10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                  to                 
Commission file Number. 1-13941
 
 AARON’S, INC.
(Exact name of registrant as specified in its charter)
 
GEORGIA
 
58-0687630
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
309 E. PACES FERRY ROAD, N.E.
ATLANTA, GEORGIA
 
30305-2377
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (404) 231-0011
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.50 Par Value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
ý
 
Accelerated Filer
 
¨
 
 
 
 
Non-Accelerated Filer
¨
 
Smaller Reporting Company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2015 was $1,978,700,976 based on the closing price on that date as reported by the New York Stock Exchange. Solely for the purpose of this calculation and for no other purpose, the non-affiliates of the registrant are assumed to be all shareholders of the registrant other than (i) directors of the registrant, (ii) executive officers of the registrant, and (iii) any shareholder that beneficially owns 10% or more of the registrant’s common shares.
As of February 26, 2016, there were 72,607,843 shares of the Company’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2016 annual meeting of shareholders, to be filed subsequently with the Securities and Exchange Commission, or SEC, pursuant to Regulation 14A, are incorporated by reference into Part III of this Annual Report on Form 10-K.

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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain oral and written statements made by Aaron’s, Inc. (the "Company" or "Aaron's") about future events and expectations, including statements in this Annual Report on Form 10-K, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For those statements we claim the protection of the safe harbor provisions for forward-looking statements contained in such section. Forward-looking statements are not statements of historical facts but are based on management’s current beliefs, assumptions and expectations regarding our future economic performance, taking into account the information currently available to management.
Generally, the words "anticipate," "believe," "could," "estimate," "expect," "intend," "plan," "project," "would," and similar expressions identify forward-looking statements. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including growth in store openings, franchises awarded, market share and statements expressing general optimism about future operating results, are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and the Company’s present expectations or projections. Factors that could cause our actual results to differ materially from any forward-looking statements include changes in general economic conditions, competition, pricing, customer demand, litigation and regulatory proceedings and those factors discussed in the Risk Factors section of this Annual Report on Form 10-K. We qualify any forward-looking statements entirely by these cautionary factors.
The above mentioned risk factors are not all-inclusive. Given these uncertainties and that such statements speak only as of the date made, you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise.


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PART I.
ITEM 1. BUSINESS
Unless otherwise indicated or unless the context otherwise requires, all references in this Annual Report on Form 10-K to the "Company," "we," "us," "our" and similar expressions are references to Aaron’s, Inc. and its consolidated subsidiaries.
General Development of Business
Established in 1955 and incorporated in 1962 as a Georgia corporation, Aaron’s, Inc., is a leading specialty retailer of furniture, consumer electronics, computers, appliances and household accessories. Our store-based operations engage in the lease ownership and retail sale of a wide variety of products such as televisions, computers, tablets, mobile phones, living room, dining room and bedroom furniture, mattresses, washers, dryers and refrigerators. Our stores carry well-known brands such as Samsung®, Frigidaire®, Hewlett-Packard®, LG®, Whirlpool®, Simmons®, Philips®, JVC®, Sharp® and Magnavox®.
On April 14, 2014, the Company acquired a 100% ownership interest in Progressive Finance Holdings, LLC ("Progressive"), a leading virtual lease-to-own company. Through our Progressive business, we offer lease-purchase solutions to the customers of traditional retailers on a variety of products, including furniture and bedding, mobile phones, consumer electronics, appliances and jewelry. Progressive provides lease-purchase solutions in 46 states.
On October 15, 2015, the Company acquired a 100% ownership interest in Dent-A-Med, Inc., d/b/a the HELPcard®, (collectively, "DAMI") which is based in Springdale, Arkansas. DAMI partners with merchants to provide a variety of revolving credit products originated through a federally insured bank to customers that may not qualify for traditional prime lending. These are commonly referred to as "second-look" credit products. Together with Progressive, DAMI allows the Company to provide retail and merchant partners one source for financing and leasing transactions with below-prime customers. The acquisition of DAMI is expected to drive long-term incremental revenue and earnings growth at Progressive, and DAMI will benefit from Progressive's proprietary technology, infrastructure and financial capacity.
As of December 31, 2015, we had 2,039 stores, comprised of 1,305 Company-operated stores in 28 states, the District of Columbia and Canada, and 734 independently-owned franchised stores in 47 states and Canada. Included in the Company-operated store counts are 1,223 Aaron’s Sales & Lease Ownership stores (our monthly and semi-monthly pay concept) and 82 HomeSmart stores (our weekly pay concept).
We own or have rights to various trademarks and trade names used in our business including Aaron’s, Aaron’s Sales & Lease Ownership, Progressive, HomeSmart, Dent-A-Med, the HELPcard® and Woodhaven Furniture Industries. We intend to file for additional trade name and trademark protection when appropriate.
Business Environment and Company Outlook
Like many industries, the lease-to-own industry has been transformed by the internet and virtual marketplace. We believe the Progressive acquisition is strategically transformational for the Company in this respect and will strengthen our business. We also believe the lease-to-own industry has suffered in recent periods due to economic challenges faced by our traditional lease-to-own customers. In response to these changing market conditions, we are executing a strategic plan for the traditional lease-to-own store-based ("core") business that focuses on the following items and that we believe positions us for success over the long-term:
Profitably grow our stores – Despite year-over-year declines in same store revenues, our price increases, inventory reduction, and cost efficiency initiatives led to improvements in operating margins for our stores in 2015, and we remain committed to driving profitable growth.
Accelerate our omni-channel platform – We believe Aarons.com represents an opportunity to provide a unique offering in the lease-to-own industry. We are focused on engaging customers in ways that are convenient for them by providing them a seamless, direct-to-door platform through which to shop across our product offering.
Promote communication, coordination and integration – We are focused on driving executional excellence through enhanced communication, coordination and integration between our stores and support centers. We also believe we can continue to improve our store operations by facilitating the re-lease or resale of returned product from customers of Progressive and Aarons.com.

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Champion compliance – Aaron’s, Inc. is a large and diverse company with thousands of daily transactions that are extensively regulated and subject to the requirements of various federal, state, and local laws and regulations. We continue to believe and set expectations that long-term success requires all associates to comply with all laws and regulations governing our company’s behavior.
Business Segments
As of December 31, 2015, the Company had six operating and reportable segments: Sales and Lease Ownership, Progressive, HomeSmart, DAMI, Franchise and Manufacturing. The results of DAMI and Progressive have been included in the Company’s consolidated results and presented as reportable segments from their October 15, 2015 and April 14, 2014 acquisition dates, respectively.
Our Company-operated stores and franchise operations are located in the United States and Canada. Additional information on our six reportable segments may be found in (i) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and (ii) Item 8. Financial Statements and Supplementary Data.
Sales & Lease Ownership
Our Aaron's Sales & Lease Ownership operation was established in 1987 and employs a monthly and semi-monthly payment model to provide durable household goods to lower to middle income consumers. Its customer base is comprised primarily of customers with limited access to traditional credit sources such as bank financing, installment credit or credit cards. Customers of our Aaron’s Sales & Lease Ownership division take advantage of our services to acquire consumer goods they might not otherwise be able to without incurring additional debt or long-term obligations.
We have developed a distinctive concept for our sales and lease ownership stores including specific merchandising, store layout, pricing and agreement terms all designed to appeal to our target consumer market. We believe these features create a store and a sales and lease ownership concept that is distinct from the operations of the lease-to-own industry generally and from consumer electronics and home furnishings retailers who finance merchandise.
The typical Aaron’s Sales & Lease Ownership store layout is a combination showroom and warehouse comprising 6,000 to 8,000 square feet, with an average of approximately 7,200 square feet. We select locations for new Aaron’s Sales & Lease Ownership stores by focusing on neighborhood shopping centers with good access that are located in established working class communities. In addition to inline space, we also lease and own several free standing buildings in certain markets. We typically locate the stores in centers with retailers who have similar customer demographics.
Each Aaron’s Sales & Lease Ownership store usually maintains at least two trucks for delivery, service and return of product. We generally offer same or next day delivery for addresses located within approximately ten miles of the store. Our stores provide a broad selection of brand name electronics, computers, appliances and furniture, including furniture manufactured by our Woodhaven Furniture Industries division.
We believe that our Aaron’s Sales & Lease Ownership stores offer prices that are lower than the prices for similar items offered by traditional lease-to-own operators, and substantially equivalent to the "all-in" contract price of similar items offered by retailers who finance merchandise. Approximately 97% of our Aaron's Sales & Lease Ownership agreements have monthly terms and the remaining 3% are semi-monthly. By comparison, weekly agreements are the industry standard.
We may re-lease or sell merchandise that customers return to us prior to the expiration of their agreements. We may also offer up-front purchase options at prices we believe are competitive. At December 31, 2015, we had 1,223 Company-operated Aaron’s Sales & Lease Ownership stores in 28 states, the District of Columbia and Canada.
Progressive
Established in 1999, Progressive is a leader in the expanding virtual lease-to-own market. Progressive partners with retailers, primarily in the furniture and bedding, mobile phones, consumer electronics, appliances and jewelry industries, to offer a lease-purchase option for customers to acquire goods they might not otherwise have been able to obtain. We serve customers who are credit challenged and are therefore unlikely to have access to traditional credit-based financing options. We offer a technology-based application and approval process that does not require Progressive employees to be staffed in a store. Once a customer is approved, Progressive purchases the merchandise from the retailer and enters into a lease-to-own agreement with the customer. The contract provides early-buyout options or ownership after a contractual number of renewals. Progressive has retail partners in 46 states and operates under state-specific regulations in those states.

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HomeSmart
Our HomeSmart operation began in 2010 and was developed to serve customers who prefer the flexibility of weekly payments and renewals. The consumer goods we provide in our HomeSmart division are substantially similar to those available in our Aaron’s Sales & Lease Ownership stores.
The typical HomeSmart store layout is a combination showroom and warehouse of 4,000 to 6,000 square feet, with an average of approximately 5,000 square feet. Store site selection, delivery capabilities and lease merchandise product mix are generally similar to those described above for our Aaron’s Sales & Lease Ownership stores.
We believe that our HomeSmart stores offer prices that are lower than the prices for similar items offered by traditional weekly lease-to-own operators. Approximately 71% of our HomeSmart agreements have weekly terms, 4% are semi-monthly and the remaining 25% are monthly. We may also offer an up-front purchase option at prices we believe are competitive. At December 31, 2015, we had 82 Company-operated HomeSmart stores in 11 states.
DAMI
DAMI was founded in 1983 and primarily serves customers that may not qualify for traditional prime lending who desire to purchase goods and services from participating merchants. DAMI, which operates as a wholly-owned subsidiary of Progressive, offers customized programs, with services that include revolving loans, private label cards and access to a unique processing platform. DAMI’s current network of merchants includes medical markets, beds and fitness equipment. The Company believes the DAMI product offerings are complementary to those of Progressive and expects to expand the markets and merchants that DAMI serves.
We extend or decline credit to an applicant through our bank partner based upon the customer's credit rating. Our bank partner originates the loan by providing financing to the merchant at the point of sale and acquiring the receivable at a discount from the face value, which represents a pre-negotiated fee between DAMI and the merchant. DAMI then acquires the receivable from the bank.
Qualifying customers receive a credit card to finance their initial purchase and to use in subsequent purchases at the merchant or other participating merchants for an initial two year period, which we will renew if the cardholder remains in good standing. The customer is required to make periodic minimum payments and pay certain annual and other periodic fees.
Franchise
We franchise our Aaron’s Sales & Lease Ownership and HomeSmart stores in markets where we have no immediate plans to enter. Our franchise program adds value to our Company by allowing us to (i) recognize additional revenues from franchise fees and royalties, (ii) strategically grow without incurring direct capital or other expenses, (iii) lower our average costs of purchasing, manufacturing and advertising through economies of scale and (iv) increase customer recognition of our brands.
Franchisees are approved on the basis of the applicant’s business background and financial resources. We enter into agreements with our franchisees to govern the opening and operations of franchised stores. Under our standard agreement, we receive a franchise fee from $15,000 to $50,000 per store depending upon market size. Our standard agreement is for a term of ten years, with one ten-year renewal option. Franchisees are also obligated to remit to us royalty payments of 5% or 6% of the weekly cash revenue collections from their franchised stores. Most franchisees are involved in the day-to-day operations of their stores.
Because of the importance of location to our store strategy, we assist each franchisee in selecting the proper site for each store. We typically will visit the intended market and provide guidance to the franchisee through the site selection process. Once the franchisee selects a site, we provide support in designing the floor plan, including the proper layout of the showroom and warehouse. In addition, we assist the franchisee in the design and decor of the showroom to ensure consistency with our requirements. We also lease the exterior signage to the franchisee and provide support with respect to pre-opening advertising, initial inventory and delivery vehicles.
Qualifying franchisees may take part in a financing arrangement we have established with several financial institutions to assist the franchisee in establishing and operating their store(s). Although an inventory financing plan is the primary component of the financing program, we have also arranged, in certain circumstances, for the franchisee to receive a revolving credit line, allowing them to expand operations. We provide guarantees for amounts outstanding under this franchise financing program.

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All franchisees are required to complete a comprehensive training program and to operate their franchised sales and lease ownership stores in compliance with our policies, standards and specifications. Additionally, each franchise is required to represent and warrant its compliance with all applicable federal, state and/or local laws, regulations and ordinances with respect to its business operations. Although franchisees are not generally required to purchase their lease merchandise from our fulfillment centers, many do so in order to take advantage of Company-sponsored financing, bulk purchasing discounts and favorable delivery terms.
Our internal audit department conducts annual financial reviews of each franchisee, as well as annual operational audits of each franchised store. In addition, our proprietary management information system links each Company and franchised store to our corporate headquarters.
Manufacturing
Woodhaven Furniture Industries, our manufacturing division, was established in 1982, and we believe it makes us the largest major furniture lease-to-own company in the United States that manufactures its own furniture. Integrated manufacturing enables us to control critical features such as the quality, cost, delivery, styling, durability and quantity of our furniture products, and we believe this provides an integration advantage over our competitors. Substantially all produced items continue to be leased or sold through Company-operated or franchised stores.
Our Woodhaven Furniture Industries division 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 designed and produced by this division incorporates features that we believe result in reduced production costs, enhanced durability and improved shipping processes all relative to furniture we would otherwise purchase from third parties. These features include (i) standardized components, (ii) reduced number of parts and features susceptible to wear or damage, (iii) more resilient foam, (iv) durable fabrics and sturdy frames which translate to longer life and higher residual value and (v) 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.
The division consists of five furniture manufacturing plants and nine bedding manufacturing facilities totaling approximately 818,000 square feet of manufacturing capacity.
Operations
Operating Strategy
Our operating strategy is based on distinguishing our brand from those of our competitors along with maximizing our operational efficiencies. We implement this strategy for our store-based operations by (i) emphasizing the uniqueness of our sales and lease ownership concept from those in our industry generally, (ii) offering high levels of customer service, (iii) promoting our vendors' and Aaron’s brand names, (iv) managing merchandise through our manufacturing and distribution capabilities and (v) utilizing proprietary management information systems.
We believe that the success of our store-based operations is attributable to our distinctive approach to the business that distinguishes us from both our lease-to-own and credit retail competitors. We have pioneered innovative approaches to meeting changing customer needs that we believe differ from many of our competitors. These include (i) offering lease ownership agreements that result in a lower "all-in" price, (ii) maintaining larger and more attractive store showrooms, (iii) offering a wider selection of higher-quality merchandise, (iv) providing an up-front cash and carry purchase option on select merchandise at competitive prices and (v) establishing an on-line platform that provides access to our product offering. Many of our sales and lease ownership customers make their payments in person and we use these frequent visits to strengthen the customer relationship.
Furthermore, our Progressive and DAMI operating strategies are based on providing excellent service to our retail and merchant partners and our customers, along with continued development of technology-based solutions. This allows us to increase our retail and merchant partner’s sales, drive demand for our service, and scale in an efficient manner. Specifically with Progressive, we believe our ability to service a retailer with limited labor costs allows us to maintain a cost of ownership for leased merchandise lower than that of other options available to our customers.

