<PAGE> 1
As filed with the Securities and Exchange Commission on December 11, 1998
Registration No. 333-65787
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
RENTERS CHOICE, INC.
RENT-A-CENTER, INC.
COLORTYME, INC.
(Exact name of co-registrants as specified in its charter)
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<S> <C> <C>
DELAWARE 7359 48-1024367
DELAWARE 7359 48-0959188
TEXAS 6794 75-2651408
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
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RENT-A-CENTER, INC. RENTERS CHOICE, INC. COLORTYME, INC.
5700 TENNYSON PARKWAY 5700 TENNYSON PARKWAY 1231 GREENWAY DRIVE, SUITE 900
THIRD FLOOR THIRD FLOOR IRVING, TEXAS 75038
PLANO, TEXAS 75029 PLANO, TEXAS 75029 (972) 751-1711
(972) 801-1100 (972) 801-1100
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(Address, including zip code, and telephone number, including area code
of each Registrant's principal executive offices)
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J. ERNEST TALLEY
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
RENTERS CHOICE, INC. With Copies To:
5700 TENNYSON PARKWAY THOMAS W. HUGHES, ESQ.
THIRD FLOOR BRUCE A. CHEATHAM, ESQ.
PLANO, TEXAS 75029 WINSTEAD SECHREST & MINICK P.C.
(972) 801-1100 5400 RENAISSANCE TOWER
(Name, address, including zip code, and telephone 1201 ELM STREET
number, DALLAS, TEXAS 75270-2199
including area code, of Agent for service) (214) 745-5400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration number for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier, effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH NOTE OF AMOUNT TO BE PROPOSED OFFERING PROPOSED AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER NOTE(1) OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
11% Senior Subordinated Notes due
2008.............................. $175,000,000 100% $175,000,000 $51,625.00
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Guarantees of Senior Subordinated
Notes(2).......................... -- -- -- (3)
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(1) In accordance with Rule 457(f)(2), the registration fee is calculated based
on the book value, which has been computed as of October 13, 1998, of the
outstanding 11% Senior Subordinated Notes due 2008 of Renters Choice, Inc.
to be canceled in the exchange transaction hereunder.
(2) Rent-A-Center, Inc. and ColorTyme, Inc., each a direct, wholly owned
subsidiary of the Registrant, have each guaranteed the Notes being
registered pursuant hereto.
(3) Pursuant to Rule 457(n), no separate fee is payable with respect to the
guarantees of the Notes being registered.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
PRELIMINARY PROSPECTUS
$175,000,000 11% SENIOR SUBORDINATED NOTES
[LOGO]
RENTERS CHOICE, INC.
Issuer
RENT-A-CENTER, INC.
COLORTYME, INC.
Guarantors
Offer to Exchange
11% Senior Subordinated Notes Due 2008 (the "Exchange Notes")
For All Outstanding 11% Senior Subordinated Notes
Due 2008 (the "Old Notes")
THE EXCHANGE NOTES --
- - Identical in all material respects to the old notes, except for certain
transfer restrictions, registration rights and liquidated damages provisions
relating to the old notes
- - Fully and unconditionally guaranteed on an unsecured, senior subordinated
basis by Rent-A-Center, Inc. and ColorTyme, Inc. (the "Subsidiary Guarantors")
THE EXCHANGE OFFER --
- - For all of the old notes
- - Expires at 5:00 p.m., New York City time, on [ ], 1998
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 21 OF THIS PROSPECTUS.
You should rely only on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
information that is different. We are not offering to sell or asking you to buy
anything other than the exchange notes. We are not offering to sell or asking
you to buy anything in any jurisdiction where doing so would be against the law.
As of September 30, 1998, we had $716.9 million of Senior Debt outstanding.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE EXCHANGE NOTES NOR DETERMINED THAT THIS PROSPECTUS
IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Subject to completion, dated December 11, 1998
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE> 3
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus, but does not
contain all material features of the exchange offer. Please read the detailed
information and consolidated financial statements and the notes thereto
appearing elsewhere in this prospectus. Except as otherwise required by the
context, references in this prospectus to "we," "us," or "Renters Choice" refer
to (i) prior to and including August 5, 1998, the businesses of Renters Choice
and ColorTyme, and (ii) after August 5, 1998, the combined business of Renters
Choice and its subsidiaries, ColorTyme and Rent-A-Center. The term "Guarantors"
refers to ColorTyme and Rent-A-Center, both wholly owned subsidiaries of Renters
Choice. The term "old notes" refers to the 11% Senior Subordinated Notes due
2008 that were issued on August 18, 1998. The term "exchange notes" refers to
the 11% Senior Subordinated Notes due 2008 offered hereby. The term "notes"
refers to the old notes and the exchange notes, collectively. The term "you"
refers to prospective investors in the exchange notes.
THE EXCHANGE OFFER
Exchange Notes............... The forms and terms of the exchange notes are
identical in all material respects to the terms
of the old notes, except for certain transfer
restrictions, registration rights and liquidated
damages provisions relating to the old notes.
These are described elsewhere in this prospectus
under "Description of the Notes and Guarantees"
and "Old Notes Exchange and Registration Rights
Agreement."
The Exchange Offer........... We are offering to exchange up to $175,000,000
of the exchange notes for up to $175,000,000 of
the old notes. Old notes may be exchanged only
in integral multiples of $1,000.
Expiration Date; Withdrawal
of Tender.................. Unless we extend the Exchange Offer, it will
expire at 5:00 p.m., New York City time, on
[ ], 1998. We will not extend this
time period to a date later than
[ ], 1998. You may withdraw any
old notes you tender pursuant to the exchange
offer at any time prior to [ ],
1998. We will return, as promptly as practicable
after the expiration or termination of the
exchange offer, any old notes not accepted for
exchange for any reason without expense to you.
Certain Conditions to the
Exchange Offer............. The exchange offer is subject to the following
customary conditions, which may be waived by us.
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These conditions permit us to refuse acceptance
of the old notes or to terminate the exchange
offer if:
- a lawsuit is instituted or threatened in a
court or before a government agency which may
impair our ability to proceed with the
exchange offer;
- a law, statute, rule or regulation is proposed
or enacted or interpreted by the SEC which may
impair our ability to proceed with the
exchange offer; or
- any governmental approval is not received
which we think is necessary to consummate the
exchange offer.
Procedures for Tendering Old
Notes...................... If you wish to accept the exchange offer, you
must complete, sign and date the letter of
transmittal in accordance with the instructions,
and deliver the letter of transmittal, along
with the old notes and any other required
documentation, to the exchange agent. By
executing the letter of transmittal, you will
represent to us that, among other things:
- any exchange notes you receive will be
acquired in the ordinary course of your
business,
- you have no arrangement with any person to
participate in the distribution of the
exchange notes, and
- you are not an "affiliate," as defined in Rule
405 of the Securities Act of 1933, as amended,
of Renters Choice or, if you are an affiliate,
you will comply with the registration and
prospectus delivery requirements of the
Securities Act to the extent applicable.
If you hold your old notes through the
Depository Trust Corporation ("DTC") and wish to
participate in the exchange offer, you may do so
through DTC's Automated Tender Offer Program. By
participating in the exchange offer, you will
agree to be bound by the letter of transmittal
as though you had executed such letter of
transmittal.
Interest on the New Notes.... Interest on the exchange notes:
- accrues from the date of issuance at the rate
of 11% per annum, and
- is payable semi-annually in arrears on each
February 15 and August 15, commencing on
February 15, 1999.
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On February 15, 1999, holders of the exchange
notes will also receive an amount equal to the
accrued interest on the old notes. Interest on
the old notes accepted for exchange will stop
accruing upon the issuance of the exchange
notes.
Special Procedures for
Beneficial Owners.......... If you are a beneficial owner whose old notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and wish to tender such old notes in the
exchange offer, please contact the registered
holder as soon as possible and instruct them to
tender on your behalf and comply with our
instructions set forth elsewhere in this
prospectus.
Guaranteed Delivery
Procedure.................. If you wish to tender your old notes, you may,
in certain instances, do so according to the
guaranteed delivery procedures set forth
elsewhere in this prospectus under "The Exchange
Offer -- Guaranteed Delivery Procedures."
Registration Rights
Agreement.................. We sold the old notes and the related Guarantees
to the Initial Purchasers in a transaction
exempt from the registration requirements of the
Securities Act of 1933, as amended, on August
18, 1998. At that time, Renters Choice and the
Initial Purchasers entered into a Registration
Rights Agreement which grants the holders of the
old notes certain exchange and registration
rights. This exchange offer satisfies those
rights, which terminate upon consummation of the
exchange offer. You will not be entitled to any
exchange or registration rights with respect to
the exchange notes.
Certain Federal Tax
Considerations............. With respect to the exchange of the old notes
for the exchange notes:
- the exchange should not constitute a taxable
exchange for U.S. federal income tax purposes,
- you should not recognize gain or loss upon
receipt of the exchange notes,
- you must include interest in gross income to
the same extent as the old notes, and
- you should be able to tack the holding period
of the exchange notes to the holding period of
the old notes.
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Use of Proceeds.............. We will not receive any proceeds from the
exchange of notes pursuant to the exchange
offer.
Exchange Agent............... We have appointed IBJ Schroder Bank & Trust
Company as the Exchange Agent for the exchange
offer. The address and telephone number of the
Exchange Agent are IBJ Schroder Bank & Trust
Company, P. O. Box 84, Bowling Green Station,
New York, New York 10274-0084, telephone (212)
858-2103.
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TERMS OF THE NOTES AND GUARANTEES
The form and terms of the exchange notes are substantially the same as the form
and terms of the old notes, except that the exchange notes are registered under
the Securities Act. As a result, the exchange notes will not bear legends
restricting their transfer and will not contain the registration rights and
liquidated damages provisions contained in the old notes.
Issuer....................... Renters Choice, Inc.
Guarantors................... Rent-A-Center, Inc. and ColorTyme, Inc.
Securities Offered........... $175,000,000 aggregate principal amount of 11%
Senior Subordinated Notes due 2008.
Maturity..................... August 15, 2008
Interest Payment Dates....... February 15 and August 15 of each year,
commencing February 15, 1999.
Sinking Fund................. None.
Optional Redemption.......... Except as described below and under "Change of
Control," we may not redeem the notes prior to
August 15, 2003. After August 15, 2003, we may
redeem any amount of the notes at any time at
the respective redemption prices, together with
accrued and unpaid interest, if any, to the date
of redemption. In addition, at any time prior to
August 15, 2001, we may redeem up to 33.33% of
the original aggregate principal amount of the
notes with the cash proceeds of one or more
Equity Offerings (as defined). Should we do so,
we would be required to pay a redemption price
equal to 111% of the principal amount of the
notes to be redeemed, together with accrued and
unpaid interest, if any, to the date of
redemption. We would still be required to keep
at least 66.67% of the original aggregate
principal amount of the notes outstanding after
such a redemption.
Change of Control............ Upon the occurrence of a change of control (as
defined), the holders of the notes have the
right to require us to repurchase the notes at a
price equal to 101% of the original aggregate
principal amount, together with accrued and
unpaid interest, if any, to the date of
repurchase. In the event of a change of control,
Renters Choice may not have sufficient funds
available to repurchase the exchange notes.
Ranking...................... The notes will be unsecured and will be
subordinated to all existing and future senior
indebtedness of Renters Choice. The notes will
rank without preference with all
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existing and future Senior Subordinated
Indebtedness of Renters Choice and will rank
senior to all existing and future Subordinated
Obligations of Renters Choice.
Guarantees................... The Guarantees are general unsecured obligations
of the Subsidiary Guarantors and are
subordinated in right of payment to all existing
and future Guarantor Senior Indebtedness. The
Guarantees are joint and several.
Restrictive Covenants........ The Indenture under which the exchange notes
will be issued and the old notes were issued
limits:
- the incurrence of additional indebtedness by
us and our subsidiaries,
- the payment of dividends on, and redemption
of, our capital stock and our subsidiaries'
capital stock and the redemption of our and
our subsidiaries' subordinated obligations,
- investments,
- sales of assets and subsidiary stock,
- transactions with affiliates,
- sale and leaseback transactions, and
- liens.
In addition, the Indenture limits our ability to
engage in consolidations, mergers and transfers
of substantially all of our assets and also
contains certain restrictions on distributions
from our subsidiaries. All of these limitations
and prohibitions are subject to a number of
important qualifications and exceptions.
Absence of a Public Market
for the Exchange Notes....... In general, you may freely transfer the exchange
notes. However, there are exceptions to this
general statement. Holders may not freely
transfer the exchange notes if:
- they acquire the exchange notes outside of
their ordinary course of business,
- they have an arrangement with any person to
participate in the distribution of the
exchange notes, or
- they are an "affiliate" of Renters Choice.
Further, the exchange notes will be new
securities for which there will not initially be
a market. As a result, the development or
liquidity of any market for the exchange notes
may not occur. The Initial Purchasers
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have advised us that they currently intend to
make a market in the exchange notes. However,
you should be aware that the Initial Purchasers
are not obligated to do so. In the event such a
market may develop, the Initial Purchasers may
discontinue it at any time without notice. We do
not intend to apply for a listing of the
exchange notes on any securities exchange or on
any automated dealer quotation system.
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RENTERS CHOICE
We are the largest operator in the U.S. rent-to-own industry with approximately
25% of the market share of rent-to-own stores. At November 30, 1998, we operated
2,127 company-owned stores and franchised 321 stores in the United States and
Puerto Rico. Our stores offer home electronics, appliances and furniture and
accessories under flexible rental purchase agreements that allow our customers
to obtain ownership of the merchandise at the conclusion of an agreed upon
rental period.
Our principal executive office is located at 5700 Tennyson Parkway, Third Floor,
Plano, Texas 75029. Our telephone number is (972) 801-1100.
BUSINESS STRATEGY
- - Integrate Rent-A-Center. We have developed a comprehensive program for the
integration of the Rent-A-Center stores, which, as described below, is
currently in process and which we expect to complete within 18-24 months. We
believe we will realize over $30 million in net annual cash cost savings upon
completion of the integration plan, primarily as a result of eliminating:
- duplicative general and administrative expenses, and
- Rent-A-Center's nationwide distribution network including seven
distribution centers.
Additional benefits and margin improvements are expected to be realized over
time as we undertake initiatives to enhance the operations of the
Rent-A-Center stores.
- - Continue to Enhance Store Operations. Our management endeavors to improve
store performance through strategies intended to produce gains in operating
efficiency and profitability. We believe we will achieve gains in revenues and
operating margins in our stores by:
- using focused advertising to increase store traffic,
- expanding the offering of upscale, higher margin products (such as Sony
wide screen televisions, La-Z-Boy recliners and JVC stereo systems) to
increase the number of product rentals,
- employing strict store-level cost control, and
- closely monitoring each store's performance through the use of our
management information system to ensure each store's adherence to
established operating guidelines.
- - Pursue Strategic Expansion. Our management team has gained significant
experience in the acquisition and integration of other rent-to-own operators
and believes the fragmented nature of the rent-to-own industry will result in
ongoing growth opportunities for us. Once our Rent-A-Center integration plan
is substantially in place, we will again focus on strategic acquisition
opportunities and new store development. We typically target underperforming
and undercapitalized chains of rent-to-own stores. These acquired stores
benefit from our management expertise, administrative network,
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improved product mix, sophisticated management information system and purchasing
power of the larger organization while strengthening their local market
position. In addition, we have access to an expanding number of franchise
locations, which we have the right of first refusal to purchase. We plan to
continue opening new stores in our existing and new markets, and will focus our
new market penetration in adjacent areas or regions which are underserved by the
rent-to-own industry. In evaluating a new market, we review demographic
statistics, cost of advertising and the number and nature of competitors.
RECENT DEVELOPMENTS
Rent-A-Center Acquisition. On August 5, 1998, we acquired Rent-A-Center pursuant
to an agreement dated June 16, 1998 with Thorn plc, a company incorporated under
the laws of England and Wales, for approximately $900 million in cash (including
the repayment of certain debt of Rent-A-Center), subject to adjustment. Prior to
this acquisition, Rent-A-Center was the largest rent-to-own competitor with
1,404 company-owned stores and 65 franchised stores in 49 states and the
District of Columbia. Rent-A-Center operated stores under three brand names,
"Rent-A-Center," "Remco" and "U-Can-Rent." Rent-A-Center operated 1,158 stores
under the Rent-A-Center brand, the most widely recognized store name in the
rent-to-own industry.
We financed the acquisition of Rent-A-Center through certain financing
arrangements, consisting of a senior credit facility and a senior subordinated
facility. We also issued a total of $260 million in preferred stock to certain
affiliates of Apollo Management IV, L.P. ("Apollo") and to an affiliate of Bear,
Stearns & Co. Inc. to assist in the funding of the Rent-A-Center acquisition, to
repurchase $25 million of our common stock and to repay our prior credit
facility. Following the acquisition of Rent-A-Center, we issued the old notes to
repay the senior subordinated facility. In connection with the acquisition of
Rent-A-Center, we assumed certain of Rent-A-Center's ongoing litigation,
including an adverse New Jersey state court judgment currently on appeal. For
additional information, please read the sections entitled "Risk Factors -- Legal
Proceedings" and "Business -- Legal Proceedings" located elsewhere in this
prospectus.
We are currently in the process of integrating the stores acquired in the
Rent-A-Center acquisition and we believe that we will realize over $30 million
in net annual cash cost savings upon completion of our integration plan. During
the first two months following the acquisition of Rent-A-Center, we have begun
to implement the initiatives of this plan. Specifically, we have reduced the
Wichita corporate staff from 560 to approximately 100 people and have planned
and organized the physical shutdown of the Wichita facility and moved the
Rent-A-Center corporate headquarters to our new facility in Plano, Texas.
Additionally, the conversion of Rent-A-Center's store management information
systems to our management information system (High Touch) is expected to be
completed during the fourth quarter of 1998. We are also in the process of
eliminating Rent-A-Center's product distribution network and replacing it with
our system of drop shipments to our stores by our vendors. We expect to close
the Rent-A-Center warehouses during the fourth quarter of 1998 and to utilize
all remaining excess inventory in the normal rental process in our stores during
the first two quarters of 1999. We retained the Rent-A-Center product repair
network and are utilizing it to provide product repair services to our customers
in the Renters Choice stores, as well as the Rent-A-Center stores. In September
1998, we
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purchased 41 Rent-A-Center franchised stores and are currently converting them
to Renters Choice owned and operated stores. Finally, we decided to operate all
of our stores under the Rent-A-Center trade name and anticipate the completion
of the conversion of the Renters Choice, Remco and U-Can-Rent stores to the
Rent-A-Center trade name by the first quarter of 1999. With the actions
described above well underway, our original assumption of a transition period of
up to 12 months for integrating the Rent-A-Center stores is progressing as
planned and should be completed on schedule.
Central Rents Acquisition. In May 1998, we acquired substantially all of the
assets of Central Rents, Inc., for approximately $100 million. Central Rents
operated 176 stores located primarily in California, the Southwest, Midwest and
South. This acquisition expanded our presence in a region of the country, the
Southwest, which we strategically targeted for expansion. We expect to generate
an additional $2.6 million in annual general and administrative cost savings as
a result of this acquisition. These cost savings will be derived primarily from
the elimination of duplicative corporate and administrative functions. In
addition to these general and administrative cost reductions, we anticipate that
we will gradually bring the store operating performance of Central Rents in line
with our own store margins within 24-30 months.
During the first 30 days following this acquisition, we converted all of the
Central Rents stores to our management information system and began implementing
our human resource, purchasing and advertising programs, as well as other
processes that are essential in our system. Our immediate focus in these stores
is to improve operations and continue to build strength in store management
personnel.
RISK FACTORS
You should consider carefully the information set forth under the caption "Risk
Factors" beginning on page 21 and all the other information set forth in this
prospectus before deciding whether to participate in the exchange offer.
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SUMMARY UNAUDITED PRO FORMA
COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
Our Unaudited Pro Forma Combined Financial Information gives effect to both the
offering of the old notes and the acquisitions of Central Rents and
Rent-A-Center, as if these transactions had occurred on January 1, 1997. The
acquisitions of Central Rents and Rent-A-Center were completed on May 28, 1998
and August 5, 1998, respectively, and have been reflected within the Renters
Choice historical balance sheet as of September 30, 1998 and the Renters Choice
historical statement of operations since their dates of acquisition. The
Unaudited Pro Forma Combined Statement of Operations for the year ended December
31, 1997 includes Rent-A-Center historical information for the year ended March
31, 1998, which was its fiscal year end. These transactions and the related
adjustments are described in the accompanying notes. In the opinion of
management, all adjustments have been made that are necessary to present fairly
the pro forma data.
Our Unaudited Pro Forma Combined Financial Information is not indicative of
Renters Choice's results of operations as of September 30, 1998, nor for any
future date, and is not necessarily indicative of what Renters Choice's results
of operations would have been had both the offering of the old notes and the
acquisitions of Central Rents and Rent-A-Center occurred on January 1, 1997.
Further, it does not give effect to (i) any transactions other than the
foregoing transactions and those described in the accompanying Notes to
Unaudited Pro Forma Combined Financial Information, or (ii) Renters Choice's,
Central Rents', or Rent-A-Center's results of operations since September 30,
1998. Although the following Unaudited Pro Forma Combined Financial Information
gives effect to expected annual net savings from the elimination of duplicative
general and administrative and field expenses as a result of the aforementioned
acquisitions, it does not give effect to additional annual net savings expected
to be achieved resulting from the acquisition of Rent-A-Center, relating
principally to changes made to its product distribution network, and the
utilization of its service and repair network. Actual amounts could differ from
those presented.
The following Unaudited Pro Forma Combined Financial Information is based upon
the historical financial statements of Renters Choice, Central Rents, and
Rent-A-Center, and should be read in conjunction with such historical financial
statements, the related notes, and the Notes to Unaudited Pro Forma Combined
Financial Information.
Nonrecurring charges represent (i) approximately $4.5 million in both the year
ended December 31, 1997 and the nine months ended September 30, 1998 of
restructuring charges relating to the closing of certain non-performing stores,
and the reorganization of certain administrative support functions and (ii)
approximately $2.1 and $1.1 million in the year ended December 31, 1997 and the
nine months ended September 30, 1998, respectively, related primarily to
Rent-A-Center's writedown of cellular phone inventory.
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SUMMARY UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
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COMBINED PRO FORMA
----------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
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(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
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STATEMENTS OF OPERATIONS DATA:
Revenue..................................................... $1,314,712 $1,027,581
Operating expenses
Direct store expenses
Depreciation of rental merchandise...................... 328,000 247,885
Other................................................... 714,312 568,317
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1,042,312 816,202
Franchise cost of merchandise sold........................ 35,841 27,318
General and administrative expenses....................... 52,512 49,925
Nonrecurring charges...................................... 6,600 5,600
Amortization of intangibles............................... 26,813 20,521
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Total operating expenses............................ 1,164,078 919,566
---------- ----------
Operating profit.................................... 150,634 108,015
Interest expense............................................ 83,219 67,431
Interest income............................................. (392) (1,932)
---------- ----------
Earnings before income taxes........................ 67,807 42,516
Income tax expense.......................................... 34,690 22,684
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Net earnings........................................ 33,117 19,832
Preferred dividends......................................... 9,888 7,662
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Earnings allocable to common stockholders........... $ 23,229 $ 12,170
========== ==========
OTHER FINANCIAL DATA:
Basic earnings per share.................................... $ .97 $ .51
========== ==========
Diluted earnings per share.................................. $ .96 $ .50
========== ==========
Ratio of earnings to fixed charges.......................... 1.7x 1.5x
========== ==========
OPERATING DATA:
Number of stores (end of period)............................ 2,065 2,125
Revenue data:
Store
Rentals and fees........................................ $1,204,971 $ 938,376
Merchandise sales....................................... 65,289 53,522
Other................................................... 793 2,094
Franchise
Merchandise sales....................................... 37,385 28,440
Royalty income and fees................................. 6,274 5,149
---------- ----------
Total revenue....................................... $1,314,712 $1,027,581
========== ==========
</TABLE>
14
<PAGE> 15
RENTERS CHOICE, INC.
SUMMARY HISTORICAL FINANCIAL DATA
Our summary historical financial data as of and for each of the five years in
the period ended December 31, 1997, have been derived from our consolidated
financial statements which have been audited and reported upon by Grant Thornton
LLP. Our summary historical financial data as of and for the nine months ended
September 30, 1997 and 1998 have been derived from our unaudited consolidated
financial statements which were prepared on the same basis as our audited
financial statements and include, in the opinion of our management, all
adjustments necessary to present fairly the information presented for such
interim periods. Please read this information in conjunction with our audited
consolidated financial statements and notes thereto included herein,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and other financial information included elsewhere in this
prospectus. Because of our significant growth from acquisitions, the historical
results of operations, the period-to-period comparisons of such results and
certain financial data may not be comparable, meaningful or indicative of future
results.
In each of the periods presented ending prior to January 1, 1995, Renters Choice
operated as an S corporation under Subchapter S of the Internal Revenue Code and
comparable provisions of certain state tax laws. Accordingly, prior to January
1, 1995, Renters Choice was not subject to federal income taxation; however,
Renters Choice was subject to other income taxes, including Puerto Rico income
tax and certain state income taxes. Earnings per share are not provided for
periods prior to January 1, 1995, because operating results for those periods
are not comparable. Depreciation and amortization expense and capital
expenditures, as presented within other financial data, excludes depreciation of
rental merchandise and purchases of rental merchandise, respectively.
Nonrecurring finance charges for the nine months ended September 30, 1998 relate
principally to interim financing utilized in the acquisition of Rent-A-Center
until permanent financing was obtained. These finance charges include an
availability fee of 1.25% and a utilization fee of 1.5% on the $175 million
bridge loan which was utilized for approximately two weeks before being repaid.
15
<PAGE> 16
RENTERS CHOICE, INC.
SUMMARY HISTORICAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
Total revenue............... $53,212 $74,385 $133,289 $237,965 $331,541 $239,253 $ 459,433
Direct store expenses
Depreciation of rental
merchandise............. 11,626 15,614 29,640 42,978 57,223 42,271 91,382
Other store expenses...... 29,576 40,701 74,966 124,934 173,823 127,694 255,177
------- ------- -------- -------- -------- -------- ----------
41,202 56,315 104,606 167,912 231,046 169,965 346,559
Franchise operating
expense................... -- -- -- 24,010 35,841 22,929 27,318
General and administrative
expenses.................. 2,151 2,809 5,766 10,111 13,304 9,597 18,054
Amortization of
intangibles............... 5,304 6,022 3,109 4,891 5,412 4,016 7,767
------- ------- -------- -------- -------- -------- ----------
Total operating
expenses.......... 48,657 65,146 113,481 206,924 285,603 206,507 399,698
------- ------- -------- -------- -------- -------- ----------
Operating profit.... 4,555 9,239 19,808 31,041 45,938 32,746 59,735
Interest expense............ 1,817 2,160 2,202 606 2,194 1,402 18,469
Nonrecurring financing
costs..................... -- -- -- -- -- -- 5,017
Interest income............. -- -- (890) (667) (304) (256) (1,932)
------- ------- -------- -------- -------- -------- ----------
Earnings before
income taxes...... 2,738 7,079 18,496 31,102 44,048 31,600 38,181
Income tax expense.......... 937 1,600 7,784 13,076 18,170 13,108 17,153
------- ------- -------- -------- -------- -------- ----------
Net earnings........ 1,801 5,479 10,712 18,026 25,878 18,492 21,028
Preferred dividends......... -- -- -- -- -- -- 1,496
------- ------- -------- -------- -------- -------- ----------
Net earnings
allocable to
common
stockholders...... $ 1,801 $ 5,479 $ 10,712 $ 18,026 $ 25,878 $ 18,492 $ 19,532
======= ======= ======== ======== ======== ======== ==========
Basic earnings per share.... $ .52 $ .73 $ 1.04 $ .74 $ .79
======== ======== ======== ======== ==========
Diluted earnings per
share..................... $ .52 $ .72 $ 1.03 $ .74 $ .78
======== ======== ======== ======== ==========
OTHER FINANCIAL DATA:
Depreciation and
amortization.............. $ 6,164 $ 7,207 $ 5,239 $ 8,571 $ 11,013 $ 8,002 $ 18,306
Capital expenditures........ 1,489 1,715 3,473 8,187 10,446 7,636 9,732
Ratio of earnings to fixed
charges................... 2.1x 3.2x 5.1x 7.9x 6.7x 7.8x 2.7x
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents... $ 1,359 $ 1,441 $ 35,321 $ 5,920 $ 4,744 $ 6,280 $ 90,483
Rental merchandise, net..... 20,672 28,096 64,240 95,110 112,759 109,696 481,981
Total assets................ 34,813 36,959 147,294 174,467 208,868 206,385 1,646,813
Total debt.................. 27,592 23,383 40,850 18,993 27,172 33,652 892,912
Total stockholders'
equity.................... 4,168 9,286 96,484 125,503 152,753 144,742 148,879
</TABLE>
16
<PAGE> 17
RENTERS CHOICE, INC.
SUMMARY HISTORICAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Number of stores (end of
period)................... 112 114 325 423 504 503 2,125
Average annual revenue per
store..................... $ 591 $ 653 $ 626 $ 608 $ 610 $ 611 $ 600
Comparable store revenue
growth.................... 11.1% 10.8% 18.1% 3.8% 8.1% 9.0% 8.7%
REVENUES:
Store revenue
Rentals and fees........ $51,162 $70,590 $126,264 $198,486 $275,344 $200,970 $ 400,793
Merchandise sales....... 1,678 3,470 6,383 10,604 14,125 10,774 24,329
Other................... 372 325 642 687 679 525 2,094
Franchise revenue
Merchandise sales......... -- -- -- 25,229 37,385 23,971 28,440
Royalty income and fees... -- -- -- 2,959 4,008 3,013 3,777
------- ------- -------- -------- -------- -------- ----------
Total revenue....... $53,212 $74,385 $133,289 $237,965 $331,541 $239,253 $ 459,433
======= ======= ======== ======== ======== ======== ==========
</TABLE>
17
<PAGE> 18
RENT-A-CENTER
SUMMARY HISTORICAL FINANCIAL DATA
The summary historical financial data for Rent-A-Center as of and for each of
the three years in the period ended March 31, 1998, have been derived from
Rent-A-Center's audited consolidated financial statements. The summary
historical financial data for Rent-A-Center as of and for the three months ended
June 30, 1997 and 1998 have been derived from Rent-A-Center's unaudited
consolidated financial statements which were prepared on the same basis as
Rent-A-Center's audited financial statements and include, in the opinion of
Rent-A-Center's management, all adjustments necessary to present fairly the
information presented for such interim periods.
As part of the acquisition of Rent-A-Center, we acquired several Non-Rent-to-Own
Businesses including used automobile retailing, credit retailing and check
cashing businesses which began generating revenues in fiscal 1998. We sold
AdvantEDGE Auto, Inc. in August 1998 for $4.0 million and are in the process of
discontinuing the remaining Non-Rent-to-Own Businesses. The Rent-to-Own
financial and certain operating data presented below represents Rent-A-Center's
historical financial results, excluding the operations of these Non-Rent-to-Own
Businesses, which were accounted for as separate divisions. Under the caption
Rent-to-Own financial data, depreciation and amortization excludes depreciation
of rental merchandise, and capital expenditures excludes purchases of rental
merchandise.
Nonrecurring charges in 1996 relate to the consolidation of corporate and field
offices and reductions in the number of employees. In 1998, nonrecurring charges
represent (A) approximately $12.3 million in charges related to discontinued
Non-Rent-to-Own Businesses, closure of certain nonperforming rent-to-own stores
and reorganized administrative support functions, and (B) approximately $2.1
million related primarily to Rent-A-Center's writedown of cellular phone
inventory.
Please read this information in conjunction with the consolidated financial
statements of Rent-A-Center and notes thereto included herein, "Management's
Discussion and Analysis of Financial Conditions and Results of Operations of
Rent-A-Center," and the other financial information included elsewhere in this
prospectus.
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<PAGE> 19
RENT-A-CENTER
SUMMARY HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
------------------------------------ -----------------------
1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenue................... $ 897,927 $ 926,871 $ 904,004 $ 225,641 $ 235,421
Cost of sales................... 43,345 39,793 45,574 8,524 12,503
Depreciation and amortization
Rental merchandise............ 257,383 260,433 244,572 62,852 62,886
Other......................... 52,236 59,085 56,869 14,598 14,532
Salaries, wages and fringe
benefits...................... 255,768 272,242 279,796 68,488 72,960
Other operating expenses........ 202,577 233,015 207,460 50,654 52,653
Nonrecurring charges............ 12,600 -- 14,392 -- --
---------- ---------- ---------- ---------- ----------
Total operating
expenses............. 823,909 864,568 848,663 205,116 215,534
---------- ---------- ---------- ---------- ----------
Operating profit....... 74,018 62,303 55,341 20,525 19,887
Interest expense, net........... 80,207 52,651 46,184 10,825 11,191
Other (income) expense.......... 101 (254) (88) (81) 72
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
income taxes......... (6,290) 9,906 9,245 9,781 8,624
Income tax expense.............. 6,771 13,880 7,760 5,950 5,344
---------- ---------- ---------- ---------- ----------
Net earnings (loss).... $ (13,061) $ (3,974) $ 1,485 $ 3,831 $ 3,280
========== ========== ========== ========== ==========
RENT-TO-OWN FINANCIAL DATA:
Depreciation and amortization... $ 52,236 $ 59,085 $ 56,464 $ 14,541 $ 14,387
Capital expenditures............ 44,642 29,906 33,187 6,574 16,887
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents....... $ 19,225 $ 26,077 $ 23,755 $ 37,399 $ 27,486
Rental merchandise, net......... 304,164 276,012 292,965 268,564 303,682
Total assets........... 1,242,211 1,108,280 1,079,109 1,086,784 1,085,796
Total debt............. 1,042,729 714,235 714,223 714,827 714,663
Total stockholder's
equity............... 88,529 239,026 236,483 242,857 239,763
RENT-TO-OWN OPERATING DATA:
Number of stores (end of
period)....................... 1,306 1,367 1,384 1,392 1,404
Average annual revenue per
store......................... $ 744 $ 694 $ 639 $ 648 $ 653
Revenues:
Store revenue
Rentals and fees............ $ 827,935 $ 864,256 $ 831,025 $ 212,256 $ 217,616
Merchandise sales........... 64,628 60,249 46,337 10,636 9,296
Franchise royalty income...... 5,364 2,366 2,266 582 560
---------- ---------- ---------- ---------- ----------
Total rent-to-own
revenue.............. 897,927 926,871 879,628 223,474 227,472
Non-rent-to-own revenue....... -- -- 24,376 2,167 7,949
---------- ---------- ---------- ---------- ----------
Total revenue.......... $ 897,927 $ 926,871 $ 904,004 $ 225,641 $ 235,421
========== ========== ========== ========== ==========
</TABLE>
19
<PAGE> 20
WHERE YOU CAN FIND MORE INFORMATION
Renters Choice files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
may read and copy any reports, statements and other information we file at the
SEC's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call 1-800-SEC-0330 for further information on the
public reference rooms. Our filings are also available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at http://www.sec.gov.
We, together with the Subsidiary Guarantors, have filed a Registration Statement
on Form S-4 to register with the SEC the exchange notes to be issued in exchange
for the old notes. This prospectus is part of that Registration Statement. As
allowed by the SEC's rules, this prospectus does not contain all of the
information you can find in the Registration Statement or the exhibits to the
Registration Statement.
FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical facts included in this
prospectus are forward-looking statements. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "intend," "estimate," "anticipate" or "believe" or the
negative thereof or variations thereon or similar terminology. We believe that
the expectations reflected in such forward-looking statements are accurate.
However, we cannot assure you that such expectations will occur. Our actual
future performance could differ materially from such statements. Factors that
could cause or contribute to such differences include, but are not limited to,
- - the uncertainties and or potential delays associated with respect to
implementing Renters Choice's business plans in the stores acquired in the
Rent-A-Center and Central Rents acquisitions,
- - the ability to enhance the performance of the other acquired stores and to
integrate the other acquired store into Renters Choice's operations,
- - the ability to acquire additional rent-to-own stores on favorable terms,
- - uncertainties regarding the ability to open new stores,
- - the passage of legislation adversely affecting the rent-to-own industry,
- - interest rates,
- - Renters Choice's ability to collect on its rental purchase agreements at the
current rate, and
- - the other risks detailed from time to time in our SEC reports.
You should not unduly rely on these forward-looking statements, which speak only
as of the date of this prospectus. Except as required by law, we are not
obligated to publicly release any revisions to these forward-looking statements
to reflect events or circumstances occurring after the date of this prospectus
or to reflect the occurrence of unanticipated events. Important factors that
could cause our actual results to differ materially from our expectations (the
"Cautionary Statements") are discussed under "Risk Factors" and elsewhere in
this prospectus. All subsequent written and oral forward-looking statements
attributable to Renters Choice, or persons acting on its behalf, are expressly
qualified in their entirety by the Cautionary Statements.
20
<PAGE> 21
RISK FACTORS
You should carefully consider the information below in addition to everything
else we have told you in this prospectus in evaluating whether or not you should
participate in the exchange offer.
RISKS ASSOCIATED WITH THE ACQUISITION OF RENT-A-CENTER
Expected Benefits of Combined Business May Not Be Achieved. We believe the
combination of Renters Choice and Rent-A-Center will be of significant benefit
to Renters Choice and its stockholders. However, you should be aware that these
benefits may not be realized if combining Renters Choice's business and
Rent-A-Center's business cannot be accomplished in an efficient and effective
manner. This combination will require, among other things, the integration of
management philosophies and personnel, arrangements with third party vendors,
standardization of training programs, realization of operating efficiencies, and
effective coordination of sales and marketing and financial reporting efforts.
In addition, we are currently implementing our information systems in the stores
we acquired in the Rent-A-Center acquisition and expect this process to be
completed by late December 1998. You should be aware that any difficulties or
delays that we may experience in implementing our system in the acquired stores
could negatively impact our financial and operating results. You should also be
aware that acquisitions in general are subject to a number of special risks,
including adverse short-term effects on our reported operating results,
diversion of management's attention, and unanticipated problems or legal
liabilities. Although we have a history of successful acquisitions, we cannot
assure you that this acquisition and the integration of Rent-A-Center's
operations into Renters Choice's will be successful or accomplished efficiently.
You should be aware that if we fail to integrate Rent-A-Center's operations
successfully with Renters Choice's, our operations and financial results could
be affected, both materially and adversely.
Increased Size of Company. Although we have successfully acquired many
businesses since our initial public offering, we have never been this large of a
company. Our operations more than doubled with the purchase of Rent-A-Center.
Our future operations depend largely upon our ability to manage this sizeable
and growing business profitably. We believe, with the implementation of our
management philosophy, that we can accomplish this task. However, we cannot
guarantee to you that we will. If we fail to manage the size and the growth of
our business, a material adverse effect could result.
SIGNIFICANT LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
Because of the acquisition of Rent-A-Center, we have a significant amount of
debt outstanding. As of September 30, 1998, we owed approximately $892.9 million
under our various debt agreements (including the old notes). The maximum amount
of senior debt that we could have borrowed on that date was $720.0 million.
Under our Term Loans, we will be required to make principal payments totalling
approximately $2.0 million in 1999, $14.0 million in 2000, $22.0 million in
2001, $26.0 million in 2002 and $30.0 million in 2003. You should be aware that
this significant amount of debt could have important consequences to you as a
holder of the notes. Below we have identified for you many, but
21
<PAGE> 22
not all, of the consequences resulting from this significant amount of debt that
we now owe.
- - We may be unable to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes.
- - A significant portion of our cash flow from operations must be dedicated to
the repayment of the indebtedness, thereby reducing the amount of cash we have
available for other purposes.
- - We may be disadvantaged as compared to our competitors as a result of the
significant amount of debt we now owe.
- - Our ability to adjust to changing market conditions and our ability to
withstand competition may be hampered by the amount of debt we now owe. It may
also make us more vulnerable in a downturned market.
You should be aware that our ability to repay or refinance our current debt
depends on our successful financial and operating performance. Our ability to
meet our payment obligations may depend on our ability to successfully implement
our business strategy. Unfortunately, we cannot assure you that we will be
successful in implementing our strategy or in realizing our anticipated
financial results. You should also be aware that our financial and operational
performance depends upon a number of factors, many of which are beyond our
control. These factors include:
- - the current economic and competitive conditions in the rent-to-own industry,
- - any operating difficulties, operating costs or pricing pressures we may
experience,
- - the passage of legislation or other regulatory developments that affects us
adversely, and
- - any delays in implementing any strategic projects we may have.
