Item 1.01 Entry into a Material Definitive Agreement.
Acquisition of W.S. Badcock
On November 22, 2021 (the "Closing Date"), Franchise Group Newco BHF, LLC, a
Delaware limited liability company ("Purchaser"), which is a newly formed
wholly-owned subsidiary of Franchise Group, Inc., a Delaware corporation (the
"Company"), entered into and completed certain transactions (the "Closing")
contemplated by a Stock Purchase Agreement (the "Purchase Agreement") with the
holders of 100% of the issued and outstanding capital stock (collectively, the
"Sellers") of W.S. Badcock Corporation, a Florida corporation ("W.S. Badcock"),
and William K. Pou, Jr., solely in his capacity as representative of the Sellers
(the "Seller Representative"). Certain transaction beneficiaries have entered
into a joinder to the Purchase Agreement for the purposes of agreeing to certain
matters with respect to the obligations of certain of the Sellers under the
Purchase Agreement.
Pursuant to the terms and provisions of the Purchase Agreement, on the Closing
Date, Purchaser purchased from the Sellers 100% of the issued and outstanding
capital stock of W.S. Badcock (the "Shares" and such transaction, the
"Acquisition") in exchange for the payment by Purchaser to the Sellers of an
aggregate amount of $581,402,834 in cash, subject to certain customary
adjustments set forth in the Purchase Agreement, including a working capital
adjustment (subject to an upward and downward collar and cap) and transaction
expenses (collectively, the "Purchase Price"). A portion of the Purchase Price
was placed in escrow to fund payment obligations of the Sellers with respect to
post-Closing Purchase Price adjustments and post-Closing indemnification
obligations of the Sellers, and another portion of the Purchase Price was
deposited into an account to reimburse the Seller Representative for any fees
and expenses incurred by the Seller Representative in performing his duties
under the Purchase Agreement as the representative of the Sellers.
The Purchase Agreement contains customary representations, warranties and
covenants for a transaction of this type, including without limitation,
representations and warranties by (a) W.S. Badcock and the Sellers, as
applicable, regarding, among other things, (i) W.S. Badcock's corporate
organization and capitalization, (ii) the accuracy of W.S. Badcock's financial
statements provided to Purchaser, (iii) the absence of certain changes or events
relating to W.S. Badcock since June 30, 2021, (iv) compliance with law and (v)
title to their respective Shares and (b) Purchaser regarding, among other
things, its corporate organization. Subject to the provisions of the Purchase
Agreement, the Sellers have agreed to indemnify Purchaser and its affiliates for
losses resulting from breaches of representations, warranties and covenants of
the Sellers and W.S. Badcock in the Purchase Agreement and for certain other
specified matters (including pre-Closing taxes). The Sellers' indemnification
obligations are subject to various limitations, including, among other things, a
deductible, caps, and time limitations.
In connection with the Acquisition, Purchaser has obtained a customary buyer's
representation and warranty insurance policy (the "R&W Insurance Policy")
providing for up to $55,000,000 in coverage in the case of breaches of
representations and warranties of the Sellers contained in the Purchase
Agreement, subject to certain exclusions and an initial $4,360,521 retention,
which drops down to $2,907,014 after 12 months following the Closing Date.
Purchaser, on the one hand, and the Sellers, on the other hand, each bore
one-half of the cost of obtaining the R&W Insurance Policy.
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In consideration for their receipt of the Purchase Price, on the Closing Date,
certain of the Sellers have each entered into a restrictive covenant agreement
providing for certain customary restrictive covenants, including customary
non-competition, non-solicitation, no hire, and non-disparagement covenants for
a period of five (5) years following the Closing Date and customary
confidentiality covenants.
The representations, warranties, covenants and agreements of each Seller,
Purchaser and W.S. Badcock, as applicable, contained in the Purchase Agreement
have been made solely for the benefit of Purchaser. In addition, such
representations, warranties and covenants: (i) have been made only for purposes
of the Purchase Agreement; (ii) have been qualified by disclosures made to
Purchaser in the disclosure schedules delivered in connection with the Purchase
Agreement; (iii) are subject to certain materiality or other customary
qualifications contained in the Purchase Agreement, which may differ from what
may be viewed as material by investors; and (iv) were made only as of the date
of the Purchase Agreement or such other date as is specified in the Purchase
Agreement. Accordingly, the Purchase Agreement is included with this filing only
to provide investors with information regarding the terms of the Purchase
Agreement, and not to provide investors with any other factual information
regarding Sellers, Purchaser, W.S. Badcock, their respective subsidiaries or
their respective businesses. Investors are not third-party beneficiaries under
the Purchase Agreement and should not rely on the representations, warranties
and covenants or any descriptions thereof as characterizations of the actual
state of facts or condition of the parties thereto or any of their respective
subsidiaries or affiliates. Moreover, information concerning the subject matter
of representations and warranties may change after the date of the Purchase
Agreement.
