UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): November 19, 2020

 

 

The Aaron’s Company, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Georgia   1-39681   85-2483376

(State or other jurisdiction of

incorporation or organization)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

400 Galleria Parkway SE, Suite 300

Atlanta, Georgia

  30339-3194
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code:

(678) 402-3000

Not Applicable

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 under the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 under the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

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.  ☐

 

 

 


Item 8.01.

Other Events.

The Aaron’s Company, Inc. (“Aaron’s” or the “Company”), a wholly-owned subsidiary of Aaron’s Holdings Company, Inc. (“Holdings”), previously filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement on Form 10 (as amended, the “Registration Statement”) relating to the distribution by Holdings of 100% of the outstanding shares of common stock of Aaron’s (the “Distribution”) in connection with the Company’s spin-off from Holdings. The Registration Statement includes a preliminary information statement that describes the Distribution and provides information regarding the Company’s business and management. On November 19, 2020, the Commission declared the Registration Statement effective.

The final information statement, dated November 19, 2020 (the “Information Statement”), is attached hereto as Exhibit 99.1 and incorporated herein by reference.

As further described in the Information Statement, the Distribution is expected to occur at 11:59 p.m., Eastern Time, on November 30, 2020.

 

Item 9.01.

Financial Statements and Exhibits

 

(d)

Exhibits

 

Exhibit No.

  

Description of Exhibit

99.1    Information Statement of The Aaron’s Company, Inc., dated November 19, 2020


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    THE AARON’S COMPANY, INC.
    By:  

/s/ C. Kelly Wall

      C. Kelly Wall
      Chief Financial Officer
Date: November 19, 2020      

Exhibit 99.1

November 19, 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 The Aaron’s Company, 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 one share of Aaron’s SpinCo common stock for every two shares of Parent common stock held as of the close of business on November 27, 2020, 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.


LOGO

November 19, 2020

Dear The Aaron’s Company, Inc. Shareholder:

On behalf of The Aaron’s Company, 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.

The Aaron’s Company 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 9,000-plus team members.

Following the separation, The Aaron’s Company 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 a shareholder as we begin this new and exciting chapter.

Sincerely,

 

LOGO

Douglas Lindsay

Chief Executive Officer

The Aaron’s Company, Inc.


INFORMATION STATEMENT

The Aaron’s Company, 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 The Aaron’s Company, 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 two shares of common stock of Parent held of record by you as of the close of business on November 27, 2020, the record date for the distribution, you will receive one share 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 11:59 p.m., Eastern Time, on November 30, 2020. 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 “AAN”. Parent expects to change its stock symbol from “AAN” to “PRG” 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 November 19, 2020.

This information statement will be made publicly available at www.materialnotice.com beginning November 19, 2020, and notices of this information statement’s availability will be first sent to Parent shareholders on or about November 19, 2020.


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 THE AARON’S COMPANY, 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

     96  

COMPENSATION DISCUSSION AND ANALYSIS

     102  

EXECUTIVE COMPENSATION

     117  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     129  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     135  

DESCRIPTION OF MATERIAL INDEBTEDNESS AND GUARANTEES

     139  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     142  

DESCRIPTION OF OUR CAPITAL STOCK

     144  

WHERE YOU CAN FIND MORE INFORMATION

     149  

 

i


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 The Aaron’s Company, 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 one share of Aaron’s SpinCo common stock for every two shares 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

 

ii


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.



 

1


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



 

2


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



 

3


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 and after the transfer of approximately $56.0 million of cash by Aaron’s SpinCo to Parent and the payment of $52.0 million of total estimated cash separation and distribution costs on behalf of Parent and Aaron’s SpinCo, we expect that we will have cash of approximately $45.0 million, with additional liquidity through a $250.0 million senior unsecured revolving credit facility of which no amounts will be drawn upon. The total estimated cash separation and distribution costs include approximately $11.0 million of unpaid costs that Aaron’s SpinCo will be obligated to pay after the effective time of the distribution. 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. For additional information regarding the transfer of cash to Parent and estimated separation and distribution costs, see the section entitled “Estimated Separation and Distribution Costs; Transfer of Cash to Parent.”

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



 

4


 

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 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.



 

5


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 November 11, 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 one share of Aaron’s SpinCo common stock for every two shares of Parent common stock held as of the close of business on November 27, 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.