In the event that we are unable to repay our current debt, we may be forced to
reduce or delay expansion, sell some of our assets, obtain additional equity
capital or refinance or restructure our debt. We cannot assure you that our cash
flow and capital resources will be sufficient to repay any indebtedness we may
incur in the future, or that we will be successful in obtaining alternative
financing. You should also read the information we have included under the
captions "Description of Other Indebtedness," "Description of the Notes and
Guarantees," and "Business -- Business Strategy" later in this prospectus.
MATERIAL LEGAL PROCEEDINGS AGAINST RENTERS CHOICE, RENT-A-CENTER AND COLORTYME
The rent-to-own industry is the subject of class action litigation involving
claims that rent-to-own contracts are in fact disguised installment sales
contracts or involve undisclosed excessive interest charges. We are involved in
such litigation in four states: New Jersey, Wisconsin, New York and Minnesota.
We are involved in three class actions in New Jersey, one of which (Robinson v.
Thorn Americas, Inc.) was originally filed against Rent-A-Center. In Robinson v.
Thorn Americas, Inc., a New Jersey state court entered a judgment against
Rent-A-Center and ordered Rent-A-Center to pay the class of plaintiffs an amount
in excess of $140 million which will increase until this litigation is resolved.
Rent-A-Center posted a $163 million supersedeas bond, which amount was derived
from an accounting by the plaintiffs of the
22
<PAGE> 23
projected amount of judgment liability as of April 1999. Rent-A-Center is
appealing the Robinson decision. The other two class actions in New Jersey are
entitled Gallagher v. Crown Leasing Corporation and Handy Boykin v. Renters
Choice, Inc. In these cases, the plaintiffs allege we (or, in the Gallagher
case, Renters Choice as the successor to Crown) violated the New Jersey Consumer
Fraud Act and the New Jersey Retail Installment Sales Act. The claims arising
from the Boykin and Gallagher cases are similar to the claims made against our
subsidiary Rent-A-Center in Robinson v. Thorn Americas, Inc. Claims have also
been made that Rent-A-Center violated rent-to-own statutes in certain other
states. We intend to vigorously defend ourselves in all pending or asserted
actions against us.
A class action entitled Fogie v. Thorn Americas, Inc. has been filed in
Minnesota alleging Rent-A-Center's rent-to-own contracts violated Minnesota's
Consumer Credit Sales Act and the Minnesota General Usury Statute. Furthermore,
a class action entitled Colon v. Thorn Americas, Inc. has been filed in New York
State court, alleging that Rent-A-Center has a duty to disclose "effective
interest" under New York consumer protection laws and seeks damages for
Rent-A-Center's failure to do so.
Rent-A-Center was also named in a class action in Wisconsin entitled Burney v.
Thorn Americas, Inc. In Burney v. Thorn Americas, Inc., a plaintiff filed a
class action in Wisconsin state court alleging Rent-A-Center violated the
Wisconsin Consumer Act. This matter was settled in principle for approximately
$16.25 million. A claim was also filed against Rent-A-Center alleging
discrimination against its African-American employees. This matter was settled
in principle for approximately $6.75 million.
An adverse ruling on any of these cases could have a material adverse effect on
our business operations and our financial performance. You should read the
sections entitled "-- Government Regulation," "Business -- Government
Regulation" and "Business -- Legal Proceedings" located later in this prospectus
for additional information regarding our litigation.
PASSAGE OF ADVERSE GOVERNMENT REGULATION IMPACTING THE RENT-TO-OWN INDUSTRY
As is the case with most businesses, we are subject to certain governmental
regulations, specifically with respect to rent-to-own transactions. There are
currently 45 states that have passed laws regulating rental purchase
transactions and another state that has a retail installment sales statute that
excludes rent-to-own transactions from its coverage if certain criteria are met.
These laws generally require certain contractual and advertising disclosures.
They also provide varying levels of substantive consumer protection, such as
requiring a grace period for late fees and contract reinstatement rights in the
event the rental purchase agreement is terminated. The rental purchase laws of
nine states limit the total amount of rentals that may be charged over the life
of a rental purchase agreement. Certain states also effectively regulate rental
purchase transactions under other consumer protection statutes. You should also
be aware that we are currently subject to outstanding judgments and other
litigation alleging that we, or our subsidiaries, have violated some of these
statutory provisions. You should also read the information under the sections
"-- Material Legal Proceedings against Renters Choice, Rent-A-Center and
ColorTyme" above and "Business -- Legal Proceedings" later in this prospectus
for a more complete discussion of these matters.
23
<PAGE> 24
Although there is no comprehensive federal legislation regulating
rental-purchase transactions, we cannot assure you that such legislation will
not be enacted in the future. From time to time, legislation has been introduced
in Congress seeking to regulate our business. In the event that legislation
having a negative impact on our business is adopted, you should be aware that it
could have a material adverse impact on us. In addition, we cannot assure you
that the various legislatures in the states where we currently do business will
not adopt new legislation or amend existing legislation that negatively affects
us. You should also read the section entitled "Business -- Government
Regulation" appearing later in this prospectus for additional discussions
related to this matter.
DEPENDENCE UPON KEY PERSONNEL
Renters Choice's continued success is highly dependent upon the personal efforts
and abilities of our senior management, including J. Ernest Talley, our Chairman
of the Board and Chief Executive Officer, Mark E. Speese, our President and
Chief Operating Officer, and L. Dowell Arnette, our Executive Vice President. We
do not have employment contracts with any of these officers and the loss of any
one of them could impact us in a negative way. Please also read the "Management"
section later in this prospectus for additional information.
CONTROL BY PRINCIPAL STOCKHOLDERS
You should be aware that a total of approximately 48.9% of our voting stock on a
fully diluted basis is controlled by Messrs. Talley, Speese and by Apollo. As a
result, in the event they act together, they have the ability to exercise
practical control over the outcome of actions requiring the approval of our
stockholders, including potential acquisitions, elections of our Board of
Directors and sales or changes in control of Renters Choice. You should read the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" later in this prospectus for additional information.
RELIANCE ON INFORMATION SYSTEMS
As is common with large organizations, we rely extensively on our information
systems to manage our operations. As a result, we regularly invest in various
upgrades to our systems in order to achieve optimum performance compared to the
costs involved. You should be aware that any disruption with respect to our
information systems could negatively impact our financial and operating results.
Please read the sections entitled "-- Potential Adverse Impact Related to the
Year 2000 Issue" next and "Business -- Management Information Systems" later in
this prospectus for additional information.
POTENTIAL ADVERSE IMPACT RELATED TO THE YEAR 2000 ISSUE
Year 2000 issues exist when dates are recorded in computers using two digits
(rather than four) and are then used for arithmetic operations, comparisons or
sorting. A two-digit recording may recognize a date using "00" as 1900 rather
than 2000, which could cause our computer systems to perform inaccurate
computations. We have received confirmation from our management information
systems vendors that our system is Year 2000 compliant. You should be aware that
Year 2000 issues relate not only to our systems, but also to those used by our
suppliers. We anticipate that system replacements and modifications will resolve
any Year 2000 issues that may exist with our suppliers or their suppliers.
However, we cannot guarantee to you that such replacements or modifications
24
<PAGE> 25
will be completed successfully or on time and, as a result, any failure to
complete such modifications on time could materially affect our financial and
operating results in a negative way. Please read the additional discussion
regarding the Year 2000 issue and the potential impact on our business in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations -- Renters Choice -- Year
2000" and read the section entitled "Business -- Management Information Systems"
later in this prospectus for additional information.
RESTRICTIONS IMPOSED ON RENTERS CHOICE BY OUR DEBT AGREEMENTS
The indenture and our senior credit facilities (as defined below) impose
significant operating and financial restrictions on us and our subsidiaries.
These restrictions may significantly limit or prohibit us from engaging in
certain transactions, including the following:
- borrowing additional money,
- paying dividends or other distributions to our stockholders,
- making certain investments,
- creating certain liens on our assets,
- selling certain assets currently held by us,
- entering into transactions with any of our affiliates, and
- engaging in certain mergers or consolidations involving Renters Choice.
The loan documents we signed to borrow money to acquire Rent-A-Center (the
"senior credit facilities") impose significant restrictive covenants on Renters
Choice and our subsidiaries and require Renters Choice and our subsidiaries to
maintain specified financial ratios and satisfy certain financial tests. Our
ability to meet these financial ratios and tests may be affected by events
beyond our control and, as a result, we cannot guarantee to you that we will be
able to meet such tests. In addition, the restrictions contained in the senior
credit facilities could limit our ability to obtain future financing, make
needed capital expenditures, withstand a future downturn in our business or in
the economy or otherwise conduct necessary corporate activities. Our failure to
comply with the restrictions in the Indenture and the senior credit facilities
could lead to a default under the terms of those documents. In the event of such
a default, the applicable lender could declare all amounts borrowed and all
amounts due under other instruments that contain certain provisions for
cross-acceleration or cross-default due and payable, including all interest that
is accrued and unpaid. In addition, the lenders under such agreements could
terminate their commitments to lend to us. If that does occur, we cannot assure
you that we would be able to make the necessary payments to the lenders and we
cannot give you any assurance that we would be able to find additional
alternative financing. Even if we could obtain additional alternative financing,
we cannot assure you that it would be on terms that are favorable or acceptable
to us.
You should also be aware that the existing indebtedness under the senior credit
facilities is secured by substantially all of our and our subsidiaries' assets.
Should a default or acceleration of such indebtedness occur, the holders of such
indebtedness could seize these assets securing the indebtedness and sell the
assets to satisfy all or a part of what is owed.
25
<PAGE> 26
The senior credit facilities also contain provisions prohibiting the
modification of the exchange notes, subject to certain exceptions favorable to
the lenders under the senior credit facilities. These exceptions include:
- - an extension of the maturity of the exchange notes,
- - a reduction in the amount of any payment of principal,
- - the reduction of the rate of interest on the exchange notes, and
- - the extension of the date for payment of interest on the exchange notes.
In addition, the senior credit facilities also limit our ability to refinance
the exchange notes without the consent of such lenders. Please refer to the
sections in this prospectus entitled "Description of the Notes and
Guarantees -- Certain Covenants," and "Description of Other Indebtedness" later
in this prospectus for additional information.
DIFFICULTY OF SATISFYING PAYMENT OBLIGATIONS UPON A CHANGE OF CONTROL
If a change of control occurs, we may be required to make an offer to purchase
all of the notes then outstanding. We would be required to purchase the notes at
101% of their principal amount, plus accrued interest to the date of repurchase.
If a change of control occurs, we cannot be sure that we would have enough funds
to pay for all of the notes. If we are required to purchase the notes, we would
need to secure third-party financing if we do not have available funds to meet
our purchase obligations. However, we cannot be sure that we would be able to
secure such financing on favorable terms, if at all.
Also, our financing arrangements will restrict our ability to repurchase the
notes, including pursuant to a change of control. Furthermore, a change of
control will result in an event of default under the senior credit facilities
and may lead to an acceleration of any other senior indebtedness we may have at
that time. In such event, the subordination provisions of the notes would
require us to pay our senior credit facilities and any other senior indebtedness
in full before repurchasing notes. In addition, a change of control could
require us to repurchase our existing notes and we could be required to offer to
redeem our Convertible Preferred Stock. See "Description of the Notes and
Guarantees -- Change of Control" and "Description of Capital Stock -- Preferred
Stock -- Mandatory Redemption." The inability to repay senior indebtedness, if
accelerated, and to purchase all of the tendered notes, would constitute an
event of default under the Indenture.
COMPETITION IN THE RENT-TO-OWN INDUSTRY
We operate in a highly competitive industry. We face competition from sources
outside the rent-to-own industry, such as department stores, discount stores and
rental stores offering short-term rent-to-rent arrangements. Because barriers to
entry in the rent-to-own industry are relatively low, additional competition may
arise from new sources. As a result of these competitive conditions, we may not
be able to sustain past levels of revenue or continue our recent revenue growth
or profitability. Please refer to the section entitled "Business -- Competition"
later in this prospectus for additional information.
ABSENCE OF PUBLIC MARKET
Currently, there is no public market for the exchange notes or the old notes. We
do not intend to apply for listing of the notes on any securities exchange or on
any automated
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<PAGE> 27
dealer quotation system. Although the Initial Purchasers have informed us that
they intend to make a market in the notes, they are not obligated to do so and
may discontinue any such market at any time without notice. In addition, such
market making activity may be limited during this exchange offer or during an
offering under a shelf registration statement should we decide to file one. As a
result, we can make no assurances to you as to the development or liquidity of
any market for the notes, your ability to sell the notes, or the price at which
you may be able to sell the notes. Future trading prices of the notes will
depend on many factors, including among other things, prevailing interest rates,
our operating results and the market for similar securities. Historically, the
market for securities similar to the notes, including non-investment grade debt,
has been subject to disruptions that have caused substantial volatility in the
prices of such securities. We cannot assure you that, if a market develops, it
will not be subject to similar disruptions.
EFFECT ON THE MARKET FOR OLD NOTES FOR THE FAILURE TO EXCHANGE THE OLD NOTES
Old notes that are not tendered in exchange for exchange notes or are tendered
but not accepted will, following consummation of the exchange offer, continue to
be subject to the existing transfer restrictions. To the extent that old notes
are tendered and accepted in the exchange offer, the trading market for
untendered and tendered but unaccepted old notes could be adversely affected due
to the limited amount, or "float," of the old notes that are expected to remain
outstanding following the exchange offer. Generally, a lower "float" of a
security could result in less demand to purchase such security and, as a result,
could result in lower prices for such security. For the same reason, to the
extent that a large amount of old notes are not tendered or are tendered and not
accepted in the exchange offer, the trading market for the exchange notes could
be adversely affected. For additional information, please refer to the sections
entitled "The Exchange Offer" and "Plan of Distribution" later in this
prospectus.
USE OF PROCEEDS OF THE EXCHANGE NOTES
This exchange offer is intended to satisfy our obligations under the Exchange
and Registration Rights Agreement dated as of August 15, 1998 (the "Exchange and
Registration Rights Agreement") by and between Renters Choice and Chase
Securities Inc., Bear, Stearns & Co. Inc., NationsBanc Montgomery Securities
LLC, and Credit Suisse First Boston Corporation, as initial purchasers (each, an
"Initial Purchaser," and, collectively, the "Initial Purchasers"). We will not
receive any cash proceeds from the issuance of the exchange notes. We will only
receive old notes with a total principal amount equal to the total principal
amount of the exchange notes issued in the exchange offer.
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<PAGE> 28
CAPITALIZATION
The following table sets forth the unaudited capitalization of Renters Choice as
of September 30, 1998. The information set forth below should be read in
conjunction with the "Summary Historical Financial Data of Renters Choice" and
the notes thereto, "Selected Historical Financial Data of Renters Choice," and
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements of Renters
Choice and the notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1998
------------------
(DOLLARS
IN MILLIONS)
<S> <C>
Senior Revolving Credit Facility(1)......................... $ 1.2
Letter of Credit/Multidraw Facility(2)...................... --
Senior Term Loan A(3)....................................... 119.3
Senior Term Loan B(4)....................................... 268.4
Senior Term Loan C(5)....................................... 328.0
Other debt outstanding...................................... 1.0
Senior Subordinated Facility(6)............................. --
Senior Subordinated Notes Due 2008(6)....................... 175.0
--------
Total debt........................................ 892.9
Convertible Preferred Stock(7).............................. 259.5
Stockholders' equity........................................ 148.9
--------
Total capitalization.............................. $1,301.3
========
</TABLE>
- -------------------------
(1) The Senior Revolving Credit Facility provides for borrowings of up to $120.0
million.
(2) The Letter of Credit/Multidraw Facility was initially used to post a letter
of credit in the amount of $122.25 million to support a $163 million bond
relating to certain New Jersey litigation. See "Business -- Legal
Proceedings." Once the Letter of Credit has been terminated, Renters Choice
may borrow up to $85 million until 2004.
(3) Senior Term Loan A is a 6.0 year facility in an aggregate principal amount
of $120 million.
(4) Senior Term Loan B is a 7.5 year facility in an aggregate principal amount
of $270 million.
(5) Senior Term Loan C is a 8.5 year facility in an aggregate principal amount
of $330 million.
(6) The proceeds from the sale of the old notes and available cash were used to
repay $175 million outstanding under the Senior Subordinated Facility.
(7) In connection with financing a portion of the acquisition of Rent-A-Center,
Apollo purchased $250 million, and an affiliate of Bear, Stearns & Co. Inc.
purchased $10 million, of Renters Choice's Convertible Preferred Stock.
Dividends on the Convertible Preferred Stock are payable quarterly at an
annual rate of 3.75% (subject to reduction based on Renters Choice's stock
price performance) in cash or in-kind at Renters Choice's option (subject to
restrictions under the senior credit facilities and the Notes). The
Convertible Preferred Stock is convertible into approximately 27.1% of
Renters Choice's common stock on a fully diluted basis. See "Description of
Capital Stock -- Preferred Stock."
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<PAGE> 29
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
At the time we issued the old notes, we agreed to file a registration statement
to register the exchange of the old notes for the exchange notes on or prior to
60 days after August 18, 1998 (the "Issue Date") and to use our reasonable best
efforts to cause such registration statement to become effective under the
Securities Act within 150 days after the Issue Date. In the event that
applicable interpretations of the staff of the SEC do not permit Renters Choice
to effect the exchange offer, or if certain holders of the old notes notify
Renters Choice that they are not eligible to participate in, or would not
receive freely tradeable exchange notes in exchange for tendered old notes
pursuant to, the exchange offer, Renters Choice will use its reasonable best
efforts to cause to become effective a shelf registration statement (the "Shelf
Registration Statement") with respect to the resale of the old notes and to keep
the Shelf Registration Statement effective until two years after the Issue Date.
If the exchange offer registration statement is not effective on January 15,
1999, Renters Choice will be obligated to pay liquidated damages to holders of
the old notes. See "Old Notes Exchange and Registration Rights Agreement."
Each holder of the old notes that wishes to exchange old notes for exchange
notes will be required to represent that (i) any exchange notes received will be
acquired in the ordinary course of its business, (ii) it has no arrangement with
any person to participate in the distribution of the exchange notes, and (iii)
it is not an "affiliate," as defined in Rule 405 of the Securities Act, of
Renters Choice or, if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
RESALE OF EXCHANGE NOTES
Based on interpretations by the staff of the SEC set forth in no-action letters
issued to third-parties, Renters Choice believes that, except as described
below, exchange notes issued pursuant to the exchange offer in exchange for old
notes may be offered for resale, resold and otherwise transferred by any holder
thereof (other than a holder which is an "affiliate" of Renters Choice within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such exchange notes are acquired in the ordinary course of such holder's
business and such holder does not intend to participate and has no arrangement
or understanding with any person to participate in the distribution of such
exchange notes. Any holder who tenders in the exchange offer with the intention
or for the purpose of participating in a distribution of the exchange notes
cannot rely on such interpretation by the staff of the SEC and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Unless an exemption from
registration is otherwise available, any such resale transaction should be
covered by an effective registration statement containing the selling security
holder's information required by Item 507 of Regulation S-K under the Securities
Act. This prospectus may be used for an offer to resell, resale or other
retransfer of exchange notes only as specifically set forth herein. Only
broker-dealers who acquired the old notes as a result of market-making
activities or other trading activities may participate in the exchange offer.
Each broker-dealer that receives exchange notes for its own account in exchange
for old notes, where such old notes were acquired by such
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<PAGE> 30
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus and in
the letter of transmittal, Renters Choice will accept for exchange any and all
old notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on [ , 1999] ( the "Expiration Date"). Renters Choice will
issue $1,000 principal amount of exchange notes in exchange for each $1,000
principal amount of outstanding old notes surrendered pursuant to the exchange
offer. Old notes may be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes will be the same as the form and terms
of the old notes except that the exchange notes will be registered under the
Securities Act and will not bear legends restricting their transfer. The
exchange notes will evidence the same debt as the old notes. The exchange notes
will be issued under and entitled to the benefits of the Indenture, which also
authorized the issuance of the old notes, such that both series will be treated
as a single class of debt securities under the Indenture. See "Description of
the Notes and Guarantees -- General."
The exchange offer is not conditioned upon any minimum aggregate principal
amount of old notes being tendered for exchange.
As of the date of this prospectus, $175.0 million of the old notes are
outstanding. This prospectus, together with the letter of transmittal, is being
sent to all registered holders of old notes. There will be no fixed record date
for determining registered holders of old notes entitled to participate in the
exchange offer.
Renters Choice intends to conduct the exchange offer in accordance with the
provisions of the Exchange and Registration Rights Agreement and the applicable
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the SEC thereunder. Old notes that are
not tendered for exchange in the exchange offer will remain outstanding and
continue to accrue interest and will be entitled to the rights and benefits such
holders have under the Indenture and the Exchange and Registration Rights
Agreement.
Renters Choice will be deemed to have accepted for exchange properly tendered
notes when, as and if Renters Choice shall have given oral or written notice of
acceptance to the exchange agent and complied with the provisions of Section 1
of the Exchange and Registration Rights Agreement. The exchange agent will act
as agent for the tendering holders for the purposes of receiving the exchange
notes from Renters Choice. Renters Choice expressly reserves the right to amend
or terminate the exchange offer, and not to accept for exchange any old notes
not accepted for exchange, upon the occurrence of any of the conditions
specified below under "-- Certain Conditions to the Exchange Offer."
Holders who tender old notes in the exchange offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of old notes pursuant
to the exchange offer. Renters Choice will pay all charges and expenses, other
than certain applicable taxes described below, in connection with the exchange
offer. See "-- Fees and Expenses."
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<PAGE> 31
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time on
[ , 1999,] unless Renters Choice, in its sole discretion, extends
the exchange offer, in which case the term "Expiration Date" will mean the
latest date and time to which the exchange offer is extended.
In order to extend the exchange offer, Renters Choice will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders of old notes an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the Expiration Date.
Renters Choice reserves the right, in its sole discretion, (i) to delay
accepting any old notes for exchange, to extend the exchange offer or to
terminate the exchange offer if any of the conditions set forth below under
"-- Certain Conditions to the Exchange Offer" have not been satisfied, by giving
oral or written notice of such delay, extension or termination to the Exchange
Agent, or (ii) to amend the terms of the exchange offer in any manner. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders of old notes. If the exchange offer is amended in a manner determined by
Renters Choice to constitute a material change, Renters Choice will promptly
disclose such amendment by means of a prospectus supplement that will be
distributed to the registered holders, and Renters Choice will extend the
exchange offer, depending upon the significance of the amendment and the manner
of disclosure to the registered holders, if the exchange offer would otherwise
expire during such period.
Without limiting the manner in which Renters Choice may choose to make a public
announcement of any delay, extension, amendment or termination of the exchange
offer, Renters Choice has no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
If Renters Choice extends the period of time during which the exchange offer is
open, or if Renters Choice is delayed in accepting for exchange of, or in
issuing and exchanging the exchange notes for, any old notes, or is unable to
accept for exchange of, or issue exchange notes for, any old notes pursuant to
the exchange offer for any reason, then, without prejudice to Renters Choice's
rights under the exchange offer, the exchange agent may, on our behalf, retain
all old notes tendered, and such old notes may not be withdrawn except as
otherwise provided below in "-- Withdrawal of Tenders." The right to delay
acceptance for exchange of, or the issuance and the exchange of the exchange
notes for, any old notes is subject to applicable law, including Rule 14e-1(c)
under the Exchange Act, which requires that Renters Choice either deliver the
exchange notes or return the old notes deposited by or on behalf of the holders
thereof promptly after termination or withdrawal of the exchange offer.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest at a rate of 11% per annum, payable
semi-annually, on February 15 and August 15 of each year, commencing on February
15, 1999. Holders of exchange notes will receive interest on February 15, 1999
from the date of initial issuance of the exchange notes, plus an amount equal to
the accrued interest on the old
31
<PAGE> 32
notes through such date. Interest on the old notes accepted for exchange will
cease to accrue upon issuance of the exchange notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the exchange offer, Renters Choice will not be
required to accept for exchange, or exchange any exchange notes for, any old
notes, and may terminate the exchange offer before the acceptance of any old
notes for exchange, if:
- any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in Renters Choice's reasonable judgment, might materially impair
the ability of Renters Choice to proceed with the exchange offer; or
- any law, statute, rule or regulation is proposed, adopted or enacted, or
any existing law, statute, rule or regulation is interpreted by the staff
of the SEC, which, in Renters Choice's reasonable judgment, might
materially impair the ability of Renters Choice to proceed with the
exchange offer; or
- any governmental approval has not been obtained, which approval Renters
Choice shall, in its reasonable discretion, deem necessary for the
consummation of the exchange offer as contemplated hereby.
If Renters Choice determines in its sole discretion that any of these foregoing
conditions are not satisfied, Renters Choice may
- refuse to accept any old notes and return all old notes to the tendering
holders,
- extend the exchange offer and retain all old notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw such old notes (see "Withdrawal of Tenders"), or
- waive such unsatisfied conditions with respect to the exchange offer and
accept all properly tendered old notes which have not been withdrawn.
If such waiver constitutes a material change to the exchange offer, Renters
Choice will promptly disclose such waiver by means of a prospectus supplement
that will be distributed to the registered holders of the old notes and Renters
Choice will extend the exchange offer for a period of five to ten business days,
depending on the significance of the waiver and the manner of disclosure to the
registered holders, if the exchange offer would otherwise expire during such
five to ten day business period.
The foregoing conditions are for the sole benefit of Renters Choice and may be
asserted by Renters Choice regardless of the circumstances giving rise to any
such condition or may be waived by Renters Choice in whole or in part at any
time and from time to time in its sole discretion. The failure by Renters Choice
at any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which may
be asserted at any time and from time to time.
In addition, Renters Choice will not accept for exchange any old notes tendered,
and no exchange notes will be issued in exchange for any such old notes, if at
such time any stop order shall be threatened or in effect with respect to the
registration statement of which
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<PAGE> 33
this prospectus constitutes a part or the qualification of the Indenture under
the Trust Indenture Act of 1939 (the "TIA").
PROCEDURES FOR TENDERING
Subject to the terms and conditions hereof and the letter of transmittal, only a
holder of old notes may tender such old notes in the exchange offer. To tender
in the exchange offer, a holder must complete, sign and date the letter of
transmittal, or facsimile thereof, have the signature thereon guaranteed if
required by the letter of transmittal, and mail or otherwise deliver such letter
of transmittal or such facsimile to the Exchange Agent prior to 5:00 p.m., New
York City time, on the Expiration Date or, in the alternative, comply with DTC's
ATOP procedures described below. In addition, either:
- - old notes must be received by the Exchange Agent along with the letter of
transmittal, or
- - a timely confirmation of book-entry transfer (a "Book-Entry Confirmation") of
such old notes, if such procedure is available, into the Exchange Agent's
account at DTC (the "Book-Entry Transfer Facility") pursuant to the procedure
for book-entry transfer described below or properly transmitted Agent's
Message (as defined below) must be received by the Exchange Agent prior to the
Expiration Date, or
- - the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the letter of transmittal and other required
documents must be received by the Exchange Agent at the address set forth below
under "-- Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date.
The tender by a holder which is not withdrawn prior to the Expiration Date will
constitute an agreement between such holder and Renters Choice in accordance
with the terms and subject to the conditions set forth herein and in the letter
of transmittal.
The method of delivery of old notes, the letter of transmittal and all other
required documents to the exchange agent is at the election and risk of the
holder. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the expiration date. No
letter of transmittal or old notes should be sent to Renters Choice. Holders may
request their respective brokers, dealers, commercial banks, trust companies or
other nominees to effect the above transactions for such holders.
Any beneficial owner whose old notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder of old notes to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the letter of transmittal and delivering such
owner's old notes, either make appropriate arrangements to register ownership of
the old notes in such owner's name or obtain a properly completed bond power
from the registered holder of old notes. The transfer of registered ownership
may take considerable time and may not be able to be completed prior to the
Expiration Date.
Signatures on a letter of transmittal and a notice of withdrawal described below
must be guaranteed by an Eligible Institution (as defined below) unless the old
notes are tendered
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<PAGE> 34
(A) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter of
transmittal, or (B) for the account of an Eligible Institution. In the event
that signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, such guarantor must be a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the letter of
transmittal (an "Eligible Institution").
If the letter of transmittal is signed by a person other than the registered
holder of any old notes listed therein, such old notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered holder
as such registered holder's name appears on such old notes with the signature
thereon guaranteed by an Eligible Institution.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by Renters Choice,
provide evidence satisfactory to Renters Choice of their authority to so act
must be submitted with the letter of transmittal.
The exchange agent and DTC have confirmed that any financial institution that is
a participant in DTC's system may utilize DTC's Automated Tender Offer Program
("ATOP") to tender. Accordingly, participants in DTC's ATOP may, in lieu of
physically completing and signing the letter of transmittal and delivering it to
the Exchange Agent, electronically transmit their acceptance of the exchange
offer by causing DTC to transfer the old notes to the Exchange Agent in
accordance with DTC's ATOP procedures for transfer. DTC will then send an
Agent's Message to the exchange agent. The term "Agent's Message" means a
message transmitted by DTC received by the Exchange Agent and forming part of
the Book-Entry Confirmation, which states that DTC has received an express
acknowledgment from a participant in DTC's ATOP that is tendering old notes
which are the subject of such book entry confirmation, that such participant has
received and agrees to be bound by the terms of the letter of transmittal (or,
in the case of an Agent's Message relating to guaranteed delivery, that such
participant has received and agrees to be bound by the applicable Notice of
Guaranteed Delivery), and that the agreement may be enforced against such
participant.
All questions as to the validity, form, eligibility (including time of receipt),
acceptance of tendered old notes and withdrawal of tendered old notes will be
determined by Renters Choice in its sole discretion, which determination will be
final and binding. Renters Choice reserves the absolute right to reject any and
all old notes not properly tendered or any old notes Renters Choice's acceptance
of which would, in the opinion of counsel for Renters Choice, be unlawful.
Renters Choice also reserves the right to waive any defects, irregularities or
conditions of tender as to particular old notes. Renters Choice's interpretation
of the terms and conditions of the exchange offer (including the instructions in
the letter of transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of old notes
must be cured within such time as Renters Choice shall determine. Although
Renters Choice intends to notify holders of defects or irregularities with
respect to tenders of old notes, neither Renters Choice, the
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<PAGE> 35
exchange agent nor any other person shall incur any liability for failure to
give such notification. Tenders of old notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any old
notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the exchange agent to the tendering holder, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
Expiration Date.
In all cases, issuance of exchange notes for old notes that are accepted for
exchange pursuant to the exchange offer will be made only after timely receipt
by the exchange agent of old notes or a timely Book-Entry Confirmation of such
old notes into the exchange agent's account at the Book-Entry Transfer Facility,
a properly completed and duly executed letter of transmittal and all other
required documents. If any tendered old notes are not accepted for exchange for
any reason set forth in the terms and conditions of the exchange offer or if old
notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged old notes will be returned without
expense to the tendering holder thereof (or, in the case of old notes tendered
by book-entry transfer into the exchange agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
below, such non-exchanged Notes will be credited to an account maintained with
such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect to
the old notes at the Book-Entry Transfer Facility for purposes of the exchange
offer within two business days after the date of this prospectus, and any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of old notes by causing the
Book-Entry Transfer Facility to transfer such old notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of notes may be effected through book-entry transfer at the Book-Entry
Transfer Facility, the letter of transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address set
forth below under "-- Exchange Agent" on or prior to the Expiration Date or, if
the guaranteed delivery procedures described below are to be complied with,
within the time period provided under such procedures. Delivery of documents to
the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their old notes and (A) whose old notes are not
immediately available, or (B) who cannot deliver their old notes, the letter of
transmittal or any other required documents to the exchange agent prior to the
Expiration Date, may effect a tender if:
- The tender is made through an Eligible Institution;
- Prior to the Expiration Date, the exchange agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery
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<PAGE> 36
(by facsimile transmission, mail or hand delivery) setting forth the name
and address of the holder, the registered number(s) of such old notes and
the principal amount of old notes tendered, stating that the tender is
being made thereby and guaranteeing that, within three (3) New York Stock
Exchange trading days after the Expiration Date, the letter of
transmittal (or facsimile thereof) together with the old notes or a
Book-Entry Confirmation, as the case may be, and any other documents
required by the letter of transmittal will be deposited by the Eligible
Institution with the exchange agent; and
- Such properly completed and executed letter of transmittal (or facsimile
thereof), or properly transmitted Agent's Message as well as all tendered
old notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and all other documents required by the letter of
transmittal, are received by the Exchange Agent within three (3) New York
Stock Exchange trading days after the Expiration Date.
Upon request to the exchange agent, a Notice of Guaranteed Delivery will be sent
to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of old notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, (i) a written notice of withdrawal must be
received by the exchange agent at one of the addresses set forth below
under "-- Exchange Agent," or (ii) holders must comply with the appropriate
procedures of DTC's ATOP system. Any such notice of withdrawal must specify the
name of the person having tendered the old notes to be withdrawn, identify the
old notes to be withdrawn (including the principal amount of such old notes),
and (where certificates for old notes have been transmitted) specify the name in
which such old notes were registered, if different from that of the withdrawing
holder. If certificates for old notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If old notes have been tendered pursuant to the procedure
for book-entry transfer described above, any notice of withdrawal must specify
the name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn old notes and otherwise comply with the procedures
of such facility. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by Renters
Choice, whose determination shall be final and binding on all parties. Any old
notes so withdrawn will be deemed not to have been validly tendered for exchange
for purposes of the exchange offer. Any old notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder (or, in the case of old notes
tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such old notes will be credited to an account maintained with
such Book-Entry Transfer Facility for the old notes) as soon as practicable
after withdrawal, rejection of tender or termination of the
36
<PAGE> 37
exchange offer. Properly withdrawn old notes may be retendered by following one
of the procedures described under "-- Procedures for Tendering" above at any
time on or prior to the Expiration Date.
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent for the
exchange offer. Questions and requests for assistance, requests for additional
copies of this prospectus or the letter of transmittal and requests for Notice
of Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
By Registered or Certified Mail
or by Overnight Courier: By Hand:
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
P. O. Box 84 One State Street
Bowling Green Station New York, New York 10004
New York, New York 10274-0084 Attn: Securities Processing
Attn: Reorganization Operations Window,
Dept Subcellar One, (SC-1)
</TABLE>
By Facsimile:
(212) 858-2611
(To confirm facsimile transmissions, call: (212) 858-2103)
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by Renters Choice. The
principal solicitation is being made by mail. However, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of Renters Choice and its affiliates.
Renters Choice has not retained any dealer-manager in connection with the
exchange offer and will not make any payments to broker-dealers or others
soliciting acceptances of the exchange offer. Renters Choice, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the exchange offer will be
paid by Renters Choice and are estimated in the aggregate to be approximately
$300,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, and
related fees and expenses.
TRANSFER TAXES
Renters Choice will pay all transfer taxes, if any, applicable to the exchange
of the old notes for exchange notes pursuant to the exchange offer. If, however,
certificates representing old notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of notes tendered, or if
tendered notes are registered in the name of any person other than the person
signing the letter of transmittal, or if a transfer tax is imposed for any
reason other than the exchange of notes pursuant to the exchange offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of
37
<PAGE> 38
such taxes or exemption therefrom is not submitted with the letter of
transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of old notes who do not exchange their old notes for exchange notes
pursuant to the exchange offer will continue to be subject to the restrictions
on transfer of such old notes, as set forth (i) in the legend thereon as a
consequence of the issuance of the old notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws, and (ii) otherwise set forth in the
Offering Memorandum dated August 13, 1998, distributed in connection with the
offering of the old notes. In general, the old notes may not be offered or sold
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. Renters Choice does not currently anticipate that it will
register the old notes under the Securities Act.
38
<PAGE> 39
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
Our Unaudited Pro Forma Combined Financial Information gives effect to both the
offering of the old notes and the acquisitions of Central Rents and
Rent-A-Center, as if these transactions had occurred on January 1, 1997. The
acquisitions of Central Rents and Rent-A-Center were completed on May 28, 1998
and August 5, 1998, respectively, and have been reflected within the Renters
Choice historical balance sheet as of September 30, 1998 and the Renters Choice
historical statement of operations since their dates of acquisition. The
Unaudited Pro Forma Combined Statement of Operations for the year ended December
31, 1997 includes Central Rents historical information for the year ended
December 31, 1997, and Rent-A-Center historical information for the year ended
March 31, 1998, which was its fiscal year end. These transactions and the
related adjustments are described in the accompanying notes. In the opinion of
management, all adjustments have been made that are necessary to present fairly
the pro forma data.
Our Unaudited Pro Forma Combined Financial Information is not indicative of
Renters Choice's results of operations as of September 30, 1998, nor for any
future date, and is not necessarily indicative of what Renters Choice's results
of operations would have been had both the offering of the old notes and the
acquisitions of Central Rents and Rent-A-Center occurred on January 1, 1997.
Further, it does not give effect to (i) any transactions other than the
foregoing transactions and those described in the accompanying Notes to
Unaudited Pro Forma Combined Financial Information, or (ii) Renters Choice's
results of operations since September 30, 1998. Although the following Unaudited
Pro Forma Combined Financial Information gives effect to expected annual net
savings from the elimination of duplicative general and administrative and field
expenses as a result of the aforementioned acquisitions, it does not give effect
to additional annual net savings expected to be achieved resulting from the
acquisition of Rent-A-Center, relating principally to changes made to its
product distribution network, and the utilization of its service and repair
network. Actual amounts could differ from those presented.
The following Unaudited Pro Forma Combined Financial Information is based upon
the historical financial statements of Renters Choice, Central Rents, and
Rent-A-Center, and should be read in conjunction with such historical financial
statements, the related notes, and the Notes to Unaudited Pro Forma Combined
Financial Information.