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Store-Based Operations
As of December 31, 2015, the Company had two senior vice presidents that provide executive leadership of the Aaron's Sales & Lease Ownership and HomeSmart divisions. Our Sales & Lease Ownership division has 11 divisional vice presidents and one Canadian director who are responsible for the overall performance of their respective divisions. HomeSmart has two directors responsible for that division’s performance. Each division is subdivided into geographic groupings of stores overseen by a total of 155 Aaron’s Sales & Lease Ownership regional managers, including two Canadian regional managers, and 12 HomeSmart regional managers.
At the individual store level, the store manager is primarily responsible for managing and supervising all aspects of store operations, including (i) customer relations and account management, (ii) deliveries and pickups, (iii) warehouse and inventory management, (iv) partial merchandise selection, (v) employment decisions, including hiring, training and terminating store employees and (vi) certain marketing initiatives. Store managers also administer the processing of lease return merchandise including making determinations with respect to inspection, repairs, sales, reconditioning and subsequent leasing.
Our business philosophy emphasizes safeguarding of Company assets, strict cost containment and financial controls. All personnel are expected to monitor expenses to contain costs. We pay all material invoices from Company headquarters in order to enhance financial accountability. We believe that careful monitoring of lease merchandise as well as operational expenses enables us to maintain financial stability and profitability.
We use computer-based management information systems to facilitate customer orders, collections, merchandise returns and inventory monitoring. Through the use of proprietary software, 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 (i) tracking merchandise on the showroom floor and warehouse, (ii) minimizing delivery times, (iii) assisting with product purchasing and (iv) matching customer needs with available inventory.
Lease Agreement Approval, Renewal and Collection
One of the factors in the success of our store-based operations is timely cash collections, which are monitored by store managers. Customers are contacted within a few days after their lease payment due dates to encourage them to keep their agreement current. Careful attention to cash collections is particularly important in sales and lease ownership 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.
We generally perform no formal credit check with third party service providers with respect to store-based sales and lease ownership customers. We do, however, verify employment or other reliable sources of income and personal references supplied by the customer. Generally our agreements for merchandise require payments in advance and the merchandise normally is recovered if a payment is significantly in arrears. We currently do not extend credit to our customers at store-based operations.
Our Progressive business uses a proprietary decisioning algorithm to determine which customers would meet our leasing qualifications. The transaction is completed through our online portal or through a point of sale integration with our retail partners. Contractual renewal payments are based on a customer’s pay frequency and are typically originated through automated clearing house payments. If the payment is unsuccessful, collections are managed in-house through our call center and proprietary lease management system. The call center contacts customers within a few days of the lease payment due date to encourage them to keep their agreement current. If the customer chooses to return the merchandise, arrangements are made to receive the merchandise from the customer, either through our retail partners, our Draper location, our customer service hubs or our Company-operated stores.
Company-wide lease merchandise adjustments (or "shrinkage") as a percentage of combined lease revenues were 5.1%, 4.5% and 3.3% in 2015, 2014 and 2013, respectively. We believe that our collection and recovery policies materially comply with applicable law and we discipline any employee we determine to have deviated from such policies.
Credit Agreement Approval and Collection
DAMI offers a variety of financing programs to below-prime customers that are originated through a federally insured bank. We believe DAMI provides the following strategic benefits when combined with Progressive's product offerings:

Enhanced product for retail partners - DAMI will enhance Progressive's best-in-class point-of-sale product with an integrated solution for below-prime customers. DAMI has a centralized, scalable decisioning model with a long operating history, deployed through its established bank partner, and a sophisticated receivable management system.

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Higher consumer credit quality - DAMI primarily serves customers with FICO scores between 600 and 700, which make up approximately a quarter of the U.S. population. These customers generally have greater purchasing power with stronger credit profiles than Progressive's current customers.
Expanded customer base - In addition to complementing Progressive's traditional offering for existing and prospective retail partners, DAMI's strong relationships in customer services offer an additional channel for longer-term growth.
DAMI uses an underwriting model that provides standardized credit decisions, including borrowing limit amounts. Credit decisions are primarily based on the customer’s credit rating and ability-to-pay ratio. Customer credit terms are based on the underlying agreement with the merchant. Loans receivable are unsecured, and collections on loans receivable are managed in-house through DAMI's call center and proprietary loans receivable management system.
Customer Service
A critical component of the success in our operations is our commitment to developing good relationships with our customers. Building a relationship with the customer that ensures customer satisfaction is critical because customers of store-based operations and Progressive have the option of returning the leased merchandise at any time or after a very short initial term. Our goal, therefore, is to develop positive associations about the Company and our products, service, and support in the minds of our customers from the moment they enter our showrooms and the showrooms of our retail partners. We demonstrate our commitment to superior customer service by providing customers with access to product through multiple channels, including Aarons.com and Progressive's network of retail partner locations, rapid delivery of leased merchandise (often on same or next day delivery) and investments in technology that improve the customer experience. Our Progressive business offers centralized customer and retailer support through contact centers located in Draper, Utah and Glendale, Arizona.
Through Aaron’s Service Plus, customers receive multiple service benefits. These benefits vary according to applicable state law but generally include the 120-day same-as-cash option, merchandise repair service, lifetime reinstatement and other discounts and benefits. In order to increase leasing at existing stores, we foster relationships with existing customers to attract recurring business, and many new agreements are attributable to repeat customers. Similarly, we believe our strong focus on customer satisfaction at Progressive and DAMI generates repeat business and long-lasting relationships with our retail and merchant partners.
In the third quarter of 2015, the Company announced the launch of Approve.Me, which is a proprietary platform that integrates with retailers' point-of-sale systems and provides a single interface for all customers seeking credit approval or lease options, from prime to second-look financing, or to Progressive's lease offering. The platform combines multiple credit and leasing providers into one application using a single interface. Approve.Me is compatible with most primary or secondary providers and is designed to give retailers a faster and more efficient way to service customers seeking to finance transactions or secure a lease option. We believe Approve.Me provides the following benefits to retail partners:

Established product - Approve.Me has been successfully piloted and is currently being used in over 7,200 retail doors.
Increased sales - Approve.Me's streamlined approach sends customer applications through each option, from prime to second-look financing, or to Progressive's no-credit-needed lease option, quickly and seamlessly. This more efficient process typically results in more applications and higher overall approval rates.
Ease of use - The time a customer spends going through the application and approval process is reduced from about an hour (for multiple applications) to just a few minutes.
Improved analytics - Approve.Me gives retail partners access to a comprehensive view of credit decisioning and lease options thereby allowing partners to better analyze and improve their overall financing/leasing flow.
Our emphasis on customer service requires that we develop skilled, effective employees who value our customers and project a genuine desire to serve their needs. To meet this requirement, we have developed a field development program, one of the most comprehensive employee training programs in the industry. Our field development program is designed to provide a uniform customer service experience. The primary focus of the field development program is equipping new associates with the knowledge and skills needed to build strong relationships with our customers. Our learning and development coaches provide live interactive instruction via webinars and by facilitating hands-on training in designated training stores. The program is also complemented with a robust e-learning library. Additionally, Aaron’s has a management development program that offers development for current and future store managers. Also, we periodically produce video-based communications on a variety of topics pertinent to store associates and regional managers regarding current Company initiatives.

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Purchasing and Retail Relationships
For our store-based operations, our product mix is determined by store managers in consultation with regional managers, divisional vice presidents and our merchandising department based on an analysis of customer demands. The following table shows the percentage of the Company’s store-based revenues for the years ended December 31, 2015, 2014 and 2013 attributable to different merchandise categories:
Merchandise Category
2015

 
2014

 
2013

Furniture
42
%
 
39
%
 
36
%
Electronics
25
%
 
26
%
 
29
%
Appliances
24
%
 
24
%
 
22
%
Computers
7
%
 
9
%
 
9
%
Other
2
%
 
2
%
 
4
%
We purchase the majority of our merchandise directly from manufacturers, with the balance from local distributors. To a lesser extent, we also may sell or release certain merchandise returned by our Progressive customers. One of our largest suppliers is our own Woodhaven Furniture Industries division, which supplies the majority of the upholstered furniture and bedding we lease or sell. Integrated manufacturing enables us to control the quality, cost, delivery, styling, durability and quantity of a substantial portion of our furniture and bedding merchandise and provides us with a reliable source of products. We have no long-term agreements for the purchase of merchandise.
The following table shows the percentage of Progressive’s revenues for the year ended December 31, 2015 and 2014 attributable to different retail partner categories:
Retail Partner Category
2015

2014

Furniture
53
%
44
%
Mattress
20
%
24
%
Auto electronics
12
%
13
%
Mobile
8
%
12
%
Jewelry
4
%
4
%
Other
3
%
3
%
During 2015, approximately 34% of the lease merchandise acquired by Progressive and subsequently leased to customers was concentrated in two retail partners.
Distribution for Store-based Operations
Sales and lease ownership operations utilize our 17 fulfillment centers to control merchandise. These centers average approximately 118,000 square feet, giving us approximately 2.0 million square feet of logistical capacity.
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 in order 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 for store-based operations targets both current Aaron’s customers and potential customers. We feature brand name products available through our no-credit-needed lease ownership plans. We reach our customer demographics by utilizing national and local broadcast, network television, cable television and radio with a combination of brand/image messaging and product/price promotions. Examples of networks include FOX, TBS, TELEMUNDO, UNIVISION and multiple general market networks that target our customer. In addition, we have enhanced our broadcast presence with digital marketing and via social environments such as Facebook and Twitter.
We target new and current customers each month distributing over 29 million, four-page circulars to homes in the United States and Canada. The circulars advertise brand name merchandise along with the features, options, and benefits of Aaron’s no-credit-needed lease ownership plans. We also distribute millions of email and direct mail promotions on an annual basis.

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Aaron’s sponsors event broadcasts at various levels along with select professional and collegiate sports, such as NFL and NBA teams. As a long-time supporter of NASCAR, Aaron’s wrapped up its 17th year of sponsoring the Aaron's Dream Machine in several NASCAR series, which in recent years has included Michael Waltrip Racing in the NASCAR Sprint Cup Series. In early 2016, Aaron’s announced continued support of NASCAR with a new, multi-year agreement with Michael Waltrip as a spokesperson.  All of Aaron’s sports partnerships are supported with advertising, promotional, marketing and brand activation initiatives that we believe significantly enhance the Company’s brand awareness and customer loyalty.
Progressive and DAMI execute their marketing strategy in partnership with retailers and other merchants. This is typically accomplished through in-store signage and marketing material, direct marketing activities, and the education of sales associates.
Competition
The lease-to-own industry is highly competitive. Our largest competitor for store-based operations is Rent-A-Center, Inc. ("Rent-A-Center"). Aaron’s and Rent-A-Center, which are the two largest lease-to-own industry participants, account for approximately 4,900 of the 8,900 lease-to-own stores in the United States, Canada and Mexico. Our stores compete with other national and regional lease-to-own businesses, 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 store location, product selection and availability, customer service and lease rates and terms.
Although an emerging market, the virtual lease-to-own industry is also competitive. Progressive's largest competitor is Acceptance Now, a division of Rent-A-Center. Other competition is fragmented and includes regional participants.
Working Capital
We are required to maintain significant levels of lease merchandise in order to provide the service 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. Failure to maintain appropriate levels of merchandise could materially adversely affect our customer relationships and our business. We believe our operating cash flows, credit availability under our financing agreements and other sources of financing are adequate to meet our normal liquidity requirements.
Raw Materials
The principal raw materials we use in furniture manufacturing 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 are not dependent on any single supplier. None of the raw materials we use are in short supply.
Seasonality
Our revenue mix is moderately seasonal for both our store-based operations and our Progressive business. 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 tend to experience slower growth in the number of agreements on lease in the third quarter for store-based operations and in the second quarter for our Progressive business when compared to the other quarters of the year. We expect these trends to continue in future periods.
Industry Overview
The Lease-to-Own Industry
The lease-to-own industry offers customers an alternative to traditional methods of obtaining electronics, computers, home furnishings and appliances. In a standard industry lease-to-own transaction, the customer has the option to acquire ownership of merchandise over a fixed term, usually 12 to 24 months, normally by making weekly, semi-monthly, or monthly lease payments. Upon making regular periodic lease payments, the customer may cancel the agreement at any time by returning the merchandise to the store. If the customer leases the item through the completion of the full term, he or she then obtains ownership of the item. The customer may also purchase the item at any time by tendering the contractually specified payment.

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The lease-to-own model is particularly attractive to customers who are unable to pay the full upfront purchase price for merchandise or who lack the credit to qualify for conventional financing programs. Other individuals who find the lease-to-own model attractive are customers who, despite access to credit, do not wish to incur additional debt, have only a temporary need for the merchandise or desire to field test a particular brand or model before purchasing it.
Aaron’s Sales and Lease Ownership versus Traditional Lease-to-Own
We blend elements of lease-to-own and traditional retailing by providing customers with the option to either lease merchandise with the opportunity to obtain ownership or to purchase merchandise outright. We believe our sales and lease ownership program is a more effective method of retailing our merchandise to lower and middle income customers than a typical lease-to-own business or the traditional method of credit installment sales. 
Our model is distinctive from the conventional lease-to-own model in that we encourage our customers to obtain ownership of their leased merchandise. Based upon our own data and industry data, our customers obtain ownership more often (approximately 45%) than in the lease-to-own businesses in general (approximately 25%).
We believe our sales and lease ownership model offers the following distinguishing characteristics when compared to traditional lease-to-own stores:
Lower total cost - Our agreement terms generally provide a lower cost of ownership to the customer.
Wider merchandise selection - We generally offer a larger selection of higher-quality merchandise.
Larger store layout - Aaron's Sales & Lease Ownership stores average 7,200 square feet, which is significantly larger than the average size of our largest competitor’s lease-to-own stores.
Fewer payments - Our typical plan offers semi-monthly or monthly payments versus the industry standard of weekly payments. Our agreements also usually provide for a shorter term for the customer to obtain ownership.
Flexible payment methods - We offer our customers the opportunity to pay by cash, check, ACH, debit card or credit card. Our Aaron’s Sales and Lease Ownership stores currently receive approximately 66% of their payment volume (in dollars) from customers by check, debit card or credit card. For our HomeSmart stores, that percentage is approximately 57%.
We believe our sales and lease ownership model also compares well against traditional retailers in areas such as store size, merchandise selection and the latest product offerings. As technology advances and home furnishings and appliances evolve, we expect to continue offering our customers the latest product at affordable prices.
Unlike transactions with traditional retailers, in which the customer is committed to purchasing the merchandise, our sales and lease ownership transactions are not credit installment contracts. Therefore, the customer may elect to terminate the transaction after a short, initial lease period. Our sales and lease ownership stores offer an up-front "cash and carry" purchase option and generally a 120-day same-as-cash option on most merchandise at prices that we believe are competitive with traditional retailers. In addition, our Progressive business provides a 90-day buy-out option on lease-purchase solutions offered through traditional retailers.
Government Regulation
Our operations are extensively regulated by and subject to the requirements of various federal, state and local laws and regulations. In general, such laws regulate applications for leases, late charges and other fees, the form of disclosure statements, the substance and sequence of required disclosures, the content of advertising materials and certain collection procedures. 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 or earnings.
A summary of certain of the state and federal 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.
Currently, nearly every state, the District of Columbia, and most provinces in Canada specifically regulate lease-to-own transactions. This includes states in which we currently operate Aaron’s Sales & Lease Ownership and HomeSmart stores, as well as states in which our Progressive business has retail partners. Most state lease purchase 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 lease

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purchase laws limit 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 lease purchase transactions as a matter of good business ethics and customer service. We believe we are in material compliance with the various state lease purchase laws in those states where we use a lease purchase form of agreement. At the present time, no federal law specifically regulates the lease-to-own industry. Federal legislation to regulate the industry has been proposed from time to time. 
There has been increased legislative attention in the United States, at both the federal and state levels, on consumer debt transactions 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 will be enacted and what the impact of such legislation would be on us. 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 sales and lease ownership or other operations.
Our sales and lease ownership franchise program is subject to Federal Trade Commission, or FTC, regulation and various state laws regulating the offer and sale of franchises. Several state laws also regulate substantive aspects of the franchisor-franchisee relationship. The FTC requires us to furnish to prospective franchisees a franchise disclosure document containing prescribed information. A number of states in which we might consider franchising also regulate the sale of franchises and require registration of the franchise disclosure document with state authorities. We believe we are in material compliance with all applicable franchise laws in those states in which we do business and with similar laws in Canada.
DAMI is subject to various federal and state laws that address lending regulations, consumer information, consumer rights, and certain credit card specific requirements, among other things. In addition, DAMI issues credit cards through a bank partner and therefore is subject to the bank's Federal Deposit Insurance Corporation regulators. Several regulations affecting DAMI have been updated in recent years through The Credit Card Act and The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Additional regulations are being developed, as the attention placed on consumer debt transactions has grown significantly. We believe we are in material compliance with all applicable laws and regulations. While 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 operations.
Supply Chain Diligence and Transparency
Section 1502 of the Dodd-Frank Act was adopted to further the humanitarian goal of ending the violent conflict and human rights abuses in the Democratic Republic of the Congo and adjoining countries ("DRC"). This conflict has been partially financed by the exploitation and trade of tantalum, tin, tungsten and gold, often referred to as conflict minerals, which originate from mines or smelters in the region. Securities and Exchange Commission ("SEC") rules adopted pursuant to the Dodd-Frank Act require reporting companies to disclose annually, among other things, whether any such minerals that are necessary to the functionality or production of products they manufactured during the prior calendar year originated in the DRC and, if so, whether the related revenues were used to support the conflict and/or abuses.
Some of the products manufactured by Woodhaven Furniture Industries, our manufacturing division, may contain tantalum, tin, tungsten and/or gold. Consequently, in compliance with SEC rules, we have adopted a policy on conflict minerals, which can be found on our website. We have also implemented a supply chain due diligence and risk mitigation process with reference to the Organisation for Economic Co-operation and Development, or the OECD, guidance approved by the SEC to assess and report annually whether our products are conflict free.
We expect our suppliers to comply with the OECD guidance and industry standards and to ensure that their supply chains conform to our policy and the OECD guidance. We plan to mitigate identified risks by working with our suppliers and may alter our sources of supply or modify our product design if circumstances require.
Employees
At December 31, 2015, the Company had approximately 12,700 employees. None of our employees are covered by a collective bargaining agreement and we believe that our relations with employees are good.
Available Information
We make available free of charge on our Internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports and the Proxy Statement for our Annual Meeting of Shareholders. Our Internet address is investor.aarons.com.