The foregoing summary of the Purchase Agreement and the transactions
contemplated thereby does not purport to be complete and is subject to,
. . .
Item 2.01 Completion of Acquisition or Disposition of Assets.
The information contained in "Item 1.01 Entry into a Material Definitive
Agreement" is incorporated herein by reference.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an
Off-Balance Sheet Arrangement of a Registrant.
The description of the terms of the Existing Credit Agreement Amendments and the
Badcock Credit Agreements set forth above in Item 1.01 is incorporated herein by
reference.
Item 8.01 Other Events.
On November 22, 2021, the Company issued a press release announcing the
Acquisition. A copy of the press release is attached as Exhibit 99.1 and
incorporated herein by reference.
In connection with the execution of the Purchase Agreement and the consummation
of the Acquisition, the Company sets forth the following information to
supplement the risk factors described in Item 1A of the Company's Annual Report
on Form 10-K for the fiscal year ended December 26, 2020. The following risk
factors should be read in conjunction with the risk factors described in such
Annual Report on Form 10-K.
The ownership of significant amounts of real estate exposes W.S. Badcock and us
to possible liabilities incidental to such ownership.
W.S. Badcock owns the land and buildings for 38 of its 383 stores, as well as
for its three distribution centers and its headquarters. Accordingly, W.S.
Badcock is subject to all of the risks associated with owning real estate. In
particular, the value of W.S. Badcock's real estate assets could decrease, and
the operating costs for such real estate could increase, because of changes in
the investment climate for real estate, demographic trends and, in the case of
its store locations, supply or demand for the use of such stores, which may
result from competition from similar stores in the area. Additionally, W.S.
Badcock is subject to potential liability for environmental conditions on the
property that it owns. In the case of owned stores, if any such store is not
profitable, and the Company decides to close it, the Company may be required to
record an impairment charge and/or exit costs associated with the disposal of
such store.
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The Company's failure to operate W.S. Badcock's dealer network in a manner which
remains outside the purview of federal and state franchise laws may adversely
affect its and our business, prospects, results of operations, financial
condition and cash flows.
As operated now, W.S. Badcock's dealer program is not a franchise subject to
franchise laws and regulations enacted by a number of states and rules
promulgated by the U.S. Federal Trade Commission (collectively, the "Franchise
Laws"). However, if the relationship between W.S. Badcock and its dealers should
be deemed to constitute a franchise under the Franchise Laws or otherwise
violate one or more of the Franchise Laws, W.S. Badcock's and our operations
could be negatively affected including requiring W.S. Badcock to incur
substantial additional costs which could adversely affect its and our business,
prospects, results of operations, financial condition and cash flows.
Additionally, W.S. Badcock could face the prospect that discontented dealers
could use such violations as the basis for seeking to terminate its dealership
agreement or to initiate claims against W.S. Badcock for alleged prior failure
to comply with the Franchise Laws. W.S. Badcock may also face enforcement
actions by the U.S. Federal Trade Commission and state governmental agencies,
which may seek fines and other remedies available to these agencies under such
Franchise Laws. If W.S. Badcock's dealer program were determined to be a
franchise subject to the Franchise Laws, as a franchisor, W.S. Badcock would be
more susceptible to the risk of adverse legislation or regulations being enacted
in the future and we cannot predict how existing or future laws or regulations
will be administered or interpreted. Additionally, we cannot predict the amount
of future expenditures that may be required in order to comply with any such
laws or regulations. Companies that operate franchise systems may be subject to
claims arising out of violations of laws and regulations at their franchised
locations, including, without limitation, for allegedly being a joint employer
with a franchisee. Litigation may lead to a decline in the sales and operating
results of W.S. Badcock's stores and divert management resources regardless of
whether the allegations in such litigation are valid or whether W.S. Badcock is
liable.
Operational and other failures by dealers may adversely impact W.S. Badcock's
and our business, prospects, results of operations, financial condition and cash
flows.