 

6


   

Well-Capitalized Balance Sheet. At the effective time of the distribution and after the transfer of approximately $56.0 million of cash by Aaron’s SpinCo to Parent and the payment of $52.0 million of total estimated cash separation and distribution costs on behalf of Parent and Aaron’s SpinCo, we expect that we will have cash of approximately $45.0 million, with additional liquidity through a $250.0 million senior unsecured revolving credit facility of which no amounts will be drawn upon. The total estimated cash separation and distribution costs include approximately $11.0 million of unpaid costs that Aaron’s SpinCo will be obligated to pay after the effective time of the distribution. 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. For additional information regarding the transfer of cash to Parent and estimated separation and distribution costs, see the section entitled “Estimated Separation and Distribution Costs; Transfer of Cash to Parent.”

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 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 (678) 402-3000. 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.



 

7


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
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

8


    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.



 

9


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 November 27, 2020, the record date of the distribution, you will be entitled to receive one share of Aaron’s SpinCo common stock for every two shares 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 two shares of common stock of Parent held of record by you as of the close of business on November 27, 2020, the record date for the distribution, you will receive one share 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 November 27, 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 11:59 p.m., Eastern Time, on November 30, 2020, to holders of record of shares of Parent common stock as of the close of business on November 27, 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



 

10


 

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 November 27, 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 one share of Aaron’s SpinCo common stock for every two shares of Parent common stock held by you as of close of business on the record date for the distribution. Based on approximately 67,557,018 shares of Parent common stock outstanding as of November 6, 2020, a total of approximately 33,778,509 shares of Aaron’s SpinCo common stock will be distributed to holders of record of Parent common stock as of the close of business on November 27, 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.


 

11


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;



 

12


   

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 11:59 p.m., Eastern Time, on November 30, 2020, to holders of record of shares of Parent common stock as of the close of business on November 27, 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 November 30, 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



 

13


 

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 “AAN.” 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 “PRG” 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 two shares of Parent common stock and one share 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



 

14


 

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 $250 million of indebtedness available to borrow upon completion of the separation under a $250 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 1-800-568-3476.

 

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:

 

  The Aaron’s Company, 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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At the effective time of the distribution and after the transfer of cash to Parent and the payment of $52.0 million of total estimated cash separation and distribution costs on behalf of Parent and Aaron’s SpinCo, we expect that we will have cash of approximately $45.0 million, with additional liquidity through a $250.0 million senior unsecured revolving credit facility of which no amounts will be drawn upon. The transfer of cash to Parent will be reduced by the amount of unpaid separation and distribution costs that Aaron’s SpinCo will be obligated to pay after the effective time of the distribution. We do not expect to incur any additional separation and distribution costs after the effective time of the distribution that would be material. However, if we do incur additional material costs and we do not have sufficient cash available to repay such costs, we may be required to borrow under our revolving credit facility to repay such amounts, resulting in greater interest expense. For additional information regarding the estimated separation and distribution costs, see the section entitled “Estimated Separation and Distribution Costs.”

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 The Aaron’s Company, 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

 

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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 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 two shares of Parent common stock and one share 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

 

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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.

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

 

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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;

   

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.

 

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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 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.

 

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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.

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 one share of our common stock and two shares 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 33,778,509 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.

 

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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 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

 

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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, 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 “PROG Holdings, Inc.”

On November 11, 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 one share of Aaron’s SpinCo common stock for every two shares of Parent common stock held as of the close of business on November 27, 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 11:59 p.m., Eastern Time on November 30, 2020, the distribution date, each Parent shareholder will receive one share of Aaron’s SpinCo common stock for every two shares 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 and after the transfer of approximately $56.0 million of cash by Aaron’s SpinCo to Parent and the payment of $52.0 million of total estimated cash separation and distribution costs on behalf of Parent and Aaron’s SpinCo, we expect that we will have cash of approximately $45.0 million, with additional liquidity through a $250.0 million senior unsecured revolving credit facility of which no amounts will be drawn upon. The total estimated cash separation and distribution costs include approximately $11.0 million of unpaid costs that Aaron’s SpinCo will be obligated to pay after the effective time of the distribution. 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. For additional information regarding the transfer of cash to Parent and estimated separation and distribution costs, see the section entitled “Estimated Separation and Distribution Costs; Transfer of Cash to Parent.”

 

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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 change of Parent to “PROG Holdings, Inc.”

 

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 11:59 p.m., Eastern Time on November 30, 2020, the distribution date, to all holders of outstanding Parent common stock as of the close of business on November 27, 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 two shares of Parent common stock that you own at the close of business on November 27, 2020, the record date for the distribution, you will receive one share 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 November 27, 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 “AAN.” Parent expects to change its stock symbol from “AAN” to “PRG” 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

 

44


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 11:59 p.m., Eastern Time on November 30, 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

 

45


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.

 

46


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  

September 30

     0.045  

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.