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ITEM 1A. RISK FACTORS
Aaron’s business is subject to certain risks and uncertainties. Any of the following risk factors could cause our actual results to differ materially from historical or anticipated results. These risks and uncertainties are not the only ones we face, but represent the risks that we believe are material. However, there may be additional risks that we currently consider not to be material or of which we are not currently aware, and any of these risks could cause our actual results to differ materially from historical or anticipated results.

We may be subject to new or additional federal and state financial services and consumer protection laws and regulations (or changes in interpretations of existing laws and regulations) that could expose us to government investigations, significant compliance costs or burdens or force us to change our business practices in a manner that may be materially adverse to our operations, prospects or financial condition.
Currently, nearly every state, the District of Columbia, and most provinces in Canada specifically regulate lease-to-own transactions. This includes states in which we currently operate Aaron’s Sales & Lease Ownership stores, as well as states in which our Progressive business has retail partners. While no federal law currently specifically regulates the lease-to-own industry, federal legislation to regulate the industry has been proposed in the past and may be proposed in the future. For example, federal and regulatory authorities such as the Consumer Financial Protection Bureau (the "CFPB") and the FTC are increasingly focused on the subprime financial marketplace in which the lease-to-own industry operates, and may propose and adopt new legislation (or interpret existing regulations) that could result in significant adverse changes in the regulatory landscape for businesses such as ours. Furthermore, our debt collections practices are subject to federal and state laws and regulations. Many of these laws and regulations are evolving, unclear and inconsistent across various jurisdictions, and ensuring compliance with them is difficult and costly. For example, with increasing frequency, federal and state regulators are holding businesses like ours to higher standards of training, monitoring and compliance. Failure by us or those businesses to comply with the laws and regulations to which we are or may become subject could result in fines, penalties or limitations on our ability to conduct our business, or federal or state actions, or private litigation, any of which could significantly harm our reputation with consumers and Progressive’s and DAMI’s retail and merchant partners and could materially and adversely affect our business, prospects and financial condition.
The risks in Progressive’s virtual lease-to-own business differ in some potentially significant respects from the risks of Aaron’s store-based lease-to-own business. These risks, whether arising from the offer by third party retailers of Progressive’s lease-purchase solution alongside traditional cash, check or credit payment options or otherwise, may also be materially adverse to our operations, prospects or financial condition. Furthermore, Progressive’s business relies on third party retailers (over whom Progressive cannot exercise the degree of control and oversight that Aaron’s and its franchisees can assert over their own respective employees) for many important business functions, from advertising through assistance with lease transaction applications. Accordingly, there is the potential that regulators may target virtual lease-to-own transactions and/or implement new legislation (or interpret existing regulations) that could negatively impact Progressive’s ability to offer virtual lease-to-own programs through third party retail partners.
In addition, as we execute on our strategic plans, we may continue to expand into complementary businesses, such as DAMI, that engage in financial, banking or lending services that are 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. Any additional laws or regulations may result in changes in the way our operations are regulated, exposing us to increased regulatory oversight, more burdensome regulations and increased litigation risk, each of which could have a material adverse effect on us.
Any proposed rulemaking by the CFPB, the FTC or any other federal or state regulators or other adverse changes in (or interpretations of) existing laws and regulations, the passage of new adverse legislation or regulations by the federal government or the states applicable to our traditional lease-to-own business, our Progressive virtual lease-to-own business, our Aarons.com e-commerce business and any complementary businesses into which we may expand could materially increase both our compliance costs and the risk that we could be subject to government investigations and subject to sanctions if we are not in compliance. In addition, new burdensome laws or regulations could force us to modify our business model, expose us to increased litigation risk, and might reduce the economic potential of our sales and lease ownership operations.

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Progressive’s virtual lease-to-own business differs in some potentially significant respects from the risks of Aaron’s store-based lease-to-own business. The risks could have a material negative effect on Progressive, which could result in a material adverse effect on our entire business.
As discussed above, our Progressive segment offers its lease-to-own solution through the stores of third party retailers. Progressive consequently faces some different risks than are associated with Aaron’s sales and lease ownership concept, which Aaron’s and its franchisees offer through their own stores. These potential risks include, among others, Progressive’s:
reliance on third party retailers (over whom Progressive cannot exercise the degree of control and oversight that Aaron’s and its franchisees can assert over their own respective employees) for many important business functions, from advertising through assistance with lease transaction applications;
revenue concentration in the customers of a relatively small number of retailers, as further discussed below;
lack of control over, and more product diversity within, its lease merchandise inventory relative to Aaron’s sale and lease ownership business, which can complicate matters such as merchandise repair and disposition of merchandise that is returned;
possibly different regulatory risks than apply to Aaron’s sales and lease ownership business, whether arising from the offer by third party retailers of Progressive’s lease-purchase solution alongside traditional cash, check or credit payment options or otherwise;
reliance on automatic bank account drafts for lease payments, which may become disfavored as a payment method for these transactions by regulators;
potential that regulators may target the virtual lease-to-own transaction and/or new regulations or legislation could be adopted (or existing laws and regulations may be interpreted) that negatively impact Progressive’s ability to offer virtual lease-to-own programs through third party retail partners; and
indemnification obligations to Progressive’s retail partners and their service providers for losses stemming from Progressive’s failure to perform with respect to its products and services.

These risks could have a material negative effect on Progressive, which could result in a material adverse effect on our entire business.
We continue to implement a new strategic plan and there is no guarantee that the new strategic plan will produce results superior to those achieved under the Company’s prior plan.
We have a new strategic plan that, in addition to acquiring Progressive in 2014, includes focusing on profitably growing our stores; accelerating our omni-channel platform; promoting communication, coordination and integration; and championing compliance.
While we have always engaged in elements of the new strategy, the new strategy calls for increased emphasis on certain elements while moderating the focus on new store openings that had traditionally been a central tenet of the Company’s strategy. There can be no guarantee that the new strategy will yield the results we currently anticipate (or results that will exceed those that might be obtained under the prior strategy), if we fail to successfully execute on one or more elements of the new strategy, even if we successfully implement one or more other components.
We may not fully execute on one or more elements of the new strategy due to any number of reasons, including, for instance, because of the division of management, financial and Company resources among multiple objectives, or other factors beyond or not completely within our control. The successful execution of our new strategy depends on, among other things, our ability to:
improve same store revenues in stores that may be maturing;
drive recurring cost savings to recapture margin;
identify which markets are best suited for more disciplined store growth;
strengthen our franchise network; and
successfully manage and grow our Aarons.com e-commerce platform

If we cannot address these challenges successfully, or overcome other critical obstacles that may emerge as we gain experience with our new strategy, we may not be able to achieve our revenue or profitability goals at the rates we currently contemplate, if at all.

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Our core business faces many challenges which could materially and adversely affect our overall results of operations.
Our traditional lease-to-own store-based ("core") business faces a number of challenges, particularly from 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. Increasing competition from the digital sector may reduce the market share held by our core business as well as its operating margins, and may materially and adversely affect our overall results of operations. Furthermore, as our Progressive virtual lease-to-own solution continues to partner with traditional retailers, including "big box" retailers, those retailers may increasingly compete with our core business, including our franchisees. For example, our Company-operated stores experienced year to date same store revenue declines of 4.1% and 2.8% in 2015 and 2014, respectively. Additionally, our franchised stores experienced year to date same store revenue declines of 0.9% and 2.5% in 2015 and 2014, respectively. We calculate same store revenue growth 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, including:
changes in competition, particularly from the digital sector;
general economic conditions;
new product introductions;
consumer trends;
changes in our merchandise mix;
timing of promotional events; and
our ability to execute our business strategy effectively.

If our core business is unable to successfully address these challenges, our overall business and results of operations may be materially and adversely affected as well.
Continuation or worsening of current economic conditions could result in decreased revenues or increased costs. The geographic concentration of our Sales & Lease Ownership stores, as well as those of Progressive’s retail partners, may magnify the impact of conditions in a particular region, including economic downturns and other occurrences.
The U.S. economy continues to experience prolonged uncertainty. We believe that the extended duration of current economic conditions, particularly as they apply to our customer base, may be resulting in our customers curtailing entering into sales and lease ownership agreements for the types of merchandise we offer, resulting in decreased revenues. Any increases in unemployment may result in increased defaults on lease payments, resulting in increased merchandise return costs and merchandise losses.
The concentration of our Sales & Lease Ownership stores, and/or those of our retail partners at Progressive, 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 and retail partners were more geographically diverse. For example, during 2015, approximately 18% of our core business’s store-based revenues were generated in Texas. Given our concentration of stores in Texas, the downturn and prolonged uncertainty in the oil and gas industry could have a material adverse effect on our overall business.
In addition, our store operations, as well as those of our retail partners at Progressive, are subject to the effects of adverse acts of nature, such as winter storms, hurricanes, hail storms, strong winds, earthquakes and tornados, which have in the past caused damage such as flooding and other damage to our stores and those of our retail partners in specific geographic locations. Additionally, we cannot assure you that the amount of our hurricane, windstorm, earthquake, flood, business interruption or other casualty insurance we maintain from time to time would entirely cover damages caused by any such event.
We could lose our access to data sources, which could cause us competitive harm and have a material adverse effect on our business, operating results, and financial condition.
We are heavily dependent on data provided by third party providers. For example, our Progressive business employs a proprietary decisioning algorithm when making lease approval decisions for its customers. This algorithm depends extensively upon continued access to and receipt of data from external sources, such as third party data vendors. In addition, our Aarons.com and DAMI businesses are similarly dependent on customer attribute data provided by external sources. Our data providers could 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

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become less economical or desirable, our Progressive, Aarons.com and DAMI businesses would be negatively impacted, which would adversely affect our operating results 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.
Progressive’s proprietary algorithm used to approve customers could no longer be indicative of our customer’s ability to pay.
We believe Progressive’s proprietary, centralized underwriting process to be a key to the success of the Progressive business. 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, changes in consumer preferences, availability of alternative products or other factors, however, could lead to increased incidence and costs related to unpaid leases and/or merchandise losses.
Progressive’s loss of operating revenues from key retail partners could materially and adversely affect our business.
Progressive’s relationship with its largest retail partners will have a significant impact on our operating revenues in future periods. The loss of any such key retailers would have a material adverse effect on our business. In addition, any publicity associated with the loss of any of Progressive’s large retail partners could harm our reputation, making it more difficult to attract and retain consumers and other retail partners, and could lessen Progressive’s negotiating power with its remaining and prospective retail partners.
Many of Progressive’s contracts with its retail partners can be terminated by them on relatively short notice, and all can be terminated in limited circumstances, such as our material breach or insolvency, our failure to meet agreed-upon service levels, certain changes in control of Progressive, and its inability or unwillingness to agree to requested pricing changes. There can be no assurance that Progressive will be able to continue its relationships with its largest retail partners on the same or more favorable terms in future periods or that its relationships will continue beyond the terms of our existing contracts with them. Our operating revenues and operating results could suffer if, among other things, any of Progressive’s retail partners renegotiates, terminates or fails to renew, or fails to renew on similar or favorable terms, their agreements with Progressive or otherwise chooses to modify the level of support they provide for Progressive’s lease-purchase option.
Failure to successfully manage and grow our Aarons.com e-commerce platform could materially adversely affect our business and future prospects.
Our Aarons.com e-commerce platform provides customers the ability to review our product offerings and prices and enter into lease agreements as well as make payments on existing leases from the comfort of their homes and on their mobile devices. Our e-commerce platform is a significant component of our strategic plan and we believe will drive future growth of our business. In order to promote our products and services and allow customers to transact online and reach new customers, we must effectively create, design, maintain, and improve our e-commerce platform. There can be no assurance that we will be able to create, design, maintain, and improve or grow our e-commerce platform in a profitable manner.
DAMI’s "second-look" credit programs for below-prime consumers differ in significant respects from the risks of Aaron’s store-based lease-to-own business. The risks could have a material negative effect on Progressive, which could result in a material adverse effect on our entire business.
As discussed above, as we execute on our strategic plans, we may continue to expand into complementary businesses that engage in financial, banking or lending services. For example, DAMI, which through its HELPcard® and other private label credit products, offers merchant partners one source for a variety of open-end credit programs for below-prime consumers, is a business that differs in significant respects from our core business. Consequently, DAMI faces different risks than are associated with Aaron’s sales and lease ownership concept, which Aaron’s and its franchisees offer through their own stores. Because DAMI is operated as a wholly-owned subsidiary of Progressive, the risks DAMI faces could have a material negative effect on Progressive, which could result in a material adverse effect on our entire business. These potential risks include, among others, DAMI’s:
reliance on third party retailers (over whom DAMI cannot exercise the degree of control and oversight that Aaron’s core business, including franchisees, can assert over their own respective employees) for many important business functions, from advertising through assistance with finance applications;

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reliance on a single bank partner to issue DAMI’s HELPcard® and other credit products. The bank’s regulators could at any time limit or otherwise modify the bank’s ability to continue its relationship with DAMI and any significant interruption of this relationship would result in DAMI being unable to acquire new receivables and provide other credit products. It is possible that a regulatory position or action taken with respect to DAMI’s issuing bank might result in the bank’s inability or unwillingness to originate future credit products on DAMI’s behalf or in partnership with it, which would adversely affect DAMI’s ability to grow its point-of-sale and direct-to-consumer credit products and other consumer credit offerings and underlying receivables. In addition, DAMI’s agreement with its issuing bank partner has a scheduled expiration date. If DAMI is unable to extend or execute a new agreement with its issuing bank upon the expiration of its current agreement, or if its existing agreement was terminated or otherwise disrupted, there is a risk that DAMI would not be able to enter into an agreement with an alternative bank provider on terms that DAMI would consider favorable or in a timely manner without disruption of its business; and
different regulatory risks than those applicable to Aaron’s and Progressive's sales and lease ownership businesses, including risks arising from state credit laws and the offering of open-end credit and the potential that regulators may target DAMI’s operating model and the interest rates it charges.