Qualified dealers who conform to W.S. Badcock's standards and requirements are
important to the overall success of its business. W.S. Badcock's dealers,
however, are independent businesses and not employees, and consequently W.S.
Badcock cannot and does not control such dealers to the same extent as W.S.
Badcock's company-operated stores. W.S. Badcock's dealers may fail in key areas,
or experience significant business or financial difficulties, which could slow
W.S. Badcock's and our growth, reduce our W.S. Badcock's revenues, damage W.S.
Badcock's reputation, expose W.S. Badcock and us to regulatory enforcement
actions or private litigation and/or cause W.S. Badcock and us to incur
additional costs. If W.S. Badcock's dealers experience business or financial
difficulties, including, for example, in connection with the COVID-19 pandemic,
we could suffer a loss of revenues and profits derived from sales of merchandise
to dealers, and could suffer write-downs of outstanding receivables those
dealers owe W.S. Badcock if such dealers fail to make those payments. If we fail
to adequately mitigate any such future losses, W.S. Badcock and our business,
prospects, results of operations, financial condition and cash flows could be
adversely impacted.
W.S. Badcock's industry is highly regulated. Existing and new laws and
regulations could have a material adverse effect on W.S. Badcock and adversely
affect W.S. Badcock's and our business, prospects, results of operations,
financial condition and cash flows and failure to comply with these laws and
regulations could subject W.S. Badcock and us to various fines, civil penalties
and other relief.
W.S. Badcock's business is subject to extensive regulation, supervision and
licensing under various federal, state, and local statutes, ordinances,
regulations, rules and guidance. We must comply with federal laws, such as The
Truth In Lending Act and Regulation Z, the Equal Credit Opportunity Act and
Regulation B, the Fair Credit Reporting Act, The Gramm-Leach-Bliley Act and
Regulation P, and Title X of the Dodd-Frank Act, among others. In addition, the
Consumer Financial Protection Bureau (the "CFPB") has regulatory and enforcement
powers over providers of consumer financial products and services under many
federal consumer protection laws and regulations. Included in the CFPB's
authority is the power to prohibit unfair, deceptive or abusive acts or
practices ("UDAAP") and to investigate and penalize financial institutions. In
addition to assessing financial penalties, the CFPB can require remediation of
practices, pursue administrative proceedings or litigation and obtain cease and
desist orders (which can include orders for restitution or rescission or
reformation of contracts). Also, if a company has violated Title X of the
Dodd-Frank Act or related CFPB regulations, the Dodd-Frank Act empowers state
attorneys general and state regulators to bring civil actions to remedy
violations. In addition, state attorneys generals and/or other state regulators
have the authority to prohibit unfair and deceptive acts and practices under
state law ("UDAP"), as well as a wide variety of state consumer protection laws
and regulations. If the CFPB or state attorneys general or state regulators
believe that W.S. Badcock has violated any laws or regulations, they could
exercise their enforcement powers which could adversely affect W.S. Badcock's
and our business, prospects, results of operations, financial condition and cash
flows.
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Accordingly, regulatory requirements, and the actions W.S. Badcock must take to
comply with regulations, vary considerably by jurisdiction. Managing this
complex regulatory environment requires considerable compliance efforts. It is
costly to operate in this environment, and it is possible that those costs will
increase materially over time. This complexity also increases the risks that
W.S. Badcock will fail to comply with regulations which could adversely affect
W.S. Badcock's and our business, prospects, results of operations, financial
condition and cash flows. These regulations affect W.S. Badcock's business in
many ways, and include regulations relating to:
· the terms of consumer loans (such as interest rates, finance and other charges,
fees, durations, repayment terms, maximum loan amounts, renewals and extensions
and repayment plans), the number and frequency of loans and reporting and use
of state-wide databases;
· underwriting requirements;
· collection and servicing activity, including initiation of payments from
consumer accounts;
· licensing, reporting and document retention;
· unfair, deceptive and abusive acts and practices and discrimination;
· disclosures, notices, advertising and marketing;
· requirements governing electronic payments, transactions, signatures and
disclosures;
· privacy and use of personally identifiable information and consumer data,
including credit reports; and
· posting of fees and charges.
There are a range of penalties that governmental entities could impose if W.S.
