinCo based on direct usage or benefit where specifically identifiable, with the remainder allocated primarily on a pro rata basis using an applicable measure of revenues, headcount or other relevant measures. Aaron’s SpinCo considers these allocations to be a reasonable reflection of the utilization of services or the benefit received. These allocated expenses are included within personnel costs and other operating expenses, net in the condensed combined statements of earnings and as an increase to invested capital in the condensed combined balance sheets. General corporate expenses allocated to Aaron’s SpinCo during the nine months ended September 30, 2020 and 2019 were $20.5 million and $19.4 million, respectively.

Management believes the assumptions regarding the allocation of general corporate expenses from Parent are reasonable. However, the condensed combined financial statements may not include all of the actual expenses that would have been incurred and may not reflect Aaron’s SpinCo’s combined results of operations, financial position and cash flows had it been a standalone company during the periods presented. Actual costs that would have been incurred if Aaron’s SpinCo had been a standalone company would depend on multiple factors, including organization structure and various other strategic decisions.

Recent Accounting Pronouncements

Refer to Note 1 to Aaron’s SpinCo’s combined financial statements and Note 1 to Aaron’s SpinCo condensed combined financial statements for a discussion of recently issued accounting pronouncements.

Quantitative and Qualitative Disclosures about Market Risk

As of September 30, 2020, Aaron’s, LLC had $60.0 million of senior unsecured notes outstanding at a fixed rate of 4.75%. Amounts outstanding under the Aaron’s, LLC unsecured revolving credit and term loan agreement as of September 30, 2020 consisted of $225.0 million in term loans. Borrowings under the revolving credit and term loan agreement are indexed to the LIBOR rate or the prime rate, which exposes us to the risk of increased interest costs if interest rates rise. Based on Aaron’s, LLC variable-rate debt outstanding as of September 30, 2020, a hypothetical 1.0% increase or decrease in interest rates would increase or decrease interest expense by approximately $2.2 million on an annualized basis.

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.

 

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MANAGEMENT

Executive Officers Following the Distribution

The following table sets forth information as of [●], 2020 regarding the individuals who are expected to serve as executive officers of Aaron’s SpinCo following the distribution. While some of Aaron’s SpinCo’s executive officers are currently executive officers and employees of Parent, after the distribution, they will cease to hold such positions upon the consummation of the separation. Aaron’s SpinCo is in the process of identifying the other persons who are expected to serve as executive officers of Aaron’s SpinCo following the completion of the separation and distribution and will include information concerning those persons in an amendment to this information statement.

 

Name

   Age     

Position

Douglas A. Lindsay

     50      Chief Executive Officer

Steve Olsen

     48      President

C. Kelly Wall

     46      Chief Financial Officer

[●]

     [●]      [●]

Below is biographical information as well as background information relating to each executive officer’s business experience and qualifications

Douglas Lindsay will be the Chief Executive Officer of Aaron’s SpinCo. He is currently Chief Executive Officer of the Aaron’s Business, a position he has held since July 2020. Prior to his current position, Mr. Lindsay served as President of the Aaron’s Business since February 2016. Prior to joining Parent, Mr. Lindsay served as the Executive Vice President and Chief Operating Officer at ACE Cash Express from February 2012 to January 2016. Previously Mr. Lindsay also served as the Executive Vice President and Chief Financial Officer from June 2007 to February 2012 and the Vice President, Finance and Treasurer from February 2005 to June 2007 for ACE Cash Express.

Steve Olsen will be the President of Aaron’s SpinCo. He is currently President of the Aaron’s Business, a position he has held since July 2020. Prior to his current position, Mr. Olsen served as Chief Operating Officer of the Aaron’s Business since April 2020 and as Chief Merchandising, Supply Chain and Transformation Officer of the Aaron’s Business from December 2016 to April 2020. Prior to joining Parent, Mr. Olsen served as Senior Vice President and General Merchandising Manager of Total Wine & More from April 2013 to November 2016. Previously Mr. Olsen also served as Chief Strategy Officer and Senior Vice President of Supply, E-commerce and Information Technology of Orchard Supply Hardware from June 2011 to February 2013 and as General Merchandising Officer and Senior Vice President from June 2010 to June 2011. Prior to working at Orchard Supply Hardware, Mr. Olsen served as Vice President, Merchandising in the Supplies/Office Products Division of Office Depot from November 2007 to May 2010.

C. Kelly Wall will be the Chief Financial Officer of Aaron’s SpinCo. He is currently Interim Chief Financial Officer of Parent, a position he has held since July 2020. Prior to his current position, Mr. Wall served as Senior Vice President of Finance and Treasurer of Parent since January 2019 and as Vice President of Finance, Treasury and Investor Relations of Parent from February 2017 to January 2019. Prior to joining Parent, Mr. Wall served as Chief Financial Officer of CNG Holdings, Inc. from August 2016 to February 2017. Previously, Mr. Wall served as President of KW Financial Consulting LLC from November 2015 to August 2016, and as Senior Vice President of Finance of TMX Finance, LLC from July 2013 to October 2015.

DIRECTORS

Board of Directors Following the Distribution

The following table sets forth information as of [●], 2020 regarding those persons who are expected to serve on Aaron’s SpinCo’s Board of Directors following the distribution and until their respective successors are duly

 

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elected and qualified. All of the nominees will be presented to Aaron’s SpinCo’s sole shareholder, Parent, for election prior to the separation. After the distribution, none of these individuals will be directors or employees of Parent.

 

Name

   Age     

Position

Kelly H. Barrett

     56      Director

Walter G. Ehmer

     54      Director

Hubert L. Harris

     77      Director

Douglas A. Lindsay

     50      Director, Chief Executive Officer

John W. Robinson

     48      Chairman

Upon completion of the distribution, our Board of Directors will be divided into three classes. The directors designated as Class I directors will have initial terms expiring at our 2021 annual meeting of shareholders. The directors designated as Class II directors will have initial terms expiring at our 2022 annual meeting of shareholders. The directors designated as Class III directors will have initial terms expiring at our 2023 annual meeting of shareholders. We expect that Messrs. Robinson and Harris will be Class I directors; Ms. Barrett and Mr. Lindsay will be Class II directors; and Mr. Ehmer will be a Class III director. Each Class I director elected at our 2021 annual meeting of shareholders, each Class II director elected at the 2022 annual meeting of shareholders and each Class III director elected at the 2023 annual meeting of shareholders shall hold office until the 2024 annual meeting of shareholders and, in each case, until his or her respective successor shall have been duly elected and qualified or until his or her earlier resignation or removal. Commencing with the 2024 annual meeting of shareholders, each director will be elected annually and shall hold office until the next annual meeting of shareholders and until his or her respective successor shall have been duly elected and qualified or until his or her earlier resignation or removal.

Below is biographical information as well as background information relating to each director’s business experience, qualifications, attributes and skills and why we believe each individual is a valuable member of our Board of Directors.

Kelly H. Barrett has served as a director of Parent since May 2019. Prior to her retirement in 2018, Ms. Barrett was employed by The Home Depot for sixteen years, commencing in 2003 serving in various roles of increasing responsibility including most recently as Senior Vice President-Home Services where she ran the $5 billion Home Services division of The Home Depot, including in-home sales and installation, operations, customer contact centers as well as contractor sourcing, onboarding and compliance. She also held the positions of Vice President-Internal Audit and Corporate Compliance, Senior Vice President -Enterprise Program Management and Vice President-Corporate Controller. Before joining The Home Depot, Ms. Barrett served for more than 10 years in senior management positions and ultimately as Senior Vice President and Chief Financial Officer of Cousins Properties Incorporated, a publicly traded real estate investment trust. Ms. Barrett currently serves on the Board of Directors of Piedmont Office Realty Trust, a real estate investment trust, and also on the Board of Directors of Americold Realty, since May 2019. She previously served on the Board of Directors of State Bank Financial Corporation from 2011 to 2016. Her leadership positions in the Atlanta community include currently serving as Chair of the Board of the Metro Atlanta YMCA, the Georgia Tech Foundation Board of Trustees and a member of the Advisory Board of Scheller College of Business at Georgia Tech. She has previously served on the Board of the Girl Scouts of Greater Atlanta, Partnership Against Domestic Violence and the Atlanta Rotary Club. Among other qualifications, Ms. Barrett brings significant operational management and financial experience to our Board of Directors. Her experience in multiple senior executive leadership positions and service on other boards provide her with retail operations, accounting, financial and compliance expertise which are utilized by our Board of Directors. These skills and experiences qualify her to serve on our Board of Directors.

Walter G. Ehmer has served as a director of Parent since May 2016. Mr. Ehmer is currently the President and Chief Executive Officer of Waffle House, Inc., or “Waffle House,” a position he has held since 2012. Mr. Ehmer has held various positions with Waffle House since joining the company in 1992 as a senior buyer in the

 

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purchasing department, including most recently serving as its President and Chief Operating Officer from 2006 until 2012 and as Chief Financial Officer from 1998 until 2002. Mr. Ehmer previously served as a member of the Georgia Tech Industrial Engineering Advisory Board, the Georgia Tech Alumni Association Board of Trustees and the Georgia Tech President’s Advisory Board. Mr. Ehmer is also a past chairperson of the Georgia Tech Alumni Association and currently serves as a member of the board of the Georgia Tech Foundation. Mr. Ehmer also serves on the boards of the City of Atlanta Police Foundation, the Metro Atlanta Chamber of Commerce, and Children’s Healthcare of Atlanta Foundation. Among other qualifications, Mr. Ehmer brings significant management and financial experience to our Board of Directors. His experience in multiple senior executive leadership positions, including with responsibility for accounting-related matters, provide him with managerial and financial expertise that is utilized by our Board of Directors. These skills and experiences qualify him to serve on our Board of Directors.

Hubert L. Harris, Jr. has served as a director of Parent since August 2012. Since 1992, Mr. Harris has owned and operated Harris Plantation, Inc., a cattle, hay and timber business. Mr. Harris has also served as a trustee for SEI mutual funds since 2008. Mr. Harris previously served as CEO of Invesco North America, CFO of Invesco PLC and Chairman of Invesco Retirement Services, and served on the Board of Directors of Invesco from 1993 to 2004. From 1988 to 2005, Mr. Harris was President and Executive Director of the International Association for Financial Planning. Mr. Harris also served as the Assistant Director of the Office of Management and Budget in Washington, D.C. from 1977 to 1980. Mr. Harris is on the Board of Councilors of the Carter Center, and he previously served as chair of the Georgia Tech Foundation and chair of the Georgia Tech Alumni Association. Among other qualifications, Mr. Harris brings a strong financial background and extensive business experience to our Board of Directors. His service on numerous for-profit and non-profit boards and management experience provide him with governance and financial expertise, which are utilized by our Board of Directors. These skills and experiences qualify him to serve on our Board of Directors.

Douglas A. Lindsay will be the Chief Executive Officer of Aaron’s SpinCo. He is currently Chief Executive Officer of the Aaron’s Business, a position he has held since July 2020. Prior to his current position, Mr. Lindsay served as President of the Aaron’s Business since February 2016. Prior to joining Parent, Mr. Lindsay served as the Executive Vice President and Chief Operating Officer at ACE Cash Express from February 2012 to January 2016. Previously Mr. Lindsay also served as the Executive Vice President and Chief Financial Officer from June 2007 to February 2012 and the Vice President, Finance and Treasurer from February 2005 to June 2007 for ACE Cash Express. Among other qualifications, Mr. Lindsay brings significant operational and financial experience to our Board of Directors having served as President of the Aaron’s Business since February 2016 and currently as Chief Executive Officer of the Aaron’s Business. His significant experience in the dynamics of our business and his intimate knowledge of our business provide him with strategic and operational expertise generally and for Aaron’s SpinCo specifically, which will be utilized by our Board of Directors. These skills and experiences qualify him to serve on our Board of Directors.

John W. Robinson III will be Chairman of the Board of Directors of Aaron’s SpinCo. He has been a director of Parent since November 2014 when he was named Parent’s Chief Executive Officer. Mr. Robinson was also named President of Parent as of February 2016. From 2012 to November 2014, Mr. Robinson served as the Chief Executive Officer of Progressive Finance Holdings, LLC, which was acquired by Parent in April 2014. Prior to working at Progressive Finance Holdings, LLC, he served as the President and Chief Operating Officer of TMX Finance LLC, or “TMX Finance.” He joined TMX Finance as Chief Operating Officer in 2004 and was appointed President in 2008. TMX Finance filed a voluntary Chapter 11 bankruptcy proceeding in April 2009 from which it emerged in April 2010. Prior to working at TMX Finance, he worked in the investment banking groups at Morgan Stanley, Lehman Brothers and Wheat First Butcher Singer. Among other qualifications, Mr. Robinson brings significant operational and financial experience to our Board of Directors. His considerable experience in senior management, and his leadership and intimate knowledge of our business, provide him with strategic and operational expertise generally and for Aaron’s SpinCo specifically, which will be utilized by our Board of Directors. These skills and experiences qualify him to serve on our Board of Directors.

 

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Director Independence

A majority of our Board of Directors, and the entire membership of our Audit, Nominating and Corporate Governance and Compensation Committees of our Board of Directors, will consist of independent, non-employee directors who meet the criteria for independence required by the NYSE listing standards. In addition, our Corporate Governance Guidelines will provide that seventy-five percent (75%) of the Board shall consist of directors who the Board has determined are “independent” under the rules of the NYSE.

Pursuant to the NYSE listing standards, no director will be deemed an independent director unless the Board affirmatively determines that the director has no material relationship with Aaron’s SpinCo, directly or as an officer, shareholder or partner of an organization that has a relationship with the Aaron’s SpinCo. For relationships that are not addressed in the NYSE Listed Company Manual, our Board of Directors is expected to establish the following standards in determining whether a relationship is material:

 

   

A relationship that does not require disclosure in our annual Proxy Statement shall generally not be considered material.

 

   

If a director is a director, officer or trustee of a charitable organization and our annual charitable contributions to the organization do not exceed the greater of $1 million or 2% of the organization’s total annual charitable receipts, the relationship shall generally not be considered material.

 

   

A director’s position (or a director’s immediate family member’s position) as an independent director of another company that transacts business with us shall not generally be considered a material relationship, absent other circumstances.

 

   

A director’s immediate family member’s non-executive position with another company that transacts business with us shall not generally be considered a material relationship, absent other circumstances.

For other relationships, a majority of our independent directors may make a determination whether or not such relationship is material and whether the director may therefore be considered independent under the NYSE rules. We will also consider and determine that members of our Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee satisfy the additional independence requirements of the NYSE and SEC for such committees.

Committees of the Board of Directors

Effective upon the completion of the distribution, our Board of Directors (“Board of Directors”) will have the following standing committees: an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation Committee. The full membership of each of the committees will be subject to the determination of our Board of Directors once it is fully constituted.

Audit Committee. Kelly H. Barrett, Walter G. Ehmer and Hubert L. Harris, Jr. are expected to be the members of our Board of Director’s Audit Committee. Kelly H. Barrett is expected to be the Audit Committee Chair. The function of the Audit Committee will be to assist our Board of Directors in fulfilling its oversight responsibility relating to: (a) the integrity of our consolidated financial statements; (b) the financial reporting process and the systems of internal accounting and financial controls; (c) the performance of our internal audit function and independent auditors; (d) the independent auditors’ qualifications and independence; (e) our compliance with ethics policies (including oversight and approval of related party transactions and reviewing and discussing certain calls to our ethics hotline and our investigation of and response to such calls) and legal and regulatory requirements; (f) the adequacy of our policies and procedures to assess, monitor and manage business risks including financial, regulatory and cybersecurity risks and its corporate compliance programs, including receiving quarterly reports related to such risks and programs; and (g) the adequacy of our information security and privacy program and cybersecurity initiatives. The Audit Committee will be directly responsible for the appointment, compensation, retention, and termination of our independent auditors, who report directly to the Audit Committee, and for

 

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recommending to our Board of Directors that the board recommend to our shareholders that the shareholders ratify the retention of our independent auditors. In connection with its performance of these responsibilities, the Audit Committee will regularly receive reports from and hold discussions with our management team, leaders from our internal audit department, leaders from our legal department, and the independent auditors. Many of those discussions will be held in executive session with the Audit Committee.

Each member of our Audit Committee will satisfy the independence requirements of the NYSE and SEC rules applicable to audit committee members, and each will be financially literate. Our Board of Directors will also designate each member of the Audit Committee as an “audit committee financial expert” as defined by SEC regulations.

Nominating and Corporate Governance Committee. Kelly H. Barrett, Walter G. Ehmer and Hubert L. Harris, Jr. are expected to be the members of our Board of Directors’ Nominating and Corporate Governance Committee. Hubert L. Harris, Jr. is expected to be the Nominating and Corporate Governance Committee Chair. The purpose of the Nominating and Corporate Governance Committee will be to assist our Board of Directors in fulfilling its responsibilities relating to: (a) board and committee membership, organization, and function; (b) director qualifications and performance; (c) management succession; and (d) corporate governance. The Nominating and Corporate Governance Committee will also, from time to time, identify and recommend to our Board of Directors individuals to be nominated for election as directors and develop and recommend to our Board of Directors for adoption Corporate Governance Guidelines applicable to Aaron’s SpinCo.

Each member of the Nominating and Corporate Governance Committee will be independent, as defined by the rules of the NYSE.

Compensation Committee. Kelly H. Barrett, Walter G. Ehmer and Hubert L. Harris, Jr. are expected to be the members of our Board’s Compensation Committee. Walter G. Ehmer is expected to be the Compensation Committee Chair. The Compensation Committee will assist our Board of Directors in fulfilling its oversight responsibilities relating to: (a) executive and director compensation; (b) equity compensation plans and other compensation and benefit plans; and (c) other significant human resources matters. The Compensation Committee will also have the authority to review and approve performance goals and objectives for the named executive officers in connection with our compensation programs, and to evaluate the performance of the named executive officers, in light of such performance goals and objectives and other matters, for compensation purposes. Based on such evaluation and other matters, the Compensation Committee will determine the compensation of the named executive officers, including our President and Chief Executive Officer. The Compensation Committee also will have the authority to approve grants of equity incentives and to consider from time to time, and recommend to our Board of Directors, changes to director compensation.

Each member of the Compensation Committee will satisfy the independence requirements of the NYSE applicable to compensation committee members and will be a non-employee director under Rule 16b-3 of the Exchange Act.

Our Board of Directors expects to adopt a written charter for each of the Audit Committee, the Nominating and Corporate Governance Committee, and the Compensation Committee. These charters will be posted on our website in connection with the separation.

Lead Director

The independent directors are expected to appoint one independent director to serve as Lead Director so long as the Chairman of our Board of Directors is not an independent director. We expect that our Board of Directors will appoint one independent director to serve as Lead Director promptly following the separation and that the Lead Director role will have robust responsibilities including but not limited to presiding at all meetings where the Chairman is not present, serving as a liaison between the independent directors and the CEO and Chairman, and helping to set Board agendas in consultation with the CEO and Chairman.

 

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Compensation Committee Interlocks and Insider Participation

During our fiscal year ended December 31, 2019, Aaron’s SpinCo was not an independent company, and did not have a compensation committee or any other committee serving a similar function. Decisions as to the compensation of those who currently serve as our executive officers were made by Parent, as described in the section of this information statement captioned “Compensation Discussion and Analysis.”

Corporate Governance

Shareholder Recommendations for Director Nominees

Our bylaws will contain provisions that address the process by which a shareholder may nominate an individual to stand for election to our Board of Directors. We expect that our Board of Directors will adopt a policy concerning the evaluation of shareholder recommendations of Board candidates by the Nominating and Corporation Governance Committee.

Corporate Governance Guidelines

Our Board of Directors is expected to adopt a set of Corporate Governance Guidelines in connection with the separation to assist it in guiding our governance practices. These practices will be regularly re-evaluated by the Nominating and Corporate Governance Committee in light of changing circumstances in order to continue serving Aaron’s SpinCo’s best interests and the best interests of our shareholders.

Communicating with our Board of Directors

Our Corporate Governance Guidelines will include procedures by which shareholders and other interested parties who would like to communicate their concerns to one or more members of our Board of Directors, a Board of Directors committee or the independent non-management directors as a group may do so, including by writing to any such party at Aaron’s SpinCo, Inc., c/o Corporate Secretary, 400 Galleria Parkway SE, Suite 300, Atlanta, Georgia 30339.

Our non-retaliation policy will prohibit us and any of our employees from retaliating or taking any adverse action against anyone for raising a concern.

Director Qualification Standards

Our Corporate Governance Guidelines will provide that the Nominating and Corporate Governance Committee is responsible for considering and making recommendations to the Board concerning nominees for election as director at our meetings of shareholders, and nominees for appointments to fill any vacancy on our Board of Directors. Our Board of Directors, after taking into account the assessment provided by the Nominating and Corporate Governance Committee, will be responsible for considering and recommending to our shareholders nominees for election as director at our annual meeting of shareholders. In accordance with our Corporate Governance Guidelines, both the Nominating and Corporate Governance Committee and our Board of Directors, in evaluating director candidates, will consider the experience, talents, skills and other characteristics of each candidate and our Board of Directors as a whole in assessing potential nominees to serve as director.

In addition, our Board of Directors will consider all information relevant in their business judgment to the decision of whether to nominate a particular candidate for a particular board seat. These factors will include a candidate’s professional and educational background, reputation, industry knowledge and business experience and the relevance of those characteristics to us and our Board of Directors. In addition, candidates will be evaluated on their ability to complement or contribute to the mix of talents, skills and other characteristics needed to maintain the effectiveness of our Board of Directors and their ability to fulfill the responsibilities of a director and of a member of one or more of the standing committees of our Board of Directors. While our Board of Directors will not have a specific policy regarding diversity among directors, diversity of race, ethnicity, gender, age, cultural background and professional experience will be considered in evaluating candidates for membership on our Board of Directors.

 

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Risk Oversight and Risk Management

Senior management will be responsible for day-to-day risk management, while our Board of Directors will oversee planning for and responding to risks, as a whole, through its committees and independent directors. Although our Board of Directors has ultimate responsibility with respect to risk management oversight, primary responsibility for certain areas will be delegated, as appropriate, to its committees. For example, the Audit Committee will be charged with, among other matters, overseeing risks attendant to (a) our system of disclosure controls and procedures, (b) internal control over financial reporting, (c) performance of our internal audit function and independent auditors, and (d) the identification and mitigation of cybersecurity risks. The Audit Committee will also consider the steps management has taken to monitor and control such risks, including our risk assessment and risk management policies. The Audit Committee, together with our General Counsel or another representative from our legal department, will also consider issues at its meetings relating to our legal and regulatory compliance obligations, including consumer protection laws in the lease-to-own industry. Likewise, the Compensation Committee will consider risks that may be implicated by our compensation programs, including review of our compensation policies and practices and determining that they do not encourage excessive or unnecessary risk taking, and do not otherwise create risks that are reasonably likely to have a material adverse effect on us.

Policies on Business Ethics

In connection with the separation, we will adopt a Code of Business Conduct and Ethics that will provide that conflict of interest situations involving directors or executive officers must receive the prior review and approval of the Audit Committee. Our Code of Business Conduct and Ethics will also set forth various examples of when conflict of interest situations may arise, including when an officer or director, or members of his or her family: (a) receive improper personal benefits as a result of his or her position in or with Aaron’s SpinCo; (b) have certain relationships with competing businesses or businesses with a material financial interest in Aaron’s SpinCo, such as suppliers or customers; or (c) receive improper gifts or favors from such businesses. All of our directors, officers, and employees will be required to read, understand and abide by the requirements of the Code of Business Conduct and Ethics. We will also adopt a Code of Ethics for the Chief Executive Officer and the Senior Financial Officers and Employees that will be designed to deter wrongdoing, promote honest and ethical conduct and set forth specific policies to guide certain covered officers and employees in the performance of their duties. The Code of Business Conduct and Ethics and Code of Ethics for the Chief Executive Officer and the Senior Financial Officers and Employees (together, the “Codes of Conduct”) will be accessible on our website. Any waiver of the Codes of Conduct for directors or executive officers may be made only by our Board of Directors. In addition, we will disclose any waiver from the Codes of Conduct for the other executive officers and for directors on our website.

Procedures for Treatment of Complaints Regarding Accounting, Internal Accounting Controls, and Auditing Matters

In accordance with the Sarbanes-Oxley Act of 2002, we expect that our Audit Committee will adopt proper procedures relating to any complaints received by Aaron’s SpinCo regarding accounting, internal accounting controls, and auditing matters and to allow for the confidential, anonymous submission by employees and others of any concerns regarding accounting or auditing matters.

COMPENSATION DISCUSSION AND ANALYSIS

Overview of Compensation Determinations Prior to the Separation

As discussed above, we are currently part of Parent and not an independent company, and our Compensation Committee has not yet been formed. Decisions about our executive compensation and benefits to date have been made by the Compensation Committee of the Parent Board of Directors (the “Parent Compensation Committee”) in consultation with Parent senior management. This Compensation Discussion and Analysis (the “CD&A”) describes the historical compensation practices of Parent (and Parent’s predecessor Aaron’s, Inc.) and outlines certain aspects of

 

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our anticipated compensation structure for our executive officers following the separation. In this CD&A, all references to Parent’s and the Parent Compensation Committee’s historical compensation policies and practices which relate to periods prior to the time of completion of the holding company formation include and refer to the historical policies and practices of Parent’s predecessor Aaron’s, Inc.

We expect that our approach to executive compensation and related issues will generally be similar to Parent’s approach to those issues. Future policies may differ from these expectations however, because once our Compensation Committee is established it will review our executive compensation and benefit programs and determine the appropriate compensation and benefits for our executives.

For purposes of the following CD&A and executive compensation disclosures, the individuals listed below are referred to collectively as our “Named Executive Officers.” They are the persons who are expected to be appointed to serve as our Chief Executive Officer, our President and our other most highly compensated executive officers, based on fiscal 2019 compensation from Parent. Our other Named Executive Officers have not yet been determined and information concerning these additional Named Executive Officers will be included in an amendment to this information statement.

 

   

Douglas A. Lindsay is our Chief Executive Officer. Since July 31, 2020, Mr. Lindsay has served as Chief Executive Officer of the Aaron’s Business segment.

 

   

Steve Olsen is our President. Since July 31, 2020, Mr. Olsen has served as President of the Aaron’s Business segment.

 

   

C. Kelly Wall is our Chief Financial Officer. Since July 31, 2020, Mr. Wall has served as Interim Chief Financial Officer of Parent.

The historical decisions relating to the compensation of Mr. Lindsay, who served as an executive officer of Parent in fiscal year 2019 and prior years, were made by the Parent Compensation Committee. The historical decisions for Messrs. Olsen and Wall, who were not executive officers of Parent, were established by Parent through its processes for non-executive officer compensation.

Treatment of Outstanding Parent Equity Compensation in the Separation

Pursuant to the employee matters agreement, which is described below, Parent’s outstanding equity awards will generally be treated as follows:

Vested and Unvested Stock Options. Each outstanding vested and/or unvested Parent stock option held by an individual who will be an Aaron’s SpinCo Employee (as defined below) as of the separation, will be converted entirely into a stock option with respect to our common stock, and each vested and/or unvested outstanding Parent stock option held by an individual who will be a Parent Employee (as defined below) following the separation will be adjusted and continue to relate to Parent common stock. In each case, the award will be converted or adjusted, as applicable, in a manner intended to preserve the aggregate value of the original corresponding Parent stock option. Each such converted or adjusted stock option will generally be subject to the same terms and conditions that applied to the original corresponding Parent stock option, including vesting requirements.

Unvested Restricted Stock Awards and Performance Share Unit Awards Granted On or After January 1, 2020. Each outstanding unvested Parent restricted stock award and/or performance share unit award granted on or after January 1, 2020 held by an individual who will be an Aaron’s SpinCo Employee as of the separation, will be converted entirely into the same type of award (i.e., restricted stock award or performance share unit award) with respect to our common stock, and each outstanding unvested Parent restricted stock award and/or performance share unit award held by an individual who will be a Parent Employee following the separation will be adjusted and continue to relate to Parent common stock. In each case, the award will be converted or adjusted, as applicable, in a manner intended to preserve the aggregate value of the original corresponding Parent restricted

 

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stock award and performance share unit award. Each converted or adjusted restricted stock award and performance share unit award will generally be subject to the same terms and conditions that applied to the original corresponding award, including vesting requirements.

Unvested Restricted Stock Awards and Performance Share Unit Awards Granted On or After January 1, 2018 but Prior to January 1, 2020. Each outstanding unvested Parent restricted stock award and/or performance share unit award granted on or after January 1, 2018 but before January 1, 2020 (“Pre-2020 Award”) (a) held by an individual who will be an Aaron’s SpinCo Employee as of the separation will generally have such award replaced with an award of the same type (i.e., restricted stock award or performance share unit) which relates to our common stock, and (b) each outstanding unvested Parent restricted stock award or performance share unit award held by an individual who will be a Parent Employee as of the separation will generally be adjusted (but continue to relate to Parent common stock). In each case, the replacement or adjustment, as applicable, will be completed in a manner intended to preserve the aggregate value of the original corresponding Pre-2020 Award. A different adjustment may apply if elected by the individual as described in the employee matters agreement.

Vested and Unvested Restricted Stock Unit Awards Held by Non-Employee Directors. Each outstanding Parent vested and/or unvested restricted stock unit award held by a non-employee director of Parent immediately prior to the separation will be adjusted so that the non-employee director receives a restricted stock unit award that relates to Parent common stock and our common stock, generally subject to the same terms and conditions as his or her original restricted stock award, including vesting. The adjustment will be completed in a manner intended to preserve the aggregate value of the original restricted stock unit award.

Anticipated Compensation Program Design Following the Separation

We believe that the separation will enable us to offer our key employees compensation directly linked to the performance of our business, which we expect will enhance our ability to attract, retain and motivate qualified personnel and serve the interests of our shareholders. Some of the employee benefit plans that will be adopted effective on the separation include, but are not limited to, the following plans:

 

   

Equity Incentive Plan. Our equity incentive plan is expected to provide for the grant of long-term equity compensation in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares, performance units and other stock-based awards to eligible employees, directors, consultants, advisors and other persons on terms and conditions that are materially the same as Parent’s Amended and Restated 2015 Equity and Incentive Plan, which is described below. Parent, which will be our sole shareholder prior to the consummation of the separation, will approve the equity incentive plan prior to the separation.

 

   

Employee Stock Purchase Plan. The employee stock purchase plan is expected to permit eligible employees to purchase shares of our common stock on periodic purchase dates at a discount on terms and conditions that are materially the same as Parent’s Employee Stock Purchase Plan, which is described below. Parent, which will be our sole shareholder prior to the consummation of the separation, will approve the employee stock purchase plan prior to the separation.

 

   

Retirement Plan. We expect to establish a 401(k) plan prior to the separation. The 401(k) plan is expected to be similar to Parent’s Employees Retirement Plan, as discussed below. Pursuant to the employee matters agreement, which is described below, we will assume certain liabilities under Parent’s Employee Retirement Plan for the individuals who will be employed by us after the separation. Also, the accounts of such individuals will be transferred from Parent’s Employee Retirement Plan to our 401(k) plan in connection with the separation.

 

   

Deferred Compensation Plan. We expect to adopt an unfunded, nonqualified deferred compensation plan open to a select group of management, highly compensated employees and non-employee directors on terms and conditions that are materially the same as Parent’s Deferred Compensation Plan, which is described below. Pursuant to the employee matters agreement we will assume certain liabilities under Parent’s

 

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Deferred Compensation Plan for the individuals who will be employed by us after the separation. Also, assets from the rabbi trust which funds Parent’s obligations under the Deferred Compensation Plan will be transferred to the rabbi trust which funds our non-qualified deferred compensation plan in proportion to its assumed liabilities shortly after the separation.

 

   

Severance Plan. Effective on the separation, we will assume and continue the Executive Severance Pay Plan, on materially the same terms and conditions described below, except that we will amend the plan to reflect the separation and it may be amended thereafter.

 

   

Individual Agreements. Pursuant to the employee matters agreement, we will assume certain severance and change-in-control agreements for the individuals who will be employed by us after the separation, including the severance and change-in-control agreement for Mr. Lindsay.

For more information about the employee matters agreement, see the section below entitled “Certain Relationships And Related Party Transactions —Employee Matters Agreement.”

In addition, we expect that our Compensation Committee will adopt a clawback policy and securities trading policy following the separation similar to such policies maintained by Parent.

Once established, our Compensation Committee will review the impact of our separation from Parent and all aspects of compensation and make appropriate adjustments to our compensation programs and practices.

Executive Summary of Parent’s Compensation Programs

The primary objectives and priorities of Parent’s executive compensation programs are to:

 

   

attract, motivate, and retain quality executive leadership;

 

   

align the incentive goals of Parent’s executive officers with the interests of Parent’s shareholders;

 

   

enhance the individual performance of each executive officer;

 

   

improve Parent’s overall performance; and

 

   

support achievement of Parent’s business plans and long-term goals.

To accomplish these objectives, the Parent Compensation Committee considers a variety of factors when approving compensation programs, including (a) changes in business strategy, (b) performance expectations for Parent and, with respect to the compensation programs for certain named executive officers (the “Parent NEOs”) the performance expectations for the Aaron’s Business or Progressive Leasing business segment, (c) external market data, (d) actual performance of Parent and, with respect to the compensation programs for certain Parent NEOs, the actual performance of the Aaron’s Business segment or Progressive Leasing business segment, (e) individual executive performance, and (f) internal compensation equity with the Parent NEOs. Parent also employs sound compensation and governance principles and policies, while avoiding problematic or disfavored practices, as noted below:

 

What Parent Does

  

What Parent Doesn’t Do

✓ Independent Compensation Committee assisted by an independent consultant    × No repricing or cash buyouts of stock options without shareholder approval
✓ Parent annually assesses its compensation policies to ensure that the features of the program do not encourage undue risk    × No excise or other tax gross-ups on change-in-control payments
✓ All executives are “at will” employees, with the elimination of employment agreements for all named executive officers except for the Parent CEO    × No hedging or pledging of Parent stock

 

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What Parent Does

  

What Parent Doesn’t Do

✓ Pay mix that emphasizes performance-based compensation over fixed compensation (approximately 89% performance-based for the Parent CEO and approximately 77% for all other named executive officers)    × No excessive perquisites or other benefits
✓ Pay mix that emphasizes long-term, equity-based incentives over short-term cash incentives    × No single-trigger severance benefits upon a change-in-control
✓ Incentive plans that utilize multiple measures, including growth, profitability, and returns    × No payment of dividends on unearned or unvested shares
✓ Reasonable incentive plan targets and ranges, with capped incentive payouts    × No guaranteed bonus payments
✓ Double-trigger equity vesting acceleration upon a change of control (awards granted in 2015 and later)   
✓ Meaningful stock ownership requirements   
✓ Formal clawback policy to recoup performance-based compensation from Parent’s senior executives, including named executive officers, under certain prescribed acts of misconduct   

Say on Pay Vote. On June 18, 2020, Parent’s shareholders cast an advisory vote on Parent’s executive compensation practices as described in Parent’s 2020 proxy statement, with 97.6% of the total votes cast in favor of Parent NEO compensation.

Parent Compensation Process Summary for 2019

Role of the Parent Compensation Committee. The Parent Compensation Committee is composed solely of directors that the Parent Board of Directors has determined to be independent under applicable SEC and NYSE listing standards. Its role is to oversee (a) executive and outside director compensation, (b) benefit plans and policies, including equity compensation plans and other forms of compensation, and (c) other significant human resources matters.

More specifically, the Parent Compensation Committee reviews and discusses proposed compensation for Parent NEOs, evaluates their performance, and sets their compensation. In addition, the Parent Compensation Committee approves all equity awards for Parent NEOs and other executive officers.

Role of Management. The Parent Compensation Committee considers the input and recommendations of Mr. John Robinson, President and Chief Executive Officer of Parent, with respect to Parent’s executive compensation programs and decisions that affect other Parent NEOs. Mr. Steve Michaels, Chief Executive Officer of Parent’s Progressive Leasing business segment, also has provided input, in his role as Chief Financial Officer, with respect to financial goals and recommendations and overall program design. Although management and other invitees at Parent Compensation Committee meetings may participate in discussions and provide input, all votes and final decision-making on Parent NEO compensation are solely the responsibility of the Parent Compensation Committee, and those final deliberations and votes are conducted in executive sessions in which no executive officer participates.

Role of Independent Compensation Consultants. The Parent Compensation Committee has the authority to retain independent consultants and other advisors. During 2019, the Parent Compensation Committee retained the

 

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services of Exequity which reported directly to the Parent Compensation Committee but worked with management at the direction of the Parent Compensation Committee. The Parent Compensation Committee assessed the independence of the advisors, including the potential for conflicts of interest as required by the SEC and NYSE listing standards, and concluded that Exequity was appropriately independent and free from potential conflicts of interest.

Although the specific services of the independent consultant vary from year to year, the following are the services generally provided by the independent consultant:

 

   

providing information on trends and related legislative, regulatory, and governance developments;

 

   

reviewing and recommending any changes to the benchmarking peer group for the consideration and approval of the Parent Compensation Committee;

 

   

conducting competitive assessments of executive compensation levels and incentive program designs;

 

   

consulting on compensation for outside directors;

 

   

conducting a review of Parent’s compensation programs from a risk assessment perspective;

 

   

reviewing compensation tally sheets on the Parent executive officers;

 

   

assisting with review and disclosures regarding the executive compensation programs; and

 

   

reviewing the Parent Compensation Committee’s annual calendar and related governance matters.

Representatives from the advisory firm attended all of the Parent Compensation Committee meetings pertaining to 2019 executive compensation decisions, and also participated in executive sessions as requested by the Parent Compensation Committee.

Benchmarking

Role of Benchmark Data. Parent uses compensation market data as a reference for understanding the competitive positioning of each element of Parent’s compensation program and of total compensation. The Parent Compensation Committee generally requests these market studies from its independent consultant from time to time as the Parent Compensation Committee deems appropriate. Market data informed compensation-related decisions for Parent NEOs in 2019. On a go forward basis, the Parent Compensation Committee may review market data on an annual basis to better understand current labor market trends.

In referencing these market studies, the Parent Compensation Committee does not manage total compensation for Parent NEOs within a prescribed competitive position or percentile of the compensation market. Rather, the Parent Compensation Committee reviews compensation for each Parent NEO relative to market data and considers other internal and external factors when exercising its business judgment as to compensation decisions. Other factors material to the Parent Compensation Committee’s deliberations include (a) objective measurements of business performance, (b) the accomplishment of compliance, strategic, and financial objectives, (c) the development and retention of management talent, (d) enhancement of shareholder value, and (e) other matters the Parent Compensation Committee deems relevant to Parent short-term and long-term success.

 

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Peer Groups. With respect to 2019 compensation decisions the Parent Compensation Committee referenced the market study that was conducted by the independent consultant for 2018. The peer group used in that study was proposed by the independent consultant and approved by the Parent Compensation Committee and included discrete peer groups for each of the major operating segments in addition to a corporate peer group. The peers were selected based on similarity in terms of size, complexity, and business focus at that time. The following are the specific peer companies that were used in that study:

 

Corporate Peers

 

Aaron’s Business Unit Peers

 

Progressive Leasing Unit Peers

Big Lots, Inc.

  Big Lots, Inc.   Credit Acceptance Corporation

Conn’s, Inc.

  Conn’s, Inc.   Enova International, Inc.

Credit Acceptance Corporation

  Dick’s Sporting Goods, Inc.   ePlus inc.

Dick’s Sporting Goods, Inc.

  DSW Inc.   EZCORP, Inc.

ePlus inc.

  FirstCash, Inc.   Fair Isaac Corporation

Green Dot Corporation

  Herc Holdings Inc.   Green Dot Corporation

OneMain Holdings, Inc.

  HSN, Inc.   LendingClub Corporation

Rent-A-Center, Inc.

  Rent-A-Center, Inc.   OneMain Holdings, Inc.

Santander Consumer USA Holdings Inc.

  Tractor Supply Company   Santander Consumer USA Holdings Inc.