These risks could have a material negative effect on Progressive, which could result in a material adverse effect on our entire business.
If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, particularly with respect to our Progressive and DAMI businesses, we may not be able to accurately report our financial results, or report them in a timely manner.
As a public reporting company subject to the rules and regulations established from time to time by the SEC and the New York Stock Exchange, we are required to, among other things, establish and periodically evaluate procedures with respect to our disclosure controls and procedures. In addition, as a public company, we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify, on an annual basis, that our internal control over financial reporting is effective.
Prior to their acquisition by us, our Progressive and DAMI businesses were private companies and were not required to establish disclosure controls and procedures. In particular, unlike our core business, these businesses have not historically operated under a fully documented and annually tested system for internal control over financial reporting that is required for public companies by Section 404 of the Sarbanes-Oxley Act.
If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures - particularly in our Progressive and DAMI businesses - we may not be able to accurately report our financial results, or report them in a timely manner, which could cause a decline in our stock price and adversely affect our results of operations and financial condition. In addition, if our senior management is unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of such controls, or if our independent registered public accounting firm cannot render an unqualified opinion on management’s assessment and the effectiveness of our internal control over financial reporting, when required, or if material weaknesses in our internal controls are identified, we could be subject to increased regulatory scrutiny and a loss of public and investor confidence, which could also have a material adverse effect on our business and our stock price.
If we do not maintain the privacy and security of customer, employee, supplier or Company information, we could damage our reputation, incur substantial additional costs and become subject to litigation and regulatory enforcement actions.
Our business involves the storage and transmission of customers’ personal information, consumer preferences and credit card information, as well as confidential information about our customers, employees, our suppliers and our Company. We also serve as an information technology provider to our franchisees including storing and processing information related to their customers on our systems. Our information systems are vulnerable to an increasing threat of continually evolving cybersecurity risks. Any significant compromise or breach of our data security, whether external or internal, or misuse of employee or customer data, could significantly damage our reputation, cause the disclosure of confidential customer, associate, supplier or Company information, and result in significant costs, lost revenues or sales, fines, regulatory enforcement actions and lawsuits. For example, we are currently subject to settlements with the FTC as well as the State of California and the Commonwealth of Pennsylvania regarding our business practices and compliance with privacy laws in those states, and data breaches of this nature could result in additional penalties under the terms of those settlements.

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Computer hackers may attempt to penetrate our network security and, if successful, misappropriate confidential customer or employee information. In addition, one of our employees, contractors or other third parties 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. While we have implemented systems and processes to protect against unauthorized access to or use of secured data and to prevent data loss, there is no guarantee that these procedures are adequate to safeguard against all data security breaches or misuse of the data. 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. These costs associated with information security, such as increased investment in technology, the costs of compliance with privacy laws, and costs incurred to prevent or remediate information security breaches, could adversely impact our business.
We have experienced security incidents in the past, including an incident in which customer information was compromised, although no security incidents have resulted in a material loss to date.  We are in the process of improving our system security, although there can be no assurance that these improvements, or others that we implement from time to time, will be effective to prevent all security incidents. We maintain network security and private liability insurance intended to help mitigate the financial risk of such incidents, but there can be no guarantee that insurance will be sufficient to cover all losses related to such incidents.
A significant compromise of sensitive employee or customer information in our possession could result in legal damages and regulatory penalties. In addition, the costs of defending such actions or remediating breaches could be material. Security breaches could also harm our reputation with our customers and retail partners, potentially leading to decreased revenues.
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 process transactions with our customers, including tracking lease payments on merchandise, and to manage other important functions of our business. Failures of our systems, such as "bugs," crashes, operator error or catastrophic events, could seriously impair our ability to operate our business. If our information technology systems are impaired, our business (and that of our franchisees) could be interrupted, our reputation could be harmed, we may experience lost revenues or sales and we could experience increased costs and expenses to remediate the problem.
If our independent franchisees fail to meet their debt service payments or other obligations under outstanding loans guaranteed by us as part of a franchise loan program, we may be required to pay to satisfy these obligations which could have a material adverse effect on our business and financial condition.
We have guaranteed the borrowings of certain franchisees under a franchise loan program with several banks with a maximum commitment amount of $175.0 million. In the event these franchisees are unable to meet their debt service payments or otherwise experience events of default, we would be unconditionally liable for a portion of the outstanding balance of the franchisees’ debt obligations, which at December 31, 2015 was $81.0 million.
We have had no significant losses associated with the franchise loan and guaranty program since its inception. Although we believe that any losses associated with defaults would be mitigated through recovery of lease merchandise and other assets, we cannot guarantee that there will be no significant losses in the future or that we will be able to adequately mitigate any such losses. If we fail to adequately mitigate any such future losses, our business 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.

19


We may engage in litigation with our franchisees.
Although we believe we generally enjoy a positive working relationship with the vast majority of 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 Document (the "FDD"), including claims based on financial information contained in our FDD. Engaging in such litigation may be costly, time-consuming and may distract management and materially adversely affect our relationships with franchisees and our ability to attract new franchisees. Any negative outcome of these or any other claims could materially adversely affect our results of operations as well as our ability to expand our franchise system 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.
Changes to the 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, Occupational Safety and Health Administration ("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 impact our ability or desire to grow our franchised base and have a material adverse effect on our results of 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, 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.
From time to time we are subject to legal and regulatory 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. For example, we are currently subject to settlements with the FTC as well as the State of California and the Commonwealth of Pennsylvania regarding our business practices and compliance with privacy laws in those states. Although we do not presently believe that any of our current legal or regulatory proceedings will ultimately have a material adverse impact on our operations, we cannot assure you that we will not incur material damages or penalties in a lawsuit or other proceeding in the future. 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 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.

20


In addition, certain consumer advocacy groups and federal and state legislators have asserted that laws and regulations should be tightened 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. If the negative characterization of these types of lease-to-own transactions becomes increasingly accepted by consumers or Progressive’s or DAMI’s retail and merchant partners, demand for our products and 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 legislators and regulators, we could become subject to more restrictive laws and regulations, 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 and our relationships with our retail partners may suffer, which could have a material adverse effect on our business, results of operations and financial condition.

The loss of the services of our key executives, or our inability to attract and retain key technical talent in the areas of IT and analytics, 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 technical talent in the areas of information technology and analytics 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.
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 CFPB and the FTC, among others, as discussed above.
In the sales and lease ownership market, our competitors include national, regional and local operators of lease-to-own stores, virtual lease-to-own companies and traditional and e-commerce retailers. 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 gain market share, which could compel us to match their pricing strategy or lose business.
Our Progressive business relies heavily on relationships with retail partners. An increase in competition could cause our retail partners to no longer offer the Progressive product in favor of our competitors which could slow growth in the Progressive business and limit profitability.
In addition, as a result of changes to the regulatory framework within which we operate, among other reasons, new competitors may emerge or current and potential competitors may establish financial or strategic relationships among themselves or with third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. The occurrence of any of these events could materially adversely impact our business.

21


We depend on hiring an adequate number of hourly employees to run our business and are subject to government regulations concerning these and our other employees, including wage and hour regulations.
Our workforce is comprised primarily of employees who work on an hourly basis. In certain areas where we operate, there is significant competition for employees. The lack of availability of an adequate number of hourly employees or an increase in wages and benefits to current employees could adversely affect our business, results of operations, cash flows, financial condition and ability to service our debt obligations. We are subject to applicable rules and regulations relating to our relationship with our employees, including wage and hour regulations, health benefits, unemployment and sales taxes, overtime and working conditions and immigration status. Accordingly, legislated increases in the federal 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, prospects, results of operations and financial condition.
Our stock price is volatile, and you may not be able to recover your investment if our stock price declines.
The price of our common stock has been volatile and can be expected to be significantly affected by factors such as:
our ability to meet market expectations with respect to the growth and profitability of each of our operating segments;
quarterly variations in our results of operations, which may be impacted by, among other things, changes in same store revenues or when and how many locations we acquire or open;
quarterly variations in our competitors’ results of operations;
changes in earnings estimates or buy/sell recommendations by financial analysts;
state or federal legislative or regulatory proposals, initiatives, actions or changes that are, or are perceived to be, adverse to our operations;
the stock price performance of comparable companies; and
continuing unpredictable global and regional economic conditions.

In addition, the stock market as a whole historically has experienced price and volume fluctuations that have affected the market price of many specialty retailers in ways that may have been unrelated to these companies’ operating performance.
We are subject to sales, income and other taxes, which can be difficult and complex to calculate due to the nature of our various businesses. 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 lease-to-own industry generally and our virtual lease-to-own Progressive and Aarons.com businesses more specifically. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the lease-to-own industry and e-commerce and, therefore, in many cases it is not clear how existing statutes apply to our various businesses. 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.

22


ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

23


ITEM 2. PROPERTIES
The Company leases warehouse and retail store space for most of its 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. The following table sets forth certain information regarding our furniture manufacturing plants, bedding facilities, fulfillment centers, service centers, warehouses, corporate management and call center facilities:
LOCATION
SEGMENT, PRIMARY USE AND HOW HELD
SQ. FT.
Cairo, Georgia
Manufacturing—Furniture Manufacturing – Owned
300,000

Cairo, Georgia
Manufacturing—Bedding and Furniture Manufacturing – Owned
147,000

Cairo, Georgia
Warehouse—Furniture Parts – Leased
111,000

Cairo, Georgia
Warehouse—Furniture Parts – Leased
40,000

Coolidge, Georgia
Manufacturing—Furniture Manufacturing – Owned
81,000

Coolidge, Georgia
Manufacturing—Furniture Manufacturing – Owned
48,000

Coolidge, Georgia
Manufacturing—Furniture Manufacturing – Owned
41,000

Coolidge, Georgia
Manufacturing—Administration and Showroom – Owned
10,000

Lewisberry, Pennsylvania
Manufacturing—Bedding Manufacturing – Leased
25,000

Fairburn, Georgia
Manufacturing—Bedding Manufacturing – Leased
57,000

Sugarland, Texas
Manufacturing—Bedding Manufacturing – Owned
23,000

Auburndale, Florida
Manufacturing—Bedding Manufacturing – Leased
20,000

Kansas City, Kansas
Manufacturing—Bedding Manufacturing – Leased
13,000

Phoenix, Arizona
Manufacturing—Bedding Manufacturing – Leased
20,000

Plainfield, Indiana
Manufacturing—Bedding Manufacturing – Leased
24,000

Cheswick, Pennsylvania
Manufacturing—Bedding Manufacturing – Leased
19,000

Auburndale, Florida
Sales and Lease Ownership—Fulfillment Center – Leased
131,000

Belcamp, Maryland
Sales and Lease Ownership—Fulfillment Center – Leased
95,000

Obetz, Ohio
Sales and Lease Ownership—Fulfillment Center – Leased
91,000

Dallas, Texas
Sales and Lease Ownership—Fulfillment Center – Leased
133,000

Fairburn, Georgia
Sales and Lease Ownership—Fulfillment Center – Leased
117,000

Sugarland, Texas
Sales and Lease Ownership—Fulfillment Center – Owned
135,000

Huntersville, North Carolina
Sales and Lease Ownership—Fulfillment Center – Leased
214,000

LaVergne, Tennessee
Sales and Lease Ownership—Fulfillment Center – Leased
100,000

Oklahoma City, Oklahoma
Sales and Lease Ownership—Fulfillment Center – Leased
130,000

Phoenix, Arizona
Sales and Lease Ownership—Fulfillment Center – Leased
89,000

Magnolia, Mississippi
Sales and Lease Ownership—Fulfillment Center – Leased
125,000

Plainfield, Indiana
Sales and Lease Ownership—Fulfillment Center – Leased
90,000

Portland, Oregon
Sales and Lease Ownership—Fulfillment Center – Leased
98,000

Rancho Cucamonga, California
Sales and Lease Ownership—Fulfillment Center – Leased
92,000

Westfield, Massachusetts
Sales and Lease Ownership—Fulfillment Center – Leased
131,000

Kansas City, Kansas
Sales and Lease Ownership—Fulfillment Center – Leased
103,000

Cheswick, Pennsylvania
Sales and Lease Ownership—Fulfillment Center – Leased
126,000


24


LOCATION
SEGMENT, PRIMARY USE AND HOW HELD
SQ. FT.
Auburndale, Florida
Sales & Lease Ownership—Service Center – Leased
7,000

Belcamp, Maryland
Sales & Lease Ownership—Service Center – Leased
5,000

Cheswick, Pennsylvania
Sales & Lease Ownership—Service Center – Leased
10,000

Fairburn, Georgia
Sales & Lease Ownership—Service Center – Leased
8,000

Grand Prairie, Texas
Sales & Lease Ownership—Service Center – Leased
11,000

Houston, Texas
Sales & Lease Ownership—Service Center – Leased
15,000

Huntersville, North Carolina
Sales & Lease Ownership—Service Center – Leased
10,000

Kansas City, Kansas
Sales & Lease Ownership—Service Center – Leased
8,000

Obetz, Ohio
Sales & Lease Ownership—Service Center – Leased
7,000

Oklahoma City, Oklahoma
Sales & Lease Ownership—Service Center – Leased
10,000

Phoenix, Arizona
Sales & Lease Ownership—Service Center – Leased
6,000

Plainfield, Indiana
Sales & Lease Ownership—Service Center – Leased
6,000

Rancho Cucamonga, California
Sales & Lease Ownership—Service Center – Leased
4,000

Ridgeland, Mississippi
Sales & Lease Ownership—Service Center – Leased
10,000

South Madison, Tennessee
Sales & Lease Ownership—Service Center – Leased
4,000

Brooklyn, New York
Sales & Lease Ownership—Warehouse – Leased
32,000

Draper, Utah
Progressive—Corporate Management/Call Center – Leased
159,000

Glendale, Arizona
Progressive—Corporate Management/Call Center – Leased
52,000

Springdale, Arkansas
DAMI—Corporate Management/Call Center – Owned
29,000

Tulsa, Oklahoma
DAMI—Call Center – Leased
3,400

Our executive and administrative offices currently occupy approximately 69,000 of the 81,000 usable square feet in a 105,000 square-foot office building in Atlanta, Georgia. We sold this building in January 2016, and entered into a short term lease to remain in the building while we prepare to move these offices. During 2015, we secured a lease in a different part of Atlanta, Georgia for approximately 64,000 square feet of a building that we plan to occupy in 2016 and use for our permanent executive and administrative offices.
We also wholly lease a building with approximately 51,000 square feet and lease 67,000 square feet of a building with approximately 78,000 square feet in Kennesaw, Georgia. Separately, we lease a building in Marietta, Georgia in which we currently use approximately 44,000 square feet. These facilities are used for additional administrative functions.
We believe that all of our facilities are well maintained and adequate for their current and reasonably foreseeable uses.
ITEM 3. 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, financial position or results of operations. However, an adverse resolution of a number of these items may have a material adverse impact on our business, financial position or results of operations. For further information, see Note 9 to the consolidated financial statements under the heading "Legal Proceedings," which discussion is incorporated by reference in response to this Item 3.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

25


PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information, Holders and Dividends
Effective December 13, 2010, all shares of the Company’s common stock began trading as a single class on the New York Stock Exchange under the ticker symbol "AAN." The CUSIP number of the Company's common stock is 002535300.
The number of shareholders of record of the Company’s common stock at February 26, 2016 was 185. The closing price for the common stock at February 26, 2016 was $22.64.
The following table shows the range of high and low sales prices per share for the Company’s common stock and the quarterly cash dividends declared per share for the periods indicated. 
Common Stock
High
 
Low
 
Cash
Dividends
Per Share
Year Ended December 31, 2015
 
 
 
 
 
First Quarter
$
33.71

 
$
27.51

 
$
.023

Second Quarter
36.98

 
27.40

 
.023

Third Quarter
40.06

 
32.36

 
.023

Fourth Quarter
40.80

 
21.32

 
.025

Common Stock
High
 
Low
 
Cash
Dividends
Per Share
Year Ended December 31, 2014
 
 
 
 
 
First Quarter
$
32.64

 
$
26.18

 
$
.021

Second Quarter
35.82

 
27.95

 
.021

Third Quarter
36.74

 
24.25

 
.021

Fourth Quarter
31.33

 
23.25

 
.023

Subject to our ongoing ability to generate sufficient income, any future capital needs and other contingencies, we expect to continue our policy of paying quarterly dividends. Dividends will be payable only when, and if, declared by the Company's Board of Directors. Under our revolving credit agreement, we may pay cash dividends in any year so long as, after giving pro forma effect to the dividend payment, we maintain compliance with our financial covenants and no event of default has occurred or would result from the payment.