39
<PAGE> 40
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
RENT-A-CENTER PRO FORMA
ADJUSTMENTS
RENTERS RENTERS --------------------------
CHOICE AND CHOICE AND ELIMINATION
CENTRAL CENTRAL RENTS CENTRAL RENTS RENT-A- NON-RENT-
RENTS PRO FORMA PRO FORMA CENTER TO-OWN
HISTORICAL(1) ADJUSTMENTS COMBINED HISTORICAL BUSINESSES ACQUISITION
------------- ------------- ------------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Store
Rentals and fees.......... $373,926 $ -- $373,926 $839,026 $ (3,779)(2) $ (4,202)(3)
Merchandise sales......... 18,972 -- 18,972 62,712 (16,395)(2) --
Other..................... 793 -- 793 -- -- --
Franchise
Merchandise sales......... 37,385 -- 37,385 -- -- --
Royalty income and fees... 4,008 -- 4,008 2,266 -- --
-------- -------- -------- -------- -------- ---------
Total revenues........ 435,084 -- 435,084 904,004 (20,174) (4,202)
Operating expenses
Direct store expenses
Depreciation of rental
merchandise............. 87,630 -- 87,630 244,572 -- (4,202)(3)
Cost of merchandise
sold.................... 14,885 -- 14,885 45,574 (14,853)(2) --
Salaries and other
expenses................ 162,458 57,884(4) 220,342 -- -- 448,364(3)
Franchise cost of
merchandise sold.......... 35,841 -- 35,841 -- -- --
General and administrative
expenses.................. 77,559 (60,484)(4) 17,075 513,481 (10,535)(2) (467,509)(3)
Indemnified litigation
expenses.................. -- -- -- 6,600 -- (6,600)(5)
Nonrecurring charges(14).... -- -- -- 14,392 (7,792)(2) --
Amortization of
intangibles............... 6,957 939(6) 7,896 24,044 -- (5,127)(6)
-------- -------- -------- -------- -------- ---------
Total operating
expenses............ 385,330 (1,661) 383,669 848,663 (33,180) (35,074)
Operating profit...... 49,754 1,661 51,415 55,341 13,006 30,872
Interest expense.............. 10,043 (752)(7) 9,291 46,184 -- 28,263(8)
Interest income and other..... (304) -- (304) (88) -- --
-------- -------- -------- -------- -------- ---------
Earnings before income
taxes............... 40,015 2,413 42,428 9,245 13,006 2,609
Income tax expense............ 17,044 965(10) 18,009 7,760 -- 8,713(11)
-------- -------- -------- -------- -------- ---------
Net earnings.......... 22,971 1,448 24,419 1,485 13,006 (6,104)
Preferred dividends........... -- -- -- -- -- 9,888(13)
-------- -------- -------- -------- -------- ---------
Net earnings allocable
to common
stockholders........ $ 22,971 $ 1,448 $ 24,419 $ 1,485 $ 13,006 $ (15,992)
======== ======== ======== ======== ======== =========
Basic earnings per share(15):
Earnings per share.......... $ 1.02
========
Weighted average common
shares outstanding........ 23,854
========
Diluted earnings per
share(15):
Earnings per share.......... $ 1.01
========
Weighted average common and
common equivalent shares
outstanding............... 24,204
========
Ratio of earnings to fixed
charges(16)................. 3.6x
========
<CAPTION>
ACQUISITIONS OFFERING PRO FORMA
PRO FORMA ADJUSTMENTS COMBINED
------------ ----------- ----------
<S> <C> <C> <C>
Revenues
Store
Rentals and fees.......... $1,204,971 $ -- $1,204,971
Merchandise sales......... 65,289 -- 65,289
Other..................... 793 -- 793
Franchise
Merchandise sales......... 37,385 -- 37,385
Royalty income and fees... 6,274 -- 6,274
---------- ----- ----------
Total revenues........ 1,314,712 -- 1,314,712
Operating expenses
Direct store expenses
Depreciation of rental
merchandise............. 328,000 -- 328,000
Cost of merchandise
sold.................... 45,606 -- 45,606
Salaries and other
expenses................ 668,706 -- 668,706
Franchise cost of
merchandise sold.......... 35,841 -- 35,841
General and administrative
expenses.................. 52,512 -- 52,512
Indemnified litigation
expenses.................. -- -- --
Nonrecurring charges(14).... 6,600 -- 6,600
Amortization of
intangibles............... 26,813 -- 26,813
---------- ----- ----------
Total operating
expenses............ 1,164,078 -- 1,164,078
Operating profit...... 150,634 -- 150,634
Interest expense.............. 83,738 (519)(9) 83,219
Interest income and other..... (392) -- (392)
---------- ----- ----------
Earnings before income
taxes............... 67,288 519 67,807
Income tax expense............ 34,482 208(12) 34,690
---------- ----- ----------
Net earnings.......... 32,806 311 33,117
Preferred dividends........... 9,888 -- 9,888
---------- ----- ----------
Net earnings allocable
to common
stockholders........ $ 22,918 $ 311 $ 23,229
========== ===== ==========
Basic earnings per share(15):
Earnings per share.......... $ 0.96 $ 0.97
========== ==========
Weighted average common
shares outstanding........ 23,854 23,854
========== ==========
Diluted earnings per
share(15):
Earnings per share.......... $ 0.95 $ 0.96
========== ==========
Weighted average common and
common equivalent shares
outstanding............... 24,204 24,204
========== ==========
Ratio of earnings to fixed
charges(16)................. 1.7x 1.7x
========== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statement of Operations
40
<PAGE> 41
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) The following historical combined statement of operations of Renters Choice
and Central Rents for the year ended December 31, 1997 has been derived from
the audited financial statements of the respective entities:
<TABLE>
<CAPTION>
RENTERS
CHOICE AND
CENTRAL RENTS
RENTERS CENTRAL HISTORICAL
CHOICE RENTS COMBINED
-------- -------- -------------
<S> <C> <C> <C>
Revenues
Store
Rentals and fees................ $275,344 $ 98,582 $373,926
Merchandise sales............... 14,125 4,847 18,972
Other........................... 679 114 793
Franchise
Merchandise sales............... 37,385 -- 37,385
Royalty income and fees......... 4,008 -- 4,008
-------- -------- --------
Total revenues............. 331,541 103,543 435,084
Operating expenses
Store expenses
Depreciation of rental
merchandise................... 57,223 30,407 87,630
Cost of merchandise sold........ 11,365 3,520 14,885
Salaries and other expenses..... 162,458 -- 162,458
Franchise cost of merchandise
sold............................ 35,841 -- 35,841
General and administrative
expenses........................ 13,304 64,255 77,559
Amortization of intangibles........ 5,412 1,545 6,957
-------- -------- --------
Total operating expenses... 285,603 99,727 385,330
Operating profit........... 45,938 3,816 49,754
Interest expense..................... 2,194 7,849 10,043
Interest income...................... (304) -- (304)
-------- -------- --------
Earnings (loss) before
income taxes............ 44,048 (4,033) 40,015
Income tax expense (benefit)......... 18,170 (1,126) 17,044
-------- -------- --------
Net earnings (loss)........ $ 25,878 $ (2,907) $ 22,971
======== ======== ========
Basic earnings per share:
Earnings per share................. $ 1.04
========
Weighted average common shares
outstanding..................... 24,844
========
Diluted earnings per share:
Earnings per share................. $ 1.03
========
Weighted average common shares
outstanding..................... 25,194
========
</TABLE>
(2) Reflects the elimination of Rent-A-Center's Non-Rent-to-Own Businesses,
including used automobile retailing, credit retailing and check cashing
businesses, which had combined total revenues of $20.2 million. These
operations, which are accounted for
41
<PAGE> 42
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
as separate divisions by Rent-A-Center, were exited by Renters Choice
shortly after the acquisition. Nonrecurring charges are discussed in Note
(14).
<TABLE>
<CAPTION>
INCREASE (DECREASE)
(3) --------------------------------------------------
STORE
RENTALS EXPENSES SALARIES
AND DEPRECIATION AND GENERAL AND
FEES OF RENTAL OTHER ADMINISTRATIVE
REVENUE MERCHANDISE EXPENSES EXPENSES
------- ------------ -------- --------------
<S> <C> <C> <C> <C>
Reclassification of
Rent-A-Center store expenses
to conform with Renters
Choice's presentation....... $ -- $ -- $457,807 $(457,807)
Reclassification Rent-A-Center
volume and cash discounts
from purchases to conform
with Renters Choice's
presentation................ (4,202) (4,202) -- --
Reclassification of
Rent-A-Center advertising
rebates as a reduction in
store expenses to conform
with Renters Choice's
presentation................ -- -- (5,798) 5,798
Elimination of income related
to a rebate of management
fees from Thorn plc......... -- -- -- 2,900
Elimination of duplicate
corporate overhead and
regional management
expenses: (a)
Corporate overhead
Salaries and benefits.... -- -- -- (17,400)
Administrative
expenses............... -- -- -- (1,000)
Regional management
expenses................. -- -- (2,500) --
Adjustment to depreciation
expense(b).................. -- -- (1,145) --
------- ------- -------- ---------
$(4,202) $(4,202) $448,364 $(467,509)
======= ======= ======== =========
</TABLE>
42
<PAGE> 43
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------
(a) In addition to cost savings of $20.9 million from the acquisition of
Rent-A-Center and $2.6 million (see Note (4)) from the acquisition of
Central Rents, included in the Unaudited Pro Forma Combined Statements
of Operations, Renters Choice is planning to implement certain other
initiatives which are expected to generate an additional $9.9 million
of annual cost savings. These include making changes to Rent-A-Center's
product distribution network, and utilizing Rent-A-Center's service and
repair network, which would result in estimated annual savings of $22.3
million and $4.6 million, respectively. In addition, Renters Choice is
considering other initiatives to increase Rent-A-Center's store
efficiencies and operating profit, resulting in increased costs of
approximately $17.0 million.
(b) Adjustment to reduce depreciation expense, representing the difference
between historical depreciation for property assets acquired in the
Rent-A-Center acquisition and depreciation computed based on the
allocated purchase price of such assets. The adjustment was calculated
for transportation equipment, furniture and equipment and leasehold
improvements on a straight-line basis over their useful lives of four
to six years.
<TABLE>
<S> <C>
Pro forma depreciation expense......................... $ 29,004
Less historical depreciation expense................... (30,149)
--------
Depreciation expense adjustment........................ $ (1,145)
========
</TABLE>
<TABLE>
<CAPTION>
INCREASE (DECREASE)
(4) -----------------------------------
STORE
EXPENSES
SALARIES GENERAL AND
AND ADMINISTRATIVE
OTHER EXPENSES TOTAL
-------- -------------- -----
<S> <C> <C> <C>
Reclassification of Central Rents other
store expenses to conform with Renters
Choice's presentation.................. $57,684 $(57,684) $ --
Elimination of duplicate corporate
overhead and additional field expenses
as a result of the Central Rents
acquisition............................ 200 (2,800) (2,600)
------- -------- -------
$57,884 $(60,484) $(2,600)
======= ======== =======
</TABLE>
(5) Elimination of litigation expense relating to Minnesota and Pennsylvania
class action litigation indemnified by seller as part of the acquisition of
Rent-A-Center.
(6) Reversal of historical intangible amortization and recording the pro forma
intangible amortization required as a result of the Central Rents and
Rent-A-Center acquisitions,
43
<PAGE> 44
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
using estimated useful lives of 5 years for the noncompete agreements, and
30 years for excess costs over fair market value of net assets acquired:
<TABLE>
<CAPTION>
CENTRAL RENT-A-
RENTS CENTER
------- -------------
<S> <C> <C>
Reversal of historical intangible amortization... $(1,545) $(24,044)
Pro forma intangible amortization................ 2,484 18,917
------- --------
$ 939 $ (5,127)
======= ========
</TABLE>
(7) Change in interest expense as a result of borrowings on the existing
revolving credit agreement used to finance the acquisition of Central Rents:
<TABLE>
<S> <C>
Borrowings of $101.4 million at 7% on the existing revolving
credit agreement used to finance the acquisition of
Central Rents............................................. $ 7,097
Elimination of historical interest expense for Central
Rents..................................................... (7,849)
-------
$ (752)
=======
</TABLE>
(8) Net adjustment to interest expense as a result of the issuance of debt to
complete the acquisition of Rent-A-Center:
<TABLE>
<S> <C>
Senior credit facilities:
$120 million Term Loan A at an annual interest rate of
7.625%................................................. $ 9,150
$270 million Term Loan B at an annual interest rate of
7.875%................................................. 21,263
$330 million Term Loan C at an annual interest rate of
8.125%................................................. 26,813
Annual commitment fee of 0.50% applied to the $120 million
unused balance of the Revolving Credit Facility........ 600
Annual 2.50% fee applied to the Letter of Credit
Facility............................................... 3,056
$175 million Senior Subordinated Facility at an annual
interest rate of 11.625%.................................. 20,344
--------
Cash interest expense....................................... 81,226
Amortization of deferred financing costs(a)................. 2,366
--------
Pro forma interest expense for the acquisitions............. 83,591
Interest expense relating to existing Renters Choice debt
not refinanced............................................ 147
--------
Pre-offering pro forma interest expense..................... 83,738
Less: Renters Choice and Central Rents pro forma combined
interest expense plus Rent-A-Center historical interest
expense................................................... (55,475)
--------
Pre-offering net interest expense adjustment................ $ 28,263
========
</TABLE>
44
<PAGE> 45
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------
(a) Deferred financing costs are amortized over the term of the related
debt (ten years for the Senior Subordinated Facility, six years for the
Term Loan A, seven and one-half years for Term Loan B, eight and
one-half years for Term Loan C, and six years for both the Revolving
Credit and Letter of Credit Facilities).
A change of 0.125% in the annual interest rates would result in a $1.1
million change in pro forma interest expense for the year.
(9) Net adjustments to interest expense as a result of the Offering:
<TABLE>
<S> <C>
Issuance of Senior Subordinated Notes due 2008 -- $175
million at 11.0%.......................................... $ 19,250
Amortization of related deferred financing costs............ 575
Repayment of Senior Subordinated Facility -- $175 million at
11.625%................................................... (20,344)
--------
$ (519)
========
</TABLE>
(10) Income tax expense adjustment related to the effects of the Central Rents
pro forma adjustments at a 40% effective tax rate.
(11) Income tax expense adjustment related to the effects of the pro forma
adjustments based upon an assumed composite income tax rate of 40% applied
to combined pro forma earnings before income taxes, adjusted for
nondeductible goodwill amortization of $18.9 million related to the
acquisition of Rent-A-Center.
(12) Income tax expense adjustment related to the effects of the Offering
adjustments, at a 40% effective tax rate.
(13) In-kind dividends at 3.75% per annum on the $260 million of redeemable
convertible preferred stock issued to finance a portion of the acquisition
of Rent-A-Center. For the first five years subsequent to issuance, Renters
Choice has the option to pay the quarterly dividends in cash or in-kind
with the issuance of additional redeemable convertible preferred stock.
Renters Choice's ability to pay the dividends in cash will be subject to
restrictions under the Senior Credit Facilities and Senior Subordinated
Notes. Dividends reflected herein are assumed to be paid in-kind with the
issuance of additional redeemable convertible preferred stock.
(14) Nonrecurring charges relate to Rent-A-Center's discontinued Non-Rent-to-Own
Businesses, the closing of certain non-performing rent-to-own stores, and
reorganization of certain administrative support functions aggregating
approximately $12.3 million, and approximately $2.1 million related
primarily to Rent-A-Center's writedown of cellular phone inventory.
(15) Weighted average common shares outstanding for both basic and diluted
earnings per share were decreased by 990,099 to give pro forma effect of
the repurchase of $25 million of Renters Choice common stock at $25.25 per
share from Renters
45
<PAGE> 46
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Choice's Chief Executive Officer on August 18, 1998. The quoted market
price of Renters Choice common stock at the close of business on August 17,
1998 was $25.25. The assumed conversion of the redeemable convertible
preferred stock would have had an anti-dilutive effect on diluted earnings
per share for the year ended December 31, 1997, and therefore has been
excluded from the computation thereof.
(16) In calculating the ratio of earnings to fixed charges, earnings consist of
earnings before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of deferred financing costs) whether expensed or capitalized
and one-fourth of rental expense, deemed representative of that portion of
rental expense estimated to be attributable to interest.
46
<PAGE> 47
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
RENTERS CHOICE RENTERS CHOICE
AND CENTRAL AND CENTRAL
RENTS CENTRAL RENTS RENTS RENT-A-CENTER
HISTORICAL PRO FORMA PRO FORMA HISTORICAL
COMBINED(1) ADJUSTMENTS COMBINED PRE-ACQUISITION(17)
-------------- ------------- -------------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues
Store
Rentals and fees................... $439,486 $ -- $439,486 $505,246
Merchandise sales.................. 26,583 -- 26,583 42,981
Other.............................. 2,094 -- 2,094 --
Franchise
Merchandise sales.................. 28,440 -- 28,440 --
Royalty income and fees............ 3,777 -- 3,777 1,372
-------- -------- -------- --------
Total revenues.................. 500,380 -- 500,380 549,599
Operating expenses
Direct store expenses
Depreciation of rental
merchandise....................... 102,804 -- 102,804 146,712
Cost of merchandise sold........... 18,574 -- 18,574 33,731
Salaries and other expenses........ 238,577 24,598(4) 263,175 --
Franchise cost of merchandise sold.... 27,318 -- 27,318 --
General and administrative expenses... 45,899 (25,681)(4) 20,218 316,845
Indemnified litigation expenses....... -- -- -- 5,600
Nonrecurring charges(14).............. -- -- -- 10,877
Amortization of intangibles........... 7,874 947(6) 8,821 13,780
-------- -------- -------- --------
Total operating expenses........ 441,046 (136) 440,910 527,545
Operating profit................ 59,334 136 59,470 22,054
Interest expense...................... 31,608 (5,221)(7) 26,387 30,349
Interest income....................... (1,932) -- (1,932) --
-------- -------- -------- --------
Earnings before income taxes.... 29,658 5,357 35,015 (8,295)
Income tax expense.................... 13,914 2,142(10) 16,056 2,238
-------- -------- -------- --------
Net earnings.................... 15,744 3,215 18,959 (10,533)
Preferred dividends................... 1,496 -- 1,496 --
-------- -------- -------- --------
Net earnings allocable to common
stockholders.................. $ 14,248 $ 3,215 $ 17,463 $(10,533)
======== ======== ======== ========
Basic earnings per share(15):
Earnings per share................... $ 0.73
========
Weighted average common shares
outstanding........................ 23,920
========
Diluted earnings per share(15):
Earnings per share................... $ 0.72
========
Weighted average common and common
equivalent shares outstanding...... 24,152
========
Ratio of earnings to fixed
charges(16).......................... 2.1x
========
<CAPTION>
RENT-A-CENTER PRO FORMA
ADJUSTMENTS
--------------------------
ELIMINATION
OF NON-
RENT-TO-OWN ACQUISITIONS OFFERING COMBINED
BUSINESSES ACQUISITION PRO FORMA ADJUSTMENTS PRO FORMA
----------- ----------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues
Store
Rentals and fees................... $ (4,725)(2) $ (1,631)(3) $ 938,376 $ -- $ 938,376
Merchandise sales.................. (16,042)(2) -- 53,522 -- 53,522
Other.............................. -- -- 2,094 -- 2,094
Franchise
Merchandise sales.................. -- -- 28,440 -- 28,440
Royalty income and fees............ -- -- 5,149 -- 5,149
-------- --------- ---------- ----- ----------
Total revenues.................. (20,767) (1,631) 1,027,581 -- 1,027,581
Operating expenses
Direct store expenses
Depreciation of rental
merchandise....................... -- (1,631)(3) 247,885 -- 247,885
Cost of merchandise sold........... (15,986)(2) -- 36,319 -- 36,319
Salaries and other expenses........ -- 268,823(3) 531,998 -- 531,998
Franchise cost of merchandise sold.... -- -- 27,318 -- 27,318
General and administrative expenses... (8,165)(2) (278,973)(3) 49,925 -- 49,925
Indemnified litigation expenses....... -- (5,600)(5) -- -- --
Nonrecurring charges(14).............. (5,277)(2) -- 5,600 -- 5,600
Amortization of intangibles........... -- (2,080)(6) 20,521 -- 20,521
-------- --------- ---------- ----- ----------
Total operating expenses........ (29,428) (19,461) 919,566 -- 919,566
Operating profit................ 8,661 17,830 108,015 -- 108,015
Interest expense...................... -- 11,084(8) 67,820 (389)(9) 67,431
Interest income....................... -- -- (1,932) -- (1,932)
-------- --------- ---------- ----- ----------
Earnings before income taxes.... 8,661 6,746 42,127 389 42,516
Income tax expense.................... -- 4,234(11) 22,528 156(12) 22,684
-------- --------- ---------- ----- ----------
Net earnings.................... 8,661 2,512 19,599 233 19,832
Preferred dividends................... -- 6,166(13) 7,662 -- 7,662
-------- --------- ---------- ----- ----------
Net earnings allocable to common
stockholders.................. $ 8,661 $ (3,654) $ 11,937 $ 233 $ 12,170
======== ========= ========== ===== ==========
Basic earnings per share(15):
Earnings per share................... $ 0.50 $ 0.51
========== ==========
Weighted average common shares
outstanding........................ 23,920 23,920
========== ==========
Diluted earnings per share(15):
Earnings per share................... $ 0.49 $ 0.50
========== ==========
Weighted average common and common
equivalent shares outstanding...... 24,152 24,152
========== ==========
Ratio of earnings to fixed
charges(16).......................... 1.5x 1.5x
========== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma combined Statement of Operations
47
<PAGE> 48
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) The following historical combined statement of operations of Renters Choice
and Central Rents for the nine months ended September 30, 1998 has been
derived from the unaudited financial statements of the respective entities:
<TABLE>
<CAPTION>
RENTERS CHOICE
AND
PLUS CENTRAL CENTRAL RENTS
RENTERS RENTS PRE HISTORICAL
CHOICE(A) ACQUISITION(B) COMBINED
--------- -------------- --------------
<S> <C> <C> <C>
Revenues
Store
Rentals and fees........................................ $400,793 $38,693 $439,486
Merchandise sales....................................... 24,329 2,254 26,583
Other................................................... 2,094 -- 2,094
Franchise
Merchandise sales....................................... 28,440 -- 28,440
Royalty income and fees................................. 3,777 -- 3,777
-------- ------- --------
Total revenues...................................... 459,433 40,947 500,380
Operating expenses
Direct store expenses
Depreciation of rental merchandise...................... 91,382 11,422 102,804
Cost of merchandise sold................................ 16,600 1,974 18,574
Salaries and other expenses............................. 238,577 -- 238,577
Franchise cost of merchandise sold........................ 27,318 -- 27,318
General and administrative expenses....................... 18,054 27,845 45,899
Amortization of intangibles............................... 7,767 107 7,874
-------- ------- --------
Total operating expenses............................ 399,698 41,348 441,046
Operating profit.................................... 59,735 (401) 59,334
Interest expense............................................ 23,486 8,122 31,608
Interest income............................................. (1,932) -- (1,932)
-------- ------- --------
Earnings before income taxes........................ 38,181 (8,523) 29,658
Income tax expense (benefit)................................ 17,153 (3,239) 13,914
-------- ------- --------
Net earnings........................................ 21,028 (5,284) 15,744
Preferred dividends......................................... 1,496 -- 1,496
-------- ------- --------
Earnings allocable to common stockholders........... $ 19,532 $(5,284) $ 14,248
======== ======= ========
Basic earnings per share:
Earnings per share........................................ $ 0.79
========
Weighted average common shares outstanding................ 24,910
========
Diluted earnings per share:
Earnings per share........................................ $ 0.78
========
Weighted average common shares outstanding................ 27,034
========
</TABLE>
48
<PAGE> 49
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT
OF OPERATIONS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------
(a) The Renters Choice information above has been taken from its Form 10-Q
for the nine months ended September 30, 1998. Included within this
information is the operations of Rent-A-Center for the period (August
5, 1998 through September 30, 1998) following the acquisition by
Renters Choice.
(b) The Central Rents information above reflects their operations for the
period (January 1, 1998 through May 28, 1998) prior to the acquisition
by Renters Choice.
(2) Reflects the elimination of Rent-A-Center's Non-Rent-to-Own Businesses,
including used automobiles retailing, credit retailing and check cashing
businesses, which had combined total revenues of $20.8 million. These
operations, which are accounted for as separate divisions by Rent-A-Center,
were exited by Renters Choice shortly after the acquisition. Nonrecurring
charges are discussed in Note (14).
<TABLE>
<CAPTION>
(3) Increase (decrease)
-------------------------------------------------------
STORE
EXPENSES
RENTALS DEPRECIATION SALARIES GENERAL AND
AND FEES OF RENTAL AND OTHER ADMINISTRATIVE
REVENUE MERCHANDISE EXPENSES EXPENSES
-------- ------------ --------- --------------
<S> <C> <C> <C> <C>
Reclassification of
Rent-A-Center store expenses
to conform with Renters
Choice's presentation....... $ -- $ -- $275,991 $(275,991)
Reclassification Rent-A-Center
volume and cash discounts
from purchases to conform
with Renters Choice's
presentation................ (1,631) (1,631) -- --
Reclassification of
Rent-A-Center advertising
rebates as a reduction in
store expenses to conform
with Renters Choice's
presentation................ -- -- (4,851) 4,851
Elimination of income related
to a rebate of management
fees from Thorn plc......... -- -- -- 2,900
Elimination of duplicate
corporate overhead and
regional management
expenses:(a)
Corporate overhead
Salaries and benefits.... -- -- -- (10,150)
Administrative
expenses............... -- -- -- (583)
Regional management
expenses................. -- -- (1,458) --
Adjustment to depreciation
expense(b):.............. -- -- (859) --
------- ------- -------- ---------
$(1,631) $(1,631) $268,823 $(278,973)
======= ======= ======== =========
</TABLE>
49
<PAGE> 50
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT
OF OPERATIONS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------
(a) Represents approximately seven months of estimated cost savings
relating to the acquisition of Rent-A-Center, which reflects the
approximate period that Rent-A-Center historical operations are
included within the accompanying Unaudited Pro Forma Combined Statement
of Operations.
(b) Adjustment to reduce depreciation expense, representing the difference
between historical depreciation for property assets acquired in the
Rent-A-Center acquisition and depreciation computed based on the
allocated purchase price of such assets. The adjustment was calculated
for transportation equipment, furniture and equipment, and leasehold
improvements on a straight-line basis over their useful lives of four
to six years.
<TABLE>
<S> <C>
Pro forma depreciation expense......................... $ 17,720
Less historical depreciation expense................... (18,579)
--------
Depreciation expense adjustment........................ $ (859)
========
</TABLE>
<TABLE>
<CAPTION>
INCREASE (DECREASE)
(4) --------------------------
STORE
EXPENSES GENERAL AND
SALARIES ADMINISTRATIVE
AND OTHER EXPENSES
--------- --------------
<S> <C> <C>
Reclassification of Central Rents' other store
expenses to conform with Renters Choice's
presentation..................................... $24,514 $(24,514)
Elimination of duplicate corporate overhead and
additional field expenses as a result of the
Central Rents acquisition........................ 84 (1,167)
------- --------
$24,598 $(25,681)
======= ========
</TABLE>
(5) Elimination of litigation expense relating to Minnesota and Pennsylvania
class action litigation indemnified by seller as part of the acquisition of
Rent-A-Center.
(6) Reversal of historical intangible amortization and recording of the pro
forma intangible amortization required as a result of the acquisition of
Central Rents and the acquisition of Rent-A-Center, using estimated useful
lives of 5 years for the
50
<PAGE> 51
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT
OF OPERATIONS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
noncompete agreements, and 30 years for excess costs over fair market value
of net assets acquired:
<TABLE>
<CAPTION>
CENTRAL
RENTS RENT-A-CENTER
------- -------------
<S> <C> <C>
Reversal of historical intangible amortization
recorded by respective entities.................... $ (107) $(13,780)
Reversal of historical intangible amortization
relating to the acquisition of Central Rents and
Rent-A-Center recorded by Renters Choice from the
acquisition date through September 30, 1998........ (809) (2,488)
Pro forma intangible amortization for nine months.... 1,863 14,188
------ --------
$ 947 $ (2,080)
====== ========
</TABLE>
<TABLE>
<S> <C> <C>
(7) Change in interest expense for nine months as a result of
borrowings on the existing revolving credit agreement used
to finance the acquisition of Central Rents:
$ 5,324
Borrowings of $101.4 million at 7%, for nine months, on the
existing revolving credit agreement used to finance the
acquisition of Central Rents..............................
(8,122)
Elimination of historical interest expense for Central Rents
prior to the acquisition by Renters Choice................
(2,423)
Elimination of historical interest expense recorded by
Renters Choice from the acquisition date through September
30, 1998, relating to the acquisition of Central Rents....
-------
$(5,221)
=======
</TABLE>
(8) Net adjustment to interest expense for nine months as a result of the
issuance of debt to complete the acquisition of Rent-A-Center:
<TABLE>
<S> <C>
Senior credit facilities:
$120 million Term Loan A at an annual interest rate of
7.625%................................................. $ 6,863
$270 million Term Loan B at an annual interest rate of
7.875%................................................. 15,947
$330 million Term Loan C at an annual interest rate of
8.125%................................................. 20,109
Annual commitment fee of 0.50% applied to the $120 million
unused balance of the Revolving Credit Facility........ 450
Annual 2.50% fee applied to the Letter of Credit
Facility............................................... 2,292
$175 million Senior Subordinated Facility at an annual
interest rate of 11.625%.................................. 15,258
--------
Cash interest expense....................................... 60,919
</TABLE>
51
<PAGE> 52
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT
OF OPERATIONS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
Amortization of deferred financing costs(a)................. 6,792
--------
Pro forma interest expense for the acquisitions............. 67,711
Interest expense relating to existing Renters Choice debt
not refinanced............................................ 109
--------
Pre-Offering pro forma interest expense..................... 67,820
Less: Renters Choice and Central Rents pro forma combined
interest expense plus Rent-A-Center historical interest
expense................................................... (56,736)
--------
Pre-Offering net interest expense adjustment................ $ 11,084
========
</TABLE>
- -------------------------
(a) Deferred financing costs are amortized over the term of the related
debt (ten years for the Senior Subordinated Facility, six years for the
Term Loan A, seven and one-half years for Term Loan B, eight and
one-half years for Term Loan C, and six years for both the Revolving
Credit and Letter of Credit Facilities). Includes $5,017 of financing
costs expensed in Renters Choice's third quarter relating to interim
financing utilized in the acquisition of Rent-A-Center until permanent
financing was obtained.
A change of 0.125% in annual interest rates would result in a $.8 million
change in pro forma interest expense for the nine months ended September
30, 1998.
(9) Net adjustments to interest expense for nine months as a result of the
Offering:
<TABLE>
<S> <C>
Issuance of Senior Subordinated Notes due 2008 -- $175
million at 11.0%.......................................... $ 14,437
Amortization of related deferred financing costs............ 432
Repayment of Senior Subordinated Facility -- $175 million at
11.625%................................................... (15,258)
--------
$ (389)
========
</TABLE>
(10) Income tax expense adjustment related to the effects of the Central Rents
pro forma adjustments at a 40% effective tax rate.
(11) Income tax expense adjustment related to the effects of the pro forma
adjustments based upon an assumed composite income tax rate of 40% applied
to combined pro forma earnings before income taxes, adjusted for
nondeductible goodwill amortization of $14.2 million related to the
acquisition of Rent-A-Center.
(12) Income tax expense adjustment related to the effects of the Offering
adjustments, at a 40% effective tax rate.
(13) Nine months of in-kind dividends at 3.75% per annum on the $260 million of
redeemable convertible preferred stock issued to finance a portion of the
acquisition of Rent-A-Center. For the first five years subsequent to
issuance, Renters Choice has the option to pay the quarterly dividends in
cash or in-kind with the issuance of additional redeemable convertible
preferred stock. Renters Choice's ability to pay the
52
<PAGE> 53
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT
OF OPERATIONS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
dividends in cash will be subject to restrictions under the Senior Credit
Facilities and Senior Subordinated Notes. Dividends reflected herein are assumed
to be paid in-kind with the issuance of additional redeemable convertible
preferred stock.
<TABLE>
<S> <C>
Pro forma in-kind dividends for nine months ended September
30, 1998.................................................. $ 7,662
Less: historical preferred dividends recorded by Renters
Choice post acquisition................................... (1,496)
-------
Pro forma preferred dividend adjustment..................... $ 6,166
=======
</TABLE>
(14) Nonrecurring charges relate to Rent-A-Center's discontinued Non-Rent-to-Own
businesses, the closing of certain non-performing Rent-to-Own stores, and
reorganization of certain administrative support functions aggregating
approximately $9.8 million and approximately $1.1 million related primarily
to Rent-A-Center's writedown of cellular phone inventory.
(15) Weighted average common shares outstanding for both basic and diluted
earnings per share were decreased by 990,099 to give pro forma effect of
the repurchase of $25 million of Renters Choice common stock at $25.25 per
share from Renters Choice's Chief Executive Officer on August 18, 1998. The
quoted market price of Renters Choice common stock at the close of business
on August 17, 1998 was $25.25. The assumed conversion of the redeemable
convertible preferred stock would have had an anti-dilutive effect on
diluted earnings per share for the nine months ended September 30, 1998, on
a pro forma basis, and therefore has been excluded from the calculation
thereof.
(16) In calculating the ratio of earnings to fixed charges, earnings consist of
earnings before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of deferred financing costs) whether expensed or capitalized
and one-fourth of rental expense, deemed representative of that portion of
rental expense estimated to be attributable to interest.
(17) The Rent-A-Center pre-acquisition information reflects their operations for
the period from January 1, 1998 to August 4, 1998. This information was
derived from Rent-A-Center's internal financial statements. In order to
prepare a statement of operations for the aforementioned period, the
results for the quarter ended March 31, 1998 were combined with the results
for the period from April 1, 1998 to August 4, 1998.
53
<PAGE> 54
RENTERS CHOICE, INC.
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data for Renters Choice as of and for each of
the five years in the period ended December 31, 1997, have been derived from
Renters Choice's consolidated financial statements which have been audited and
reported upon by Grant Thornton LLP. The selected historical financial data for
Renters Choice as of and for the nine months ended September 30, 1997 and 1998
have been derived from Renters Choice's unaudited consolidated financial
statements which were prepared on the same basis as Renters Choice's audited
financial statements and include, in the opinion of Renters Choice's management,
all adjustments necessary to present fairly the information presented for such
interim periods. This information should be read in conjunction with Renters
Choice's audited consolidated financial statements and notes thereto included
herein, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and other financial information included elsewhere in this
prospectus. Because of the significant growth of Renters Choice from
acquisitions, the historical results of operations, its period-to-period
comparisons of such results and certain financial data may not be comparable,
meaningful or indicative of future results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- ---------------------
1993(1) 1994(1) 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
Total revenue.................. $53,212 $74,385 $133,289 $237,965 $331,541 $239,253 $ 459,433
Direct store expenses
Depreciation of rental
merchandise.................. 11,626 15,614 29,640 42,978 57,223 42,271 91,382
Other store expenses......... 29,576 40,701 74,966 124,934 173,823 127,694 255,177
------- ------- -------- -------- -------- -------- ----------
41,202 56,315 104,606 167,912 231,046 169,965 346,559
Franchise operating
expense(2)................... -- -- -- 24,010 35,841 22,929 27,318
General and administrative
expenses..................... 2,151 2,809 5,766 10,111 13,304 9,597 18,054
Amortization of intangibles.... 5,304 6,022 3,109 4,891 5,412 4,016 7,767
------- ------- -------- -------- -------- -------- ----------
Total operating
expenses............. 48,657 65,146 113,481 206,924 285,603 206,507 399,698
------- ------- -------- -------- -------- -------- ----------
Operating profit....... 4,555 9,239 19,808 31,041 45,938 32,746 59,735
Interest expense............... 1,817 2,160 2,202 606 2,194 1,402 18,469
Nonrecurring financing
costs(8)..................... -- -- -- -- -- -- 5,017
Interest income................ -- -- (890) (667) (304) (256) (1,932)
------- ------- -------- -------- -------- -------- ----------
Earnings before income
taxes................ 2,738 7,079 18,496 31,102 44,048 31,600 38,181
Income tax expense............. 937 1,600 7,784 13,076 18,170 13,108 17,153
------- ------- -------- -------- -------- -------- ----------
Net earnings........... 1,801 5,479 10,712 18,026 25,878 18,492 21,028
Preferred dividends............ -- -- -- -- -- -- 1,496
------- ------- -------- -------- -------- -------- ----------
Net earnings allocable
to common
stockholders......... $ 1,801 $ 5,479 $ 10,712 $ 18,026 $ 25,878 $ 18,492 $ 19,532
======== ======== ======== ======== ==========
Basic earnings per share....... $ .52 $ .73 $ 1.04 $ .74 $ .79
======== ======== ======== ======== ==========
Diluted earnings per share..... $ .52 $ .72 $ 1.03 $ .74 $ .78
======== ======== ======== ======== ==========
</TABLE>
54
<PAGE> 55
RENTERS CHOICE, INC.
SELECTED HISTORICAL FINANCIAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- ---------------------
1993(1) 1994(1) 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Depreciation and
amortization(3).............. $ 6,164 $ 7,207 $ 5,239 $ 8,571 $ 11,013 $ 8,002 $ 18,306
Capital expenditures(4)........ 1,489 1,715 3,473 8,187 10,446 7,636 9,732
Ratio of earnings to fixed
charges(5)................... 2.1x 3.2x 5.1x 7.9x 6.7x 7.8x 2.7x
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents...... $ 1,359 $ 1,441 $ 35,321 $ 5,920 $ 4,744 $ 6,280 $ 90,483
Rental merchandise, net........ 20,672 28,096 64,240 95,110 112,759 109,696 481,981
Total assets................... 34,813 36,959 147,294 174,467 208,868 206,385 1,646,813
Total debt..................... 27,592 23,383 40,850 18,993 27,172 33,652 892,912
Total stockholders' equity..... 4,168 9,286 96,484 125,503 152,753 144,742 148,879
OPERATING DATA:
Number of stores (end of
period)...................... 112 114 325 423 504 503 2,125
Average annual revenue per
store(6)..................... $ 591 $ 653 $ 626 $ 608 $ 610 $ 611 $ 600
Comparable store revenue
growth(7).................... 11.1% 10.8% 18.1% 3.8% 8.1% 9.0% 8.7%
Revenues:
Store revenue
Rentals and fees........... $51,162 $70,590 $126,264 $198,486 $275,344 $200,970 $ 400,793
Merchandise sales.......... 1,678 3,470 6,383 10,604 14,125 10,774 24,329
Other...................... 372 325 642 687 679 525 2,094
Franchise revenue
Merchandise sales.......... -- -- -- 25,229 37,385 23,971 28,440
Royalty income and fees.... -- -- -- 2,959 4,008 3,013 3,777
------- ------- -------- -------- -------- -------- ----------
Total revenue.......... $53,212 $74,385 $133,289 $237,965 $331,541 $239,253 $ 459,433
======= ======= ======== ======== ======== ======== ==========
</TABLE>
55
<PAGE> 56
NOTES TO SELECTED HISTORICAL FINANCIAL DATA OF RENTERS CHOICE, INC.
(1) In each of the periods presented ending prior to January 1, 1995, we
operated as an S corporation under Subchapter S of the Internal Revenue Code
and comparable provisions of certain state tax laws. Accordingly, prior to
January 1, 1995, we were not subject to federal income taxation. Earnings
per share are not provided for periods prior to January 1, 1995, because
operating results for those periods are not comparable.
(2) Prior to our acquisition of ColorTyme in May 1996, we conducted no franchise
operations. Therefore, we presented franchise operation financial
information for periods beginning with the year ended December 31, 1996.
(3) This amount excludes depreciation of rental merchandise.
(4) We exclude purchase of rental merchandise.
(5) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of deferred financing costs) whether expensed or capitalized
and one-fourth of rental expense, which we deem representative of that
portion of rental expense estimated to be attributable to interest.
(6) We annualized the revenues for the nine months ended September 30, 1997 and
1998.
(7) Comparable store revenue growth for each period presented includes revenues
only of stores open throughout the full period and the comparable prior
period.
(8) Nonrecurring finance charges for the nine months ended September 30, 1998,
relate principally to interim financing utilized in the acquisition of
Rent-A-Center until permanent financing was obtained. These finance charges
include an availability fee of 1.25% and a utilization fee of 1.5% that were
levied upon a $175 million bridge loan that was utilized for approximately
two weeks before being repaid.
56
<PAGE> 57
RENT-A-CENTER
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data for Rent-A-Center as of and for each of
the three years in the period ended March 31, 1998, have been derived from
Rent-A-Center's audited consolidated financial statements. The selected
historical financial data for Rent-A-Center as of and for the three months ended
June 30, 1997 and 1998 have been derived from Rent-A-Center's unaudited
consolidated financial statements which were prepared on the same basis as
Rent-A-Center's audited financial statements and include, in the opinion of
Rent-A-Center's management, all adjustments necessary to present fairly the
information presented for such interim periods. This information should be read
in conjunction with the consolidated financial statements of Rent-A-Center and
notes thereto included herein, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the other financial
information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
------------------------------------ -----------------------
1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:(1)
Total revenue.............. $ 897,927 $ 926,871 $ 904,004 $ 225,641 $ 235,421
Cost of sales.............. 43,345 39,793 45,574 8,524 12,503
Depreciation and
amortization
Rental merchandise....... 257,383 260,433 244,572 62,852 62,886
Other.................... 52,236 59,085 56,869 14,598 14,532
Salaries, wages and fringe
benefits................. 255,768 272,242 279,796 68,488 72,960
Other operating expenses... 202,577 233,015 207,460 50,654 52,653
Nonrecurring charges(2).... 12,600 -- 14,392 -- --
---------- ---------- ---------- ---------- ----------
Total operating
expenses........ 823,909 864,568 848,663 205,116 215,534
---------- ---------- ---------- ---------- ----------
Operating
profit.......... 74,018 62,303 55,341 20,525 19,887
Interest expense, net...... 80,207 52,651 46,184 10,825 11,191
Other (income) expense..... 101 (254) (88) (81) 72
---------- ---------- ---------- ---------- ----------
Earnings (loss)
before income
taxes........... (6,290) 9,906 9,245 9,781 8,624
Income tax expense......... 6,771 13,880 7,760 5,950 5,344
---------- ---------- ---------- ---------- ----------
Net earnings (loss)........ $ (13,061) $ (3,974) $ 1,485 $ 3,831 $ 3,280
========== ========== ========== ========== ==========
RENT-TO-OWN FINANCIAL
DATA:(3)
Depreciation and
amortization(4).......... $ 52,236 $ 59,085 $ 56,464 $ 14,541 $ 14,387
Capital expenditures(5).... 44,642 29,906 33,187 6,574 16,887
</TABLE>
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RENT-A-CENTER
SELECTED HISTORICAL FINANCIAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31, JUNE 30,
------------------------------------ -----------------------
1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash
equivalents.............. $ 19,225 $ 26,077 $ 23,755 $ 37,399 $ 27,486
Rental merchandise, net.... 304,164 276,012 292,965 268,564 303,682
Total assets............... 1,242,211 1,108,280 1,079,109 1,086,784 1,085,796
Total debt................. 1,042,729 714,235 714,223 714,827 714,663
Total stockholder's
equity................... 88,529 239,026 236,483 242,857 239,763
RENT-TO-OWN OPERATING DATA:
Number of stores (end of
period).................. 1,306 1,367 1,384 1,392 1,404
Average annual revenue per
store(6)................. $ 744 $ 694 $ 639 $ 648 $ 653
Revenues:
Store revenue
Rentals and fees....... $ 827,935 $ 864,256 $ 831,025 $ 212,256 $ 217,616
Merchandise sales...... 64,628 60,249 46,337 10,636 9,296
Franchise royalty
income................. 5,364 2,366 2,266 582 560
---------- ---------- ---------- ---------- ----------
Total rent-to-own
revenue......... $ 897,927 $ 926,871 $ 879,628 $ 223,474 $ 227,472
Non-Rent-to-Own
revenue................ -- -- 24,376 2,167 7,949
---------- ---------- ---------- ---------- ----------
Total Revenue..... $ 897,927 $ 926,871 $ 904,004 $ 225,641 $ 235,421
========== ========== ========== ========== ==========
</TABLE>
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NOTES TO SELECTED HISTORICAL FINANCIAL DATA OF RENT-A-CENTER
(1) As part of the acquisition of Rent-A-Center, we acquired several
Non-Rent-to-Own Businesses including used automobile retailing, credit
retailing and check cashing businesses which began generating revenues in
fiscal 1998. We sold AdvantEDGE Auto, Inc. in August 1998 for $4.0 million
and are in the process of discontinuing the remaining Non-Rent-to-Own
Businesses.