Tractor Supply Company

  Wayfair, Inc.   World Acceptance Corporation

Survey Data. If data from the proxy peer group is not available for all Parent NEO positions, the Parent Compensation Committee may also review broader survey benchmarking data from time to time, as necessary. Survey data was also used by Parent for compensation decisions for other Parent executives who are not NEOs, including Messrs. Olsen and Wall.

In 2019, at the request of the Parent Compensation Committee, Exequity conducted a comprehensive review of potential peers taking into account revenue size, industry, and labor market.

The Parent Compensation Committee approved the peer group, which comprises the 25 companies listed below. The peer group was used for the 2019 benchmarking and to inform 2020 pay levels for Parent NEOs. The peer group is composed of both retail and consumer finance companies that approximate Parent in terms of key size metrics. The composition of the group considers the major operating segments of Parent as represented by Aaron’s SpinCo which operates in the retail space, and the Progressive Leasing and Vive business segments which operate in the consumer finance space. In addition to the peer group shown below, general industry pay survey data was also provided and considered to ensure a fulsome evaluation of the competitive pay landscape.

 

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Company Name

  

Primary Industry

Ally Financial Inc.

   Consumer Finance

Big Lots, Inc.

   Multiline Retail

Burlington Stores, Inc.

   Specialty Retail

Conn’s, Inc.

   Specialty Retail

Credit Acceptance Corporation

   Consumer Finance

CURO Group Holdings Corp.

   Consumer Finance

Designer Brands Inc.

   Specialty Retail

DICK’S Sporting Goods, Inc.

   Specialty Retail

Discover Financial Services

   Consumer Finance

Encore Capital Group, Inc.

   Consumer Finance

Enova International, Inc.

   Consumer Finance

FirstCash, Inc.

   Consumer Finance

Foot Locker, Inc.

   Specialty Retail

Green Dot Corporation

   Consumer Finance

OneMain Holdings, Inc.

   Consumer Finance

Rent-A-Center, Inc.

   Specialty Retail

RH

   Specialty Retail

Sally Beauty Holdings, Inc.

   Specialty Retail

Santander Consumer USA Holdings Inc.

   Consumer Finance

Sleep Number Corporation

   Specialty Retail

SLM Corporation

   Consumer Finance

Synchrony Financial

   Consumer Finance

Tractor Supply Company

   Specialty Retail

Wayfair Inc.

   Internet and Direct Marketing Retail

Williams-Sonoma, Inc.

   Specialty Retail

Components of the Executive Compensation Program

The three primary components of each Parent NEO’s total direct compensation for 2019, including Mr. Lindsay, were as follows:

 

Component

  

Terms and Objectives

Base Salary

  

Fixed amount of compensation for performing day-to-day job responsibilities intended to reflect the scope of an executive’s role.

 

Reviewed annually for potential adjustment based on factors such as market levels, individual performance, and scope of responsibility.

Annual Cash Incentive Award    Variable performance-based award opportunity based on achievements with respect to Parent’s or the Aaron’s Business segment’s or the Progressive Leasing business segment’s financial and operational performance goals (Adjusted EBITDA, Revenue, and Compliance).
Long-Term Equity Incentive Award    To balance long-term performance and retention, 2019 equity awards were made in the form of 50% performance share units, 25% stock options, and 25% time-based restricted stock awards.

These components are designed to be competitive with employers with whom Parent competes for executive talent and to support Parent compensation program objectives. The Parent Compensation Committee has not set a prescribed mix or allocation for each component, but rather focuses on total direct compensation when making compensation decisions for executives of Parent. In making these decisions, the Parent Compensation Committee also

 

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considers the following related factors: (a) performance against corporate and individual objectives for the fiscal year; (b) performance of general management responsibilities; (c) the value of any unique skills and capabilities; (d) contributions as a member of the executive management team; and (e) competitive market considerations.

Total direct compensation for Parent executive officers emphasizes variable and performance-based compensation more so than for Parent’s other employees. This reflects Parent’s philosophy that performance-based compensation opportunities—linked to financial, operating, and stock price performance—should increase as overall responsibility increases.

The pay components and philosophy discussed above were also used for other executives at Parent, including Messrs. Olsen and Wall.

Base Salary

The Parent Compensation Committee views base salary as fixed compensation intended to reflect the scope of an executive’s role. It reviews base salaries annually and adjusts them as necessary to ensure that salary levels remain appropriate and competitive. Salary increases are periodic rather than annual and are made after the Parent Compensation Committee considers relevant factors, including:

 

   

breadth and scope of an executive’s role, including any significant change in duties;

 

   

competitive market pay levels;

 

   

internal comparisons to similar roles;

 

   

individual performance throughout the year; and

 

   

overall economic climate and Parent performance and, with respect to certain Parent NEOs, like Mr. Lindsay, the performance of the Aaron’s Business.

The following table sets forth information regarding the base salary for our Named Executive Officers.

 

Named Executive Officer

   2019
Base Salary
 

Douglas A. Lindsay

   $ 600,000  

Steve Olsen

   $ 450,000  

C. Kelly Wall

   $ 300,000  

Annual Cash Incentive Awards

Annual cash incentive awards provide the opportunity to earn cash rewards for meeting Parent, Progressive Leasing business segment, or Aaron’s Business segment financial and operational performance goals. Under the 2019 program, Parent NEOs had the potential to earn cash incentive awards based on performance against pre-determined performance goals, with amounts that vary based on the degree to which the related goals are achieved.

Target Awards. At the beginning of the year, the Parent Compensation Committee approves the target award opportunity for each Parent NEO as a percentage of base salary. Messrs. Olsen and Wall’s target award opportunities were also set as a percentage of base salary.

 

Named Executive Officer

   2019 Target % of
Salary
 

Douglas A. Lindsay

     100

Steve Olsen

     45

C. Kelly Wall

     45

 

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Performance Measures and Weights. The following were the performance measures and weights in the 2019 annual cash incentive program for Messrs. Lindsay, Olsen, and Wall:

 

Named Executive Officer

   Adjusted
EBITDA
    Revenue     Compliance  

Douglas A. Lindsay

     50     30     20

Steve Olsen

     50     30     20

C. Kelly Wall

     50     30     20

For Messrs. Lindsay and Olsen, the measures are calculated as follows:

 

   

Aaron’s Business Revenue is measured on a GAAP basis.

 

   

Adjusted EBITDA is based on GAAP earnings before interest expense, taxes, depreciation, and amortization, with the Aaron’s Business segment EBITDA results, subject to the non-GAAP adjustments described in Parent’s Form 8-K filed with the SEC on February 20, 2020 and subject to further adjustments described below.

 

   

Performance results for each measure also exclude the effects of certain nonrecurring items of gains and expenses or losses. For 2019, this included adjustments, as applicable, to remove the insurance recovery for the 2017 Hurricanes Harvey and Irma from Adjusted EBITDA metrics of the Aaron’s Business and to remove certain legal and due diligence costs from the Adjusted EBITDA metric for the Aaron’s Business.

 

   

Compliance-related goals established in the first quarter of 2019 for the Aaron’s Business focused on several areas, including information security and related compliance training and the development and implementation of various processes to further improve compliance monitoring.

For Mr. Wall, the performance measures and weights for the 2019 annual cash incentive program are the same, but they are based on Parent measures, and not Aaron’s Business measures, and are calculated as follows:

 

   

Parent Business Revenue is measured on a GAAP basis.

 

   

Adjusted EBITDA is based on GAAP earnings before interest expense, taxes, depreciation, and amortization, with the Parent Adjusted EBITDA results, subject to the non-GAAP adjustments described in Parent’s Form 8-K filed with the SEC on February 20, 2020 and subject to further adjustments described below.

 

   

Performance results for each measure also exclude the effects of certain nonrecurring items of gains and expenses or losses. For 2019, this included adjustments, as applicable, to remove the insurance recovery for the 2017 Hurricanes Harvey and Irma from Adjusted EBITDA metrics of Parent and to remove certain legal and due diligence costs from the Adjusted EBITDA metric for Parent.

 

   

Compliance-related goals established in the first quarter of 2019 for Parent focused on several areas, including information security and related compliance training and the development and implementation of various processes to further improve compliance monitoring.

Performance Goals and Results. The Parent Compensation Committee established annual goals for each of the performance measures in the annual incentive program, including a Threshold, Target, and Maximum performance goal that corresponded to a Threshold, Target, and Maximum incentive payout level. For the financial measures (Adjusted EBITDA and revenue), the payout range was from 25% to 200% of Target and for Compliance the payout range was from 0% to 125% of Target (based on the number of compliance goals achieved).

 

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The following tables summarize the performance goals, performance results, and related incentive payout levels as a percent of target for Messrs. Lindsay and Olsen:

Aaron’s Business: Lindsay and Olsen

 

($ Million)       Plan Performance Range   Actual Performance and Payout  

Metric

  Weight   Threshold   Target Zone1   Maximum   Year
Ending
12/31/2019
  % of
Target
    Payout
Calculation
 

Aaron’s Business Revenue

  30%   $1,716   $1,846 - $1,865   $1,995   $1,784     96.2     72.0
Aaron’s Business Adj. EBITDA2   50%   $150   $168 - $170   $186   $165     97.5     87.8

Compliance3

  20%     4 Projects   5 Projects   5 Projects     125.0     125.0
             

 

 

 

Payout

    25%   100%   200%         90.5
             

 

 

 

 

1

If actual performance falls anywhere within this dollar range then payout is at 100% of target.

2

Further adjusted to remove insurance recoveries for the 2017 Hurricanes Harvey and Irma and to remove certain legal and due diligence costs.

3

Maximum payout on Compliance is 125%.

The following tables summarize the performance goals, performance results, and related incentive payout levels as a percent of target for Mr. Wall:

Parent: Wall

 

($ Million)        Plan Performance Range   Actual Performance and Payout  

Metric

   Weight   Threshold   Target Zone1   Maximum   Year
Ending
12/31/2019
   % of
Target
    Payout
Calculation
 

Parent Revenue

   30%   $3,851   $4,033 - $4,073   $4,256   $3,948      97.4     79.5
Parent Adj. EBITDA2    50%   $405   $438-$443   $476   $435      98.9     95.9

Compliance3

   20%     4 Projects   5 Projects   5 Projects      125.0     125.0
               

 

 

 

Payout

     25%   100%   200%          96.8
               

 

 

 

 

1 

If actual performance falls anywhere within this dollar range then payout is at 100% of target.

2 

Further adjusted to remove insurance recoveries for the 2017 Hurricanes Harvey and Irma at the Aaron’s Business, to remove certain legal and due diligence costs at the Aaron’s Business and to remove the effect of the change in allowance for loan losses at Vive.

3 

Maximum payout on Compliance is 125%.

Based on the above performance results and incentive calculations, the chart below shows the final annual cash incentive awards paid to Messrs. Lindsay, Olsen and Wall for 2019 performance as compared to what those payments would have been at the target level:

 

Named Executive Officer

   Target Annual Incentive1      Award Earned under
Annual Incentive Plan
 

Douglas A. Lindsay

   $ 600,000      $ 542,800  

Steve Olsen

   $ 202,500      $ 183,200  

C. Kelly Wall

   $ 135,000      $ 130,700  

 

1

Calculated on annual base salary paid for 2019.

Changes for 2020. As previously described, the Parent Compensation Committee adopted changes to the 2020 annual cash incentive plan. These changes include eliminating the overlap with metrics in the performance share

 

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plan and a heightened focus on unit level profitability as measured through EBITDA. Beginning in 2020, Parent officers with corporate responsibility will be measured 80% on performance relative to corporate EBITDA goals and 20% relative to strategic objectives that include certain compliance related goals.

Long-Term Equity Incentive Awards

Parent long-term equity incentive awards are intended to:

 

   

reward the achievement of business objectives that the Parent Compensation Committee believes will benefit Parent shareholders;

 

   

align the interests of Parent senior management with those of Parent shareholders; and

 

   

assist with retaining Parent senior management to ensure continuity of leadership.

Beyond these objectives, the Parent Compensation Committee also considers market design practices, equity dilution, accounting expense, and other internal considerations when deciding on the structure and size of equity awards.

Award Type and Mix. Each year the Parent Compensation Committee grants equity awards to Parent NEOs; however, the award type and mix may change from time to time. In order to balance performance and retention incentives, the 2019 equity awards were made in the form of performance share units, stock options, and time-based restricted stock awards.

The graphic below depicts Parent 2019 equity award mix for all Parent executives:

 

 

LOGO

 

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Equity Award

 

Objective

 

Provisions

Performance Shares

 

•  Focus participants on the fundamentals of growing Parent business and increasing the level of Parent earnings over the long term.

 

•  One-year performance period ensures greater validity in Parent forecasts.

 

•  Number of performance shares earned based on one-year Parent performance.

 

•  Earned awards are subject to additional time-based vesting, with vesting occurring in three equal increments following the first, second, and third anniversaries of the grant.

Stock Options

 

•  Aligns executives with shareholders, with the value of an award realized only if the stock price appreciates following the date of grant.

 

•  Pro rata annual three-year vesting, with vesting occurring in three equal increments following the first, second, and third anniversaries of the grant.

 

Restricted Stock

 

•  Addresses competitive concerns with a focus on retaining Parent key executives needed to realize Parent’s long-term performance objectives.

 

•  Pro rata annual three-year vesting, with vesting occurring in three equal increments following the first, second, and third anniversaries of the grant.

Target Awards. The target awards for 2019 for Messrs. Lindsay, Olsen, and Wall are expressed as a percentage of base salary.

 

Named Executive Officer

   LTIP Target % of Salary  

Douglas A. Lindsay

     225

Steve Olsen

     60

C. Kelly Wall

     60

The award target percentage was set by the Parent Compensation Committee after reviewing the general award levels across Parent’s peer group and considering the responsibilities of Mr. Lindsay. Parent’s processes for non-executive officer compensation are similar and resulted in the targets for Messrs. Olsen and Wall.

The award is generally converted to a target number of performance shares and time-based RSAs by dividing the allocable portion of the grant date award value by Parent’s closing stock price on the date of grant. To determine the number of options to grant, the allocable portion of the grant date award value was divided by the estimated fair value of an option, as determined for benchmarking purposes using the Black-Scholes valuation methodology.

The LTI target awards that were granted to Messrs. Lindsay, Olsen, and Wall pursuant to the 2019 program structure are set forth in the table below:

2019 Equity Awards

LTI Target Value

 

Named Executive Officer

  Stock Options 25% +     Restricted Stock 25% +     Performance Shares 50% =     2019 LTI Value Target  

Douglas A. Lindsay

  $ 337,500     $ 337,500     $ 675,000     $ 1,350,000  

Steve Olsen

  $ 67,500     $ 67,500     $ 135,000     $ 270,000  

C. Kelly Wall

  $ 45,500     $ 45,500     $ 90,000     $ 180,000  

 

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Shares Awarded (at target)

 

Named Executive Officer

  Stock Options 25% +     Restricted Stock 25% +     Performance Shares 50% =     2019 LTI Shares
at Target
 

Douglas A. Lindsay

    17,400       6,240       12,480       36,120  

Steve Olsen

    3,480       1,260       2,520       7,260  

C. Kelly Wall

    2,340       840       1,680       4,860  

Performance Shares Performance Measures and Weights. The following were the performance measures and weights for the performance shares granted in 2019:

 

Named Executive Officer

   Adjusted Aaron’s
Business Revenue
    Adjusted Aaron’s
Business EBITDA
    Adjusted Revenue
(Consolidated)
 

Douglas A. Lindsay

     50     30     20

Steve Olsen

     50     30     20

Named Executive Officer

   Adjusted Parent
Revenue 

(Consolidated)
    Adjusted Parent
EBITDA
    Return on
Capital
 

C. Kelly Wall

     50     25     25

Parent Compensation Committee selected these measures for its Named Executive Officers to focus participants on growing Parent’s business and on sustaining and improving the quality of Parent’s earnings. The same structure that was used by Parent Compensation Committee for its Named Executive Officers was used for Messrs. Olsen and Wall as well. With respect to Messrs. Lindsay and Olsen, the measures are specific to the Aaron’s Business, except where noted as “consolidated,” which refers to Parent, and are calculated as follows:

 

   

Revenue is based on the Aaron’s Business results for 2019, as described above in “Components of the Executive Compensation Program—Annual Cash Incentive Awards” for the Aaron’s Business. Consolidated Adjusted Revenue includes the consolidation of Aaron’s Business segment with Progressive and Vive and is reduced for the amount of provision expense at Vive; and

 

   

Adjusted EBITDA is based on the Aaron’s Business results for 2019, calculated as described above in “Components of the Executive Compensation Program—Annual Cash Incentive Awards.”

With respect to Mr. Wall, return on capital was measured by dividing adjusted net operating profit (which we define as operating profit adjusted for certain non-recurring items as shown in Appendix A) after tax by the sum of average net debt (which we define as debt less cash and cash equivalents) and average total shareholders’ equity, with the final result being an average of quarterly calculations. Refer to Appendix A for the reconciliation of these non-GAAP measures to the closest GAAP measurement.

Performance Goals and Results. The Parent Compensation Committee established goals for each of the performance measures in the performance share program, including a Threshold, Target, and Maximum performance goal that corresponded to a Threshold, Target, and Maximum number of shares that could be earned. The number of shares that could be earned ranged from 25% to 200% of Target. Payouts for results between these levels are interpolated, with scales that vary by business segment. If the results are less than threshold, then no shares would be earned.

 

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The following tables summarize the performance goals, performance results, and related earning levels as a percent of target for Messrs. Lindsay and Olsen:

Aaron’s Business:

 

($ Million)         Plan Performance Range   Actual Performance and Payout  

Metric

        Threshold   Target Zone1   Maximum   Actual     % of
Target
    Payout
Calculation
 

Aaron’s Business Revenue

    50   $1,716   $1,846 - $1,865   $1,995   $ 1,784       96.2     72.0

Aaron’s Business Adj. EBITDA2

    30   $150   $168 - $170   $186   $ 165       97.5     87.8

Consolidated Adjusted Revenue3

    20   $3,831   $4,012 - $4,053   $4,234   $ 3,926       97.4     78.7
             

 

 

 

Payout

    25%   100%   200%         78.1
             

 

 

 

 

1

If actual performance falls anywhere within this dollar range then payout is at 100% of target.

2

Further adjusted to remove insurance recoveries for Hurricanes Harvey and Irma and to remove certain due diligence costs.

3

Further adjusted to remove the effect of provision expense at Vive.

The performance shares earned by Mr. Lindsay and Olsen based on 2019 performance will vest in three annual increments on March 7, 2020, 2021, and 2022.

The following tables summarize the performance goals, performance results, and related earning levels as a percent of target for Mr. Wall:

Parent:

 

($ Million)           Plan Performance Range    Actual Performance and Payout

Metric

          Threshold    Target Zone1   Maximum    Actual      % of
Target
   Payout
Calculation

Parent Revenue

     50    $3,831    $4,012 - $4,053   $4,234    $ 3,926      97.4%    78.7%

Parent Adj. EBITDA2

     25    $405    $438 - $443   $476    $ 435      98.9%    95.9%

Return on Capital3

     25    9.90%    11.6% - 11.8%   14.0%      11.9%      101.6%    103.0%
                   

 

Payout

      25%    100%   200%          89.1%
                   

 

 

1 

If actual performance falls anywhere within this dollar range then payout is at 100% of target.

2 

Further adjusted to remove the effect of provision expense at Vive.

3 

Further adjusted to remove insurance recoveries for Hurricanes Harvey and Irma at the Aaron’s Business, to remove certain due diligence costs at the Aaron’s Business and to remove the effect of the change in allowance for loan losses at Vive.

The performance shares earned by Mr. Wall based on 2019 performance will vest in three annual increments on March 7, 2020, 2021, and 2022.

 

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Changes for 2020. Parent Compensation Committee made changes to the design of the 2020 performance share program. In order to eliminate overlap between the annual cash incentive plan and the performance share plan, the metrics for long-term incentive were changed to focus largely on Consolidated or Business Segment revenue creation as appropriate. Line-of-sight profitability continues to be emphasized and measured via adjusted pre-tax income, and metrics for corporate participants will contain a balance sheet component to encourage a holistic and balanced approach to sustained growth and value creation. The same structure Parent Compensation Committee used for its NEOs was used for Messrs. Olsen and Wall as well. The weightings of the metrics are as shown in the tables below:

 

Named Executive Officer

   Aaron’s Business
Revenue
    Adjusted Aaron’s Business
Pre-Tax Income
 

Douglas A. Lindsay

     70     30

Steve Olsen

     70     30

 

Named Executive Officer

   Adjusted Parent
Revenue
    Adjusted Parent
Pre-tax Income
    Parent Return on
Capital
 

C. Kelly Wall

     60     20     20

Executive Compensation Policies

Stock Ownership Guidelines. The Parent Compensation Committee has adopted stock ownership guidelines to further align the interests of senior executives with Parent shareholders. The table below summarizes the current guidelines that apply to Parent NEOs. As of December 31, 2019, all of Parent’s executive officers satisfied these guidelines.

 

Feature

  

Provision

Required levels

  

5x base salary: Chief Executive Officer

 

3x base salary:

 

•  CFO and President, Strategic Operations;

 

•  Chief Executive Officer, Progressive; and

 

•  Chief Innovation Officer, Progressive

 

2x base salary: President, Aaron’s Business

Stock counted toward guidelines

  

Stock owned outright

 

Stock held in retirement accounts

 

Unvested time-based RSUs and RSAs

 

Earned but unvested performance shares

 

“In the money” value of vested but unexercised stock options

Clawback Policy. The Parent Compensation Committee has adopted a policy that provides that annual incentive and equity awards to Parent executive officers may be recouped if Parent restates Parent’s consolidated financial statements. Under this policy, covered employees including Parent NEOs may be required to repay to Parent the difference between the amount of incentives and awards received and the amount that would have been payable under the restated financial statements.

Securities Trading Policy. As part of Parent’s Insider Trading Policy, all Parent officers and directors are prohibited from trading any interest or position relating to the future price of Parent securities. These prohibited transactions include trading in puts, calls, short sales, or hedging transactions, but do not generally prohibit other purchases and sales of Parent common stock made in compliance with the limitations contained in Parent’s Insider Trading Policy. Pledging of Parent securities is prohibited under Parent’s Insider Trading Policy.

 

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Tally Sheets. The Parent Compensation Committee reviews tally sheets for select executives. These tally sheets provide a comprehensive view of target, actual, and contingent executive compensation payouts under a variety of termination and performance scenarios. The tally sheets allow the Parent Compensation Committee to understand the cumulative effect of prior pay decisions and stock performance, as well as the retentive ability of existing LTIs, severance, and change-in-control arrangements. The tally sheets are intended to facilitate the Parent Compensation Committee’s understanding of the nature and amounts of total compensation under Parent’s executive compensation program and to assist Parent’s Compensation Committee in its overall evaluation of the Parent program.

Executive Benefits and Perquisites

Parent’s executive compensation program also provides certain benefits and perquisites to Parent NEOs. The value of these benefits and perquisites represents a small portion of a Parent NEO’s overall total compensation opportunity and does not materially influence the Parent Compensation Committee’s decisions with respect to the salary and incentive elements of the compensation of Parent NEOs. The Parent Compensation Committee periodically reviews the perquisites and other personal benefits that are provided to senior management to ensure they remain in the best interests of Parent and its shareholders.

Healthcare Benefits. Parent NEOs receive a full range of standard benefits, including the medical, dental, vision, life and voluntary disability coverage available to Parent employees generally.

Retirement Plans. Parent NEOs participate on the same basis as other employees in the Aaron’s, Inc. Employees Retirement Plan (the “Retirement Plan”) for all covered employees. Employees with at least one year of service who meet certain eligibility requirements are eligible for a Parent match.

Parent’s Retirement Plan uses a safe harbor formula that allows employees to contribute up to 75% of their annual compensation with 100% matching by Parent on the first 3% of compensation and an additional 50% match on the next 2% of compensation. All safe harbor matching contributions made by the Parent are immediately vested under the safe harbor formula and any non-safe harbor matching and nonelective contributions made by the Parent vest under a graded vesting schedule which provides full vesting after six years of service.

Under Parent’s Deferred Compensation Plan (the “Deferred Compensation Plan”), a select group of management or highly compensated employees are eligible to elect to defer up to 75% of their base salary and up to 75% of their annual bonus on a pre-tax basis. Should they so elect, Parent will make discretionary matching contributions under the same formula that applies for Parent’s Retirement Plan, with the benefit not exceeding the statutory limit.

Perquisites. Parent NEOs may use Parent’s aircraft from time to time for non-business use. Incremental operating costs associated with such personal use is paid by Parent. The amount of income attributed to each Parent NEO for income tax purposes from personal aircraft use is determined by the Standard Industry Fare Level method, and the executives are responsible for paying the tax on this income. The aggregate incremental cost to Parent of such use by each Parent NEO, if any, is included under the “All Other Compensation” column of “Executive Compensation—Summary Compensation Table.”

Employment Agreements and Other Post-Termination Protections

To attract and retain talented executives, we recognize the need to provide protection to Parent executives in the event of certain termination situations. The highly competitive nature of the relevant market for key leadership positions means we may be at a competitive disadvantage in trying to retain Parent’s current leaders, or hire executives from outside of Parent, if we are not able to offer them the type of protections typically found in the market.

 

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Mr. Lindsay is covered by a severance and change-in-control agreement Parent entered into with him in February 2019, which is intended to provide certain benefits in the event employment is terminated other than for cause, disability or death, or in the event termination of employment occurs by Mr. Lindsay for good reason following a change of control at any time. The severance and change-in-control agreement aids Parent in retaining key leaders who are critical to the ongoing stability of Parent’s business, foster objectivity should Mr. Lindsay be asked to evaluate proposals that may result in the loss of his employment, and provide important protections to us in terms of confidential information and competitive matters that could arise after Mr. Lindsay’s employment is terminated.

During 2019, Messrs. Olsen and Wall were covered by Parent’s Executive Severance Pay Plan. The purposes of that Plan include (a) providing certain executives of the company and/or any affiliate or subsidiary with severance pay benefits in the event of the termination of their employment, (b) better enabling the company and its affiliates and subsidiaries to attract and retain highly qualified executives, (c) providing executives protection in the event of a change in control of the company so that the executives are focused on pursuing transaction opportunities that are beneficial to shareholders, and (d) retaining critical talent in the event of a potential change in control transaction. As described in “Potential Payments Upon Termination or Change in Control” below, Mr. Olsen is still covered by Parent’s Executive Severance Pay Plan, and Mr. Wall entered into a severance and change in control agreement in August 2020.

EXECUTIVE COMPENSATION

As noted above, we are in the process of identifying all of the persons who will be our executive officers following the distribution and the compensation arrangements that will be applicable to such individuals. In a subsequent amendment to this information statement, we will disclose, in accordance with the SEC requirements, information regarding the compensation of our Named Executive Officers.

Summary Compensation Table

The following Summary Compensation Table summarizes the total compensation earned by, or awarded to, our named executive officers in 2019, 2018 and 2017, as applicable.

 

Name and Principal Position

  Year     Salary
($)
    Stock
Awards(1)

($)
    Option
Awards(2)

($)
    Non-Equity
Incentive Plan
Compensation(3)

($)
    All Other
Compensation(4)

($)
    Total
($)
 

Douglas A. Lindsay, Chief Executive Officer

    2019       600,000       1,014,250       340,866       542,800       12,010 ((5)      2,509,926  
    2018       584,615       1,015,145       375,127       610,100       25,418       2,610,405  
    2017       500,000       375,899       121,068       744,600       17,480       1,759,047  

Steve Olsen, President

    2019       450,000       204,800       68,173       183,200       30,563 (5),(6)      936,736  

C. Kelly Wall, Chief Financial Officer

    2019       300,000       136,534       45,841       130,700       22,850 (5),(6)      665,924  

 

(1)

Represents the aggregate grant date fair value of awards of time-based RSUs, RSAs, and performance shares recognized by Parent as required by Financial Accounting Standards Board Codification Topic 718. See Note 13 to Parent’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of the assumptions used in calculating these amounts. For the time-based RSUs and RSAs, the fair value is calculated using the closing stock price on the date of grant. For the performance shares, the fair value is also the closing stock price on the date of grant, multiplied by a number of shares that is based on the targeted attainment level, which represents the probable outcome of the performance condition on the date of grant. The amounts do not reflect the value actually realized or that may ultimately be realized by Parent’s executive officers. Assuming the highest performance conditions for the performance share awards granted in 2019, the grant date fair value would be: Mr. Lindsay $1,352,333; Mr. Olsen $273,067; and Mr. Wall: $182,045.

 

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(2)

Represents the grant date fair value of awards of stock options recognized by Parent as required by the Financial Accounting Standards Board Codification Topic 718. Parent 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. See Note 13 to Parent’s consolidated financial statements in Parent’s Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of the assumptions used in calculating these amounts.

(3)

Reflects the value of the cash bonus earned under Parent’s annual cash incentive award program.

(4)

Parent provides a limited number of perquisites to our named executive officers and value those perquisites based on their aggregate incremental cost to Parent. Parent calculated the incremental cost of aircraft use based on the average variable operating costs to Parent. Variable operating costs include fuel costs, maintenance fees, positioning costs, catering costs, landing/ramp fees, and the amount, if any, of disallowed tax deductions associated with the personal use of Parent’s aircraft. The total annual variable operating costs are divided by the annual number of flight hours flown by the aircraft to derive an average variable cost per flight hour. This average variable cost per flight hour is then multiplied by the flight hours flown for personal use to derive the incremental cost to Parent. This method excludes fixed costs that do not change based on usage, such as pilots’ and other employees’ salaries and benefits and hangar expenses. Aggregate incremental cost, if any, of travel by the executive’s family or other guests when accompanying the executive is also included.

(5)

Includes matching contributions in the amount of $11,200 made by Parent to Messrs. Lindsay’s, Olsen’s, or Wall’s account, as applicable, in the Retirement Plan.

(6)

Includes matching contributions in the amount of $7,328 made by Parent to Mr. Olsen’s account, and $11,200 made by Parent to Mr. Wall’s account, as part of the Deferred Compensation Plan. These amounts are also included in the “—Nonqualified Deferred Compensation as of December 31, 2019” section below.

Grants of Plan-Based Awards in Fiscal Year 2019

The Parent Compensation Committee granted restricted stock, stock options and performance shares to our named executive officers during 2019. Set forth below is information regarding awards granted in 2019.

 

    Grant
Date
    Potential Payouts Under Non-
Equity Incentive Plan
Awards(1)
    Estimated Future
Payouts Under Equity
Incentive Plan Awards(2)
    All Other
Stock
Awards:
Number of
Shares of
Stock or
Units(3)
    All
Other
Option
Awards:
Number
of
Securities
Under-
lying
Options(4)
    Exercise
or Base
Price of
Option
Awards
($/Sh)
    Grant
Date
Fair
Value of
Stock
and
Option
Awards(5)
($)
 

Name

  Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
 

Douglas A. Lindsay

      150,000       600,000       1,110,000                
    2/21/2019             3,120       12,480       24,960             676,166  
    2/21/2019                   6,240           338,083  
    2/21/2019                     17,400       54.18       340,866  

Steve Olsen

      50,625       202,500       374,625                
    2/21/2019             630       2,520       5,040             136,534  
    2/21/2019                   1,260           68,267  
    2/21/2019                     3,480       54.18       68,173  

C. Kelly Wall

      50,625       202,500       374,625                
    2/21/2019             420       1,680       3,360             45,841  
    2/21/2019                   840           91,022  
    2/21/2019                     2,340       54.18       45,511  

 

(1)

For the named executive officers, represents the amounts that could be earned under the annual cash incentive award program based on performance against pre-determined goals for revenue and Adjusted

 

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  EBITDA of the Aaron’s Business segment , based on each executive’s organizational level. The amounts actually earned are included in the non-equity incentive plan compensation column of the Summary Compensation Table.
(2)

Represents the performance shares granted under Parent’s 2019 long-term equity incentive award program. Performance metrics for Mr. Lindsay and Mr. Olsen included consolidated Parent revenues, revenues for the Aaron’s Business and Adjusted EBITDA for the Aaron’s Business. Performance metrics for Mr. Wall included consolidated Parent revenues, adjusted Parent EBITDA, and Parent return on capital. For all named executive officers who received awards, the threshold number of shares represents 25% of target, and the maximum number of shares represents 200% of target. Any awards earned vest in three approximately equal increments over a three-year period on March 7, 2020, 2021 and 2022. Based on Parent’s performance for the year, performance shares were earned under the 2019 program at 78.1% of target for Mr. Lindsay, 78.1% for Mr. Olsen, and 89.1% for Mr. Wall.

(3)

Includes the time-based RSAs granted to our named executive officers under Parent’s 2019 long-term equity incentive award program, that are expected to vest in three approximately equal increments over a three-year period on each of March 7, 2020, 2021 and 2022.

(4)

Includes stock options granted under Parent’s 2019 long-term equity incentive award program that are expected to vest in three approximately equal increments over a three-year period on each of March 7, 2020, 2021 and 2022.

(5)

Represents the aggregate grant date fair value of awards recognized by Parent as required by Financial Accounting Standards Board Codification Topic 718. See Note 13 to Parent’s consolidated financial statements in Parent’s Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of the assumptions used in calculating these amounts.

Parent’s Amended and Restated 2015 Equity and Incentive Plan

General. The purpose of Parent’s Amended and Restated 2015 Equity and Incentive Plan (the “A&R 2015 Plan”), which was approved by shareholders at an annual meeting on May 8, 2019, is to promote the long-term growth and profitability of Parent and its subsidiaries by providing employees, directors, consultants, advisors and other persons who work for Parent and its subsidiaries with incentives to maximize shareholder value and otherwise contribute to Parent’s continued success. In addition, Parent believes the A&R 2015 Plan is a critical component to help Parent attract, retain and reward the best talent and align their interests with Parent’s shareholders.

Administration of the A&R 2015 Plan. The Parent Board of Directors may appoint the Parent Compensation Committee or such other committee consisting of two or more members to administer the A&R 2015 Plan, and the Parent Board of Directors has currently designated the Parent Compensation Committee to serve this function. The Parent Compensation Committee has the right to select the persons who receive awards under the A&R 2015 Plan, to set the terms and conditions of such awards (including the term, exercise price, vesting conditions, and the consequences of termination of employment), and to interpret and administer the A&R 2015 Plan. Subject to the express provisions of the A&R 2015 Plan, the Parent Compensation Committee is authorized and empowered to do all things that the Parent Compensation Committee in its discretion determines to be necessary or appropriate in connection with the administration and operation of the A&R 2015 Plan.

Types of Awards. The A&R 2015 Plan provides for the grant of non-qualified stock options (“NQSOs”), incentive stock options (“ISOs”), stock appreciation rights (“SARs”), restricted stock, RSUs, performance shares, performance units, annual incentive awards and other stock-based awards to eligible participants. ISOs may only be granted to employees of Parent or its subsidiaries.

If shares awarded under the A&R 2015 Plan are not issued, or are reacquired by Parent, as a result of a forfeiture of restricted stock or an RSU, or the termination, expiration or cancellation of an NQSO, ISO, SAR, performance share or performance unit, or the settlement of an award in cash in lieu of shares, that number of shares will be added back to the Share Pool. If the exercise price of an option, or the purchase price and/or tax withholding obligation under any award is satisfied by Parent retaining shares or by the participant tendering

 

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shares (either by actual delivery or attestation), the number of shares so retained or tendered shall be deemed delivered for purposes of determining the Share Pool and shall not be available for further awards under the A&R 2015 Plan. To the extent a SAR is settled in shares of common stock of Parent, the gross number of shares subject to such SAR shall be deemed delivered for purposes of determining the Share Pool and shall not be available for further awards under the A&R 2015 Plan. Shares reacquired by Parent on the open market or otherwise using cash proceeds from the exercise of options shall not be added back to the Share Pool.

Amendment and Termination. The board of directors of Parent or the Parent Compensation Committee may amend or terminate the A&R 2015 Plan in whole or in part at any time, but the amendment or termination cannot adversely affect any rights or obligations with respect to an award previously granted without the affected participant’s written consent. Parent must obtain the approval of the shareholders before amending the A&R 2015 Plan to the extent required by Section 422 of the Code or the rules of the NYSE or other applicable law.

The Parent Compensation Committee may amend an outstanding award agreement in a manner not inconsistent with the terms of the A&R 2015 Plan, but the amendment will not be effective without the participant’s written consent if the amendment is materially adverse to the participant. The Parent Compensation Committee cannot amend outstanding awards, without shareholder approval, to reduce the exercise price of outstanding awards, or cancel outstanding options or SARs in exchange for cash, another award or stock option or SAR with an option exercise price or SAR price that is less than the option exercise price or SAR price of the original stock option or SAR.

Parent’s Amended and Restated 2001 Stock Option and Incentive Award Plan

The Aaron Rents, Inc. 2001 Stock Option and Incentive Award Plan, as amended and restated (the “2001 Incentive Plan”), was replaced by the 2015 Equity and Incentive Plan which was subsequently amended and restated and is referred to as the “A&R 2015 Plan.” The 2001 Incentive Plan is no longer open to participation by any of Parent’s employees, officers or directors, and no further awards may be granted under the 2001 Incentive Plan. While the plan remained in effect, the Parent Compensation Committee administered the 2001 Incentive Plan and had the exclusive right to set the terms and conditions of grants and awards, including the term, exercise price, vesting conditions (including vesting based on Parent’s performance or upon share price performance), and consequences of termination of employment. The Parent Compensation Committee also selected the persons who receive such grants and awards and interpreted and administered the 2001 Incentive Plan. The last awards granted under the 2001 Incentive Plan vested in 2018, and the last stock options granted under that plan will expire in 2025.

Parent’s Employee Stock Purchase Plan

General. The purpose of Parent’s Employee Stock Purchase Plan (the “ESPP”), which was approved by shareholders at an annual meeting on May 9, 2018, is to encourage ownership of Parent’s common stock by eligible employees of Parent and certain Parent subsidiaries which have been designated as eligible to participate in the ESPP. Specifically, the ESPP provides eligible employees of Parent and certain Parent subsidiaries an opportunity to use payroll deductions to purchase shares of Parent common stock on periodic purchase dates at a discount. The Parent Compensation Committee believes that the ESPP is a valued benefit for Parent’s eligible employee base. Parent believes that allowing employees to purchase shares of Parent common stock through the ESPP motivates high levels of performance and provides an effective means of encouraging employee commitment to Parent’s success and recruiting new employees. Parent expects that employee participation in the ownership of the business through the ESPP will be to the mutual benefit of both Parent employees and Parent. The Parent Board of Directors or the Parent Compensation Committee may amend, suspend or terminate the ESPP at any time. However, no amendment may increase the number of shares of common stock available under the ESPP, change the employees eligible to participate, or cause the ESPP to cease to be an “employee stock purchase plan” within the meaning of Section 423 of the Code, without obtaining shareholder approval within 12 months before or after such amendment.

Administration. The ESPP is administered by the Parent Compensation Committee, although the Compensation Committee may, where permitted by the terms of the ESPP and applicable law, delegate administrative tasks

 

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under the ESPP to the services of an agent and/or Parent employees to assist with the administration of the ESPP. Subject to the provisions of the ESPP and applicable law, the Parent Compensation Committee or its delegate will have full and exclusive authority to interpret the terms of the ESPP and determine eligibility to participate in the ESPP. In all cases, the ESPP is required to be administered in such a manner so as to comply with applicable requirements of Section 423 of the Code. All determinations of the Parent Compensation Committee are final and binding on all persons having an interest in the ESPP.

Offering Period, Purchase of Shares. Under the ESPP, participants have the ability to purchase shares of Parent common stock at a discount during a series of successive offering periods, which will commence and end on such dates as determined by the Parent Compensation Committee or its delegate. Unless otherwise determined by the Parent Compensation Committee or its delegate, each offering period will be six months in length. However, in no event may an offering period be longer than 27 months in length.