26


Issuer Purchases of Equity Securities
As of December 31, 2015, 10,496,421 shares of common stock remained available for repurchase from time to time under the purchase authority approved by the Company’s Board of Directors and previously announced. The following table presents our share repurchase activity for the three months ended December 31, 2015:
Period
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans
 
Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans1
October 1 through October 31, 2015

 
$

 

 
10,496,421

November 1 through November 30, 2015

 

 

 
10,496,421

December 1 through December 31, 2015

 

 

 
10,496,421

Total

 
 
 

 
 
1 Share repurchases are conducted under authorizations made from time to time by the Company’s Board of Directors. The most recent authorization was publicly announced on October 4, 2013 and authorized the repurchase of an additional 10,955,345 shares of common stock over the previously authorized repurchase amount of 4,044,655 shares, increasing the total number of our shares of common stock authorized for repurchase to 15,000,000. These authorizations have no expiration date, and the Company is not obligated to repurchase any shares. Subject to applicable law, repurchases may be made at such times and in such amounts as the Company deems appropriate. Repurchases may be discontinued at any time.
Securities Authorized for Issuance Under Equity Compensation Plans
Information concerning the Company’s equity compensation plans is set forth in Item 12 of Part III of this Annual Report on Form 10-K.

27


ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data of Aaron’s, Inc., which have been derived from its Consolidated Financial Statements for each of the five years in the period ended December 31, 2015. Certain reclassifications have been made to the prior periods to conform to the current period presentation. This historical information may not be indicative of the Company’s future performance. The information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the notes thereto. 
(Dollar Amounts in Thousands, Except Per Share Data)
Year Ended December 31, 2015
 
Year Ended December 31, 2014
 
Year Ended December 31, 2013
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
OPERATING RESULTS
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Lease Revenues and Fees
$
2,684,184

 
$
2,221,574

 
$
1,748,699

 
$
1,676,391

 
$
1,516,508

Retail Sales
32,872

 
38,360

 
40,876

 
38,455

 
38,557

Non-Retail Sales
390,137

 
363,355

 
371,292

 
425,915

 
388,960

Franchise Royalties and Fees
63,507

 
65,902

 
68,575

 
66,655

 
63,255

Interest and Fees on Loans Receivable
2,845

 

 

 

 

Other
6,211

 
5,842

 
5,189

 
5,411

 
5,298

 
3,179,756

 
2,695,033

 
2,234,631

 
2,212,827

 
2,012,578

Costs and Expenses:
 
 
 
 
 
 
 
 
 
Depreciation of Lease Merchandise
1,212,644

 
932,634

 
628,089

 
601,552

 
547,839

Retail Cost of Sales
21,040

 
24,541

 
24,318

 
21,608

 
22,619

Non-Retail Cost of Sales
351,777

 
330,057

 
337,581

 
387,362

 
351,887

Operating Expenses
1,357,030

 
1,231,801

 
1,022,684

 
952,617

 
866,600

Financial Advisory and Legal Costs

 
13,661

 

 

 

Restructuring Expenses

 
9,140

 

 

 

Retirement and Vacation Charges

 
9,094

 
4,917

 
10,394

 
3,532

Progressive-Related Transaction Costs

 
6,638

 

 

 

Legal and Regulatory (Income) Expense

 
(1,200
)
 
28,400

 
(35,500
)
 
36,500

Other Operating Expense (Income), Net
1,324

 
(1,176
)
 
1,584

 
(2,235
)
 
(3,550
)
 
2,943,815

 
2,555,190

 
2,047,573

 
1,935,798

 
1,825,427

Operating Profit
235,941

 
139,843

 
187,058

 
277,029

 
187,151

Interest Income
2,185

 
2,921

 
2,998

 
3,541

 
1,718

Interest Expense
(23,339
)
 
(19,215
)
 
(5,613
)
 
(6,392
)
 
(4,709
)
Other Non-Operating (Expense) Income, Net
(1,667
)
 
(1,845
)
 
517

 
2,677

 
(783
)
Earnings Before Income Taxes
213,120

 
121,704

 
184,960

 
276,855

 
183,377

Income Taxes
77,411

 
43,471

 
64,294

 
103,812

 
69,610

Net Earnings
$
135,709


$
78,233


$
120,666


$
173,043


$
113,767

Earnings Per Share
$
1.87

 
$
1.08

 
$
1.59

 
$
2.28

 
$
1.46

Earnings Per Share Assuming Dilution
1.86

 
1.08

 
1.58

 
2.25

 
1.43

 
 
 
 
 
 
 
 
 
 
Dividends Per Share
.094

 
.086

 
.072

 
.062

 
.054

FINANCIAL POSITION
 
 
 
 
 
 
 
 
 
(Dollar Amounts in Thousands)
 
 
 
 
 
 
 
 
 
Lease Merchandise, Net
$
1,138,938

 
$
1,087,032

 
$
869,725

 
$
964,067

 
$
862,276

Property, Plant and Equipment, Net
225,836

 
219,417

 
231,293

 
230,598

 
226,619

Total Assets
2,658,875

 
2,456,844

 
1,827,176

 
1,812,929

 
1,731,899

Debt
610,450

 
606,082

 
142,704

 
141,528

 
153,789

Shareholders’ Equity
1,366,618

 
1,223,521

 
1,139,963

 
1,136,126

 
976,554

AT YEAR END
 
 
 
 
 
 
 
 
 
Stores Open:
 
 
 
 
 
 
 
 
 
Company-operated
1,305

 
1,326

 
1,370

 
1,324

 
1,232

Franchised
734

 
782

 
781

 
749

 
713

Lease Agreements in Effect
1,628,000

 
1,665,000

 
1,751,000

 
1,724,000

 
1,508,000

Number of Employees
12,700

 
12,400

 
12,600

 
11,900

 
11,200

Progressive Active Doors1
13,248

 
12,307

 

 

 

1 Progressive was acquired on April 14, 2014. Active doors represent retail store locations at which at least one virtual lease-to-own transaction has been completed during the trailing three month period.

28


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
Aaron’s, Inc. ("we", "our", "us", "Aaron’s" or the "Company") is a leader in the sales and lease ownership and specialty retailing of furniture, consumer electronics, computers, and home appliances and accessories throughout the United States and Canada.
On April 14, 2014, the Company acquired a 100% ownership interest in Progressive Finance Holdings, LLC ("Progressive"), a leading virtual lease-to-own company, for merger consideration of $700.0 million, net of cash acquired. Progressive provides lease-purchase solutions in 46 states on a variety of products, including furniture and bedding, mobile phones, consumer electronics, appliances and jewelry. It does so by purchasing merchandise from third-party retailers desired by those retailers’ customers, and in turn leasing that merchandise to the customers on a lease-to-own basis. Progressive consequently has no stores of its own, but rather offers lease-purchase solutions to the customers of traditional retailers.
On July 15, 2014, the Company announced that a rigorous evaluation of the Company-operated store portfolio had been performed, which, along with other cost-reduction initiatives, resulted in the closure of 44 underperforming stores and the realignment of home office and field support. In the ordinary course of business, we continually review, and as appropriate adjust, the amount and mix of Company-operated and franchised stores to help optimize overall performance. These adjustments included closing additional underperforming Company-operated stores during 2015.
On October 15, 2015, the Company acquired a 100% ownership interest in Dent-A-Med, Inc., d/b/a the HELPcard®, (collectively, "DAMI") for $50.7 million, net of cash acquired. The Company also assumed $44.8 million of debt in the form of a secured revolving credit facility in connection with the acquisition. DAMI offers a variety of second-look financing programs for below-prime customers that are originated through a federally insured bank and, along with Progressive's existing technology-based application and approval process, allows the Company to provide retail partners one source for financing and leasing transactions with below-prime customers.
Our major operating divisions are Aaron’s Sales & Lease Ownership, Progressive, HomeSmart, DAMI and Woodhaven Furniture Industries, which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in our stores.
Total revenues increased from $2.235 billion in 2013 to $3.180 billion in 2015, primarily as a result of the Progressive acquisition during 2014. Total revenues for the year ended December 31, 2015 increased $484.7 million, or 18.0%, over the prior year. Progressive revenues for the twelve months ended December 31, 2015 were $1.0 billion compared to $519.3 million for the period from the acquisition date to December 31, 2014. The increase in Progressive revenues was partially offset by a decrease of $48.5 million in revenue from our traditional lease-to-own store-based ("core") business primarily resulting from a 4.1% decrease in Company-operated same store revenues.

29


The Company’s franchised and Company-operated store activity (unaudited) is summarized as follows:
 
2015
 
2014
 
2013
Franchised stores
 
 
 
 
 
Franchised stores open at January 1,
782

 
781

 
749

Opened
10

 
23

 
45

Purchased from the Company
16

 
6

 
2

Purchased by the Company
(25
)
 
(9
)
 
(10
)
Closed, sold or merged
(49
)
 
(19
)
 
(5
)
Franchised stores open at December 31,
734

 
782

 
781

Company-operated Sales & Lease Ownership stores
 
 
 
 
 
Company-operated Sales & Lease Ownership stores open at January 1,
1,243

 
1,262

 
1,227

Opened
7

 
30

 
33

Added through acquisition
25

 
9

 
10

Closed, sold or merged
(52
)
 
(58
)
 
(8
)
Company-operated Sales & Lease Ownership stores open at December 31,
1,223

 
1,243

 
1,262

Company-operated HomeSmart stores
 
 
 
 
 
Company-operated HomeSmart stores open at January 1,
83

 
81

 
78

Opened

 
3

 
3

Closed, sold or merged
(1
)
 
(1
)
 

Company-operated HomeSmart stores open at December 31,
82

 
83

 
81

Company-operated RIMCO stores 1
 
 
 
 
 
Company-operated RIMCO stores open at January 1,

 
27

 
19

Opened

 

 
8

Closed, sold or merged

 
(27
)
 

Company-operated RIMCO stores open at December 31,

 

 
27

1 In January 2014, we sold our 27 Company-operated RIMCO stores and the rights to five franchised RIMCO stores.
Same Store Revenues. We believe that changes in same store revenues are a key performance indicator of our core business. For the year ended December 31, 2015, we calculated this amount by comparing revenues for the year ended December 31, 2015 to revenues for the year ended December 31, 2014 for all stores open for the entire 24-month period ended December 31, 2015, excluding stores that received lease agreements from other acquired, closed or merged stores. During the first quarter of 2015, the Company revised the methodology for calculating same store revenues to reflect a full lifecycle for customer retention after stores are closed. As a result, revenues for stores that have been consolidated/merged are now included in the comparable same store calculation after 24 months. Previously, consolidated/merged stores were included in the same store calculation after 15 months. The change in the same store calculation had an immaterial impact on comparable store revenues for 2015, 2014 and 2013.
Active Doors. We believe that active doors are a key performance indicator of our Progressive segment. Active doors represent retail store locations at which at least one virtual lease-to-own transaction has been completed during the trailing three month period. The following table presents active doors for the Progressive segment:
Active Doors at December 31 (Unaudited)
2015
 
2014
Progressive Active Doors
13,248

 
12,307

Invoice Volume. We also believe that invoice volume is a key performance indicator of our Progressive segment. Invoice volume is defined as the retail price of lease merchandise acquired and leased by Progressive during the period, excluding returns. The following table presents invoice volume for the Progressive segment:
For the Year Ended December 31 (Unaudited and In Thousands)
2015
 
2014
Progressive Invoice Volume
$
780,038

 
$
471,902


30


Business Environment and Company Outlook
Like many industries, the lease-to-own industry has been transformed by the internet and virtual marketplace. We believe the Progressive acquisition is strategically transformational for the Company in this respect and will strengthen our business. We also believe the lease-to-own industry has suffered in recent periods due to economic challenges faced by our core customers. In response to these changing market conditions, we are executing a strategic plan for the core business that focuses on the following items and that we believe positions us for success over the long-term:
Profitably grow our stores
Accelerate our omni-channel platform
Promote communication, coordination and integration
Champion compliance
Key Components of Net Earnings
In this management’s discussion and analysis section, we review our consolidated results. For the years ended December 31, 2015, 2014 and 2013, some of the key revenue and cost and expense items that affected earnings were as follows:
Revenues. We separate our total revenues into six components: lease revenues and fees, retail sales, non-retail sales, franchise royalties and fees, interest and fees on loans receivable and other. Lease revenues and fees include all revenues derived from lease agreements at Company-operated stores and retail locations serviced by Progressive. Retail sales represent sales of both new and returned lease merchandise from our Company-operated stores. Non-retail sales mainly represent new merchandise sales to our Aaron’s Sales & Lease Ownership franchisees. Franchise royalties and fees represent fees from the sale of franchise rights and royalty payments from franchisees, as well as other related income from our franchised stores. Interest and fees on loans receivable primarily represents the accretion of the discount on loans acquired in the DAMI acquisition, as well as finance charges and annual and other fees earned on loans originated since the acquisition. Other revenues primarily relate to revenues from leasing real estate properties to unrelated third parties, as well as other miscellaneous revenues.
Depreciation of Lease Merchandise. Depreciation of lease merchandise reflects the expense associated with depreciating merchandise held for lease and leased to customers by our Company-operated stores and Progressive.
Retail Cost of Sales. Retail cost of sales represents the depreciated cost of merchandise sold through our Company-operated stores.
Non-Retail Cost of Sales. Non-retail cost of sales primarily represents the cost of merchandise sold to our franchisees.
Operating Expenses. Operating expenses include personnel costs, occupancy costs, lease merchandise write-offs, bad debt expense, and advertising, among other expenses.
Other Operating Expense (Income), Net. Other operating expense (income), net consists of gains or losses on sales of Company-operated stores and delivery vehicles, fair value adjustments on assets held for sale and gains or losses on other transactions involving property, plant and equipment.
Critical Accounting Policies
We discuss the most critical accounting policies below. For a discussion of the Company's significant accounting policies, see Note 1 to the consolidated financial statements.
Revenue Recognition
Lease revenues are recognized in the month they are due on the accrual basis of accounting. For internal management reporting purposes, lease revenues from sales and lease ownership agreements are recognized by the reportable segments as revenue in the month the cash is collected. On a monthly basis, we record an accrual for lease revenues due but not yet received, net of allowances, and a deferral of revenue for lease payments received prior to the month due. Our revenue recognition accounting policy matches the lease revenue with the corresponding costs, mainly depreciation, associated with the lease merchandise. At December 31, 2015 and 2014, we had a revenue deferral representing cash collected in advance of being due or otherwise earned totaling $68.6 million and $60.5 million, respectively, and an accrued revenue receivable, net of allowance for doubtful accounts, based on historical collection rates of $34.5 million and $30.2 million, respectively.
Revenues from the sale of merchandise to franchisees are recognized at the time of receipt of the merchandise by the franchisee and revenues from such sales to other customers are recognized at the time of shipment.