(2) Nonrecurring charges in 1996 relate to the consolidation of corporate and
field offices and reductions in the number of employees. In 1998,
nonrecurring charges represents (i) approximately $12.3 million in charges
related to discontinued Non-Rent-to-Own Businesses, closure of certain
nonperforming rent-to-own stores and reorganized administrative support
functions, and (ii) approximately $2.1 million related primarily to
Rent-A-Center's writedown of cellular phone inventory.
(3) The rent-to-own financial data and certain operating data represents
Rent-A-Center's historical financial results, excluding the operations of
the Non-Rent-to-Own Businesses, which are accounted for as separate
divisions.
(4) We excluded depreciation of rental merchandise.
(5) We excluded purchases of rental merchandise.
(6) Our revenues for the three months ended June 30, 1997 and 1998 have been
annualized.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations of Renters
Choice for the period ending September 30, 1998 reflects the consummation of the
acquisition of Rent-A-Center by Renters Choice, the issuance by Renters Choice
of the Convertible Preferred Stock, the offering of the notes and the repurchase
of $25 million of Renters Choice's Stock (together, the "Transactions"), all of
which occurred during the third quarter of 1998. However, the discussion and
analysis of the periods ending prior to September 30, 1998 do not reflect the
significant impact of the Transactions on the operations and financial results
of Renters Choice. See "Risk Factors," "Unaudited Pro Forma Combined Financial
Information" and "-- Liquidity and Capital Resources of Renters Choice" for
further discussion relating to the impact on Renters Choice. The following
discussion should be read in conjunction with "Selected Historical Financial
Information -- Renters Choice," "Rent-A-Center Selected Historical Financial
Information" and the Financial Statements, including the notes thereto,
incorporated by reference herein.
GENERAL
Renters Choice is the largest operator in the United States rent-to-own industry
with approximately 25% market share (based on store count). In June 1998,
Renters Choice entered into an agreement to acquire Rent-A-Center, Inc. (f/k/a
Thorn Americas, Inc.) with Thorn plc, a UK-based company, to purchase
Rent-A-Center, an indirect wholly-owned subsidiary of Thorn plc (the
"Rent-A-Center Acquisition"). Proceeds from the Senior Credit Facilities, Senior
Subordinated Facility and the sale of the Convertible Preferred Stock were used
to fund the Rent-A-Center Acquisition, refinance Renters Choice's
pre-Acquisition indebtedness and repurchase $25 million of Renters Choice's
common stock held by J. Ernest Talley. Renters Choice's stores offer home
electronics, appliances, and furniture and accessories under flexible rental
purchase agreements that allow its customers to obtain ownership of the
merchandise at the conclusion of the agreed upon rental period.
Renters Choice has developed a plan to integrate the operations of Rent-A-Center
with Renters Choice's business practices. The main initiatives of this
integration plan are to (i) eliminate duplicative general and administrative
expenses, (ii) eliminate Rent-A-Center's distribution network, (iii) implement
Renters Choice's management practices into Rent-A-Center's stores, (iv) increase
the number of higher margin products available for rent while eliminating lower
margin products, and (v) divest non-core assets. Renters Choice believes its
integration plan will be fully implemented within 18-24 months and will yield
net annual cost savings of $30 million. In addition to the anticipated net cost
savings from its implementation plan, Renters Choice anticipates additional
improvement in sales and profitability as a direct result of the investment
Renters Choice intends to make in Rent-A-Center's stores.
As part of the Rent-A-Center Acquisition, Renters Choice acquired certain of the
Non-Rent-to-Own Businesses which began generating revenues in fiscal 1998.
Renters Choice is in the process of discontinuing the operations of the
Non-Rent-to-Own Businesses. For the fiscal year ended March 31, 1998, the
Non-Rent-to-Own Businesses generated revenue of $20.2 million and a net loss
before income taxes of $5.2 million. Subsequent to the
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Rent-A-Center Acquisition, Renters Choice sold all of the outstanding stock of
AdvantEDGE Auto, Inc., a Non-Rent-to-Own Business, for approximately $4.0
million.
Since 1993, Renters Choice's store count has grown from 27 to 2,127 through
acquisitions and new store openings. In May 1998, Renters Choice completed the
acquisition of Central Rents, Inc. (the "Central Acquisition"), acquiring
substantially all of the assets of an underperforming rent-to-own operator which
expanded Renters Choice's presence in a region of the country, the Southwest,
which Renters Choice had strategically targeted for expansion. Renters Choice
expects to generate annual general and administrative cost savings as a result
of the Central Acquisition of $2.6 million. These cost savings will be derived
primarily from the closing of Central Rents' corporate headquarters and the
elimination of duplicative corporate and administrative functions. In addition
to these general and administrative cost reductions, Renters Choice anticipates
that it will gradually bring the store operating performance of Central Rents in
line with its own store margins within 24-30 months.
Renters Choice operates on a December 31 fiscal year end. Rent-A-Center's
historical results of operations, which were based upon a March 31 fiscal year
end, have not been restated to a December 31 year end for the purpose of any pro
forma financial presentation of Renters Choice's historical operations.
COMPONENTS OF INCOME
Revenue. Renters Choice collects nonrefundable rental payments and fees in
advance, generally on a weekly or monthly basis. This revenue is recognized when
collected. Rental purchase agreements generally include a discounted early
purchase option. Amounts received upon sales of merchandise pursuant to such
options, and upon the sale of used merchandise, are recognized as revenue when
the merchandise is sold.
Franchise Revenue. Revenue from the sale of rental equipment is recognized upon
shipment of the equipment to the franchisee. Franchise fee revenue is recognized
upon completion of substantially all services and satisfaction of all material
conditions required under the terms of the franchise agreement.
Depreciation of Rental Merchandise. Except for tax purposes, Renters Choice
depreciates its rental merchandise using the income forecasting method. The
income forecasting method of depreciation does not consider salvage value and
does not allow the depreciation of rental merchandise during periods when it is
not generating rental revenue. For periods prior to 1996, Renters Choice used
the income forecasting method to calculate depreciation of its rental
merchandise for tax purposes. However, in 1996, Renters Choice began using the
MACRS method of depreciation using a five-year class life for its rental
purchase merchandise. In August 1997, the Internal Revenue Service issued a
revenue ruling requiring rental purchase companies to use MACRS, with a three
year class life for all purchases after August 5, 1997. Renters Choice began
application of the ruling for all purchases effective August 5, 1997, and
thereafter.
Cost of Merchandise Sold. Cost of merchandise sold represents the book value net
of accumulated depreciation of rental merchandise at time of sale.
Salaries and Other Expenses. Salaries and other expenses include all salaries
and wages paid to store level employees and regional management salaries, travel
and occupancy,
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<PAGE> 62
including any related benefits and taxes, as well as all store level general and
administrative expenses and selling, advertising, occupancy, nonrental
depreciation and other operating expenses.
General and Administrative Expenses. General and administrative expenses include
all corporate overhead expenses related to Renters Choice's headquarters such as
salaries, taxes and benefits, occupancy, administrative and other operating
expenses, as well as Regional Vice Presidents' salaries, travel and office
expenses.
RESULTS OF OPERATIONS -- RENTERS CHOICE
The following table sets forth, for the periods indicated, certain historical
Statement of Earnings data as a percentage of total revenue from stores and
total revenue from franchise operations.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEARS ENDED ENDED YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
--------------------- ------------- -------------------- -------------
1995 1996 1997 1997 1998 1995 1996 1997 1997 1998
----- ----- ----- ----- ----- ---- ----- ----- ----- -----
(COMPANY OWNED STORES ONLY) (FRANCHISE OPERATIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Rentals and fees..... 94.7% 94.7% 94.9% 94.7% 94.2% --% --% --% --% --%
Merchandise Sales.... 4.8 5.0 4.9 5.1 5.4 -- 89.6 90.3 88.8 88.3
Other/Royalties...... 0.5 0.3 0.2 0.2 0.4 -- 10.4 9.7 11.2 11.7
----- ----- ----- ----- ----- -- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% --% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== == ===== ===== ===== =====
Operating Expenses
Direct store expenses
Depreciation of
rental
merchandise...... 22.2% 20.5% 19.7% 20.0% 21.4% --% --% --% --% --%
Cost of merchandise
sold............. 3.8 3.9 3.9 3.9 3.9 -- 85.0 86.6 85.0 84.8
Salaries and other
expenses......... 52.5 55.6 56.0 56.2 56.1 -- -- -- -- --
----- ----- ----- ----- ----- -- ----- ----- ----- -----
78.5 80.0 79.6 80.1 81.4 -- 85.0 86.6 85.0 84.8
General and
administrative
expenses........... 4.3 3.8 3.8 3.6 5.0 -- 7.7 5.3 6.3 6.0
Amortization of
intangibles........ 2.3 2.3 1.7 1.7 1.7 -- 0.6 1.0 1.2 0.8
----- ----- ----- ----- ----- -- ----- ----- ----- -----
Total operating
expenses..... 85.1 86.1 85.1 85.4 88.1 -- 93.3 92.9 92.5 91.6
----- ----- ----- ----- ----- -- ----- ----- ----- -----
Operating profit....... 14.9 13.9 14.9 14.6 11.9 -- 6.7 7.1 7.5 8.4
Interest expense/
(income)............. 1.0 0.1 0.8 0.9 3.9 -- (1.9) (0.6) (1.7) (0.8)
----- ----- ----- ----- ----- -- ----- ----- ----- -----
Earnings before income
taxes................ 13.9% 13.8% 14.1% 13.7% 8.0% --% 8.6% 7.7% 9.2% 9.2%
===== ===== ===== ===== ===== == ===== ===== ===== =====
</TABLE>
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Renters Choice has increased the number of stores owned from 27 at the beginning
of 1993 to 2,127 at November 30, 1998. The following table shows the number of
stores opened, acquired and closed during 1993 through 1998.
<TABLE>
<CAPTION>
RENTERS CHOICE
-----------------------------------------------------------------
BEGINNING
FISCAL YEAR ENDED OF PERIOD NEW STORE STORE STORE END OF PERIOD
DECEMBER 31, STORE COUNT OPENINGS ACQUISITIONS CLOSINGS STORE COUNT
----------------- ----------- --------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
1993.................. 27 1 84 -- 112
1994.................. 112 2 -- -- 114
1995.................. 114 4 209 (2) 325
1996.................. 325 13 94 (9) 423
1997.................. 423 10 76 (5) 504
1998(1)............... 504 1 1,633 (11) 2,127
</TABLE>
- -------------------------
(1) Through November 30, 1998.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Total revenue increased by $220.1 million, or 92.0%, to $459.4 million for 1998
from $239.3 million for 1997. The increase in total revenue was primarily
attributable to the Rent-A-Center Acquisition and the Central Acquisition. Same
store revenues increased by $17.1 million, or 8.7% to $214.0 million for 1998
from $196.9 million in 1997. Same store revenues represent those revenues earned
in stores that were operated by Renters Choice for the entire nine-month periods
ending September 30, 1998 and 1997. This improvement was primarily attributable
to an increase in both the number of items on rent and in revenue earned per
item on rent.
Depreciation of rental merchandise increased by $49.1 million, or 116.2%, to
$91.4 million for 1998 from $42.3 million for 1997. Depreciation of rental
merchandise expressed as a percent of total store rental and fee revenue
increased from 21.0% in 1997 to 22.8% in 1998. The increase was primarily
attributable to the Central Acquisition and the Rent-A-Center Acquisition, as
these companies were experiencing depreciation rates of 22.9% and 29.8%
respectively. Renters Choice is in the process of implementing its pricing
strategy and inventory management practices in the stores acquired pursuant to
the Rent-A-Center Acquisition and the Central Acquisition.
Salaries and other expenses expressed as a percentage of total store revenue
decreased to 55.8% for 1998 from 56.2% for 1997. This decrease is attributable
to the increase in store revenues from the Rent-A-Center Acquisition and the
Central Acquisition, as well as the same store base, and Renters Choice has
experienced some efficiencies in spreading costs over a larger store base, in
particular advertising costs and certain service costs. General and
administrative expenses expressed as a percent of total revenue decreased from
4.0% in 1997 to 3.9% in 1998. This decrease was the result of increased revenues
from the Central Acquisition as well as the Rent-A-Center Acquisition, allowing
Renters Choice to leverage its fixed and semi-fixed costs over the larger
revenue base.
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Operating profit, including non-recurring charges of $2.5 million in 1998 to
effect a name change of the Renters Choice stores to Rent-A-Center, increased by
$27.0 million, or 82.4%, to $59.7 million for 1998 from $32.7 million for 1997.
This improvement was primarily attributable to an increase in both the number of
items on rent and in revenue earned per item on rent, both in stores acquired
before 1995 and in stores acquired in the 1996 and 1997 Acquisitions offset by
the non-recurring charges. Net interest expense increased from $1.1 million of
interest expense in 1997 to $16.5 million of interest expense in 1998. The
increased interest expense and debt level relates primarily to the financing
associated with Central Acquisition in May 1998 and the Rent-A-Center
Acquisition in August 1998. Net earnings for the period were also impacted
negatively by non-recurring financing cost of $5.0 million associated with the
interim financing utilized in the Rent-A-Center Acquisition until permanent
financing was obtained. Net earnings increased by $2.5 million, or 13.7%, to
$21.0 million in 1998 from $18.5 million in 1997. The improvement was a result
of the increase in operating profit described above.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Between January 1, 1997 and December 31, 1997 Renters Choice acquired 76 stores
(five of which were subsequently consolidated with existing locations) in 18
separate transactions. The 1997 acquisitions were accounted for as purchases,
and accordingly, the operating results of the acquired operations have been
included in the results of operations of Renters Choice since the respective
dates of acquisition. Primarily as a result of the 1997 Acquisitions,
comparisons of Renters Choice's operating results for 1997 and 1996 may not be
meaningful or indicative of future results.
Revenues. Total revenue increased by $93.5 million, or 39.3%, to $331.5 million
for 1997 from $238.0 million for 1996. Store revenues increased $80.3 million,
or 38.3% to $290.1 million in 1997 from $209.8 million in 1996. The increase in
store revenue was primarily due to the inclusion of 76 stores acquired in 1997
and the full year impact of the 94 stores acquired in 1996. Store revenues also
increased as a result of the increase in same store revenue growth of 8.1%. Same
store revenues increased due to an increase in both the number of items on rent
and in revenue earned per item on rent. Franchise revenues increased $13.2
million, or 46.9% to $41.4 million from $28.2 million in 1996. This increase was
primarily due to the inclusion of the franchise operations for an entire year in
1997, compared to only eight months in 1996.
Depreciation of rental merchandise. Depreciation of rental merchandise increased
$14.2 million, or 33.0%, to $57.2 million for 1997 from $43.0 million for 1996.
Depreciation of rental merchandise as a percent of total store revenue decreased
to 19.7% for 1997 from 20.5% for 1996. The decrease in depreciation of rental
merchandise as a percent of revenue was primarily attributable to higher rental
rates on rental merchandise.
Salaries and other expenses. Salaries and other expenses as a percentage of
store revenue increased to 56.0% for 1997 from 55.6% for 1996. This increase was
primarily attributable to the increase in salaries for employees and other
expenses of the acquired stores immediately following the acquisitions.
Occupancy costs also increased as a percent of total store revenue due to the
relocation of certain stores acquired in 1996 and 1997 to locations that are
larger in square footage. Generally, revenue from these stores increased
gradually while the additional payroll and occupancy costs were incurred
immediately. The average
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square footage per store was approximately 4,150 at December 31, 1996 as
compared to 4,290 for 1997.
General and administrative expenses. General and administrative expenses
expressed as a percentage of total revenue decreased to 4.0% for 1997 from 4.2%
for 1996. Expressed as a percentage of store revenue only, general and
administrative expenses, exclusive of expenses relative to ColorTyme, were 3.8%
in both 1997 and 1996. Franchise general and administrative expenses as a
percentage of franchise revenue totaled 5.3% in 1997, down significantly from
7.7% in 1996. This decrease was primarily attributable to streamlining efforts
as overhead reductions were implemented in 1996 and 1997.
Operating profit. Operating profit increased by $14.9 million, or 48.1%, to
$45.9 million for 1997 from $31.0 million for 1996.
Net earnings. Net earnings increased by $7.9 million, or 43.9%, to $25.9 million
in 1997 from $18.0 million in 1996. The improvement was primarily attributable
to the increase in operating profit described above.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
In May 1996, Renters Choice completed the acquisition of ColorTyme, and between
May 1996 and December 1996, Renters Choice acquired a total of 94 additional
stores. The 1996 acquisitions were accounted for as purchases, and accordingly,
the operating results of the acquired operations have been included in the
results of operations of Renters Choice since the respective dates of
acquisition. Primarily as a result of the 1996 Acquisitions on Renters Choice's
results of operations, comparisons of Renters Choice's operating results for
1996 and 1995 may not be meaningful or indicative of future results.
Total revenues. Total revenue increased by $104.7 million, or 78.5%, to $238.0
million for 1996 from $133.3 million for 1995. Store revenues increased $76.5
million, 57.4% to $209.8 million in 1996 from $133.3 million in 1995. The
increase in store revenue was primarily due to the inclusion of stores acquired
in 1996 and the full year impact of the stores acquired in 1995. Store revenues
also increased as a result of the increase in same store revenue growth of 3.8%.
Some store revenues increased primarily due to an increase in both the number of
items on rent and in revenue per rental. Franchise revenue was $28.2 million in
1996.
Depreciation of rental merchandise. Depreciation of rental merchandise increased
by $13.4 million, or 45.3%, to $43.0 million for 1996 from $29.6 million for
1995. Depreciation of rental merchandise as a percent of total store revenue
decreased to 20.5% for 1996 from 22.2% for 1995. The decrease in depreciation of
rental merchandise as a percent of revenue was primarily attributable to higher
rental rates on rental merchandise.
Salaries and other expenses. Salaries and other expenses as a percentage of
store revenue increased to 55.6% for 1996 from 52.5% for 1995. This increase is
primarily attributable to the increase in salaries for employees and other
expenses of the acquired stores immediately following the acquisitions while
store revenue has increased gradually. Additionally, Renters Choice increased
its advertising efforts during 1996 in the markets related to the stores
acquired in 1996. Occupancy costs also increased as a percent of total
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<PAGE> 66
store revenue due to the relocation of certain stores acquired in 1996 to stores
that are larger in square footage. Revenue from these stores increased gradually
while the additional occupancy costs are incurred immediately. The average
square footage per store was approximately 3,800 at December 31, 1995 compared
to 4,150 at December 31, 1996.
General and administrative expenses. General and administrative expenses
expressed as a percentage of total revenue decreased to 4.2% for 1996 from 4.3%
for 1995. This relatively small decrease was primarily attributable to the
leveraging of corporate overhead expenses over a larger store and revenue base
offset by franchise general and administrative expenses incurred in 1996 for the
first year of operations. Franchise general and administrative expenses as a
percentage of franchise revenue totaled 7.7% in 1996. This increase was offset
by the decrease in corporate overhead for store operations in 1996, which
declined to 3.8% of store revenue in 1996 compared to 4.3% in 1995.
Operating profit. Operating profit increased by $11.2 million, or 56.6%, to
$31.0 million for 1996 from $19.8 million for 1995.
Net earnings. Net earnings increased by $7.3 million, or 68.2%, to $18.0 million
for 1996 from $10.7 million for 1995. The improvement was primarily attributable
to the increase in operating profit described above, as well as a reduction in
interest expense from 1995.
LIQUIDITY AND CAPITAL RESOURCES
Renters Choice's primary liquidity requirements are for debt service under its
senior credit facilities (the "Senior Credit Facilities"), the notes, other
indebtedness outstanding, working capital and capital expenditures. As of
September 30, 1998, Renters Choice's consolidated indebtedness was approximately
$892.9 million, consisting primarily of $716.9 million of the Senior Credit
Facilities (including the Senior Revolving Credit Facility of $1.2 million, but
excluding outstanding letters of credit under the Letter of Credit/Multidraw
Facility), $175.0 million of the notes and $1.0 million of other debt. In
addition, Renters Choice raised $260 million through the sale of the Convertible
Preferred Stock. During the nine months ended September 30, 1998, Renters Choice
acquired 1,632 stores for an aggregate purchase price of approximately $1.0
billion. Renters Choice also opened 1 new store during the first three quarters
of 1998.
Renters Choice purchased $120.1 million and $62.0 million of rental merchandise
during the nine months ended September 30, 1998 and 1997, respectively.
For the nine months ended September 30, 1998, cash provided (used) by operating
activities decreased by $53.5 million, from $21.6 million in 1997 to ($31.9)
million in 1998, primarily due to payments on liabilities assumed in the
Rent-A-Center Acquisition. Cash used in investing activities increased by $918.1
million from $36.7 million in 1997 to $954.8 million in 1998, principally
related to the greater number of stores acquired in 1998 as compared to the
number of stores acquired during the same period for 1997. Cash provided by
financing activities was $1,072.4 million for the nine months ended September
30, 1998.
At September 30, 1998, Renters Choice had in place a $962 million Senior Credit
Facility. Borrowings under the Senior Credit Facility bore interest at a rate
equal to 0.25% to 1.75% over the designated prime rate (8.5% per annum at
September 30, 1998) or 1.25% to 2.75% over LIBOR (5.375% at September 30, 1998)
at Renters Choice's option. At
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September 30, 1998, the average rate on outstanding borrowings was 8.2%. For the
quarter, the weighted average interest rate under the Senior Credit Facility was
8.4%. During the quarter, Renters Choice entered into certain interest rate
protection agreements (the "Interest Rate Agreements") with two banks. Under the
terms of the Interest Rate Agreements, the LIBOR rate used to calculate the
interest rate charged on $500 million of the outstanding senior term debt has
been fixed at an average rate of 5.59%. These Interest Rate Agreements have
terms of three and five years. Borrowings were collateralized by a lien on
substantially all of the assets of the Company. A commitment fee equal to .25%
to .50% of the unused portion of the term loan facility was payable quarterly.
The Senior Credit Facility included certain net worth and fixed charge coverage
requirements, as well as covenants which restrict additional indebtedness and
the disposition of assets not in the ordinary course of business. On September
30, 1998, the outstanding borrowings under the Senior Credit Facility were
$716.9 million.
Principal and interest payments under the Senior Credit Facilities and the notes
will represent significant liquidity requirements for Renters Choice. Under the
Term Loans, Renters Choice will be required to make principal payments totaling
approximately $2.0 million in 1999, $14.0 million in 2000, $22.0 million in
2001, $26.0 million in 2002, and $30.0 million in 2003. Loans under the Senior
Credit Facilities will bear interest at floating rates based upon the interest
rate option selected by Renters Choice. Under the terms of the Senior Credit
Facilities, Renters Choice is required to purchase and maintain interest rate
protection with respect to 50% of the Term Loans for 3 years. During September
1998, Renters Choice entered into a three-year interest rate swap for $250
million and a five-year interest rate swap for $250 million. These swaps fixed
the interest rate plus the applicable spread for the applicable periods. The
blended interest rate for the swaps is 5.59%. See "Description of Other
Indebtedness."
During the quarter ended September 30, 1998, Renters Choice issued $175 million
of Senior Subordinated Notes in a private placement transaction under Rule 144A
(the "Note Issuance"). The proceeds from the Note Issuance were used to retire a
$175 million senior subordinated credit facility entered into in conjunction
with the Senior Credit Facility.
In connection with the integration plan for Rent-A-Center, Renters Choice
expects to incur $45.0 million of nonrecurring cash costs within 24 months
following the Rent-A-Center Acquisition.
Capital expenditures are generally to maintain existing operations and for the
acquisition and opening of stores. Renters Choice expects to spend approximately
$26.4 million in 1998 and $24.8 million in 1999 on capital expenditures, all of
which are to maintain existing operations. Furthermore, Renters Choice purchases
new property and equipment in connection with a store acquisition or new store
opening.
During the next twelve to twenty-four months, Renters Choice's central business
strategy is to successfully integrate the Rent-A-Center Acquisition and the
Central Acquisition into the Renters Choice system. Once completed, Renters
Choice intends to resume its strategy to increase its store base and annual
revenues and profits through the opening of new stores, as well as opportunistic
acquisitions. Renters Choice anticipates ample opportunities to increase its
store base through its continued participation in the industry consolidation and
the possibility for increased penetration and expansion of its existing customer
base.
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After the assimilation of the Rent-A-Center Acquisition and the Central
Acquisition, Renters Choice plans to accomplish its future growth through
selective and opportunistic acquisitions, with an increasing emphasis on new
store development. Typically, a newly opened rental store is profitable on a
monthly basis in the sixth to seventh month after its initial opening.
Historically, a typical store has achieved break-even profitability in twelve to
fifteen months after its initial opening. Total financing requirements of a
typical new store approximates $350,000, with roughly 80% to 85% of that amount
relating to the purchase of rental merchandise inventory (both on-rent and
idle). A newly opened store historically has achieved results consistent with
other Renters Choice mature stores (stores that have been operating within the
system for greater than two years) by the end of its third year of operation.
There can be no assurance that Renters Choice will be able to acquire any
additional stores, or that any stores that are acquired will be or will become
profitable, nor is there any assurance that Renters Choice will open any new
stores in the future, or as to the number, location or profitability thereof.
Renters Choice believes that cash flow from operations together with amounts
available under the Senior Credit Facilities (including the Revolving Credit
Facility and Letter of Credit/Multidraw Facility therein) will be sufficient to
fund its debt service requirements, working capital needs, capital expenditures
and litigation exposure during 1998 and 1999. The Revolving Credit Facility
provides Renters Choice with revolving loans in an aggregate principal amount
not exceeding $120.0 million and the Letter of Credit/ Multidraw Facility will
provide Renters Choice with an additional $122.25 million of financing to
support certain litigation assumed in connection with the Rent-A-Center
acquisition. Based upon its extensive review and analysis of such litigation and
its potential exposure thereon, Renters Choice believes it will have sufficient
funds available to pay any litigation expenses related to such litigation. In
addition, once the letter of credit is terminated, the Letter of
Credit/Multidraw Facility will convert to a $85 million term loan.
In addition, to provide any additional funds necessary for the continued pursuit
of Renters Choice's growth strategies, Renters Choice may incur from time to
time additional short or long-term bank indebtedness and may issue, in public or
private transactions, equity and debt securities. The availability and
attractiveness of any outside sources of financing will depend on a number of
factors, some of which will relate to the financial condition and performance of
Renters Choice, and some of which will be beyond Renters Choice's control, such
as prevailing interest rates and general economic conditions. There can be no
assurance such additional financing will be available, or if available, will be
on terms acceptable to Renters Choice.
YEAR 2000
Year 2000 issues exist when dates are recorded on computers using two digits
(rather than four) and are then used for arithmetic operations, comparisons or
sorting. A two digit recording may recognize a date using "00" as 1900, rather
than 2000, which could cause computer systems to perform inaccurate computations
or shut down. Many of the world's computer systems currently record years in a
two-digit format. Such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to disruptions in computer
operations.
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Renters Choice is currently in the process of evaluating its operations and the
potential problems that could occur with respect to the Year 2000. Renters
Choice plans to complete the identification and replacement of any vulnerable
systems during 1999. Certain areas in its operations have been identified and
preparations for the Year 2000 have begun with respect to the following areas:
- Management Information System. Renters Choice's primary information
technology system controls all of its computer operations in its
rent-to-own stores and in the home office. Renters Choice has received
written assurance from the software vendor for its system that the system
is Year 2000 compliant, which means that it is equipped to interpret
dates beyond the year 1999. As part of the integration plan, this same
system is currently being integrated into the retail outlets and
operations of Rent-A-Center. In addition, Renters Choice has engaged
external resources to complete an independent review of its information
systems with respect to Year 2000 readiness. Renters Choice anticipates
that this review will be completed during the first quarter of 1999.
- Major Suppliers. Renters Choice utilizes many suppliers and no single
supplier is material to the operations of Renters Choice. As a result,
Renters Choice has the ability to obtain merchandise for its stores from
many different vendors. In the event any one of its vendors has a Year
2000 problem, sufficient additional sources exist which Renters Choice
should be able to utilize. However, with respect to Renters Choice's
existing vendors, Renters Choice is currently requesting written
assurance from such vendors to determine whether they are Year 2000
compliant.
- Other Systems. Renters Choice uses certain on-site non-information
technology systems that may be Year 2000 sensitive. Renters Choice is
currently in the process of identifying these systems and, once these
systems have been fully identified, Renters Choice will determine, with
the help of outside vendors, whether these systems are Year 2000
compliant. Potential non-information technology systems include:
- alarms,
- elevators,
- irrigation systems,
- thermostats, and
- utility meters and switches.
Renters Choice will utilize both internal and external resources to test and
replace its systems for Year 2000 compliance. Renters Choice anticipates
completing this process during 1999. However, there can be no guarantee that the
systems of other companies on which Renters Choice may rely will be timely
converted and will not have an adverse effect on our operations.
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Contingency Plans. Renters Choice will evaluate the need for a contingency plan
in 1999 as it progresses through its Year 2000 conversion.
INFLATION
During the years ended December 31, 1997, 1996 and 1995, the cost of rental
merchandise, lease expense and salaries and wages have increased modestly. The
increases have not had a significant effect on Renters Choice's results of
operations because Renters Choice has been able to charge proportionally higher
rental rates for its merchandise.
RESULTS OF OPERATIONS -- RENT-A-CENTER
The following table sets forth, for the periods indicated, certain historical
Statement of Operations data as a percentage of total revenue.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
----------------------- --------------
1996 1997 1998 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue
Rent-to-own revenue................. 100.0% 100.0% 97.3% 99.0% 96.6%
Non-rent-to-own revenue............. -- -- 2.7 1.0 3.4
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Operating Expenses
Depreciation of rental
merchandise...................... 28.7% 28.1% 27.0% 27.9% 26.7%
Amortization of intangibles......... 2.1 2.5 2.7 2.7 2.5
Cost of merchandise sold............ 4.8 4.3 5.0 3.8 5.3
Salaries, wages and fringe
benefits......................... 28.5 29.4 31.0 30.4 31.0
Other............................... 26.3 29.0 26.8 26.1 26.1
Restructuring charges............... 1.4 -- 1.4 -- --
----- ----- ----- ----- -----
Total operating expenses.... 91.8 93.3 93.9 90.9 91.6
Operating profit...................... 8.2 6.7 6.1 9.1 8.4
Interest expense/(income)............. 8.9 5.6 5.1 4.8 4.7
----- ----- ----- ----- -----
Earnings (loss) before income taxes... (0.7)% 1.1% 1.0% 4.3% 3.7%
===== ===== ===== ===== =====
</TABLE>
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Rent-A-Center increased its owned stores from 1,006 at fiscal year end 1993 to
1,384 at fiscal year end 1998. The following table sets forth the number of
stores, opened, acquired and closed from 1994 through 1998.
<TABLE>
<CAPTION>
RENT-A-CENTER
----------------------------------------------------------------
FISCAL YEAR BEGINNING OF END OF
ENDED PERIOD STORE NEW STORE STORE STORE PERIOD
MARCH 31, COUNT OPENINGS ACQUISITIONS CLOSINGS STORE COUNT
----------- ------------ --------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C>
1994................... 1,006 54 27 (10) 1,077
1995................... 1,077 32 12 (12) 1,109
1996................... 1,109 12 200 (15) 1,306
1997................... 1,306 19 64 (22) 1,367
1998................... 1,367 34 25 (42) 1,384(1)
</TABLE>
- -------------------------
(1) As of March 31, 1998, Rent-A-Center increased its store count by 25 to
1,409, the number of stores acquired by Renters Choice pursuant to the
acquisition of Rent-A-Center.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Total revenue. Total revenues were $235.4 million for 1998 compared to $225.6
million for 1997, an increase of 4.3% or $9.8 million. The increase in revenues
was primarily attributable to an increase in the total rental agreements
outstanding, partially offset by a reduction in the average price charged per
rental agreement. The increase in the total rental agreements outstanding was
primarily the result of increases in the number of store locations, combined
with increases in agreements outstanding in existing stores resulting from
certain advertising promotions. Rent-A-Center ended the quarter ending June 30,
1998 with 1,404 store locations, up from 1,392 at June 30, 1997. The increase in
the number of stores since June 30, 1997 was partially offset by the impact of
the closing of 42 stores in the fourth quarter of fiscal 1998. The decrease in
the average price charged per rental agreement was principally due to a shift in
product mix toward less expensive items such as cellular phones and pagers, as
well as promotional pricing programs.
Depreciation of rental merchandise. Depreciation of rental merchandise was
approximately the same in terms of dollars for both periods, $62.9 million for
1998 and 1997. Depreciation of rental merchandise as a percent of revenues
decreased to 26.7% for 1998 and from 27.9% in 1997. This decrease is primarily
due to selected price increases in recent months on certain core products and an
increasing emphasis on overall gross margin management.
Salaries, wages and fringe benefits. Salaries, wages and fringe benefits
increased 6.6%, or $4.5 million, to $72.0 million for 1998 from $68.5 million
for 1997. This increase was primarily related to the increase in the number of
stores and rental agreements for fiscal 1998 as these salaries and wages were
largely consistent with the number of rental contracts and stores.
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Other operating expenses. Other operating expenses increased 4.0%, or $2.0
million, to $52.7 million for 1998 from $50.7 million for 1997. The increase was
generally consistent with the revenue increase of 4.3% discussed above.
Net income. Net income decreased by $.5 million, to $3.3 million for 1998 from
$3.8 million in 1997.
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1998 AND FISCAL YEAR ENDED MARCH 31,
1997
Total revenue. Total revenues were $904.0 million for fiscal 1998 compared to
$926.9 million for fiscal 1997, a decrease of 2.5% or $22.9 million. Total
rent-to-own revenues decreased by 5.1%, or $47.3 million, to $879.6 million for
fiscal 1998 from $926.9 million for fiscal 1997. Rent-to-own revenues are
comprised of two principal components, rental revenues and other revenues.
Rental revenues declined by 4.9%, or $37.8 million, from $764.0 million for
fiscal 1997 to $726.2 million for fiscal 1998. The decline in rental revenues is
primarily attributable to a reduction in the average price charged per rental
agreement offset by an increase in total rental agreements outstanding. The
reduction in the average price charged per rental agreement is principally due
to a shift in product mix toward less expensive items such as cellular phones
and pagers, as well as a promotional pricing program. The increase in the total
rental agreements outstanding is primarily the result of promotional activities
and an increase in the average number of stores open during the year. During the
fiscal year, Rent-A-Center acquired and opened a total of 59 stores, but this
was offset by the closing of 42 stores in the fourth quarter of fiscal 1998.
Other revenues decreased slightly to $153.4 million for fiscal 1998 versus
$162.9 million for fiscal 1997. This decrease was primarily attributable to
decreased sales of used merchandise for fiscal 1998 due to stronger business
conditions and less build-up of excess idle inventory resulting from a better
product mix of the volume of merchandise rented. This decrease was offset by
increases in ancillary service fees and revenues associated with the rental of
merchandise to commercial business. Ancillary services include the sale of
product protection plans, cellular phones and pager airtime. The introduction of
the Value Club program by Rent-A-Center for fiscal 1998, in particular,
contributed positively to Other Revenues. The Value Club program provides
customers loss damage waiver protection, extended service contracts, and other
miscellaneous benefits such as dental savings, grocery coupons, discounts on
auto service, entertainment discounts and emergency auto assistance. The balance
of total revenues in 1998 of $24.4 million is due to Non-Rent-to-Own Businesses
($20.2 million) including used car retailing, credit retailing and check cashing
kiosks and conforming adjustments ($4.2 million). Non-Rent-to-Own Businesses had
no revenues in 1997.
Depreciation of rental merchandise. Depreciation of rental merchandise decreased
by $15.8 million, or 6.1%, to $244.6 million for fiscal 1998 from $260.4 million
for fiscal 1997. Depreciation of rental merchandise as a percent of rent-to-own
revenues decreased to 27.8% for 1998 and from 28.1% for 1997. This decrease was
primarily due to results from the change in product mix discussed above and a
reduction in the average quantity and cost of idle inventory held as available
for rent in the stores. This reduction in idle inventory was largely due to the
implementation of a new jewelry strategy in October 1997, which used alloy-based
prototypes rather than actual jewelry for display in the stores.
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Salaries, wages and fringe benefits. Salaries, wages and fringe benefits
increased 2.8%, or $7.6 million, to $279.8 million for fiscal 1998 from $272.2
million for fiscal 1997. This increase was primarily attributable to the
increase in number of rental agreements for fiscal 1998 as these salaries and
wages are largely consistent with the number of rental contracts.
Other operating expenses. Other operating expenses decreased 18.0%, or $25.9
million, to $117.6 million for fiscal 1998 from $143.5 million for fiscal 1997.
The decrease was primarily a result of the impact of the field reorganization
that occurred at the end of fiscal 1997. As part of the reorganization, field
divisional offices were closed and consolidated into the corporate office. In
addition, for fiscal 1998 Rent-A-Center eliminated store managers' meetings
resulting in savings of $2.0 million.
Restructuring charges. Restructuring charges were $12.3 million for fiscal 1998,
while fiscal 1997 had none. The restructuring charges related to the
discontinuation of certain new concepts, certain nonperforming rental purchase
stores and the reorganization of certain administrative support functions.
Operating income. Operating income decreased by $7.0 million, or 11.2%, to $55.3
million for fiscal 1998 from $62.3 million for fiscal 1997. This decrease was
primarily attributable to the reasons stated above.
Net income. Net income increased by $5.5 million, or 137.5%, to $1.5 million for
fiscal 1998 from a net loss of $4.0 million the fiscal 1997.
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1997 AND FISCAL YEAR ENDED MARCH 31,
1996
In August 1995, Rent-A-Center completed the U-Can-Rent acquisition, and in
January 1996, Rent-A-Center completed the Advantage, Inc. acquisition. The
financial results of these stores are included in Rent-A-Center's fiscal 1996
results from the dates of the respective acquisitions.
Total revenue. Total revenues were $926.9 million for fiscal 1997 compared to
$897.9 million for fiscal 1996, an increase of $28.9 million, or 3.2%.
Non-Rent-to-Own Businesses had no revenues in 1997 and 1996. Rent-to-own
revenues are comprised of two principal components, rental revenue and other
revenue. Rental revenue increased 2.7%, or $19.9 million, during fiscal 1997 to
$764.0 million from $744.1 million for fiscal 1996. The increase was primarily
attributable to two acquisitions made during fiscal 1996. The increase in rental
revenue experienced in fiscal 1997 as a result of these acquisitions was offset
by soft results experienced by, Rent-A-Center overall., Rent-A-Center's net
portfolio of agreements outstanding during fiscal 1997 declined by 55,400
primarily due to a disappointing holiday season. Other revenue increased 5.9%,
or $9.1 million, during fiscal 1997 to $162.9 million from $153.8 million for
fiscal 1996. The increase was primarily attributable to the impact of,
Rent-A-Center's acquisitions made during fiscal 1996, as discussed above, as
well as the increase in revenues associated with, Rent-A-Center's commercial
rental business, which commenced operation in August 1995. In addition, during
fiscal 1997, Rent-A-Center experienced a substantial increase in customer
participation in its Value Club program which was introduced in fiscal 1996.