 

47


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 The Aaron’s Company, 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      $ 45,000  
  

 

 

    

 

 

 

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: 112,500,000 Shares Authorized, 33,778,509 Shares Issued and Outstanding, Pro Forma4

     —          16,889  

Additional Paid-in Capital4

     —          604,936  

Invested Capital4

     727,129       

Accumulated Other Comprehensive Loss

     (1,244      (1,244
  

 

 

    

 

 

 

Total Equity

   $ 725,885    $ 620,581  
  

 

 

    

 

 

 

Total Capitalization

   $ 1,011,008    $ 621,736  
  

 

 

    

 

 

 

 

1 

Reflects an expected minimum cash and cash equivalents balance of $45.0 million pursuant to the terms of the separation and distribution agreement.

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 will have a $250.0 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 will have a $250.0 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 one share of Aaron’s SpinCo common stock for every two shares of Parent common stock.

 

48


SELECTED HISTORICAL COMBINED FINANCIAL DATA OF

THE AARON’S COMPANY, 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
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

49


    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.

 

50


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 prior to or on the distribution date;

 

   

the anticipated entry into a new senior unsecured revolving credit facility prior to or on the distribution date;

 

   

the anticipated entry into a new franchise loan facility prior to or on the distribution date;

 

   

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.

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.

 

51


THE AARON’S COMPANY, 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     $ (387,862)     (a)   $ 45,000  

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       (4,654   (b)(c)     84,661  
 

 

 

   

 

 

     

 

 

 

Total Assets

  $ 1,676,747     $ (396,340     $ 1,280,407  
 

 

 

   

 

 

     

 

 

 

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, 112,500,000 shares authorized and 33,778,509 shares issued and outstanding on a pro forma basis

      16,889     (d)     16,889  

Additional Paid-in Capital

      604,936     (a)(b)(c)(d)     604,936  

Invested Capital

    727,129       (727,129   (d)     —    

Accumulated Other Comprehensive Loss

    (1,244     —           (1,244
 

 

 

   

 

 

     

 

 

 

Total Equity

    725,885       (105,304       620,581  
 

 

 

   

 

 

     

 

 

 

Total Liabilities & Equity

  $ 1,676,747     $ (396,340     $ 1,280,407  
 

 

 

   

 

 

     

 

 

 

See the accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements, which are an integral part of the financial statements.

 

52


THE AARON’S COMPANY, 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     7,627      
(f

    (998

Other Non-Operating Income, Net

     887       —           887  
  

 

 

   

 

 

     

 

 

 

LOSS BEFORE INCOME TAX EXPENSE

     (400,756     9,361        
(391,395

INCOME TAX BENEFIT

     (131,969     2,301      
(g

   
(129,668

  

 

 

   

 

 

     

 

 

 

NET LOSS

   $ (268,787   $ 7,060       $ (261,727
  

 

 

   

 

 

     

 

 

 

LOSS PER SHARE

        
(h

   
(7.80)
 

LOSS PER SHARE ASSUMING DILUTION

        
(i

    (7.80)  

Weighted Average Shares Outstanding—Basic

        
(h

   
33,554
 

Weighted Average Shares Outstanding—Diluted

        
(i

    33,554  

See the accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements, which are an integral part of the financial statements.

 

53


THE AARON’S COMPANY, 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     15,273      (f)     (1,694

Other Non-Operating Income, Net

     3,881       —            3,881  
  

 

 

   

 

 

      

 

 

 

EARNINGS BEFORE INCOME TAX EXPENSE

     34,270       15,273          49,543  

INCOME TAX EXPENSE

     6,171       3,759      (g)     9,930  
  

 

 

   

 

 

      

 

 

 

NET EARNINGS

   $ 28,099     $ 11,514        $ 39,613  
  

 

 

   

 

 

      

 

 

 

EARNINGS PER SHARE

        (h)     1.18  

EARNINGS PER SHARE ASSUMING DILUTION

        (i)     1.18  

Weighted Average Shares Outstanding—Basic

        (h)     33,661  

Weighted Average Shares Outstanding—Diluted

        (i)     33,661  

See the accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements, which are an integral part of the financial statements.