Shares Available for Issuance. The maximum number of shares of Parent common stock authorized for sale under the ESPP is 200,000. The shares made available for sale under the ESPP may be authorized but unissued shares, treasury shares, reacquired shares reserved for issuance under the ESPP, or shares acquired on the open market. As of December 31, 2019, the aggregate number of shares of common stock that may be issued under the ESPP was 128,134.

 

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Outstanding Equity Awards at 2019 Fiscal Year-End

 

Name of
Executive

  Number of
Securities
Underlying
Unexercised
Options
Exercisable
    Number of
Securities
Underlying
Unexercised
Options
Unexercisable
    Option
Exercise
Price
($)
    Option
Expiration
Date
    Number of
Shares of
Stock That
Have Not
Vested
    Market Value
of Shares
or Units
of Stock
That Have
Not Vested
($)(1)
    Equity Incentive
Plan Awards:
Number of
Unearned
Shares, Units or
Other Rights
That Have Not
Vested
    Equity Incentive
Plan Awards:
Market or
Payout Value of
Unearned
Shares, Units or
Other Rights
That Have Not
Vested
($)(1)
 

Douglas A. Lindsay

               
    18,390       —         22.65       2/1/2026          
    9,440 (2)      4,720 (2)      27.18       2/24/2027          
    7,560 (3)      15,120 (3)      47.26       3/2/2028          
      17,400 (4)      54.18       2/21/2029          
            1,540 (5)      87,949       4,516       257,909  
            4,780 (6)      272,986       9,636       550,312  
            6,240 (7)      356,366       12,480 (8)      712,733  

Steve Olsen

               
      —         22.65       2/1/2026          
      2,410 (9)      27.18       2/24/2027          
    1,520 (3)      3,040 (3)      47.26       3/2/2028          
      3,480 (4)      54.18       2/21/2029          
            790 (5)      45,117      
            960 (6)      54,826      
            1,260 (7)      71,959      
                2,309       131,867  
                1,940       110,793  
                2,520 (8)      143,917  

C. Kelly Wall

               
      1,700 (9)      27.18       2/24/2027          
      2,020 (3)      47.26       3/2/2028          
      2,340 (4)      54.18       2/21/2019          
            560 (5)      31,982      
            640 (6)      36,550      
            840 (7)      47,972      
                1,558       88,977  
                1,268       72,415  
                1,680 (8)      95,945  

 

(1)

Reflects award value based on a share price of $57.11, the closing price of Parent common stock on December 31, 2019.

(2)

These options vest in three equal increments on each of March 15, 2018, 2019 and 2020.

(3)

These options vest in three equal increments on each of March 7, 2019, 2020 and 2021.

(4)

These options vest in three equal increments on each of March 7, 2020, 2021 and 2022.

(5)

These RSAs vested on March 15, 2020.

(6)

One half of these RSAs vested on March 7, 2020 and the remaining one-half are expected to vest on March 7, 2021.

(7)

These RSAs vest in three equal increments on each of March 7, 2020, 2021 and 2022.

 

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(8)

Amounts shown reflect performance shares subject to meeting specific performance goals and service periods, which, based on Parent performance, are reflected at the target award level. Performance shares earned vest in three equal increments on each of March 7, 2020, 2021 and 2022.

(9)

These options vested on March 15, 2020.

Options Exercised and Stock Vested in Fiscal Year 2019

The following table provides information for our Named Executive Officers on (a) stock option exercises during 2019, including the number of shares acquired upon exercise and the value realized and (b) the number of shares acquired upon the vesting of stock awards, each before payment of any applicable withholding tax and broker commissions.

 

     Option Awards      Stock Awards  

Name

   Number of Shares
Acquired on Exercise
(#)
     Value Realized on
Exercise(1)

($)
     Number of Shares
Acquired on Vesting
(#)
     Value Realized
on Vesting(2)
($)
 

Douglas A. Lindsay

     —          —          36,614        1,871,747  

Steve Olsen

     2,410        70,349        8,049        441,133  

C. Kelly Wall

     2,710        56,533        3,072        160,715  

 

(1)

Reflects the value of options exercised based on the difference between the closing price of Parent common stock on the day of exercise and the applicable exercise price.

(2)

Reflects the value of shares that vested based on the closing price of Parent common stock on the applicable vesting date.

Pension Benefits

Parent does not provide defined benefit pension plans for the Parent NEOs.

Nonqualified Deferred Compensation as of December 31, 2019

Effective July 1, 2009, Parent implemented the Deferred Compensation Plan, an unfunded, nonqualified deferred compensation plan open to a select group of management, highly compensated employees and non-employee directors. On a pre-tax basis, eligible employees of Parent can defer receipt of up to 75% of their base salary and up to 75% of their incentive pay compensation, and eligible non-employee directors can defer receipt of up to 100% of their cash director fees. In addition, Parent elected to make restoration matching contributions on behalf of eligible employees to compensate for certain limitations on the amount of matching contributions an employee can receive under Parent’s Retirement Plan.

Compensation deferred under the plan is recorded as a deferred compensation liability, which is recorded in accounts payable and accrued expenses in the combined balance sheets. Liabilities under the plan are recorded at amounts due to participants, based on the fair value of participants’ selected investments, which consist of equity and debt “mirror” funds. The obligations are unsecured general obligations of Parent and the participants have no right, interest or claim in the assets of Parent, except as unsecured general creditors. Parent has established a rabbi trust to fund obligations under the plan primarily with company-owned life insurance policies.

Effective January 1, 2018, Parent implemented a discretionary match within the Deferred Compensation Plan. The match allows eligible employees to receive 100% matching by Parent on the first 3% of contributions and 50% on the next 2% of contributions for a total of a 4% match. The annual match is not to exceed $11,000 for an individual employee and is subject to a three-year cliff vesting schedule.

 

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The following table provides information on accounts of and compensation deferred by Messrs. Lindsay, Olsen, and Wall pursuant to the Deferred Compensation Plan.

 

Name of Executive

   Executive
Contributions
in 2019
     Company
Contributions
in 2019
     Aggregate
Earnings (Loss)
in Last
Fiscal Year
     Aggregate
Withdrawals /
Distributions
     Aggregate
Balance at
December 31, 2019
 

Douglas A. Lindsay(1)

   $ 30,505      $ —        $ 13,100      $      —        $ 81,366  

Steve Olsen

   $ 13,430      $ 7,328      $ 6,411      $ —        $  31,939  

C. Kelly Wall

   $ 21,003      $ 11,200      $ 8,588      $ —        $ 50,938  

 

(1)

Mr. Lindsay was a participant in the Deferred Compensation Plan in prior periods but did not participate in 2019. Mr. Lindsay had contributions from 2018 bonus earnings paid into the plan during the first quarter of 2019.

Potential Payments Upon Termination or Change in Control

Severance Plan. The Parent Compensation Committee has adopted an Executive Severance Pay Plan (the “Parent Severance Plan”) intended to provide senior managers certain benefits in the event their employment is terminated by Parent without cause or after a change in control. The Parent Severance Plan also provides important protections to Parent in terms of confidential information and competitive matters that could arise after their employment is terminated.

 

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In February 2019, Parent entered into a severance and change-in-control agreement with Mr. Lindsay. The agreement will continue for a term of three years, automatically renewing for one-year periods after the initial term unless either party gives notice not to extend the term. Under the agreement, if Mr. Lindsay’s employment is terminated by Parent during the two-year period from the commencement of a change in control (as defined in the agreement) other than for cause (as defined in the agreement), disability or death, or if employment is terminated by the executive for good reason (as defined in the agreement), Mr. Lindsay shall receive (a) severance payments in a lump sum amount equal to two times the sum of (i) Mr. Lindsay’s annual salary plus (ii) Mr. Lindsay’s target bonus; (b) a lump sum cash bonus payment based on the average annual bonus earned by the executive over the two years prior to the year in which the termination occurs, pro-rated based on the number of days in the year in which termination occurs that lapse prior to termination; (c) a lump sum cash payment equal to Mr. Lindsay’s accrued, unused vacation time; and (d) a lump sum payment in an amount equal to two years’ worth of Mr. Lindsay’s monthly COBRA premiums for continued coverage under Parent’s group health insurance plan, in each case, payable on the sixtieth day following termination. In the event of termination by Parent other than for cause, disability or death, or termination by Mr. Lindsay for good reason, in the absence of a change in control, or more than two years following a change in control, Mr. Lindsay would be entitled to (a) continued salary for twenty-four months following termination plus bonus payments in an amount equal to one-twelfth of Mr. Lindsay’s target bonus in each of the twenty-four months following termination, payable no less frequently than on a monthly basis beginning on the sixtieth day following termination; and (b) a lump sum cash payment in an amount equal to Mr. Lindsay’s accrued, unused vacation time, payable on the sixtieth day following termination.

Assuming Mr. Lindsay’s employment terminated or there was a change in control on December 31, 2019, such payments and benefits have an estimated value of $5,584,054.

 

Termination Event

   Cash Severance      Equity Acceleration      Cash Bonus      Total Value  

Voluntary Resignation by Executive

   $ —        $ —        $ —        $ —    

Termination by Company for Cause

   $ —        $ —        $ —        $ —    

Termination due to Death

   $ —        $ 2,431,239      $ 542,800      $ 2,974,039  

Termination due to Disability

   $ —        $ 2,431,239      $ 542,800      $ 2,974,039  

Termination by Company without Cause

   $ 2,420,837      $ —        $ —        $ 2,420,837  

Termination by Executive for Good Reason

   $ 2,400,000      $ —        $ —        $ 2,400,000  

Termination by Company without Cause (following CIC)

   $ 2,441,673      $ 2,465,031      $ 677,350      $ 5,584,054  

Termination by Executive for Good Reason (following CIC)

   $ 2,441,673      $ 2,465,031      $ 677,350      $ 5,584,054  

Change in Control (CIC)

   $ —        $ —        $ —        $ —    

Parent did not have any severance or change-in-control agreement with Messrs. Olsen or Wall during 2019. Messrs. Olsen and Wall were then covered by the Parent Severance Plan. Under the terms of that plan that would apply on December 31, 2019, if Mr. Olsen’s or Mr. Wall’s employment is terminated by Parent during the two-year period from the commencement of a change in control (as defined in the Plan), or is terminated by Mr. Olsen or Mr. Wall for good reason within the two-year period from the commencement of a change in control (as defined in the Plan), Mr. Olsen or Mr. Wall would be entitled to (a) severance payments of his annual salary for a period of eighteen months following his termination date, paid in accordance with Parent’s standard payroll schedule, (b) bonus payments in an amount equal to one-twelfth of Mr. Olsen’s or Mr. Wall’s target bonus in each of the eighteen months following termination, payable no less frequently than on a monthly basis beginning on the sixtieth day following termination, (c) a lump sum cash bonus payment based on the target bonus under Mr. Olsen’s or Mr. Wall’s annual bonus plan for the fiscal year of his termination date, pro-rated

 

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based on the number of days in the year in which termination occurs that lapse prior to termination, and (d) eighteen months of monthly COBRA premiums for continued coverage under Parent’s group health insurance plan. In the event of termination by Parent for disability or death, Mr. Olsen or Mr. Wall would be eligible for (a) acceleration of unvested equity, including full vesting of options, RSUs, and RSAs, full vesting of earned but unvested PSUs, and (b) pro-rata acceleration of unearned PSU’s based on actual performance. In the event of termination by Parent other than for cause, disability or death, and in the absence of a change in control or more than two years following a change in control, Mr. Olsen or Mr. Wall would be eligible for (a) severance payments of his annual salary for a period of twelve months following his termination date, paid in accordance with Parent’s standard payroll schedule, and (b) twelve months of monthly COBRA premiums for continued coverage under Parent’s group health insurance plan.

Assuming Mr. Olsen’s employment terminated as the result of a change in control on December 31, 2019, such payments and benefits have an estimated value of $2,233,935.

 

Termination Event

   Cash Severance      Equity Acceleration      Cash Bonus      Total Value  

Voluntary Resignation by Executive

   $ —        $ —        $ —        $ —    

Termination by Company for Cause

   $ —        $ —        $ —        $ —    

Termination due to Death

   $ —        $ 670,750      $ —        $ 670,750  

Termination due to Disability

   $ —        $ 670,750      $ —        $ 670,750  

Termination by Company without Cause

   $ 467,861      $ —        $ —        $ 467,681  

Termination by Executive for Good Reason

   $ —        $ —        $ —        $ —    

Termination by Company without Cause (following CIC)

   $ 1,225,685      $ 670,750      $ 337,500      $ 2,233,935  

Termination by Executive for Good Reason (following CIC)

   $ 1,225,685        670,750        337,500        2,233,935  

Change in Control (CIC)

   $ —        $ —        $ —        $ —    

Assuming Mr. Wall’s employment terminated as the result of a change in control on December 31, 2019, such payments and benefits have an estimated value of $1,204,048.

 

Termination Event

   Cash Severance      Equity Acceleration      Cash Bonus      Total Value  

Voluntary Resignation by Executive

   $ —        $ —        $ —        $ —    

Termination by Company for Cause

   $ —        $ —        $ —        $ —    

Termination due to Death

   $ —        $ 451,476      $ —        $ 451,476  

Termination due to Disability

   $ —        $ 451,476      $ —        $ 451,476  

Termination by Company without Cause

   $ 317,750      $ —        $ —        $ 317,750  

Termination by Executive for Good Reason

   $ —        $ —        $ —        $ —    

Termination by Company without Cause (following CIC)

   $ 647,572      $ 451,476      $ 105,000      $ 1,204,048  

Termination by Executive for Good Reason (following CIC)

   $ 647,572      $ 451,476      $ 105,000      $ 1,204,048  

Change in Control (CIC)

   $ —        $ —        $ —        $ —    

An amendment to the Parent Severance Plan that became effective on July 9, 2020 would affect the payments due to Mr. Olsen. On an involuntary termination other than in connection with a change in control (as

 

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defined in the plan), in addition to the payments Mr. Olsen would otherwise receive under the Parent Severance Plan, he is also entitled to a payment of his target bonus. If Mr. Olsen is involuntarily terminated or he terminates his employment for good reason (as defined in the plan) during the two-year period following a change in control (as defined in the plan), he would be eligible for 24 months of annual salary and target bonus instead of 18 months. In addition, in circumstances when Mr. Olsen is to be paid such severance, it will now be paid in a lump-sum payment, except that if the payment is not exempt from Section 409A of the Code it would be paid in substantially equal installments in accordance with Parent’s standard payroll schedule over the specific number of months. Because the effects of this amendment to the Parent Severance Plan would not affect what Mr. Olsen would be eligible for on December 31, 2019, the effects of this amendment are not reflected in the table above.

Parent entered into a severance and change-in-control agreement with Mr. Wall that became effective on August 3, 2020 that would affect the payments due to Mr. Wall. On an involuntary termination other than in connection with a change in control (as defined in the agreement), Mr. Wall would be entitled to a lump sum payment equal to two (2) times the sum of the higher of his annual salary either immediately prior to the date of termination or immediately prior to the change in control, two (2) times the higher of his annual target bonus in effect either immediately prior to his date of termination or immediately prior to the change in control, an amount equal to the product of the average annual bonus earned by Mr. Wall in the two (2) calendar years immediately preceding the year in which the date of termination occurs and pro-rated bonus for the year in which the date of termination occurs, a payment equal to 24 months of Mr. Wall’s COBRA premiums, and payment for any accrued, unused vacation time. If Mr. Wall is involuntarily terminated without cause, disability or death or he terminates his employment for good reason (as defined in agreement) other than due to a change in control, he is eligible for continuation of his annual salary immediately prior to the date of termination for 18 months and 1/12th of the target bonus in effect on the date of termination in each month for 18 months, and a lump-sum payment for any accrued, unused vacation time. If Mr. Wall voluntarily resigned without good reason, Mr. Wall would receive only his accrued obligations. If Mr. Wall’s employment is terminated due to disability or death, Mr. Wall or his estate would be due a pro-rated annual bonus and accrued obligations. If any payment due to Mr. Wall is not exempt from Section 409A of the Code it would be paid or provided (without interest) on the first business day that is more than six (6) months after Mr. Wall’s separation from service. Because the effects of this severance and change-in-control agreement would not affect what Mr. Wall would be eligible for on December 31, 2019, the effects of this agreement are not reflected in the table above.

Severance Agreement and Plan Definitions. For purposes of the severance and change-in-control agreement with Mr. Lindsay described herein, “Cause” generally means (a) the commission by the executive of fraud, embezzlement, theft or proven dishonesty, or any other illegal act or practice; (b) the willful engaging by the executive in misconduct which is deemed by the Board, in good faith, to be materially injurious to the company or an affiliate of the company; or (c) the willful and continued failure or habitual neglect by the executive to perform the executive’s duties with the company or an affiliate of the company substantially in accordance with the operating and personnel policies and procedures of the company or an affiliate of the company generally applicable to all of their employees.

For purposes of the severance and change-in-control agreement with Mr. Lindsay described herein, “Change in Control” generally means: (a) the acquisition (other than from the company) by any person of beneficial ownership, of 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, (i) any acquisition by the company or (ii) 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 of Directors 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 of Directors 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; excluding, however, a transaction pursuant to which 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

 

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indirectly, more than 50% 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.

For purposes of the severance and change-in-control agreement with Mr. Lindsay described herein, “Good Reason” generally means: (a) any material reduction in the named executive officer’s base salary; (b) any material reduction in the named executive officer’s authority, duties or responsibilities; (c) any significant change in the geographic location at which the named executive officer must perform his duties; or (d) any material breach of the named executive officer’s employment agreement by the company.

For purposes of the severance and change-in-control agreement with Mr. Lindsay described herein, “Disability” shall mean the named executive officer’s inability, due to physical or mental injury or illness, to perform the essential functions of his position with or without reasonable accommodation for a period of 180 days, whether or not consecutive, occurring within any period of 12 consecutive months.

Severance Plan Definitions. The Parent Severance Plan contains definitions for the terms “Cause,” “Change in Control,” “Good Reason” and “Disability” which are substantially similar to those contained in “—Severance Agreement and Plan Definitions” above.

Incentive Plans. Generally, under the terms of the Parent Severance Plan, in the event of a change in control, the named executive officer would receive an automatic payment of target-level cash bonuses, prorated to the extent the change in control occurs during the annual performance period. The Parent Severance Plan does not contain a provision accelerating or awarding payments in the event of termination.

Under the terms of the A&R 2015 Plan and the related award agreements that apply to our executive officers, all outstanding unvested stock options, RSUs and earned performance shares immediately vest in the event of termination of employment due to death or disability. With respect to performance shares that have not been earned at the time of a termination of employment due to death or disability, those performance shares will not vest immediately, but rather, will vest at the earned amount that is determined at the end of the performance period applicable to those performance shares. In the event of termination for any other reason not in connection with a change in control, all unvested equity awards are forfeited. In the event of a change in control, all outstanding unvested stock options, RSUs and performance shares would vest upon a termination by the employer without Cause or by the executive officer for Good Reason during the following two years.

No Change-in-Control Payments in Connection with the Separation. The completion of the separation will not result in our directors or named executive officers receiving any increased compensation or other benefits under the terms of the Parent Severance Plan or our severance and change-in-control agreements with any of our directors and executive officers because the separation will not result in a “change in control” under such plan and agreements.

Director Compensation

We are in the process of identifying the compensation arrangements that will be applicable to our directors. Effective on or prior to the separation, we expect our Board of Directors to adopt a non-employee director compensation plan that is materially similar to Parent’s Non-Employee Director Compensation Plan for the benefit of our current and future non-employee directors. Under Parent’s Non-Employee Director Compensation Plan, non-employee directors receive an annual cash retainer of $75,000 and an annual award of restricted stock units having a value of $125,000, which generally vests one year following the grant date. The Chairman receives a cash retainer of $100,000, paid quarterly in $25,000 installments. Non-employee directors serving as the chair of the Audit, Compensation, and Nominating and Corporate Governance Committees also received an

 

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additional annual retainer of $20,000, $15,000 and $10,000, respectively, for their service in these roles and the additional time commitments required.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The following discussion contains summaries of certain material agreements into which Aaron’s SpinCo will enter with Parent in connection with the separation. These agreements are intended to provide for an allocation between Aaron’s SpinCo and Parent of Parent assets, employees, liabilities and obligations and will govern certain relationships between Aaron’s SpinCo and Parent following the separation. The agreements will be limited in duration and may not fully capture the benefits that we have enjoyed as a result of being integrated with Parent. Please see “Risk Factors” for a discussion of the uncertainties and risks associated with our entrance into these agreements.

Agreements with Parent

After the distribution, Parent and Aaron’s SpinCo will be separate companies with separate management teams and separate boards of directors. Prior to the distribution, Aaron’s SpinCo will enter into a separation agreement with Parent, which is referred to in this information statement as the “separation agreement.” In connection with the separation, we will also enter into various other agreements to effect the separation and provide a framework for our relationship with Parent after the separation, including a transition services agreement, a tax matters agreement and an employee matters agreement. These agreements, together with the documents and agreements by which the internal reorganization will be effected, will provide for the allocation between Aaron’s SpinCo and Parent of Parent assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after our separation from Parent and will govern certain relationships between Aaron’s SpinCo and Parent after the separation.

The material agreements described below are filed as exhibits to the registration statement on Form 10 of which this information statement is a part (the “Form 10”). The summaries of each of the agreements listed above are qualified in their entireties by reference to the full text of the applicable agreements, which are incorporated by reference into this information statement. When used in this section, “distribution date” refers to the date on which Parent distributes Aaron’s SpinCo common stock to the holders of Parent common stock.

Separation and Distribution Agreement

 

Transfer of Assets and Assumption of Liabilities

The separation agreement will identify certain transfers of assets and assumptions of liabilities that are necessary in advance of our separation from Parent so that we and Parent retain the assets of, and the liabilities associated with, our respective businesses, and will provide for when and how these transfers and assumptions will occur. The separation agreement will also provide for the settlement or extinguishment of certain liabilities and other obligations between us and Parent. In particular, the separation agreement will provide that, among other things, subject to the terms and conditions contained therein:

 

   

certain assets (whether tangible or intangible) related to the Aaron’s Business (the “Aaron’s SpinCo Assets”), will be retained by or transferred to Aaron’s SpinCo or one of its subsidiaries, including:

 

   

equity interests in certain Parent subsidiaries that hold assets relating to the Aaron’s Business;

 

   

rights to technology, software and intellectual property primarily related to the Aaron’s Business;

 

   

certain real property and associated rights thereto, including our 1,085 company-operated stores and the Woodhaven manufacturing facilities;

 

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rights to certain types of information that is primarily related to the Aaron’s SpinCo Assets, the Aaron’s SpinCo Liabilities or the Aaron’s Business;

 

   

contracts that primarily relate to the Aaron’s Business;

 

   

rights and assets expressly allocated to us pursuant to the terms of the separation agreement or certain other agreements entered into in connection with the separation;

 

   

registrations and permits primarily related to the Aaron’s Business;

 

   

cash in an amount not less than $[●];

 

   

other assets (excluding cash) that are included in our balance sheet, which appear in the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements”; and

 

   

other assets (excluding cash), to the extent not included in the categories above, that are primarily related to the Aaron’s Business.

 

   

certain liabilities related to the Aaron’s Business (the “Aaron’s SpinCo Liabilities”), will be retained by or transferred to Aaron’s SpinCo or one of its subsidiaries, including:

 

   

liabilities reflected as liabilities or obligations on our balance sheet, which appear in the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements”;

 

   

liabilities to the extent relating to the Aaron’s Business or an Aaron’s SpinCo Asset;

 

   

liabilities relating to contracts, technology, software, intellectual property and permits that primarily relate to the Aaron’s Business;

 

   

liabilities relating to the financing transactions to be entered into by Aaron’s SpinCo in connection with the separation and described in this information statement; and

 

   

liabilities related to any untrue statement or omission or alleged statement or omission of a material fact in the Form 10 and in this information statement, in each case, relating to the Aaron’s Business or Aaron’s SpinCo; and

 

   

generally, all of the assets and liabilities of Parent and its subsidiaries (including whether accrued, contingent or otherwise) other than the Aaron’s SpinCo Assets and Aaron’s SpinCo Liabilities will be retained by or transferred to Parent (the “Parent Assets” and “Parent Liabilities”, respectively).

Except as expressly set forth in the separation agreement or any ancillary agreement, neither Parent nor Aaron’s SpinCo will make any representation or warranty as to the assets, business or liabilities transferred, licensed or assumed as part of the separation, as to any approvals or notifications required in connection with the transfers, as to the value or freedom from any security interests of any of, or any other matter concerning, the assets transferred, as to the absence or presence of any defenses to or right of setoff against or freedom from counterclaim with respect to any proceeding or other asset, including any accounts receivable, of either Parent or Aaron’s SpinCo or as to the legal sufficiency of any conveyance and assumption instruments or any other ancillary agreement to convey title to any asset or thing of value to be transferred in connection with the separation or any other representations or warranties. Except as expressly set forth in the separation agreement or any ancillary agreement, all assets will be transferred on an “as is,” “where is” basis, and the respective transferees will bear the economic and legal risks that any conveyance and assumption instrument or any other ancillary agreement will prove to be insufficient to vest in the transferee good and marketable title, free and clear of all security interests, that any necessary consents or governmental approvals are not obtained, or that any requirements of law, agreements, security interests, or judgments are not complied with.

Information in this information statement with respect to the assets and liabilities of the parties following the distribution is presented based on the allocation of such assets and liabilities pursuant to the separation agreement, unless the context otherwise requires. The separation agreement will provide that, in the event that

 

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the transfer or assignment of certain assets and liabilities to us or Parent, as applicable, does not occur prior to the separation, then the parties will use commercially reasonable efforts to promptly effect the transfer or assignment of such assets and liabilities and will be treated by the parties for all purposes as if such transfer or assignment had occurred prior to the separation and distribution.

The Distribution

The separation agreement will also govern the rights and obligations of the parties regarding the distribution following the completion of the separation. On the distribution date, Parent will distribute to its shareholders that hold Parent common stock as of the record date for the distribution all of the issued and outstanding shares of Aaron’s SpinCo common stock on a pro rata basis. Shareholders will receive cash in lieu of any fractional shares, if applicable.

Conditions to the Distribution

The separation agreement will provide that the distribution is subject to satisfaction (or waiver by Parent) of certain conditions. These conditions are described under “The Separation and Distribution—Conditions to the Distribution.” Parent will have the sole and absolute discretion to determine (and change) the terms of, and to determine whether to proceed with, the distribution and, to the extent that it determines to so proceed, to determine the record date for the distribution, the distribution date and the distribution ratio.

Claims

In general, each party to the separation agreement will assume liability for all claims, demands, proceedings and similar legal matters primarily relating to, arising out of or resulting from its own assets, business or its assumed or retained liabilities, and will indemnify the other party for any liability to the extent arising out of or resulting from such assumed or retained legal matters.

Releases

The separation agreement will provide that we and our subsidiaries will release and discharge Parent and its subsidiaries from all Aaron’s SpinCo Liabilities, from all liabilities arising from or in connection with the transactions and all other activities to implement the separation and distribution, and from all liabilities arising from or in connection with actions, inactions, events, omissions, conditions, factors or circumstances occurring or existing prior to the separation and distribution (whether or not such liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case, before, at or after the separation and distribution) to the extent relating to, arising out of or resulting from the Aaron’s Business, the Aaron’s SpinCo Assets or the Aaron’s SpinCo Liabilities. Parent and its subsidiaries will release and discharge us from all Parent Liabilities, from all liabilities arising from or in connection with the transactions and all other activities to implement the separation and distribution, and from all liabilities arising from or in connection with actions, inactions, events, omissions, conditions, factors or circumstances occurring or existing prior to the separation and distribution (whether or not such liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case, before, at or after the separation and distribution) to the extent relating to, arising out of or resulting from Parent’s Progressive and Vive business segments, the Parent Assets or the Parent Liabilities.

These releases will not extend to obligations or liabilities under any agreements between the parties that remain in effect following the separation, which agreements include, but are not limited to, the separation agreement, the transition services agreement, the tax matters agreement, the employee matters agreement, the documents by which the internal reorganization is effected and the transfer documents in connection with the separation.

 

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Indemnification

In the separation agreement, we will agree to indemnify, defend and hold harmless Parent, each of its subsidiaries and each of their respective directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

 

   

the Aaron’s SpinCo Liabilities;

 

   

the failure of us, any of our subsidiaries or any other person to pay, perform or otherwise promptly discharge any of the Aaron’s SpinCo Liabilities, in accordance with their respective terms, whether prior to, at or after the distribution;

 

   

any breach by us or any of our subsidiaries of the separation agreement or any of the ancillary agreements, unless such ancillary agreement expressly provides for separate indemnification, or for no indemnification, therein (which will be controlling); and

 

   

any breach by Aaron’s SpinCo of its representations and warranties in the separation agreement or any of the ancillary agreements.

In the separation agreement, Parent will agree to indemnify, defend and hold harmless us, each of our subsidiaries and each of our respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from:

 

   

the Parent Liabilities;

 

   

the failure of Parent, any Parent subsidiaries or any other person to pay, perform or otherwise promptly discharge any of the Parent Liabilities, in accordance with their respective terms, whether prior to, at or after the distribution;

 

   

any breach by Parent or any Parent subsidiaries of the separation agreement or any of the ancillary agreements, unless such ancillary agreement expressly provides for separate indemnification, or for no indemnification, therein (which will be controlling); and

 

   

any breach by Parent of its representations and warranties in the separation agreement or any of the ancillary agreements.

The separation agreement will also establish procedures with respect to claims subject to indemnification and related matters. Indemnification with respect to taxes will be governed solely by the tax matters agreement.

Insurance

The separation agreement will provide for the allocation between the parties of rights and obligations under existing insurance policies with respect to occurrences prior to the distribution and sets forth procedures for the administration of insured claims under such policies.

Further Assurances

In addition to the actions specifically provided for in the separation agreement, both Parent and Aaron’s SpinCo will, and cause their respective subsidiaries to, use commercially reasonable efforts, prior to and after the distribution date, to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and agreements to consummate and make effective the transactions contemplated by the separation agreement and the ancillary agreements and to permit the operations of Parent’s Progressive Leasing and Vive business segments and the Aaron’s Business; provided, however, that neither Parent nor Aaron’s SpinCo, nor their respective subsidiaries, will be obligated to pay any consideration, grant any concession or incur any additional liability to any third party other than ordinary and customary fees paid to a governmental authority.

 

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Dispute Resolution

The separation agreement will contain provisions that govern, except as otherwise provided in any ancillary agreement, the resolution of disputes, controversies or claims that may arise between Parent and us related to the separation or distribution. These provisions will contemplate that efforts will be made to resolve disputes, controversies and claims by elevation of the matter to executives of Parent and us. If such efforts are not successful, either we or Parent may submit the dispute, controversy or claim to binding arbitration, subject to the provisions of the separation agreement.

Expenses

Except as expressly set forth in the separation agreement or in any ancillary agreement, Parent will be responsible for all costs and expenses incurred in connection with the separation incurred prior to the distribution date, including costs and expenses relating to legal and tax counsel, financial advisors and accounting advisory work related to the separation. Except as expressly set forth in the separation agreement or in any ancillary agreement, or as otherwise agreed in writing by Parent and Aaron’s SpinCo, all costs and expenses incurred in connection with the separation after the distribution will be paid by the party incurring such cost and expense.

Other Matters

Other matters governed by the separation agreement will include access to financial and other information, the provision of litigation support, confidentiality, access to and provision of records and treatment of outstanding guarantees and similar credit support.

Termination

The separation agreement will provide that it and all of the other agreements between the parties may be terminated, and the distribution may be amended, modified or abandoned, at any time prior to the effective time of the distribution by and in the sole discretion of Parent without the approval of any person, including Aaron’s SpinCo. After the distribution, the separation agreement may not be terminated except by an agreement in writing signed by a duly authorized officer of each of the parties to the separation agreement.

In the event of a termination of the separation agreement, the separation agreement will become null and void and no party, nor any of its directors, officers, agents or employees, will have any liability of any kind to the other party or any other person.

Transition Services Agreement

We intend to enter into a transition services agreement pursuant to which Parent will provide us, and we will provide Parent, with specified services for a limited time to help ensure an orderly transition following the distribution. The services to be provided will include certain information technology services, finance, tax and accounting services, fleet management support and human resource and employee benefits services. The party receiving each service is required to pay to the party providing the service a fee equal to the cost of service specified for each service, which is billed on a monthly basis. The agreed-upon charges for such services are generally intended to allow the party providing the service to recover all costs and expenses of providing such services.

The transition services agreement will terminate on the expiration of the term of the last service provided under it. The receiving party may also terminate specified services by giving prior written notice to the provider of such services and paying specified wind-down charges.

Subject to certain exceptions, the liability of Aaron’s SpinCo and Parent under the transition services agreement for the services they provide will be limited to the aggregate amount of charges paid and payable to

 

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such provider for all services by the recipient pursuant to the transition services agreement. The transition services agreement also provides that neither company shall be liable to the other for any indirect, incidental, consequential, special, punitive, exemplary, remote, speculative or similar damages in excess of compensatory damages of the other party (including lost profits or lost revenues).

Tax Matters Agreement

Aaron’s SpinCo and Parent will enter into a tax matters agreement prior to the distribution that will govern the parties’ respective rights, responsibilities and obligations after the distribution with respect to taxes (including taxes arising in the ordinary course of business and taxes, if any, incurred as a result of any failure of the distribution and certain related transactions to qualify as tax-free for U.S. federal income tax purposes), tax attributes, the preparation and filing of tax returns, tax elections, the control of audits and other tax proceedings and assistance and cooperation in respect of tax matters.

The tax matters agreement will also impose certain restrictions on us and our subsidiaries (including, among others, restrictions on share issuances, business combinations, sales of assets and similar transactions) designed to preserve the tax-free status of the distribution and certain related transactions. The tax matters agreement will provide special rules that allocate tax liabilities in the event the distribution, together with certain related transactions, is not tax-free. In general, under the tax matters agreement, each party is expected to be responsible for any taxes imposed on Parent or us that arise from the failure of the distribution, together with certain related transactions, to qualify as a transaction that is generally tax-free under Sections 355 and 368(a)(1)(D) and certain other relevant provisions of the Code, to the extent that the failure to so qualify is attributable to actions, events or transactions relating to such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by that party in the tax matters agreement.

As discussed below under the heading “Material U.S. Federal Income Tax Consequences,” notwithstanding receipt by Parent of an opinion of tax counsel, the IRS could assert that the distribution or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes. If the IRS were successful in taking this position, we, Parent, and Parent shareholders could be subject to significant U.S. federal income tax liability. In addition, certain events that may or may not be within the control of Parent or us could cause the distribution and certain related transactions not to qualify for tax-free treatment for U.S. federal income tax purposes. Depending on the circumstances, we may be required to indemnify Parent for taxes and certain related amounts resulting from the distribution and certain related transactions not qualifying as tax-free.

Employee Matters Agreement

On or before the separation, we will enter into an employee matters agreement with Parent to allocate certain assets, liabilities and responsibilities relating to employment matters, employee compensation and benefits plans and programs and other related matters. The employee matters agreement will govern certain compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of each company.

The employee matters agreement will generally provide that, unless otherwise specified, Parent will be responsible for liabilities associated with employees who will be employed by Parent following the separation and certain specified current and former employees (collectively, the “Parent Employees”), and Aaron’s SpinCo will be responsible for liabilities associated with employees who will be employed by Aaron’s SpinCo following the separation and certain specified current and former employees (collectively, the “Aaron’s SpinCo Employees”).

Aaron’s SpinCo Employees will be eligible to participate in the Aaron’s SpinCo benefit plans following the separation in accordance with the terms and conditions of the Aaron’s SpinCo benefit plans as in effect from time to time. In general, we will credit each Aaron’s SpinCo Employee with his or her service with Parent prior to the

 

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separation for all purposes under the Aaron’s SpinCo benefit plans to the same extent such service was recognized by Parent for similar purposes under Parent’s comparable benefits plans immediately before the separation and so long as such crediting does not result in a duplication of benefits. The employee matters agreement will also include provisions relating to cooperation between Parent and Aaron’s SpinCo on matters relating to employees and employee benefits and other administrative provisions.

Aaron’s SpinCo will establish a qualified defined contribution retirement plan as well as a non-qualified deferred compensation plan for eligible Aaron’s SpinCo Employees. In connection with the separation, assets, liabilities and account balances (as applicable) of Aaron’s SpinCo Employees will be transferred from Parent or Parent’s plans to Aaron’s SpinCo or Aaron’s SpinCo plans, as applicable, and Parent or Parent plans will retain assets, liabilities and account balances (as applicable) of Parent Employees. In addition, the employee matters agreement will provide for the assignment by Parent to us and assumption by us, of certain employment, severance, change-in-control, retention and similar agreements for Aaron’s SpinCo Employees. Effective as of the separation, Aaron’s SpinCo Employees will cease to participate in the ESPP, and the last purchase of common stock under the ESPP will occur prior to the separation. Under the employee matters agreement, we agree to establish and maintain an employee stock purchase plan that may have terms similar to the ESPP.

For a summary of the treatment of outstanding Parent equity awards held by our current and former employees and non-employee directors at the time of the separation, please see “Compensation Discussion and Analysis—Treatment of Outstanding Parent Equity Compensation in the Separation.”

Procedures for Approval of Related Party Transactions

The charter for our Audit Committee will provide that the Audit Committee shall review and ratify all transactions to which we are a party and in which any director or executive officer has a direct or indirect material interest, apart from their capacity as director or executive officer of Aaron’s SpinCo. To assist with this review process, the Audit Committee will adopt a policy on related party transactions that provides procedures for the review, and approval or ratification, of certain transactions involving related parties. This policy will apply to any transaction or series of transactions in which we or one of our subsidiaries is a participant, the amount involved exceeds or may be expected to exceed $120,000 in any fiscal year and a related party has a direct or indirect material interest. Under the policy, a related party will include (a) any person who is or was, since the beginning of the last fiscal year, a director, executive officer or nominee for election as a director, (b) a greater than 5% beneficial owner of any class of our voting securities, (c) an immediate family member of either of the foregoing persons or (d) any entity in which any of the foregoing persons is employed or is a partner or principal or in a similar position in which such person has a 5% or greater beneficial ownership interest. Related party transactions will be referred to the Audit Committee, or if there are not a sufficient number of directors on the Audit Committee without interests in the transaction, by the disinterested directors serving on our Board of Directors, for approval, ratification, or other action.

In addition, our Company’s Code of Business Conduct and Ethics will provide that conflict of interest situations involving directors or executive officers must receive the prior review and approval of the Audit Committee. Our Code of Business Conduct and Ethics will also set forth various examples of when conflict of interest situations may arise, including when an officer or director, or members of his or her family: receive improper personal benefits as a result of his or her position in or with Aaron’s SpinCo; have certain relationships with a competing business or businesses with a material financial interest in Aaron’s SpinCo, such as suppliers or customers; or receive improper gifts or favors from such business or businesses.

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

The following is a discussion of material U.S. federal income tax consequences of the distribution of Aaron’s SpinCo common stock to “U.S. holders” (as defined below) of Parent common stock. This summary is

 

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based on the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury Regulations promulgated thereunder, rulings and other administrative pronouncements issued by the IRS, and judicial decisions, all as in effect on the date of this information statement, and all of which are subject to change at any time, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. This discussion applies only to U.S. holders of shares of Parent common stock who hold such shares as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion is based upon the assumption that the distribution, together with certain related transactions, will be consummated in accordance with the separation documents and as described in this information statement. This summary is for general information only and is not tax advice. It does not discuss all aspects of U.S. federal income taxation that may be relevant to a particular holder in light of its particular circumstances or to holders subject to special rules under the Code (including, but not limited to, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, partners in partnerships that hold Parent common stock, pass-through entities, traders in securities who elect to apply a mark-to-market method of accounting, shareholders who hold Parent common stock as part of a “hedge,” “straddle,” “conversion,” “synthetic security,” “integrated investment” or “constructive sale transaction,” individuals who receive Parent common stock upon the exercise of employee stock options or otherwise as compensation, holders who are liable for alternative minimum tax or any holders who actually or constructively own more than 5% of Parent common stock). This discussion also does not address any tax consequences arising under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010, nor does it address any tax considerations under state, local or foreign laws or U.S. federal laws other than those pertaining to the U.S. federal income tax.