31


Lease Merchandise
Our Aaron’s Sales & Lease Ownership and HomeSmart divisions depreciate merchandise over the applicable agreement period, generally 12 to 24 months (monthly agreements) or 65 to 104 weeks (weekly agreements) when leased, and generally 36 months when not leased, to a 0% salvage value. The Company's Progressive division depreciates merchandise over the lease agreement period, which is typically over 12 months, while on lease.
Our policies generally require weekly lease merchandise counts at our store-based operations, which include write-offs for unsalable, damaged, or missing merchandise inventories. Full physical inventories are generally taken at our fulfillment and manufacturing facilities one to two times a year with appropriate provisions made for missing, damaged and unsalable merchandise. In addition, we monitor lease merchandise levels and mix by division, store and fulfillment center, as well as the average age of merchandise on hand. If unsalable lease merchandise cannot be returned to vendors, its carrying amount is adjusted to net realizable value or written off.
All lease merchandise is available for lease and sale, excluding merchandise determined to be missing, damaged or unsalable. We record lease merchandise carrying amount adjustments on the allowance method, which estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based on historical write off experience. As of December 31, 2015 and 2014, the allowance for lease merchandise write-offs was $33.4 million and $27.6 million, respectively. Lease merchandise adjustments totaled $136.4 million, $99.9 million and $58.0 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Acquisition Accounting for Businesses
We account for acquisitions of businesses by recognizing the assets acquired and liabilities assumed at their respective fair values on the date of acquisition. We estimate the fair value of identifiable intangible assets using discounted cash flow analyses or estimates of replacement cost based on market participant assumptions. The excess of the purchase price paid over the estimated fair values of the identifiable net tangible and intangible assets acquired in connection with business acquisitions is recorded as goodwill. We consider accounting for business combinations critical because management's judgment is used to determine the estimated fair values assigned to assets acquired and liabilities assumed, as well as the useful life of and amortization method for intangible assets, which can materially affect the results of our operations. Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to an impairment charge if we are unable to recover the value of the recorded net assets.
Loans acquired in a business acquisition are recorded at their fair value at the acquisition date. The projected net cash flows from expected payments of principal, interest, fees and servicing costs and anticipated charge-offs are included in the determination of fair value; therefore, an allowance for loan losses and an amount for unamortized fees is not recognized for the acquired loans. The difference, or discount, between the expected cash flows to be received and the fair value of the acquired loans is accreted to revenue based on the effective interest method. At each period end, the Company evaluates the appropriateness of the accretable discount on the acquired loans based on actual and revised projected future cash receipts.
Goodwill and Other Intangible Assets
Intangible assets are classified into one of three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. For intangible assets with definite lives, tests for impairment must be performed if conditions exist that indicate the carrying amount may not be recoverable. For intangible assets with indefinite lives and goodwill, tests for impairment must be performed at least annually, and sooner if events or circumstances indicate that an impairment may have occurred. Factors which could necessitate an interim impairment assessment include a sustained decline in the Company’s stock price, prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results. As an alternative to this annual impairment testing for intangible assets with indefinite lives and goodwill, the Company may perform a qualitative assessment for impairment if it believes it is not more likely than not that the carrying amount of a reporting unit's net assets exceeds the reporting unit's fair value.
Indefinite-lived intangible assets represent the value of trade names and trademarks acquired as part of the Progressive acquisition. At the date of acquisition, the Company determined that no legal, regulatory, contractual, competitive, economic or other factors limit the useful life of the trade name and trademark intangible asset and, therefore, the useful life is considered indefinite. The Company reassesses this conclusion quarterly and continues to believe the useful life of this asset is indefinite.
We estimate the fair value of indefinite-lived trade name and trademark intangible assets based on projected discounted future cash flows under a relief from royalty method. The Company completed its indefinite-lived intangible asset impairment test as of October 1, 2015 and determined that no impairment had occurred.


32


The following table presents the carrying amount of goodwill and other intangible assets, net as of December 31, 2015:
(In Thousands)
2015
Goodwill
$
539,475

Other Indefinite-Lived Intangible Assets
53,000

Definite-Lived Intangible Assets, Net
222,912

Goodwill and Other Intangibles, Net
$
815,387

Management has deemed its operating segments to be reporting units due to the fact that the operations included in each operating segment have similar economic characteristics. As of December 31, 2015, the Company had six operating segments and reporting units: Sales and Lease Ownership, Progressive, HomeSmart, DAMI, Franchise and Manufacturing. As of December 31, 2015, the Company’s Sales and Lease Ownership, Progressive, HomeSmart and DAMI reporting units were the only reporting units with assigned goodwill balances. The following is a summary of the Company’s goodwill by reporting unit at December 31, 2015:
(In Thousands)
2015
Sales and Lease Ownership
$
233,851

Progressive
290,605

HomeSmart
14,729

DAMI
290

Total
$
539,475

The Company performs its annual goodwill impairment testing as of October 1 each year . When evaluating goodwill for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit or intangible asset group is impaired. The decision to perform a qualitative impairment assessment for an individual reporting unit in a given year is influenced by a number of factors, including the size of the reporting unit's goodwill, the current and projected operating results, the significance of the excess of the reporting unit's estimated fair value over carrying amount at the last quantitative assessment date and the amount of time in between quantitative fair value assessments and the date of acquisition. During 2015, the Company performed a qualitative assessment for the goodwill of the Progressive reporting unit and concluded no indications of impairment existed.
For the other reporting units, we use a combination of valuation techniques to determine the fair value of our reporting units, including an income approach and a market approach. Under the income approach, we estimate fair value based on estimated discounted cash flows, which require assumptions about short-term and long-term revenue growth rates, operating margins, capital requirements, and a weighted-average cost of capital and/or discount rate. Under the market approach, we use a combination of valuation techniques to calculate the fair value of our reporting units, including a multiple of gross revenues approach and a multiple of projected earnings before interest, taxes, depreciation and amortization approach using assumptions consistent with those we believe a hypothetical marketplace participant would use.
We believe the benchmark companies we evaluate as marketplace participants for each reporting unit serve as an appropriate reference when calculating fair value because those benchmark companies have similar risks, participate in similar markets, provide similar products and services for their customers and compete with us directly. The values separately derived from each of the income and market approach valuation techniques were used to develop an overall estimate of each reporting unit's fair value. The selection and weighting of the various fair value techniques, which requires the use of management judgment to determine what is most representative of fair value, may result in a higher or lower fair value.
The Company completed its goodwill impairment testing for reporting units other than Progressive as of October 1, 2015 and determined that no impairment had occurred. During the performance of the goodwill impairment testing, the Company did not identify any reporting units that were not substantially in excess of their carrying values, other than the HomeSmart reporting unit for which the estimated fair value exceeded the carrying value of the reporting unit by approximately 9%. While no impairment was noted in the impairment testing, if HomeSmart is unable to sustain its recent profitability improvements, there could be a change in the valuation of the HomeSmart reporting unit that may result in the recognition of an impairment loss in future periods.

33


Intangible assets acquired in recent transactions may be more susceptible to impairment, primarily due to the fact that they are recorded at fair value based on recent operating plans and macroeconomic conditions present at the time of acquisition. Consequently, if operating results and/or macroeconomic conditions deteriorate shortly after an acquisition, it could result in the impairment of the acquired assets. A deterioration of macroeconomic conditions may not only negatively impact the estimated operating cash flows used in our cash flow models, but may also negatively impact other assumptions used in our analyses, including but not limited to, the estimated cost of capital and/or discount rates. Additionally, as discussed above, in accordance with accounting principles generally accepted in the United States, we are required to ensure that assumptions used to determine fair value in our analyses are consistent with the assumptions a hypothetical marketplace participant would use. As a result, the cost of capital and/or discount rates used in our analyses may increase or decrease based on market conditions and trends, regardless of whether our actual cost of capital has changed. Therefore, if the cost of capital and/or discount rates change, we may recognize an impairment of an intangible asset in spite of realizing actual cash flows that are approximately equal to, or greater than, our previously forecasted amounts.
The Company determined that there were no events that occurred or circumstances that changed in the fourth quarter of 2015 that would more likely than not reduce the fair value of a reporting unit below its carrying amount or that would indicate an impairment of the other intangible assets. As a result, the Company did not perform interim impairment testing for any reporting unit or other intangible asset as of December 31, 2015. We will continue to monitor the fair value of goodwill and other intangible assets in future periods.
Leases and Closed Store Reserves
The majority of our Company-operated stores are operated from leased facilities under operating lease agreements. The majority of the leases are for periods that do not exceed five years, although lease terms range in length up to approximately 15 years. Leasehold improvements related to these leases are generally amortized over periods that do not exceed the lesser of the lease term or useful life. For leases which contain escalating payments we record the related lease expense on a straight-line basis over the lease term. We generally do not obtain significant amounts of lease incentives or allowances from landlords. Any incentive or allowance amounts we receive are recognized on a straight-line basis over the lease term.
From time to time, we close or consolidate stores. Our primary costs associated with closing stores are the future lease payments and related commitments. We record an estimate of the future obligation related to closed stores based upon the present value of the future lease payments and related commitments, net of estimated sublease income based upon historical experience. As of December 31, 2015 and 2014, our reserve for closed stores was $5.7 million and $5.6 million, respectively. Due to changes in market conditions, our estimates related to sublease income may change and, as a result, our actual liability may be more or less than the recorded amount. Excluding estimated sublease income, our future obligations related to closed stores on an undiscounted basis were $8.1 million and $7.8 million as of December 31, 2015 and 2014, respectively.
Insurance Programs
We maintain insurance contracts to fund workers compensation, vehicle liability, general liability and group health insurance claims. Using actuarial analyses and projections, we estimate the liabilities associated with open and incurred but not reported workers compensation, vehicle liability and general liability claims. This analysis is based upon an assessment of the likely outcome or historical experience, net of any stop loss or other supplementary coverage. We also calculate the projected outstanding plan liability for our group health insurance program using historical claims runoff data. Our gross estimated liability for workers compensation insurance claims, vehicle liability, general liability and group health insurance was $38.6 million and $36.8 million at December 31, 2015 and 2014, respectively. In addition, we have prefunding balances on deposit with the insurance carriers of $31.8 million and $28.3 million at December 31, 2015 and 2014, respectively.
If we resolve insurance claims for amounts that are in excess of our current estimates and within policy stop loss limits, we will be required to pay additional amounts beyond those accrued at December 31, 2015.
The assumptions and conditions described above reflect management’s best assumptions and estimates, but these items involve inherent uncertainties as described above, which may or may not be controllable by management. As a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future periods.

34


Legal and Regulatory Reserves 
We are subject to various legal and regulatory proceedings arising in the ordinary course of business. Management regularly assesses the Company’s insurance deductibles, monitors our litigation and regulatory exposure with the Company’s attorneys and evaluates its loss experience. An accrued liability for legal and regulatory proceedings is established when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Legal fees and expenses associated with the defense of all of our litigation are expensed as such fees and expenses are incurred.
Income Taxes
The calculation of our income tax expense requires judgment and the use of estimates. We periodically assess tax positions based on current tax developments, including enacted statutory, judicial and regulatory guidance. In analyzing our overall tax position, consideration is given to the amount and timing of recognizing income tax liabilities and benefits. In applying the tax and accounting guidance to the facts and circumstances, income tax balances are adjusted appropriately through the income tax provision. Reserves for income tax uncertainties are maintained at levels we believe are adequate to absorb probable payments. Actual amounts paid, if any, could differ significantly from these estimates.
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets when we expect the amount of tax benefit to be realized is less than the carrying amount of the deferred tax asset.
Fair Value Measurements
For the valuation techniques used to determine the fair value of financial assets and liabilities on a recurring basis, as well as assets held for sale, which are recorded at fair value on a nonrecurring basis, refer to Note 4 in the consolidated financial statements.
Results of Operations
As of December 31, 2015, the Company had six operating and reportable segments: Sales and Lease Ownership, Progressive, HomeSmart, DAMI, Franchise and Manufacturing. The results of DAMI and Progressive have been included in the Company’s consolidated results and presented as reportable segments from their October 15, 2015 and April 14, 2014 acquisition dates, respectively. In January 2014, the Company sold the 27 Company-operated RIMCO stores and the rights to five franchised RIMCO stores. In all periods presented, RIMCO has been reclassified from the RIMCO segment to Other.
The Company’s Sales and Lease Ownership, Progressive, HomeSmart and Franchise segments accounted for substantially all of the operations of the Company and, therefore, unless otherwise noted, only material changes within these four segments are discussed. The production of our Manufacturing segment, consisting of the Woodhaven Furniture Industries division, is primarily leased or sold through the Company-operated and franchised stores, and consequently, substantially all of that segment’s revenues and earnings before income taxes are eliminated through the elimination of intersegment revenues and intersegment profit or loss.

35


Results of Operations – Years Ended December 31, 2015, 2014 and 2013
 
 
 
Change
 
Year Ended December 31,
 
2015 vs. 2014
 
2014 vs. 2013
(In Thousands)
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Revenues
and Fees
$
2,684,184

 
$
2,221,574

 
$
1,748,699

 
$
462,610

 
20.8
 %
 
$
472,875

 
27.0
 %
Retail Sales
32,872

 
38,360

 
40,876

 
(5,488
)
 
(14.3
)
 
(2,516
)
 
(6.2
)
Non-Retail Sales
390,137

 
363,355

 
371,292

 
26,782

 
7.4

 
(7,937
)
 
(2.1
)
Franchise Royalties and Fees
63,507

 
65,902

 
68,575

 
(2,395
)
 
(3.6
)
 
(2,673
)
 
(3.9
)
Interest and Fees on Loans Receivable
2,845

 

 

 
2,845

 
nmf

 

 
nmf

Other
6,211

 
5,842

 
5,189

 
369

 
6.3

 
653

 
12.6

 
3,179,756

 
2,695,033

 
2,234,631

 
484,723

 
18.0

 
460,402

 
20.6

COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation of Lease Merchandise
1,212,644

 
932,634

 
628,089

 
280,010

 
30.0

 
304,545

 
48.5

Retail Cost of Sales
21,040

 
24,541

 
24,318

 
(3,501
)
 
(14.3
)
 
223

 
.9

Non-Retail Cost of Sales
351,777

 
330,057

 
337,581

 
21,720

 
6.6

 
(7,524
)
 
(2.2
)
Operating Expenses
1,357,030

 
1,231,801

 
1,022,684

 
125,229

 
10.2

 
209,117

 
20.4

Financial Advisory and Legal Costs

 
13,661

 

 
(13,661
)
 
nmf

 
13,661

 
nmf

Restructuring Expenses

 
9,140

 

 
(9,140
)
 
nmf

 
9,140

 
nmf

Retirement and Vacation Charges

 
9,094

 
4,917

 
(9,094
)
 
nmf

 
4,177

 
85.0

Progressive-Related Transaction Costs

 
6,638

 

 
(6,638
)
 
nmf

 
6,638

 
nmf

Legal and Regulatory (Income) Expenses

 
(1,200
)
 
28,400

 
(1,200
)
 
nmf

 
(29,600
)
 
nmf

Other Operating Expense (Income), Net
1,324

 
(1,176
)
 
1,584

 
2,500

 
212.6

 
(2,760
)
 
(174.2
)
 
2,943,815

 
2,555,190

 
2,047,573

 
388,625

 
15.2

 
507,617

 
24.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING PROFIT
235,941

 
139,843

 
187,058

 
96,098

 
68.7

 
(47,215
)
 
(25.2
)
Interest Income
2,185

 
2,921

 
2,998

 
(736
)
 
(25.2
)
 
(77
)
 
(2.6
)
Interest Expense
(23,339
)
 
(19,215
)
 
(5,613
)
 
4,124

 
21.5

 
13,602

 
242.3

Other Non-Operating (Expense) Income, Net
(1,667
)
 
(1,845
)
 
517

 
(178
)
 
(9.6
)
 
2,362

 
456.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
EARNINGS BEFORE INCOME TAXES
213,120

 
121,704

 
184,960

 
91,416

 
75.1

 
(63,256
)
 
(34.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INCOME TAXES
77,411

 
43,471

 
64,294

 
33,940

 
78.1

 
(20,823
)
 
(32.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET EARNINGS
$
135,709

 
$
78,233

 
$
120,666

 
$
57,476

 
73.5
 %
 
$
(42,433
)
 
(35.2
)%
nmf—Calculation is not meaningful

36


Revenues
Information about our revenues by reportable segment is as follows:
 
 
 
 
Change
 
Year Ended December 31,
 
2015 vs. 2014
 
2014 vs. 2013
(In Thousands)
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and Lease Ownership1
$
2,001,682

 
$
2,037,101

 
$
2,076,269

 
$
(35,419
)
 
(1.7
)%
 
$
(39,168
)
 
(1.9
)%
Progressive2
1,049,681

 
519,342

 

 
530,339

 
102.1

 
519,342

 
nmf

HomeSmart1
63,477

 
64,276

 
62,840

 
(799
)
 
(1.2
)
 
1,436

 
2.3

DAMI3
2,845

 

 

 
2,845

 
nmf

 

 
nmf

Franchise4
63,507

 
65,902

 
68,575

 
(2,395
)
 
(3.6
)
 
(2,673
)
 
(3.9
)
Manufacturing
106,020

 
104,058

 
106,523

 
1,962

 
1.9

 
(2,465
)
 
(2.3
)
Other
1,118

 
2,969

 
22,158

 
(1,851
)
 
(62.3
)
 
(19,189
)
 
(86.6
)
Revenues of Reportable Segments
3,288,330

 
2,793,648

 
2,336,365

 
494,682

 
17.7

 
457,283

 
19.6

Elimination of Intersegment Revenues
(103,890
)
 
(102,296
)
 
(103,834
)
 
(1,594
)
 
(1.6
)
 
1,538

 
1.5

Cash to Accrual Adjustments
(4,684
)
 
3,681

 
2,100

 
(8,365
)
 
(227.2
)
 
1,581

 
75.3

Total Revenues from External Customers
$
3,179,756

 
$
2,695,033

 
$
2,234,631

 
$
484,723

 
18.0
 %
 
$
460,402

 
20.6
 %
nmf—Calculation is not meaningful
1 Segment revenue consists of lease revenues and fees, retail sales and non-retail sales.
2 Segment revenue consists of lease revenues and fees.
3 Segment revenue consists of interest and fees on loans receivable, and excludes the effect of interest expense.
4 Segment revenue consists of franchise royalties and fees.
Year Ended December 31, 2015 Versus Year Ended December 31, 2014
Sales and Lease Ownership. Sales and Lease Ownership segment revenues decreased $35.4 million to $2.002 billion due to a $57.4 million, or 3.5%, decrease in lease revenues and fees and a $5.3 million, or 14.3%, decrease in retail sales, offset by a $26.4 million, or 7.3%, increase in non-retail sales. Lease revenues and fees and retail sales decreased partly due to the net reduction of 39 Sales and Lease Ownership stores since the beginning of 2014. In addition, lease revenues and fees and retail sales were impacted by a 4.2% decrease in same store revenues. In particular, Texas stores, which represent approximately 18% of our store-based revenues, have been down considerably in 2015 due to the effects of contractions in the oil industry on that market. Non-retail sales increased primarily due to increased demand for product by franchisees.
Progressive. Progressive segment revenues increased $530.3 million to $1.0 billion in 2015, partly due to Progressive's results being included for a full year compared to a partial year in 2014 from the April 14, 2014 acquisition date. Revenues also increased in 2015 due to increases in invoice volume at existing active doors as well as a net increase of approximately 941 active doors since the beginning of 2015.
HomeSmart. HomeSmart segment revenues decreased $799,000 to $63.5 million due to a $772,000, or 1.2%, decrease in lease revenues and fees. Lease revenues and fees within the HomeSmart segment decreased due to a decline of 3.7% in same store revenues, which more than offset the net addition of one HomeSmart store since the beginning of 2014.
Franchise. Franchise segment revenues decreased $2.4 million to $63.5 million primarily due to a .9% decrease in same store revenues of existing franchised stores and the impact of the net reduction of 47 franchised stores since the beginning of 2014.
Other. Revenues in the Other category are primarily revenues attributable to leasing space to unrelated third parties in the corporate headquarters building and several minor unrelated activities.