Restructuring charges. Restructuring charges were $12.6 million for fiscal 1996
while fiscal 1997 had none. The restructuring charges related to the
consolidation of offices and
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reductions in the number of employees. These charges were primarily made up of
employee separation costs.
Depreciation of rental merchandise. Depreciation of rental merchandise increased
by $3.1 million, or 1.2%, to $260.4 million for fiscal 1997 from $257.4 million
for fiscal 1996. Depreciation of rental merchandise as a percent of rent-to-own
revenues decreased to 28.1% for fiscal 1997 from 28.7% for fiscal 1996. This
increase was primarily attributable to the result of the 1996 acquisitions and
the associated increase in rental merchandise held as available for rent in the
stores.
Salaries, wages and fringe benefits. Salaries, wages and fringe benefits
increased 6.4% or $16.5 million, to $272.2 million for fiscal 1997 from $255.8
million for fiscal 1996. This increase was primarily attributable to the impact
of the 1996 acquisitions and a reduction in average revenue per store for fiscal
1997 compared to fiscal 1996.
Other operating expenses. Other operating expenses increased $27.2 million, or
23.4%, to $143.5 million for fiscal 1997 from $116.3 million for fiscal 1996.
Operating income. Operating income decreased by $11.7 million, or 15.8%, to
$62.3 million for fiscal 1997 from $74.0 million for fiscal 1996. This decrease
was primarily attributable to the reasons stated above.
Net loss. The net loss decreased by $9.1 million, or 69.5% to a loss of $4.0
million for fiscal 1997 from a loss of $13.1 million for fiscal 1996.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES -- RENT-A-CENTER
RAC's primary capital requirements were the acquisition of existing stores, the
opening of new stores, the purchase of additional rental merchandise and the
purchase of replacement rental merchandise.
Capital spent on the purchase of new rental merchandise in 1998 was $306.8
million compared to $289.5 million and $299.7 million in 1997 and 1996,
respectively. The cost of depreciation of rental merchandise was $244.6 million,
$260.4 million and $257.4 million in 1998, 1997 and 1996, respectively.
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The following table sets forth (A) the number of stores acquired, (B) the cash
consideration paid for such stores, and (C) capital expenditures for the 1998,
1997 and 1996 fiscal years:
<TABLE>
<CAPTION>
($MILLIONS)
------------------------
1996 1997 1998
------ ----- -----
<S> <C> <C> <C>
Number of stores acquired..................... 200 64 25
Cash consideration for acquired stores........ $124.6 $21.1 $ 7.6
Capital expenditures for property and
equipment:
Transportation equipment.................... $ 19.3 $10.9 $ 8.0
Computer furniture and equipment............ 8.8 3.8 5.5
Leasehold improvements...................... 4.4 12.5 12.1
Store fixtures and equipment................ 4.2 4.9 11.5
Buildings................................... 7.3 -- --
Other....................................... 0.6 0.2 1.0
------ ----- -----
Total............................... $ 44.6 $32.3 $38.1
====== ===== =====
</TABLE>
QUARTERLY RESULTS -- RENTERS CHOICE
The following table contains certain unaudited historical financial information
for the quarters indicated.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nine months ended September 30,
1998(1)
Revenue........................ $90,233 $103,313 $265,886 n/a
Operating profit............... 13,721 15,547 30,467 n/a
Year ended December 31, 1997(2)
Revenue........................ $74,587 $ 80,803 $ 83,864 $92,288
Operating profit............... 9,639 11,341 11,766 13,192
Year ended December 31, 1996(3)
Revenue........................ $49,002 $ 57,756 $ 60,025 $71,182
Operating profit............... 6,344 7,558 7,957 9,183
</TABLE>
- -------------------------
(1) During 1998, 5 stores were purchased during the first quarter; 177 stores
were purchased during the second quarter; and 1,450 stores were purchased
during the third quarter. In addition, one store was opened in the first
quarter of 1998.
(2) During 1997, 28 stores were purchased during the first quarter; 39 stores
were purchased during the second quarter; and nine stores were purchased
during the third quarter. Of the 76 stores acquired, five were subsequently
consolidated with existing store locations. In addition, two stores were
opened during the first quarter; two stores were opened during the second
quarter; four stores were opened during the third quarter; and two stores
were opened during the fourth quarter.
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(3) During 1996, 11 stores were purchased during the second quarter, 12 stores
were purchased during the third quarter, and 71 stores were purchased during
the fourth quarter of 1996. In addition, three stores were opened in the
second quarter, four stores were opened in the third quarter, and six stores
were opened in the fourth quarter of 1996.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 addresses the manner in which
certain items included in stockholders equity are displayed in the financial
statements, but does not affect reported assets or net earnings. Renters Choice
adopted SFAS No. 130 effective January 1, 1998.
In 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." See Note A to the consolidated financial
statements of Renters Choice, Inc. and Subsidiaries for further discussion.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for fiscal years beginning after
June 15, 1998. Renters Choice will account for the derivative transactions
required under the terms of the Senior Credit Facilities in accordance with SFAS
No. 133.
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BUSINESS
RENTERS CHOICE
Renters Choice is the largest operator in the rent-to-own industry with
approximately 25% market share (based on the number of stores). As of November
30, 1998, Renters Choice operated 2,127 company-owned stores, and franchised 321
stores, in 50 states, Puerto Rico and the District of Columbia. Renters Choice's
stores offer home electronics, appliances, and furniture and accessories under
flexible rental purchase agreements that allow customers to obtain ownership of
the merchandise at the conclusion of an agreed upon rental period. The Company's
revenue from rentals and fees related to these flexible rental purchase
agreements, expressed as a percentage of total consolidated revenue, was 94.7%,
83.4% and 83.0% for the years ended December 31, 1995, 1996 and 1997,
respectively. The rent-to-own industry appeals to a wide variety of consumers by
allowing them to obtain merchandise that they might otherwise be (i) unable to
purchase due to insufficient cash resources or a lack of access to credit, or
(ii) unwilling to purchase due to a temporary, short-term need or desire to
rent.
Rent-A-Center Acquisition. On August 5, 1998, Renters Choice acquired
Rent-A-Center pursuant to an agreement with Thorn plc dated June 16, 1998, for
approximately $900 million in cash (including the repayment of certain debt of
Rent-A-Center), subject to adjustment. Prior to this acquisition, Rent-A-Center
was the largest rent-to-own competitor with 1,404 company-owned stores and 65
franchised stores in 49 states and the District of Columbia. Rent-A-Center
operated stores under three brand names, "Rent-A-Center," "Remco" and
"U-Can-Rent." Rent-A-Center operated 1,158 stores under the Rent-A-Center brand,
the most widely recognized store name in the rent-to-own industry.
Renters Choice financed the acquisition of Rent-A-Center through certain
financing arrangements, consisting of a senior credit facility and a senior
subordinated facility. Renters Choice also issued a total of $260 million in
preferred stock to certain affiliates of Apollo and to an affiliate of Bear
Stearns to assist in the funding of the Rent-A-Center Acquisition, to repurchase
$25 million of our common stock and to repay its prior credit facility.
Following the acquisition of Rent-A-Center, Renters Choice issued the old notes
to repay the senior subordinated facility. In connection with the acquisition of
Rent-A-Center, Renters Choice assumed certain of Rent-A-Center's ongoing
litigation, including an adverse New Jersey state court judgment currently on
appeal. In addition, Thorn plc has agreed to indemnify and hold harmless Renters
Choice and Rent-A-Center from two lawsuits and has deposited $40 million in
escrow with respect to such claims and other indemnification claims Renters
Choice may have against Thorn plc. For additional information, please read the
sections entitled "Risk Factors -- Legal Proceedings" and "-- Legal Proceedings"
located elsewhere in this prospectus.
Prior to the Rent-A-Center Acquisition, Renters Choice was the second largest
competitor in the rent-to-own industry with 680 company-owned stores operating
under the "Renters Choice" brand name in 35 states and Puerto Rico. In addition,
its ColorTyme subsidiary was the largest rent-to-own franchisor in the U.S. with
278 franchised stores in 37 states. Renters Choice's management team has gained
extensive experience in integrating acquisitions and is headed by J. Ernest
Talley, the Chairman and Chief Executive Officer of Renters Choice, who is
generally credited with founding the rent-to-own industry in the
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early 1960's. Since 1993, Renters Choice's store count grew from 27 to 2,127
through acquisitions and new store openings.
RENT-TO-OWN INDUSTRY
Overview. According to APRO, an industry trade association, the rent-to-own
industry generated approximately $4.1 billion in revenue during 1996 through the
rental of roughly 5.8 million products to approximately 3.0 million households.
Renters Choice estimates the rent-to-own target market is greater than 20
million households, principally comprised of households with annual income from
$15,000 to $50,000. Management estimates that the rent-to-own industry is
comprised of approximately 8,300 stores. Although the five largest rent-to-own
companies operate approximately 38.5% of the industry's store base, the industry
is highly fragmented as the majority of rent-to-own competitors operate fewer
than 20 stores. The industry has experienced significant consolidation since
1993, when the five largest rent-to-own companies operated approximately 26.6%
of the industry's store base. The rent-to-own industry is experiencing
consolidation primarily because larger, multi-unit operators have significant
competitive advantages compared to their smaller competitors. Larger operators
enjoy greater purchasing power, which enables them to offer more competitively
priced merchandise and are able to operate more efficiently than smaller
operators in areas such as management information systems, advertising and
purchasing. Many smaller competitors lack the managerial resources necessary to
operate larger rent-to-own operations efficiently across multiple locations.
Management believes that these factors will continue to promote the trend toward
consolidation and present an opportunity for well-capitalized operators to
acquire additional stores on favorable terms.
Rent-to-Own Transaction. The rent-to-own industry provides consumers with: (A) a
means of obtaining merchandise without the burden of incurring debt or
qualifying for credit, (B) the ability to return merchandise at any time without
future obligations, (C) flexible payment terms, (D) delivery, repair and pick-up
service typically at no incremental charge, and (E) the potential for
merchandise ownership after a predetermined number of payments. The types of
products rented by rent-to-own customers include: furniture and accessories,
electronics, appliances, and other items including jewelry, pagers and personal
computers. Customers enter into weekly or monthly rental purchase agreements,
which renew automatically upon receipt of each payment. Rental payments are made
each week in advance generally in cash. Rent-to-own companies retain title to
rental merchandise during the term of the rental purchase agreement. Ownership
of the merchandise typically transfers to the customer if the customer has
continuously renewed the rental purchase agreement for a specified period of
time or exercises a specified early purchase option. On average, however,
ownership requirements are met on less than 25% of items being rented for the
first time. Products are typically rented four to six times over a 24 month
period with the average time on rent to each customer lasting approximately four
months. Virtually all rental items are ultimately rented to ownership in
subsequent rental transactions. The rent-to-own transaction bears an important
distinction to a traditional retail transaction: rent-to-own companies do not
lend to customers or bear the associated credit risk because customers make all
payments in advance. As a result, balance sheets of rent-to-own companies have
very few accounts receivable.
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BUSINESS STRENGTHS
Over the past several years, Renters Choice experienced significant increases in
sales and operating income through acquisitions and internal growth. During this
period, Renters Choice focused on achieving a position as a market-leading
operator of rent-to-own stores. As a result, Renters Choice believes that it
benefits from the following competitive advantages.
Industry Leader. Renters Choice is the largest competitor in the rent-to-own
industry (based on the number of stores) with market share of approximately 25%.
The next largest operator has a market share of less than 5.5%. Renters Choice's
stores currently operate under various brand names including Renters Choice and
Rent-A-Center, the most widely recognized name in the rent-to-own industry.
Renters Choice is currently in the process of converting all of its stores to
the Rent-A-Center brand name. In 1997, Renters Choice and Rent-A-Center together
served over 1 million customers. As the only nationwide rent-to-own competitor,
Renters Choice benefits from (A) greater visibility among consumers, (B)
geographic diversity, (C) increased opportunities to expand into contiguous
markets, (D) certain efficiencies in areas such as advertising, purchasing and
human resources, and (E) the ability to leverage its corporate overhead over a
larger store base.
Consistent Revenue and Strong Cash Flow. In 1997, repeat customers accounted for
approximately 50% of Renters Choice's revenues. Historically, Renters Choice has
not experienced a significant correlation between economic conditions (as
measured by GDP growth) and same store revenue growth. As a result of this loyal
customer base, as well as the Company's resilience to economic cycles, the
Company has been able to generate stable revenue. Through the successful
integration of Rent-A-Center into Renters Choice's operating system, management
expects to substantially increase the profit margins and cash flows at the
combined company. Consistently stable revenue and strong margins (combined with
low levels of maintenance capital expenditures) provide resources that can be
used to fund Renters Choice's growth strategy.
Superior Customer Service. Management believes that providing superior customer
service is a key element for its long-term success. Renters Choice achieves a
high level of customer satisfaction by providing: (A) appealing store
environments, (B) premium quality, durable merchandise, (C) personal customer
service, and (D) experienced, well-trained store personnel. Renters Choice
believes its high level of customer satisfaction allows it to maximize the
number and length of rental agreements per store, leading to customer referrals
and repeat business.
Premium Quality Product Offerings. Renters Choice distinguishes itself from its
competitors by purchasing, marketing, and renting premium name brand products
from manufacturers such as Sony, JVC and Magnavox for home electronics;
La-Z-Boy, Sealy and Ashley for home furnishings and accessories; and Whirlpool,
General Electric and Kenmore for appliances. In addition to satisfying customer
demand, premium products reduce service costs through increased reliability.
Furthermore, Renters Choice has developed strong relationships with its key
vendors, enabling cost effective direct-to-store distribution from its vendors.
Ability to Successfully Integrate Acquisitions. Since 1993, Renters Choice
acquired 2,090 stores, giving management extensive experience in the integration
of diverse rent-to-own operations. Renters Choice's information systems
facilitate acquisition integration by
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providing management with operating and financial information about each store
location and region and every rental purchase transaction. As a result of
management's ability to implement Renters Choice's business practices, operating
performance of the integrated stores has improved significantly. For example, in
1997, store operating margins (before field administration and corporate
overhead) for all of Renters Choice's stores was 23.9%, while its 325 mature
stores (in Renters Choice's system for at least two years) generated store
operating margins of 26.8%. Renters Choice's mature stores primarily consist of
acquired stores. The average store operating margin for Rent-A-Center's stores
for fiscal 1998 was 20.9%.
Experienced and Committed Management Team. Renters Choice has a senior
management team with an average of 17 years of rent-to-own experience. J. Ernest
Talley, Chairman and Chief Executive Officer of Renters Choice, is generally
credited with founding the rent-to-own industry in the early 1960's. Renters
Choice's management team has a significant personal economic interest in Renters
Choice's performance: (A) the senior management group collectively owns
approximately 26.2% of Renters Choice on a fully-diluted basis, and (B) store,
regional and senior manager compensation is tied directly to store revenue
and/or operating profit and such bonuses account for up to 30% of all
compensation. Renters Choice believes that the de-centralized, entrepreneurial
spirit of its field management, together with the guidance provided by senior
management, will continue to be a key factor in its efforts to maximize revenue,
improve margins and expand Renters Choice's store base.
BUSINESS STRATEGY
Renters Choice is focusing its strategic efforts on (A) the implementation of
its integration plan, (B) continued efforts to improve store operations, and (C)
the pursuit of strategic expansion once the integration plan is substantially in
place.
Implement the Integration Plan. Renters Choice management has developed a
comprehensive program for the integration of Rent-A-Center, which it expects
will be completed within 18-24 months. Renters Choice believes it will
experience over $30 million in net annual cash cost savings upon completion of
the integration plan, primarily as a result of eliminating (A) duplicative
general and administrative expenses, and (B) Rent-A-Center's nationwide
distribution network including seven distribution centers. Additional benefit
and margin improvement is expected to be realized over time as management
undertakes initiatives to enhance operations in Rent-A-Center stores. These cost
savings represent less than 2.5% of Renters Choice's latest twelve months
revenues. In addition, Renters Choice is continuing the process of integrating
Central Rents, from which it expects to realize an additional $2.6 million of
annual general and administrative cost savings.
Continue to Enhance Store Operations. Management seeks to improve store
performance through strategies intended to produce gains in operating efficiency
and profitability. Renters Choice believes it will achieve these gains in
revenues and operating margins in its stores by: (A) using focused advertising
to increase store traffic, (B) expanding the offering of upscale, higher margin
products (such as Sony wide screen televisions, La-Z-Boy recliners and JVC
stereo systems) to increase the number of product rentals, (C) employing strict
store-level cost control, and (D) closely monitoring each store's performance
through the use of its management information system to ensure each store's
adherence to established operating guidelines.
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Pursue Strategic Expansion. Management has gained significant experience in the
acquisition and integration of other rent-to-own operators and believes the
fragmented nature of the rent-to-own industry will result in ongoing growth
opportunities. Once the integration plan is substantially in place, Renters
Choice will again focus on strategic acquisition opportunities and new store
development. Renters Choice typically targets underperforming and
undercapitalized chains of rent-to-own stores. The acquired stores benefit from
the administrative network, improved product mix, sophisticated management
information system and purchasing power of the larger organization while
strengthening their local market position. In addition, Renters Choice has
access to an expanding number of franchise locations, which it has the right of
first refusal to purchase. Renters Choice believes the rent-to-own market is
significantly under-penetrated and plans to continue opening new stores in
current and new markets. Renters Choice will focus its new market penetration in
adjacent areas or regions which are underserved by the rent-to-own industry. In
evaluating a new market, Renters Choice reviews demographic statistics, cost of
advertising and the number and nature of competitors.
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STORES
Store sizes range from approximately 1,500 to 8,200 square feet, and average
approximately 3,600 square feet. Approximately 80% of each store's space is
generally used for showroom space and 20% for offices and storage space. As of
November 30, 1998, Renters Choice operated approximately 2,127 Company-owned
stores and franchised approximately 321 stores in 50 states, Puerto Rico and the
District of Columbia, as illustrated by the following table:
<TABLE>
<CAPTION>
NUMBER OF STORES NUMBER OF STORES
------------------- -------------------
COMPANY COMPANY
LOCATION OWNED FRANCHISE LOCATION OWNED FRANCHISE
-------- ------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Alabama.............. 46 -- Nebraska............. 4 --
Alaska............... 1 -- Nevada............... 16 4
Arizona.............. 54 10 New Hampshire........ 15 2
Arkansas............. 23 2 New Jersey........... 40 9
California........... 119 9 New Mexico........... 10 10
Colorado............. 26 3 New York............. 100 19
Connecticut.......... 17 6 North Carolina....... 95 9
Delaware............. 15 1 North Dakota......... 1 --
District of
Columbia........... 4 -- Ohio................. 127 8
Florida.............. 136 8 Oklahoma............. 37 13
Georgia.............. 95 5 Oregon............... 6 4
Hawaii............... 11 1 Pennsylvania......... 76 5
Idaho................ 1 2 Puerto Rico.......... 17 --
Illinois............. 114 -- Rhode Island......... 7 4
Indiana.............. 75 17 South Carolina....... 28 1
Iowa................. 19 -- South Dakota......... 2 --
Kansas............... 28 17 Tennessee............ 78 8
Kentucky............. 42 7 Texas................ 226 60
Louisiana............ 35 4 Utah................. 16 1
Maine................ -- 13 Vermont.............. 6 --
Maryland............. 46 6 Virginia............. 39 1
Massachusetts........ 40 11 Washington........... 27 3
Michigan............. 95 14 West Virginia........ 14 2
Minnesota............ 6 -- Wisconsin............ 29 2
Mississippi.......... 12 10 Wyoming.............. 1 --
----- ---
Missouri............. 49 7
Montana.............. 1 3 Total................ 2,127 321
===== ===
</TABLE>
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Renters Choice has increased its owned stores from 27 at the beginning of 1993
to 2,127 at November 30, 1998 (including the acquisition of 1,409 Rent-A-Center
stores). The following table shows the number of stores opened, acquired and
closed during 1993 through 1998.
<TABLE>
<CAPTION>
RENTERS CHOICE
- ---------------------------------------------------------------------------------------------
END OF
FISCAL YEARS BEGINNING OF NEW PERIOD
ENDED PERIOD STORE STORE STORE STORE
DECEMBER 31, STORE COUNT OPENINGS ACQUISITIONS CLOSINGS(1) COUNT
------------ ------------ -------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C>
1993......................... 27 1 84 -- 112
1994......................... 112 2 -- -- 114
1995......................... 114 4 209 (2) 325
1996......................... 325 13 94 (9) 423
1997......................... 423 10 76 (5) 504
1998(2)...................... 504 1 1,633 (11) 2,127
</TABLE>
- -------------------------
(1) Historically Renters Choice has only closed stores in connection with
acquiring stores.
(2) Through November 30, 1998.
Renters Choice focuses on expansion by making acquisitions and opening new
stores. With respect to store acquisitions, Renters Choice typically targets
underperforming and undercapitalized chains of rent-to-own stores. The acquired
stores benefit from the management expertise, administrative network, improved
product mix, sophisticated management information system and purchasing power of
the larger organization allowing them to strengthen their local market position.
In addition, Renters Choice's information systems facilitate acquisition
integration by providing management with access to operating and financial
information about any store location or region in which Renters Choice operates
and generates management reports on a daily, weekly, month-to-date and year-to-
date basis for each store and every rental purchase transaction.
Store leases typically range from three to five years and contain one to two
renewal options. Before a new site is selected, management reviews demographic
information regarding the median income, housing and other factors that affect
the buying patterns for potential rental purchase customers primarily within a
five mile radius for urban locations and up to 30 miles for rural locations of a
potential site. Store locations are selected based upon management's analysis of
such demographic information, location of competitors, customer traffic for the
site, accessibility and cost. Stores are typically located in or near low to
middle income neighborhoods, usually in strip shopping centers which contain a
large anchor tenant and other suitable tenants. Renters Choice estimates that
the average investment with respect to opening a new store is approximately
$350,000 of which rental merchandise comprises approximately 80% of the
investment. The remaining investment consists of leasehold improvements,
furnishings and fixtures, computer equipment, store signs and start-up costs.
Newly opened stores historically have become profitable after approximately six
months. Management believes that suitable store space is generally available for
lease and that Renters Choice would be able to relocate any of its stores
without significant difficulty should it be unable to renew a particular lease.
Management also expects that additional space will be readily available at
competitive rates in the event Renters Choice desires to open new stores.
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PRODUCT SELECTION
Renters Choice's stores offer merchandise from three basic product categories:
home electronics, appliances and furniture and accessories. Management's policy
is to ensure that its stores maintain sufficient inventory to provide a wide
variety of high quality merchandise to its customers and emphasizes products
from a core group of brand-name manufacturers. Choices of merchandise reflect
management's belief that customers want to rent the same quality of merchandise
that is available from more traditional retailers and that customers are willing
to pay for value and quality. In addition, by focusing on its manufacturers'
premium quality products, Renters Choice seeks to avoid frequent service
problems associated with inferior products. During 1997, home electronic
products accounted for approximately 46%, appliances for 24% and furniture and
accessories for 30% of Renters Choice's store revenue. Management believes the
effect of this product mix and its focus on "higher end" products results in its
favorable profit margin relative to its competitors.
The general product mix in Renters Choice's stores is determined by senior
management, based on an analysis of customer rental patterns and the
introduction of new products on a test basis. Individual store managers are
responsible for determining the particular product selection for their store
from the list of products approved by senior management. Customers may request
either new merchandise or previously rented merchandise. Previously rented
merchandise is offered at the same weekly or monthly rental rate as is offered
for new merchandise, but with an opportunity to obtain ownership of the
merchandise after fewer rental payments. In order to achieve gross margins
consistent with its mature stores, Renters Choice standardizes inventory in each
of its acquired stores.
On average, Rent-A-Center's stores offer approximately 1,000 stock keeping units
("SKUs"), as compared to approximately 100 SKUs offered by the Renters Choice
stores. This greater number of product offerings is achieved in part through the
use of an in-store catalog. Merchandise is offered from the same three basic
product categories: home electronics (40.7% of total Rent-A-Center sales),
appliances (16.6%) and furniture and accessories (27.5%), as well as computers,
pagers, cellular phones and jewelry (15.2%). Historically, Renters Choice has
elected not to rent certain of these merchandise categories, such as pagers,
cellular phones and jewelry. Management believes these products do not produce
enough volume to justify their relatively lower margins. Moreover, with pagers
and cellular phones, revenue is generated primarily from the sale of air time
(which is not a part of Renters Choice's business) rather than from the rental
of the hardware. As part of the integration process, Renters Choice is in the
process of standardizing the inventory in each of the Rent-A-Center stores.
Home Electronics. Home electronic products offered by Renters Choice's stores
include televisions, video cassette recorders and stereos. Renters Choice offers
home electronics merchandise from top brand manufacturers such as Magnavox,
Sony, JVC and Technics, with weekly rental prices in this product category
ranging from approximately $9.99 to $45.99 per item.
Appliances. Renters Choice rents major appliances manufactured by Whirlpool,
General Electric and Kenmore, including refrigerators, washing machines, dryers,
microwave ovens, freezers and ranges, with weekly rental prices in this product
category ranging from approximately $9.99 to $29.99 per item.
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Furniture and Accessories. Renters Choice offers a variety of furniture
products, including dining room, living room and bedroom furniture featuring a
number of styles, materials and colors. Showroom displays enable customers to
visualize how the product will look in their homes and provide a showcase for
accessories. Renters Choice offers furniture made by Ashley, England-Corsair,
La-Z-Boy and other top brand manufacturers, with weekly rental prices in this
product category ranging from approximately $5.99 to $35.99. Accessories such as
pictures, plants, lamps and tables are typically rented as part of a package of
items to furnish a complete room. Rental rates for accessories vary widely and
are often determined based upon the rental rates of the other items in the
package.
Computers. Rent-A-Center began the rental of computers in 1993 and Renters
Choice is considering adding computers to its product offering. As new
generations of computers become available, Rent-A-Center reduced the rental
rates and/or rental terms on older models. This makes the computers affordable
to a customer base that would otherwise be unwilling or unable to afford the
higher rates for the new units. Store associates receive training in marketing
personal computers. Major computer brands in this category include Packard Bell
and Epson. Weekly rental rates for computers range from $34.99 to $39.99.
PURCHASING AND DISTRIBUTION
Specific purchasing decisions for Renters Choice's stores are made by store
managers, subject to review by headquarters management. Other than the
warehouses previously utilized by Rent-A-Center, Renters Choice does not
maintain any warehouse space. All merchandise is shipped by vendors directly to
each store, typically within two to six days for electronics and appliances and
one to two weeks for furniture, where it is held for rental. Renters Choice
purchases the majority of its merchandise directly from manufacturers. Renters
Choice's largest suppliers include Magnavox and Whirlpool, which accounted for
approximately 21.7% and 21.6%, respectively, of merchandise purchased for
Renters Choice's stores in 1997. No other supplier accounted for more than 10%
of merchandise purchased by Renters Choice during such period. Renters Choice
generally does not enter into written contracts with its suppliers. Although
Renters Choice currently expects to continue relationships with its existing
suppliers, management believes there are numerous sources of products available
to Renters Choice, and does not believe that the success of its operations is
dependent on any one or more of its present suppliers.
In contrast to Renters Choice's strategy of direct-to-store delivery,
Rent-A-Center previously maintained a nationwide network of seven distribution
centers. These distribution centers consisted of warehouses, all of which were
leased, ranging in size from 87,000 to 215,000 square feet (averaging
approximately 135,000 square feet) and had the capacity to distribute to an
average of approximately 300 stores each. Rent-A-Center utilized a fleet of 171
trucks to distribute its products through its distribution system, delivering
merchandise to its stores once a week in the holiday season and once every two
weeks in the off-peak season. Expenses incurred to operate this distribution
network were $23.5 million for the fiscal year ended March 31, 1998. Renters
Choice is in the process of closing down Rent-A-Center's distribution system as
part of the integration process.
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THE RENTAL PROCESS
Marketing. Renters Choice uses advertising to introduce and reinforce the
benefits of its rental-purchase program to existing and potential customers as
well as to make such customers aware of new products and special promotions.
Renters Choice's advertisements emphasize such features as product and brand
name selection, prompt delivery and the absence of any initial deposit, credit
investigation or long-term obligation. Renters Choice focuses on direct mail
advertising, and to a lesser extent television, radio and secondary print
advertising. Direct mail is used extensively because it allows Renters Choice to
target specific zip codes near its stores and those areas where potential
customers reside. On average, Renters Choice distributes approximately 8 million
color flyers per month by direct mail. As a percentage of store revenues,
Renters Choice spent 4.7% ($13.7 million) in its most recent fiscal year on
advertising. As Renters Choice acquires or opens new stores in its existing
market areas, it realizes certain efficiencies by listing all stores in the same
market-wide advertisement.
Rental-Purchase Agreement. In general, Renters Choice and Rent-A-Center utilized
substantially similar rental purchase agreements and screening processes.
Renters Choice retains title to the merchandise during the term of the rental
purchase agreement. The term required for ownership of new products on initial
rental is 12 to 36 months depending on the product category. The contract also
provides the customer with an early purchase option. On average, however,
ownership requirements are met on less than 25% of items being rented for the
first time. During 1997, the average actual term of Renters Choice's rental
purchase agreements was approximately 4.3 months. Actual rental periods vary
based on the type of merchandise rented: consumer electronics products have an
average actual rental period of 3.8 months, while appliances and furniture are
generally rented for longer periods with an average actual rental period of 5.2
and 4.6 months, respectively.
Renters Choice strives to make the rental-purchase transaction as simple and as
accessible as possible for the customer. An agreement is intended to be
straightforward and understandable and includes the total amount required to be
paid for ownership of the merchandise, as well as all other required
disclosures. If a customer elects to continue to rent the merchandise, the
customer pays the next period's rental. If a customer elects to terminate an
agreement, Renters Choice will pick up the merchandise or the merchandise will
be returned by the customer and in either case, will be held by Renters Choice
for re-rental. A customer may purchase a rented product at any time for a price
based on a predetermined formula.
Approval Process. Although Renters Choice does not conduct a formal credit
review, its order approval process provides a mechanism for qualifying a
customer. This process is designed to verify a customer's financial ability to
meet weekly or monthly payments and to ensure store personnel will be able to
locate the merchandise should the customer's account become past due. Renters
Choice's qualification process consists of obtaining the customer's name,
address, landlord or mortgage holder, source of income and personal references.
Information is verified over the telephone by store personnel contacting the
personal references and other sources. Generally, Renters Choice will verify
employment and residence status. Since merchandise is rented rather than
purchased, Renters Choice focuses on a customer's credibility, not the
customer's credit history. If a customer does not pay promptly, the rent-to-own
merchandise is simply returned or picked up. The approval process is designed to
be completed within an hour.
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Product Delivery. Renters Choice offers same day or 24-hour delivery and
installation of its merchandise at no additional cost to the customer. While
providing value to the customers, delivery of the merchandise provides Renters
Choice with further confirmation of the information provided in the customer's
rental order and better inventory control. As an additional service to the
customer, Renters Choice provides free pick-up should the customer wish to
terminate the rental agreement.
Repair. Through the network of 22 service centers previously utilized by
Rent-A-Center and acquired pursuant to the Rent-A-Center Acquisition, Renters
Choice also provides any required service or repair of merchandise without
additional charge, except for damage in excess of normal wear and tear. If the
product cannot be repaired at the customer's residence, Renters Choice provides
a temporary replacement while the product is being repaired. The customer is
fully liable for damage, loss or destruction of the merchandise, unless the
customer purchases an optional loss/damage waiver. Most of the products offered
by Renters Choice are covered by a manufacturer's warranty for varying periods,
which, subject to the terms of the warranty, is transferred to the customer in
the event that the customer obtains ownership.
Collections. Management believes that good collections practices are critical to
Renters Choice's success in the rent-to-own industry. Management believes its
strict and disciplined approach to collections results in increased collected
revenue and ultimately enhances its long term relationships with its customers.
Once a customer accepts delivery of merchandise, the next priority is to
encourage the customer to continue renting the merchandise while making all
payments in a timely manner. The goal is to treat each customer with respect and
dignity. Store managers use a computerized management information system to
track cash collections on a daily basis. Most rental-purchase payments are made
on or near the due date, with little or no collection efforts by Renters Choice
and are made in cash and in person. Having customers deliver payments in person
affords Renters Choice an opportunity to further develop its customer
relationships and market additional merchandise. On average, 93.5% of all
Renters Choice's accounts are collected within seven days of their respective
due dates.
In the event a customer fails to make a rental payment when due, store
management will attempt to contact the customer to obtain payment and reinstate
the contract or will terminate the account and arrange to regain possession of
the merchandise. Renters Choice attempts to recover the rental items by the
seventh to tenth day following termination or default of a rental purchase
agreement. Depending on state regulatory requirements, Renters Choice charges
for the reinstatement of terminated accounts or collects a delinquent account
fee. It also collects loss/damage waiver fees from customers desiring such
product protection in the case of theft and certain natural disasters. Such fees
are standard in the industry and may be subject to government-specified limits.
See "-- Government Regulation." Renters Choice's policy is to charge-off
accounts within 90 days of becoming past due. Renters Choice's charge-offs due
to lost or stolen merchandise, expressed as a percentage of store revenues, were
approximately 2.1% in 1997, as compared to approximately 2.3% in 1996.
Rent-A-Center's charge-offs were approximately 2.3% in 1997, as compared to
approximately 2.4% in 1996. These percentages compare to an industry average of
2.9% in 1997 for chains of 20 stores or more.
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STORE OPERATIONS
Renters Choice employs a decentralized management organization, delegating
significant responsibility to its store and field managers and emphasizing
results-oriented compensation directly tied to store profitability and/or growth
in store revenue. A typical mature store has a store manager, an assistant
manager, and two or three account executives. Each store is responsible for its
operations including customer relations, credit management, delivery and pickup
of merchandise, inventory management, staffing and certain marketing efforts.
Account executives make deliveries, monitor accounts, secure timely rental
payments and pick up rental merchandise, as necessary.
Renters Choice's philosophy is to treat store managers as "owners" of their
stores. At the end of each year, store managers prepare projections for the
upcoming year that must be approved by executive officers and senior management.
Each month actual results are compared to projected results, and managers must
be able to explain significant discrepancies. Because up to 30% of the
compensation of the managers of mature stores is based on profitability, store
managers are attentive to their store's financial statements and play an active
role in the analysis of store performance.
The latitude granted to Renters Choice's store managers is a key to manager
accountability. Unless inventory units not rented within the last 90 days exceed
acceptable levels, no approval by Renters Choice's senior management is required
to order merchandise from Renters Choice's approved vendor list. Renters Choice
has idle inventory standards that are closely monitored and designed to provide
for adequate display merchandise without building up excess inventory. All of
these factors help keep store inventory as low as possible while maintaining
sufficient quantities for store displays and customer deliveries.
As part of the integration process, Renters Choice is currently reallocating its
existing resources to add the assistant manager position in the Rent-A-Center
stores. Management believes the assistant manager is a critical position in
increasing store depth as it adds additional support for the store manager and
develops management backup. In addition, starting pay for entry level positions
in Renters Choice's stores is greater than in Rent-A-Center stores. In addition,
Renters Choice intends to transition the salaries of Rent-A-Center's entry level
employees to those of Renters Choice as it believes the higher wages allow it to
attract and retain stronger, more efficient employees.
REGIONAL MANAGEMENT
Each store manager reports to a market manager who typically oversees seven to
nine stores. Market managers are primarily responsible for monitoring individual
store performance and inventory levels within their respective regions. Renters
Choice's approximately 265 market managers, in turn, report to 41 regional
directors, who monitor the operations of approximately six regions, and, through
the market managers, individual store performance. The regional directors report
to Renters Choice's senior management and together, the regional directors and
senior management direct and coordinate purchasing, financial planning and
controls, employee training, personnel matters and new store site selection.
Despite Renters Choice's decentralized structure, senior management closely
monitors operations by examining store-level performance on a daily basis
through Renters Choice's management information system and frequent on-site
reviews. As part of
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the integration process, Renters Choice is in the process of reorganizing
Rent-A-Center's field reporting structure and aligning its compensation plans to
conform to the structure employed by Renters Choice. Up to 30% of all market
manager compensation at Renters Choice is tied directly to store revenue and/or
operating profit.
RECRUITMENT, RETENTION AND TRAINING
Renters Choice places great importance on recruiting and training quality
personnel and believes that its managers are among the best in the industry. As
part of its recruiting process, each prospective store employee is administered
an examination to determine his or her managerial abilities. In order to attract
and retain quality personnel, Renters Choice generally pays its entry level
employees more than the industry average and provides competitive benefits
packages. In order to become a store manager, a candidate must have experience
working in Renters Choice system and be selected by regional and senior
management and complete the management training program. In order to be promoted
to regional manager, a candidate must have previously served as a store manager.
Renters Choice conducts an annual managers' meeting at a central location
attended by store managers, regional managers, regional vice presidents and
executive management. At such sessions, prior performance is critiqued,
operating procedures are reviewed and revised, new merchandise is showcased and
managers receive classroom training in the areas of financial management,
product information, inventory management, customer service, credit management
and other areas of store operations.
MANAGEMENT INFORMATION SYSTEMS
Utilizing Renters Choice's management information system, executive management,
regional managers and store managers can closely monitor the productivity of
stores under their supervision as compared to prescribed guidelines. This system
provides Renters Choice's management with access to operating and financial
information about each store location and region, and generates management
reports on a daily, weekly, month-to-date and year-to-date basis for each unit
of merchandise and every rental purchase transaction. The reports for all stores
are reviewed daily by senior management and any irregularities are addressed the
following business day. Each store is equipped with a computer system that
tracks individual components of revenue, each item in idle and rented inventory,
total items on rent, delinquent accounts and other account information. In
addition, Renters Choice's computer system maintains all standard agreements,
which are printed off the system on an as-needed basis at each store. All
documents including standard agreements, sales material and collection material
have been pre-formatted. Renters Choice has only five employees in its
management information system department as it outsources the maintenance and
software development to an outside vendor.
COMPETITION
The rent-to-own industry is highly competitive. Renters Choice is the largest
rent-to-own operator with 2,127 stores as well as the largest franchisor with
307 stores. The five largest industry participants account for only 38.5% of the
approximately 8,300 rent-to-own stores in the United States. Renters Choice's
stores will compete with other rent-to-own businesses, as well as with rental
stores that do not offer their customers a purchase option.
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With respect to customers desiring to purchase merchandise for cash or on
credit, Renters Choice will also compete with department stores and discount
stores. Competition is based primarily on store location, product selection and
availability, customer service and rental rates and terms.
FRANCHISE OPERATIONS
ColorTyme is the largest nationwide rent-to-own franchisor with 297 stores in 39
states. In addition, Rent-A-Center has 24 franchise stores in 3 states.
All ColorTyme franchised stores use ColorTyme's trade names, service marks,
trademarks, logos, emblems and indicia of origin and operate under distinctive
operating procedures and standards specified by ColorTyme. ColorTyme's primary
source of revenue is the sale of rental equipment to its franchisees, who, in
turn, offer the equipment to the general public for rent or purchase under a
rent-to-own program. As franchisor, ColorTyme receives royalties of 2.3% to 4.0%
of the franchisees' rental income and, generally, an initial fee of $7,500 per
location for existing franchisees and up to $25,000 per location for new
franchisees.
ColorTyme has established a national advertising fund (the "Fund") for the
franchised stores, whereby ColorTyme has the right to collect up to 3% of the
monthly gross rental payments and sales from each franchisee to be contributed
to the Fund. Currently, ColorTyme has set the monthly franchisee contribution at
$250 per store per month. ColorTyme directs the advertising programs of the
Fund, generally consisting of advertising in print, television and radio.
Furthermore, the franchisees are required to expend 3% of their monthly gross
rental payments and sales on local advertising.
Rent-A-Center has 24 franchised locations operating under the Rent-A-Center
name. As franchisor, Rent-A-Center receives royalties of up to 3% of gross
receipts and a fee of $25,000 per location. Additionally, franchisees can
purchase merchandise through Rent-A-Center with no mark-up. Rent-A-Center
franchisees pay substantially the same amount for advertising as the ColorTyme
stores.