If a partnership, including for this purpose any entity or arrangement that is treated as a partnership for U.S. federal income tax purposes, holds Parent common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. An investor that is a partnership and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of the distribution.

For purposes of this discussion, a “U.S. holder” is any beneficial owner of Parent common stock that is, for U.S. federal income tax purposes:

 

   

an individual who is a citizen or a resident of the United States;

 

   

a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States, any state thereof or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

   

a trust, if (a) a court within the United States is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions or (b) it has a valid election in place under applicable Treasury Regulations to be treated as a United States person.

THE FOLLOWING DISCUSSION IS A SUMMARY OF MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW AND IS FOR GENERAL INFORMATION ONLY. ALL HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE APPLICATION AND EFFECT OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.

Parent has not sought and does not intend to seek a ruling from the IRS with respect to the treatment of the distribution and certain related transactions for U.S. federal income tax purposes and there can be no assurance that the IRS will not assert that the distribution and/or certain related transactions are taxable. It is a condition to the distribution that Parent receive an opinion of counsel satisfactory to the Parent Board of Directors, regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free under Sections 355 and

 

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368(a)(1)(D) of the Code. The opinion of counsel will be based upon and rely on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of Aaron’s SpinCo (including those relating to the past and future conduct of Aaron’s SpinCo and Parent). If any of these representations, statements or undertakings are, or become, inaccurate or incomplete, or if Aaron’s SpinCo and Parent breach any of their respective covenants in the separation documents, the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized. An opinion of counsel is not binding on the IRS or the courts.

Notwithstanding receipt by Parent of the opinion of counsel, the IRS could assert that the distribution and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes. If the IRS were successful in taking this position, Parent, Aaron’s SpinCo and Parent shareholders could be subject to significant U.S. federal income tax liability. Please refer to “—Material U.S. Federal Income Tax Consequences if the Distribution is Taxable” below.

Material U.S. Federal Income Tax Consequences if the Distribution Qualifies as a Transaction that is Generally Tax-Free Under Sections 355 and Sections 368(a)(1)(D) of the Code

Assuming the distribution, together with certain related transactions, qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, the U.S. federal income tax consequences of the distribution are as follows:

 

   

no gain or loss will be recognized by, and no amount will be includible in the income of Parent as a result of the distribution, other than gain or income arising in connection with certain internal restructurings undertaken in connection with the separation and distribution (including with respect to any portion of the borrowing proceeds transferred to Parent from Aaron’s SpinCo that is not used for qualifying purposes) and with respect to any “excess loss account” or “intercompany transaction” required to be taken into account by Parent under U.S. Treasury regulations relating to consolidated federal income tax returns;

 

   

no gain or loss will be recognized by (and no amount will be included in the income of) U.S. holders of Parent common stock upon the receipt of Aaron’s SpinCo common stock in the distribution, except with respect to any cash received in lieu of fractional shares of Aaron’s SpinCo common stock (as described below);

 

   

the aggregate tax basis of the Parent common stock and the Aaron’s SpinCo common stock received in the distribution (including any fractional share interest in Aaron’s SpinCo common stock for which cash is received) in the hands of each U.S. holder of Parent common stock after the distribution will equal the aggregate basis of Parent common stock held by the U.S. holder immediately before the distribution, allocated between the Parent common stock and the Aaron’s SpinCo common stock (including any fractional share interest in Aaron’s SpinCo common stock for which cash is received) in proportion to the relative fair market value of each on the date of the distribution; and

 

   

the holding period of the Aaron’s SpinCo common stock received by each U.S. holder of Parent common stock in the distribution (including any fractional share interest in Aaron’s SpinCo common stock for which cash is received) will generally include the holding period at the time of the distribution for the Parent common stock with respect to which the distribution is made.

A U.S. holder who receives cash in lieu of a fractional share of Aaron’s SpinCo common stock in the distribution will be treated as having sold such fractional share for cash, and will recognize capital gain or loss in an amount equal to the difference between the amount of cash received and such U.S. holder’s adjusted tax basis in such fractional share. Such gain or loss will be long-term capital gain or loss if the U.S. holder’s holding period for its Parent common stock exceeds one year at the time of distribution.

If a U.S. holder of Parent common stock holds different blocks of Parent common stock (generally shares of Parent common stock purchased or acquired on different dates or at different prices), such holder should consult its tax advisor regarding the determination of the basis and holding period of shares of Aaron’s SpinCo common stock received in the distribution in respect of particular blocks of Parent common stock.

 

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Material U.S. Federal Income Tax Consequences if the Distribution is Taxable

As discussed above, Parent has not sought and does not intend to seek a ruling from the IRS with respect to the treatment of the distribution and certain related transactions for U.S. federal income tax purposes. Notwithstanding receipt by Parent of an opinion of counsel, the IRS could assert that the distribution does not qualify for tax-free treatment for U.S. federal income tax purposes. If the IRS were successful in taking this position, the consequences described above would not apply and Parent, Aaron’s SpinCo and Parent shareholders could be subject to significant U.S. federal income tax liability. In addition, certain events that may or may not be within the control of Parent or Aaron’s SpinCo could cause the distribution and certain related transactions not to qualify for tax-free treatment for U.S. federal income tax purposes. Depending on the circumstances, Aaron’s SpinCo may be required to indemnify Parent for taxes (and certain related losses) resulting from the distribution not qualifying as tax-free.

If the distribution fails to qualify as a tax-free transaction for U.S. federal income tax purposes, in general, Parent would recognize taxable gain as if it had sold the Aaron’s SpinCo common stock in a taxable sale for its fair market value (unless Parent and Aaron’s SpinCo jointly make an election under Section 336(e) of the Code with respect to the distribution, in which case, in general, (a) the Parent group would recognize taxable gain as if Aaron’s SpinCo had sold all of its assets in a taxable sale in exchange for an amount equal to the fair market value of the Aaron’s SpinCo common stock and the assumption of all Aaron’s SpinCo liabilities and (b) Aaron’s SpinCo would obtain a related step up in the basis of its assets) and Parent shareholders who receive Aaron’s SpinCo common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.

Even if the distribution were to otherwise qualify as tax-free under Sections 355 and 368(a)(1)(D) of the Code, it may result in taxable gain to Parent under Section 355(e) of the Code if the distribution were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, shares representing a 50% or greater interest (by vote or value) in Parent or Aaron’s SpinCo. For this purpose, any acquisitions of Parent or Aaron’s SpinCo shares within the period beginning two years before the separation and ending two years after the separation are presumed to be part of such a plan, although Aaron’s SpinCo or Parent may be able to rebut that presumption depending on the circumstances.

In connection with the distribution, Aaron’s SpinCo and Parent will enter into a tax matters agreement pursuant to which Aaron’s SpinCo will be responsible for certain liabilities and obligations following the distribution. In general, under the terms of the tax matters agreement, if the distribution, together with certain related transactions, were to fail to qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code (including as a result of Section 355(e) of the Code) or if certain related transactions were to fail to qualify as tax free and, in each case, if such failure were the result of actions taken after the distribution by Parent or Aaron’s SpinCo, the party responsible for such failure will be responsible for all taxes imposed on Parent or Aaron’s SpinCo to the extent such taxes result from such actions. For a discussion of the tax matters agreement, see “Certain Relationships and Related Person Transactions—Tax Matters Agreement.” Aaron’s SpinCo’s indemnification obligations to Parent under the tax matters agreement are not expected to be limited in amount or subject to any cap. If Aaron’s SpinCo is required to pay any taxes or indemnify Parent and its subsidiaries and their respective officers and directors under the circumstances set forth in the tax matters agreement, Aaron’s SpinCo may be subject to substantial liabilities.

Backup Withholding and Information Reporting

Payments of cash to U.S. holders of Parent common stock in lieu of fractional shares of Aaron’s SpinCo common stock may be subject to information reporting and backup withholding (currently, at a rate of 24%), unless such U.S. holder delivers a properly completed IRS Form W-9 certifying such U.S. holder’s correct taxpayer identification number and certain other information, or otherwise establishing a basis for exemption from backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup

 

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withholding rules may be refunded or credited against a U.S. holder’s U.S. federal income tax liability provided that the required information is timely furnished to the IRS.

THE FOREGOING DISCUSSION IS A SUMMARY OF MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW AND IS FOR GENERAL INFORMATION ONLY. THE FOREGOING DISCUSSION DOES NOT PURPORT TO ADDRESS ALL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OR TAX CONSEQUENCES THAT MAY ARISE UNDER THE TAX LAWS OF OTHER JURISDICTIONS OR THAT MAY APPLY TO PARTICULAR CATEGORIES OF SHAREHOLDERS. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE APPLICATION OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.

DESCRIPTION OF MATERIAL INDEBTEDNESS AND GUARANTEES

As part of the separation, Aaron’s SpinCo anticipates that its direct subsidiary after completion of the internal reorganization prior to the separation, Aaron’s, LLC, will have approximately $200 million of indebtedness available to borrow under a senior unsecured revolving credit facility, along with a guarantee of a $25 million franchise loan facility agreement. Aaron’s SpinCo will be a guarantor for both facilities. We expect that no amounts will be drawn upon at the closing of the separation under the senior unsecured revolving credit facility.

The following summarizes the expected terms of the senior unsecured revolving credit facility (the “Revolving Facility”) and the franchise loan facility (the “Franchise Loan Facility”).

Description of Material Indebtedness

Revolving Facility

Aaron’s SpinCo expects to enter into a credit agreement and related agreements relating to the Revolving Facility as one guarantor for a new senior unsecured revolving credit facility in an aggregate principal amount of $200 million with Aaron’s, LLC as borrower. The Revolving Facility will include (i) a $[●] million sublimit for the issuance of letters of credit on customary terms, and (ii) a $[●] million sublimit for swing line loans on customary terms.

Aaron’s SpinCo expects that the Revolving Facility will be used to provide for working capital and capital expenditures, to finance future permitted acquisitions and for other general corporate purposes.

Incremental Facilities

Aaron’s, LLC will have the right from time to time to increase the size or add certain incremental revolving or term loan facilities (the “Incremental Facilities”) in minimum amounts to be agreed upon. The aggregate principal amount of all such Incremental Facilities may not exceed $[●] million.

Interest Rate

Borrowings under the Revolving Facility are expected to bear interest at a rate per annum equal to, at the option of Aaron’s, LLC, (i) LIBOR plus the applicable margin of [●]% - [●]% for revolving loans, based on total leverage, or (ii) the Base Rate plus the applicable margin, which will be [●]% lower than the applicable margin for LIBOR loans.

 

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Maturity

The loans and commitments under the Revolving Facility are expected to mature or terminate on the fifth anniversary of the closing date.

Guarantees

Obligations of Aaron’s, LLC under the Revolving Facility will be jointly and severally guaranteed by Aaron’s SpinCo and certain of its existing and future direct and indirect U.S. subsidiaries (but excluding (i) unrestricted subsidiaries and (ii) immaterial subsidiaries).

Springing Security

The Revolving Facility will be unsecured on the separation date. In the event that the total net leverage ratio exceeds [●] to [●] as of the end of any fiscal quarter, Aaron’s, LLC, Aaron’s SpinCo and the other guarantors will provide a first priority perfected lien on substantially all of their respective assets and the proceeds thereof, excluding certain excluded assets. If triggered, the liens securing the Revolving Facility and the Franchise Loan Facility will be pari passu.

Certain Covenants and Events of Default

The credit agreement contains customary financial covenants including (a) a maximum total net leverage ratio set at [●] to [●] and (b) a minimum fixed charge coverage ratio set at [●] to [●].

In addition, the credit agreement is expected to contain a number of covenants that, among other things and subject to certain exceptions, will restrict our ability and the ability of our other restricted subsidiaries to:

 

   

incur additional indebtedness;

 

   

pay dividends and other distributions;

 

   

make investments, loans and advances;

 

   

engage in transactions with our affiliates;

 

   

sell assets or otherwise dispose of property or assets;

 

   

alter the business we conduct;

 

   

merge and engage in other fundamental changes;

 

   

prepay, redeem or repurchase certain debt; and

 

   

incur liens.

The credit agreement will also contain certain customary representations and warranties, affirmative covenants and provisions relating to events of default.

Guarantees

Franchise Loan Facility

Aaron’s SpinCo expects to enter into a franchise loan facility agreement and related agreements in connection with the Franchise Loan Facility as one guarantor for a new senior unsecured franchise loan facility in an aggregate principal amount of $25 million with Aaron’s, LLC as sponsor, various sales and lease ownership franchisees of Aaron’s, LLC domiciled in the United States and Canada as borrowers and certain lenders.

The Franchise Loan Facility operates as a guarantee by Aaron’s SpinCo, Aaron’s LLC and certain of its subsidiaries of certain debt obligations of some of the franchisees under a franchise loan program with one of the

 

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banks in the Revolving Facility. In the event these franchisees are unable to meet their debt service payments or otherwise experience an event of default, Aaron’s SpinCo, Aaron’s, LLC and certain of its subsidiaries 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 [●] days of the event of default. At September 30, 2020, the total amount that we might be obligated to repay in the event franchisees defaulted was $18.6 million. However, due to franchisee borrowing limits, we believe any losses associated with defaults would be substantially mitigated through recovery of lease merchandise and other assets.

Interest Rate

Funded participations under the Franchise Loan Facility are expected to bear interest at a rate per annum equal to, at the option of Aaron’s, LLC, (i) LIBOR plus the applicable margin of [●]% - [●]% for revolving loans, based on total leverage, or (ii) the Base Rate plus the applicable margin, which will be [●]% lower than the applicable margin for LIBOR loans.

Termination Date and Extension

The Revolving Facility is expected to be available for [●] days after the closing date, with the ability for Aaron’s, LLC to request extensions for additional [●] day periods.

Guarantees

Obligations of Aaron’s, LLC under the Franchise Loan Facility will be jointly and severally guaranteed by Aaron’s SpinCo and certain of its existing and future direct and indirect U.S. subsidiaries with customary exclusions.

Springing Security

The Franchise Loan Facility will be unsecured on the separation date. In the event that the total net leverage ratio exceeds [●] to [●] as of the end of any fiscal quarter, Aaron’s, LLC, Aaron’s SpinCo and the other guarantors will provide a first priority perfected lien on substantially all of their respective assets and the proceeds thereof, excluding certain excluded assets. If triggered, the liens securing the Franchise Loan Facility and the Revolving Facility will be pari passu.

Certain Covenants and Events of Default

The facility agreement is expected to contain customary financial covenants including (a) a maximum total net leverage ratio set at [●] to [●] and (b) a minimum fixed charge coverage ratio set at [●] to [●].

In addition, the facility agreement is expected to contain a number of covenants that, among other things and subject to certain exceptions, will restrict our ability and the ability of our other restricted subsidiaries to:

 

   

incur additional indebtedness;

 

   

pay dividends and other distributions;

 

   

make investments, loans and advances;

 

   

engage in transactions with our affiliates;

 

   

sell assets or otherwise dispose of property or assets;

 

   

alter the business we conduct;

 

   

merge and engage in other fundamental changes;

 

   

prepay, redeem or repurchase certain debt; and

 

   

incur liens.

 

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The facility agreement will also contain certain customary representations and warranties, affirmative covenants and provisions relating to events of default.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Before the distribution, all of the outstanding shares of Aaron’s SpinCo common stock will be owned beneficially and of record by Parent. Following the distribution, we expect to have outstanding an aggregate of approximately [●] million shares of common stock based upon approximately [●] million shares of Parent common stock outstanding on [●], 2020, excluding treasury shares and assuming no exercise of Parent options, and applying the distribution ratio.

As of the date hereof, all of the issued and outstanding shares of Aaron’s SpinCo common stock are owned indirectly by Parent.

The following table sets forth the number of shares of Aaron’s SpinCo common stock that we expect will be beneficially owned, immediately following the completion of the distribution, by:

 

   

each person who will beneficially own more than five percent of Aaron’s SpinCo common stock;

 

   

each of our expected directors;

 

   

each of our executive officers; and

 

   

all of our expected directors and executive officers as a group.

The table is based upon information available as of [●], 2020 as to those persons who beneficially own more than five percent of Parent common stock and an assumption that, for every share of Parent common stock held by such persons, they will receive [●] share[s] of Aaron’s SpinCo common stock. Pursuant to SEC regulations, shares receivable through the exercise of employee stock options that are currently exercisable or exercisable within 60 days of [●], 2020 and shares receivable through the vesting of RSUs that are scheduled to vest within 60 days of [●], 2020, are deemed to be outstanding for the purpose of computing the percentage ownership of the person holding those options or RSUs, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

Name and Address of

Beneficial Owner

  

Amount and Nature of

Beneficial Ownership

  

Percent of Class

[●]

   [●]    [●]

[●]

   [●]    [●]

[●]

   [●]    [●]

[●]

   [●]    [●]

[●]

   [●]    [●]

[●]

     

[●]

   [●]    [●]

 

(1)

[●]

DESCRIPTION OF OUR CAPITAL STOCK

Our articles of incorporation and bylaws will be amended and restated prior to the distribution. The following is a summary of the material terms of our capital stock that will be contained in our amended and restated articles of incorporation and bylaws. The summaries and descriptions below do not purport to be complete statements of the relevant provisions of our articles of incorporation or of the bylaws to be in effect at the time of the distribution, which you must read for complete information on our capital stock as of the time of

 

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the distribution. The articles of incorporation and bylaws, each in a form expected to be in effect at the time of the distribution, are included as exhibits to our registration statement on Form 10, of which this information statement forms a part. The summaries and descriptions below do not purport to be complete statements of the Georgia Business Code.

Capitalization

Our authorized capital stock will consist of [●] shares of common stock, par value $0.50 per share, and [●] shares of preferred stock, par value $1.00 per share, all of which shares of preferred stock are undesignated. All of the shares issued and outstanding immediately following the distribution will be fully paid and nonassessable. Immediately following the distribution, we expect that approximately [●] million shares of Aaron’s SpinCo common stock will be issued and outstanding, based on approximately [●] million shares of Parent common stock issued and outstanding on [●], and that no shares of preferred stock will be issued and outstanding.

Common Stock

Voting Rights. Holders of Aaron’s SpinCo common stock will be entitled to one vote per share, and, in general, a majority of issued and outstanding shares of Aaron’s SpinCo common stock will be sufficient to authorize action upon all matters submitted for a vote. Directors will be elected by a majority of the votes cast at the annual meeting of the shareholders, and shareholders of Aaron’s SpinCo will not have the right to cumulate their votes in the election of directors. This means that the holders of a majority of the votes represented by the common stock can elect all of the directors then standing for election.

Dividends. Holders of outstanding shares of Aaron’s SpinCo common stock will be entitled to receive dividends and other distributions legally available therefor in amounts as the Aaron’s SpinCo board of directors may determine from time to time, subject to preferential dividend rights of any outstanding preferred stock. Funds for Aaron’s SpinCo dividends generally will be provided through dividends and distributions from its subsidiaries, including Parent. All shares of Aaron’s SpinCo common stock will be entitled to participate ratably with respect to dividends or other distributions.

Preemptive Rights. Holders of Aaron’s SpinCo common stock will not have any preemptive, subscription, redemption or conversion rights and are not entitled to the benefit of any sinking fund.

Liquidation. In the event of the liquidation, dissolution or winding up of Aaron’s SpinCo, the holders of Aaron’s SpinCo common stock will be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of Aaron’s SpinCo available for distribution, subject to the prior rights of preferred stock, if any, outstanding.

Transfer Agent and Registrar. The transfer agent and registrar for the Aaron’s SpinCo common stock is Computershare, which is also the transfer agent for the Parent common stock.

Preferred Stock

Parent does not have any preferred stock outstanding and Aaron’s SpinCo will not issue any preferred stock in connection with the separation and distribution. Nonetheless, Aaron’s SpinCo will be authorized to issue preferred stock in the future.

Anti-Takeover Effects of our Articles of Incorporation and Bylaws and Georgia Law

Upon completion of the separation and distribution, Aaron’s SpinCo’s amended and restated articles of incorporation and bylaws will contain provisions that could delay or make more difficult the acquisition of

 

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control of us through a hostile tender offer, open market purchases, proxy contest, merger or other takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in a premium over the market price of our common stock.

Authorized but Unissued Capital Stock

We will have an aggregate [●] million authorized shares of common stock and [•] million authorized shares of preferred stock. One of the consequences of our authorized but unissued common stock and undesignated preferred stock may be to enable our Board of Directors to make more difficult or to discourage an attempt to obtain control of us. If, in the exercise of its fiduciary obligations, our Board of Directors determined that a takeover proposal was not in our best interest, our Board of Directors could authorize the issuance of those shares without shareholder approval, subject to limits imposed by the NYSE. The shares could be issued in one or more transactions that might prevent or make the completion of a proposed change of control transaction more difficult or costly by, among other things:

 

   

diluting the voting or other rights of the proposed acquiror or insurgent shareholder group;

 

   

creating a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent board; or

 

   

effecting an acquisition that might complicate or preclude the takeover.

In this regard, our amended and restated articles of incorporation will grant our Board of Directors broad power to establish the rights and preferences of the authorized and unissued preferred stock. Our Board of Directors could establish one or more series of preferred stock that entitle holders to:

 

   

vote separately as a class on any proposed merger or consolidation;

 

   

cast a proportionately larger vote together with our common stock on any transaction or for all purposes;

 

   

elect directors having terms of office or voting rights greater than those of other directors;

 

   

convert preferred stock into a greater number of shares of our common stock or other securities;

 

   

demand redemption at a specified price under prescribed circumstances related to a change of control of us; or

 

   

exercise other rights designed to impede a takeover.

Special Meetings of Shareholders

Special meetings of our shareholders may only be called by our chief executive officer or secretary (a) when directed by the chairman of our Board of Directors or by a majority of our entire Board of Directors, or (b) upon the demand of shareholders representing at least 25% of all votes entitled to be cast on each issue to be considered at the proposed special meeting of shareholders.

Election and Removal of Directors

Our amended and restated articles will provide that, subject to any rights granted to holders of shares of any class or series of our preferred stock outstanding, the number of directors which will constitute our Board of Directors will be fixed from time to time by resolution adopted by the affirmative vote of a majority of the total number of directors then in office; provided that the number of directors that will constitute the whole board will be at least three. In addition, no decrease in the size of our Board of Directors will shorten the term of any incumbent director.

 

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Our amended and restated bylaws will also provide that a director may be removed by the shareholders only for cause and only by the affirmative vote of at least a majority of the issued and outstanding capital stock entitled to vote for the election of directors.

Finally, our amended and restated bylaws will provide that vacancies, including vacancies resulting from an increase in the number of directors or from removal of a director, may be filled by a majority vote of the remaining directors then in office, even if less than a quorum or a sole remaining director.

Classified Board of Directors

Our amended and restated articles of incorporation will provide that our Board of Directors will be divided into three classes. The directors designated as Class I directors will have initial terms expiring at our 2021 annual meeting of shareholders. The directors designated as Class II directors will have initial terms expiring at our 2022 annual meeting of shareholders. The directors designated as Class III directors will have initial terms expiring at our 2023 annual meeting of shareholders. Each Class I director elected at our 2021 annual meeting of shareholders, each Class II director elected at the 2022 annual meeting of shareholders and each Class III director elected at the 2023 annual meeting of shareholders shall hold office until the 2024 annual meeting of shareholders and, in each case, until his or her respective successor shall have been duly elected and qualified or until his or her earlier resignation or removal. Commencing with the 2024 annual meeting of shareholders, each director will be elected annually and shall hold office until the next annual meeting of shareholders and until his or her respective successor shall have been duly elected and qualified or until his or her earlier resignation or removal.

Advance Notice Procedure for Director Nomination and Shareholder Proposals

Our amended and restated bylaws will provide the manner in which shareholders may give notice of director nominations and other business to be brought before an annual meeting. In general, to bring a matter before an annual meeting, other than a proposal being presented in accordance with the provisions of Rule 14a-8 under the Exchange Act, a shareholder must give notice of the proposed matter in writing not less than 90 and not more than 120 days prior to the meeting and satisfy the other requirements in our bylaws. To nominate a candidate for election as a director, a shareholder must give notice of the proposed nomination in writing not less than 60 or more than 120 days prior to the first anniversary of the prior year’s annual meeting. If the annual meeting is more than 30 days before or more than 70 days after the first anniversary of the prior year’s annual meeting or no annual meeting was held during the preceding year, a shareholder must instead give notice of a proposed nomination in writing no more than 120 days prior to such annual meeting and no less than 60 days prior to the annual meeting or the 10th day following the public announcement of when the meeting will be held. Any notice to nominate a candidate for election as a director must also satisfy all other requirements specified in our amended and restated bylaws.

Amendments of Our Articles of Incorporation and Bylaws

Amendments to our articles of incorporation generally must be approved by our Board of Directors and by a majority of the outstanding stock entitled to vote on the amendment, and, if applicable, by a majority of the outstanding stock of each class or series entitled to vote on the amendment as a class or series. Our amended and restated bylaws may be amended by a majority vote of our Board of Directors. Any bylaws adopted by our Board of Directors may be amended, and new bylaws may be adopted, by our shareholders by majority vote of all of the shares having voting power.

Georgia Anti-Takeover Statute

The Georgia Business Code restricts certain business combinations with “interested shareholders” and contains fair price requirements applicable to certain mergers with certain interested shareholders that are

 

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summarized below. The restrictions imposed by these statutes will not apply to a corporation unless it elects to be governed by these statutes. We will not elect to be covered by these restrictions, and, although we have no present intention to do so, we could elect to do so in the future.

The Georgia Business Code regulates business combinations such as mergers, consolidations, share exchanges and asset purchases where the acquired business has at least 100 shareholders residing in Georgia and has its principal office in Georgia, and where the acquiror became an interested shareholder of the corporation, unless either:

 

   

the transaction resulting in such acquiror becoming an interested shareholder or the business combination received the approval of the corporation’s board of directors prior to the date on which the acquiror became an interested shareholder;

 

   

the acquiror became the owner of at least 90% of the outstanding voting stock of the corporation, excluding shares held by directors, officers and affiliates of the corporation and shares held by certain other persons, in the same transaction in which the acquiror became an interested shareholder; or

 

   

the acquiror became the owner of at least 90% of the outstanding voting stock of the corporation, excluding shares held by directors, officers and affiliates of the corporation and shares held by certain other persons, subsequent to the transaction in which the acquiror became an interested shareholder, and the business combination is approved by a majority of the shares entitled to vote, exclusive of shares owned by the interested shareholder, directors and officers of the corporation, certain affiliates of the corporation and the interested shareholder and certain employee stock plans.

For purposes of this statute, an interested shareholder generally is any person who directly or indirectly, alone or in concert with others, beneficially owns or controls 10% or more of the voting power of the outstanding voting shares of the corporation. The statute prohibits business combinations with an unapproved interested shareholder for a period of five years after the date on which such person became an interested shareholder.

The statute restricting business combinations is broad in its scope and is designed to inhibit unfriendly acquisitions.

The Georgia Business Code also prohibits certain business combinations between a Georgia corporation and an interested shareholder unless:

 

   

certain “fair price” criteria are satisfied;

 

   

the business combination is unanimously approved by the continuing directors;

 

   

the business combination is recommended by at least two-thirds of the continuing directors and approved by a majority of the votes entitled to be cast by holders of voting shares, other than voting shares beneficially owned by the interested shareholder; or

 

   

the interested shareholder has been such for at least three years and has not increased his ownership position in such three-year period by more than one percent in any 12-month period.

The fair price statute is designed to inhibit unfriendly acquisitions that do not satisfy the specified “fair price” requirements.

No Cumulative Voting

The Georgia Business Code also provides that shareholders are denied the right to cumulate votes in the election of directors, unless our articles of incorporation provides otherwise. Our amended and restated articles of incorporation will not provide for cumulative voting.

 

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Index to Financial Statements

Limitation on Liability of Directors; Indemnification

Our amended and restated articles of incorporation will provide that none of our directors will be personally liable to us or our shareholders for monetary damages resulting from a breach of the duty of care or any other duty owed to us as a director to the fullest extent permitted by Georgia law. Our bylaws require us to indemnify any person to the fullest extent permitted by law for any liability and expense resulting from any threatened, pending or completed legal action, suit or proceeding resulting from the fact that such person is or was a director or officer of us, including service at our request as a director, officer partner, trustee, employee, administrator or agent of another entity. Our directors and officers are also insured against losses arising from any claim against them in connection with their service as directors and officers for wrongful acts or omissions, subject to certain limitations.

We will also enter into indemnification agreements with our directors and officers (the “Indemnification Agreements”). The Indemnification Agreements supplement our bylaws and Georgia law in providing certain indemnification rights to our directors. The Indemnification Agreements provide, among other things, that we will indemnify our directors to the fullest extent permitted by Georgia law (and to any greater extent that Georgia law may in the future permit). The Indemnification Agreements provide procedures for the determination of a director’s right to receive indemnification and the advancement of expenses. Subject to the express terms of the Indemnification Agreements, our obligations under the Indemnification Agreements continue even after a covered party ceases to be a director of the Company.

Exclusive Forum

Our amended and restated bylaws will provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for any shareholder (including a beneficial owner) to bring (a) any derivative action or proceeding brought on behalf of Aaron’s SpinCo, (b) any action asserting a claim of breach of a fiduciary or legal duty owed by any current or former director, officer, employee, shareholder, or agent of Aaron’s Spinco to Aaron’s SpinCo or the Aaron’s SpinCo shareholders, including a claim alleging the aiding and abetting of any such breach of fiduciary duty, (c) any action asserting a claim against Aaron’s SpinCo, its current or former directors, officers, employees, shareholders, or agents arising pursuant to any provision of the Georgia Business Code or our articles of incorporation or bylaws (as either may be amended from time to time), (d) any action asserting a claim against us, our current or former directors, officers, employees, shareholders, or agents governed by the internal affairs doctrine, or (e) any action against us, our current or former directors, officers, employees, shareholders, or agents asserting a claim identified in O.C.G.A. § 15-5A-3 shall be the Georgia State-Wide Business Court. Our amended and restated bylaws also provide that the foregoing exclusive forum provisions do not apply to any action asserting claims under the Exchange Act or the Securities Act.

We have included this exclusive forum provision in our amended and restated bylaws because such provision, in our view, is in the best interests of our Company and our shareholders for the following reasons: (a) the exclusive forum provision provides that certain intra-corporate disputes will be litigated in Georgia, the state in which our Company is incorporated and whose law governs such disputes; (b) the Georgia State-Wide Business Court was specifically created to adjudicate commercial and corporate-related disputes, and thus has expertise in dealing with corporate law issues; (c) the exclusive forum provision will help us avoid multiple lawsuits in numerous jurisdictions relating to the same dispute, thus preventing corporate resources from being unnecessarily diverted to address duplicative, costly and wasteful multi-forum litigation; (d) the exclusive forum provision will provide value to our Company and our shareholders by facilitating consistency and predictability in litigation outcomes and reducing the risk that the outcome of cases in multiple jurisdictions could be inconsistent, even though each jurisdiction purports to follow Georgia law; (e) the exclusive forum provision does not materially change the substantive legal claims or remedies available to our shareholders, but rather only regulates the forum in which shareholders may file claims relating to certain specified intra-corporate disputes; and (f) our Board of Directors has the ability to consent to an alternative forum in appropriate circumstances where the board determines that the interests of our Company and our shareholders are best served by permitting a particular dispute to proceed in a forum other than Georgia.

 

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Listing

We intend to apply to have our shares of common stock listed on the NYSE under the symbol “[●].”

Sale of Unregistered Securities

On [●], Aaron’s SpinCo issued [●] shares of its common stock to Parent pursuant to Section 4(a)(2) of the Securities Act. We did not register the issuance of the issued shares under the Securities Act because such issuance did not constitute a public offering.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form 10 with the SEC with respect to the shares of our common stock being distributed as contemplated by this information statement. This information statement is a part of, and does not contain all of the information set forth in, the registration statement and the exhibits and schedules to the registration statement. For further information with respect to Parent and Aaron’s SpinCo common stock, please refer to the registration statement, including its exhibits and schedules. Statements made in this information statement relating to any contract or other document filed as an exhibit to the registration statement include the material terms of such contract or other document. However, such statements are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may review a copy of the registration statement, including its exhibits and schedules, at the SEC’s public reference room, located at 100 F Street, NE, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330, as well as on the Internet website maintained by the SEC at www.sec.gov. Information contained on any website referenced in this information statement is not incorporated by reference in this information statement.

As a result of the distribution, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, will file periodic reports, proxy statements and other information with the SEC. We intend to furnish holders of our common stock with annual reports containing consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles and audited and reported on, with an opinion expressed, by an independent registered public accounting firm.

You should rely only on the information contained in this information statement or to which this information statement has referred you. We have not authorized any person to provide you with different information or to make any representation not contained in this information statement.

 

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APPENDIX A

RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION

The tables below present a reconciliation of certain Parent non-GAAP financial measures to GAAP.

The Adjusted EBITDA metrics are calculated as earnings before interest expense, depreciation on property, plant and equipment, amortization of intangible assets and income taxes. Further adjustments were made to calculate Adjusted EBITDA such as excluding insurance recoveries for the 2017 Hurricanes Harvey and Irma from the Aaron’s Business and to remove certain legal and due diligence costs from the Aaron’s Business. The amounts for these pre-tax non-GAAP adjustments can be found in the Adjusted EBITDA table below.

 

Adjusted EBITDA    Year Ended
December 31, 2019
 

(In Thousands)

   Aaron’s Business  

Earnings Before Income Taxes

   $ 46,731  

Interest Expense

     4,868  

PP&E Depreciation

     60,415  

Amortization

     13,294  
  

 

 

 

EBITDA

     125,308  
  

 

 

 

Restructuring Expenses

     39,990  

Acquisition Transaction and Transition Costs

     735  
  

 

 

 

Adjusted EBITDA

     166,033  

Insurance Recoveries for Hurricanes and certain Legal and Due Diligence Costs, net

     (1,257
  

 

 

 

Adjusted EBITDA- used for Management incentive purposes

   $ 164,776  
  

 

 

 

The Adjusted Revenues figures have been reduced for the amount of provision expense at Vive, the amounts for which can be found in the Adjusted Revenues table below.

 

Parent’s Adjusted Revenues by segment    Year Ended December 31, 2019  

(In Thousands)

   Progressive
Leasing1
     Aaron’s Business      Vive      Consolidated  

Revenues—GAAP

   $ 2,128,133      $ 1,784,477      $ 35,046      $ 3,947,656  

Less Vive Bad Debt Expense from Credit Losses2

     —        —        21,666        21,666  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Revenues

   $ 2,128,133      $ 1,784,477      $ 13,380      $ 3,925,990  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The adjusted revenue metric used to evaluate Progressive Leasing for incentive purposes includes the consolidation of Progressive and Vive, further adjusted to remove the effect of provision expense at Vive.

(2) 

The adjustment removes the effect of Vive’s Provision for Credit Losses.

 

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INDEX TO FINANCIAL STATEMENTS

 

     Page  

Audited Combined Financial Statements of Aaron’s SpinCo, Inc.

  

Report of Independent Registered Public Accounting Firm

     F-2  

Combined Balance Sheets at December 31, 2019 and 2018

     F-3  

Combined Statements of Earnings for the years ended December  31, 2019, 2018 and 2017

     F-4  

Combined Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017

     F-5  

Combined Statements of Parent’s Equity for the years ended December 31, 2019, 2018 and 2017

     F-6  

Combined Statements of Cash Flows for the years ended December  31, 2019, 2018 and 2017

     F-7  

Notes to Combined Financial Statements

     F-8  

Unaudited Condensed Combined Financial Statements of Aaron’s SpinCo, Inc.

  

Condensed Combined Balance Sheets as of September 30, 2020 and December 31, 2019

     F-48  

Condensed Combined Statements of Earnings for the nine months ended September 30, 2020 and 2019

     F-49  

Condensed Combined Statements of Comprehensive (Loss) Income for the nine months ended September 30, 2020 and 2019

     F-50  

Condensed Combined Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

     F-51  

Notes to Condensed Combined Financial Statements

     F-52  

All financial statement schedules have been omitted because they are not applicable, the required matter is not present, or the required information has been otherwise supplied in the financial statements or the notes thereto.

 

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Index to Financial Statements

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Aaron’s, Inc.

Opinion on the Financial Statements

We have audited the accompanying combined balance sheets of Aaron’s SpinCo, Inc. (comprised primarily of the Aaron’s Business) (the Company), a wholly-owned business of Aaron’s, Inc., as of December 31, 2019 and 2018, the related combined statements of earnings, comprehensive income, parent’s equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “combined financial statements”). In our opinion, the combined financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Adoption of ASU 2016-02

As discussed in Note 1 to the combined financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU 2016-02, Leases (ASC 842), as amended, effective January 1, 2019, using the modified retrospective approach.

We have served as the Company’s auditor since 2020.

/s/ Ernst & Young LLP

Atlanta, Georgia

September 8, 2020

 

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AARON’S SPINCO, INC.

COMBINED BALANCE SHEETS

 

     December 31,  
     2019     2018  
     (In Thousands)  

ASSETS:

    

Cash and Cash Equivalents

   $ 48,773   $ 12,006

Accounts Receivable (net of allowances of $10,720 in 2019 and $9,546 in 2018)

     37,079     46,372

Lease Merchandise (net of accumulated depreciation and allowances of $467,769 in 2019 and $459,233 in 2018)

     781,598     807,457

Property, Plant and Equipment, Net

     207,301     202,753

Operating Lease Right-of-Use Assets

     305,257     —    

Goodwill

     447,781     444,369

Other Intangibles, Net

     14,234     29,774

Income Tax Receivable

     5,927     12,536

Prepaid Expenses and Other Assets

     92,381     77,545
  

 

 

   

 

 

 

Total Assets

   $ 1,940,331   $ 1,632,812
  

 

 

   

 

 

 

LIABILITIES & PARENT’S EQUITY:

    

Accounts Payable and Accrued Expenses

   $ 220,596   $ 242,389

Deferred Income Taxes Payable

     157,425     137,341

Customer Deposits and Advance Payments

     47,692     46,421

Operating Lease Liabilities

     335,807     —    

Debt

     341,030     424,752
  

 

 

   

 

 

 

Total Liabilities

     1,102,550     850,903

Parent’s Equity:

    

Invested Capital

     837,800     782,996

Accumulated Other Comprehensive Loss

     (19     (1,087
  

 

 

   

 

 

 

Total Parent’s Equity

     837,781     781,909
  

 

 

   

 

 

 

Total Liabilities & Parent’s Equity

   $ 1,940,331   $ 1,632,812
  

 

 

   

 

 

 

The accompanying notes are an integral part of the Combined Financial Statements.

 

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AARON’S SPINCO, INC.

COMBINED STATEMENTS OF EARNINGS

 

     Year Ended December 31,  
     2019     2018     2017  
     (In Thousands)  

REVENUES:

      

Lease and Retail Revenues

   $ 1,608,832   $ 1,540,800   $ 1,460,815

Non-Retail Sales

     140,950     207,262     270,253

Franchise Royalties and Other Revenues

     34,695     46,654     50,834
  

 

 

   

 

 

   

 

 

 
     1,784,477     1,794,716     1,781,902

COST OF REVENUES:

      

Cost of Lease and Retail Revenues

     559,232     533,974     517,946

Non-Retail Cost of Sales

     113,229     174,180     241,356
  

 

 

   

 

 

   

 

 

 
     672,461     708,154     759,302
  

 

 

   

 

 

   

 

 

 

GROSS PROFIT

     1,112,016     1,086,562     1,022,600

OPERATING EXPENSES

      

Personnel Costs

     499,993     482,712     460,606

Other Operating Expenses, Net

     426,774     431,158     382,853

Provision for Lease Merchandise Write-Offs

     97,903     68,970     59,621

Restructuring Expenses, Net

     39,990     2,750     17,145
  

 

 

   

 

 

   

 

 

 
     1,064,660     985,590     920,225
  

 

 

   

 

 

   

 

 

 

OPERATING PROFIT

     47,356     100,972     102,375

Interest Expense

     (16,967     (16,440     (18,151

Impairment of Investment

     —         (20,098     —    

Other Non-Operating Income (Expense), Net

     3,881     (866     5,416
  

 

 

   

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAX EXPENSE (BENEFIT)

     34,270     63,568     89,640

INCOME TAX EXPENSE (BENEFIT)

     6,171     12,915     (53,278
  

 

 

   

 

 

   

 

 

 

NET EARNINGS

   $ 28,099   $ 50,653   $ 142,918
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the Combined Financial Statements.