37


Year Ended December 31, 2014 Versus Year Ended December 31, 2013
Sales and Lease Ownership. Sales and Lease Ownership segment revenues decreased $39.2 million to $2.037 billion due to a $33.1 million, or 2.0%, decrease in lease revenues and fees, and a $7.0 million, or 1.9%, decrease in non-retail sales. Lease revenues and fees within the Sales and Lease Ownership segment decreased due to a 3.0% decrease in same store revenues, which more than offset the net addition of 16 Company-operated stores since the beginning of 2013. Non-retail sales decreased primarily due to less demand for product by franchisees.
Progressive. Progressive segment revenues were $519.3 million and have been included in the Company's consolidated results from the April 14, 2014 acquisition date.
HomeSmart. HomeSmart segment revenues increased $1.4 million to $64.3 million due to a $1.3 million, or 2.2%, increase in lease revenues and fees. Lease revenues and fees within the HomeSmart segment increased primarily due to a net addition of five HomeSmart stores since the beginning of 2013.
Franchise. Franchise segment revenues decreased $2.7 million to $65.9 million primarily due to a decrease in finance fees under the franchise loan program.
Other. Revenues in the Other category are primarily revenues attributable to (i) the RIMCO segment through the date of sale in January 2014, (ii) leasing space to unrelated third parties in the corporate headquarters building and (iii) several minor unrelated activities.
Operating Expenses
Information about certain significant components of operating expenses is as follows:
 
Year Ended December 31,
(In Thousands)
2015
 
2014
 
2013
Personnel costs
$
619,557

 
$
594,246

 
$
550,093

Occupancy costs
208,927

 
206,806

 
199,300

Lease merchandise write-offs
136,380

 
99,942

 
57,989

Bad debt expense
122,184

 
60,514

 

Advertising
39,334

 
50,445

 
42,956

Other operating expenses
230,648

 
219,848

 
172,346

Operating Expenses
$
1,357,030

 
$
1,231,801

 
$
1,022,684

Year Ended December 31, 2015 Versus Year Ended December 31, 2014
Operating expenses increased $125.2 million, or 10.2%, to $1.4 billion in 2015, from $1.2 billion for the comparable period in 2014 due primarily to the consolidation of Progressive’s results from operations from the April 14, 2014 acquisition date.
Personnel costs increased in 2015 compared to 2014 due to hiring to support the growth of Progressive.
Lease merchandise write-offs increased $36.4 million in 2015 compared to 2014 due to the increase in Progressive revenues as a percentage of total revenues. Progressive's lease merchandise write-offs as a percentage of Progressive's lease revenues decreased from 8% in 2014 to 7% in 2015. Lease merchandise write-offs as a percentage of lease revenues for our core business increased from 3% in 2014 to 4% in 2015.
Bad debt expense increased $61.7 million in 2015 compared to 2014 due to the increase in Progressive revenues as a percentage of total revenues. Progressive's bad debt expense in 2015 was affected by the impact of a temporary interruption of certain data attributes used to make our approval decisions. We lost access to the attributes in February 2015 and replaced them in April 2015. Leases generated during the period of interruption, while expected to be profitable, charged off at higher rates than originally anticipated during the second and third quarters. Nonetheless, Progressive's bad debt expense as a percentage of Progressive's revenues remained constant at 12% in both years.
In 2015, other operating expenses includes $3.7 million of one-time transaction costs incurred in connection with the acquisition of DAMI.

38


As a percentage of total revenues, operating expenses decreased to 42.7% in 2015 from 45.7% in 2014, generally as a result of the Company's price increases, inventory reduction, and cost initiatives. Operating margin improvements also relate to the continued growth of Progressive, which has lower operating expenses as a percentage of total revenues than the Company’s traditional lease-to-own business because it does not have store operations.
Year Ended December 31, 2014 Versus Year Ended December 31, 2013
Operating expenses increased $209.1 million, or 20.4%, to $1.2 billion in 2014 from $1.0 billion for the comparable period in 2013 due primarily to the consolidation of Progressive's results from operations from the April 14, 2014 acquisition date. Progressive's personnel costs, lease merchandise write-offs, and bad debt expense were $30.2 million, $40.9 million, and $60.5 million, respectively, in 2014 from that date.
As a percentage of total revenues, operating expenses decreased to 45.7% in 2014 from 45.8% in 2013, generally as a result of the Company's price increases, inventory reduction, and cost initiatives.
Other Costs and Expenses
Year Ended December 31, 2015 Versus Year Ended December 31, 2014
Depreciation of lease merchandise. Depreciation of lease merchandise increased $280.0 million, or 30.0%, to $1.2 billion during 2015 from $932.6 million during 2014. The Aaron's core business has continued to reduce inventory, while levels of merchandise on lease have remained consistent year over year, resulting in idle merchandise representing approximately 6% of total depreciation expense in 2015 and 2014. As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to 45.2% from 42.0% in the prior year, primarily because of Progressive's continued growth relative to our core business. Progressive's depreciation as a percentage of lease revenues is higher than the core business because, among other factors, its merchandise has a shorter average life on lease and a higher rate of early buyouts.
Retail cost of sales. Retail cost of sales decreased $3.5 million, or 14.3%, to $21.0 million in 2015 from $24.5 million for the comparable period in 2014, and as a percentage of retail sales, remained consistent at 64.0% in both periods.
Non-retail cost of sales. Non-retail cost of sales increased $21.7 million, or 6.6%, to $351.8 million in 2015, from $330.1 million for the comparable period in 2014, and as a percentage of non-retail sales, decreased to 90.2% from 90.8%.
Financial advisory and legal costs. Financial advisory and legal costs of $13.7 million were incurred during 2014 related to addressing now-resolved strategic matters, including an unsolicited acquisition offer, two proxy contests and shareholder proposals.
Restructuring expenses. In connection with the Company’s July 15, 2014 announced closure of 44 Company-operated stores and restructuring of its home office and field support, charges of $9.1 million were incurred in 2014 and principally consist of contractual lease obligations, the write-off and impairment of property, plant and equipment and workforce reductions.
Retirement charges. Retirement charges of $9.1 million were incurred during 2014 due to the retirements of both the Company’s Chief Executive Officer and Chief Operating Officer in 2014.
Progressive-related transaction costs. Financial advisory and legal costs of $6.6 million were incurred in 2014 in connection with the April 14, 2014 acquisition of Progressive.
Regulatory income. Regulatory income of $1.2 million in 2014 was recorded as a reduction in previously recognized regulatory expense upon the resolution of the regulatory investigation by the California Attorney General.
Year Ended December 31, 2014 Versus Year Ended December 31, 2013
Depreciation of lease merchandise. Depreciation of lease merchandise increased $304.5 million, or 48.5%, to $932.6 million during 2014 from $628.1 million during the comparable period in 2013 due primarily to the consolidation of Progressive's results from operations from the April 14, 2014 acquisition date. Levels of merchandise on lease for the Aaron's core business remained generally consistent year over year, resulting in idle merchandise representing approximately 6% of total depreciation expense in 2014 as compared to approximately 7% in 2013. As a percentage of total lease revenues and fees, depreciation of lease merchandise increased to 42.0% from 35.9% in the prior year, primarily due to the inclusion of Progressive's results of operations from the April 14, 2014 acquisition date. Progressive's inclusion increased depreciation as a percentage of lease revenues because, among other factors, its merchandise has a shorter average life on lease, as well as a higher rate of early buyouts, than our traditional lease-to-own business.

39


Retail cost of sales. Retail cost of sales increased $223,000, or .9%, to $24.5 million in 2014, from $24.3 million for the comparable period in 2013, and as a percentage of retail sales, increased to 64.0% from 59.5% due to increased discounting of pre-leased merchandise.
Non-retail cost of sales. Non-retail cost of sales decreased $7.5 million, or 2.2%, to $330.1 million in 2014, from $337.6 million for the comparable period in 2013, and as a percentage of non-retail sales, remained consistent at approximately 91% in both periods.
Financial advisory and legal costs. Financial advisory and legal costs of $13.7 million were incurred during 2014 related to addressing now-resolved strategic matters, including an unsolicited acquisition offer, two proxy contests and certain other shareholder proposals.
Restructuring expenses. In connection with the Company’s July 15, 2014 announced closure of 44 Company-operated stores and restructuring of its home office and field support, charges of $9.1 million were incurred in 2014 and principally consist of contractual lease obligations, the write-off and impairment of property, plant and equipment and workforce reductions.
Retirement and vacation charges. Retirement charges during 2014 were $9.1 million due primarily to the retirement of both the Company’s Chief Executive Officer and Chief Operating Officer in 2014. Retirement and vacation charges during 2013 were $4.9 million associated with the retirement of the Company’s Chief Operating Officer and a change in the Company's vacation policies.
Progressive-related transaction costs. Financial advisory and legal costs of $6.6 million were incurred in 2014 in connection with the April 14, 2014 acquisition of Progressive.
Legal and regulatory (income) expense. Regulatory income of $1.2 million in 2014 was recorded as a reduction in previously recognized regulatory expense upon the resolution of the regulatory investigation by the California Attorney General. During 2013, regulatory expenses of $28.4 million were incurred related to the then-pending regulatory investigation by the California Attorney General.
Other Operating Expense (Income), Net
Information about the components of other operating expense (income), net is as follows:
 
Year Ended December 31,
(In Thousands)
2015
 
2014
 
2013
Net gains on sales of stores
$
(2,139
)
 
$
(1,694
)
 
$
(833
)
Net gains on sales of delivery vehicles
(1,706
)
 
(1,099
)
 
(1,895
)
Impairment charges and losses on asset dispositions and assets held for sale
5,169

 
1,617

 
4,312

Other Operating Expense (Income), Net
$
1,324

 
$
(1,176
)
 
$
1,584

In 2015, other operating expense, net of $1.3 million included a $3.5 million loss related to a lease termination on a Company aircraft, impairment charges of $757,000 on leasehold improvements related to Company-operated stores that were closed during the period and impairment of $502,000 on assets held for sale. In addition, the Company recognized gains of $2.1 million from the sale of 25 Aaron's Sales & Lease Ownership stores during 2015.
In 2014, other operating income, net of $1.2 million included charges of $477,000 related to the impairment of various land outparcels and buildings that the Company decided not to utilize for future expansion and $762,000 related to the loss on sale of the RIMCO net assets. In addition, the Company recognized gains of $1.7 million from the sale of six Aaron's Sales & Lease Ownership stores during 2014.
In 2013, other operating expense, net of $1.6 million included charges of $3.8 million related to the impairment of various land outparcels and buildings that the Company decided not to utilize for future expansion and the net assets of the RIMCO operating segment (principally consisting of lease merchandise, office furniture and leasehold improvements) in connection with the Company's decision to sell the 27 Company-operated RIMCO stores. In addition, the Company recognized gains of $833,000 from the sale of two Aaron's Sales & Lease Ownership stores during 2013.
Operating Profit
Interest income. Interest income decreased to $2.2 million in 2015 from $2.9 million in 2014 and $3.0 million in 2013 due to lower average investment and cash equivalent balances.

40


Interest expense. Interest expense increased to $23.3 million in 2015 from $19.2 million in 2014 and $5.6 million in 2013 due primarily to approximately $491.3 million of additional debt financing incurred in connection with the April 14, 2014 Progressive acquisition. Interest expense also increased in 2015 due to increased revolving credit borrowings during the year to finance the acquisition of DAMI and the assumption of $44.8 million of debt in that acquisition.
Other non-operating (expense) income, net. Other non-operating (expense) income, net includes the impact of foreign currency exchange gains and losses, as well as gains and losses resulting from changes in the cash surrender value of Company-owned life insurance related to the Company's deferred compensation plan. Included in other non-operating (expense) income, net were foreign exchange transaction losses of $2.5 million, $2.3 million and $1.0 million during 2015, 2014 and 2013, respectively. These losses result from the strengthening of the U.S. dollar against the British pound and Canadian dollar during the period. Gains related to the changes in the cash surrender value of Company-owned life insurance were $831,000, $432,000 and $1.5 million during 2015, 2014 and 2013, respectively.
Earnings (Loss) Before Income Taxes
Information about our earnings (loss) before income taxes by reportable segment is as follows: 
 
 
 
Change
 
Year Ended December 31,
 
2015 vs. 2014
 
2014 vs. 2013
(In Thousands)
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
EARNINGS (LOSS) BEFORE INCOME TAXES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and Lease Ownership
$
166,838

 
$
140,854

 
$
183,965

 
$
25,984

 
18.4
 %
 
$
(43,111
)
 
(23.4
)%
Progressive
54,525

 
4,603

 

 
49,922

 
nmf

 
4,603

 
nmf

HomeSmart
771

 
(2,643
)
 
(3,428
)
 
3,414

 
129.2

 
785

 
22.9

DAMI
(1,964
)
 

 

 
(1,964
)
 
nmf

 

 
nmf

Franchise
48,576

 
50,504

 
54,171

 
(1,928
)
 
(3.8
)
 
(3,667
)
 
(6.8
)
Manufacturing
2,520

 
860

 
107

 
1,660

 
193.0

 
753

 
703.7

Other
(51,651
)
 
(75,905
)
 
(56,114
)
 
24,254

 
32.0

 
(19,791
)
 
(35.3
)
Earnings Before Income Taxes for Reportable Segments
219,615

 
118,273

 
178,701

 
101,342

 
85.7

 
(60,428
)
 
(33.8
)
Elimination of Intersegment Profit
(2,488
)
 
(813
)
 
(94
)
 
(1,675
)
 
(206.0
)
 
(719
)
 
(764.9
)
Cash to Accrual and Other Adjustments
(4,007
)
 
4,244

 
6,353

 
(8,251
)
 
(194.4
)
 
(2,109
)
 
(33.2
)
Total
$
213,120

 
$
121,704

 
$
184,960

 
$
91,416

 
75.1
 %
 
$
(63,256
)
 
(34.2
)%
nmf—Calculation is not meaningful
During 2015, earnings before income taxes increased $91.4 million, or 75.1%, to $213.1 million from $121.7 million in 2014. In 2015, the results of the Company's operating segments were impacted by the following items:
Sales and Lease Ownership earnings before income taxes included a $3.5 million loss related to a lease termination on a Company aircraft.
Progressive earnings before tax included $3.7 million of transaction costs related to the October 15, 2015 DAMI acquisition.
During 2014, earnings before income taxes decreased $63.3 million, or 34.2%, to $121.7 million from $185.0 million in 2013. In 2014, the results of the Company's operating segments were impacted by the following items:
Sales and Lease Ownership earnings before income taxes included $4.8 million of restructuring charges related to the Company's strategic decision to close 44 Company-operated stores and restructure its home office and field support.
Other category loss before income taxes included $13.7 million in financial and advisory costs related to addressing now resolved strategic matters, including proxy contests, $4.3 million of restructuring charges in connection with the store closures noted above, $9.1 million of charges associated with the retirements of both the Company's Chief Executive Officer and Chief Operating Officer, $6.6 million in transaction costs related to the Progressive acquisition and $1.2 million of regulatory income that reduced previously recognized regulatory expense upon the resolution of the regulatory investigation by the California Attorney General.