EMPLOYEES
As of November 30, 1998, Renters Choice had approximately 11,514 employees, of
whom approximately 322 were assigned to Renters Choice's headquarters and the
remainder of whom were directly involved in the management and operation of
Renters Choice's stores. As of the same date, ColorTyme had approximately 18
employees, all of which were employed full-time. None of Renters Choice's
employees are covered by a collective bargaining agreement.
PROPERTIES
Renters Choice. Renters Choice leases space for all of its retail stores, as
well as its corporate and regional offices, under operating leases. Most of
these leases are for terms of 3 to 5 years and contain renewal options for an
additional one or two terms at rental rates adjusted according to agreed upon
formulas. In November 1998, Renters Choice moved its headquarters to 5700
Tennyson Parkway, Plano, Texas (the "New Headquarters"). The New Headquarters
consist of approximately 82,274 square feet and is the home office for
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all of Renters Choice's operations. The Rent-A-Center operations were moved to
the New Headquarters from Rent-A-Center's Wichita, Kansas office in December
1998. Renters Choice intends to dispose of the former headquarters of
Rent-A-Center.
ColorTyme. ColorTyme's headquarters are located at 1231 Greenway Drive in
Irving, Texas, and consist of approximately 9,600 square feet. It is anticipated
that ColorTyme will relocate to the New Headquarters in January 1999.
GOVERNMENT REGULATION
State Regulation
There are currently 45 states that have legislation regulating rental purchase
transactions. With some variations in individual states, most state legislation
requires the lessor to make prescribed disclosures to customers about the rental
purchase agreement and transaction, and provides time periods during which
customers may reinstate agreements. Some state rental purchase laws prescribe
grace periods for nonpayment, prohibit or limit certain types of collection or
other practices, and limit certain fees that may be charged. Nine states limit
the total rental payments that can be charged. Such limitations, however, do not
become applicable in general unless the total rental payments required under
agreements exceed 2 times to 2.4 times of the "disclosed cash price" or the
retail value.
Minnesota and, more recently, New Jersey have had lower court decisions which
treat rental purchase transactions as credit sales subject to consumer lending
restrictions. In response, Renters Choice has developed and utilizes
rent-to-rent agreements, with certain variations, in both Wisconsin and
Minnesota.
Three other states (Alaska, Montana and North Carolina), Puerto Rico and the
District of Columbia have no rental purchase legislation. However, the retail
installment sales statute in North Carolina recognizes that rental purchase
transactions which provide for more than a nominal purchase price at the end of
the agreed rental period are not credit sales under such statute. Renters Choice
operates 23 stores in the remaining jurisdictions (excluding North Carolina)
which have no rental purchase legislation.
There can be no assurance that new or revised rental purchase laws will not be
enacted or, if enacted, that such laws would not have a material adverse effect
on Renters Choice. See "Risk Factors -- Passage of Adverse Government Regulation
Impacting the Rent-to-Own Industry."
Federal Legislation
No comprehensive federal legislation has been enacted regulating or otherwise
impacting the rental-purchase transaction. From time to time, legislation has
been introduced in Congress that would regulate the rental-purchase transaction,
including legislation that would subject the rental-purchase transaction to
interest rate, finance charge and fee limitations, as well as the Federal Truth
in Lending Act. Any such federal legislation, if enacted, could have a material
adverse effect on Renters Choice. See "Risk Factors -- Passage of Adverse
Government Regulation Impacting the Rent-to-Own Industry."
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LEGAL PROCEEDINGS
From time to time, Renters Choice, along with its subsidiaries, is party to
various legal proceedings arising in the ordinary course of business. The
majority of the material proceedings involve claims that may be generally
characterized into one of two categories, recharacterization claims and
statutory compliance claims. Recharacterization claims generally involve claims
(A) in states that do not have rent-to-own legislation, (B) that rent-to-own
transactions are disguised installment sales in violation of applicable state
installment statutes, and (C) that allege greater damages. Statutory compliance
claims generally involve claims (A) in states that have rent-to-own legislation,
(B) that the operator failed to comply with applicable state rental purchase
statutes (e.g., notices and late fees), and (C) that allege lesser damages.
Except as described below, Renters Choice is not currently a party to any
material litigation.
The following litigation matters were assumed with Rent-A-Center pursuant to the
Rent-A-Center Acquisition. In connection with accounting for the Rent-A-Center
Acquisition, Renters Choice made appropriate purchase accounting adjustments for
contingent liabilities associated with outstanding litigation.
Robinson v. Thorn Americas, Inc. The plaintiffs filed this class action on April
19, 1994 in state court in New Jersey. The class consists of all residents of
New Jersey who are or have been parties to Rent-A-Center rent-to-own contracts
since April 19, 1988. During this period, Rent-A-Center operated approximately
23 stores in New Jersey. The plaintiffs' claims are for alleged violations of
the New Jersey Retail Installment Sales Act and the New Jersey Consumer Fraud
Act, usury, unlawful contractual penalty and conversion. On January 5, 1998, the
court entered a judgment against Rent-A-Center and ordered Rent-A-Center to pay
the plaintiffs the amount equal to (A) all reinstatement fees collected by
Rent-A-Center since April 29, 1988 and (B) 40% of all rental revenue collected
by Rent-A-Center from the plaintiffs from April 29, 1988, trebled. Later, the
court added an incentive award to the class representative, the inclusion of
attorneys' fees, and granted plaintiff's counsel 25% of the amount to be
distributed to the class. The judgment is secured by a supersedeas bond posted
by Rent-A-Center in the amount of $163 million, which amount was derived from an
accounting by plaintiffs of the projected amount of the judgment liability
through April 1999. Rent-A-Center filed its notice of appeal on January 26, 1998
and the appeal is now fully briefed. Renters Choice is vigorously defending this
action on behalf of its subsidiary Rent-A-Center. However, there can be no
assurance that Renters Choice will be successful on appeal.
Burney v. Thorn Americas, Inc. The plaintiffs originally filed a class action in
federal court in Wisconsin alleging Rent-A-Center's rent-to-own contracts
violated the Wisconsin Consumer Act and federal RICO and truth-in-lending
statutes. The court first granted the plaintiffs' motion for summary judgment as
to liability. The court then withdrew that decision and dismissed the action for
lack of federal subject matter jurisdiction once the plaintiffs withdrew their
truth-in-lending claims. The plaintiffs' refiled the action on February 28, 1997
in state court in Wisconsin, and the court granted plaintiffs' motion for class
certification on July 7, 1998. The class is comprised of the persons who were
party to rent-to-own contracts with Rent-A-Center in Wisconsin after October 19,
1988 and who have paid RAC an amount equal to or greater than the value of the
merchandise. During this period, Rent-A-Center operated approximately 23 stores
in Wisconsin. (The plaintiffs have asserted that the value of the merchandise
for class certification purposes is 60% of
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the amount required to obtain ownership.) This limitation on the members of the
class distinguishes Burney from Robinson. Renters Choice has settled this matter
on behalf of its subsidiary Rent-A-Center for $16.25 million, subject to final
approval by the court. The court has preliminarily approved the settlement and
notices to class members are being prepared.
Colon v. Thorn Americas, Inc. The plaintiffs filed this class action in November
1997 in New York state court. Rent-A-Center removed the case to the U.S.
District Court for the Southern District of New York. Plaintiffs filed a motion
to remand, which was granted. The plaintiffs acknowledge that rent-to-own
transactions in New York are subject to the provisions of New York's Rental
Purchase Statute but contend the Rental Purchase Statute does not provide
Rent-A-Center immunity from suit for other statutory violations. Plaintiffs
allege Rent-A-Center has a duty to disclose "effective interest" under New York
consumer protection laws, and seek damages and injunctive relief for
Rent-A-Center's failure to do so. This suit also alleges violations relating to
late fees, harassment, undisclosed charges, and the ease of use and accuracy of
its payment records. No damages theory was specified in the complaint. The
proposed class includes all New York residents who were party to Rent-A-Center
rent-to-own contracts from November 26, 1991 through November 26, 1997. Renters
Choice is vigorously defending this action on behalf of its subsidiary
Rent-A-Center and on September 24, 1998, filed motions to deny class
certification and dismiss the complaint. However, there can be no assurance that
such motions will be granted or that Rent-A-Center will be found not to have any
liability.
Anslono v. Thorn Americas, Inc. This is a putative class action filed in
Massachusetts state court on January 6, 1998. Plaintiffs acknowledge that
rent-to-own contracts constitute "consumer leases" under Massachusetts'
rent-to-own statute, but contend that Rent-A-Center failed to comply with
certain statutory provisions and Rent-A-Center failed to provide certain
disclosures. Plaintiffs seek actual and statutory damages and an injunction to
prohibit Rent-A-Center from engaging in the acts complained of. The proposed
class includes all Massachusetts residents who were parties to Rent-A-Center
rent-to-own contracts in the four-year period prior to the January 6, 1998
filing. Renters Choice is vigorously defending this action on behalf of its
subsidiary Rent-A-Center. However, there can be no assurance that Rent-A-Center
will be found not to have any liability.
Allen v. Thorn Americas, Inc. The plaintiffs filed August 15, 1997 a putative
nationwide class action suit in federal court in Missouri, alleging that
Rent-A-Center has discriminated against African-Americans in its hiring,
compensation, promotional and termination policies. Renters Choice, on behalf of
its subsidiary Rent-A-Center, has settled this matter in principle for
approximately $6.75 million.
Cooks v. Thorn Americas, Inc. The plaintiff filed a putative class action in
Texas state court in 1993, alleging violations of Texas' usury statute,
Deceptive Trade Practices Act and Insurance Code. This case has been dormant
since 1994. Renters Choice intends to vigorously defend its subsidiary in this
action should it once again become active. However, there can be no assurance
that Rent-A-Center will be found not to have any liability.
In connection with the Rent-A-Center Acquisition, Thorn plc agreed to indemnify
and hold harmless Renters Choice and Rent-A-Center from the following two
lawsuits and
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deposited $40 million in escrow in respect of these two lawsuits and other
indemnification claims that Renters Choice may have against Thorn plc.
Fogie v. Thorn Americas, Inc. The plaintiffs filed this class action on December
4, 1991 in Minnesota. The class consists of residents of Minnesota who entered
rental purchase contracts with Rent-A-Center from August 1, 1990 through
November 30, 1996. The plaintiffs alleged that Rent-A-Center's rent-to-own
contracts violated Minnesota's Consumer Credit Sales Act and the Minnesota
General Usury Statute. On April 15, 1998, the court entered a final judgment
against Rent-A-Center and ordered it to pay approximately $30 million to the
plaintiffs. Under certain provisions of the judgment, Rent-A-Center may receive
certain credits against the judgment. On May 15, 1998, Rent-A-Center filed a
notice of appeal from the damages finding only and is vigorously pursuing its
appeal.
Willis v. Thorn Americas, Inc. The Willis action consolidated three separate but
related actions, the first of which was filed in 1994, that cover the period
from December 22, 1988 to September 9, 1996. The plaintiffs alleged that prior
to Pennsylvania's enactment of rent-to-own legislation, Rent-A-Center's
rent-to-own contracts were actual installment sales contracts in violation of
Pennsylvania law. Rent-A-Center entered into a settlement agreement with the
plaintiffs whereby Rent-A-Center agreed to pay $9,350,000. On July 8, 1998, the
court approved the settlement and rebate checks have been sent to eligible
members of the class.
The following litigation matters are also pending against Renters Choice:
Gallagher v. Crown Leasing Corporation. On January 3, 1996, Renters Choice was
served with a class action complaint adding it as a defendant in this action
originally filed in April 1994 against Crown and certain of its affiliates in
state court in New Jersey. The class consists of all New Jersey residents who
entered into rent-to-own contracts with Crown between April 25, 1988 and April
20, 1995. During this period, Crown operated approximately 5 stores in New
Jersey. The lawsuit alleges, among other things, that under certain rent-to-own
contracts entered into between the plaintiff class and Crown, some of which were
purportedly acquired by Renters Choice pursuant to the acquisition of Crown and
certain of its affiliates (the "Crown Acquisition"), the defendants failed to
make the necessary disclosures and charged the plaintiffs fees and expenses that
violated the New Jersey Consumer Fraud Act and the New Jersey Retail Installment
Sales Act. The plaintiffs seek damages including, among other things, a refund
of all excessive fees and/or interest charged or collected by the defendants in
violation of such acts, state usury laws and other related statutes and treble
damages, as applicable. Pursuant to the Asset Purchase Agreement entered into
between Crown, its controlling shareholder and Renters Choice in connection with
the Crown Acquisition, Renters Choice did not contractually assume any
liabilities pertaining to Crown's rent-to-own contracts for the period prior to
the acquisition of Crown. The plaintiffs have obtained class certification and a
summary judgment against Crown on the liability issues. Subsequent to these
decisions by the New Jersey state court, Crown filed for protection from its
creditors under Chapter 11 of the federal bankruptcy laws. The bankruptcy court
has allowed the lawsuit to proceed in New Jersey, where the state court granted
summary judgment on the plaintiff's damages formula against Crown. The
plaintiffs calculated actual damages for purposes of their summary judgment
motion at approximately $7.6 million. The court ruled that the plaintiffs are
entitled to three times actual damages. However, the state court's ruling
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requires certain minor adjustments pursuant to an accounting. Although the
plaintiffs were unsuccessful in their attempt to certify a class against Renters
Choice, the plaintiffs have attempted to assert a theory of successor liability
against Renters Choice. Management believes there is no basis for a claim of
successor liability against Renters Choice. Renters Choice will take appropriate
steps to defend the successor liability issues at trial. Due to the
uncertainties associated with any litigation, the ultimate outcome of this
matter cannot presently be determined.
Michelle Newhouse v. Renters Choice, Inc./Handy Boykin v. Renters Choice,
Inc. On November 26, 1997 a class action complaint was filed against Renters
Choice by Michelle Newhouse in New Jersey state court alleging, among other
things, that under certain rent-to-own contracts entered into between the
plaintiffs and Renters Choice, Renters Choice failed to make the necessary
disclosures and charged the plaintiffs fees and expenses that violated the New
Jersey Consumer Fraud Act and the New Jersey Installment Sales Act. The claims
arising from this action are similar to the claims made in Robinson v. Thorn
Americas, Inc. and Gallagher v. Crown Leasing Corporation. The proposed class
consists of all residents of New Jersey who are or have been parties to
contracts to rent-to-own merchandise from Renters Choice within the past six
years. During this period, Renters Choice operated approximately 17 stores in
New Jersey.
Renters Choice removed the case to federal court on January 21, 1998, and was
then advised by the plaintiffs' attorney that Michelle Newhouse no longer wished
to serve as class representative. A motion to voluntarily dismiss the Newhouse
case filed by the plaintiffs' attorney was granted shortly thereafter. However,
on May 1, 1998, a new class action complaint against Renters Choice made by
Handy Boykin was filed by the plaintiffs' attorney in the Newhouse matter in New
Jersey state court alleging the same causes of action with the same proposed
class as that of the Newhouse matter. This new filing essentially constitutes a
replacement of the named plaintiff in the Newhouse matter with a new named
plaintiff, Handy Boykin. Management anticipated such a replacement and is
defending this matter vigorously. Renters Choice removed the Boykin case to
federal court, where Boykin's motion to remand to New Jersey state court is now
pending. No motion for class certification has been made; however, due to the
uncertainties associated with any litigation, the ultimate outcome of this
matter cannot presently be determined. An adverse decision in this case could
have a material effect on Renters Choice.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the executive
officers and directors of Renters Choice:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
J. Ernest Talley................ 63 Chairman of the Board of
Directors and Chief Executive
Officer
Mark E. Speese.................. 41 President, Chief Operating
Officer and Director
Danny Z. Wilbanks............... 42 Senior Vice President -- Finance
and Chief Financial Officer
L. Dowell Arnette............... 51 Executive Vice President
Bradley W. Denison.............. 38 Senior Vice President -- General
Counsel
Anthony M. Doll................. 30 Senior Vice President
C. Edward Ford, III............. 31 Senior Vice President
Dana F. Goble................... 33 Senior Vice President
John H. Whitehead............... 48 Senior Vice President
David A. Kraemer................ 37 Senior Vice President
William C. Nutt................. 42 Senior Vice President
Thomas J. Lopez................. 39 Senior Vice President
Robert D. Davis................. 27 Vice President -- Finance and
Treasurer
David M. Glasgow................ 30 Secretary
Mitchell E. Fadel............... 41 President and Chief Executive
Officer of ColorTyme, Inc.
Joseph V. Mariner, Jr........... 78 Director
J.V. Lentell.................... 60 Director
Rex W. Thompson................. 48 Director
Laurence M. Berg................ 32 Director
Peter P. Copses................. 40 Director
</TABLE>
J. Ernest Talley. Mr. Talley has served as Chairman of the Board of Directors of
Renters Choice since May 1989 and Chief Executive Officer since November 1994.
Mr. Talley operated a rent-to-own business from 1963 to 1974 in Wichita, Kansas,
which he sold to Remco (later acquired by Rent-A-Center and acquired as part of
the Rent-A-Center Acquisition) in 1974. From 1974 to 1988, he was involved in
the commercial real estate business in Dallas, Texas. Mr. Talley co-founded
Talley Lease to Own, Inc. with his son, Michael C. Talley, in 1987 and served as
a director and Chief Executive Officer of that company from 1988 until its
merger with Renters Choice on January 1, 1995. Mr. Talley's term as a director
expires at Renters Choice's 2001 annual meeting.
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Mark E. Speese. Mr. Speese has served as President and a director of Renters
Choice since 1990, and as Chief Operating Officer since November 1994. From
Renters Choice's inception in 1986 until 1990, Mr. Speese served as a Vice
President responsible for Renters Choice's New Jersey operations. Prior to
joining Renters Choice, Mr. Speese was a regional manager for Rent-A-Center from
1979 to 1986. Mr. Speese's term as a director expires at Renters Choice's 1999
annual meeting.
Danny Z. Wilbanks. Mr. Wilbanks was appointed Senior Vice President -- Finance
and Chief Financial Officer of Renters Choice in April 1997. From January 1995
to April 1997, Mr. Wilbanks served as President and Chief Executive Officer of
Trans Texas Capital, L.L.C., a rental purchase company, the assets of which were
acquired by Renters Choice in February 1997. Between August 1993 and January
1995, Mr. Wilbanks was a self-employed consultant in the rent-to-own industry.
From January 1986 to August 1993, Mr. Wilbanks, who is a certified public
accountant, served as Chief Financial Officer of Remco.
L. Dowell Arnette. Mr. Arnette has served as an Executive Vice President of
Renters Choice since September 1996. From May 1995 to September 1996, Mr.
Arnette served as Senior Vice President of Renters Choice. From November 1994 to
May 1995, he served as Regional Vice President of Renters Choice. From 1993 to
November 1994, he served as a regional manager of Renters Choice responsible for
the southeastern region. From 1975 until 1993, Mr. Arnette was an Executive Vice
President of DEF Investments, Inc. ("DEF"), an operator of rent-to-own stores.
Renters Choice acquired substantially all of the assets of DEF and its
subsidiaries in April 1993. Mr. Arnette is the brother of Joe T. Arnette, Vice
President -- Training & Personnel of Renters Choice.
Bradley W. Denison. Mr. Denison was appointed Senior Vice President -- General
Counsel of Renters Choice in September 1998. Between September 1996 and
September 1998, Mr. Denison was Vice President and Assistant General Counsel for
Rent-A-Center, Inc. From August 1996 to September 1996, Mr. Denison served as
Associate General Counsel for Rent-A-Center, Inc. and from June 1994 until
August 1996, served as Director and Chief Counsel for Rent-A-Center, Inc. Prior
to that time, Mr. Denison served as a Staff Attorney for Rent-A-Center, Inc.
Anthony M. Doll. Mr. Doll was appointed Senior Vice President of Renters Choice
in September 1998. From September 1996 until September 1998, Mr. Doll served as
Regional Vice President of Renters Choice. Between May 1995 and September 1996,
Mr. Doll served as Renters Choice's regional manager for the Detroit, Michigan
area. From April 1993 to May 1995, Mr. Doll served as the manager of Renters
Choice's stores in Michigan.
C. Edward Ford, III. Mr. Ford was appointed Senior Vice President of Renters
Choice in September 1998. From January 1997 until September 1998, Mr. Ford
served as a Regional Vice President of Renters Choice. Between November 1994
until January 1997, Mr. Ford served as a regional manager for Renters Choice for
the Tennessee region. From July 1993 until November 1994, Mr. Ford served as a
store manager for Renters Choice.
Dana F. Goble. Mr. Goble was appointed Senior Vice President of Renters Choice
in December 1996 and served as a Regional Vice President of Renters Choice from
May 1995 until December 1996. From April 1993 to May 1995, Mr. Goble served as
regional manager for the Detroit, Michigan area.
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John H. Whitehead. Mr. Whitehead was appointed Senior Vice President of Renters
Choice in September 1997. Between May 1995 and September 1997, Mr. Whitehead
served as a Regional Vice President for Renters Choice. From July 1993 to May
1995, Mr. Whitehead served as Renters Choice's regional manager for the Atlanta,
Georgia area.
David A. Kraemer. Mr. Kraemer was appointed Senior Vice President of Renters
Choice in September 1998. From December 1995 until September 1998, Mr. Kraemer
served as a Regional Vice President for Renters Choice. Prior to that time, Mr.
Kraemer served as a Divisional Vice President for MRTO Holdings from November
1990 until Renters Choice acquired MRTO Holdings in September 1995.
William C. Nutt. Mr. Nutt was appointed Senior Vice President of Renters Choice
in May 1998. Between December 1995 until May 1998, Mr. Nutt served as a Regional
Vice President for Renters Choice. From December 1992 through December 1995, Mr.
Nutt served as Renters Choice's regional manager for the Northeast Ohio area.
Thomas J. Lopez. Mr. Lopez was appointed Senior Vice President in September
1998. Between December 1995 and September 1998, Mr. Lopez served as a Regional
Vice President for Renters Choice. From April 1991 until Renters Choice acquired
MRTO Holdings in September 1995, Mr. Lopez served as a Divisional Vice President
for MRTO Holdings.
Robert D. Davis. Mr. Davis was appointed Vice President -- Finance and Treasurer
of Renters Choice in September 1998. Between June 1997 and September 1998, Mr.
Davis served as Treasurer of Renters Choice. From January 1997 until June 1997,
Mr. Davis served as Renters Choice's Assistant Secretary and Treasurer. Between
June 1995 and January 1997, Mr. Davis served as the Payroll Supervisor for
Renters Choice and from June 1993 to June 1995 served as an accountant for
Renters Choice.
David M. Glasgow. Mr. Glasgow has served as Secretary for Renters Choice since
June 1995. Between June 1995 to June 1997, Mr. Glasgow served as Secretary and
Treasurer for Renters Choice. From March 1995 to June 1995, Mr. Glasgow served
as accounting operations supervisor and from June 1993 to March 1995, served as
an accountant for Renters Choice.
Mitchell E. Fadel. Mr. Fadel has been President and Chief Executive Officer of
ColorTyme since November 1992. ColorTyme was acquired by Renters Choice in May
1996.
Joseph V. Mariner, Jr. Mr. Mariner has served as a director of Renters Choice
since February 1995. Until his retirement in 1978, Mr. Mariner served as
Chairman of the Board of Directors and Chief Executive Officer of Hydrometals,
Inc., a large conglomerate with subsidiaries engaged in the manufacture of
retail plumbing supplies, nonpowered hand tools and electronic components. Mr.
Mariner currently serves as a director of Temtex Industries, Inc., a
manufacturer of energy efficient fireplaces and gas logs, Peerless Mfg. Co., a
manufacturer of heavy oil and gas filtration equipment and Dyson Kissner Moran
Corp., a New York based private investment company engaged in acquiring and
operating a multitude of manufacturing companies with additional holdings in
real estate. Mr. Mariner's term as a director expires at Renters Choice's 2000
annual meeting.
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J.V. Lentell. Mr. Lentell has served as a director of Renters Choice since
February 1995. Mr. Lentell was employed by Kansas State Bank & Trust Co.,
Wichita, Kansas, from 1966 through July 1993, serving as Chairman of the Board
from 1981 through July 1993. Since July 1993, he has served as a director and
Vice Chairman of the Board of Directors of Intrust Bank, N.A., successor by
merger to Kansas State Bank & Trust Co. Mr. Lentell's term as a director expires
at Renters Choice's 2000 annual meeting.
Rex W. Thompson. Mr. Thompson has served as a director of Renters Choice since
February 1995. Since 1988, Mr. Thompson has served as a Professor of Finance at
the Edwin L. Cox School of Business, Southern Methodist University, Dallas,
Texas, where he is the Collins Professor of Finance. Mr. Thompson previously
served as department chair, and as an associate professor at the University of
British Columbia and the Wharton School of Business. Mr. Thompson's term as a
director expires at Renters Choice's 1999 annual meeting.
Laurence M. Berg. Mr. Berg was appointed a director of Renters Choice on August
5, 1998. Mr. Berg has been associated since 1992 and a principal since 1995 with
Apollo Advisors, L.P., which together with its affiliates, acts as managing
general partner of Apollo Investment Fund, L.P., AIF II, L.P., Apollo Investment
Fund III, L.P., and Apollo Investment Fund IV, L.P. Mr. Berg is also a director
of Paragon Health Network, Inc., Continental Graphics Holdings, Inc., CWT
Specialty Stores, Inc. and Communications Corp. of America. Mr. Berg serves as
one of Apollo's designees on Renters Choice's Board. Mr. Berg's term as a
director expires at Renters Choice's 1999 annual meeting.
Peter P. Copses. Mr. Copses was appointed a director of Renters Choice on August
5, 1998. Mr. Copses has been a principal since 1990 of Apollo Advisors, L.P.,
which, together with its affiliates, acts as managing general partner of Apollo
Investment Fund, L.P., AIF II, L.P., Apollo Investment Fund III, L.P. and Apollo
Investment Fund IV, L.P. Mr. Copses is also a director of Paragon Health
Network, Inc., Dominick Supermarkets, Inc., and Zale Corporation. Mr. Copses
serves as one of Apollo's designees on Renters Choice's Board. Mr. Copses' term
as a director expires at Renters Choice's 2001 annual meeting.
TERM AND COMPENSATION OF DIRECTORS
Renters Choice's Board of Directors is divided into three separate classes
(Class I, Class II and Class III), with one class of directors elected at each
annual meeting to serve a three year term. Each director elected serves in such
capacity until the next annual meeting of the stockholders of Renters Choice
where that class is re-elected or until their successors are duly elected and
qualified. Directors that are not employees of Renters Choice (the "Outside
Directors") each receive $3,000 for each meeting of the Board of Directors that
they attend and $1,000 for attending a meeting of a committee of the Board of
Directors. Automatic annual awards of fully-vested options to purchase 3,000
shares of Renters Choice's par value $.01 per share common stock (the "Common
Stock") at the market price on the date of grant are made to each Outside
Director on the first business day of each year. Each of Renters Choice's
directors is reimbursed for any expenses incurred by such director in connection
with such director's attendance at a meeting of the Board of Directors, or
committee thereof. Directors receive no other compensation from Renters Choice
for serving on the Board of Directors.
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TERM OF EXECUTIVE OFFICERS
The Board of Directors names the officers of Renters Choice at the first board
meeting following Renters Choice's annual meeting of stockholders. Each officer
serves at the behest of the Board of Directors and until their successors are
elected and appointed or until the earlier of their death, resignation or
removal.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has appointed (A) a Compensation Committee which consists
of Messrs. Thompson, Lentell, Mariner and Copses, (B) an Audit Committee
comprising Messrs. Mariner, Lentell, Thompson and Berg, and (C) a Finance
Committee comprising Messrs. Talley, Lentell and Copses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
J.V. Lentell, a director of Renters Choice, serves as Vice Chairman of the Board
of Directors of Intrust Bank, N.A., one of Renters Choice's lenders. Intrust
Bank, N.A. was an $18,000,000 participant in Renters Choice's prior credit
facility and is a $20,000,000 participant in the Senior Credit Facilities. The
prior credit facility was replaced by the Senior Credit Facilities. In addition,
Intrust Bank, N.A. serves as trustee of Company's 401(k) plan.
No executive officer of Renters Choice served as a member of the compensation or
similar committee or Board of Directors of any other entity of which an
executive officer served on the Compensation Committee or Board of Directors of
Renters Choice.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law, Renters Choice has adopted
provisions in its Certificate of Incorporation and Bylaws which provide for the
indemnification of its directors and officers to the fullest extent permitted by
applicable law. These provisions, among other things, indemnify each of Renters
Choice's directors for certain expenses (including attorneys' fees), judgments,
fines and settlement amounts incurred by such director in any action or
proceeding, including any action by or in the right of Renters Choice, on
account of such director's service as a director of Renters Choice. In addition,
Renters Choice maintains a customary directors' and officers' liability
insurance policy covering its directors and officers. Renters Choice believes
that these indemnification provisions are necessary to attract and retain
qualified persons as directors.
100
<PAGE> 101
EXECUTIVE COMPENSATION
The following table summarizes the compensation for fiscal 1997, 1996 and 1995
for Renters Choice's Chief Executive Officer and each of its four other most
highly compensated executive officers in fiscal 1997 (the Chief Executive
Officer and such other officers, collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION
--------------------- ------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) ($)
- --------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
J. Ernest Talley........... 1997 $250,000 $ -- -- --
Chairman of the Board and 1996 240,000 -- -- --
Chief Executive
Officer 1995 240,000 -- -- --
Mark E. Speese............. 1997 $170,000 $21,000 -- --
President and Chief 1996 160,000 16,000 -- --
Operating Officer 1995 150,000 10,000 -- --
Mitchell E. Fadel(2)....... 1997 $210,000 $96,000 10,000(3) --
President -- ColorTyme,
Inc. 1996 210,000(2) 96,000 -- --
1995 -- -- -- --
L. Dowell Arnette.......... 1997 $160,000 $25,000 -- --
Executive Vice President 1996 150,000 16,000 -- --
1995 132,000 23,000 15,000(4) --
Dana F. Goble.............. 1997 $120,000 $14,000 5,000(5) --
Senior Vice President 1996 82,000 22,000 -- --
1995 60,000 12,000 15,000(6) --
</TABLE>
- -------------------------
(1) The Named Executive Officers did not receive any annual compensation not
properly categorized as salary or bonus, except for certain perquisites or
other benefits the aggregate cost of which did not exceed the lesser of
$50,000 or 10% of the total of annual salary and bonus for each such
officer.
(2) Mr. Fadel is President of ColorTyme, which was acquired by Renters Choice in
May 1996. The amount presented for 1996 reflects the entire portion of his
$210,000 annual salary received in 1996, although only $105,000 of such
salary was paid to Mr. Fadel by Renters Choice.
(3) These amounts represent options to purchase Renters Choice's Common Stock
that were granted to Mr. Fadel in July 1996 and were outstanding as of
December 31, 1996 (the "1996 Options"). Effective January 2, 1997, the 1996
Options were canceled and Mr. Fadel was granted 10,000 new options (the "New
Options") to replace the 1996 Options. The New Options vest at 25% per year,
beginning January 2, 1998.
(4) In May 1995, Mr. Arnette was granted 15,000 options to purchase Renters
Choice's Common Stock on a one-for-one basis, pursuant to Renters Choice's
Long-Term Incentive Plan. The options vest over four years and expire 10
years from the date of the grant.
101
<PAGE> 102
(5) In January 1997, Mr. Goble was granted 5,000 options to purchase Renters
Choice's Common Stock on a one-for-one basis, pursuant to Renters Choice's
Long-Term Incentive Plan. The options vest over four years and expire 10
years from the date of the grant.
(6) In May 1995, Mr. Goble was granted 15,000 options to purchase Renters
Choice's Common Stock on a one-for-one basis, pursuant to Renters Choice's
Long-Term Incentive Plan. The options vest over four years and expire 10
years from the date of the grant.
102
<PAGE> 103
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth information concerning options granted during
fiscal 1997 to each of the Named Executive Officers. To date, no such options
have been exercised.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF ANNUAL STOCK PRICE
SECURITIES TOTAL APPRECIATION FOR
UNDERLYING GRANTED OPTION TERM(1)
OPTIONS IN FISCAL EXERCISE EXPIRATION --------------------
NAME GRANTED(2) 1997 PRICE(3) DATE 5% 10%
---- ---------- --------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
J. Ernest Talley..... 0 0 N/A N/A N/A N/A
Mark E. Speese....... 0 0 N/A N/A N/A N/A
Mitchell E. Fadel.... 10,000(4) 1.16% $14.38 1/2/07 90,450 229,217
L. Dowell Arnette.... 0 0 N/A N/A N/A N/A
Dana F. Goble........ 5,000 0.58% $14.38 1/2/07 45,225 114,609
</TABLE>
- -------------------------
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of Renters Choice's Common Stock and overall market conditions.
There can be no assurance that the amounts reflected in this table will be
achieved.
(2) Options are exercisable at 25% per year, beginning one year from the date of
grant.
(3) The exercise price was fixed at the date of the grant and represented the
fair market value per share of common stock on such date.
(4) These amounts represent the 1996 Options that were granted to Mr. Fadel in
July 1996 and were outstanding as of December 31, 1996. Effective January 2,
1997, the 1996 Options were canceled and Mr. Fadel was granted 10,000 new
options to replace the 1996 Options. The New Options vest at 25% per year,
beginning January 2, 1998, have an exercise price of $14.38 per share and
expire on January 2, 2007.
EMPLOYMENT AGREEMENTS
Renters Choice entered into an employment agreement with Danny Z. Wilbanks dated
March 28, 1997, pursuant to which Mr. Wilbanks became the Senior Vice
President -- Finance and Chief Financial Officer of Renters Choice effective
April 1, 1997. The employment agreement provides for Mr. Wilbanks' employment by
Renters Choice for a two-year period commencing April 1, 1997, subject to
earlier termination by Renters Choice or Mr. Wilbanks at any time for any
reason, and for an annual salary of $140,000 for the first year, with annual
increases thereafter as authorized by Renters Choice's Board of Directors.
Renters Choice and Mr. Wilbanks also entered into a stock option agreement
pursuant to which Mr. Wilbanks received an option to purchase 60,000 shares of
Renters Choice's Common Stock under Renters Choice's Long-Term Incentive Plan,
at an exercise price of $14.00 per share. Of the 60,000 options granted, 20,000
are currently exercisable, with the remaining options vesting over the remaining
four-year period through the year 2002 on each anniversary date of the
agreement.
Renters Choice does not have employment agreements with any other executive
officers.
103
<PAGE> 104
LONG-TERM INCENTIVE AND OTHER PLANS FOR EMPLOYEES
Long-Term Incentive Plan. Under Renters Choice's Amended and Restated 1994
Renters Choice, Inc. Long-Term Incentive Plan (the "Long-Term Incentive Plan")
designated officers, employees and directors are eligible to receive awards in
the form of stock options, stock appreciation rights, restricted stock grants
and cash awards. An aggregate of 4,500,000 shares of Common Stock is currently
reserved for issuance under the Long-Term Incentive Plan, subject to adjustment
in the event of a stock split, stock dividend or other change in the Common
Stock or the capital structure of Renters Choice.
401(k) Savings Plan. Renters Choice maintains a defined contribution plan (the
"401(k) Plan") whereby after one year of service substantially all employees may
defer a portion of their current salary, on a pre-tax basis, to the 401(k) Plan.
Renters Choice may make discretionary matching contributions to the 401(k) Plan
in an amount equal to a certain percentage of each participant's salary
reduction contribution for the plan year. Renters Choice may also make a
discretionary profit sharing contribution to the 401(k) Plan that is allocated
to the participants based on a formula defined by the 401(k) Plan. Matching
contributions made by Renters Choice for the plan year ended December 31, 1997
were twenty-five cents (25c) for every one dollar ($1.00) contributed through
the first four percent (4%) of employee compensation. Discretionary
contributions made by Renters Choice for the plan year ended December 31, 1997
were $61,824. The trustee of the 401(k) Plan is Intrust Bank, N.A.
104
<PAGE> 105
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the voting securities of Renters Choice as of November 9, 1998, by
(i) each person who is known to Renters Choice to be the beneficial owner of
more than 5% or more of the outstanding voting securities of Renters Choice,
(ii) each director of Renters Choice, (iii) each Named Executive Officer, and
(iv) all executive officers and directors of the company as a group. Unless
otherwise indicated, the persons named below have the sole power to vote and
dispose of the shares of voting securities beneficially owned by them, subject
to community property laws, where applicable.
<TABLE>
<CAPTION>
SHARES OF SERIES A
SHARES OF COMMON STOCK PREFERRED STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
---------------------- ------------------
NAME AND ADDRESS OF PERCENT PERCENT
BENEFICIAL OWNER NUMBER OF CLASS NUMBER OF CLASS
------------------- --------- -------- ------- --------
<S> <C> <C> <C> <C>
J. Ernest Talley(1).................... 4,903,166(2) 20.37% -- --
Mark E. Speese(1)...................... 2,288,432 9.51% -- --
Montgomery Asset Management, LLC(3).... 1,818,600(4) 7.55% -- --
L. Dowell Arnette...................... 416,164(5) 1.77% -- --
Mitchell E. Fadel...................... 89,523(6) * -- --
Dana F. Goble.......................... 22,813(7) * -- --
J.V. Lentell........................... 13,000(8) * -- --
Rex W. Thompson........................ 12,000(8) * -- --
Joseph V. Mariner, Jr.................. 5,842 * -- --
Lawrence M. Berg(9).................... 0 * -- --
Peter P. Copses(9)..................... 0 * -- --
Apollo(10)............................. 8,949,347 27.10% 260,000 100.0%
All officers and directors as a group
(19 total)........................... 7,829,623 32.38% -- --
</TABLE>
- -------------------------
* Less than 1%.
(1) The address of J. Ernest Talley and Mark E. Speese is 13800 Montfort Drive,
Suite 300, Dallas, Texas 75240.
(2) Does not include an aggregate of 326,184 shares owned by two of Mr.
Talley's children, as to which Mr. Talley disclaims beneficial ownership.
(3) The address of Montgomery Asset Management, LLC is 101 California Street,
San Francisco, California 94111.
(4) As of December 3, 1998.
(5) Includes 11,250 shares issuable pursuant to options granted under the
Long-Term Incentive Plan, all of which are currently exercisable.
(6) Includes 5,000 shares issuable pursuant to options granted under the
Long-Term Incentive Plan, all of which are currently exercisable.
(7) Includes 13,750 shares issuable pursuant to options granted under the
Long-Term Incentive Plan, all of which are currently exercisable.
(8) These shares are issuable pursuant to options granted under the Long-Term
Incentive Plan, all of which are currently exercisable.
(9) Messrs. Berg and Copses are each principals and officers of certain
affiliates of Apollo. Accordingly, each of Messrs. Berg and Copses may be
deemed to beneficially own shares owned by Apollo. Messrs. Berg and Copses
disclaim beneficial ownership with respect to any such shares owned by
Apollo.
(10) The address of Apollo is 1999 Avenue of the Stars, Suite 1900, Los Angeles,
California 90067. The 8,949,347 shares of Common Stock represent the shares
of Common Stock into which the Series A Preferred Stock is convertible.
Apollo owns 250,000 shares of the Series A Preferred Stock, which
represents in excess of 96% of the outstanding shares of the Series A
Preferred Stock. Apollo also has the right to vote RCAC's 10,000 shares of
Series A Preferred Stock. Apollo disclaims any beneficial ownership in
these 10,000 shares other than its right to vote these shares.
105
<PAGE> 106
CERTAIN TRANSACTIONS OF RENTERS CHOICE
CERTAIN BUSINESS RELATIONSHIPS
J.V. Lentell, a director of Renters Choice, serves as Vice Chairman of the Board
of Directors of Intrust Bank, N.A., one of Renters Choice's lenders. Intrust
Bank, N.A. was an $18.0 million participant in Renters Choice's prior credit
facility and is a $20.0 million participant in the Senior Credit Facilities. The
prior credit facility was replaced by the Senior Credit Facilities. In addition,
Intrust Bank, N.A. serves as trustee of Renters Choice's 401(k) plan.
Mitchell E. Fadel, President of ColorTyme, owns approximately 13.5% of each of
Portland II RAC, Inc. ("Portland") and Wilson Enterprises of Maine, Inc.