 

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AARON’S SPINCO, INC.

COMBINED STATEMENTS OF COMPREHENSIVE INCOME

 

     Year Ended December 31,  

(In Thousands)

   2019      2018     2017  

Net Earnings

   $ 28,099    $ 50,653   $ 142,918

Other Comprehensive Income (Loss):

       

Foreign Currency Translation Adjustment

     1,068      (1,861     1,305
  

 

 

    

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

     1,068      (1,861     1,305
  

 

 

    

 

 

   

 

 

 

Comprehensive Income

   $ 29,167    $ 48,792   $ 144,223
  

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of the Combined Financial Statements.

 

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AARON’S SPINCO, INC.

COMBINED STATEMENTS OF PARENT’S EQUITY

 

(In Thousands, Except Per Share)

   Invested Capital     Accumulated Other
Comprehensive
(Loss) Income
    Total Parent’s
Equity
 

Balance, January 1, 2017

   $ 670,737   $ (531   $ 670,206

Stock-Based Compensation

     13,487     —         13,487

Net decrease in Invested Capital

     (90,349     —         (90,349

Net Earnings

     142,918     —         142,918

Foreign Currency Translation Adjustment

     —         1,305     1,305
  

 

 

   

 

 

   

 

 

 

Balance, December 31, 2017

     736,793     774     737,567

Opening Balance Sheet Adjustment - ASC 606

     (1,793     —         (1,793

Stock-Based Compensation

     14,187     —         14,187

Net decrease in Invested Capital

     (16,844     —         (16,844

Net Earnings

     50,653     —         50,653

Foreign Currency Translation Adjustment

     —         (1,861     (1,861
  

 

 

   

 

 

   

 

 

 

Balance, December 31, 2018

     782,996     (1,087     781,909

Opening Balance Sheet Adjustment - ASC 842

     2,535     —         2,535

Stock-Based Compensation

     12,696     —         12,696

Net increase in Invested Capital

     11,474     —         11,474

Net Earnings

     28,099     —         28,099

Foreign Currency Translation Adjustment

     —         1,068     1,068
  

 

 

   

 

 

   

 

 

 

Balance, December 31, 2019

   $ 837,800   $ (19   $ 837,781
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the Combined Financial Statements.

 

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AARON’S SPINCO, INC.

COMBINED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  

(In Thousands)

   2019     2018     2017  

OPERATING ACTIVITIES:

      

Net Earnings

   $ 28,099   $ 50,653   $ 142,918

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:

      

Depreciation of Lease Merchandise

     528,382     509,351     499,414

Other Depreciation and Amortization

     73,582     64,618     52,134

Accounts Receivable Provision

     46,721     40,128     32,815

Stock-Based Compensation

     13,486     15,517     15,057

Deferred Income Taxes

     18,226     10,042     (51,475

Impairment of Assets

     30,344     20,098     1,968

Non-Cash Lease Expense

     110,615     —         —    

Other Changes, Net

     (3,917     362     (2,547

Changes in Operating Assets and Liabilities, Net of Effects of Acquisitions and Dispositions:

      

Additions to Lease Merchandise

     (734,641     (809,672     (821,014

Book Value of Lease Merchandise Sold or Disposed

     236,627     271,524     325,749

Accounts Receivable

     (39,881     (26,733     (31,222

Prepaid Expenses and Other Assets

     (18,151     10,122     12,049

Income Tax Receivable

     6,610     49,463     (59,315

Operating Lease Right-of-Use Assets and Liabilities

     (120,287     —         —    

Accounts Payable and Accrued Expenses

     9,435     (16,712     (4,165

Customer Deposits and Advance Payments

     727     (2,225     (2,196
  

 

 

   

 

 

   

 

 

 

Cash Provided by Operating Activities

     185,977     186,536     110,170
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES:

      

Proceeds from Investments

     1,212     3,066     2,658

Outflows on Purchases of Property, Plant & Equipment

     (79,932     (67,099     (48,333

Proceeds from Property, Plant, and Equipment

     14,005     6,989     12,687

Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired

     (14,285     (189,901     (145,558

Proceeds from Dispositions of Businesses and Customer Agreements, Net of Cash Disposed

     2,813     942     1,141
  

 

 

   

 

 

   

 

 

 

Cash Used in Investing Activities

     (76,187     (246,003     (177,405
  

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES:

      

(Repayments) Borrowings on Revolving Facility, Net

     (16,000     16,000     —    

Proceeds from Debt

     —         137,500     15,625

Repayments on Debt

     (68,531     (97,583     (103,129

Debt Issuance Costs

     (40     (535     (3,130

Other Transfers From (To) Parent

     11,428     (17,513     (91,559
  

 

 

   

 

 

   

 

 

 

Cash (Used in) Provided by Financing Activities

     (73,143     37,869     (182,193
  

 

 

   

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

     120     (156     75

Increase (Decrease) in Cash and Cash Equivalents

     36,767     (21,754     (249,353

Cash and Cash Equivalents at Beginning of Year

     12,006     33,760     283,113
  

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents at End of Year

   $ 48,773   $ 12,006   $ 33,760
  

 

 

   

 

 

   

 

 

 

Net Cash Paid (Received) During the Year:

      

Interest

   $ 16,460   $ 16,243   $ 18,109

Income Taxes

   $ (4,554   $ (46,272   $ 58,832

The accompanying notes are an integral part of the Combined Financial Statements.

 

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AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1: BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Holding Company Formation and Proposed Transaction

Aaron’s, Inc., an existing publicly traded company, is a leading omnichannel provider of lease-to-own (“LTO”) and purchase solutions to individual consumers through its Progressive Leasing, Aaron’s Business, and Vive segments. Management of Aaron’s, Inc. intends to create a new holding company structure (the “holding company formation”), in which Aaron’s, Inc. will become a direct, wholly owned subsidiary of a newly formed company, Aaron’s Holdings Company, Inc. The holding company formation is expected to be completed prior to the separation and distribution discussed below. Upon completion of the holding company formation and prior to the completion of the separation and distribution, Aaron’s Holdings Company, Inc. (“Parent”) will be the publicly traded parent company of the Progressive Leasing, Aaron’s Business, and Vive segments.

On July 29, 2020, Aaron’s, Inc. announced its intention to separate its Aaron’s Business segment from its Progressive Leasing and Vive segments, which would result in two separate companies via a spin-off of a newly formed company, Aaron’s SpinCo, Inc., a Georgia corporation (“Aaron’s SpinCo”). Upon completion of the separation and distribution, Aaron’s SpinCo will be a new, publicly traded company that is expected to be traded on the NYSE and will be comprised of the existing Aaron’s Business segment. Parent will continue to be traded on the NYSE and will be comprised of the existing Progressive Leasing and Vive segments.

Unless the context otherwise requires or we specifically indicate otherwise, references to “Parent” refer to Aaron’s, Inc. prior to the completion of the holding company formation transaction described herein and to Aaron’s Holdings Company, Inc. following completion of the holding company formation transaction described herein. References to “Aaron’s SpinCo,” “we,” “us,” “our,” “our Company,” and “the Company” refer to Aaron’s SpinCo, Inc., currently a wholly-owned subsidiary of Parent, that will hold directly or indirectly the assets and liabilities historically associated with Parent’s Aaron’s Business segment (the “Aaron’s Business”) as of the separation and distribution date, and for which historical amounts herein include revenues and costs directly attributable to Aaron’s SpinCo and an allocation of expenses related to certain Parent corporate functions.

We describe in these footnotes the business to be held by us after the separation as if it were a standalone business for all historical periods described. However, we were not a standalone separate entity with independently conducted operations before the separation. References in these footnotes to our historical assets, liabilities, products, business or activities generally refer to the historical assets, liabilities, products, businesses or activities of the Aaron’s Business as it was conducted as part of Parent before the separation that will be held directly or indirectly by Aaron’s SpinCo immediately following the separation and distribution transaction described herein. Unless the context otherwise requires or we specifically indicate otherwise, the information included in these footnotes about Aaron’s SpinCo assumes the completion of all of the transactions referred to in the information statement in connection with the separation and distribution.

Business Overview

Description of Aaron’s SpinCo Business

Aaron’s SpinCo is a wholly owned subsidiary of Parent and is a leading omnichannel provider of LTO and purchase solutions to individual consumers. Aaron’s SpinCo offers furniture, home appliances, consumer electronics and accessories to consumers with a lease-to-own agreement through approximately 1,500 company-operated and franchised stores in the United States, Canada and Puerto Rico, as well as through its e-commerce platform, Aarons.com. In addition, Aaron’s SpinCo includes the operations of Woodhaven Furniture Industries (“Woodhaven”), which manufactures and supplies the majority of the bedding and a significant portion of the upholstered furniture leased and sold in company-operated and franchised stores.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The following table presents store count by ownership type for the Aaron’s SpinCo operations:

 

Stores at December 31 (Unaudited)

   2019      2018      2017  

Company-operated Stores

     1,167      1,312      1,175

Franchised Stores

     335      377      551
  

 

 

    

 

 

    

 

 

 

Systemwide Stores

     1,502      1,689      1,726
  

 

 

    

 

 

    

 

 

 

Basis of Presentation

The combined financial statements were prepared on a standalone basis and are derived from the consolidated financial statements and accounting records of Parent. These combined financial statements reflect the historical results of operations, financial position and cash flows of Aaron’s SpinCo in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The historical results of operations, financial position and cash flows of Aaron’s SpinCo presented in these combined financial statements may not be indicative of what they would have been had Aaron’s SpinCo been an independent standalone entity, nor are they necessarily indicative of Aaron’s SpinCo’s future results of operations, financial position and cash flows.

The combined financial statements include all revenues and costs directly attributable to Aaron’s SpinCo and an allocation of expenses related to certain corporate functions. These expenses have been allocated to Aaron’s SpinCo based on direct usage or benefit where specifically identifiable, with the remaining expenses allocated primarily on a pro rata basis using an applicable measure of revenues, headcount or other relevant measures. Aaron’s SpinCo considers these allocations to be a reasonable reflection of the utilization of services or the benefit received. See Note 14 to the combined financial statements for further information regarding Aaron’s SpinCo’s related party transactions.

These financial statements have been prepared on a combined, rather than consolidated, basis because the final steps of the legal reorganization, which will result in the contribution of all the entities that will comprise Aaron’s SpinCo as of the separation, are not yet complete. Aaron’s, Inc., on a standalone legal entity basis, is one of the legal entities forming the basis of Aaron’s SpinCo. The combined financial statements include assets and liabilities specifically attributable to Aaron’s SpinCo, including assets and liabilities where Aaron’s, Inc. is the legal beneficiary or obligor. All intercompany transactions and balances within Aaron’s SpinCo have been eliminated. Transactions between Aaron’s SpinCo and Parent have been included as invested capital within the combined financial statements.

Revenue Recognition

Aaron’s SpinCo provides lease merchandise, consisting primarily of furniture, home appliances, consumer electronics and accessories to its customers for lease under certain terms agreed to by the customer. Our stores and e-commerce platform offer leases with flexible terms that can be renewed up to 12, 18 or 24 months. The customer has the right to acquire ownership either through an early purchase option or through payment of all required lease payments. The agreements are cancelable at any time by either party without penalty, and as such we consider the agreements to be month-to-month arrangements. Aaron’s SpinCo also earns revenue from the sale of merchandise to customers and its franchisees, and earns ongoing revenue from its franchisees in the form of royalties and through advertising efforts that benefit the franchisees. See Note 6 to the combined financial statements for further information regarding Aaron’s SpinCo’s revenue recognition policies and disclosures.

Lease Merchandise

Aaron’s SpinCo’s lease merchandise is recorded at the lower of cost or net realizable value. The cost of merchandise manufactured by our Woodhaven operations is recorded at cost and includes overhead from

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

production facilities, shipping costs and warehousing costs. Aaron’s SpinCo begins depreciating merchandise at the earlier of 12 months and one day from its purchase of the merchandise or when the item is leased to customers. Lease merchandise depreciates to a 0% salvage value over the lease agreement period when on lease, generally 12 to 24 months, and generally 36 months when not on lease. Depreciation is accelerated upon early payout.

The following is a summary of lease merchandise, net of accumulated depreciation and allowances:

 

     December 31,  

(In Thousands)

   2019      2018  

Merchandise on Lease, net of Accumulated Depreciation and Allowances

   $ 504,979    $ 542,671

Merchandise Not on Lease, net of Accumulated Depreciation and Allowances

     276,619      264,786
  

 

 

    

 

 

 

Lease Merchandise, net of Accumulated Depreciation and Allowances1

   $ 781,598    $ 807,457
  

 

 

    

 

 

 

 

1 

Includes Woodhaven raw materials and work-in-process inventory that has been classified within lease merchandise in the combined balance sheets of $14.0 million and $15.2 million as of December 31, 2019 and 2018, respectively.

Aaron’s SpinCo’s policies require weekly merchandise counts for its store-based operations, which include write-offs for unsalable, damaged, or missing merchandise inventories. In addition to monthly cycle counting, full physical inventories are generally taken at the fulfillment and manufacturing facilities annually and appropriate provisions are made for missing, damaged and unsalable merchandise. In addition, Aaron’s SpinCo monitors merchandise levels and mix by division, store, and fulfillment center, as well as the average age of merchandise on hand. If obsolete merchandise cannot be returned to vendors, its carrying amount is adjusted to its net realizable value or written off. Generally, all merchandise not on lease is available for lease or sale. On a monthly basis, all damaged, lost or unsalable merchandise identified is written off.

Aaron’s SpinCo records a provision for write-offs using the allowance method. The allowance for lease merchandise write-offs 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. Other qualitative factors are considered in estimating the allowance, such as current and forecasted business trends. The provision for write-offs is included in provision for lease merchandise write-offs in the accompanying combined statements of earnings.

The following table shows the components of the allowance for lease merchandise write-offs, which is included within lease merchandise, net within the combined balance sheets:

 

     Year ended December 31,  

(In Thousands)

   2019      2018      2017  

Beginning Balance

   $ 10,910    $ 8,987    $ 8,888

Merchandise Written off, net of Recoveries

     (94,990      (67,047      (59,522

Provision for Write-offs

     97,903      68,970      59,621
  

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 13,823    $ 10,910    $ 8,987
  

 

 

    

 

 

    

 

 

 

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Retail and Non-Retail Cost of Sales

Included in cost of lease and retail revenues as well as non-retail cost of sales is the net book value of merchandise sold via retail and non-retail sales, primarily using specific identification. It is not practicable to allocate operating expenses between selling and lease operations.

Shipping and Handling Costs

Shipping and handling costs of $74.3 million, $75.2 million and $67.3 million were incurred for the years ended December 31, 2019, 2018 and 2017, respectively. These costs are primarily classified within other operating expenses, net in the accompanying combined statements of earnings and to a lesser extent capitalized into the cost of lease merchandise and subsequently depreciated or recognized as cost of retail sales.

Advertising

Aaron’s SpinCo expenses advertising costs as incurred. Advertising production costs are initially recognized as a prepaid advertising asset and are expensed when an advertisement appears for the first time. Total advertising costs amounted to $37.1 million, $33.3 million and $28.7 million for the years ended December 31, 2019, 2018 and 2017, respectively, and are classified within other operating expenses, net in the combined statements of earnings. These advertising costs are shown net of cooperative advertising considerations received from vendors, which represents reimbursement of specific, identifiable and incremental costs incurred in selling those vendors’ products. The amount of cooperative advertising consideration recorded as a reduction of such advertising costs was $27.7 million, $28.3 million and $22.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. The prepaid advertising asset was $0.3 million and $1.6 million at December 31, 2019 and 2018, respectively, and is reported within prepaid expenses and other assets on the combined balance sheets.

Stock-Based Compensation

Parent has stock-based employee compensation plans in which certain Aaron’s SpinCo employees are participants, which are more fully described in Note 12 to these combined financial statements. Management estimates the fair value for the options granted on the grant date using a Black-Scholes-Merton option-pricing model. The fair value of each share of restricted stock units (“RSUs”), restricted stock awards (“RSAs”) and performance share units (“PSUs”) awarded is equal to the market value of a share of Parent common stock on the grant date. Management estimates the fair value of awards issued under the Parent employee stock purchase plan (“ESPP”) using a series of Black-Scholes pricing models that consider the components of the “lookback” feature of the plan, including the underlying stock, call option and put option. The design of awards issued under the Parent ESPP is more fully described in Note 12 to these combined financial statements.

Income Taxes

Aaron’s SpinCo is included within Parent’s federal consolidated income tax return in the United States and separate legal entities file in various states and foreign jurisdictions. In all periods presented, the income tax provision has been computed for the entities comprising Aaron’s SpinCo on a standalone, separate return basis as if Aaron’s SpinCo were a separate taxpayer.

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Income taxes as presented attribute deferred income taxes of Parent to Aaron’s SpinCo standalone combined financial statements in a manner that is

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

systematic, rational and consistent with the asset and liability method. As a result, actual tax transactions included in the consolidated financial statements of Parent may not be included in the separate combined financial statements of Aaron’s SpinCo. Similarly, the tax treatment of certain items reflected in the combined financial statements of Aaron’s SpinCo may not be reflected in the consolidated financial statements and tax returns of Parent.

The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of Aaron’s SpinCo’s assets and liabilities and are adjusted for changes in tax rates and tax laws when such changes are enacted. Aaron’s SpinCo’s largest temporary differences arise principally from the use of accelerated depreciation methods on lease merchandise for tax purposes. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

Aaron’s SpinCo recognizes uncertain tax positions in the combined financial statements when it is more likely than not that the tax position will be sustained upon examination. Uncertain tax positions are measured based on the probabilities that the uncertain tax position will be realized upon final settlement.

See further details on income taxes for Aaron’s SpinCo in Note 9 to these combined financial statements.

Cash and Cash Equivalents

Aaron’s SpinCo classifies as cash equivalents any highly liquid investments that have maturity dates of three months or less at the time they are purchased. Aaron’s SpinCo 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 in which the balances are held, any exposure to loss is believed to be minimal. Also included in cash and cash equivalents are amounts in transit due from financial institutions related to credit card transactions, which generally settle within three business days from the original transaction.

Investments

At December 31, 2017, Aaron’s SpinCo maintained an investment classified as held-to-maturity securities in PerfectHome, a rent-to-own company operating in the United Kingdom, of £15.1 million ($20.4 million). During the second quarter of 2018, PerfectHome’s liquidity deteriorated significantly due to continuing operating losses and the senior lender’s decision to no longer provide additional funding under a secured revolving debt agreement resulting from PerfectHome’s default of certain covenants. In July 2018, PerfectHome entered into the United Kingdom’s insolvency process and was subsequently acquired by the senior lender. Aaron’s SpinCo recorded a full impairment of the PerfectHome investment of $20.1 million during the second quarter of 2018. Aaron’s SpinCo has not received any repayments since the impairment charge and does not believe it will receive any further payments on its subordinated secured notes.

Accounts Receivable

Accounts receivable consist primarily of receivables due from customers on lease agreements, corporate receivables incurred during the normal course of business (primarily for vendor consideration and real estate leasing activities) and franchisee obligations.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Accounts receivable, net of allowances, consist of the following:

 

     December 31,  

(In Thousands)

   2019      2018  

Customers

   $ 9,820    $ 9,149

Corporate

     14,028      18,114

Franchisee

     13,231      19,109
  

 

 

    

 

 

 
   $ 37,079    $ 46,372
  

 

 

    

 

 

 

Aaron’s SpinCo maintains an accounts receivable allowance, under which Aaron’s SpinCo’s policy is to record a provision for returns and uncollectible contractually due renewal payments based on historical collection experience, which is recognized as a reduction of lease and retail revenues within the combined statements of earnings. Aaron’s SpinCo writes off lease receivables that are 60 days or more past due on pre-determined dates twice monthly.

The following table shows the components of the accounts receivable allowance:

 

     Year Ended December 31,  

(In Thousands)

   2019      2018      2017  

Beginning Balance

   $ 9,546    $ 6,992    $ 7,923

Accounts Written Off, net of Recoveries

     (45,547      (37,574      (33,746

Accounts Receivable Provision

     46,721      40,128      32,815
  

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 10,720    $ 9,546    $ 6,992
  

 

 

    

 

 

    

 

 

 

Property, Plant and Equipment

Aaron’s SpinCo 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 20 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. Aaron’s SpinCo primarily develops software for use in its store-based operations. Management uses an agile development methodology in which feature-by-feature updates are made to its software. Certain costs incurred during the application development stage of an internal-use software project are capitalized when members of management who possess the authority to do so authorize and commit to funding a feature update and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalization of costs ceases when the feature update is substantially complete and ready for its intended use. All costs incurred during preliminary and post-implementation project stages are expensed appropriately. Generally, the life cycle for each feature update implementation is one month.

Gains and losses related to dispositions and retirements are recognized as incurred. Maintenance and repairs are also expensed as incurred, and leasehold improvements are capitalized and amortized over the lesser of the lease term or the asset’s useful life. Depreciation expense for property, plant and equipment is included in other operating expenses, net in the accompanying combined statements of earnings and was $60.3 million, $53.9 million and $48.0 million during the years ended December 31, 2019, 2018 and 2017, respectively. Amortization of previously capitalized internal use software development costs, which is a component of depreciation expense for property, plant and equipment, was $15.7 million, $13.5 million and $11.0 million during the years ended December 31, 2019, 2018 and 2017, respectively.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Management assesses its long-lived assets other than goodwill for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. If it is determined that the carrying amount of an asset is not recoverable, management compares the carrying amount of the asset to its fair value as estimated using discounted expected future cash flows, market values or replacement values for similar assets. The amount by which the carrying amount exceeds the fair value of the asset, if any, is recognized as an impairment loss.

Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist of the following:

 

     December 31,  

(In Thousands)

   2019      2018  

Prepaid Expenses

   $ 28,975    $ 22,910

Prepaid Insurance

     26,393      27,948

Assets Held for Sale

     10,131      6,589

Deferred Tax Assets

     3,439      2,327

Other Assets

     23,443      17,771
  

 

 

    

 

 

 
   $ 92,381    $ 77,545
  

 

 

    

 

 

 

Assets Held for Sale

Certain properties, consisting of parcels of land and commercial buildings, met the held for sale classification criteria as of December 31, 2019 and 2018. Assets held for sale are recorded at the lower of their carrying value or fair value less estimated cost to sell and are classified within prepaid expenses and other assets in the combined balance sheets. Depreciation is suspended on assets upon classification to held for sale.

The carrying amount of the properties held for sale as of December 31, 2019 and 2018 was $10.1 million and $6.6 million, respectively. Management estimated the fair values of real estate properties using the market values for similar properties. These properties are considered Level 2 assets as defined below.

Charges of $1.2 million and $0.9 million were recorded within restructuring expenses, net during the years ended December 31, 2019 and 2017, respectively, with insignificant charges recorded during 2018. These charges related to the impairment of store properties that Aaron’s SpinCo decided to close under its restructuring programs as described in Note 11. Impairment charges were also recorded on assets held for sale that were not part of a restructuring program of $0.2 million and $0.7 million during the years ended December 31, 2018 and 2017, respectively, in other operating expenses, net within the combined statements of earnings. These charges related to the impairment of various parcels of land and buildings that were not part of a restructuring program and that Aaron’s SpinCo decided not to utilize for future expansion. Impairment charges on assets held for sale recorded in other operating expenses, net were not significant in 2019.

Net gains of $1.7 million were recognized during the year ended December 31, 2019 related to the sale of four former company-operated store properties for a total selling price of $2.6 million. The sales proceeds were recorded in proceeds from sales of property, plant and equipment in the combined statements of cash flows and the net gains were recorded as a reduction to other operating expenses, net in the combined statements of earnings. Net gains of $0.4 million were recognized during the year ended December 31, 2018 related to the disposal of certain land and buildings that were closed under the 2016 and 2017 restructuring plans as described in Note 11 to these combined financial statements. These gains were recorded as a reduction to restructuring expenses, net within the combined statements of earnings. Gains and losses on the disposal of assets held for sale were not significant in 2017.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

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 amount of goodwill is not recoverable from future cash flows. Goodwill is not amortized but is subject to an impairment test at the reporting unit level annually as of October 1 and more frequently if events or circumstances indicate that impairment may have occurred. Factors which could necessitate an interim impairment assessment include a sustained decline in the Aaron’s, Inc. stock price, prolonged negative industry or economic trends and significant underperformance relative to historical results, projected future operating results, or if Aaron’s SpinCo fails to successfully execute on one or more elements of its strategic plans. Aaron’s SpinCo completed its annual goodwill impairment test as of October 1, 2019 and determined that no impairment had occurred. Aaron’s SpinCo determined that there were no events that occurred or circumstances that changed in the fourth quarter of 2019 that would more likely than not reduce the fair value of its reporting unit below its carrying amount. See Note 15 for further details on the full impairment of goodwill recorded during the first quarter of 2020.

Segment Reporting

Management has concluded that the Company has one operating segment based on the nature of the financial information that is regularly reviewed by the Chief Operating Decision Maker, which is used to assess performance and allocate resources. We have also concluded that the Company has one reporting unit due to the fact that the components included within the operating segment have similar economic characteristics, such as the nature of the products and services provided, the nature of the customers we serve, and the interrelated nature of the components that are aggregated to form the sole reporting unit.

Other Intangibles

Other intangibles include customer relationships, non-compete agreements, reacquired franchise rights, customer lease contracts and expanded customer base intangible assets acquired in connection with store-based business acquisitions, asset acquisitions of customer contracts, and franchisee acquisitions. The customer relationship intangible asset is amortized on a straight-line basis over a three-year estimated useful life. The customer lease contract intangible asset is amortized on a straight-line basis over a one-year estimated useful life. The non-compete intangible asset is amortized on a straight-line basis over the life of the agreement (generally one to five years). The expanded customer base intangible asset represents the estimated fair value paid in an asset acquisition for the ability to advertise and execute lease agreements with a larger pool of customers in the respective markets, and is generally amortized on a straight-line basis over two to six years. Acquired franchise rights are amortized on a straight-line basis over the remaining life of the franchisee’s ten-year license term.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

 

     December 31,  

(In Thousands)

   2019      2018  

Accounts Payable

   $ 80,173    $ 78,415

Accrued Insurance Costs

     44,032      40,423

Accrued Salaries and Benefits

     33,122      32,258

Accrued Real Estate and Sales Taxes

     21,129      21,513

Deferred Rent1

     —          17,598

Other Accrued Expenses and Liabilities1

     42,140      52,182
  

 

 

    

 

 

 
   $ 220,596    $ 242,389
  

 

 

    

 

 

 

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

1 

Amounts as of December 31, 2019 were impacted by the January 1, 2019 adoption of ASC 842. Upon transition to ASC 842, the remaining balances of deferred rent, lease incentives, and closed store reserve were reclassified as a reduction to the operating lease right-of-use asset in the accompanying combined balance sheets.

Insurance Reserves

Estimated insurance reserves are accrued primarily for workers compensation, vehicle liability, general liability and group health insurance benefits provided to employees. Insurance reserves are recorded within accrued insurance costs in accounts payable and accrued expenses in the combined balance sheets. 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. This analysis is based upon an assessment of the likely outcome or historical experience. Aaron’s SpinCo makes periodic prepayments to its insurance carriers to cover the projected claims run off for both reported and incurred but not reported claims, considering its retention or stop loss limits. In addition, we have prefunding balances on deposit and other insurance receivables with the insurance carriers which are recorded within prepaid expenses and other assets in our combined balance sheets.

Asset Retirement Obligations

Aaron’s SpinCo 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 fair value. When the related liability is initially recorded, Aaron’s SpinCo 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 updated for changes in estimates. Upon settlement of the liability, Aaron’s SpinCo recognizes a gain or loss for any differences between the settlement amount and the liability recorded. Asset retirement obligations, which are included in accounts payable and accrued expenses in the combined balance sheets, amounted to approximately $2.7 million as of December 31, 2019 and 2018. The capitalized cost is depreciated over the useful life of the related asset.

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 management’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

Aaron’s SpinCo measures a liability related to the non-qualified deferred compensation plan, which represents benefits accrued for Aaron’s SpinCo participants that are part of the Parent plan and is valued at the quoted market prices of the participants’ investment elections, at fair value on a recurring basis. Aaron’s SpinCo measures assets held for sale at fair value on a nonrecurring basis and records impairment charges when they are deemed to be impaired. Aaron’s SpinCo maintains certain financial assets and liabilities, including fixed-rate long term debt, that are not measured at fair value but for which fair value is disclosed.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The fair values of Aaron’s SpinCo’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. The fair value of any revolving credit and term loan borrowings also approximate their carrying amounts.

Foreign Currency

The financial statements of Aaron’s SpinCo’s Canadian subsidiary are translated from the Canadian dollar functional currency 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 the subsidiary are recorded in accumulated other comprehensive (loss) income as a component of Parent’s equity. Aaron’s SpinCo assets include assets from Canadian operations of $28.2 million and $25.9 million as of December 31, 2019 and 2018, respectively.

Foreign currency remeasurement gains and losses are recorded due to Aaron’s SpinCo’s previous investment in PerfectHome, which was fully impaired during 2018, as well as remeasurement of the financial assets and liabilities of Aaron’s SpinCo’s Canadian stores between the Canadian dollar and the U.S. dollars. These net gains and losses are recorded as a component of other non-operating income (expense), net in the combined statements of earnings and were gains of $2.1 million during 2017. Foreign currency remeasurement losses were not significant in 2019 or 2018.

Invested Capital

Invested capital in the combined balance sheets and combined statements of parent’s equity represents Parent’s historical investment in Aaron’s SpinCo, the accumulated net earnings after taxes and the net effect of the transactions with and allocations from Parent.

Supplemental Disclosure of Non-Cash Investing Transactions

The purchase price for the acquisition of certain franchisees made during the years ended December 31, 2019 and 2018 included the non-cash settlement of pre-existing accounts receivable the franchisees owed the Company of $1.7 million and $5.4 million, respectively. This non-cash consideration has been excluded from the line “Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired” in the investing activities section of the combined statements of cash flows for the respective periods.

During the year ended December 31, 2018, Aaron’s SpinCo entered into transactions to acquire and sell certain customer agreements and related lease merchandise with third parties which were accounted for as asset acquisitions and asset disposals. The fair value of the non-cash consideration exchanged in these transactions was $0.6 million.

As described in Note 2 to these combined financial statements, the purchase price for the acquisition of SEI during the year ended December 31, 2017 included the non-cash settlement of pre-existing accounts receivable that SEI owed Aaron’s SpinCo of $3.5 million.

Hurricane Impact

During the third and fourth quarters of 2017, Hurricanes Harvey and Irma resulted in property damages (primarily in-store and on-lease merchandise, store leasehold improvements and furniture and fixtures), increased customer-related accounts receivable allowances and lease merchandise allowances, and lost lease revenue due to store closures. During the year ended December 31, 2017, pre-tax losses of $3.7 million were recorded related to

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

property damages and remediation costs and $0.2 million for increases in its accounts receivable allowance and lease merchandise allowances from customers in the impacted areas. $2.7 million of pre-tax income was recognized for estimated property-related insurance proceeds in 2017. The property damage losses, net of estimated property-related insurance proceeds, and the customer-related allowances were recorded as a reduction to other operating expenses, net and an increase to the provision for lease merchandise write-offs, respectively, in the combined statements of earnings during the year ended December 31, 2017.

During the years ended December 31, 2019 and 2018, insurance recovery gains of $4.5 million and $0.9 million, respectively, were recognized related to the settlement of property damage claims and business interruption claims, which are recorded within other operating expenses, net in the combined statements of earnings.

Recent Accounting Pronouncements

Adopted

Revenue Recognition. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). ASU 2014-09 replaces substantially all existing revenue recognition guidance with a single, comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods and services to customers at the amount to which it expects to be entitled in exchange for transferring those goods or services. On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning on January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

The standard changed the timing of recognition of store pre-opening revenue from franchisees. Previously, our accounting policy was to recognize initial franchise store pre-opening revenue when earned, which is generally when a new store opens. Under Topic 606, the initial franchise pre-opening services are not considered distinct from the continuing franchise services as they would not transfer a benefit to the franchisee directly without use of the franchise license and should be bundled with the franchise license as a single performance obligation. As a result, the pre-opening revenues is recognized from the store opening date over the remaining life of the franchise license term.

The standard also changed the presentation of certain fees charged to franchisees, primarily advertising fees. Previously, there was diversity in practice and advertising fees charged to franchisees were recorded as a reduction to advertising costs, which is classified within other operating expenses, net in the combined statements of earnings. Topic 606 resulted in the presentation of advertising fees charged to franchisees to be reported as franchise royalties and other revenues in the combined statements of earnings, instead of as a reduction to advertising costs.

We adopted the standard on January 1, 2018 using the modified retrospective approach and recorded a pre-tax adjustment to opening invested capital and deferred revenue of $2.4 million on January 1, 2018.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The impact of adoption on the combined statements of earnings and balance sheets was as follows:

Combined Statements of Earnings

 

Year Ended December 31, 2018

                    

(In Thousands)

   As
Reported
     Balance
Without
ASC 606
Adoption
     Effect of
Change
Higher/
(Lower)
 

Franchise Royalties and Other Revenues

   $ 46,654    $ 38,084    $ 8,570

Other Operating Expenses, Net

     431,158      423,946      7,212

Operating Profit

     100,972      99,614      1,358

Earnings Before Income Taxes

     63,568      62,210      1,358

Income Taxes

     12,915      12,582      333
  

 

 

    

 

 

    

 

 

 

Net Earnings

   $ 50,653    $ 49,628    $ 1,025
  

 

 

    

 

 

    

 

 

 

Combined Balance Sheets

 

Balance at December 31, 2018

                    

(In Thousands)

   As Reported      Balance
Without
ASC 606
Adoption
     Effect of
Change
Higher/
(Lower)
 

Deferred Income Taxes Payable

   $ 137,341    $ 137,631    $ (290

Customer Deposits and Advance Payments

     46,421      45,427      994

Total Liabilities

     850,903      850,199      704

Invested Capital

     782,996      783,700      (704

Total Parent’s Equity

     781,909      782,613      (704
  

 

 

    

 

 

    

 

 

 

Total Liabilities & Parent’s Equity

   $ 1,632,812    $ 1,632,812    $ —  
  

 

 

    

 

 

    

 

 

 

Combined Statements of Comprehensive Income

 

Year Ended December 31, 2018

                    

(In Thousands)

   As
Reported
     Balance
Without
ASC 606
Adoption
     Effect of
Change
Higher/
(Lower)
 

Comprehensive Income

   $ 48,792    $ 47,767    $ 1,025
  

 

 

    

 

 

    

 

 

 

Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (“ASC 842”), which requires lessees to recognize assets and liabilities for most leases and changes certain aspects of lessor accounting, among other things. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Companies must use a modified retrospective approach to adopt ASC 842; however, we adopted an optional transition method in which entities are permitted to not apply the requirements of ASC 842 in the comparative periods presented within the financial statements in the year of adoption, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The application of this optional transition method resulted in a cumulative-effect adjustment of

 

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Table of Contents
Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

$2.5 million representing an increase to Aaron’s SpinCo’s January 1, 2019 invested capital balance, net of tax. The increase to invested capital is due primarily to the recognition of deferred gains recorded under previous sale and operating leaseback transactions. The ASC 842 transition guidance requires companies to recognize any deferred gains not resulting from off-market terms as a cumulative adjustment to retained earnings upon adoption of ASC 842.

As a lessor, a majority of Aaron’s SpinCo’s revenue generating activities are within the scope of ASC 842. The new standard did not materially impact the timing of revenue recognition. Aaron’s SpinCo has customer lease agreements with lease and non-lease components that fall within the scope of ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”). Management has elected to aggregate these components into a single component for all classes of underlying assets as the lease and non-lease components generally have the same timing and pattern of transfer.

The new standard also impacts Aaron’s SpinCo as a lessee by requiring substantially all of its operating leases to be recognized on the balance sheet as operating lease right-of-use assets and operating lease liabilities. See Note 7 to these combined financial statements for further details regarding Aaron’s SpinCo’s leasing activities as a lessee. Management elected to adopt a package of practical expedients offered by the FASB which removes the requirement to reassess whether expired or existing contracts contain leases and removes the requirement to reassess the lease classification for any existing leases prior to the adoption date of January 1, 2019. Additionally, management has elected the practical expedient to include both lease and non-lease components as a single component and account for it as a lease.

Cloud Computing Arrangements. In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The intent of the standard is to reduce diversity in practice in accounting for the costs of implementing cloud computing arrangements that are service contracts. Under the new standard, entities will be required to apply the accounting guidance as prescribed by ASC 350-40, Internal Use Software, in determining which implementation costs should be capitalized as assets or expensed as incurred. The internal-use software guidance requires the capitalization of certain costs incurred during the application development stage of an internal-use software project, while requiring companies to expense all costs incurred during preliminary and post-implementation project stages. As a result, certain implementation costs which were previously expensed are now eligible for capitalization under ASU 2018-15. The standard may be applied either prospectively to all implementation costs incurred after the adoption date or retrospectively. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Management elected to early adopt ASU 2018-15 on a prospective basis effective January 1, 2019, and the impact to the combined financial statements was not significant. Costs eligible for capitalization will be capitalized within prepaid expenses and other assets and expensed through other operating expenses, net in the combined balance sheets and statements of earnings, respectively.

Pending Adoption

Financial Instruments - Credit Losses. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“CECL”). The main objective of the update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by companies at each reporting date. For trade and other receivables, held to maturity debt securities and other instruments, companies will be required to use a new forward-looking “expected losses” model that generally will result in the recognition of allowances for losses earlier than under current accounting guidance. The standard will be adopted on a modified retrospective basis with a cumulative-effect adjustment to invested capital as of the beginning of the first reporting period in which the guidance is

 

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Table of Contents
Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

effective. ASU 2016-13 is effective for Aaron’s SpinCo in the first quarter of 2020. Aaron’s SpinCo’s operating lease activities will not be impacted by ASU 2016-13, as operating lease receivables are not in the scope of the CECL standard, and the implementation of CECL will not have a material impact to Aaron’s SpinCo’s combined financial statements.

Intangibles - Goodwill and Other. In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to measure an impairment of goodwill, if any, by eliminating the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. In accordance with the amendment, entities should perform goodwill impairment tests by comparing the carrying value of their reporting units to their fair value. If the carrying value of the reporting unit exceeds the fair value, an entity should record an impairment charge for the amount by which its carrying amount exceeds its reporting unit’s fair value; however, the charge recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for Aaron’s SpinCo in the first quarter of 2020. The Company concluded that the need for an interim goodwill impairment test was triggered for Aaron’s SpinCo as of March 31, 2020 and applied the simplification guidance in ASU 2017-04 in the test. The Company determined the Aaron’s SpinCo goodwill was fully impaired and recorded a goodwill impairment loss of $446.9 million during the three months ended March 31, 2020. See Note 15 for further discussion.

 

NOTE

2: ACQUISITIONS

During the years ended December 31, 2019, 2018 and 2017, cash payments, net of cash acquired, related to the acquisitions of businesses and contracts were $14.3 million, $189.9 million and $145.6 million, respectively. Cash payments made during the years ended December 31, 2019, 2018 and 2017 principally relate to the acquisitions of franchised stores described below.

The franchisee acquisitions have been accounted for as business combinations and the results of operations of the acquired businesses are included in Aaron’s SpinCo’s results of operations from their dates of acquisition. The effect of Aaron’s SpinCo’s acquisitions of businesses and contracts to the combined financial statements, other than the specific 2018 and 2017 franchisee acquisitions described below, was not significant for the years ended December 31, 2019, 2018 and 2017.