Badcock fails to comply with the various laws and regulations that apply to its
business, including:
? ordering corrective actions, including changes to compliance systems, product
terms and other business operations;
? imposing fines or other monetary penalties, which could be substantial;
? ordering restitution, damages or other amounts to customers, including
multiples of the amounts charged;
? requiring disgorgement of revenues or profits from certain activities;
? imposing cease and desist orders, including orders requiring affirmative
relief, targeting specific business activities;
? subjecting W.S. Badcock's operations to monitoring or additional regulatory
examinations during a remediation period;
? revoking licenses required to operate in particular jurisdictions; and/or
? ordering the closure of one or more stores.
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Accordingly, if W.S. Badcock fails to comply with applicable laws and
regulations, it could adversely affect W.S. Badcock's and our business,
prospects, results of operations, financial condition and cash flows.
Certain judicial or regulatory decisions may restrict or eliminate the
enforceability of certain types of contractual provisions, such as mandatory
arbitration clauses.
To attempt to limit costly and lengthy consumer and other litigation, including
class actions, and to provide a streamlined, faster and less expensive method of
dispute resolution, W.S. Badcock requires customers to sign arbitration
agreements and class action waivers, many of which offer opt-out provisions.
Recent judicial and regulatory actions have attempted to restrict or eliminate
the enforceability of such agreements and waivers. If W.S. Badcock is not
permitted to use arbitration agreements and/or class action waivers, or if the
enforceability of such agreements and waivers is restricted or eliminated, W.S.
Badcock and, as a result thereof, the Company, could incur increased costs to
resolve legal actions brought by customers and others as W.S. Badcock would be
. . .
Item 9.01. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
The financial statements required by this item with respect to the Acquisition
will be filed as soon as practicable, and in any event not later than 71 days
after the date upon which this Current Report on Form 8-K is required to be
filed pursuant to Item 2.01.
(b) Pro Forma Financial Information.
The pro forma financial information required by this item with respect to the
Acquisition will be filed as soon as practicable, and in any event not later
than 71 days after the date upon which this Current Report on Form 8-K is
required to be filed pursuant to Item 2.01.
(d) Exhibits.
The following exhibits are filed with this Current Report on Form 8-K:
Exhibit Number Description
2.1 Stock Purchase Agreement, dated as of November 22, 2021, by
and among Franchise Group Newco BHF, LLC, W.S. Badcock
Corporation, the shareholders set forth on Annex I thereto, and
William K. Pou, Jr.*
10.1 First Amendment to First Lien Credit Agreement by and among
Franchise Group, Inc., Franchise Group Newco PSP, LLC, Valor
Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC,
the other loan parties party thereto from time to time, the
lenders party thereto from time to time, and JPMorgan Chase
Bank, N.A. as Administrative Agent and Collateral Agent.
10.2 First Amendment to Second Lien Credit Agreement by and among
Franchise Group, Inc., Franchise Group Newco PSP, LLC, Valor
Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC,
the other loan parties party thereto from time to time, and
Alter Domus (US) LLC, as Administrative Agent and Collateral
Agent.
10.3 First Amendment to Third Amended and Restated Loan and
Security Agreement, by and among Franchise Group, Inc.,
Franchise Group Newco PSP, LLC, Valor Acquisition, LLC,
Franchise Group Newco Intermediate AF, LLC, the other loan
parties party thereto from time to time, and JPMorgan Chase
Bank, N.A., as Agent.
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10.4 Amended and Restated Intercreditor Agreement, dated as of
November 22, 2021, by and among JPMorgan Chase Bank, N.A. as ABL
Representative, JPMorgan Chase Bank N.A. as Initial First Lien
Term Loan Representative, Alter Domus (US) LLC as Initial Second
Lien Term Loan Representative, JPMorgan Chase Bank, N.A. as BDK
First Lien Term Loan Representative and Alter Domus (US) LLC as
BDK Second Lien Term Loan Representative.
10.5 First Lien Pari Passu Intercreditor Agreement, dated as of
November 22, 2021, by and among JPMorgan Chase Bank, N.A. as
Initial FRG Representative and Initial FRG Collateral Agent and
JPMorgan Chase Bank, N.A. as BDK Representative and BDK
Collateral Agent.
10.6 Second Lien Pari Passu Intercreditor Agreement, dated as of
November 22, 2021, by and among Alter Domus (US) LLC, as Initial
FRG Representative and Initial FRG Collateral Agent and Alter
Domus (US) LLC, as BDK Representative and BDK Collateral
Agent.