("Wilson"), both of which are franchisees of Rent-A-Center. As of October 13,
1998, Portland and Wilson collectively were indebted to Rent-A-Center for
approximately $31,000.
On August 5, 1998, Apollo purchased $250 million of Renters Choice's Preferred
Stock. Pursuant to the Stock Purchase Agreement Renters Choice entered into with
Apollo, Apollo is entitled to designate two individuals on Renters Choice's
Board. Messrs. Berg and Copses currently serve as Apollo's designees on Renters
Choice's Board.
ACQUISITION OF TRANS TEXAS CAPITAL, L.L.C.
In February 1997, Renters Choice acquired fourteen stores in Texas from Trans
Texas Capital, L.L.C. ("Trans Texas") for approximately $7.3 million in cash
(the "Trans Texas Acquisition"). Danny Z. Wilbanks, Senior Vice
President -- Finance and Chief Financial Officer of Renters Choice was the
managing member of Trans Texas. At the time of the Trans Texas Acquisition, Mr.
Wilbanks was not an executive officer of Renters Choice.
REPURCHASE OF $25 MILLION OF RENTERS CHOICE'S COMMON STOCK
On August 18, 1998, Renters Choice repurchased 990,099 shares of its common
stock for $25 million from J. Ernest Talley, its Chairman of the Board and Chief
Executive Officer. The repurchase of Mr. Talley's stock was approved by the
Board of Directors of Renters Choice on August 5, 1998. The price was determined
by a pricing committee made up of Joseph V. Mariner, Jr., J. V. Lentell and Rex
W. Thompson (and approved by the Board of Directors of Renters Choice, with Mr.
Talley abstaining). The pricing committee met on August 17, 1998, after the
close of the markets, and Mr. Talley's shares were repurchased at the price of
$25.25 per share, the closing price of Renters Choice's common stock on August
17, 1998.
106
<PAGE> 107
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of Renters Choice and certain
provisions of Renters Choice's Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Renters Choice's Amended and Restated
By-Laws (the "By-Laws") is a summary and is qualified in its entirety by the
provisions of the Certificate of Incorporation and By-Laws, copies of which have
been filed as exhibits to Renters Choice's filings, from time to time, with the
SEC.
As of November 9, 1998, the authorized capital stock of Renters Choice consisted
of (i) 50,000,000 shares of Common Stock, par value $.01 per share, of which
24,074,734 shares were outstanding, and (ii) 5,000,000 shares of Preferred
Stock, par value $.01 per share, of which 260,000 shares were outstanding.
COMMON STOCK
As of November 9, 1998, there were 24,074,734 shares of Common Stock outstanding
held by approximately 75 record holders. The holders of Common Stock are
entitled to one vote per share on all matters submitted to a vote of the
stockholders. Cumulative voting of shares of Common Stock is prohibited. The
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of assets
legally available therefor, subject to the payment of any preferential dividends
and the setting aside of sinking funds or redemption accounts, if any, with
respect to any Preferred Stock that from time to time may be outstanding. In the
event of liquidation, dissolution or winding up of Renters Choice, the holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of the holders of
any outstanding Preferred Stock. The holders of Common Stock have no preemptive
or conversion rights or other subscription rights, and there are no redemption
or sinking fund provisions applicable to the Common Stock. All of the
outstanding shares of Common Stock are fully paid and nonassessable, and all of
the shares of Common Stock offered hereby, when issued, will be fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors of Renters Choice, without further action by the
stockholders, is authorized to issue up to 5,000,000 shares of Preferred Stock
(the "Preferred Stock") in one or more series and to fix and determine as to any
series any and all of the relative rights and preferences of shares in such
series, including, without limitation, preferences, limitations or relative
rights with respect to redemption rights, conversion rights, voting rights,
dividend rights and preferences on liquidation.
Convertible Preferred Stock
To finance a portion of the cost of the Rent-A-Center Acquisition, Renters
Choice issued to Apollo 250,000 shares of Convertible Preferred Stock at $1,000
per share, resulting in aggregate proceeds to Renters Choice of $250 million. In
addition, Renters Choice issued to an affiliate of Bear, Stearns & Co. Inc.
("Bear Stearns") 10,000 shares of Convertible Preferred Stock at $1,000 per
share contemporaneously with the Offering, resulting in
107
<PAGE> 108
aggregate proceeds to Renters Choice of $10 million. The terms of the
Convertible Preferred Stock are summarized below.
Series A and Series B Preferred Stock. Renters Choice issued to Apollo 134,414
shares of Series A Preferred Stock ("Series A Preferred Stock") and 115,586
shares of Series B Preferred Stock ("Series B Preferred Stock" and, together
with the Series A Preferred Stock, the "Convertible Preferred Stock"). Renters
Choice issued to Bear Stearns 5,377 shares of Series A Preferred Stock and 4,623
of Series B Preferred Stock. At a special meeting of the stockholders of Renters
Choice held on October 20, 1998, the stockholders approved the conversion of the
Series B Preferred Stock into Series A Preferred Stock. As a result, all of the
issued and outstanding Series B Preferred Stock automatically converted to
Series A Preferred Stock. Therefore, a total of 250,000 shares of Series A
Preferred Stock is now held by Apollo and a total of 10,000 shares of Series A
Preferred Stock is held by Bear Stearns.
Liquidation Preference. The Series A Preferred Stock has a liquidation
preference of $1,000 per share, plus all accrued and unpaid dividends. No
distributions may be made to holders of Common Stock until the holders of the
Convertible Preferred Stock have received the liquidation preference.
Dividends. Holders of Series A Preferred Stock are entitled to receive quarterly
dividends at the rate of $37.50 per annum per share of Series A Preferred Stock.
For the first five years, dividends on the Convertible Preferred Stock may be
paid, at the option of Renters Choice, in cash or in additional Convertible
Preferred Stock. For the four quarters beginning the ninth quarter following
August 5, 1998, no dividend shall be paid or accrued on any share of Series A
Preferred Stock for any quarter in which the average stock price for the fifteen
consecutive trading days immediately preceding the payment date is equal to or
greater than two times the Conversion Price (as defined below). For each quarter
beginning the thirteenth quarter following August 5, 1998, no dividend shall be
paid or accrued on any share of Series A Preferred Stock in any quarter in which
the average stock price for the fifteen consecutive trading days immediately
preceding the payment date is equal to or greater than the Conversion Price
accumulated forward to the payment date at a compound annual growth rate of 25%
per annum, compounded quarterly.
Conversion Price. Holders of Series A Preferred Stock may convert their shares
of Series A Preferred Stock at any time into shares of Renters Choice's Common
Stock at a price equal to $27.935 per share (the "Conversion Price").
Optional Redemption. The Series A Preferred Stock is not redeemable for four
years; thereafter, Renters Choice may redeem all but one share of the Series A
Preferred Stock at any time at 105% of the liquidation preference plus accrued
and unpaid dividends. Apollo may reserve from redemption one share of Series A
Preferred Stock until such time as it and its Permitted Transferees (as defined
in the Certificate of Designations, Preferences and Relative Rights and
Limitations of Series A Preferred Stock of Renters Choice, Inc.) shall own less
than 33 1/3% of the Shares (as defined immediately below) initially issued to
Apollo. "Shares" is defined as shares of the common stock (voting and
non-voting) and the Series A Preferred Stock, and the preceding percentage shall
be calculated as if each of the Shares had been exchanged or converted into
shares of common stock immediately prior to the calculation regardless of the
existence of any restrictions on such exchange or conversion.
108
<PAGE> 109
Mandatory Redemption. Holders of Convertible Preferred Stock have the right to
require Renters Choice to redeem the Convertible Preferred Stock on the earliest
of a change of control, the date upon which Renters Choice's common stock is not
listed for trading on a United States national securities exchange or the Nasdaq
National Market System or the eleventh anniversary of the issuance of the
Convertible Preferred Stock at a price equal to the liquidation preference of
the Convertible Preferred Stock.
Board Representation. Holders of Series A Preferred Stock are entitled to two
seats on Renters Choice's Board of Directors.
Voting Rights. Holders of Series A Preferred Stock are entitled to vote on all
matters presented to the holders of Renters Choice's common stock. The number of
votes per share of Series A Preferred Stock shall be equal to the number of
votes associated with the underlying voting common stock into which such Series
A Preferred Stock is convertible.
CERTAIN ANTI-TAKEOVER MATTERS
Renters Choice's Amended and Restated By-Laws establish advance notice
procedures with regard to stockholder proposals relating to the nomination of
candidates for election as directors to be brought before meetings of
stockholders of Renters Choice. These procedures provide that notice of such
stockholder proposals must be timely given in writing to the Secretary of
Renters Choice prior to the meeting at which action is to be taken. Generally,
to be timely, notice must be received at the principal executive offices of
Renters Choice not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders. Such notice must also
contain certain information specified in Renters Choice's Amended and Restated
By-Laws.
There are currently 5,000,000 authorized shares of Preferred Stock, of which
260,000 shares were outstanding as of November 9, 1998. The existence of
authorized but unissued Preferred Stock may enable the Board of Directors to
render more difficult or to discourage an attempt to obtain control of Renters
Choice by means of a merger, tender offer, proxy consent or otherwise. For
example, if in the due exercise of its fiduciary obligations, the Board of
Directors were to determine that a takeover proposal is not in Renters Choice's
best interests, the Board of Directors could cause shares of Preferred Stock to
be issued without stockholder approval in one or more private offerings or other
transactions that might dilute the voting or other rights of the proposed
acquirer or insurgent stockholder or stockholder group or create a substantial
voting block in institutional or other hands that might undertake to support the
position of the incumbent Board of Directors. In this regard, the Amended and
Restated Certificate of Incorporation grants the Board of Directors broad power
to establish the rights and preferences of authorized and unissued Preferred
Stock. The issuance of shares of Preferred Stock pursuant to the Board of
Directors' authority described above could decrease the amount of earnings and
assets available for distribution to holders of Common Stock and adversely
affect the rights and powers, including voting rights, of such holders and may
have the effect of delaying, deterring or preventing a change in control of
Renters Choice. The Board of Directors does not currently intend to seek
stockholder approval prior to any issuance of Preferred Stock, unless otherwise
required by law.
109
<PAGE> 110
Renters Choice is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, subject to certain
exceptions, Section 203 prohibits a Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder,
unless
- - prior to such date the board of directors of the corporation approved either
the business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, or
- - upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding for purposes of determining the number of
shares outstanding those shares owned by (A) persons who are directors and
also officers and (B) employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer), or
- - on or subsequent to such date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. Section 203 defines a "business combination" to include certain
mergers, consolidations, asset sales and stock issuances and certain other
transactions resulting in a financial benefit to an "interested stockholder."
In addition, Section 203 defines an "interested stockholder" to include any
entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with such an
entity or person.
LIMITATION OF LIABILITY
The DGCL allows a Delaware corporation to limit a director's personal liability
for monetary damages for breaches of certain fiduciary duties owed to the
corporation and its stockholders. The Amended and Restated Certificate of
Incorporation contains a provision that limits the liability of its directors
for monetary damages for any breach of fiduciary duty as a director to the
maximum extent permitted by the DGCL. This provision, however, does not
eliminate a director's liability
- - for any breach of the director's duty of loyalty to Renters Choice or its
stockholders,
- - for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- - for a transaction from which the director derived an improper personal
benefit, or
- - in respect of certain unlawful dividend payments or stock purchases or
redemptions.
The inclusion of this provision in the Amended and Restated Certificate of
Incorporation may reduce the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing a
lawsuit against directors for breaches of their fiduciary duties, even though
such an action, if successful, might otherwise have benefited Renters Choice and
its stockholders. This provision does not prevent Renters Choice or its
stockholders from seeking injunctive relief or other equitable remedies
110
<PAGE> 111
against its directors under applicable state law, although there can be no
assurance that such remedies, if sought, would be obtained.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and the Preferred Stock is
ChaseMellon Shareholder Services, L.L.C.
111
<PAGE> 112
DESCRIPTION OF OTHER INDEBTEDNESS
The description set forth below does not purport to be complete and is subject
to, and qualified in its entirety by reference to, all of the provisions
(including all of the definitions therein of terms not defined in this
prospectus) of certain agreements setting forth the principal terms and
conditions of Renters Choice's Senior Credit Facility which is available upon
request from Renters Choice.
SENIOR SECURED CREDIT FACILITY
To assist in financing the Rent-A-Center Acquisition, Renters Choice obtained
$962.3 million in senior secured credit facilities, for which The Chase
Manhattan Bank serves as Administrative Agent. Chase Securities Inc. acted as
Arranger. Comerica Bank serves as Documentation Agent. NationsBank, N.A. serves
as Syndication Agent. The senior credit facilities consist of the following:
<TABLE>
<CAPTION>
LIBOR
SENIOR FACILITIES AMOUNT TENOR SPREAD(1)
- ----------------- ------ --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Senior Revolving Credit Facility............ $120.0 6.0 years 225 bps
Letter of Credit/Multidraw Facility(2)...... 122.3 6.0 years 225 bps
Senior Term Loan A Facility................. 120.0 6.0 years 225 bps
Senior Term Loan B Facility................. 270.0 7.5 years 250 bps
Senior Term Loan C Facility................. 330.0 8.5 years 275 bps
------
Total Facilities.................. $962.3
</TABLE>
- -------------------------
(1) Pricing subject to a leverage-based pricing grid.
(2) The Letter of Credit/Multidraw Facility are included in funded debt for
purposes of calculating covenants and the pricing grid.
The $120.0 million 6.0 year Revolving Credit Facility will be made available to
Renters Choice for working capital and general corporate purposes, including
acquisitions. The $122.3 million 6.0 year Letter of Credit/Multidraw Facility
has been initially used to post a letter of credit to support a $163 million
bond relating to certain New Jersey litigation. Once the Letter of Credit has
been terminated, Renters Choice will be permitted to borrow up to $85 million
under the multidraw term loan facility. The $720.0 million in Term Loan
Facilities, comprised of a $120.0 million 6.0 year Series A facility, a $270.0
million 7.5 year Series B facility, and a $330.0 million 8.5 year Series C
facility, was drawn at the closing of the Rent-A-Center Acquisition to fund
Renters Choice's purchase of Rent-A-Center's stock, refinance existing debt held
by Renters Choice and to pay certain other costs associated with the
Rent-A-Center Acquisition.
The senior credit facilities are secured by a perfected first priority security
interest in substantially all of Renters Choice's tangible and intangible assets
including, without limitation, intellectual property, real property, and the
capital stock of Renters Choice's direct and indirect subsidiaries. The senior
credit facilities are unconditionally guaranteed by each of Renters Choice's
direct and indirect domestic subsidiaries. In addition, the senior credit
facilities will be subject to several financial covenants, including (A) a
maximum leverage ratio, (B) a minimum interest coverage ratio, and (C) a minimum
fixed charge coverage ratio.
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DESCRIPTION OF THE NOTES AND GUARANTEES
GENERAL
The exchange notes will be issued, and the old notes were issued, under the
Indenture among Renters Choice, the Subsidiary Guarantors and IBJ Schroder Bank
& Trust Company, as trustee (the "Trustee"), a copy of which has been filed as
an exhibit to the Registration Statement of which this prospectus is a part.
The following summary of certain provisions of the Indenture and the notes does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Indenture, including the definitions
of certain terms therein and those terms made a part thereof by the TIA. We do,
however, believe that we have disclosed to you in this prospectus the material
elements of the Indenture and the notes. Capitalized terms defined in
"-- Certain Definitions" below are used in this "Description of the Notes and
Guarantees" as so defined. For purposes of this Section, any reference to a
"Holder" means a Holder of the notes.
The notes are unsecured obligations of Renters Choice ranking subordinate in
right of payment to all senior indebtedness of Renters Choice. The notes are
fully and unconditionally guaranteed on an unsecured senior subordinated basis
by Renters Choice's existing and future Restricted Subsidiaries.
MATURITY, INTEREST AND PRINCIPAL
The notes are limited to $175 million and mature on August 15, 2008. Each note
bears interest at 11% per annum from the date of issuance, or from the most
recent date to which interest has been paid or provided. Interest is payable
semiannually in cash and in arrears to Holders of record at the close of
business on the February 1 or August 1 immediately preceding the interest
payment date on February 15 and August 15 of each year, beginning February 15,
1999.
Interest is computed on the basis of a 360-day year comprised of twelve 30-day
months. Principal of, premium, if any, and interest on the notes is payable at
the office or agency of Renters Choice in the Borough of Manhattan, The City of
New York (which initially shall be the principal corporate trust office of the
Trustee, at One State Street, New York, New York). The notes may be exchanged at
the same office or agency. However, at the option of Renters Choice, payment of
interest may be made by check mailed to the addresses of the Holders of the
notes as such addresses appear in the Note Register. Any old notes that remain
outstanding after the completion of the exchange offer, together with the
exchange notes issued in connection with the exchange offer, will be treated as
a single class of securities under the Indenture. See "The Exchange Offer" and
"Old Notes Exchange and Registration Rights Agreement."
The notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and integral multiples thereof. No service charge will
be made for any registration of transfer or exchange of notes, but Renters
Choice may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
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OPTIONAL REDEMPTION
The notes are redeemable, at Renters Choice's option, in whole or in part, at
any time and from time to time on and after August 15, 2003 and prior to
maturity. Renters Choice must provide notice of redemption not less than 30 nor
more than 90 days' prior to such redemption by first-class mail to each Holder's
registered address. The notes may be redeemed at the following redemption prices
(expressed as a percentage of principal amount), plus accrued interest, if any,
to the redemption date (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the 12-month period commencing on August 15 of the
years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2003........................................ 105.500%
2004........................................ 103.667%
2005........................................ 101.833%
2006 and thereafter......................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to August 15, 2001, Renters
Choice may redeem up to 33.33% of the original aggregate principal amount of the
notes with the proceeds of one or more Equity Offerings by Renters Choice at a
redemption price (expressed as a percentage of principal amount thereof) of 111%
plus accrued interest, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date). However, at least 66.67% of the original amount
of the notes must remain outstanding after each such redemption. Any redemption
under this provision must occur within 90 days following the closing of any such
Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the notes are redeemed pursuant to an
optional redemption, selection of the notes for redemption will be made by the
Trustee on a pro rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate. No notes of a principal amount or principal amount at
maturity, of $1,000 or less may be redeemed in part. Notice of redemption must
be mailed by first-class mail at least 30 but not more than 90 days before the
redemption date to each Holder of notes to be redeemed at the Holder's
registered address. If any note is to be redeemed in part only, the notice of
redemption that relates to such note must state the portion of the principal
amount or principal amount at maturity, as the case may be, to be redeemed. A
new note in a principal amount equal to the unredeemed portion must be issued in
the name of the Holder upon cancellation of the original note. On and after the
redemption date, interest will cease to accrue on notes or portions thereof
called for redemption as long as Renters Choice has deposited with the paying
agent for the notes funds in satisfaction of the applicable redemption price
pursuant to the Indenture.
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RANKING
The indebtedness evidenced by the notes:
- - is unsecured Senior Subordinated Indebtedness of Renters Choice
- - is subordinated in right of payment, as set forth in the Indenture, to the
payment when due of all existing and future Senior Indebtedness of Renters
Choice, including Renters Choice's Obligations under the Senior Credit
Facility
- - ranks without preference in right of payment with all existing and future
Senior Subordinated Indebtedness of Renters Choice, and
- - is senior in right of payment to all existing and future Subordinated
Obligations of Renters Choice. The notes are also effectively subordinated to
any Secured Indebtedness of Renters Choice and its Subsidiaries to the extent
of the value of the assets securing such Indebtedness. However, payment from
the money or the proceeds of U.S. Government Obligations held in any
defeasance trust described under "-- Defeasance" below is not subordinated to
any Senior Indebtedness or subject to the restrictions described herein.
At September 30, 1998, the outstanding Senior Indebtedness of Renters Choice was
$716.9 million (including the Senior Revolving Credit Facility and excluding
outstanding letters of credit under the Letter of Credit/Multidraw Facility).
Although the Indenture contains limitations on the amount of additional
Indebtedness which Renters Choice may Incur, under certain circumstances the
amount of such Indebtedness could be substantial and, in any case, such
Indebtedness may be Senior Indebtedness. See "-- Certain Covenants -- Limitation
on Indebtedness" below.
Only Indebtedness of Renters Choice that is Senior Indebtedness will rank senior
to the notes in accordance with the provisions of the Indenture. The notes will
rank without preference with all other Senior Subordinated Indebtedness of
Renters Choice. Renters Choice has agreed in the Indenture that it will not
Incur, directly or indirectly, any Indebtedness that is subordinate or junior in
ranking in any respect to Senior Indebtedness unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness. Unsecured Indebtedness is not deemed to be
subordinate or junior to Secured Indebtedness merely because it is unsecured.
Renters Choice may not pay principal of, premium (if any) or interest on, the
notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not otherwise purchase, redeem or otherwise retire
any notes (collectively, "pay the notes") if
- - any Senior Indebtedness is not paid when due in cash or Cash Equivalents, or
- - any other default on Senior Indebtedness occurs and the maturity of such
Senior Indebtedness is accelerated in accordance with its terms unless, in
either case, (A) the default has been cured or waived and any such
acceleration has been rescinded in writing, or (B) such Senior Indebtedness
has been paid in full in cash or Cash Equivalents. However, Renters Choice may
pay the notes without regard to the foregoing if Renters Choice and the
Trustee receive written notice approving such
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payment from the Representative of the Designated Senior Indebtedness with
respect to which either of the events set forth in bullet points above of the
immediately preceding sentence has occurred and is continuing.
If any Designated Senior Indebtedness is in default and such default would allow
the acceleration of the Designated Senior Indebtedness without notice, Renters
Choice will not be permitted to pay the notes for a period (the "Payment
Blockage Period") beginning upon the receipt by the Trustee of written notice (a
"Blockage Notice") of such default from the Designated Senior Indebtedness
representative specifying an election to effect a Payment Blockage Period. This
Payment Blockage Period will end on the earlier of
- - written notice to the Trustee to terminate the period by the person who gave
the Blockage Notice;
- - the discharge or repayment in full of the Designated Senior Indebtedness;
- - the default giving rise to the Blockage Notice is no longer continuing; or
- - 179 days have passed following the delivery of the Blockage Notice.
Unless the maturity of the Designated Senior Indebtedness has been accelerated,
Renters Choice will be permitted to resume payments on the notes after the end
of the Payment Blockage Period. Only one Blockage Notice may be given in a
360-day period, regardless of the number of defaults on the Designated Senior
Indebtedness during that period. However, if a Blockage Notice is given by a
holder of Designated Senior Indebtedness other than Bank Indebtedness during the
360-day period, a representative of Bank Indebtedness may give another Blockage
Notice during the 360-day period. In no event, however, may the total number of
days during which any Payment Blockage Period or Periods is in effect exceed 179
days during any 360 consecutive day period.
The holders of Senior Indebtedness are entitled to receive payment in full
before the noteholders are entitled to receive any payment upon:
- - any payment or distribution of the assets of Renters Choice upon a total or
partial liquidation, dissolution or reorganization of (or a similar
proceeding) relating to Renters Choice; or
- - in a bankruptcy, insolvency, receivership or similar proceeding relating to
Renters Choice.
The holders of Senior Indebtedness will be entitled to receive payment in full
before the noteholders are entitled to receive any payment. Until the Senior
Indebtedness is paid in full, any payment or distribution to which the
noteholders would be entitled (but for the subordination provisions of the
Indenture) will be made to the holders of the Senior Indebtedness as their
interests may appear. If a distribution is made to the noteholders that should
have not been made to them as a result of these subordination provisions, the
noteholders are required to hold such a distribution in trust for the holders of
the Senior Indebtedness and pay it over to them as their interests may appear.
If payment of the notes is accelerated because of an Event of Default, Renters
Choice or the Trustee is required to promptly notify the holders of the
Designated Senior Indebtedness or the representative of such holders of the
acceleration. Renters Choice is not permitted to pay the notes until five
Business Days after such holders or the
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Representative of the Designated Senior Indebtedness receive notice of such
acceleration. At that time, the Company may pay the notes only if the
subordination provisions of the Indenture otherwise permit payment at that time.
As a result of the subordination provisions in the Indenture, creditors of
Renters Choice who are holders of Senior Indebtedness may recover more, ratably,
than the noteholders in the event of insolvency.
GUARANTEES
Each Subsidiary Guarantor will unconditionally guarantee, jointly and severally,
on an unsecured, senior subordinated basis, the full and prompt payment of
principal of, premium, if any, and interest on the notes, and of all other
obligations under the Indenture.
Ranking. The indebtedness evidenced by each Subsidiary Guarantee (including the
payment of principal of, premium, if any, and interest on the notes and other
obligations with respect to the notes) will be subordinated to all Guarantor
Senior Indebtedness of such Subsidiary Guarantor on the same basis as the notes
are subordinated to Senior Indebtedness of Renters Choice. Each Subsidiary
Guarantee will in all respects rank without preference with all other Senior
Subordinated Indebtedness of such Subsidiary Guarantor. In addition, a
Subsidiary Guarantor may not incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect to any Guarantor Senior
Indebtedness of such Subsidiary Guarantor unless such Indebtedness is Guarantor
Senior Subordinated Indebtedness of such Subsidiary Guarantor or is expressly
subordinated in right of payment to Guarantor Senior Subordinated Indebtedness
of such Subsidiary Guarantor. As of September 30, 1998, there was no Guarantor
Senior Indebtedness of Subsidiary Guarantors other than the Guarantees of the
senior credit facility. See "Description of Other Indebtedness." Although the
Indenture contains limitations on the amount of additional Indebtedness that
Renters Choice's Restricted Subsidiaries may incur, under certain circumstances
the amount of such Indebtedness could be substantial and, in any case, such
Indebtedness may be Guarantor Senior Indebtedness. See "-- Certain
Covenants -- Limitation on Indebtedness" and "-- Ranking."
Limitation on Subsidiary Guarantee. The obligation of each Subsidiary Guarantor
under its Subsidiary Guarantee is limited to the maximum amount as will not
constitute a fraudulent conveyance or fraudulent transfer under federal or state
law, after giving effect to:
- - all other contingent and fixed liabilities of the Subsidiary Guarantor
(including any Guarantees under the Senior Credit Facility); and
- - any collections from or payments made by or on behalf of any other Subsidiary
Guarantor with respect to other Subsidiary Guarantor's obligations under its
Subsidiary Guarantee pursuant to its contribution obligations under the
Indenture.
Consolidation and Merger. Each Subsidiary Guarantor is permitted to consolidate
or merge into or sell its assets to Renters Choice or another Wholly-Owned
Subsidiary Guarantor without limitation. Each Subsidiary Guarantor is permitted
to consolidate with or merge into or sell all or substantially all of its assets
to a corporation, partnership, trust,
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limited partnership, limited liability company or other similar entity other
than Renters Choice or another Wholly-Owned Subsidiary Guarantor if:
- - the provisions under the Indenture (including the covenant described under
"-- Certain Covenants -- Limitations on Sales of Assets") are complied with;
and
- - such Subsidiary Guarantor is released from all of its obligations under the
Indenture and its Subsidiary Guarantee (which will terminate). However, any
such termination will only occur to the extent that the Subsidiary Guarantor's
obligations under the Senior Credit Facility and all of its Guarantees of any
other Indebtedness of Renters Choice also terminate.
CHANGE OF CONTROL
Upon the occurrence of a change of control (as defined below), each Holder will
have the right to require Renters Choice to repurchase all or any part of such
Holder's notes at a purchase price in cash equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date). Renters Choice will
not be obligated to purchase the notes, however, if it has exercised its right
to redeem all of the notes as described under "-- Optional Redemption." A
"change of control" is defined as
- - any "Person" (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act), other than one or more Permitted Holders, who is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
shares that any such Person has the right to acquire within one year),
directly or indirectly, of more than 50% of the Voting Stock of Renters Choice
or a Successor Company (as defined below) (including, without limitation,
through a merger or consolidation or purchase of Voting Stock of Renters
Choice); provided that the Permitted Holders do not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors;
- - during any period of two consecutive years, individuals who at the beginning
of such period constituted the Board of Directors (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the stockholders of Renters Choice was approved by a vote of a
majority of the directors of Renters Choice then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office;
- - the sale, lease, transfer, conveyance or other disposition (other than by way
of merger or consolidation), in one or a series of related transactions, of
all or substantially all of the assets of Renters Choice and its Restricted
Subsidiaries taken as a whole to any Person or group of related Persons (a
"Group") (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act) other than a Permitted Holder; or
- - the adoption of a plan relating to the liquidation or dissolution of Renters
Choice.
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Unless Renters Choice has exercised its right to redeem all the Notes as
described under "-- Optional Redemption," Renters Choice is required, within 30
days following any change of control (or at Renters Choice's option, prior to
such change of control but after the public announcement thereof), to mail a
notice to each Holder with a copy to the Trustee stating:
- - that a change of control has occurred or will occur and that such Holder has
(or upon such occurrence will have) the right to require Renters Choice to
purchase such Holder's notes at a purchase price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of Holders of record on a record date
to receive interest on the relevant interest payment date);
- - the circumstances and relevant facts and financial information regarding such
change of control;
- - the date of purchase (which shall be no earlier than 30 days nor later than 90
days from the date such notice is mailed);
- - the instructions determined by Renters Choice, consistent with this covenant,
that a Holder must follow in order to have its notes purchased; and
- - that, if such offer is made prior to such change of control, payment is
conditioned on the occurrence of such change of control.
Renters Choice will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, Renters Choice will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The change of control purchase feature is a result of negotiations between
Renters Choice and the Initial Purchasers. Renters Choice has no present plans
to engage in a transaction involving a change of control, although it is
possible that Renters Choice would decide to do so in the future. Subject to the
limitations discussed below, Renters Choice could, in the future, enter into
certain transactions, including acquisitions, refinancings or recapitalizations,
that would not constitute a change of control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect Renters Choice's capital structure or credit ratings.
The occurrence of a change of control would constitute a default under the
Senior Credit Agreement. Future Senior Indebtedness of Renters Choice may
contain prohibitions of certain events which would constitute a change of
control or require such Senior Indebtedness to be repurchased upon a change of
control. Moreover, the exercise by the Holders of their right to require Renters
Choice to repurchase the notes could cause a default under such Senior
Indebtedness, even if the change of control itself does not, due to the
financial effect of such repurchase on Renters Choice. Finally, Renters Choice's
ability to pay cash to the Holders upon a repurchase may be limited by Renters
Choice's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases.
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The change of control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving Renters Choice by increasing
the capital required to effectuate such transactions. The definition of "change
of control" includes a disposition of all or substantially all of the property
and assets of Renters Choice and its Subsidiaries. With respect to the
disposition of property or assets, the phrase "all or substantially all" as used
in the Indentures varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under New York law and is
subject to judicial interpretation. Accordingly, in certain circumstances there
may be a degree of uncertainty in ascertaining whether a particular transaction
would involve a disposition of "all or substantially all" of the property or
assets of a Person, and therefore it may be unclear as to whether a change of
control has occurred and whether Renters Choice is required to make an offer to
repurchase the notes as described above.
CERTAIN COVENANTS
The Indenture contains covenants, including, among others, the following:
Limitation on Indebtedness. (A) Neither Renters Choice nor any Restricted
Subsidiary may Incur any Indebtedness. However, Renters Choice and any
Restricted Subsidiary which is a Subsidiary Guarantor may Incur Indebtedness and
related Refinancing Indebtedness if, on the date of the Incurrence of such
Indebtedness, the Consolidated Coverage Ratio would be greater than:
- - 2.25 to 1.00 if such Indebtedness is Incurred on or before the second
anniversary of the Issue Date, and
- - 2.50 to 1.00 if such Indebtedness is Incurred after the second anniversary of
the Issue Date.
(B) Renters Choice and its Restricted Subsidiaries may Incur the following types
of Indebtedness:
- - Indebtedness Incurred pursuant to the Senior Credit Facility, or any
refinancing thereof, in a principal amount not to exceed $962.25 million,
- - the Subsidiary Guarantees and Guarantees of Indebtedness Incurred pursuant to
paragraph (A) above, or, Incurred pursuant to the Senior Credit Facility, or
any refinancing thereof, in a principal amount not to exceed $962.25 million,
- - Indebtedness of Renters Choice to any Restricted Subsidiary,
- - Indebtedness of any Wholly Owned Subsidiary to Renters Choice or any
Restricted Subsidiary. However, any subsequent issuance or transfer of any
Capital Stock, or any other event resulting in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any other subsequent
transfer of such Indebtedness, except to Renters Choice or a Wholly Owned
Subsidiary, will be deemed an Incurrence of Indebtedness by Renters Choice or
such Restricted Subsidiary, in the amount remaining outstanding after such
issuance or transfer of such securities,
- - Indebtedness represented by the Notes,
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- - Any Indebtedness and related Refinancing Indebtedness, other than the
Indebtedness described in any of the situations above, outstanding on the date
of the Indenture, and any Incurred in connection with any of the Indebtedness
described,
- - Indebtedness of Renters Choice or any Restricted Subsidiary in the form of
Capitalized Lease Obligations, Purchase Money Obligations or Attributable
Debt, and any related Refinancing Indebtedness, in an aggregate amount note to
exceed 2.5% of Consolidated Tangible Assets outstanding at any one time,
- - Indebtedness under Hedging Obligations, as long as such Hedging Obligations
are entered into for bona fide hedging purposes of Renters Choice or any
Restricted Subsidiary and are either in the ordinary course of business or are
required by the Senior Credit Facility,
- - Indebtedness evidenced by letters of credit assumed in the Transactions or
issued in the ordinary course of business of Renters Choice to secure workers'
compensation and other insurance coverage,
- - Guarantees of Renters Choice for Indebtedness of franchisees not to exceed $50
million outstanding at any one time, and
- - Indebtedness, which may include Bank Indebtedness, in an aggregate principal
amount not to exceed $25 million outstanding at any one time.
(C) Neither Renters Choice nor any Restricted Subsidiary may Incur any
Indebtedness pursuant to paragraph (B) above that permits Refinancing
Indebtedness related to Indebtedness that constitutes Subordinated Obligations,
if the proceeds of such Refinancing Indebtedness are used to Refinance such
Subordinated Obligations. However, such Indebtedness is permitted if the
Refinancing Indebtedness will be subordinated to the notes at least to the same
extent as such Subordinated Obligations.
In addition, no Subsidiary Guarantor may Incur any Indebtedness pursuant to
paragraph (B) above that permits Refinancing Indebtedness with respect to
Indebtedness constituting Guarantor Subordinated Obligations, if the proceeds of
such Refinancing Indebtedness are used to Refinance such Guarantor Subordinated
Obligations of such Subsidiary Guarantor. However, such Indebtedness is
permitted if the Refinancing Indebtedness will be subordinated to the
obligations of such Subsidiary Guarantor under its Subsidiary Guarantee to at
least the same extent as such Guarantor Subordinated Obligations.
(D) If Indebtedness meets the criteria of more than one of the types of
Indebtedness described in paragraph (B) above, then for purposes of determining
compliance with this covenant, including the outstanding principal amount of any
particular Indebtedness relating to this covenant:
- - Renters Choice shall have sole discretion to classify such item of
Indebtedness. Renters Choice is required only to include the amount and type
of such Indebtedness in one of such clauses, and
- - the amount of Indebtedness issued at a price that is less than the principal
amount of such Indebtedness shall be equal to the amount of the liability
attributable to such Indebtedness determined in accordance with GAAP.
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(E) Renters Choice will not permit any Unrestricted Subsidiary to incur any
Indebtedness other than Non-Recourse Debt. However, if any such Indebtedness
ceases to be Non-Recourse Debt, then such event shall constitute an Incurrence
of Indebtedness by Renters Choice or a Restricted Subsidiary.
Limitation on Layering. Renters Choice shall not incur any Indebtedness that is
expressly subordinate in right of payment to any Senior Indebtedness, unless
such Indebtedness is Senior Subordinated Indebtedness or is subordinated in
right of payment to Senior Subordinated Indebtedness by contract.
In addition, no Subsidiary Guarantor will incur any Indebtedness that is
expressly subordinate in right of payment to any Guarantor Senior Indebtedness,
unless such Indebtedness is Guarantor Senior Subordinated Indebtedness of such
Subsidiary Guarantor, or is subordinated in right of payment to Guarantor Senior
Subordinated Indebtedness by contract.
Unsecured indebtedness is not considered subordinate to Secured Indebtedness
merely because it is unsecured, and Indebtedness that is not guaranteed by a
particular person is not deemed to be subordinate to Indebtedness that is so
guaranteed, merely because it is not guaranteed.
Limitation on Restricted Payments. (A) Renters Choice and its Restricted
Subsidiaries are not permitted to take the following actions:
- - Declare or pay any dividend or make any distribution on or with respect to its
Capital Stock, including payments in connection with any merger or
consolidation involving Renters Choice. However, dividends or distributions
are permitted if they are either payable solely in Capital Stock (other than
Disqualified Stock), or payable to Renters Choice or any Restricted
Subsidiary. If such Restricted Subsidiary is not a Wholly Owned Subsidiary,
then the distributions or dividends may be payable to its other shareholders
only if on a pro rata basis, measured by value.
- - Purchase, redeem, retire or otherwise acquire for value any Capital Stock of
Renters Choice or any Restricted Subsidiary held by Persons other than Renters
Choice or another Restricted Subsidiary.
- - Purchase, repurchase, redeem, defease or otherwise acquire or retire for value
any Subordinated Obligation before scheduled maturity, scheduled repayment or
scheduled sinking fund payment. However, this restriction does not apply to a
purchase, repurchase, redemption or other acquisition made in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition.
- - Make certain Restricted Payments. Restricted Payments are defined as any
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment. Renters Choice and its Restricted
Subsidiaries shall not make any Investment, other than a Permitted Investment,
in any Person if at the time Renters Choice or its Restricted Subsidiary makes
a Restricted Payment, if:
- a Default occurs and continues to occur or would result therefrom,
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- if Renters Choice would not incur at least $1.00 of additional
Indebtedness under paragraph (A) of the covenant described in
"Limitation of Indebtedness"), or
- if the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made after the date of the Indenture
would exceed the sum of:
- 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the end of the most
recent fiscal quarter ending before the Issue Date to the end of
the most recent fiscal quarter ending before the date of such
Restricted Payment for which consolidated financial statements of
Renters Choice are available (or, if such Consolidated Net Income
is a deficit, then minus 100% of such deficit);
- the aggregate Net Cash Proceeds received by Renters Choice from
issuing or selling its Capital Stock (other than Disqualified
Stock) after the Issue Date. This does not apply to an issuance
or sale to a Restricted Subsidiary, as long as such issuance or
sale is to an employee stock ownership plan or other trust
established by Renters Choice or any of its Subsidiaries for the
benefit of their employees, to the extent that the purchase by
such plan or trust is financed by Indebtedness of such plan or
trust and for which Renters Choice is liable as a guarantor or
otherwise, such aggregate amount of Net Cash Proceeds shall be
limited to the aggregate amount of principal payments made by
such plan or trust with respect to such Indebtedness, and
- in the case of the disposition or repayment of any Investment
constituting a Restricted payment, without duplication of any
amount deducted in calculating the amount of Investments at any
time outstanding included in the amount of Restricted Payments,
an amount equal to the lesser of the return of capital of similar
repayment with respect to such Investment, or the initial amount
of such Investment, in either case, less the cost of the
disposition of such Investment.
(B) The provisions of paragraph (A) above will not prohibit the following
actions:
- - any purchase, redemption, repurchase, defeasance, retirement or other
acquisition of Capital Stock of Renters Choice or Subordinated Obligations
made by exchange (including any such exchange pursuant to the exercise of a
conversion right or privilege in connection with which cash is paid in lieu of
the issuance of fractional shares) for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of Renters Choice (other than
Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary
or an employee stock ownership plan or other trust established by Renters
Choice or any of its Subsidiaries), provided that:
- such purchase, redemption, repurchase, defeasance, retirement or other
acquisition shall be excluded in subsequent calculations of the amount
of Restricted Payments, and
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- the Net Cash Proceeds or reduction of Indebtedness from such sale shall
be excluded in calculations under paragraph (A) above.
- - any purchase, redemption, repurchase, defeasance, retirement or other
acquisition of Subordinated Obligations made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Subordinated Obligations of
Renters Choice that is permitted to be Incurred by the covenant described
under "Limitation on Indebtedness." However, such purchase, redemption,
repurchase, defeasance, retirement or other acquisition shall be excluded in
subsequent calculations of the amount of Restricted Payments.