Franchisee Acquisitions - 2018

During 2018, Aaron’s SpinCo acquired 152 franchised stores operated by franchisees for an aggregate purchase price of $190.2 million, exclusive of the settlement of pre-existing receivables and post-closing working capital settlements.

The acquired operations generated revenues of $183.3 million and $72.0 million and earnings before income taxes of $3.3 million and $0.8 million during the years ended December 31, 2019 and 2018, respectively, which are included in our combined statements of earnings for the respective periods. The results of the acquired operations were impacted by acquisition-related transaction and transition costs, amortization expense of the various intangible assets recorded from the acquisitions, and restructuring charges incurred under Aaron’s SpinCo’s restructuring programs associated with the closure of a number of acquired stores. The revenues and earnings before income taxes of the acquired operations discussed above have not been adjusted for estimated non-retail sales, franchise royalties and fees, and related expenses that Aaron’s SpinCo could have generated as revenue and expenses to Aaron’s SpinCo from the franchisees during the years ended December 31, 2019 and 2018 had the transaction not been completed.

The 2018 acquisitions are benefiting Aaron’s SpinCo’s omnichannel platform through added scale, strengthening its presence in certain geographic markets, and enhancing operational control, including compliance, and enabling Aaron’s SpinCo to execute its business transformation initiatives on a broader scale. The following

 

F-21


Table of Contents
Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

table presents summaries of the fair value of the assets acquired and liabilities assumed in the franchisee acquisitions as of the respective acquisition dates:

 

(in Thousands)

   Final Amounts
Recognized as
of Acquisition
Dates
 

Purchase Price

   $ 190,167

Add: Settlement of Accounts Receivable from Pre-existing Relationship

     5,405

Add: Working Capital Adjustments

     155
  

 

 

 

Aggregate Consideration Transferred

     195,727

Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed

  

Cash and Cash Equivalents

     50

Lease Merchandise

     59,616

Property, Plant and Equipment

     5,568

Operating Lease Right-of-Use Assets1

     4,338

Other Intangibles2

     23,322

Prepaid Expenses and Other Assets

     1,241
  

 

 

 

Total Identifiable Assets Acquired

     94,135

Accounts Payable and Accrued Expenses

     (977

Customer Deposits and Advance Payments

     (5,156
  

 

 

 

Total Liabilities Assumed

     (6,133

Goodwill3

     107,725
  

 

 

 

Net Assets Acquired (excluding Goodwill)

   $ 88,002
  

 

 

 

 

1

As of the respective acquisition dates, Aaron’s SpinCo had not yet adopted ASC 842. As such, there were no operating lease right-of-use assets or operating lease liabilities recognized within the combined financial statements at the time of acquisition. Aaron’s SpinCo recognized operating lease right-of-use assets and operating lease liabilities for the acquired stores as part of the transition to ASC 842 on January 1, 2019. We finalized our valuation of assumed favorable and unfavorable real estate operating leases during 2019, which also impacted the valuation of the customer lease contract and customer relationship intangible assets. As a result, measurement period adjustments of $4.3 million were recorded within operating lease right-of-use assets as net favorable, with a corresponding reduction of $1.2 million within other intangibles, net in Aaron’s SpinCo’s combined balance sheets. The adjustment also resulted in the recognition of immaterial adjustments to other operating expenses, net and restructuring expenses, net during 2019 to recognize expense that would have been recorded in prior periods had the favorable lease and intangible assets been recorded as of the acquisition date.

2 

Identifiable intangible assets are further disaggregated in the table set forth below.

3 

The total goodwill recognized in conjunction with the franchisee acquisitions is expected to be deductible for tax purposes. The purchase price exceeded the fair value of the net assets acquired, which resulted in the recognition of goodwill, primarily due to synergies created from the expected benefits to Aaron’s SpinCo’s omnichannel platform, implementation of Aaron’s SpinCo’s operational capabilities, and control of Aaron’s SpinCo’s brand name in the acquired geographic markets. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.

 

F-22


Table of Contents
Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The intangible assets attributable to the franchisee acquisitions are comprised of the following:

 

     Fair Value
(in thousands)
     Weighted
Average
Useful
Life
(in years)
 

Non-compete Agreements

   $ 1,872      3.0  

Customer Contracts

     7,457      1.0  

Customer Relationships

     9,330      3.0  

Reacquired Franchise Rights

     4,663      3.9  
  

 

 

    

Total Acquired Intangible Assets1

   $ 23,322   
  

 

 

    

 

1 

Acquired definite-lived intangible assets have a total weighted average life of 2.5 years.

We incurred $1.7 million of acquisition-related costs in connection with the franchisee acquisitions, substantially all of which were incurred during 2018. These costs were included in other operating expenses, net in the combined statements of earnings.

Franchisee Acquisition - 2017

On July 27, 2017, Aaron’s SpinCo acquired substantially all of the assets and liabilities of the store operations of a franchisee, SEI, for approximately $140 million in cash. At the time of the acquisition, those store operations served approximately 90,000 customers through 104 stores in 11 states primarily in the Northeast. The acquisition is benefiting Aaron’s SpinCo’s omnichannel platform through added scale, strengthening its presence in certain geographic markets, and enhancing operational control, including compliance, and enabling Aaron’s SpinCo to execute its business transformation initiatives on a broader scale.

The acquired operations generated revenues of $122.5 million, $129.4 million, and $58.3 million, and earnings before income taxes of $3.6 million, $11.0 million, and $2.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. These revenues and earnings before income taxes are included in our combined statements of earnings since the date of acquisition. Included in the earnings before income taxes of the acquired operations are acquisition-related transaction and transition costs, amortization expense of the various intangible assets recorded from the acquisition and restructuring expenses associated with the closure of several acquired stores. The revenues and earnings before income taxes above have not been adjusted for estimated non-retail sales, franchise royalties and fees, and related expenses that Aaron’s SpinCo could have generated from SEI, as a franchisee, from July 27, 2017 through December 31, 2019 had the transaction not been completed.

 

F-23


Table of Contents
Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The SEI acquisition has been accounted for as a business combination, and the results of operations of the acquired business is included in Aaron’s SpinCo’s results of operations from the date of acquisition. The following table presents a summary of the fair value of the assets acquired and liabilities assumed in the SEI franchisee acquisition:

 

(In Thousands)

   Final Amounts
Recognized as
of Acquisition
Date
 

Purchase Price

   $ 140,000

Add: Settlement of Accounts Receivable from Pre-existing Relationship

     3,452

Less: Reimbursement for Insurance Costs

     (100

Add: Working Capital Adjustments

     188
  

 

 

 

Consideration Transferred

     143,540

Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed

  

Cash and Cash Equivalents

     34

Accounts Receivable

     1,345

Lease Merchandise

     40,941

Property, Plant and Equipment

     8,832

Other Intangibles1

     13,779

Prepaid Expenses and Other Assets

     440
  

 

 

 

Total Identifiable Assets Acquired

     65,371

Accounts Payable and Accrued Expenses

     (6,698

Customer Deposits and Advance Payments

     (2,500

Capital Leases

     (4,514
  

 

 

 

Total Liabilities Assumed

     (13,712
  

 

 

 

Goodwill2

     91,881
  

 

 

 

Net Assets Acquired (excluding Goodwill)

   $ 51,659
  

 

 

 

 

1 

Identifiable intangible assets are further disaggregated in the table set forth below.

2 

The total goodwill recognized in conjunction with the franchisee acquisitions is expected to be deductible for tax purposes. The purchase price exceeded the fair value of the net assets acquired, which resulted in the recognition of goodwill, primarily due to synergies created from the expected benefits to Aaron’s SpinCo’s omnichannel platform, implementation of Aaron’s SpinCo’s operational capabilities, and control of Aaron’s SpinCo’s brand name in the acquired geographic markets. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.

 

F-24


Table of Contents
Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The estimated intangible assets attributable to the SEI acquisition are comprised of the following:

 

     Fair Value
(in thousands)
     Weighted
Average
Useful
Life
(in years)
 

Non-compete Agreements

   $ 1,244      5.0  

Customer Lease Contracts

     2,154      1.0  

Customer Relationships

     3,215      2.0  

Reacquired Franchise Rights

     3,640      4.1  

Favorable Operating Leases1

     3,526      11.3  
  

 

 

    

Total Acquired Intangible Assets2

   $ 13,779   
  

 

 

    

 

1

Upon the adoption of ASC 842 on January 1, 2019, Aaron’s SpinCo reclassified the remaining favorable operating lease asset from other intangibles, net to operating lease right-of-use assets within its combined balance sheets.

2 

Acquired definite-lived intangible assets have a total weighted average life of 5.1 years.

We incurred $2.1 million of acquisition-related costs in connection with the franchisee acquisition, substantially all of which were incurred during the third quarter of 2017. These costs were included in other operating expenses, net in the combined statements of earnings.

NOTE 3: GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table provides information related to the carrying amount of Aaron’s SpinCo’s goodwill:

 

(In Thousands)

      

Balance at January 1, 2018

   $ 334,871

Acquisitions

     110,469

Disposals, Currency Translation and Other Adjustments

     (984

Acquisition Accounting Adjustments

     13
  

 

 

 

Balance at December 31, 2018

     444,369

Acquisitions

     6,526

Disposals, Currency Translation and Other Adjustments

     (362

Acquisition Accounting Adjustments

     (2,752
  

 

 

 

Balance at December 31, 2019

   $ 447,781
  

 

 

 

See further details regarding the full impairment of Aaron’s SpinCo’s goodwill recorded during the first quarter of 2020 in Note 15.

 

F-25


Table of Contents
Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Definite-Lived Intangible Assets

The following table summarizes information related to Aaron’s SpinCo’s definite-lived intangible assets at December 31:

 

     2019      2018  

(In Thousands)

   Gross      Accumulated
Amortization
    Net      Gross      Accumulated
Amortization
    Net  

Customer Relationships

   $ 10,478    $ (4,783   $ 5,695    $ 14,321    $ (4,198   $ 10,123

Reacquired Franchise Rights

     8,428      (3,307     5,121      9,739      (2,624     7,115

Non-Compete Agreements

     4,398      (2,488     1,910      4,304      (1,319     2,985

Customer Lease Contracts

     804      (503     301      8,073      (2,999     5,074

Acquired Favorable Operating Leases1

     —          —         —          4,288      (722     3,566

Expanded Customer Base

     1,720      (513     1,207      1,090      (179     911
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 25,828    $ (11,594   $ 14,234    $ 41,815    $ (12,041   $ 29,774
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

1 

Upon the adoption of ASC 842 on January 1, 2019, Aaron’s SpinCo reclassified the remaining favorable operating lease asset from other intangibles, net to operating lease right-of-use assets within its combined balance sheets.

Total amortization expense of Aaron’s SpinCo’s definite-lived intangible assets included in other operating expenses, net in the accompanying combined statements of earnings was $13.3 million, $10.7 million and $4.1 million during the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, estimated future amortization expense for the next five years related to Aaron’s SpinCo’s definite-lived intangible assets is as follows:

 

(In Thousands)

      

2020

   $ 6,581

2021

     4,355

2022

     1,428

2023

     843

2024

     468

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, 2019      December 31, 2018  

(In Thousands)

   Level 1      Level 2     Level 3      Level 1      Level 2     Level 3  

Deferred Compensation Liability

   $ —      $ (11,048   $ —      $ —      $ (10,259   $ —  

Parent maintains the Aaron’s, Inc. Deferred Compensation Plan as described in Note 13 to these combined financial statements. The liability pertaining to the Aaron’s SpinCo’s participants is recorded in accounts payable and accrued expenses in the combined balance sheets. The liability represents benefits accrued for Aaron’s SpinCo plan participants and 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.

 

F-26


Table of Contents
Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

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, 2019      December 31, 2018  

(In Thousands)

   Level 1      Level 2      Level 3      Level 1      Level 2      Level 3  

Assets Held for Sale

   $ —      $ 10,131    $ —      $ —      $ 6,589    $ —  

Assets classified as held for sale are recorded at the lower of carrying value or fair value less estimated costs to sell, and any adjustment is recorded in other operating expenses, net or restructuring expenses, net (if the asset is a part of restructuring programs as described in Note 11) in the combined statements of earnings. The highest and best use of the assets held for sale is as real estate land parcels for development or real estate properties for use or lease; however, Aaron’s SpinCo has chosen not to develop or use these properties.

Certain Financial Assets and Liabilities Not Measured at Fair Value

The following table summarizes the fair value of liabilities that are not measured at fair value in the combined balance sheets, but for which the fair value is disclosed:

 

     December 31, 2019      December 31, 2018  

(In Thousands)

   Level 1      Level 2     Level 3      Level 1      Level 2     Level 3  

Fixed-Rate Long Term Debt1

   $ —      $ (123,580   $ —      $ —      $ (184,088   $ —  

 

1

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 amount of fixed-rate long term debt was $120.0 million and $180.0 million at December 31, 2019 and 2018, respectively.

NOTE 5: PROPERTY, PLANT AND EQUIPMENT

The following is a summary of Aaron’s SpinCo’s property, plant, and equipment:

 

     December 31,  

(In Thousands)

   2019      2018  

Land

   $ 16,427    $ 19,950

Buildings and Improvements

     54,923      67,081

Leasehold Improvements and Signs

     75,762      73,011

Fixtures and Equipment

     215,605      182,760

Software - Internal-Use

     121,075      101,757

Assets Under Finance Leases:

     

with Related Parties

     —          872

with Unrelated Parties

     2,690      12,742

Construction in Progress

     4,483      9,165
  

 

 

    

 

 

 
     490,965      467,338

Less: Accumulated Depreciation and Amortization1

     (283,664      (264,585
  

 

 

    

 

 

 
   $ 207,301    $ 202,753
  

 

 

    

 

 

 

 

1

Accumulated amortization of internal-use software development costs amounted to $70.9 million and $55.5 million as of December 31, 2019 and 2018, respectively.

 

F-27


Table of Contents
Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Depreciation expense on assets recorded under finance leases is included in other operating expenses, net and was $1.5 million, $1.9 million and $2.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. Finance leases as of December 31, 2019 relate to vehicles assumed as part of the SEI acquisition. Finance leases as of December 31, 2018 primarily consist of buildings and improvements, as well as vehicles assumed as part of the SEI acquisition. Assets under finance leases with related parties included $0.8 million in accumulated depreciation as of December 31, 2018. Assets under finance leases with unrelated parties included $1.9 million and $9.7 million in accumulated depreciation as of December 31, 2019 and 2018, respectively.

NOTE 6: REVENUE RECOGNITION

The following table disaggregates revenue by source:

 

     Year Ended December 31,  

(In Thousands)

   2019      2018      2017  

Lease Revenues and Fees

   $ 1,570,358    $ 1,509,529    $ 1,433,350

Retail Sales

     38,474      31,271      27,465

Non-Retail Sales

     140,950      207,262      270,253

Franchise Royalties and Fees

     33,432      44,815      48,278

Other

     1,263      1,839      2,556
  

 

 

    

 

 

    

 

 

 

Total1

   $ 1,784,477    $ 1,794,716    $ 1,781,902
  

 

 

    

 

 

    

 

 

 

 

1

Includes revenues from Canadian operations of $24.7 million, $21.3 million, and $18.3 million during the years ended December 31, 2019, December 31, 2018, and December 31, 2017, which are primarily lease revenues and fees.

Lease Revenues and Fees

Aaron’s SpinCo provides merchandise, consisting primarily of furniture, home appliances, electronics and accessories to its customers for lease under certain terms agreed to by the customer. Aaron’s SpinCo’s stores and its e-commerce platform offer leases with flexible terms that can be renewed up to 12, 18 or 24 months. Aaron’s SpinCo does not require deposits upon inception of customer agreements. The customer has the right to acquire ownership either through an early purchase option or through payment of all required lease payments. The agreements are cancelable at any time by either party without penalty.

Lease revenues are recognized as revenue net of related sales taxes in the month they are earned. Lease payments received prior to the month earned are recorded as deferred lease revenue, and this amount is included in customer deposits and advance payments in the accompanying combined balance sheets. Lease revenues are recorded net of a provision for returns and uncollectible renewal payments.

All of Aaron’s SpinCo’s customer agreements are considered operating leases. Aaron’s SpinCo maintains ownership of the lease merchandise until all payment obligations are satisfied under sales and lease ownership agreements. Initial direct costs related to customer agreements are expensed as incurred and have been classified as other operating expenses, net in the combined statements of earnings. The statement of earnings effect of expensing the initial direct costs as incurred are not materially different from amortizing initial direct costs over the lease term.

Substantially all lease revenues and fees were within the scope of ASC 842, Leases, during the year ended December 31, 2019 and within the scope of ASC 840, Leases, during the years ended December 31, 2018 and

 

F-28


Table of Contents
Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

December 31, 2017. The Company had $24.7 million and $17.7 million of other revenue during the years ended December 31, 2019 and December 31, 2018, respectively, within the scope of ASC 606, Revenue from Contracts with Customers, and $4.9 million of other revenue within the scope of ASC 605, Revenue from Contracts with Customers, during the year ended December 31, 2017. Lease revenues and fees are recorded within lease and retail revenues in the accompanying combined statements of earnings.

Retail and Non-Retail Sales

Revenues from the retail sale of merchandise to customers are recognized at the point of sale. Generally, the transfer of control occurs near or at the point of sale for retail sales. Revenues for the non-retail sale of merchandise to franchisees are recognized when control transfers to the franchisee, which is upon delivery of the merchandise.

Sales of lease merchandise to franchisees and to other customers are recorded within non-retail sales and lease and retail revenues, respectively, in the accompanying combined statements of earnings. All retail and non-retail sales revenue is within the scope of ASC 606, Revenue from Contracts with Customers, during the years ended December 31, 2019 and December 31, 2018, and within the scope of ASC 605, Revenue from Contracts with Customers, during the year ended December 31, 2017.

Franchise Royalties and Fees

Franchisees pay an ongoing royalty of 6% of the weekly cash revenue collections, which is recognized as the fees become due.

Aaron’s SpinCo guarantees certain debt obligations of some of the franchisees and receives guarantee fees based on the outstanding debt obligations of such franchisees. Refer to Note 10 of these combined financial statements for additional discussion of the franchise-related guarantee obligation. Aaron’s SpinCo also charges fees for advertising efforts that benefit the franchisees, which are recognized at the time the advertising takes place.

Substantially all franchise royalties and fees revenue is within the scope of ASC 606, Revenue from Contracts with Customers, during the years ended December 31, 2019 and December 31, 2018, and within the scope of ASC 605, Revenue from Contracts with Customers, during the year ended December 31, 2017. Of the franchise royalties and fees, $25.5 million, $33.3 million, and $44.6 million during the years ended December 31, 2019, December 31, 2018, and December 31, 2017 is related to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers. The remaining revenue is primarily related to fees collected for pre-opening services, which are being deferred and recognized as revenue over the agreement term, and advertising fees charged to franchisees. Franchise royalties and fees are recorded within franchise royalties and other revenue in the accompanying combined statements of earnings.

NOTE 7: LEASES

Lessor Information

Refer to Note 6 to these combined financial statements for further information about Aaron’s SpinCo’s revenue generating activities as a lessor. All of Aaron’s SpinCo’s customer agreements are considered operating leases, and Aaron’s SpinCo currently does not have any sales-type or direct financing leases.

Lessee Information

As a lessee, Aaron’s SpinCo leases retail store and warehouse space for most of its store-based operations as well as management and information technology space for store and e-commerce supporting functions under

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

operating leases expiring at various times through 2033. To the extent that a leased retail store or warehouse space is vacated prior to the termination of the lease, the spaces may be subleased to third parties while Aaron’s SpinCo maintains its primary obligation as the lessee in the head lease. Aaron’s SpinCo leases transportation vehicles under operating and finance leases, most of which generally expire during the next three years. The vehicle leases generally include a residual value that is guaranteed to the lessor, which ensures that the vehicles will be returned to the lessor in reasonable working condition. Aaron’s SpinCo also leases various IT equipment such as printers and computers under operating leases, most of which generally expire during the next three years. For all of its leases in which it is a lessee, Aaron’s SpinCo has elected to include both the lease and non-lease components as a single component and account for it as a lease.

Rental charges incurred, net of sublease receipts, was $106.6 million, $108.1 million, and $100.2 million in the years ended December 31, 2019, 2018, and 2017, respectively, which are primarily classified within other operating expenses, net in the combined statements of earnings, and to a lesser extent capitalized into the cost of lease merchandise and subsequently depreciated. Aaron’s SpinCo also incurred right-of-use asset impairment charges of $28.4 million during the year ended December 31, 2019 under ASC 842 and contractual lease obligation charges, net of estimated sublease receipts of $2.1 million and $13.4 million in the years ended December 31, 2018 and 2017, respectively, related to the closure of company-operated stores. These charges are reported within restructuring expenses, net in the combined statements of earnings.

Finance lease costs are comprised of the amortization of right-of-use assets and the interest accretion on discounted lease liabilities, which are recorded within other operating expenses, net and interest expense, respectively, in the combined statements of earnings. Operating lease costs are recorded on a straight-line basis within other operating expenses, net. For stores that are related to restructuring programs as described in Note 11, operating lease costs recorded subsequent to any necessary operating lease right-of-use asset impairment charges are recognized in a pattern that is generally accelerated within restructuring expenses, net in the combined statements of earnings. Aaron’s SpinCo’s total lease expense is comprised of the following:

 

     Year Ended December 31,  

(In Thousands)

   2019  

Finance Lease cost:

  

Amortization of Right-of-Use Assets

   $ 1,542

Interest on Lease Liabilities

     363
  

 

 

 

Total Finance Lease cost:

     1,905

Operating Lease cost:

  

Operating Lease cost classified within Other Operating Expenses, Net1

     107,581

Operating Lease cost classified within Restructuring Expenses, Net

     3,339

Sublease Receipts2

     (2,644
  

 

 

 

Total Operating Lease cost:

     108,276
  

 

 

 

Total Lease cost

   $ 110,181
  

 

 

 

 

1 

Includes short-term and variable lease costs, which are not significant. Short-term lease expense is defined as leases with a lease term of greater than one month, but not greater than 12 months.

2 

Aaron’s SpinCo has anticipated future sublease receipts from executed sublease agreements of $2.7 million in 2020, $2.4 million in 2021, $1.5 million in 2022, $1.0 million in 2023, $0.5 million in 2024 and $0.3 million thereafter through 2025.

 

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AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Additional information regarding Aaron’s SpinCo’s leasing activities as a lessee is as follows:

 

     Year Ended
December 31,
 

(In Thousands)

   2019  

Cash Paid for amounts included in measurement of Lease Liabilities:

  

Operating Cash Flows for Finance Leases

   $ 411

Operating Cash Flows for Operating Leases

     121,864

Financing Cash Flows for Finance Leases

     2,493
  

 

 

 

Total Cash paid for amounts included in measurement of Lease Liabilities

     124,768

Right-of-Use Assets obtained in exchange for new Finance Lease Liabilities

     —    

Right-of-Use Assets obtained in exchange for new Operating Lease Liabilities

   $ 49,504

Supplemental balance sheet information related to leases is as follows:

 

(In Thousands)

   Balance Sheet Classification      December 31, 2019  

Assets

     

Operating Lease Assets

     Operating Lease Right-of-Use Assets      $ 305,257

Finance Lease Assets

     Property, Plant and Equipment, Net        768
     

 

 

 

Total Lease Assets

      $ 306,025
     

 

 

 

Liabilities

     

Operating Lease Liabilities

     Operating Lease Liabilities      $ 335,807

Finance Lease Liabilities

     Debt        2,670
     

 

 

 

Total Lease Liabilities

      $ 338,477
     

 

 

 

Most of Aaron’s SpinCo’s real estate 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. Aaron’s SpinCo currently does not have any real estate leases in which it considers the renewal options to be reasonably certain of exercise, as historical experience indicates that renewal options are not reasonably certain to be exercised. Additionally, Aaron’s SpinCo’s leases contain contractual renewal rental rates that are considered to be in line with market rental rates, and there are not significant economic penalties or business disruptions incurred by not exercising any renewal options.

Aaron’s SpinCo uses its incremental borrowing rate as the discount rate for its leases, as the implicit rate in the lease is not readily determinable. Below is a summary of the weighted-average discount rate and weighted-average remaining lease term for finance and operating leases:

 

     Weighted Average
Discount Rate1
    Weighted Average
Remaining Lease
Term (in years)
 

Finance Leases

     5.7     2  

Operating Leases

     3.6     5  

 

1

Upon adoption of ASC 842, discount rates for existing operating leases were established as of January 1, 2019.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Under the short-term lease exception provided within ASC 842, Aaron’s SpinCo does not record a lease liability or right-of-use asset for any leases that have a lease term of 12 months or less at commencement. Below is a summary of undiscounted finance and operating lease liabilities that have initial terms in excess of one year as of December 31, 2019. The table also includes a reconciliation of the future undiscounted cash flows to the present value of the finance and operating lease liabilities included in the combined balance sheets.

 

(In Thousands)

   Operating Leases      Finance Leases      Total  

2020

   $ 102,857    $ 2,006    $ 104,863

2021

     85,784      801      86,585

2022

     64,449      80      64,529

2023

     43,400      —          43,400

2024

     27,149      —          27,149

Thereafter

     42,694      —          42,694
  

 

 

    

 

 

    

 

 

 

Total Undiscounted Cash Flows

     366,333      2,887      369,220

Less: Interest

     30,526      217      30,743
  

 

 

    

 

 

    

 

 

 

Present Value of Lease Liabilities

   $ 335,807    $ 2,670    $ 338,477
  

 

 

    

 

 

    

 

 

 

Sale-Leaseback Transactions

In addition to the leasing activities described above, Aaron’s SpinCo entered into two separate sale and leaseback transactions related to a fulfillment and distribution center and three company-operated store properties during the fourth quarter of 2019. Aaron’s SpinCo received net proceeds of $8.1 million and recorded gains of $5.6 million related to the sale and leaseback transactions, which were classified within other operating expenses, net in the combined statements of earnings.

NOTE 8: INDEBTEDNESS

All of Parent’s debt obligations as of December 31, 2019 and December 31, 2018 and the related interest expense and unamortized debt issuance costs for the years then ended have been included within Aaron’s SpinCo’s combined financial statements because Aaron’s, Inc., as the primary obligor for the external debt agreements, is one of the legal entities forming the basis of Aaron’s SpinCo.

Following is a summary of Aaron’s SpinCo’s debt, net of unamortized debt issuance costs:

 

     December 31,  

(In Thousands)

   2019      2018  

Revolving Facility

   $ —        $ 16,000

Senior Unsecured Notes, 4.75%, Due in Installments through April 2021

     119,847      179,750

Term Loan, Due in Installments through September 2022

     218,513      223,837

Finance Lease Obligation:

     

with Related Parties

     —          123

with Unrelated Parties

     2,670      5,042
  

 

 

    

 

 

 

Total Debt1

     341,030      424,752

Less: Current Maturities

     83,886      83,778
  

 

 

    

 

 

 

Long-Term Debt

   $ 257,144    $ 340,974
  

 

 

    

 

 

 

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

1

Total debt as of December 31, 2019 and 2018 includes unamortized debt issuance costs of $1.0 million and $1.4 million, respectively. Aaron’s SpinCo also recorded $1.9 million and $2.6 million of debt issuance costs as of December 31, 2019 and 2018 related to the revolving credit facility within prepaid expenses and other assets in the combined balance sheets.

Revolving Credit and Term Loan Agreement

On January 21 and February 19, 2020, Parent amended its revolving credit and term loan agreement (the “Credit Agreement”) to, among other changes: (a) increase the revolving credit commitment from $400.0 million to $500.0 million, (b) increase borrowings under the term loan to $225.0 million, (c) extend the maturity date for the revolving credit commitment and term loan from September 18, 2022 to January 21, 2025, (d) amend the definition of adjusted EBITDA to exclude certain charges, and (e) modify certain other terms and conditions. The amended agreement continues to provide for quarterly repayment installments of $5.6 million under the $225.0 million term loan. The quarterly term loan repayment installments are payable on the last day of each March, June, September, and December beginning on December 31, 2020, with the remaining principal balance payable upon the maturity date of January 21, 2025. Prior to the amendment, the term loan outstanding balance was $219.4 million as of December 31, 2019, and the term loan interest rate was 3.05%.

The interest rate on the revolving credit and term loan agreement borrowings bear interest at an adjusted London Interbank Overnight (LIBO) rate plus a margin within a range of 1.25% to 2.25% depending on Parent’s total net debt to adjusted EBITDA ratio or, alternatively, the administrative agent’s prime rate plus a margin ranging from 0.25% to 1.25%, with the amount of such margin determined based upon the ratio of Parent’s total net debt to adjusted EBITDA. Total net debt refers to Parent consolidated total debt minus certain unrestricted cash, as defined in the Credit Agreement. Adjusted EBITDA refers to Parent consolidated net income before interest and tax expense, depreciation (other than lease merchandise depreciation), amortization expense, and other cash and non-cash charges as defined in the Credit Agreement.

The revolving credit and term loan agreement also provides for an uncommitted incremental facility increase option which, subject to certain terms and conditions, permits Parent 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 the greater of $250.0 million or any amount provided that the incremental borrowing does not result in a total debt to adjusted EBITDA ratio greater than 2.50:1.00, with such additional credit extensions provided by one or more lenders thereunder at their sole discretion.

Parent pays a commitment fee on unused balances, which ranges from 0.15% to 0.30% as determined by Parent’s ratio of total net debt to adjusted EBITDA. As of December 31, 2019, the amount available under the revolving credit component of the Credit Agreement was reduced by approximately $13.8 million for our outstanding letters of credit, resulting in availability of $386.2 million.

Senior Unsecured Notes

On April 14, 2014, Parent entered into note purchase agreements, as amended, pursuant to which Parent 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 commenced on July 14, 2014 and are due quarterly, and principal payments of $60.0 million commenced on April 14, 2017 and are due annually until maturity.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Financial Covenants

The revolving credit and term loan agreement, senior unsecured notes discussed above, and franchise loan program discussed in Note 10 to these combined financial statements contain financial covenants, which include requirements that Parent maintain ratios of (a) adjusted EBITDA plus lease expense to fixed charges of no less than 2.50:1.00 and (b) total debt to adjusted EBITDA of no greater than 3.00:1.00.

If Parent fails to comply with these covenants, Parent will be in default under these agreements, and all amounts could become due immediately. Under the revolving credit and term loan agreement, senior unsecured notes and franchise loan program, Parent may pay cash dividends in any year so long as, after giving pro forma effect to the dividend payment, Parent maintains compliance with its financial covenants and no event of default has occurred or would result from the payment. At December 31, 2019, Parent was in compliance with all covenants related to its outstanding debt.

Future principal maturities under Aaron’s SpinCo debt and finance lease obligations as of December 31, 2019 are as follows:

 

(In Thousands)

      

2020

   $ 84,321

2021

     83,271

2022

     174,453

2023

     —    

2024

     —    

Thereafter

     —    
  

 

 

 

Total

   $ 342,045
  

 

 

 

NOTE 9: INCOME TAXES

Following is a summary of the Company’s income tax expense (benefit):

 

     Year Ended December 31,  

(In Thousands)

   2019      2018      2017  

Current Income Tax (Benefit) Expense:

        

Federal

   $ (13,438    $ (140    $ (4,967

State

     916      1,757      1,742

Foreign

     467      1,256      1,422
  

 

 

    

 

 

    

 

 

 
     (12,055      2,873      (1,803

Deferred Income Tax Expense (Benefit):

        

Federal

     19,497      9,884      (52,202

State

     (159      923      1,548

Foreign

     (1,112      (765      (821
  

 

 

    

 

 

    

 

 

 
     18,226      10,042      (51,475

Income Tax Expense (Benefit)

   $ 6,171    $ 12,915    $ (53,278
  

 

 

    

 

 

    

 

 

 

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Significant components of the Company’s deferred income tax liabilities and assets are as follows:

 

     December 31,  

(In Thousands)

   2019      2018  

Deferred Tax Liabilities:

     

Lease Merchandise and Property, Plant and Equipment

   $ 192,091    $ 185,285

Goodwill and Other Intangibles

     43,713      40,247

Operating Lease Right-of-Use Assets

     73,602      —    

Other, Net

     2,760      1,723
  

 

 

    

 

 

 

Total Deferred Tax Liabilities

     312,166      227,255

Deferred Tax Assets:

     

Accrued Liabilities

     14,927      19,683

Advance Payments

     9,676      9,358

Operating Lease Liabilities

     81,488      —    

Net Operating Losses

     41,014      49,241

Other, Net

     14,734      17,165
  

 

 

    

 

 

 

Total Deferred Tax Assets

     161,839      95,447

Less Valuation Allowance

     3,659      3,206
  

 

 

    

 

 

 

Net Deferred Tax Liabilities

   $ 153,986    $ 135,014
  

 

 

    

 

 

 

The Company’s effective tax rate differs from the statutory United States Federal income tax rate as follows:

 

     Year Ended December 31,  
     2019     2018     2017  

Statutory Rate

     21.0     21.0     35.0

Increases (Decreases) in United States Federal Taxes

      

Resulting From:

      

State Income Taxes, net of Federal Income Tax Benefit

     4.8     4.4     3.2  

Other Permanent Differences

     (2.6     (2.5     1.1  

Federal Tax Credits

     (5.2     (3.6     (4.0

Remeasurement of net Deferred Tax Liabilities

     (0.7     0.3     (93.4

Other, net

     0.7     0.7     (1.3
  

 

 

   

 

 

   

 

 

 

Effective Tax Rate

     18.0     20.3     (59.4 )% 
  

 

 

   

 

 

   

 

 

 

On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, (a) lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018; (b) provided for 100% expense deduction of certain qualified depreciable assets, which includes the Company’s lease merchandise, purchased after September 27, 2017 (but would be phased down starting in 2023); and (c) the manufacturing deduction that expired in 2017 under the previous tax legislation was not extended. Consequently, the Company remeasured its net deferred tax liabilities as of December 31, 2017 using the lower U.S. corporate income tax rate, which resulted in an $83.7 million non-cash income tax benefit recognized during the year ended December 31, 2017.

The Company was in a net operating loss position for tax purposes in 2017 and 2018 as a result of the Tax Act’s 100% expense deduction on qualified depreciable assets discussed above. The federal net operating loss and credits earned during 2017 were carried back and generated refunds of $4.2 million received in March 2019. The

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

net operating loss earned during 2018 must be carried forward and will be available to offset 80% of future taxable income, based on laws in effect as of December 31, 2019.

The Company is estimating a taxable loss in 2019. Parent files a consolidated federal return that includes the income of Parent’s Progressive segment. The Company’s taxable loss in 2019 is offset by a portion of Progressive’s 2019 taxable income. Furthermore, a portion of the Company’s 2018 net operating loss will also be offset by Progressive’s 2019 taxable income. The current federal tax benefit of $13.4 million in 2019 is a result of the transfer of net operating losses of $11.0 million plus federal tax credits of $2.4 million to Progressive. Similarly, the Company effectively transferred state tax credits to Progressive, generating a current state tax benefit, of $0.6 million, $0.6 million, and $0.7 million in 2017, 2018, and 2019, respectively, that were absorbed by Progressive income each year reported on combined state returns. In addition, the Company acquired certain state tax attributes related to bonus depreciation tax deductions from Parent’s Progressive Leasing segment, which were recorded as an adjustment to invested capital, with a cumulative balance of $3.8 million and $4.0 million as of December 31, 2018 and 2019, respectively.

At December 31, 2019, the Company had approximately $174.4 million of federal tax net operating loss carryforwards, which can be carried forward indefinitely and will not expire, and $3.1 million of federal foreign tax credit carryforwards, which will begin to expire in 2027. In addition, at December 31, 2019, the Company had $4.4 million of tax-effected state net operating loss carryforwards and $7.9 million of state tax credit carryforwards, which will both begin to expire in 2022. The valuation allowance of $3.7 million and $3.2 million as of December 31, 2019 and 2018, respectively, is related to the state tax credit carryforward.

As a result of the 100% bonus depreciation provisions in the Tax Act not being enacted until December 22, 2017, the Company made more than the required estimated federal tax liability payments in 2017 and, therefore, had a $58.8 million income tax receivable as of December 31, 2017. The Company received a refund of $49.6 million in February 2018.

Parent 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, Parent is no longer subject to federal, state and local tax examinations by tax authorities for years before 2016.

The following table summarizes the activity related to the Company’s uncertain tax positions:

 

     Year Ended December 31,  

(In Thousands)

   2019      2018      2017  

Balance at January 1,

   $ 2,338    $ 2,030    $ 2,157

Additions Based on Tax Positions Related to the Current Year

     236      269      456

Additions for Tax Positions of Prior Years

     20      615      232

Prior Year Reductions

     (76      (85      (236

Statute Expirations

     (168      (209      (148

Settlements

     —          (282      (431
  

 

 

    

 

 

    

 

 

 

Balance at December 31,

   $ 2,350    $ 2,338    $ 2,030
  

 

 

    

 

 

    

 

 

 

As of December 31, 2019 and 2018, the amount of uncertain tax benefits that, if recognized, would affect the effective tax rate is $2.1 million and $2.0 million, respectively, including interest and penalties.

During the years ended December 31, 2019 and 2018, the Company recognized interest and penalties of $0.1 million and $0.1 million, respectively. During the year ended December 31, 2017, the Company recognized

 

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AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

a net benefit of $0.6 million related to interest and penalties. The Company had $0.3 million and $0.2 million of accrued interest and penalties at December 31, 2019 and 2018, respectively. The Company recognizes potential interest and penalties related to uncertain tax benefits as a component of income tax expense (benefit).

NOTE 10: COMMITMENTS AND CONTINGENCIES

Guarantees

Aaron’s SpinCo has guaranteed certain debt obligations of some of the franchisees under a franchise loan program with one of the banks that is a party to the Aaron’s SpinCo Credit Agreement. In the event these franchisees are unable to meet their debt service payments or otherwise experience an event of default, Aaron’s SpinCo 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 75 days of the event of default. At December 31, 2019, the maximum amount that Aaron’s SpinCo would be obligated to repay in the event franchisees defaulted was $29.4 million. Aaron’s SpinCo has recourse rights to franchisee assets securing the debt obligations, which consist primarily of lease merchandise and fixed assets. Since the inception of the franchise loan program in 1994, losses associated with the program have been immaterial. Subsequent to the separation and distribution transaction, Aaron’s SpinCo will continue as the guarantor of outstanding debt obligations of its franchisees under the franchise loan program. We believe that any future amounts to be funded by Aaron’s SpinCo in connection with these guarantees will be immaterial. The carrying amount of the franchisee-related borrowings guarantee, which is included in accounts payable and accrued expenses in the combined balance sheets, was $0.3 million as of December 31, 2019 and 2018, respectively.

On October 11, 2019, Aaron’s SpinCo amended its franchisee loan facility to (a) reduce the total commitment amount from $55.0 million to $40.0 million; and (b) extend the maturity date to October 22, 2020. The loan agreement continues to provide a Canadian subfacility commitment amount for loans to franchisees that operate stores in Canada (other than the province of Quebec) of CAD $25.0 million. See Note 8 to these combined financial statements for more information regarding the Company’s financial covenants.

On January 21 and February 19, 2020, Aaron’s SpinCo further amended the franchisee loan agreement to, among other changes: (a) reduce the facility commitment from $40.0 million to $35.0 million, (b) extend the commitment termination date thereunder from October 22, 2020 to January 20, 2021, (c) amend the definition of adjusted EBITDA to exclude certain charges, and (d) modify certain other terms and conditions. The terms of the loan facility include an option to further reduce the maximum facility commitment amount by providing written notice to the lender, which Aaron’s SpinCo subsequently exercised on February 11, 2020 to reduce the facility commitment to $25.0 million.