41


During 2013, the results of the Company's operating segments were impacted by the following items:
Other category loss before income taxes included $28.4 million related to an accrual for loss contingencies for the then-pending regulatory investigation by the California Attorney General and $4.9 million related to retirement expense and a change in vacation policies.
Income Tax Expense
Income tax expense increased $33.9 million to $77.4 million in 2015, compared with $43.5 million in 2014, representing a 78.1% increase due primarily to a 75.1% increase in earnings before income taxes in 2015. The effective tax rate increased to 36.3% in 2015 from 35.7% in 2014 primarily as a result of reduced federal credits.
Income tax expense decreased $20.8 million to $43.5 million in 2014, compared with $64.3 million in 2013, representing a 32.4% decrease due primarily to a 34.2% decrease in earnings before income taxes in 2014. The effective tax rate increased to 35.7% in 2014 from 34.8% in 2013 as a result of decreased tax benefits related to the Company's furniture manufacturing operations and reduced federal credits.
Net Earnings
Net earnings increased $57.5 million to $135.7 million in 2015 from $78.2 million in 2014, representing a 73.5% increase. As a percentage of total revenues, net earnings were 4.3% and 2.9% in 2015 and 2014, respectively.
Net earnings decreased $42.4 million to $78.2 million in 2014 from $120.7 million in 2013, representing a 35.2% decrease. As a percentage of total revenues, net earnings were 2.9% and 5.4% in 2014 and 2013, respectively.
Overview of Financial Position
The major changes in the consolidated balance sheet from December 31, 2014 to December 31, 2015, are as follows:
Cash and cash equivalents increased $11.4 million to $14.9 million at December 31, 2015 from $3.5 million at December 31, 2014. For additional information, refer to the "Liquidity and Capital Resources" section below.
Lease merchandise, net increased $51.9 million to $1.139 billion at December 31, 2015 primarily due to the growth in invoice volume at Progressive.
Loans receivable, net of $85.8 million as of December 31, 2015, resulted from the October 15, 2015 DAMI acquisition. This amount represents the principal, interest and fees outstanding from DAMI credit cardholders, net of an allowance for loan losses and unamortized fees. Refer to Notes 1 and 6 to the consolidated financial statements for further information.
Income tax receivable increased $55.1 million due to the enactment of the Protecting Americans From Tax Hikes Act of 2015 signed into law on December 18, 2015, which retroactively extended 50% bonus depreciation and reauthorized work opportunity tax credits for 2015. Throughout 2015, the Company made payments based on the previously enacted law, resulting in an overpayment when the current act was signed.
Deferred income taxes payable increased $38.9 million due primarily to accelerated bonus depreciation deductions on lease merchandise on hand at December 31, 2015. Purchases of lease merchandise increased by $310.0 million in 2015 compared to 2014 primarily due to the inclusion of Progressive for a full year in 2015, as well as its continued growth.

42


Liquidity and Capital Resources
General
The Company's operating activities provided $166.8 million of cash in 2015, used $49.0 million of cash in 2014 and provided $308.4 million of cash in 2013. The $215.8 million increase in cash flows from operating activities in 2015 as compared to 2014 was due primarily to revenue growth, operating margin improvements and income tax refunds. Among other changes, there was a $57.5 million increase in net earnings, a $24.0 million increase related to inventory reduction initiatives, and a $63.5 million increase related to income taxes receivable. The revenue growth and operating margin improvements were related primarily to Progressive, which continues to grow and expand invoice volume and active doors, and has lower operating expenses as a percentage of total revenues than the Company's traditional lease-to-own business because it does not have store operations. The operating margin improvements also related to price increases, inventory reduction, and cost initiatives at the Aaron’s Sales & Lease Ownership division. The change in the income tax receivable occurred primarily because of the enactment of the Tax Increase Prevention Act of 2014 and the Protecting Americans From Tax Hikes Act of 2015, which have resulted in income tax refunds, as discussed further in the "Commitments" section below. Both acts were signed in December of the respective years and retroactively extended accelerated depreciation. The Company made payments throughout the year based on enacted laws resulting in overpayments at the end of the year.
Purchases of sales and lease ownership stores initially have a positive impact on operating cash flows because the lease merchandise, other assets and intangibles acquired are recognized as investing cash outflows in the period of acquisition. However, the initial positive impact may not be indicative of the extent to which these stores will contribute positively to operating cash flows in future periods. The amount of lease merchandise purchased in store acquisitions and shown under investing activities was $8.5 million and $4.0 million in 2015 and 2013, respectively. The amount of lease merchandise purchased in acquisitions and shown under investing activities was $144.0 million in 2014, substantially all of which was the direct result of the April 14, 2014 Progressive acquisition.
Sales of Company-operated stores are an additional source of investing cash flows, and resulted in net cash proceeds of $14.0 million, $16.5 million and $2.2 million in 2015, 2014 and 2013, respectively. Proceeds from the sales of Company-operated stores in 2014 included cash consideration of $10.0 million in connection with the sale of the 27 Company-operated RIMCO stores and the rights to five franchised RIMCO stores in January 2014. The amount of lease merchandise sold in these sales and shown under investing activities was $8.8 million in 2015, $3.1 million in 2014 and $882,000 in 2013.
Our primary capital requirements consist of buying lease merchandise for sales and lease ownership stores and Progressive's operations. As we continue to grow, the need for additional lease merchandise is expected to remain our major capital requirement. Other capital requirements include purchases of property, plant and equipment, expenditures for acquisitions and income tax payments, and funding of loan receivables for DAMI. Our capital requirements historically have been financed primarily through:
cash flows from operations;
private debt offerings;
bank debt;
trade credit with vendors;
proceeds from the sale of lease return merchandise; and
stock offerings.

43


Debt Financing
In connection with the Company's acquisition of Progressive on April 14, 2014, the Company amended and restated its revolving credit agreement, amended certain other financing agreements and entered into two new note purchase agreements. On December 9, 2014, the Company amended the amended and restated revolving credit agreement, the senior unsecured notes and the franchise loan agreement. On September 21, 2015, the Company entered into certain amendments related to the DAMI acquisition. The April 2014, December 2014, and September 2015 amendments are discussed in further detail in Note 7 to the Company's consolidated financial statements. In connection with acquiring DAMI on October 15, 2015, the Company also assumed a secured revolving credit facility (the "DAMI credit facility"), which is discussed in further detail in Note 7 to the Company's consolidated financial statements.
As of December 31, 2015, $109.4 million and $75.0 million of term loans and revolving credit balances, respectively, were outstanding under the revolving credit agreement. Our current revolving credit facility matures December 9, 2019 and the total available credit on the facility as of December 31, 2015 was $150.0 million. The revolving credit and term loan agreement includes an uncommitted incremental facility increase option (an "accordion facility") which, subject to certain terms and conditions, permits the Company at any time prior to the maturity date to request an increase in extensions of credit available thereunder by an aggregate additional principal amount of up to $200.0 million.
As of December 31, 2015, $41.8 million was outstanding under the DAMI credit facility. The DAMI credit facility is currently set to mature on October 15, 2017 and the total available credit on the facility as of December 31, 2015 was $7.3 million, in addition to letter of credit not to exceed $2.0 million. In addition, the DAMI credit facility includes an accordion facility, which, subject to certain terms and conditions, permits DAMI at any time prior to the maturity date to request an increase in the maximum facility of up to $25.0 million.
As of December 31, 2015, the Company had outstanding $300.0 million in aggregate principal amount of senior unsecured notes issued in a private placement in connection with the April 14, 2014 Progressive acquisition. The notes bear interest at the rate of 4.75% per year and mature on April 14, 2021. Payments of interest are due quarterly, commencing July 14, 2014, with principal payments of $60.0 million each due annually commencing April 14, 2017.
As of December 31, 2015, the Company had outstanding $75.0 million in senior unsecured notes originally issued in a private placement in July 2011. Effective April 28, 2014, the notes bear interest at the rate of 3.95% per year and mature on April 27, 2018. Quarterly payments of interest commenced July 27, 2011, and annual principal payments of $25.0 million commenced April 27, 2014.
Our revolving credit and term loan agreement and senior unsecured notes, and our franchise loan agreement discussed below, contain certain financial covenants. These covenants include requirements that the Company maintain ratios of (i) EBITDA plus lease expense to fixed charges of no less than 1.75:1.00 through December 31, 2015 and 2.00:1.00 thereafter and (ii) total debt to EBITDA of no greater than 3.25:1.00 through December 31, 2015 and 3.00:1.00 thereafter. In each case, EBITDA refers to the Company’s consolidated earnings before interest and tax expense, depreciation (other than lease merchandise depreciation), amortization expense and other non-cash charges. On September 21, 2015, the Company amended the existing revolving credit and term loan agreement and the senior unsecured note agreements to exclude DAMI financial information from the calculation of financial debt covenants, among other things. If we fail to comply with these covenants, we will be in default under these agreements, and all amounts will become due immediately. We are in compliance with these covenants at December 31, 2015 and we believe that we will continue to be in compliance in the future.
The DAMI credit facility includes financial covenants that, among other things, require DAMI to maintain (i) an EBITDA ratio of not less than 1.7 to 1.0 and (ii) a senior debt to capital base ratio of not more than 2.0 to 1.0. We are in compliance with these covenants at December 31, 2015. Furthermore, the DAMI credit facility restricts DAMI's ability to transfer funds by limiting intercompany dividends to an amount not to exceed the amount of capital the Company has invested in DAMI. The aggregate amount of such dividends made in a calendar year are limited to 75% of DAMI's net income for the immediately preceding calendar year.
Share Repurchases
We purchase our stock in the market from time to time as authorized by our Board of Directors. In December 2013, the Company paid $125.0 million under an accelerated share repurchase program with a third party financial institution and received an initial delivery of 3,502,627 shares. In February 2014, the accelerated share repurchase program was completed and the Company received an additional 1,000,952 shares of common stock. As of December 31, 2015, the Company has 10,496,421 shares authorized for repurchase.

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Dividends
We have a consistent history of paying dividends, having paid dividends for 28 consecutive years. Our annual common stock dividend was $.094 per share, $.086 per share and $.072 per share in 2015, 2014 and 2013, respectively, and resulted in aggregate dividend payments of $6.8 million, $7.8 million and $3.9 million in 2015, 2014 and 2013, respectively. At its November 2015 meeting, our Board of Directors increased the quarterly dividend by 8.7%, raising it to $.025 per share. The Company also increased its quarterly dividend rate by 9.5%, to $.023 per share, in November 2014 and by 23.5%, to $.021 per share, in November 2013. Subject to sufficient operating profits, any future capital needs and other contingencies, we currently expect to continue our policy of paying dividends.
If we achieve our expected level of growth in our operations, we anticipate we will supplement our expected cash flows from operations, existing credit facilities, vendor credit and proceeds from the sale of lease return merchandise by expanding our existing credit facilities, by securing additional debt financing, or by seeking other sources of capital to ensure we will be able to fund our capital and liquidity needs for at least the next 12 to 24 months.
Commitments
Income Taxes. During the year ended December 31, 2015, we made $91.7 million in income tax payments, net of a $100 million refund. Within the next twelve months, we anticipate that we will make cash payments for federal and state income taxes of approximately $51.0 million.
The American Taxpayer Relief Act of 2012 allowed for the deduction of 50% of the adjusted basis of qualified property for assets placed in service from January 1, 2012 through the end of 2013. The Tax Increase Prevention Act of 2014 signed into law on December 20, 2014 extended bonus depreciation and reauthorized work opportunity tax credits through the end of 2014. The Protecting Americans From Tax Hikes Act of 2015 (the 2015 Act) signed into law on December 18, 2015 extended 50% bonus depreciation and reauthorized work opportunity tax credits through the end of 2019. As a result, the Company applied for and received a $100 million quick refund from the Internal Revenue Service (the "IRS") for the 2014 tax year during January 2015, and a $120.0 million quick refund for the 2015 tax year during February 2016. Accordingly, our cash flow benefited from having a lower cash tax obligation, which, in turn, provided additional cash flow from operations. Because of our sales and lease ownership model, in which the Company remains the owner of merchandise on lease, we benefit more from bonus depreciation, relatively, than traditional furniture, electronics and appliance retailers.
In future years, we may have to make increased tax payments on our earnings as a result of expected profitability and the elimination of the accelerated depreciation deductions that were taken in 2015 and prior periods. While the 2015 Act extended bonus depreciation through 2019, not considering the effects of bonus depreciation on future qualifying expenditures, we estimate that at December 31, 2015, the remaining tax deferral associated with the acts described above is approximately $178.0 million, of which approximately 80% is expected to reverse in 2016 and most of the remainder during 2017 and 2018.
Leases. We lease warehouse and retail store space for most of our store-based operations, call center space, and management and information technology space for corporate functions under operating leases expiring at various times through 2033. Most of the leases contain renewal options for additional periods ranging from one to 20 years. We also lease transportation vehicles under operating leases which generally expire during the next four years. We expect that most leases will be renewed or replaced by other leases in the normal course of business. Approximate future minimum rental payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 2015 are shown in the below table under "Contractual Obligations and Commitments."
As of December 31, 2015, the Company had 19 remaining capital leases with a limited liability company ("LLC") controlled by a group of current and former executives. In October and November 2004, the Company sold 11 properties, including leasehold improvements, to the LLC. The LLC obtained borrowings collateralized by the land and buildings totaling $6.8 million. The Company occupies the land and buildings collateralizing the borrowings under a 15-year term lease, with a five-year renewal at the Company’s option, at an aggregate annual rental of $788,000. The transaction has been accounted for as a financing in the accompanying consolidated financial statements. The rate of interest implicit in the leases is approximately 9.7%. Accordingly, the land and buildings, associated depreciation expense and lease obligations are recorded in the Company’s consolidated financial statements. No gain or loss was recognized in this transaction.
In December 2002, the Company sold 10 properties, including leasehold improvements, to the LLC. The LLC obtained borrowings collateralized by the land and buildings totaling $5.0 million. The Company occupies the land and buildings collateralizing the borrowings under a 15-year term lease at an aggregate annual rental of approximately $1.2 million. The transaction has been accounted for as a financing in the accompanying consolidated financial statements. The rate of interest implicit in the leases is approximately 10.1%. Accordingly, the land and buildings, associated depreciation expense and lease obligations are recorded in the Company’s consolidated financial statements. No gain or loss was recognized in this transaction.

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In the past, we financed a small portion of our store expansion through sale-leaseback transactions. The properties were generally sold at net book value and the resulting leases qualified and are accounted for as operating leases. We do not have any retained or contingent interests in the stores nor do we provide any guarantees, other than a corporate level guarantee of lease payments, in connection with the sale-leasebacks. The operating leases that resulted from these transactions are included in the table below under "Contractual Obligations and Commitments."
Franchise Loan Guaranty. We have guaranteed the borrowings of certain independent franchisees under a franchise loan agreement with several banks. On December 4, 2015, we amended our third amended and restated loan facility to, among other things, extend the maturity date to December 8, 2016.
At December 31, 2015, the portion that we might be obligated to repay in the event franchisees defaulted was $81.0 million. However, due to franchisee borrowing limits, we believe any losses associated with defaults would be mitigated through recovery of lease merchandise and other assets. Since the inception of the franchise loan program in 1994, we have had no significant associated losses. We believe the likelihood of any significant amounts being funded in connection with these commitments to be remote.
Contractual Obligations and Commitments. The following table shows the approximate contractual obligations, including interest, and commitments to make future payments as of December 31, 2015:
 
(In Thousands)
Total
 
Period Less
Than 1 Year
 
Period 1-3
Years
 
Period 3-5
Years