 

54


NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

(a)

Reflects adjustment to present the minimum cash and cash equivalents balance of $45.0 million pursuant to the terms of the separation and distribution agreement. Cash in excess of the $45.0 million subsequent to the expected repayment of outstanding indebtedness and expected payment of separation and distribution costs prior to and upon the distribution date will be transferred to Parent. The transfer of cash to Parent will be reduced by the amount of unpaid separation and distribution costs that Aaron’s SpinCo will be obligated to pay after the effective time of the distribution. The pro forma adjustments are summarized below:

 

(In Thousands)    September 30,
2020
 

Repayment of outstanding indebtedness

     (286,700

Payment of estimated separation and distribution costs

     (42,348

Transfer to Parent

     (58,814
  

 

 

 

Total pro forma adjustment to cash and cash equivalents

   $ (387,862
  

 

 

 

 

(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 will have a $250.0 million senior unsecured revolving credit facility, which is expected to be undrawn at the distribution date and we have assumed to be undrawn during the pro forma periods presented. Accordingly, the adjustment to the historical debt balance as of September 30, 2020 reflects the removal of the outstanding debt balance of $284.0 million, which is net of debt issuance costs of $1.0 million. The adjustment to the historical accounts payable and accrued expenses balance includes the removal of $0.7 million of related accrued and unpaid interest expense. The adjustment to the historical prepaid expenses and other assets balance reflects the removal of debt issuance costs of $2.2 million related to the historical revolving credit facility, and the recognition of $2.3 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 33,778,509 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 two 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

     (16,889

Invested Capital

     727,129  

Impact of pro forma adjustments

     (105,304
  

 

 

 

Total pro forma adjustment to additional paid-in-capital

   $ 604,936  
  

 

 

 

 

(e)

Reflects the removal of non-recurring separation and distribution 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 $250.0 million senior unsecured

 

55


  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 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 $1.0 million and $1.3 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

     (657      (876

Amortization of new debt issuance costs

     (341      (455

Removal of historical interest expense, excluding finance lease obligations

     8,625        16,604  
  

 

 

 

Total pro forma adjustment to interest expense

   $ 7,627      $ 15,273  
  

 

 

 

 

(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 two 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 distribution date. We cannot estimate the dilutive effects at this time.

 

56


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

 

57


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.

 

58


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.

 

59


   

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.

 

60


   

Maintain a well-capitalized balance sheet

At the effective time of the distribution and after the transfer of approximately $56.0 million of cash by Aaron’s SpinCo to Parent and the payment of $52.0 million of total estimated cash separation and distribution costs on behalf of Parent and Aaron’s SpinCo, we expect that we will have cash of approximately $45.0 million, with additional liquidity through a $250.0 million senior unsecured revolving credit facility of which no amounts will be drawn upon. The total estimated cash separation and distribution costs include approximately $11.0 million of unpaid costs that Aaron’s SpinCo will be obligated to pay after the effective time of the distribution. 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. For additional information regarding the transfer of cash to Parent and estimated separation and distribution costs, see the section entitled "Estimated Separation and Distribution Costs; Transfer of Cash to Parent."

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.

 

61


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 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 November 10, 2020, Aaron’s SpinCo had approximately 9,000-plus 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 The Aaron’s Company, 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, The Aaron’s Company, Inc., a Georgia corporation. Upon completion of the separation and distribution transaction, The Aaron’s Company, 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; Transfer of Cash to Parent

Parent and Aaron’s SpinCo are incurring incremental costs to evaluate, plan and execute the separation. Parent and Aaron’s SpinCo estimate that these cash separation and distribution costs will be approximately $52.0 million in the aggregate (or approximately $66.0 million when including $14.0 million of non-cash expenses related to employee stock compensation modifications and the write-off of unamortized debt issuance costs related to the current credit facilities). Of the estimated 52.0 million in cash separation and distribution costs, we expect that approximately $40.0 million will be paid by Parent and Aaron’s SpinCo prior to or concurrent with the distribution. After the separation and distribution, we expect that Parent will pay $1.0 million of cash separation and distribution costs, and SpinCo will pay $11.0 million of cash separation and distribution costs.

Prior to completion of the separation and distribution, we expect that Aaron’s SpinCo will transfer approximately $56.0 million of cash to Parent.

 

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We expect that we will have cash of approximately $45.0 million after giving effect to the transfer of cash by Aaron’s SpinCo to Parent and the payment of all total estimated cash separation and distribution costs on behalf of Aaron’s SpinCo and Parent.

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.

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

 

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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.

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

 

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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.

Provision for Lease Merchandise Write-offs. Provision for lease merchandise write-offs represents charges incurred related to estimated lease merchandise write-offs.

 

73


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.

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
  

 

 

   

 

 

   

 

 

   

 

 

 

 

74


     Nine Months Ended
September 30,
    Change  

(In Thousands)

   2020     2019     $     %  

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 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.

 

75


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 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.

 

76


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.

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.

 

77


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-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.

 

78


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

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

 

79


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.

 

80


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 </