Legal Proceedings

From time to time, Aaron’s SpinCo is party to various legal and regulatory proceedings arising in the ordinary course of business, certain proceedings of which have been described below. Aaron’s SpinCo 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. Aaron’s SpinCo continually monitors its litigation and regulatory exposure and reviews the adequacy of its legal and regulatory reserves on a quarterly basis. 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 due to the inherent uncertainty in litigation, regulatory and similar adversarial proceedings, and substantial losses from these proceedings or the costs of defending them could have a material adverse impact upon the Company’s business, financial position and results of operations.

At December 31, 2019 and 2018, the Company had accrued $7.7 million and $1.3 million, respectively, for pending legal and regulatory matters for which it believes losses are probable and is management’s best estimate

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

of its exposure to loss. Of the amount accrued, Aaron’s SpinCo believes that $5.5 million is probable of recovery via payments received from insurance proceeds as of December 31, 2019. Aaron’s SpinCo records these liabilities in accounts payable and accrued expenses in the combined balance sheets. The corresponding expected insurance recoveries are recorded within prepaid expenses and other assets in the combined balance sheet. The Company estimates that the aggregate range of reasonably possible loss in excess of accrued liabilities for such probable loss contingencies is between $0 and $1.5 million.

At December 31, 2019, Aaron’s SpinCo 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 $0 and $0.5 million. Those matters for which a reasonable estimate is not possible are not included within estimated ranges and, therefore, the estimated ranges do not represent Aaron’s SpinCo’s maximum loss exposure. Aaron’s SpinCo’s estimates for legal and regulatory accruals, aggregate probable loss amounts and reasonably possible loss amounts, are all subject to the uncertainties and variables described above.

Regulatory Inquiries

In July 2018, Parent received civil investigative demands (“CIDs”) from the FTC regarding disclosures related to lease-to-own and other financial products offered by Parent through Aaron’s SpinCo and Parent’s Progressive Leasing business and whether such disclosures violate the Federal Trade Commission Act (the “FTC Act”). We believe such Aaron’s SpinCo disclosures were in compliance with the FTC Act. We cooperated with the FTC in its inquiry regarding disclosures made by the Aaron’s SpinCo business, after which the FTC resolved that inquiry without taking any action against the Aaron’s SpinCo business.

In April 2019, Parent, along with other lease-to-own companies, received an unrelated CID from the FTC focused on certain transactions involving the contingent purchase and sale of customer lease agreements with other lease-to-own companies, and whether such transactions violated the FTC Act. Although we believe those transactions did not violate any laws, in August 2019, Parent reached an agreement in principle with the FTC staff to resolve the issues raised in that CID. The proposed consent agreement, which would prohibit such contingent purchases and sales of customer lease portfolios in the future but would not require any payments to the FTC, was approved by the FTC on February 21, 2020.

Other Contingencies

At December 31, 2019, Aaron’s SpinCo had non-cancelable commitments primarily related to certain advertising and marketing programs, consulting agreements, software licenses, and hardware and software maintenance of $23.9 million. Payments under these commitments are scheduled to be $13.4 million in 2020, $9.0 million in 2021, and $1.5 million in 2022.

Management regularly assesses Aaron’s SpinCo’s insurance deductibles, monitors litigation and regulatory exposure with Aaron’s SpinCo’s attorneys and evaluates its loss experience. Aaron’s SpinCo 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.

NOTE 11: RESTRUCTURING

2019 Restructuring Program

During the first quarter of 2019, Aaron’s SpinCo initiated a restructuring program to further optimize its company-operated store portfolio, which resulted in the closure and consolidation of 155 company-operated

 

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stores during 2019. Aaron’s SpinCo also further rationalized its home office and field support staff, which resulted in a reduction in associate headcount in those areas to more closely align with current business conditions.

Total net restructuring expenses of $38.4 million were recorded by Aaron’s SpinCo during the year ended December 31, 2019 under the 2019 restructuring program. Restructuring expenses were comprised mainly of closed store operating lease right-of-use asset impairment and operating lease charges, the impairment of vacant store properties, including the planned exit from one of our store support buildings, workforce reductions, and a loss on the sale of six Canadian stores to a third party. These costs were included in restructuring expenses, net in the combined statements of earnings. We expect future restructuring expenses (reversals) due to potential future early buyouts of leases with landlords, as well as continuing variable maintenance charges and taxes.

2017 and 2016 Restructuring Programs

During the years ended December 31, 2017 and 2016, Aaron’s SpinCo initiated restructuring programs to rationalize its company-operated store base portfolio to better align with marketplace demand. The programs resulted in the closure and consolidation of 139 company-operated stores throughout 2016, 2017, and 2018. Aaron’s SpinCo also optimized its home office staff and field support, which resulted in a reduction in associate headcount in those areas to more closely align with current business conditions.

Total net restructuring expenses of $1.6 million were recorded during the year ended December 31, 2019 under the 2017 and 2016 restructuring programs. Restructuring activity for the year ended December 31, 2019 was comprised principally of operating lease charges for stores closed under the restructuring programs. These costs were included in restructuring expenses, net in the combined statements of earnings. We expect future restructuring expenses (reversals) due to potential future early buyouts of leases with landlords, as well as continuing variable maintenance charges and taxes. To date, Aaron’s SpinCo has incurred charges of $41.7 million under the 2017 and 2016 restructuring programs.

The following table summarizes the balances of the accruals for both programs, which are recorded in accounts payable and accrued expenses in the combined balance sheets, and the activity for the years ended December 31, 2019 and 2018:

 

(In Thousands)

   Contractual
Lease
Obligations
     Severance      Total  

Balance at January 1, 2018

   $ 12,437    $ 2,303    $ 14,740

Charges

     —          610      610

Adjustments1

     2,057      —          2,057
  

 

 

    

 

 

    

 

 

 

Restructuring Charges

     2,057      610      2,667

Payments

     (6,022      (2,262      (8,284
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2018

     8,472      651      9,123

ASC 842 Transition Adjustment1

     (8,472      —          (8,472
  

 

 

    

 

 

    

 

 

 

Adjusted Balance at January 1, 2019

     —          651      651

Restructuring Charges

     —          3,403      3,403

Payments

     —          (3,298      (3,298
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2019

   $ —        $ 756    $ 756
  

 

 

    

 

 

    

 

 

 

 

1

Upon the adoption of ASC 842 on January 1, 2019, Aaron’s SpinCo reclassified the remaining liability for contractual lease obligations from accounts payable and accrued expenses to a reduction to operating lease right-of-use assets within its combined balance sheets.

 

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The following table summarizes restructuring charges incurred:

 

     Year Ended December 31,  

(In Thousands)

   2019      2018      2017  

Right-of-Use Asset Impairment and Operating Lease Charges

   $ 28,411    $ 2,057    $ 13,432

Fixed Asset Impairment

     5,238      —          1,386

Severance

     3,403      610      2,705

Other Expenses (Reversals)

     1,886      460      (378

Loss (Gain) on Sale of Store Properties

     1,052      (377      —    
  

 

 

    

 

 

    

 

 

 

Total Restructuring Expenses, Net

   $ 39,990    $ 2,750    $ 17,145
  

 

 

    

 

 

    

 

 

 

NOTE 12: STOCK-BASED COMPENSATION

Historically, and until consummation of the distribution from Parent, Aaron’s SpinCo’s employees participate in the Parent stock-based compensation plans. The stock-based compensation expense recorded by Aaron’s SpinCo in the periods presented includes the expense directly attributable to Aaron’s SpinCo employees that have received Parent awards, as well as the expense associated with the allocation of stock-based compensation expense for Parent’s corporate and shared function employees.

Parent grants stock options, RSUs, RSAs and PSUs to certain employees of Aaron’s SpinCo under the 2015 Equity and Incentive Award Plan and previously did so under the 2001 Stock Option and Incentive Award Plan (the “2015 Plan” and “2001 Plan”). The 2001 Plan was originally approved by Parent shareholders in May 2001 and was amended and restated with shareholder approval in May 2009 and discontinued with the approval of the 2015 Plan on May 6, 2015. The 2015 Plan was subsequently amended and restated with shareholder approval in February 2019. Beginning in 2015, as part of the Parent long-term incentive compensation program (“LTIP Plan”) and pursuant to the Parent 2001 Plan and 2015 Plan, Parent granted a mix of stock options, time-based restricted stock and performance share units to key executives and managers.

Aaron’s SpinCo has elected a policy to estimate forfeitures in determining the amount of stock compensation expense. Total stock-based compensation expense recognized by Aaron’s SpinCo was $13.2 million, $15.4 million and $15.1 million for the years ended December 31, 2019, 2018 and 2017, respectively, which includes the allocation of stock-based compensation expense for Parent’s corporate and shared function employees of $7.8 million, $8.4 million and $8.8 million, respectively, These costs were included as a component of personnel costs in the combined statements of earnings.

The total income tax benefit recognized in the combined statements of earnings for stock-based compensation arrangements was $3.3 million, $3.8 million and $5.7 million in the years ended December 31, 2019, 2018 and 2017, respectively. Benefits of tax deductions in excess of recognized compensation cost, which are included in operating cash flows, were $2.5 million, $3.0 million and $0.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.

As of December 31, 2019, there was $11.5 million of total unrecognized compensation expense related to non-vested stock-based compensation, which includes unrecognized expense related to the allocation for Parent’s corporate and shared function employees. This expense is expected to be recognized by Aaron’s SpinCo over a period of 1.3 years.

 

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Stock Options

Under the Parent 2001 Plan, options granted become exercisable after a period of one to five years and unexercised options lapse 10 years after the date of grant. Under the Parent 2015 Plan, options granted to date become exercisable after a period of one to three years and unexercised options lapse 10 years after the date of the grant. Unvested options are subject to forfeiture upon termination of service for both plans. Aaron’s SpinCo recognizes compensation expense for options that have a graded vesting schedule on a straight-line basis over the requisite service period. Shares have historically been issued from the treasury shares of Parent upon share option exercises.

Aaron’s SpinCo determines the fair value of Parent 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 Parent stock and the historical volatility of Parent 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 historical option exercise experience. Aaron’s SpinCo 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 of Parent 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.

Parent granted 63,000, 75,000 and 105,000 stock options to Aaron’s SpinCo employees during the years ended December 31, 2019, 2018 and 2017, respectively. The weighted-average fair value of options granted and the weighted-average assumptions used in the Black-Scholes-Merton option pricing model for such grants were as follows:

 

     2019     2018     2017  

Dividend Yield

     0.3     0.3     0.4

Expected Volatility

     36.5     34.8     32.8

Risk-free Interest Rate

     2.5     2.6     1.9

Expected Term (in years)

     5.3       5.3       5.3  

Weighted-average Fair Value of Stock Options Granted

   $ 19.59   $ 16.54   $ 8.55

The following table summarizes information about Aaron’s SpinCo employee-related stock options outstanding at December 31, 2019, excluding stock-based compensation awards for Parent’s corporate and shared function employees and board of directors:

 

     Options Outstanding      Options Exercisable  

Range of
Exercise
Prices

   Number Outstanding
December 31, 2019
     Weighted Average
Remaining Contractual
Life
(in Years)
     Weighted Average
Exercise Price
     Number Exercisable
December 31, 2019
     Weighted Average
Exercise Price
 

$19.92-20.00

     11,250      0.15      $ 19.92      11,250    $ 19.92

20.01-30.00

     88,562      6.09        25.38      64,722      24.71

30.01-40.00

     2,001      0.16        30.29      2,001      30.29

40.01-50.00

     56,740      7.41        47.26      17,400      47.26

50.01-54.18

     56,520      8.48        54.18      —          —    
  

 

 

          

 

 

    

19.92-54.18

     215,073      6.70        38.48      95,373      28.38
  

 

 

          

 

 

    

 

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The table below summarizes Aaron’s SpinCo employee-related option activity during 2019, excluding stock-based compensation awards for Parent’s corporate and shared function employees and board of directors:

 

     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, 2019

     227   $ 31.61         

Granted

     63     54.18         

Exercised

     (57     26.68         

Forfeited/expired

     (18     44.65         
  

 

 

            

Outstanding at December 31, 2019

     215     38.48      6.70      $ 4,006    $ 13.34
  

 

 

            

Expected to Vest

     117     46.36      8.14        1,257      16.32
  

 

 

            

Exercisable at December 31, 2019

     95     28.38      5.29        2,740      9.52
  

 

 

            

The aggregate intrinsic value amounts in the table above represent the closing price of Parent common stock on December 31, 2019 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 by Aaron’s SpinCo employees, which represents the value of Parent common stock at the time of exercise in excess of the exercise price, was $1.7 million, $4.8 million and $2.5 million during the years ended December 31, 2019, 2018 and 2017, respectively. The total grant-date fair value of options vested during the years ended December 31, 2019, 2018 and 2017 was $0.8 million, $0.7 million and $0.3 million, respectively.

Restricted Stock

Restricted stock units or restricted stock awards (collectively, “restricted stock”) may be granted to Aaron’s SpinCo employees and directors under the 2015 Plan and typically vest over approximately one to three-year periods; under the 2001 Plan restricted stock typically vests over approximately one to five-year periods. Restricted stock grants are generally settled in stock and may be subject to one or more objective employment, performance or other forfeiture conditions as established at the time of grant. Aaron’s SpinCo generally recognizes compensation expense for restricted stock with a graded vesting schedule on a straight-line basis over the requisite service period as restricted stock is generally not subject to performance metrics. Compensation expense for performance-based restricted stock is recognized on an accelerated basis over the vesting period based on the projected assessment of the level of performance that will be achieved and earned. Shares are issued from the treasury shares of Parent upon vesting. Any shares of restricted stock that are forfeited may again become available for issuance.

The fair value of restricted stock is generally based on the fair market value of Parent common stock on the date of grant.

In 2011, Parent established a restricted stock program as a component of the 2001 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

 

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revenue levels by the employees’ operating units or overall Parent. 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 Parent home office, divisional vice presidents and regional managers. These grants began vesting in 2016.

During 2015, 2016 and 2017, Parent granted performance-based restricted stock to certain executive officers that vest over a three-year service period and with the achievement of specific performance criteria. The compensation expense associated with these awards is recognized on an accelerated basis over the respective vesting periods based on the projected assessment of the level of performance that will be achieved and earned. As of December 31, 2019, there are no performance-based restricted shares still subject to performance conditions.

Parent granted 48,000, 51,000 and 132,000 shares of restricted stock to Aaron’s SpinCo employees at weighted-average fair values of $54.40, $47.11 and $31.20 in the years ended December 31, 2019, 2018 and 2017, respectively. The following table summarizes information about Aaron’s SpinCo employee-related restricted stock activity during 2019, excluding stock-based compensation awards for Parent’s corporate and shared function employees and board of directors:

 

     Restricted Stock
(In Thousands)
     Weighted Average
Fair Value
 

Non-vested at January 1, 2019

     155    $ 32.51

Granted

     48      54.40

Vested

     (94      28.88

Forfeited/unearned

     (21      42.82
  

 

 

    

Non-vested at December 31, 2019

     88      45.87
  

 

 

    

The total vest-date fair value of restricted stock described above was $4.9 million, $6.2 million and $5.8 million in the years ended December 31, 2019, 2018 and 2017, respectively.

Performance Share Units

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 various performance criteria, which have included adjusted EBITDA, revenue and return on capital for Parent. Beginning in 2016, Parent added adjusted pre-tax profit as an additional performance criterion. When the performance criteria are met, the award is earned and one-third of the award vests. Another one-third of the earned award is subject to an additional one-year service period and the remaining one-third of the earned award is subject to an additional two-year service period. Shares are issued from the treasury shares of Parent upon vesting. The number of performance-based shares which could potentially be issued ranges from zero to 200% of the target award.

The fair value of performance share units is based on the fair market value of Parent common stock on the date of grant. The compensation expense associated with these awards is amortized on an accelerated basis over the vesting period based on the projected assessment of the level of performance that will be achieved and earned. In the event Aaron’s SpinCo 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.

 

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The following table summarizes information about Aaron’s SpinCo employee-related performance share unit activity during 2019, excluding stock-based compensation awards for Parent’s corporate and shared function employees and board of directors:

 

     Performance
Share Units
(In Thousands)
     Weighted Average
Fair Value
 

Non-vested at January 1, 2019

     209    $ 33.61

Granted

     71      54.27

Vested

     (106      30.80

Forfeited/unearned

     (35      41.31
  

 

 

    

Non-vested at December 31, 2019

     139      44.44
  

 

 

    

The total vest-date fair value of performance share units described above that vested during the period was $5.6 million, $6.0 million and $2.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Employee Stock Purchase Plan

Effective May 9, 2018, the Parent Board of Directors and shareholders approved the Employee Stock Purchase Plan, which is a tax-qualified plan under Section 423 of the Internal Revenue Code. The purpose of the ESPP is to encourage ownership of Parent common stock by eligible employees. Under the ESPP, eligible employees are allowed to purchase common stock of Parent during six-month offering periods at the lower of: (a) 85% of the closing trading price per share of the common stock on the first trading date of an offering period in which a participant is enrolled; or (b) 85% of the closing trading price per share of the common stock on the last day of an offering period. Employees participating in the ESPP can contribute up to an amount not exceeding 10% of their base salary and wages up to an annual maximum of $25,000 in total fair market value of the common stock.

The compensation cost related to the ESPP is measured on the grant date based on eligible employees’ expected withholdings and is recognized over each six-month offering period. Total compensation cost recognized by Aaron’s SpinCo in connection with the ESPP was $0.2 million and $0.1 million for years ended December 31, 2019 and 2018, respectively. These costs were included as a component of personnel costs in the combined statements of earnings. During the year ended December 31, 2019, Parent issued 24,782 shares to Aaron’s SpinCo employees under the ESPP at a weighted average purchase price of $42.21. During the year ended December 31, 2018, Parent issued 13,088 shares to Aaron’s SpinCo employees at a purchase price of $35.74.

NOTE 13: COMPENSATION ARRANGEMENTS

Deferred Compensation

Parent maintains the Aaron’s, Inc. Deferred Compensation Plan, which 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 75% of their incentive pay compensation, and eligible non-employee directors can defer receipt of up to 100% of their cash director fees.

Compensation deferred under the plan is recorded as a deferred compensation liability, which is recorded in accounts payable and accrued expenses in the combined balance sheets. The deferred compensation plan liability related to employees of Aaron’s SpinCo was $11.0 million and $10.3 million as of December 31, 2019 and 2018, respectively. Liabilities under the plan are recorded at amounts due to participants, based on the fair value of

 

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participants’ selected investments, which consist of equity and debt “mirror” funds. The obligations are unsecured general obligations of Parent and the participants have no right, interest or claim in the assets of Parent, except as unsecured general creditors. Parent has established a rabbi trust to fund obligations under the plan primarily with company-owned life insurance policies. The value of the assets within the rabbi trust, which is primarily the cash surrender value of the life insurance, was $14.4 million and $13.5 million as of December 31, 2019 and 2018, respectively, and is included in prepaid expenses and other assets in the combined balance sheets. The full value of the assets within the rabbi trust are included within Aaron’s SpinCo’s combined financial statements, as the plan is maintained by one of the legal entities forming the basis of Aaron’s SpinCo. Aaron’s SpinCo recorded gains related primarily to changes in the cash surrender value of the life insurance plans owned by Parent of $2.1 million and $1.5 million during the years ended December 31, 2019 and 2017, respectively, and recorded losses of $1.2 million during the year ended December 31, 2018, which were recorded within other non-operating income (expense), net in the combined statements of earnings.

Benefits of $2.9 million, $2.7 million and $2.3 million were paid to Aaron’s SpinCo participants during the years ended December 31, 2019, 2018 and 2017, respectively. Effective January 1, 2018, Parent implemented a discretionary match within the nonqualified Deferred Compensation Plan. The match allows eligible employees to receive 100% matching by the Company on the first 3% of contributions and 50% on the next 2% of contributions for a total of a 4% match. The annual match is not to exceed $11,000 for an individual employee and is subject to a three-year cliff vesting schedule. Deferred compensation expense charged to operations for the matching contributions was $0.4 million during the year ended December 31, 2019 and was not significant during the years ended December 31, 2018 and 2017.

401(k) Defined Contribution Plan

Parent maintains a 401(k) savings plan for employees who meet certain eligibility requirements. Effective January 1, 2015, the 401(k) savings plan was amended to allow employees to contribute up to 75% of their annual compensation in accordance with federal contribution limits with 100% matching by Parent on the first 3% of compensation and 50% on the next 2% of compensation for a total of a 4% match. Aaron’s SpinCo’s expense related to the plan was $5.5 million in 2019, $5.3 million in 2018 and $4.6 million in 2017.

Employee Stock Purchase Plan

See Note 12 to these combined financial statements for more information regarding the Parent compensatory Employee Stock Purchase Plan.

NOTE 14: RELATED PARTY TRANSACTIONS

All intercompany transactions between Aaron’s SpinCo and Parent have been included within invested capital in the combined balance sheets and classified as changes in invested capital on the combined statements of parent’s equity. The total net effect of the settlement of these intercompany transactions is reflected in the combined statements of cash flows as a financing activity. The significant components of the net increase (decrease) in invested capital for the years ended December 31, 2019, 2018 and 2017 were as follows:

 

     Year Ended December 31,  

(In Thousands)

   2019      2018      2017  

General financing activities, net

   $ (38,052    $ (67,852    $ (127,245

Corporate allocations

     27,276      28,640      27,638

Income tax1

     22,250      22,368      9,258
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in Invested Capital

   $ 11,474    $ (16,844    $ (90,349
  

 

 

    

 

 

    

 

 

 

 

1 

See Note 9 to these combined financial statements for more information regarding Aaron’s SpinCo’s income taxes.

 

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Corporate Allocations

Aaron’s SpinCo’s operating model includes a combination of standalone and combined business functions with Parent. The combined financial statements include corporate allocations for expenses related to activities that are provided on a centralized basis within Parent, which are primarily expenses related to executive management, finance, treasury, tax, audit, legal, information technology, human resources and risk management functions and the related benefit cost associated with such functions, including stock-based compensation. See Note 12 to these combined financial statements for more information regarding stock-based compensation. These expenses have been allocated to Aaron’s SpinCo based on direct usage or benefit where specifically identifiable, with the remainder allocated primarily on a pro rata basis using an applicable measure of revenues, headcount or other relevant measures. Aaron’s SpinCo considers these allocations to be a reasonable reflection of the utilization of services or the benefit received. These allocated expenses are included within personnel costs and other operating expenses, net in the combined statements of earnings and as an increase to invested capital in the combined balance sheets. General corporate expenses allocated to Aaron’s SpinCo during the years ended December 31, 2019, 2018 and 2017 were $27.3 million, $28.6 million and $27.6 million, respectively.

Management believes the assumptions regarding the allocation of general corporate expenses from Parent are reasonable. However, the combined financial statements may not include all of the actual expenses that would have been incurred and may not reflect Aaron’s SpinCo’s combined results of operations, financial position and cash flows had it been a standalone company during the periods presented. Actual costs that would have been incurred if Aaron’s SpinCo had been a standalone company would depend on multiple factors, including organization structure and various other strategic decisions.

Aaron Ventures

Aaron Ventures I, LLC (“Aaron Ventures”) was formed in December 2002 for the purpose of acquiring properties from Aaron’s SpinCo and leasing them back to Aaron’s SpinCo and is controlled by certain of Aaron’s SpinCo’s current and former executives. Aaron Ventures purchased a combined total of 21 properties from Aaron’s SpinCo in 2002 and 2004, and leased the properties back to Aaron’s SpinCo. As of December 31, 2019, Aaron’s SpinCo had no remaining finance or operating leases with Aaron Ventures. Aaron’s SpinCo paid annual rent for the various properties leased from Aaron’s Ventures of $0.2 million, $1.2 million, and $2.0 million for the years ending December 31, 2019, 2018, and 2017 respectively.

NOTE 15: SUBSEQUENT EVENTS

COVID-19 and Related Developments

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. In response, local, state and federal governmental authorities have since issued various forms of stay-at-home orders. Aaron’s SpinCo has been classified as a provider of essential products in most jurisdictions, and thus, its store showrooms generally were not required to close. However, Aaron’s SpinCo temporarily closed its showrooms in March 2020 and shifted to e-commerce and curbside service only for all of its company-operated stores in order to protect the health and safety of its customers and associates, except where such curbside service was prohibited by governmental authorities. Since that time, we have reopened all of our Aaron’s SpinCo store showrooms, but there can be no assurance that those showrooms will not be closed in future months, or have their operations limited. In response to the global impacts of COVID-19 on U.S. companies and citizens, the government enacted the CARES Act on March 27, 2020, which provided stimulus payments and/or federally supplemented unemployment payments to a significant portion of our customers as well as several tax relief options for companies.

 

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AARON’S SPINCO, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The COVID-19 pandemic may adversely impact our business, results of operations, financial condition, liquidity and/or cash flow in future periods. The extent to which the COVID-19 pandemic, governmental and regulatory measures related to the pandemic, and our precautionary measures in response thereto may impact our business will depend on future developments, which are highly uncertain and cannot be predicted at this time.

Aaron’s SpinCo Goodwill Impairment

We concluded that the need for an interim goodwill impairment test was triggered for Aaron’s SpinCo as of March 31, 2020. Factors that led to this conclusion include: (a) a significant decline in Parent stock price and market capitalization in March 2020; (b) the temporary closure of all company-operated store showrooms due to the COVID-19 pandemic, which may adversely impact future financial results; (c) the significant uncertainty with regard to the short-term and long-term impacts that adverse macroeconomic conditions arising from the COVID-19 pandemic and related government emergency and executive orders may have on the financial health of our customers and franchisees; and (d) consideration given to the amount by which Aaron’s SpinCo fair value exceeded the carrying value from the October 1, 2019 annual goodwill impairment test.

As of March 31, 2020, the Company determined the Aaron’s SpinCo goodwill was fully impaired and recorded a goodwill impairment loss of $446.9 million during the three months ended March 31, 2020.

2020 Restructuring Program

During the first quarter of 2020, Aaron’s SpinCo initiated further restructuring actions related to a real estate repositioning initiative, which resulted in the closure and consolidation of 71 company-operated stores during the first six months of 2020. We currently expect to close approximately 47 additional stores over the next six to nine months. Aaron’s SpinCo has incurred total net restructuring expenses of $22.5 million for the six months ended June 30, 2020 under the 2020 restructuring program, which were comprised mainly of operating lease right-of-use asset impairment charges related to the vacancy or planned vacancy of the stores identified for closure, severance charges to rationalize our field support and store support center staff to better align the organization with current operations and business conditions, and fixed asset impairment charges.

Aaron’s SpinCo continually evaluates its company-operated store portfolio to determine if it will further rationalize its store base to better align with marketplace demand. Additional restructuring charges may result from our real estate repositioning and optimization initiatives, which may include investing in our new store concept and operating model to better appeal to our target customer market.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

CONDENSED COMBINED BALANCE SHEETS

 

     (Unaudited)
September 30,
2020
    December 31,
2019
 
     (In Thousands)  

ASSETS:

    

Cash and Cash Equivalents

   $ 432,862   $ 48,773

Accounts Receivable (net of allowances of $6,504 in 2020 and $10,720 in 2019)

     32,368     37,079

Lease Merchandise (net of accumulated depreciation and allowances of $463,735 in 2020 and $467,769 in 2019)

     661,522     781,598

Property, Plant and Equipment, Net (net of accumulated depreciation of $301,776 in 2020 and $283,664 in 2019)

     194,970     207,301

Operating Lease Right-of-Use Assets

     248,272     305,257

Goodwill

     2,645     447,781

Other Intangibles, Net (net of accumulated amortization of $13,767 in 2020 and $11,594 in 2019)

     9,503     14,234

Income Tax Receivable

     5,290     5,927

Prepaid Expenses and Other Assets

     89,315     92,381
  

 

 

   

 

 

 

Total Assets

   $ 1,676,747   $ 1,940,331
  

 

 

   

 

 

 

LIABILITIES & PARENT’S EQUITY:

    

Accounts Payable and Accrued Expenses

   $ 253,036   $ 220,596

Deferred Income Taxes Payable

     73,640     157,425

Customer Deposits and Advance Payments

     49,711     47,692

Operating Lease Liabilities

     289,352     335,807

Debt

     285,123     341,030
  

 

 

   

 

 

 

Total Liabilities

     950,862     1,102,550

Parent’s Equity:

    

Invested Capital

     727,129     837,800

Accumulated Other Comprehensive Loss

     (1,244     (19
  

 

 

   

 

 

 

Total Parent’s Equity

     725,885     837,781
  

 

 

   

 

 

 

Total Liabilities & Parent’s Equity

   $ 1,676,747   $ 1,940,331
  

 

 

   

 

 

 

The accompanying notes are an integral part of the Condensed Combined Financial Statements.

 

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AARON’S SPINCO, INC.

CONDENSED COMBINED STATEMENTS OF EARNINGS

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2020     2019  
     (In Thousands)  

REVENUES:

    

Lease and Retail Revenues

   $ 1,190,903   $ 1,220,475

Non-Retail Sales

     94,710     102,190

Franchise Royalties and Other Revenues

     19,134     26,860
  

 

 

   

 

 

 
     1,304,747     1,349,525

COST OF REVENUES:

    

Cost of Lease and Retail Revenues

     412,009     425,640

Non-Retail Cost of Sales

     82,006     83,057
  

 

 

   

 

 

 
     494,015     508,697
  

 

 

   

 

 

 

GROSS PROFIT

     810,732     840,828

OPERATING EXPENSES

    

Personnel Costs

     351,905     378,991

Other Operating Expenses, Net

     324,156     336,935

Provision for Lease Merchandise Write-Offs

     47,478     70,068

Restructuring Expenses, Net

     33,318     37,535

Impairment of Goodwill

     446,893     —    
  

 

 

   

 

 

 
     1,203,750     823,529
  

 

 

   

 

 

 

OPERATING (LOSS) PROFIT

     (393,018     17,299

Interest Expense

     (8,625     (13,247

Other Non-Operating Income

     887     2,835
  

 

 

   

 

 

 

(LOSS) EARNINGS BEFORE INCOME TAXES

     (400,756     6,887

INCOME TAX BENEFIT

     (131,969     (690
  

 

 

   

 

 

 

NET (LOSS) EARNINGS

   $ (268,787   $ 7,577
  

 

 

   

 

 

 

The accompanying notes are an integral part of the Condensed Combined Financial Statements.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

CONDENSED COMBINED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

     Nine Months Ended
September 30,
 

(In Thousands)

   2020     2019  
Net (Loss) Earnings    $ (268,787   $ 7,577

Other Comprehensive (Loss) Income:

    

Foreign Currency Translation Adjustment

     (1,225     739
  

 

 

   

 

 

 

Total Other Comprehensive (Loss) Income

     (1,225     739
  

 

 

   

 

 

 

Comprehensive (Loss) Income

   $ (270,012   $ 8,316
  

 

 

   

 

 

 

The accompanying notes are an integral part of the Condensed Combined Financial Statements.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

CONDENSED COMBINED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended
September 30,
 

(In Thousands)

   2020     2019  

OPERATING ACTIVITIES:

    

Net Earnings

   $ (268,787   $ 7,577

Adjustments to Reconcile Net (Loss) Earnings to Net Cash Provided by Operating Activities:

    

Depreciation of Lease Merchandise

     382,956     400,487

Other Depreciation and Amortization

     50,699     56,034

Accounts Receivable Provision

     22,089     33,467

Stock-Based Compensation

     9,324     10,345

Deferred Income Tax (Benefit) Expense

     (83,278     13,289

Impairment of Goodwill and Other Assets

     469,783     28,998

Non-Cash Lease Expense

     72,231     84,087

Other Changes, Net

     1,398     2,615

Changes in Operating Assets and Liabilities, Net of Effects of Acquisitions and Dispositions:

    

Additions to Lease Merchandise

     (413,585     (510,330

Book Value of Lease Merchandise Sold or Disposed

     151,318     173,660

Accounts Receivable

     (17,409     (24,330

Prepaid Expenses and Other Assets

     5,552     (12,544

Income Tax Receivable

     636     962

Operating Lease Right-of-Use Assets and Liabilities

     (81,240     (88,792

Accounts Payable and Accrued Expenses

     33,745     (7,420

Customer Deposits and Advance Payments

     1,806     (4,409
  

 

 

   

 

 

 

Cash Provided by Operating Activities

     337,238     163,696
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Proceeds from Investments

     —         1,212  

Outflows on Purchases of Property, Plant & Equipment

     (45,704     (58,743

Proceeds from Disposition of Property, Plant, and Equipment

     3,815     2,780

Outflows on Acquisitions of Businesses and Customer Agreements, Net of Cash Acquired

     (2,875     (12,873

Proceeds from Dispositions of Businesses and Customer Agreements, Net of Cash Disposed

     358     2,813
  

 

 

   

 

 

 
Cash Used in Investing Activities      (44,406     (64,811
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Repayments on Revolving Facility, Net

     —         (16,000

Proceeds from Debt

     5,625     —    

Repayments on Debt

     (61,515     (62,317

Debt Issuance Costs

     (1,020     —    

Other Transfers From Parent, net

     148,189     111,678
  

 

 

   

 

 

 
Cash Provided by Financing Activities      91,279     33,361
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

     (22     102

Increase in Cash and Cash Equivalents

     384,089     132,348

Cash and Cash Equivalents at Beginning of Period

     48,773     12,006
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 432,862   $ 144,354
  

 

 

   

 

 

 

The accompanying notes are an integral part of the Condensed Combined Financial Statements.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

NOTE 1: BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As described elsewhere in this information statement, the COVID-19 pandemic has led to significant market disruption and adverse impacts on many aspects of our operations, directly and indirectly. Throughout these notes to the condensed combined financial statements, the impacts of the COVID-19 pandemic on the financial results for the nine months ended September 30, 2020 have been identified under the respective sections. Additionally, there are significant uncertainties regarding the future scope and nature of these impacts, which continue to evolve each day. For a discussion of operational measures taken, as well as trends and uncertainties that have affected our business, as a result of the COVID-19 pandemic see Management’s Discussion and Analysis of Financial Condition and Results of Operations, including the “Recent Developments,” “Results of Operations”, “Liquidity and Capital Resources”, and Item 1A “Risk Factors”, included within this information statement.

Description of Holding Company Formation and Proposed Transaction

On October 16, 2020, management of Aaron’s, Inc., a leading omnichannel provider of lease-to-own (“LTO”) and purchase solutions to individual consumers through its Progressive Leasing, Aaron’s Business, and Vive segments, finalized the formation of a new holding company structure in anticipation of the separation and distribution transaction described below. Under the holding company structure (the “holding company formation”), Aaron’s, Inc. became a direct, wholly owned subsidiary of a newly formed company, Aaron’s Holdings Company, Inc. and thereafter converted to a limited liability company (“Aaron’s, LLC”). Upon completion of the holding company formation, Aaron’s Holdings Company, Inc. (“Parent”) became the publicly traded parent company of the Progressive Leasing, Aaron’s Business, and Vive segments.

On July 29, 2020, Aaron’s, Inc. announced its intention to separate its Aaron’s Business segment from its Progressive Leasing and Vive segments, which would result in two separate companies via a spin-off of a newly formed company, Aaron’s SpinCo, Inc., a Georgia corporation (“Aaron’s SpinCo”). Upon completion of the separation and distribution transaction, Aaron’s SpinCo will be a new, publicly traded company that is expected to be traded on the NYSE and will be primarily comprised of the existing Aaron’s Business segment. Parent will continue to be traded on the NYSE and will be comprised of the existing Progressive Leasing and Vive segments. We currently expect to complete the separation and distribution prior to December 31, 2020.

Unless the context otherwise requires or we specifically indicate otherwise, references to “Parent” refer to Aaron’s, Inc. prior to the completion of the holding company formation transaction described herein and to Aaron’s Holdings Company, Inc. following completion of the holding company formation transaction described herein. References to “Aaron’s SpinCo,” “we,” “us,” “our,” “our Company,” and “the Company” refer to Aaron’s SpinCo, Inc., currently a wholly-owned subsidiary of Parent, that will hold directly or indirectly the assets and liabilities historically associated with Parent’s Aaron’s Business segment (the “Aaron’s Business”) as of the separation and distribution date, and for which historical amounts herein include revenues and costs directly attributable to Aaron’s SpinCo and an allocation of expenses related to certain Parent corporate functions.

We describe in these footnotes the business to be held by us after the separation as if it were a standalone business for all historical periods described. However, we were not a standalone separate entity with independently conducted operations before the separation. References in these footnotes to our historical assets, liabilities, products, business or activities generally refer to the historical assets, liabilities, products, businesses or activities of the Aaron’s Business as it was conducted as part of Parent before the separation that will be held directly or indirectly by Aaron’s SpinCo immediately following the separation and distribution transaction described herein. Unless the context otherwise requires or we specifically indicate otherwise, the information

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

included in these footnotes about Aaron’s SpinCo assumes the completion of all of the transactions referred to in the information statement in connection with the separation and distribution transaction.

Business Overview

Description of Aaron’s SpinCo Business

Aaron’s SpinCo is a wholly owned subsidiary of Parent and is a leading omnichannel provider of LTO and purchase solutions to individual consumers. Aaron’s SpinCo offers furniture, home appliances, consumer electronics and accessories to consumers with a lease-to-own agreement through approximately 1,400 company-operated and franchised stores in the United States, Canada and Puerto Rico, as well as through its e-commerce platform, Aarons.com. In addition, Aaron’s SpinCo includes the operations of Woodhaven Furniture Industries (“Woodhaven”), which manufactures and supplies the majority of the bedding and a significant portion of the upholstered furniture leased and sold in company-operated and franchised stores.

The following table presents store count by ownership type for the Aaron’s SpinCo operations:

 

Stores at September 30 (Unaudited)

   2020      2019  

Company-operated Stores

     1,086      1,163

Franchised Stores

     308      341
  

 

 

    

 

 

 

Systemwide Stores

     1,394      1,504
  

 

 

    

 

 

 

Basis of Presentation

The condensed combined financial statements were prepared on a standalone basis and are derived from the condensed consolidated financial statements and accounting records of Parent. These condensed combined financial statements reflect the historical results of operations, financial position and cash flows of Aaron’s SpinCo in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The historical results of operations, financial position and cash flows of Aaron’s SpinCo presented in these condensed combined financial statements may not be indicative of what they would have been had Aaron’s SpinCo been an independent standalone entity, nor are they necessarily indicative of Aaron’s SpinCo’s future results of operations, financial position and cash flows.

The condensed combined financial statements include all revenues and costs directly attributable to Aaron’s SpinCo and an allocation of expenses related to certain corporate functions. These expenses have been allocated to Aaron’s SpinCo based on direct usage or benefit where specifically identifiable, with the remaining expenses allocated primarily on a pro rata basis using an applicable measure of revenues, headcount or other relevant measures. Aaron’s SpinCo considers these allocations to be a reasonable reflection of the utilization of services or the benefit received.

These financial statements have been prepared on a combined, rather than consolidated, basis because the final steps of the legal reorganization, which will result in the contribution of all the entities that will comprise Aaron’s SpinCo as of the separation, are not yet complete. Aaron’s, Inc., which was subsequently converted to Aaron’s, LLC, on a standalone legal entity basis, is one of the legal entities forming the basis of Aaron’s SpinCo. The condensed combined financial statements include assets and liabilities specifically attributable to Aaron’s SpinCo, including assets and liabilities where Aaron’s, LLC is the legal beneficiary or obligor. All intercompany transactions and balances within Aaron’s SpinCo have been eliminated. Transactions between Aaron’s SpinCo and Parent have been included as invested capital within the condensed combined financial statements.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

The preparation of Aaron’s SpinCo’s condensed combined financial statements in conformity with U.S. GAAP for interim financial information 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. However, as described above, the extent to which the COVID-19 pandemic and resulting measures taken by the Company will impact the Aaron’s SpinCo business will depend on future developments, which are highly uncertain and cannot be precisely predicted at this time. In many cases, management’s estimates and assumptions are highly dependent on estimates of future developments and may change significantly in the future due to unforeseen direct and indirect impacts of the COVID-19 pandemic.

The accompanying unaudited condensed combined financial statements do not include all information required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying unaudited condensed combined financial statements. These financial statements should be read in conjunction with the audited combined financial statements and notes thereto for the year ended December 31, 2019 and the comparable prior year periods, which are included elsewhere within this information statement. The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of operating results for the full year.