10.7 Amended and Restated 1L/2L Intercreditor Agreement, dated as
of November 22, 2021, by and among JPMorgan Chase Bank, N.A., as
the Initial First Lien Representative and the Initial First Lien
Collateral Agent for the First Lien Claimholders, Alter Domus
(US) LLC, as the Initial Second Lien Representative and the
Initial Second Lien Collateral Agent for the Second Lien
Claimholders, JPMorgan Chase Bank, N.A. as the BDK First Lien
Representative and the BDK First Lien Collateral Agent and Alter
Domus (US) LLC as the BDK Second Lien Representative and the BDK
Second Lien Collateral Agent.
10.8 Four Lien Intercreditor Agreement, dated as of November 22,
2021, by and among JPMorgan Chase Bank, N.A., as First Lien
Representative and the First Lien Collateral Agent for the First
Lien Claimholders, Alter Domus (US) LLC, as the Second Lien
Representative and the Second Lien Collateral Agent for the
Second Lien Claimholders, JPMorgan Chase Bank, N.A. as Third
Lien Representative and the Third Lien Collateral Agent for the
Third Lien Claimholders, and Alter Domus (US) LLC, as Fourth
Lien Representative and Fourth Lien Collateral Agent for the
Fourth Lien Claimholders
10.9 First Lien Credit Agreement, dated as of November 22, 2021, by
and among Franchise Group, Inc., Franchise Group Newco PSP, LLC,
Valor Acquisition, LLC, Franchise Group Newco Intermediate AF,
LLC, the lenders party thereto from time to time, and JPMorgan
Chase Bank, NA., as Administrative Agent and Collateral Agent.
10.10 First Lien Collateral Agreement, dated as of November 22,
2021, by and among Franchise Group, Inc., Franchise Group Newco
PSP, LLC, Valor Acquisition, LLC, Franchise Group Newco
Intermediate AF, LLC, the other grantors party thereto from time
to time, and JPMorgan Chase Bank, N.A. as Collateral Agent.
10.11 First Lien Collateral Agreement, dated as of November 22,
2021, by and among W. S. Badcock Corporation and JPMorgan Chase
Bank, N.A. as Collateral Agent
10.12 First Lien Guarantee Agreement, dated as of November 22, 2021,
by and among Franchise Group, Inc., Franchise Group Newco PSP,
LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate
AF, LLC, the other guarantors party thereto from time to time,
and JPMorgan Chase Bank, N.A. as Administrative Agent.
10.13 First Lien Guarantee Agreement, dated as of November 22, 2021,
by and among W.S. Badcock Corporation, the other guarantors
party thereto from time to time, and JPMorgan Chase Bank, N.A.
as Administrative Agent.
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10.14 Second Lien Credit Agreement, dated as of November 22, 2021,
by and among Franchise Group, Inc., Franchise Group Newco PSP,
LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate
AF, LLC, the lenders party thereto from time to time, and Alter
Domus (US) LLC, as Administrative Agent and Collateral Agent.
10.15 Second Lien Collateral Agreement, dated as of November 22,
2021, by and among Franchise Group, Inc., Franchise Group Newco
PSP, LLC, Valor Acquisition, LLC, Franchise Group Newco
Intermediate AF, LLC, the other grantors party thereto from time
to time, and Alter Domus (US) LLC, as Collateral Agent.
10.16 Second Lien Collateral Agreement, dated as of November 22,
2021, by and among W. S. Badcock Corporation and Alter Domus
(US) LLC, as Collateral Agent.
10.17 Second Lien Guarantee Agreement, dated as of November 22,
2021, by and among Franchise Group, Inc., Franchise Group Newco
PSP, LLC, Valor Acquisition, LLC, Franchise Group Newco
Intermediate AF, LLC, the other guarantors party thereto from
time to time, and Alter Domus (US) LLC, as Administrative
Agent.
10.18 Second Lien Guarantee Agreement, dated as of November 22,
2021, by and among W.S. Badcock Corporation, the other
guarantors party thereto from time to time, and Alter Domus (US)
LLC, as Administrative Agent.
99.1 Press Release, dated November 22, 2021.
104 Cover Page Interactive Data File (embedded within Inline XBRL
document)
* All disclosure schedules and exhibits to the Purchase Agreement have been
omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish
the omitted disclosure schedules to the SEC upon request by the SEC; provided,
however, that the Company reserves the right to request confidential treatment
pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for
any schedule or exhibit so furnished.
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