Accounting Policies and Estimates

See Note 1 to the audited combined financial statements included elsewhere in this information statement for an expanded discussion of accounting policies and estimates. Discussions of accounting estimates and application of accounting policies herein have also been updated as applicable to describe the impacts of the COVID-19 pandemic described above.

Revenue Recognition

Aaron’s SpinCo provides lease merchandise, consisting primarily of furniture, home appliances, consumer electronics and accessories to its customers for lease under certain terms agreed to by the customer. Our stores and e-commerce platform offer leases with flexible terms that can be renewed up to 12, 18 or 24 months. The customer has the right to acquire ownership either through an early purchase option or through payment of all required lease payments. The agreements are cancelable at any time by either party without penalty, and as such we consider the agreements to be month-to-month arrangements. Aaron’s SpinCo also earns revenue from the sale of merchandise to customers and its franchisees, and earns ongoing revenue from its franchisees primarily in the form of royalties and through advertising efforts that benefit the franchisees. In response to the COVID-19 pandemic, Aaron’s SpinCo temporarily suspended, as opposed to deferring, the royalty fee obligation in March 2020, effectively forgiving the franchisee royalty payments that otherwise would have been due during the suspension period. Aaron’s SpinCo reinstated the requirement that franchisees make royalty payments during the second quarter of 2020, but there can be no assurance that we will not implement another suspension or a deferral of franchisee royalty payments in future periods, such as, for example, in response to our franchisees experiencing financial difficulty due to a resurgence of COVID-19 cases.

Aaron’s SpinCo’s lease revenues are recognized as revenue net of related sales taxes in the month they are earned. Lease payments received prior to the month earned are recorded as deferred lease revenue, and this amount is included in customer deposits and advance payments in the accompanying condensed combined balance sheets. Lease payments due but not yet received are recorded within accounts receivable in the condensed combined balance sheets. Lease revenues are recorded net of a provision for returns and uncollectible renewal payments.

 

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Index to Financial Statements

AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

See Note 3 to these condensed combined financial statements for further information regarding Aaron’s SpinCo’s revenue recognition policies and disclosures.

Lease Merchandise

Aaron’s SpinCo’s lease merchandise is recorded at the lower of cost or net realizable value. The cost of merchandise manufactured by our Woodhaven operations is recorded at cost and includes overhead from production facilities, shipping costs and warehousing costs. Aaron’s SpinCo begins depreciating merchandise at the earlier of 12 months and one day from its purchase of the merchandise or when the item is leased to customers. Lease merchandise depreciates to a 0% salvage value over the lease agreement period when on lease, generally 12 to 24 months, and generally 36 months when not on lease. Depreciation is accelerated upon early payout.

The following is a summary of lease merchandise, net of accumulated depreciation and allowances:

 

(In Thousands)

   September 30,
2020
     December 31,
2019
 

Merchandise on Lease, net of Accumulated Depreciation and Allowances

   $ 453,429    $ 504,979

Merchandise Not on Lease, net of Accumulated Depreciation and Allowances

     208,093      276,619
  

 

 

    

 

 

 

Lease Merchandise, net of Accumulated Depreciation and Allowances1

   $ 661,522    $ 781,598
  

 

 

    

 

 

 

 

1 

Includes Woodhaven raw materials and work-in-process inventory that has been classified within lease merchandise in the condensed combined balance sheets of $16.4 million and $14.0 million as of September 30, 2020 and December 31, 2019, respectively.

Aaron’s SpinCo’s policies require weekly merchandise counts for its store-based operations, which include write-offs for unsalable, damaged, or missing merchandise inventories. In addition to monthly cycle counting, full physical inventories are generally taken at the fulfillment and manufacturing facilities annually and appropriate provisions are made for missing, damaged and unsalable merchandise. In addition, Aaron’s SpinCo monitors merchandise levels and mix by division, store, and fulfillment center, as well as the average age of merchandise on hand. If obsolete merchandise cannot be returned to vendors, its carrying amount is adjusted to its net realizable value or written off. Generally, all merchandise not on lease is available for lease or sale. On a monthly basis, all damaged, lost or unsalable merchandise identified is written off.

Aaron’s SpinCo records a provision for write-offs using the allowance method. The allowance for lease merchandise write-offs estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based primarily on historical write-off experience. Other qualitative factors are considered in estimating the allowance, such as current and forecasted business trends including, but not limited to, the potential unfavorable impacts of the COVID-19 pandemic on our business. Given the significant uncertainty regarding the impacts of the COVID-19 pandemic on our businesses, a high level of estimation was involved in determining the allowance as of September 30, 2020; therefore, actual lease merchandise write-offs could differ materially from the allowance. The provision for write-offs is included in provision for lease merchandise write-offs in the accompanying condensed combined statements of earnings. Aaron’s SpinCo writes

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

off lease merchandise on lease agreements that are 60 days or more past due on pre-determined dates twice monthly.

The following table shows the components of the allowance for lease merchandise write-offs, which is included within lease merchandise, net within the condensed combined balance sheets:

 

     Nine Months Ended
September 30,
 

(In Thousands)

   2020      2019  

Beginning Balance

   $ 13,823    $ 10,910

Merchandise Written off, net of Recoveries

     (49,058      (68,665

Provision for Write-offs

     47,478      70,068
  

 

 

    

 

 

 

Ending Balance

   $ 12,243    $ 12,313
  

 

 

    

 

 

 

Retail and Non-Retail Cost of Sales

Included in cost of lease and retail revenues as well as non-retail cost of sales is the net book value of merchandise sold via retail and non-retail sales, primarily using specific identification.

Accounts Receivable

Accounts receivable consist primarily of receivables due from customers on lease agreements, corporate receivables incurred during the normal course of business (primarily for vendor consideration and real estate leasing activities) and franchisee obligations.

Accounts receivable, net of allowances, consist of the following:

 

(In Thousands)

   September 30,
2020
     December 31,
2019
 

Customers

   $ 7,174    $ 9,820

Corporate

     14,101      14,028

Franchisee

     11,093      13,231
  

 

 

    

 

 

 
   $ 32,368    $ 37,079
  

 

 

    

 

 

 

Aaron’s SpinCo maintains an accounts receivable allowance, under which Aaron’s SpinCo’s policy is to record a provision for returns and uncollectible contractually due renewal payments based on historical collection experience. Other qualitative factors are considered in estimating the allowance, such as current and forecasted business trends including, but not limited to, the potential unfavorable impacts of the COVID-19 pandemic on our businesses. The provision for returns and uncollectible contractually due renewal payments is recognized as a reduction of lease and retail revenues within the condensed combined statements of earnings. Aaron’s SpinCo writes off lease receivables that are 60 days or more past due on pre-determined dates twice monthly.

Aaron’s SpinCo also maintains an allowance for outstanding franchisee accounts receivable. Aaron’s SpinCo’s policy is to estimate a specific allowance on accounts receivable to estimate future losses related to certain franchisees that are deemed higher risk of non-payment and a general allowance based on historical losses as well as management’s assessment of the financial health of all other franchisees. The estimated allowance on accounts receivable includes consideration of broad macroeconomic trends, such as the potential unfavorable

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

impacts of the COVID-19 pandemic on the franchisees’ ability to satisfy their obligations. The provision for uncollectible franchisee accounts receivable is recorded as bad debt expense in other operating expenses, net within the condensed combined statements of earnings.

Given the significant uncertainty regarding the impacts of the COVID-19 pandemic on our business, a high level of estimation was involved in determining the allowance for accounts receivable as of September 30, 2020; therefore, actual accounts receivable write-offs could differ materially from the allowance.

The following table shows the amounts recognized for bad debt expense and provision for returns and uncollected payments:

 

     Nine Months Ended
September 30,
 

(In Thousands)

   2020      2019  

Bad Debt Expense

   $ 933    $ 688

Provision for Returns and Uncollectible Renewal Payments

     21,156      32,779
  

 

 

    

 

 

 

Accounts Receivable Provision

   $ 22,089    $ 33,467
  

 

 

    

 

 

 

Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist of the following:

 

(In Thousands)

   September 30,
2020
     December 31,
2019
 

Prepaid Expenses

   $ 27,263    $ 28,975

Prepaid Insurance

     28,609      26,393

Assets Held for Sale

     11,799      10,131

Deferred Tax Assets

     3,438      3,439

Other Assets

     18,206      23,443
  

 

 

    

 

 

 
   $ 89,315    $ 92,381
  

 

 

    

 

 

 

Assets Held for Sale

Certain properties, consisting of parcels of land and commercial buildings, met the held for sale classification criteria as of September 30, 2020 and December 31, 2019. Assets held for sale are recorded at the lower of their carrying value or fair value less estimated cost to sell and are classified within prepaid expenses and other assets in the condensed combined balance sheets. Depreciation is suspended on assets upon classification to held for sale.

The carrying amount of the properties held for sale as of September 30, 2020 and December 31, 2019 was $11.8 million and $10.1 million, respectively. Management estimated the fair values of real estate properties using the market values for similar properties. These properties are considered Level 2 assets as defined below.

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

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. The following table provides information related to the carrying amount of Aaron’s SpinCo goodwill.

 

(In Thousands)

      

Balance at December 31, 2019

   $ 447,781

Acquisitions

     2,658

Disposals, Currency Translation and Other Adjustments

     (941

Acquisition Accounting Adjustments

     40

Impairment Loss

     (446,893
  

 

 

 

Balance at September 30, 2020

   $ 2,645
  

 

 

 

Impairment occurs when the carrying amount of goodwill is not recoverable from future cash flows. Goodwill is not amortized but is subject to an impairment test at the reporting unit level annually as of October 1 and more frequently if events or circumstances indicate that impairment may have occurred. An interim goodwill impairment test is required if management believes it is more likely than not that the carrying amount exceeds the reporting units’ fair value. The Company concluded that the need for an interim goodwill impairment test was triggered as of March 31, 2020. Factors that led to this conclusion included: (i) a significant decline in Parent’s stock price and market capitalization in March 2020; (ii) the temporary closure of all company-operated store showrooms due to the COVID-19 pandemic, which adversely impacted our financial results and was expected to adversely impact future financial results; (iii) the significant uncertainty with regard to the short-term and long-term impacts that adverse macroeconomic conditions arising from the COVID-19 pandemic and related government emergency and executive orders would have on the financial health of our customers and franchisees; and (iv) consideration given to the amount by which the Aaron’s SpinCo fair value exceeded the carrying value from the October 1, 2019 annual goodwill impairment test.

As of March 31, 2020, the Company determined the Aaron’s SpinCo goodwill was fully impaired and recorded a goodwill impairment loss of $446.9 million during the three months ended March 31, 2020. The Company engaged the assistance of a third-party valuation firm to perform the interim goodwill impairment test, which entailed an assessment of the Aaron’s SpinCo reporting unit’s fair value relative to the carrying value that was derived using a combination of both income and market approaches and performing a market capitalization reconciliation which included an assessment of the control premium implied from Parent’s estimated fair values of its reporting units. The fair value measurement involved significant unobservable inputs (Level 3 inputs, as discussed more fully below). The income approach utilized the discounted future expected cash flows, which required assumptions about short-term and long-term revenue growth or decline rates, operating margins, capital requirements, and a weighted-average cost of capital. The income approach reflects assumptions and estimates made by management regarding direct and indirect impacts of the COVID-19 pandemic on the short-term and long-term cash flows for Aaron’s SpinCo. Due to the significant uncertainty associated with the impacts of the COVID-19 pandemic, the assumptions and estimates used by management were highly subjective. The weighted-average cost of capital used in the income approach was adjusted to reflect the specific risks and uncertainties associated with the COVID-19 pandemic in developing the cash flow projections. Given the uncertainty discussed above, management performed certain sensitivity analyses including considering reasonably possible alternative assumptions for short-term and long-term growth or decline rates, operating margins, capital requirements, and weighted-average cost of capital rates. Each of the sensitivity analyses performed supported the conclusion of a full impairment of the Aaron’s SpinCo goodwill as of March 31,2020.

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

The market approach, which includes the guideline public company method, utilized pricing multiples derived from an analysis of publicly traded companies comparable to Aaron’s SpinCo. We believe the comparable companies we evaluate as marketplace participants serve as an appropriate reference when calculating fair value because those companies have similar risks, participate in similar markets, provide similar products and services for their customers and compete with us directly. However, we considered that such publicly available information regarding the comparable companies evaluated likely does not reflect the impact of the COVID-19 pandemic in determining the multiple assumptions selected.

Segment Reporting

Management has concluded that the Company has one operating segment based on the nature of the financial information that is regularly reviewed by the Chief Operating Decision Maker, which is used to assess performance and allocate resources. We have also concluded that the Company has one reporting unit due to the fact that the components included within the operating segment have similar economic characteristics, such as the nature of the products and services provided, the nature of the customers we serve, and the interrelated nature of the components that are aggregated to form the sole reporting unit. The Company evaluates performance and allocates resources for Aaron’s SpinCo as a single operating segment based on revenue growth and pre-tax profit or loss from operations.

Loss before income taxes for Aaron’s SpinCo during the nine months ended September 30, 2020 was impacted by (i) goodwill impairment charges of $446.9 million, (ii) $14.1 million related to an early termination fee for a sales and marketing agreement, (iii) $1.7 million of transaction and separation-related charges and (iv) restructuring charges of $33.3 million related to operating lease right-of-use asset impairment and operating lease charges, fixed asset impairment charges, and workforce reductions.

Earnings before income taxes for Aaron’s SpinCo during the nine months ended September 30, 2019 includes restructuring charges of $37.5 million related to closed store right-of-use asset impairment and operating lease charges, the write-off and impairment of store property, plant and equipment and related workforce reductions.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

 

(In Thousands)

   September 30,
2020
     December 31,
2019
 

Accounts Payable

   $ 72,157    $ 80,173

Accrued Insurance Costs

     49,352      44,032

Accrued Salaries and Benefits

     61,344      33,122

Accrued Real Estate and Sales Taxes

     23,430      21,129

Other Accrued Expenses and Liabilities

     46,753      42,140
  

 

 

    

 

 

 
   $ 253,036    $ 220,596
  

 

 

    

 

 

 

Debt

All of the Aaron’s, LLC debt obligations and related unamortized debt issuance costs as of September 30, 2020, and December 31, 2019 and the related interest expense for the nine months ended September 30, 2020 and 2019 have been included within Aaron’s SpinCo’s condensed combined financial statements because Aaron’s, LLC, as the primary obligor for the external debt agreements, is one of the legal entities forming the basis of Aaron’s SpinCo.

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

During the first quarter of 2020, Parent temporarily borrowed $300.0 million from its revolving credit facility to preserve and protect its cash position in light of the COVID-19 pandemic. This amount was subsequently repaid on April 30, 2020. The total available credit under our revolving credit facility as of September 30, 2020 was $486.2 million.

At September 30, 2020, Parent was in compliance with all covenants related to its outstanding debt. However, given the uncertainties associated with the COVID-19 pandemic’s impact on our operations and financial performance in future periods, there can be no assurances that we will not be required to seek amendments or modifications to one or more of the covenants in our debt agreements and/or waivers of potential or actual defaults of those covenants. Refer to Note 8 to the audited combined financial statements included elsewhere in this information statement for further information regarding the Company’s indebtedness.

Leases

In response to the anticipated adverse impacts of the COVID-19 pandemic on the Aaron’s SpinCo store-based business, the Company negotiated lease concessions for approximately 184 of our company-operated store locations and received near-term rent abatements and deferrals of approximately $1.9 million as of September 30, 2020. On April 10, 2020, the Financial Accounting Standards Board (“FASB”) issued guidance for lease concessions executed in response to the COVID-19 pandemic, which provides a practical expedient to forego an evaluation of whether a lease concession should be accounted for as a modification if the concession does not result in a substantial increase of the lessee’s obligations. Management has elected to apply this guidance to all lease concessions negotiated as a result of the COVID-19 pandemic that meet these criteria.

Income Taxes

In response to the global impacts of COVID-19 on U.S. companies and citizens, the government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) CARES Act on March 27, 2020. The CARES Act, among other things, (i) waived the 80% taxable income limitation on the use of net operating losses which was previously set forth under the Tax Cuts and Jobs Act of 2017 and (ii) provided that net operating losses arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 may be treated as a carryback to each of the five preceding taxable years. These CARES Act provisions resulted in $34.2 million of net tax benefits driven by the rate differential on the carryback of net operating losses previously recorded at 21% where the benefit is recognized at 35%, which resulted in an effective tax rate of 32.9% for the nine months ended September 30, 2020.

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

Parent’s Equity

Invested capital in the condensed combined balance sheets represents the Parent’s historical investment in Aaron’s SpinCo, the accumulated net earnings after taxes and the net effect of the transactions with and allocations from Parent. Changes in Parent’s equity for the nine months ended September 30, 2020 and 2019 are as follows:

 

(In Thousands)

   Invested
Capital
     Accumulated
Other
Comprehensive
Loss
     Total
Parent’s
Equity
 

Balance, December 31, 2019

   $ 837,800    $ (19    $ 837,781

Stock-Based Compensation

     9,571      —          9,571

Net increase in Invested Capital

     148,545      —          148,545

Net Loss

     (268,787      —          (268,787

Foreign Currency Translation Adjustment

     —          (1,225      (1,225
  

 

 

    

 

 

    

 

 

 

Balance, September 30, 2020

   $ 727,129    $ (1,244    $ 725,885
  

 

 

    

 

 

    

 

 

 

 

(In Thousands)

   Invested
Capital
     Accumulated
Other
Comprehensive
Loss
     Total
Parent’s
Equity
 

Balance, December 31, 2018

   $ 782,996    $ (1,087    $ 781,909

Opening Balance Sheet Adjustment—ASC 842

     2,535      —          2,535

Stock-Based Compensation

     9,567      —          9,567

Net increase in Invested Capital

     111,712      —          111,712

Net Earnings

     7,577      —          7,577

Foreign Currency Translation Adjustment

     —          739      739
  

 

 

    

 

 

    

 

 

 

Balance, September 30, 2019

   $ 914,387    $ (348    $ 914,039
  

 

 

    

 

 

    

 

 

 

Related Party Transactions

All intercompany transactions between Aaron’s SpinCo and Parent have been included within invested capital in the condensed combined balance sheets. The total net effect of the settlement of these intercompany transactions is reflected in the condensed combined statements of cash flows as a financing activity. The significant components of the net increase in invested capital for the nine months ended September 30, 2020 and 2019 were as follows:

 

     Nine Months Ended
September 30,
 

(In Thousands)

   2020      2019  

General financing activities, net

   $ 101,295    $ 61,287

Corporate allocations

     20,452      19,366

Income tax1

     26,798      31,059
  

 

 

    

 

 

 

Net increase in Invested Capital

   $ 148,545    $ 111,712
  

 

 

    

 

 

 

 

1 

See Note 9 to the audited combined financial statements included elsewhere in this information statement for more information regarding Aaron’s SpinCo’s income taxes.

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

A liability of $3.6 million related to accrued transaction and separation-related costs has been included within accounts payable and accrued expenses as of September 30, 2020 in these condensed combined financial statements because Aaron’s, LLC is the legal obligor for the liability and is one of the legal entities forming the basis of Aaron’s SpinCo. Transaction expenses and separation-related costs of $1.7 million were recorded in personnel costs within the condensed combined statements of earnings and comprehensive income during the nine months ended September 30, 2020.

Corporate Allocations

Aaron’s SpinCo’s operating model includes a combination of standalone and combined business functions with Parent. The condensed combined financial statements include corporate allocations for expenses related to activities that are provided on a centralized basis within Parent, which are primarily expenses related to executive management, finance, treasury, tax, audit, legal, information technology, human resources and risk management functions and the related benefit cost associated with such functions, including stock-based compensation. These expenses have been allocated to Aaron’s SpinCo based on direct usage or benefit where specifically identifiable, with the remainder allocated primarily on a pro rata basis using an applicable measure of revenues, headcount or other relevant measures. Aaron’s SpinCo considers these allocations to be a reasonable reflection of the utilization of services or the benefit received. These allocated expenses are included within personnel costs and other operating expenses, net in the condensed combined statements of earnings and as an increase to invested capital in the condensed combined balance sheets. General corporate expenses allocated to Aaron’s SpinCo during the nine months ended September 30, 2020 and 2019 were $20.5 million and $19.4 million, respectively.

Management believes the assumptions regarding the allocation of general corporate expenses from Parent are reasonable. However, the condensed combined financial statements may not include all of the actual expenses that would have been incurred and may not reflect Aaron’s SpinCo’s combined results of operations, financial position and cash flows had it been a standalone company during the periods presented. Actual costs that would have been incurred if Aaron’s SpinCo had been a standalone company would depend on multiple factors, including organization structure and various other strategic decisions.

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 management’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

Aaron’s SpinCo measures a liability related to the non-qualified deferred compensation plan, which represents benefits accrued for Aaron’s SpinCo participants that are part of the Parent plan and is valued at the quoted market prices of the participants’ investment elections, at fair value on a recurring basis. Aaron’s SpinCo measures assets held for sale at fair value on a nonrecurring basis and records impairment charges when they are deemed to be impaired. Aaron’s SpinCo maintains certain financial assets and liabilities, including fixed-rate long term debt, that are not measured at fair value but for which fair value is disclosed.

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

The fair values of Aaron’s SpinCo’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. The fair value of any revolving credit and term loan borrowings also approximate their carrying amounts.

Recent Accounting Pronouncements

Adopted

Intangibles—Goodwill and Other. In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to measure an impairment of goodwill, if any, by eliminating the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. In accordance with the amendment, entities should perform goodwill impairment tests by comparing the carrying value of their reporting units to their fair value. If the carrying value of the reporting unit exceeds the fair value, an entity should record an impairment charge for the amount by which its carrying amount exceeds its reporting unit’s fair value; however, the charge recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 was effective for Aaron’s SpinCo in the first quarter of 2020. The Company concluded that the need for an interim goodwill impairment test was triggered for Aaron’s SpinCo as of March 31, 2020 and applied the simplification guidance in ASU 2017-04 in the test. The Company determined the Aaron’s SpinCo goodwill was fully impaired and recorded a goodwill impairment loss of $446.9 million during the three months ended March 31, 2020.

Financial Instruments—Credit Losses. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“CECL”). The main objective of the update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by companies at each reporting date. For trade and other receivables, held to maturity debt securities and other instruments, companies will be required to use a new forward-looking “expected losses” model that generally will result in the recognition of allowances for losses earlier than under current accounting guidance. Aaron’s SpinCo’s operating lease activities are not impacted by ASU 2016-13, as operating lease receivables are not in the scope of the CECL model. Aaron’s SpinCo adopted ASU 2016-13 on a modified retrospective basis during the first quarter of 2020, and the implementation of CECL did not have a material impact to the Aaron’s SpinCo condensed combined financial statements.

Leases. In February 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”), which requires lessees to recognize assets and liabilities for most leases and changes certain aspects of lessor accounting, among other things. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Companies must use a modified retrospective approach to adopt ASC 842; however, we adopted an optional transition method in which entities are permitted to not apply the requirements of ASC 842 in the comparative periods presented within the financial statements in the year of adoption, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The application of this optional transition method resulted in a cumulative-effect adjustment of $2.5 million representing an increase to Aaron’s SpinCo’s January 1, 2019 invested capital balance, net of tax. The increase to invested capital is due primarily to the recognition of deferred gains recorded under previous sale and operating leaseback transactions. The ASC 842 transition guidance requires companies to recognize any deferred gains not resulting from off-market terms as a cumulative adjustment to retained earnings upon adoption of ASC 842.

As a lessor, a majority of Aaron’s SpinCo’s revenue generating activities are within the scope of ASC 842. The new standard did not materially impact the timing of revenue recognition. Aaron’s SpinCo has customer lease agreements with lease and non-lease components that fall within the scope of ASU 2014-09, Revenue from

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

Contracts with Customers (“ASC 606”). Management has elected to aggregate these components into a single component for all classes of underlying assets as the lease and non-lease components generally have the same timing and pattern of transfer.

The new standard also impacts Aaron’s SpinCo as a lessee by requiring substantially all of its operating leases to be recognized on the balance sheet as operating lease right-of-use assets and operating lease liabilities. See Note 7 to the audited combined financial statements included elsewhere in this information statement regarding Aaron’s SpinCo’s leasing activities as a lessee. Management elected to adopt a package of practical expedients offered by the FASB which removes the requirement to reassess whether expired or existing contracts contain leases and removes the requirement to reassess the lease classification for any existing leases prior to the adoption date of January 1, 2019. Additionally, management has elected the practical expedient to include both lease and non-lease components as a single component and account for it as a lease.

NOTE 2: 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:

 

     September 30, 2020      December 31, 2019  

(In Thousands)

   Level 1      Level 2     Level 3      Level 1      Level 2     Level 3  

Deferred Compensation Liability

   $   —        $ (10,150   $   —        $   —        $ (11,048   $   —    

Parent maintains the Aaron’s Holdings Company, Inc. Deferred Compensation Plan, which is an unfunded, nonqualified deferred compensation plan for a select group of management, highly compensated employees and non-employee directors. The liability pertaining to the Aaron’s SpinCo’s participants is recorded in accounts payable and accrued expenses in the condensed combined balance sheets. The liability represents benefits accrued for Aaron’s SpinCo plan participants and 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:

 

     September 30, 2020      December 31, 2019  

(In Thousands)

   Level 1      Level 2      Level 3      Level 1      Level 2      Level 3  

Assets Held for Sale

   $   —        $ 11,799    $   —        $   —        $ 10,131    $   —    

Assets classified as held for sale are recorded at the lower of carrying value or fair value less estimated costs to sell, and any adjustment is recorded in other operating expenses, net or restructuring expenses, net (if the asset is a part of restructuring programs as described in Note 5) in the condensed combined statements of earnings. The highest and best use of the assets held for sale is as real estate land parcels for development or real estate properties for use or lease; however, Aaron’s SpinCo has chosen not to develop or use these properties.

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

Certain Financial Assets and Liabilities Not Measured at Fair Value

The following table summarizes the fair value of liabilities that are not measured at fair value in the combined balance sheets, but for which the fair value is disclosed:

 

     September 30, 2020      December 31, 2019  

(In Thousands)

   Level 1      Level 2     Level 3      Level 1      Level 2     Level 3  

Fixed-Rate Long Term Debt 1

   $   —        $ (61,886   $   —        $   —        $ (123,580   $   —    

 

1

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 amount of fixed-rate long term debt was $60.0 million and $120.0 million at September 30, 2020 and December 31, 2019, respectively.

NOTE 3: REVENUE RECOGNITION

The following table disaggregates revenue by source:

 

     Nine Months Ended
September 30,
 

(In Thousands)

   2020      2019  

Lease Revenues and Fees

   $ 1,153,799    $ 1,189,914

Retail Sales

     37,104      30,561

Non-Retail Sales

     94,710      102,190

Franchise Royalties and Fees

     18,168      25,899

Other

     966      961
  

 

 

    

 

 

 

Total

   $ 1,304,747    $ 1,349,525
  

 

 

    

 

 

 

Lease Revenues and Fees

Aaron’s SpinCo provides merchandise, consisting primarily of furniture, home appliances, electronics and accessories to its customers for lease under certain terms agreed to by the customer. Aaron’s SpinCo’s stores and its e-commerce platform offer leases with flexible terms that can be renewed up to 12, 18 or 24 months. Aaron’s SpinCo does not require deposits upon inception of customer agreements. The customer has the right to acquire ownership either through an early purchase option or through payment of all required lease payments. The agreements are cancelable at any time by either party without penalty.

Lease revenues are recognized as revenue net of related sales taxes in the month they are earned. Lease payments received prior to the month earned are recorded as deferred lease revenue, and this amount is included in customer deposits and advance payments in the accompanying condensed combined balance sheets. Lease revenues are recorded net of a provision for returns and uncollectible renewal payments.

All of Aaron’s SpinCo’s customer agreements are considered operating leases. Aaron’s SpinCo maintains ownership of the lease merchandise until all payment obligations are satisfied under sales and lease ownership agreements. Initial direct costs related to customer agreements are expensed as incurred and have been classified as other operating expenses, net in the condensed combined statements of earnings. The statement of earnings effect of expensing the initial direct costs as incurred are not materially different from amortizing initial direct costs over the lease term.

Substantially all lease revenues and fees were within the scope of ASC 842, Leases, during the nine months ended September 30, 2020 and September 30, 2019. The Company had $18.9 million and $18.4 million of other

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

revenue during the nine months ended September 30, 2020 and September 30, 2019, respectively, within the scope of ASC 606, Revenue from Contracts with Customers. Lease revenues and fees are recorded within lease and retail revenues in the condensed combined statements of earnings.

Retail and Non-Retail Sales

Revenues from the retail sale of merchandise to customers are recognized at the point of sale. Generally, the transfer of control occurs near or at the point of sale for retail sales. Revenues for the non-retail sale of merchandise to franchisees are recognized when control transfers to the franchisee, which is upon delivery of the merchandise.

Sales of lease merchandise to franchisees and to other customers are recorded within non-retail sales and lease and retail revenues, respectively, in the accompanying condensed combined statements of earnings. All retail and non-retail sales revenue is within the scope of ASC 606, Revenue from Contracts with Customers, during the nine months ended September 30, 2020 and September 30, 2019.

Franchise Royalties and Fees

Franchisees pay an ongoing royalty of 6% of the weekly cash revenue collections, which is recognized as the fees become due.

Aaron’s SpinCo guarantees certain debt obligations of some of the franchisees and receives guarantee fees based on the outstanding debt obligations of such franchisees. Refer to Note 4 of these condensed combined financial statements for additional discussion of the franchise-related guarantee obligation. Aaron’s SpinCo also charges fees for advertising efforts that benefit the franchisees, which are recognized at the time the advertising takes place.

Substantially all franchise royalties and fees revenue is within the scope of ASC 606, Revenue from Contracts with Customers, during the nine months ended September 30, 2020 and September 30, 2019. Of the franchise royalties and fees, $13.7 million and $19.6 million during the nine months ended September 30, 2020 and September 30, 2019, is related to franchise royalty income that is recognized as the franchisee collects cash revenue from its customers. The remaining revenue is primarily related to fees collected for pre-opening services, which are being deferred and recognized as revenue over the agreement term, and advertising fees charged to franchisees. Franchise royalties and fees are recorded within franchise royalties and other revenue in the condensed combined statements of earnings.

NOTE 4: COMMITMENTS AND CONTINGENCIES

Guarantees

Aaron’s SpinCo has guaranteed certain debt obligations of some of the franchisees under a franchise loan program with one of the banks that is a party to Parent’s Credit Agreement. In the event these franchisees are unable to meet their debt service payments or otherwise experience an event of default, Aaron’s SpinCo 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 75 days of the event of default. At September 30, 2020, the maximum amount that Aaron’s SpinCo would be obligated to repay in the event franchisees defaulted was $18.6 million. Aaron’s SpinCo has recourse rights to franchisee assets securing the debt obligations, which consist primarily of lease merchandise and fixed assets. Since the inception of the franchise loan program in 1994, losses associated with the program have been immaterial, but could be material in a future period due to

 

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AARON’S SPINCO, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

 

the COVID-19 pandemic’s impact on franchisee operations and financial performance or other adverse trends in the liquidity and/or financial performance of Aaron’s SpinCo’s franchisees. Aaron’s SpinCo records a liability related to estimated future losses from repaying the franchisees’ outstanding debt obligations upon any possible future events of default. This is included in accounts payable and accrued expenses in the condensed combined balance sheets and was $2.4 million and $0.4 million as of September 30, 2020 and December 31, 2019, respectively. Subsequent to the separation and distribution transaction, Aaron’s SpinCo will continue as the guarantor of outstanding debt obligations of its franchisees under the franchise loan program.

Aaron’s SpinCo is subject to financial covenants under the franchise loan program that are consistent with the Revolving Credit and Term Loan Agreement, which are more fully described in Note 10 to the audited combined financial statements included elsewhere in this information statement. The Company is in compliance with all covenants at September 30, 2020 and believes it will continue to be in compliance in the future. However, given the uncertainties associated with the COVID-19 pandemic’s impact on our operations and financial performance in future periods, there can be no assurances that we will not be required to seek amendments or modifications to one or more of the covenants in our debt agreements and/or waivers of potential or actual defaults of those covenants.

Legal Proceedings

From time to time, Aaron’s SpinCo is party to various legal and regulatory proceedings arising in the ordinary course of business, certain proceedings of which have been described below. Aaron’s SpinCo 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. Aaron’s SpinCo continually monitors its litigation and regulatory exposure and reviews the adequacy of its legal and regulatory reserves on a quarterly basis. 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 due to the inherent uncertainty in litigation, regulatory and similar adversarial proceedings, and substantial losses from these proceedings or the costs of defending them could have a material adverse impact upon the Company’s business, financial position and results of operations.

At September 30, 2020 and December 31, 2019, the Company accrued $4.2 million and $7.7 million, respectively, for pending legal and regulatory matters for which it believes losses are probable and is management’s best estimate of its exposure to loss. Aaron’s SpinCo records these liabilities in accounts payable and accrued expenses in the condensed combined balance sheets. Of the amounts accrued, $1.0 million and $5.5 million were recorded within prepaid expenses and other assets in the condensed combined balance sheets, as Aaron’s SpinCo believes that the amounts were probable of recovery via payments received from insurance proceeds as of September 30, 2020 and December 31, 2019, respectively. The Company estimates that the aggregate range of reasonably possible loss in excess of accrued liabilities for such probable loss contingencies is between $0 and $1.0 million.

At September 30, 2020 and December 31, 2019, Aaron’s SpinCo 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 $0 and $1.0 million. Those matters for which a reasonable estimate is not possible are not included within estimated ranges and, therefore, the estimated ranges do not represent Aaron’s SpinCo’s maximum loss exposure. Aaron’s SpinCo’s estimates for legal and regulatory accruals, aggregate probable loss amounts and reasonably possible loss amounts, are all subject to the uncertainties and variables described above.

 

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Regulatory Inquiries

In July 2018, Parent received civil investigative demands (“CIDs”) from the FTC regarding disclosures related to lease-to-own and other financial products offered by Parent through Aaron’s SpinCo and Parent’s Progressive Leasing business and whether such disclosures violate the Federal Trade Commission Act (the “FTC Act”). We believe such Aaron’s SpinCo disclosures were in compliance with the FTC Act. We cooperated with the FTC in its inquiry regarding disclosures made by the Aaron’s SpinCo business, after which the FTC resolved that inquiry without taking any action against the Aaron’s SpinCo business.

In April 2019, Parent, along with other lease-to-own companies, received an unrelated CID from the FTC focused on certain transactions involving the contingent purchase and sale of customer lease agreements with other lease-to-own companies, and whether such transactions violated the FTC Act. Although we believe those transactions did not violate any laws, in August 2019, Parent reached an agreement in principle with the FTC staff to resolve the issues raised in that CID. The proposed consent agreement, which would prohibit such contingent purchases and sales of customer lease portfolios in the future but would not require any payments to the FTC, was approved by the FTC on February 21, 2020.

NOTE 5: RESTRUCTURING

Real Estate Repositioning and Optimization Restructuring Program

During the first quarter of 2020, Aaron’s SpinCo initiated a real estate repositioning and optimization restructuring program. This program includes a strategic plan to remodel, reposition and consolidate our company-operated store footprint over the next 3-4 years. Management believes that such strategic actions will allow the Company to continue to successfully serve our markets while continuing to utilize our growing Aarons.com shopping and servicing platform. Management expects that this strategy, together with our increased use of technology, will enable us to reduce store count while retaining a significant portion of our existing customer relationships as well as attracting new customers.

Since initiation, the program has resulted in the closure and consolidation of 88 company-operated stores during the first nine months of 2020. We currently expect to close and consolidate approximately 35 additional stores over the next three to six months. Total net restructuring expenses of $25.2 million were recorded for the nine months ended September 30, 2020 under the real estate repositioning and optimization restructuring program. Restructuring expenses for the nine months ended September 30, 2020 were comprised mainly of operating lease right-of-use asset and fixed asset impairment charges related to the vacancy or planned vacancy of the stores identified for closure, continuing variable maintenance charges and taxes incurred related to closed stores, and severance charges to rationalize our field support and store support center staff to better align the organization with current operations and business conditions.

Management continually evaluates its company-operated store portfolio to determine if it will further rationalize its store base to better align with marketplace demand. Under the real estate repositioning restructuring program, Aaron’s SpinCo’s current strategic plan is to reduce its company-operated store footprint by approximately 300 stores over the next 3-4 years. To the extent that management executes on its long-term plan, additional restructuring charges will result from our real estate repositioning and optimization initiatives, primarily related to operating lease right-of-use asset and fixed asset impairments. However, the extent of future restructuring charges is not estimable at this time, as specific store locations to be closed and/or consolidated have not yet been identified by management.

2019 Restructuring Program

During the first quarter of 2019, Aaron’s SpinCo initiated a restructuring program to further optimize its company-operated store portfolio, which resulted in the closure and consolidation of 155 company-operated

 

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stores during 2019. Aaron’s SpinCo also further rationalized its home office and field support staff, which resulted in a reduction in associate headcount in those areas to more closely align with current business conditions.

Total net restructuring expenses of $6.2 million were recorded by Aaron’s SpinCo for the nine months ended September 30, 2020 under the 2019 restructuring program. Restructuring expenses for the nine months ended September 30, 2020 were comprised principally of closed store operating lease right-of-use asset impairment charges due to changes in estimates of future sublease activity of the vacant properties. These costs were included in restructuring expenses, net in the condensed combined statements of earnings. We expect future restructuring expenses (reversals) due to potential future early buyouts of leases with landlords as well as continuing variable maintenance charges and taxes.

2017 and 2016 Restructuring Programs

During the years ended December 31, 2017 and 2016, Aaron’s SpinCo initiated restructuring programs to rationalize its company-operated store base portfolio to better align with marketplace demand. The programs resulted in the closure and consolidation of 139 company-operated stores throughout 2016, 2017, and 2018. Aaron’s SpinCo also optimized its home office staff and field support, which resulted in a reduction in associate headcount in those areas to more closely align with current business conditions.

Total net restructuring expenses of $1.9 million were recorded for the nine months ended September 30, 2020 under the 2017 and 2016 restructuring programs. Restructuring expenses for the nine months ended September 30, 2020 were comprised principally of closed store operating lease right-of-use asset impairment charges due to changes in estimates of future sublease activity of the vacant properties. These costs were included in restructuring expenses, net in the condensed combined statements of earnings. We expect future restructuring expenses (reversals) due mainly to potential future early buyouts of leases with landlords as well as continuing variable maintenance charges and taxes, but do not expect these charges or reversals to be material.

The following table summarizes restructuring charges for the nine months ended September 30, 2020 and 2019, respectively, under the three programs:

 

     Nine Months Ended
September 30,
 

(In Thousands)

   2020      2019  

Right-of-Use Asset Impairment

   $ 19,526    $ 23,597

Operating Lease Charges

     4,318      3,019

Severance

     5,711      3,368

Fixed Asset Impairment

     3,168      4,743

Other Expenses

     595      2,808
  

 

 

    

 

 

 

Total Restructuring Expenses, Net

   $ 33,318    $ 37,535
  

 

 

    

 

 

 

To date, the Company has incurred charges of $42.8 million under the 2016 and 2017 restructuring programs, $44.6 million under the 2019 restructuring program, and $25.2 million under the real estate repositioning and optimization restructuring program. These cumulative charges are primarily comprised of operating lease right-of-use asset and fixed impairment charges, losses recognized related to contractual lease obligations, and severance related to reductions in store support center and field support staff headcount.

 

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The following table summarizes the balances of the accruals for the restructuring programs, which are recorded in accounts payable and accrued expenses in the condensed combined balance sheets, and the activity for the nine months ended September 30, 2020:

 

(In Thousands)

   Severance  

Balance at January 1, 2020

   $ 756

Restructuring Severance Charges

     5,711

Payments

     (4,981
  

 

 

 

Balance at September 30, 2020

   $ 1,486
  

 

 

 

 

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