- - any purchase, redemption, repurchase, defeasance, retirement or other
acquisition of Subordinated Obligations from Net Available Cash to the extent
permitted by the covenant described under "Limitation on Sales of Assets."
However, such purchase, redemption, repurchase, defeasance, retirement or
other acquisition shall be excluded in subsequent calculations of the amount
of Restricted Payments.
- - Payment of dividends within 60 days after the date of declaration of such
dividends, if at the date of declaration such dividend would have complied
with paragraph (A) above. However, such dividend shall be included in
subsequent calculations of the amount of Restricted Payments.
- - any purchase or redemption of any share of Capital Stock of Renters Choice
from employees of Renters Choice and its Subsidiaries pursuant to the
repurchase provisions under employee stock option or stock purchase agreements
or other agreements to compensate management in am aggregate amount after the
date of the Indenture not in excess of $2.5 million in any fiscal year, plus
any unused amounts under this clause from prior fiscal years. However, such
purchases or redemptions shall be excluded in subsequent calculations of the
amount of Restricted Payments.
- - The repurchase of Renters Choice common stock in an aggregate amount not to
exceed the amount by which the proceeds from the issuance of the Convertible
Preferred Stock exceeds $235 million. However, the aggregate amount of
repurchases made pursuant to his clause shall not exceed $25 million.
Designation of Unrestricted Subsidiaries. The Board of Directors of Renters
Choice may designate any Restricted Subsidiary to be an Unrestricted Subsidiary
if such designation would not cause a default. For purposes or making such
determination, all outstanding Investments by Renters Choice and its Restricted
Subsidiaries (except to the extent repaid in cash) in the subsidiary so
designated will be deemed Restricted Payments at the time of such designation,
and will reduce the amount available for Restricted Payments under clause three
of paragraph (A) of the covenant described in "Limitation on Restricted
Payments."
All such outstanding Investments will be deemed to constitute Investments in an
amount equal to the greater of the fair market value or the book value of such
Subsidiary at the time of such designation. Such Designation will be permitted
only if such Restricted Payment would be permitted at such time, and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
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Limitation on Restrictions on Distributions from Restricted
Subsidiaries. Neither Renters Choice nor any Restricted Subsidiary shall create
or otherwise cause or permit to exist any consensual restriction on the ability
of any Restricted Subsidiary to take the following actions:
- - pay dividends or make any other distributions on its Capital Stock or pay any
Indebtedness or other obligations owed to Renters Choice,
- - make any loans or advances to Renters Choice, or
- - transfer any of its property or assets to Renters Choice.
However, this prohibition does not apply to:
- - any restriction pursuant to an agreement in effect or entered into on the date
of the Indenture (including, without limitation, the Senior Credit Facility),
- - any restriction with respect to a Restricted Subsidiary that is either:
- pursuant to an agreement relating to any Indebtedness Incurred by a
Restricted Subsidiary before the date on which such Restricted
Subsidiary was acquired by Renters Choice, or of another Person that is
assumed by Renters Choice or a Restricted Subsidiary in connection with
the acquisition of assets from, or merger or consolidation with, such
Person and is outstanding on the date of such acquisition, merger or
consolidation. However, this does not include Indebtedness Incurred
either as consideration in, or for the provision of any portion of the
funds or credit support used to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became
a Restricted Subsidiary or was acquired by Renters Choice, or such
acquisition of assets, merger or consolidation, or
- pursuant to any agreement (not relating to any Indebtedness) existing
when a Person becomes a Subsidiary of Renters Choice or when such
agreement is acquired by Renters Choice or any Subsidiary thereof, that
is not created in contemplation of such Person becoming such a
Subsidiary or such acquisition. For purposes of this clause, if another
Person is the Successor Company, any Subsidiary or agreement thereof
shall be deemed acquired or assumed by Renters Choice when such Person
becomes the Successor Company.
- - any restriction with respect to a Restricted Subsidiary pursuant to an
agreement (a "Refinancing Agreement") effecting a refinancing of Indebtedness
Incurred pursuant to, or that otherwise extends, renews, refinances or
replaces, an agreement referred to in this covenant (an "Initial Agreement")
or contained in any amendment to an Initial Agreement. However, the
restrictions contained in any such Refinancing Agreement or amendment cannot
be less favorable to the Holders of the notes taken as a whole than
restrictions contained in the Initial Agreement or Agreements to which such
Refinancing Agreement or amendment relates.
- - any restriction that is a customary restriction on subletting, assignment or
transfer of any property or asset that is subject to a lease, license or
similar contract, or the assignment or transfer of any lease, license or other
contract.
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- - any restriction by virtue of a transfer, agreement to transfer, option, right,
or Lien with respect to any property or assets of Renters Choice or any
Restricted Subsidiary not otherwise prohibited by the Indenture.
- - any restriction contained in mortgages, pledges or other agreements securing
Indebtedness of a Restricted Subsidiary to the extent such encumbrance or
restrictions restrict the transfer of the property subject to such mortgages,
pledges or other security agreements.
- - any restriction pursuant to customary restrictions on dispositions of real
property interests set forth in any reciprocal easement agreements of Renters
Choice or any Restricted Subsidiary.
- - any restriction with respect to a Restricted Subsidiary (or any of its
property or assets) imposed pursuant to an agreement for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary (or the property or assets that are subject to such
restriction) pending the closing of such sale or disposition.
- - any restriction on the transfer of property or assets required by any
regulatory authority having jurisdiction over Renters Choice or any Restricted
Subsidiary or any of their businesses.
Limitation on Sales of Assets. Neither Renters Choice nor any Restricted
Subsidiary shall make any Asset Disposition unless:
- - Renters Choice or such Restricted Subsidiary receives consideration (including
relief from, or the assumption of another Person for, any liabilities,
contingent or otherwise) at the time of such Asset Disposition at least equal
to the fair market value of the shares and assets subject to such Asset
Disposition. The Board of Directors shall determine the fair market value, and
their determination shall be conclusive, including as to the value of all
non-cash consideration.
- - At least 75% of the consideration for any Asset Disposition received by
Renters Choice or such Restricted Subsidiary is in the form of cash. However,
in the case of an Asset Disposition of assets, consideration is excluded if it
is by way of relief from, or by any other person assuming responsibility for,
any liabilities, contingent or otherwise, which are not Indebtedness.
- - Renters Choice or such Restricted Subsidiary applies an amount equal to 100%
of the Net Available Cash from such Asset Disposition in the following manner:
- First, to the extent Renters Choice elects (or is required by the terms
of any Senior Indebtedness or Indebtedness, other than Preferred Stock,
of a Restricted Subsidiary) to prepay, repay or purchase senior
indebtedness or such Indebtedness of a Restricted Subsidiary (in each
case other than the Indebtedness owed to Renters Choice or a Restricted
Subsidiary) within 365 days after the date of such Asset Disposition.
- Second, to the extent of the balance of Net Available Cash, to the extent
Renters Choice or such Restricted Subsidiary elects, to reinvest in
Additional Assets (including by means of an Investment in Additional
Assets by a Restricted Subsidiary with Net Available Cash received by
Renters Choice or another
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Restricted Subsidiary) within 365 days from the date of such Asset
Disposition or, if such reinvestment in Additional Assets is a project
authorized by the Board of Directors that will take longer than 365 days
to complete, the period of time necessary to complete such project.
- Third, to the extent of the balance of such Net Available Cash remaining
(the "Excess Proceeds"), to make an offer to purchase notes at a price in
cash equal to 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the purchase date, and, to the extent
required by the terms thereof, any other Senior Subordinated Indebtedness
subject to the agreements governing such other Indebtedness at a purchase
price of 100% of the principal amount thereof plus accrued and unpaid
interest to the purchase date, and
- Fourth, to the extent of the balance of such Excess Proceeds, to fund any
general corporate purpose, including the repayment of Subordinated
Obligations. However, in connection with any prepayments, repayment or
purchase of Indebtedness pursuant to the first and third clauses above,
Renters Choice or such Restricted Subsidiary will retire such
Indebtedness and will cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased.
The provisions of this covenant do not require Renters Choice and the Restricted
Subsidiaries to apply any Net Available Cash in accordance with this covenant,
except to the extent that the aggregate Net Available Cash from all Asset
Dispositions that is not applied in accordance with this covenant exceeds $10.0
million.
To the extent that the aggregate principal amount of the notes and other Senior
Subordinated Indebtedness tendered pursuant to an offer to purchase made in
accordance with the third clause above exceeds the amount of Excess Proceeds,
the Trustee shall select the notes and Senior Subordinated Indebtedness to be
purchased on a pro rata basis, based on the aggregate principal amount thereof
surrendered in such offer to purchase. When such offer to purchase is complete,
the amount of Excess Proceeds shall be reset to zero.
For the purposes of this covenant, the following are deemed to be cash:
- - Cash Equivalents,
- - the assumption of Indebtedness of Renters Choice (other than Disqualified
Stock of Renters Choice) or any Restricted Subsidiary and the release of
Renters Choice or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition,
- - Indebtedness of any Restricted Subsidiary that is no longer a Restricted
Subsidiary as a result of such Asset Disposition, to the extent that Renters
Choice and each other Restricted Subsidiary is released from any Guarantee of
such Indebtedness in connection with such Asset Disposition,
- - securities received by Renters Choice or any Restricted Subsidiary from the
transferee that are promptly converted by Renters Choice or such Restricted
Subsidiary into cash, and
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- - consideration consisting of Indebtedness of Renters Choice or any Restricted
Subsidiary.
Renters Choice will comply with any applicable requirements of Section 14(e) of
the Exchange Act and any other securities laws or regulations in connection with
the repurchase of notes pursuant to this covenant. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
this covenant, Renters Choice will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
this covenant as a result of such compliance.
Limitation on Transactions with Affiliates. Neither Renters Choice nor any of
its Restricted Subsidiaries shall engage in any transaction or series of
transactions, including the purchase, sale, lease or exchange of any property or
the rendering of any service with any Affiliate of Renters Choice (an "Affiliate
Transaction") on terms that:
- - taken as a whole are less favorable to Renters Choice or such Restricted
Subsidiary than the terms that could be obtained at the time of such
transaction in arm's-length dealings with a non-affiliate, and,
- - in the event such Affiliate Transaction involves an aggregate amount in excess
of $10.0 million, is not in writing and has not been approved by a majority of
the members of the Board of Directors having no material personal financial
interest in such Affiliate Transaction. If there are no such Board members,
then Renters Choice must obtain a Fairness Opinion. A Fairness Opinion means
an opinion from an independent investment banking firm or appraiser of
national prominence which indicates that the terms of such transaction are
fair to Renters Choice or such Restricted Subsidiary from a financial point of
view.
In addition, any transaction involving aggregate payments or other transfers by
Renters Choice and its Restricted Subsidiaries in excess of $20.0 million will
also require a Fairness Opinion.
The provisions of the paragraph above shall not prohibit the following actions:
- - any Restricted Payment permitted by the covenant described under "Limitation
on Restricted Payments" or any Permitted Investment,
- - the performance of the obligations of Renters Choice or a Restricted
Subsidiary under any employment contract, collective bargaining agreement,
service agreement, employee benefit plan, related trust agreement or any other
similar arrangement entered into in the ordinary course of business,
- - payment of compensation, performance of indemnification or contribution
obligations,
- - any issuance, grant or award of stock, options or other securities, to
employees, officers or directors in the ordinary course of business,
- - any transaction between Renters Choice and a Restricted Subsidiary or between
Restricted Subsidiaries,
- - the Transactions and payments of all fees and expenses payable in connection
therewith as described or contemplated by the prospectus,
- - any other transaction arising out of agreements existing on the Issue Date,
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- - transactions with suppliers or other purchasers or sellers of goods or
services, in each case in the ordinary course of business and on terms no less
favorable to Renters Choice or the Restricted Subsidiary than those that could
be obtained at such time in arm's-length dealings with a non-affiliate.
Limitation on the Sale or Issuance of Preferred Stock of Restricted
Subsidiaries. Renters Choice shall not sell any shares of Preferred Stock of a
Restricted Subsidiary, and shall not permit any Restricted Subsidiary to issue
or sell any shares of its Preferred Stock to any Person, other than to Renters
Choice or a Restricted Subsidiary.
Limitation on Liens. Neither Renters Choice nor any Restricted Subsidiary shall
create or permit to exist any Lien (other than Permitted Liens) on any of its
property or assets (including Capital Stock), whether owned on the date of the
Indenture or thereafter acquired, securing any Indebtedness that is not Senior
Indebtedness (the "Initial Lien"), unless at the same time effective provision
is made to secure the obligations due under the Indenture and the notes or, with
respect to Liens on any Restricted Subsidiary's property or assets, equally and
ratably with such obligation for so long as such obligation is secured by such
Initial Lien.
Any such Lien created in favor of the notes will be automatically and
unconditionally released and discharged upon:
- - the release and discharge of the Initial Lien to which it relates, or
- - any sale, exchange or transfer to a non-affiliate of Renters Choice of the
property or assets secured by such Initial Lien, or of all of the Capital
Stock held by Renters Choice or any Restricted Subsidiary, or all or
substantially all of the assets of any Restricted Subsidiary creating such
Lien.
Reporting Requirements. As long as any of the notes are outstanding, Renters
Choice will file with the SEC (unless the SEC will not accept such a filing) the
annual reports, quarterly reports and other documents required to be filed with
the SEC pursuant to Sections 13 and 15 of the Exchange Act, whether or not
Renters Choice is then obligated to file reports pursuant to such sections.
Renters Choice will be required to file with the Trustee and provide to each
holder of notes copies of such reports and documents within 15 days after filing
with the SEC (or if any such filing is not permitted under the Exchange Act, 15
days after Renters Choice would have been required to make such filing).
Future Subsidiary Guarantors. After the Issue Date, Renters Choice will cause
each Restricted Subsidiary created or acquired by Renters Choice to execute and
deliver to the Trustee a Subsidiary Guarantee. Pursuant to such Guarantee, such
Restricted Subsidiary will unconditionally Guarantee, on a joint and several
basis, the full and prompt payment of the principal, premium (if any) and
interest on the notes on a senior unsecured basis.
Limitation on Sale/Leaseback Transactions. Neither Renters Choice nor any
Restricted Subsidiary shall enter into any Sale/Leaseback Transaction for any
property unless:
- - Renters Choice or such Restricted Subsidiary would be entitled to Incur
Indebtedness in an amount equal to the Attributable Debt with respect to such
Sale/Leaseback Transaction pursuant to the covenant described under
"Limitation on Indebtedness;"
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- - the net proceeds received by Renters Choice or any Restricted Subsidiary in
connection with such Sale/Leaseback Transaction are at least equal to the fair
value (as determined by the Board of Directors) of such property; and
- - the transfer of such property is permitted by the covenant described under
"Limitation on Sales of Assets," and Renters Choice or such Restricted
Subsidiary applies the proceeds of such transaction in compliance with the
covenant described under "Limitation on Sales of Assets."
MERGER AND CONSOLIDATION
Renters Choice will not, in a single transaction or a series of related
transactions, consolidate with or merge with or into, or convey, transfer or
lease all or substantially all its assets to, any Person, unless:
- - the resulting, surviving or transferee Person (the "Successor Company") will
be a Person organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia;
- - the Successor Company (if not Renters Choice) will expressly assume, by an
indenture supplemental to the Indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of Renters
Choice under the notes and the Indenture;
- - immediately before and after giving effect to such transaction or series of
transactions no Default or Event of Default exists;
- - Renters Choice or the Successor Company (if Renters Choice is not the
continuing obligor under the Indenture) will, at the time of such transaction
or series of transactions and after giving proforma effect thereto as if such
transaction or series of transactions had occurred at the beginning of the
applicable four-quarter period, be permitted to Incur at least an additional
$1.00 of Indebtedness pursuant to paragraph (A) of "-- Limitation on
Indebtedness;" and
- - Renters Choice will have delivered to the Trustee an Officer's Certificate and
an Opinion of Counsel, each to the effect that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the Indenture,
provided that:
- in giving such opinion such counsel may rely on such Officer's Certificate
as to any matters of fact, including without limitation as to compliance
with the foregoing clauses, and
- no Opinion of Counsel will be required for a consolidation, merger or
transfer described in the previous paragraph of this covenant.
The Successor Company will be substituted for, and may exercise every right and
power of, Renters Choice under the Indenture. Thereafter the Renters Choice
shall be relieved of all obligations and covenants under the Indenture, except
that, in the case of a conveyance, transfer or lease of all or substantially all
its assets, the Renters Choice will not be released from the obligation to pay
the principal of and interest on the notes.
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The provisions of this covenant do not prohibit any Restricted Subsidiary from
consolidating with, merging into or transferring all or part of its properties
and assets to Renters Choice. Additionally, Renters Choice may merge with an
Affiliate incorporated or organized for the purpose of reincorporating or
reorganizing Renters Choice in another jurisdiction to realize tax or other
benefits.
DEFAULTS
An Event of Default under the Indenture is defined as:
- - a default in any payment of interest on any note when due (whether or not such
payment is prohibited by the provisions described under "-- Ranking" above),
continued for 30 days,
- - a default in the payment of principal of any note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, whether or not such payment is prohibited by the provisions
described under "-- Ranking" above,
- - the failure by Renters Choice to comply with its obligations under the
covenant described under "-- Merger and Consolidation" above,
- - the failure by Renters Choice to comply for 30 days after written notice with
any of its obligations under the covenants described under "-- Change of
Control" or "-- Certain Covenants" above (in each case, other than a failure
to purchase notes),
- - the failure by Renters Choice to comply for 60 days after notice with its
other agreements contained in the notes or the Indenture,
- - the failure by Renters Choice or any Significant Subsidiary to pay any
Indebtedness within any applicable grace period after final maturity or the
acceleration of any such Indebtedness by the holders thereof because of a
default if the total amount of such Indebtedness unpaid or accelerated exceeds
$25 million (the "Cross Acceleration Provision"),
- - events of bankruptcy, insolvency or reorganization of Renters Choice or a
Significant Subsidiary (the "Bankruptcy Provisions"),
- - the rendering of any judgment or decree for the payment of money in an amount
(net of any insurance or indemnity payments actually received in respect
thereof prior to or within 90 days from the entry thereof, or to be received
in respect thereof in the event any appeal thereof shall be unsuccessful) in
excess of $25 million against Renters Choice or a Significant Subsidiary that
is not discharged, bonded or insured by a third Person if either an
enforcement proceeding thereon is commenced, or such judgment or decree
remains outstanding for a period of 90 days and is not discharged, waived or
stayed (the "Judgment Default Provision") or
- - the failure of any Guarantee of the notes by a Subsidiary Guarantor to be in
full force (except as contemplated by the terms thereof or of the Indenture)
or the denial in writing by any such Subsidiary Guarantor of its obligations
under the Indenture or any such Guarantee if such Default continues for 10
days.
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The events listed above will constitute Events of Default regardless of their
reasons, whether voluntary or involuntary or whether effected by operation of
law or pursuant to any judgment, decree order, rule or regulation of any
administrative or governmental body.
However, a Default by Renters Choice under the covenants described under "Change
of Control" or "Certain Covenants," or a failure by Renters Choice to comply
with agreements in the notes or the Indenture will not constitute an Event of
Default until the applicable Trustee or the Holders of at least 25% of the
aggregate principal amount of the outstanding applicable notes notify Renters
Choice of the Default and Renters Choice does not cure such Default within the
time specified after receipt of such notice.
If an Event of Default (other than a Default relating to certain events of
bankruptcy, insolvency or reorganization of Renters Choice) occurs and is
continuing, either the Trustee, by notice to Renters Choice, or the Holders of
at least a majority in principal amount of the outstanding notes, by notice to
Renters Choice and the Trustee, may declare the principal of and accrued but
unpaid interest on all of such notes to be due and payable.
Upon such a declaration, such principal and interest will be due and payable
immediately. If an Event of Default relating to events of bankruptcy, insolvency
or reorganization of Renters Choice occurs and is continuing, the principal of
and interest on all the notes will become immediately due and payable without
any declaration or other act on the part of the Trustee or any Holder. Under
certain circumstances, the Holders of a majority in principal amount of the
outstanding notes may rescind any such acceleration with respect to the notes
and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders, unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the notes unless:
- - such Holder has previously given the Trustee notice that an Event of Default
is continuing,
- - Holders of at least 25% in principal amount of the outstanding notes have
requested the Trustee to pursue the remedy,
- - such Holders have offered the Trustee reasonable security or indemnity against
any loss, liability or expense,
- - the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity, and
- - the Holders of a majority in principal amount of the applicable notes have not
given the Trustee a direction inconsistent with such request within such
60-day period.
Subject to certain restrictions, the Holders of a majority in principal amount
of the notes outstanding are given the right to direct the time, method and
place of conducting any
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proceeding for any remedy available to the Trustee or of exercising any trust or
power conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that:
- - conflicts with law or the Indenture,
- - the Trustee determines is unduly prejudicial to the rights of any other
Holder, or
- - would involve the Trustee in personal liability.
Before taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is known
to the Trustee, the Trustee must mail to each Holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium (if any) or interest on any note, the Trustee may
withhold notice if and so long as a committee of its Trust Officers in good
faith determines that withholding notice is in the interests of the Noteholders.
In addition, Renters Choice is required to deliver to the Trustee, within 120
days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year.
Renters Choice also is required to deliver to the Trustee, within 30 days after
the occurrence thereof, written notice of any event which would constitute
certain Defaults, their status and what action Renters Choice is taking or
proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent of
the Holders of a majority in principal amount of the notes then outstanding.
Additionally, any past default on any provisions may be waived with the consent
of the Holders of a majority in principal amount of the notes then outstanding.
However, without the consent of each Holder, no amendment may, among other
things:
- - reduce the principal amount of notes whose Holders must consent to an
amendment,
- - reduce the rate of or extend the time for payment of interest on any note,
- - reduce the principal amount of or extend the Stated Maturity of any note,
- - reduce the premium payable upon the redemption of any note or change the time
at which any note may be redeemed as described under "-- Optional Redemption"
above,
- - make any note payable in money other than that stated in the note,
- - make any change to the subordination provisions of the Indenture that
adversely affects the rights of any Holder,
- - impair the right of any Holder to receive payment of principal of and interest
on such Holder's notes on or after the due dates therefor or to sue for the
enforcement of any payment on or with respect to such Holder's notes, or
- - make any change in the amendment provisions which require each Holder's
consent or in the waiver provisions.
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Without the consent of any Holder, Renters Choice, the Subsidiary Guarantors and
the Trustee may amend the Indenture in the following manner:
- - to cure any ambiguity, omission, defect or inconsistency,
- - to provide for the assumption by a successor corporation of the obligations of
Renters Choice under the Indenture,
- - to provide for uncertificated notes in addition to or in place of certificated
notes (provided, however, that the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated notes are described in Section 163(f)(2)(B) of
the Code),
- - to add Guarantees with respect to the notes, to secure the notes, to add to
the covenants of Renters Choice for the benefit of the Noteholders or to
surrender any right or power conferred upon Renters Choice, and
- - to make any change that does not adversely affect the rights of any Holder, or
to comply with any requirement of the SEC in connection with the qualification
of the Indenture under the TIA.
However, no amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of senior indebtedness
then outstanding unless the holders of such senior indebtedness (or any group or
representative thereof authorized to give a consent) consent to such change.
The consent of the Noteholders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
Indenture becomes effective, Renters Choice is required to mail to the
applicable Noteholders a notice briefly describing such amendment. However, the
failure to give such notice to all such Noteholders, or any defect in such
notice, will not impair or affect the validity of the amendment.
DEFEASANCE
Renters Choice at any time may terminate all its obligations under the Notes and
the Indenture ("legal defeasance"), except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the notes, to replace mutilated, destroyed, lost or stolen notes
and to maintain a registrar and paying agent in respect of the notes. Renters
Choice at any time may terminate its obligations under the covenants described
under "-- Certain Covenants," the operation of the Cross Acceleration Provision,
the Bankruptcy Provisions with respect to Subsidiaries and the Judgment Default
Provision described under "-- Defaults" above and the limitations contained in
the third and fourth clauses under "-- Merger and Consolidation" above
("covenant defeasance").
Renters Choice may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If Renters Choice exercises
its legal defeasance option, payment of the notes may not be accelerated because
of an Event of Default. If Renters Choice exercises its covenant defeasance
option, payment of the notes may not be accelerated because of an Event of
Default specified in clauses four, six, seven, (but only
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with respect to certain bankruptcy events of a Significant Subsidiary), eight or
nine under "-- Defaults" above or because of the failure of Renters Choice to
comply with clause three or four under "-- Merger and Consolidation" above.
Either defeasance option may be exercised before any redemption date or the
maturity date for the notes. In order to exercise either defeasance option,
Renters Choice must irrevocably deposit in trust (the "defeasance trust") with
the Trustee money or U.S. Government Obligations, or a combination thereof, for
the payment of principal of, and premium (if any) and interest on, the
applicable notes to redemption or maturity, as the case may be. Additionally,
Renters Choice must comply with other conditions, including delivery to the
Trustee of an Opinion of Counsel to the effect that Holders of the notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such deposit and defeasance and will be subject to federal income tax in the
same amount and in the same manner and times as would have been the case if such
deposit and defeasance had not occurred. In the case of legal defeasance only,
such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable federal income tax law since the date of
the Indenture.
CONCERNING THE TRUSTEE
IBJ Schroder Bank & Trust Company serves as the Trustee for the notes. The
Trustee has been appointed by Renters Choice as Registrar and Paying Agent with
regard to the notes.
GOVERNING LAW
Both the Indenture and the notes will be governed by, and construed in
accordance with, the laws of the State of New York. Principles of conflicts of
law will not apply to the extent that such principles would require the
application of the law of another jurisdiction.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than Indebtedness
and Capital Stock) to be used by the Company or a Restricted Subsidiary in a
Related Business; (ii) the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of the acquisition of such Capital Stock by the Company
or another Restricted Subsidiary; (iii) Capital Stock of any Person that at such
time is a Restricted Subsidiary, acquired from a third party; provided, however,
that, in the case of clauses (ii) and (iii), such Restricted Subsidiary is
primarily engaged in a Related Business; or (iv) Capital Stock of any Person
which is primarily engaged in a Related Business; provided, however, for
purposes of the covenant described under "-- Certain Covenants -- Limitation on
Sales of Assets," the aggregate amount of Net Available Cash permitted to be
invested pursuant to this clause (iv) shall not exceed at any one time
outstanding 5% of Consolidated Tangible Assets.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
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The Chase Manhattan Bank and its Affiliates shall not be deemed an Affiliate of
the Company.
"Apollo" means Apollo Management IV, L.P. and its Affiliates or any entity
controlled thereby or any of the partners thereof.
"Asset Disposition" means any sale, lease, transfer or other disposition of
shares of Capital Stock of a Restricted Subsidiary (other than directors'
qualifying shares), property or other assets (each referred to for the purposes
of this definition as a "disposition") by the Company or any of its Restricted
Subsidiaries (including any disposition by means of a merger, consolidation or
similar transaction) other than (i) a disposition by a Restricted Subsidiary to
the Company or by the Company or a Restricted Subsidiary to a Restricted
Subsidiary, (ii) a disposition of inventory, equipment, obsolete assets or
surplus personal property in the ordinary course of business, (iii) the sale of
Temporary Cash Investments or Cash Equivalents in the ordinary course of
business, (iv) a transaction or a series of related transactions in which either
(x) the fair market value of the assets disposed of, in the aggregate, does not
exceed 2.5% of the Consolidated Tangible Assets of the Company or (y) the EBITDA
related to such assets does not, in the aggregate, exceed 2.5% of the Company's
EBITDA, (v) the sale or discount (with or without recourse, and on commercially
reasonable terms) of accounts receivable or notes receivable arising in the
ordinary course of business, or the conversion or exchange of accounts
receivable for notes receivable, (vi) the licensing of intellectual property in
the ordinary course of business, (vii) an RTO Facility Swap, (viii) for purposes
of the covenant described under "-- Certain Covenants -- Limitation on Sales of
Assets" only, a disposition subject to the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments," or (ix) a disposition of
property or assets that is governed by the provisions described under "-- Merger
and Consolidation."
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the
time of determination, the present value (discounted at the interest rate
assumed in making calculations in accordance with FAS 13) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Indebtedness or Preferred
Stock multiplied by the amount of such payment by (ii) the sum of all such
payments.
"Bank Indebtedness" means any and all amounts, whether outstanding on the Issue
Date or thereafter incurred, payable under or in respect of the Senior Credit
Facility, including, without limitation, principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company or any Restricted
Subsidiary whether or not a claim for postfiling interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, guarantees,
other monetary obligations of any nature and all other amounts payable
thereunder or in respect thereof.
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"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means a day other than a Saturday, Sunday or other day on which
commercial banking institutions are authorized or required by law to close in
New York City.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Cash Equivalents" means any of the following: (a) securities issued or fully
guaranteed or insured by the United States Government or any agency or
instrumentality thereof, (b) time deposits, certificates of deposit or bankers'
acceptances of (i) any lender under the Senior Credit Agreement or (ii) any
commercial bank having capital and surplus in excess of $500,000,000 and the
commercial paper of the holding company of which is rated at least "A-2" or the
equivalent thereof by S&P or at least "P-2" or the equivalent thereof by Moody's
(or if at such time neither is issuing ratings, then a comparable rating of
another nationally recognized rating agency), (c) commercial paper rated at
least "A1" or the equivalent thereof by S&P or at least "P-1" or the equivalent
thereof by Moody's (or if at such time neither is issuing ratings, then a
comparable rating of another nationally recognized rating agency), (d)
investments in money market funds complying with the risk limiting conditions of
Rule 2a-7 or any successor rule of the SEC under the Investment Company Act, (e)
repurchase obligations of any commercial bank satisfying the requirements of
clause (b) of this definition, having a term of not more than 30 days, with
respect to securities issued or fully guaranteed or insured by the United States
government, (f) securities with maturities of one year or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States, by any political subdivision or taxing authority of any
such state, commonwealth or territory or by any foreign government, the
securities of which state, commonwealth, territory, political subdivision,
taxing authority or foreign government (as the case may be) are rated at least
"A" by S&P or "A" by Moody's and (g) securities with maturities of six months or
less from the date of acquisition backed by standby letters of credit issued by
any commercial bank satisfying the requirements of clause (b) of this
definition.
"Central Acquisition" means the Company's acquisition of substantially all of
the assets of Central Rents, Inc.
"Chase" means The Chase Manhattan Bank.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Company" means the Renters Choice, Inc. after giving effect to the
Rent-A-Center Acquisition.
"Consolidated Coverage Ratio" as of any date of determination means the ratio of
(i) the aggregate amount of EBITDA of the Company and its Restricted
Subsidiaries for the period of the most recent four consecutive fiscal quarters
ending prior to the date of such determination for which consolidated financial
statements of the Company are available to (ii) Consolidated Interest Expense
for such four fiscal quarters (in each of clauses (i) and (ii), determined, for
each fiscal quarter (or portion thereof) of the four fiscal quarters ending
prior to the Issue Date, on a pro forma basis to give effect to the Central
Acquisition and the Transactions (including the anticipated disposition of any
non-rent-to-own businesses under contract for sale or held for sale following
the Issue Date) as if they had occurred at the beginning of such four-quarter
period); provided, however, that: (1) if the Company or any Restricted
Subsidiary (x) has Incurred any Indebtedness since the beginning of such period
that remains outstanding on such date of determination or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio is an
Incurrence of Indebtedness, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day of such
period (except that in making such computation, the amount of Indebtedness under
any revolving credit facility outstanding on the date of such calculation shall
be computed based on (A) the average daily balance of such Indebtedness during
such four fiscal quarters or such shorter period for which such facility was
outstanding or (B) if such facility was created after the end of such four
fiscal quarters, the average daily balance of such Indebtedness during the
period from the date of creation of such facility to the date of such
calculation) and the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new Indebtedness as
if such discharge had occurred on the first day of such period, or (y) has
repaid, repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of the period that is no longer outstanding on such date of
determination, or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio involves a discharge of Indebtedness (in each case
other than Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid), EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving effect on a pro forma
basis to such discharge of such Indebtedness, including with the proceeds of
such new Indebtedness, as if such discharge had occurred on the first day of
such period; (2) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition of any company or
any business or any group of assets, the EBITDA for such period shall be reduced
by an amount equal to the EBITDA (if positive) directly attributable to the
assets that are the subject of such Asset Disposition for such period or
increased by an amount equal to the EBITDA (if negative) directly attributable
thereto for such period and Consolidated Interest Expense for such period shall
be reduced by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to the
Company and its continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period (and, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent the
Company and its continuing Restricted Subsidiaries are no longer liable for such
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Indebtedness after such sale); (3) if since the beginning of such period the
Company or any Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Person that thereby becomes a Restricted Subsidiary, or
otherwise acquired any company or any business or any group of assets, including
any such acquisition of assets occurring in connection with a transaction
causing a calculation to be made hereunder, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto (including the Incurrence of any Indebtedness and including the pro
forma expenses and cost reductions calculated on a basis consistent with
Regulation S-X of the Securities Act) as if such Investment or acquisition
occurred on the first day of such period; and (4) if since the beginning of such
period any Person (that subsequently became a Restricted Subsidiary or was
merged with or into the Company or any Restricted Subsidiary since the beginning
of such period) shall have made any Asset Disposition or any Investment or
acquisition of assets that would have required an adjustment pursuant to clause
(2) or (3) above if made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset Disposition,
Investment or acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
Asset Disposition, Investment or acquisition of assets, or any transaction
governed by the provisions described under "-- Merger and Consolidation," or the
amount of income or earnings relating thereto and the amount of Consolidated
Interest Expense associated with any Indebtedness Incurred or repaid,
repurchased, defeased or otherwise discharged in connection therewith, the pro
forma calculations in respect thereof shall be as determined in good faith by a
responsible financial or accounting officer of the Company, based on reasonable
assumptions. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest expense on such Indebtedness shall be
calculated at a fixed rate as if the rate in effect on the date of determination
had been the applicable rate for the entire period (taking into account any
Interest Rate Agreement applicable to such Indebtedness if such Interest Rate
Agreement has a remaining term as at the date of determination in excess of 12
months). If any Indebtedness bears, at the option of the Company or a Restricted
Subsidiary, a fixed or floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be computed by applying,
at the option of the Company or such Restricted Subsidiary, either a fixed or
floating rate. If any Indebtedness which is being given pro forma effect was
Incurred under a revolving credit facility, the interest expense on such
Indebtedness shall be computed based upon the average daily balance of such
Indebtedness during the applicable period.
"Consolidated Interest Expense" means, as to any Person, for any period, the
total consolidated interest expense of such Person and its Subsidiaries
determined in accordance with GAAP, minus, to the extent included in such
interest expense, amortization or write-off of financing costs plus, to the
extent incurred by such Person and its Subsidiaries in such period but not
included in such interest expense, without duplication, (i) interest expense
attributable to Capitalized Lease Obligations and the interest component of rent
expense associated with Attributable Debt in respect of the relevant lease
giving rise thereto, determined as if such lease were a capitalized lease, in
accordance with GAAP, (ii) amortization of debt discount, (iii) interest in
respect of Indebtedness of any other Person that has been Guaranteed by such
Person or any Subsidiary, but only to the extent that such interest is actually
paid by such Person or any Restricted Subsidiary,
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(iv) non-cash interest expense, (v) net costs associated with Hedging
Obligations, (vi) the product of (A) mandatory Preferred Stock cash dividends in
respect of all Preferred Stock of Subsidiaries of such Person and Disqualified
Stock of such Person held by Persons other than such Person or a Subsidiary
multiplied by (B) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and local
statutory tax rate of such Person, expressed as a decimal, in each case,
determined on a consolidated basis in accordance with GAAP; and (vii) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest to any
Person (other than the referent Person or any Subsidiary thereof) in connection
with Indebtedness Incurred by such plan or trust; provided, however, that as to
the Company, there shall be excluded therefrom any such interest expense of any
Unrestricted Subsidiary to the extent the related Indebtedness is not Guaranteed
or paid by the Company or any Restricted Subsidiary. For purposes of the
foregoing, gross interest expense shall be determined after giving effect to any
net payments made or received by such Person and its Subsidiaries with respect
to Interest Rate Agreements.
"Consolidated Net Income" means, as to any Person, for any period, the
consolidated net income (loss) of such Person and its Subsidiaries before
preferred stock dividends, determined in accordance with GAAP; provided,
however, that there shall not be included in such Consolidated Net Income: (i)
any net income (loss) of any Person if such Person is not (as to the Company) a
Restricted Subsidiary and (as to any other Person) an unconsolidated Person,
except that (A) subject to the limitations contained in clause (iv) below, the
referent Person's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate amount of
cash actually distributed by such Person during such period to the referent
Person or a Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution to a Subsidiary, to the limitations
contained in clause (iii) below) and (B) the net loss of such Person shall be
included to the extent of the aggregate Investment of the referent Person or any
of its Subsidiaries in such Person; (ii) any net income (loss) of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition; (iii) any net income (loss) of any Restricted Subsidiary
(as to the Company) or of any Subsidiary (as to any other Person) if such
Subsidiary is subject to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the limitations contained
in (iv) below, such Person's equity in the net income of any such Subsidiary for
such period shall be included in Consolidated Net Income up to the aggregate
amount of cash that could have been distributed by such Subsidiary during such
period to such Person or another Subsidiary as a dividend (subject, in the case
of a dividend that could have been made to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) the net loss of such Subsidiary
shall be included in determining Consolidated Net Income; (iv) any charges for
costs and expenses associated with the Transactions; (v) any extraordinary gain
or loss; and (vi) the cumulative effect of a change in accounting principles.
"Consolidated Tangible Assets" means, as of any date of determination, the total
assets, less goodwill and other intangibles (other than patents, trademarks,
copyrights, licenses and other intellectual property), shown on the balance
sheet of the Company and its Restricted Subsidiaries as of the most recent date
for which such a balance sheet is available,
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determined on a consolidated basis in accordance with GAAP less all write-ups
(other than write-ups in connection with acquisitions) subsequent to the date of
the Indenture in the book value of any asset (except any such intangible assets)
owned by the Company or any of its Restricted Subsidiaries.
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP;
provided, however, that "Consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary, but the interest of the Company in any
Unrestricted Subsidiary will be accounted for as an investment. The term
"Consolidated" has a correlative meaning.
"Convertible Preferred Stock" means (i) the convertible preferred stock of the
Company issued to Apollo, resulting in gross proceeds to the Company of $250
million, and (ii) the convertible preferred stock of the Company which will be
issued to an Affiliate of Bear, Stearns & Co. concurrently with the issuance of
the Old Notes, resulting in gross proceeds to the Company of $10 million.
"Currency Agreement" means in respect of a Person any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement (including
derivative agreements or arrangements) as to which such Person is a party or a
beneficiary.
"Default" means any event or condition that is, or after notice or passage of
time or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii) any
other Senior Indebtedness which, at the date of determination, has an aggregate
principal amount of, or under which, at the date of determination, the holders
thereof are committed to lend up to, at least $25.0 million and is specifically
designated by the Company in the instrument evidencing or governing such Senior
Indebtedness as "Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
(excluding the Convertible Preferred Stock) that by its terms (or by the terms
of any security into which it is convertible or for which it is exchangeable or
exercisable) or upon the happening of any event (i) matures or is mandatorily
redeemable pursuant to a sinking fund obligation or otherwise, (ii) is
convertible or exchangeable for Indebtedness or Disqualified Stock or (iii) is
redeemable at the option of the holder thereof, in whole or in part, in the case
of clauses (i), (ii) and (iii), on or prior to the 91st day after the Stated
Maturity of the Notes.
"EBITDA" means, as to any Person, for any period, the Consolidated Net Income
for such period, plus the following to the extent included in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense (other than depreciation expense relating to
rental merchandise), (iv) amortization expense and (v) other non-cash charges or
non-cash losses, and minus any gain (but not loss) realized upon the sale or
other disposition of any asset of the Company or its Restricted Subsidiaries
(including pursuant to any Sale/Leaseback Transaction) that is not sold or
otherwise disposed of in the ordinary course of business.
"Equity Offering" means a primary public or private offering or sale of common
stock of the Company, the proceeds of which shall be at least $25.0 million.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States of
America as in effect on the Issue Date (for purposes of the definitions of the
terms "Consolidated Coverage Ratio," "Consolidated Interest Expense,"
"Consolidated Net Income" and "EBITDA," all defined terms in the Indenture to
the extent used in or relating to any of the foregoing definitions, and all
ratios and computations based on any of the foregoing definitions) and as in
effect from time to time (for all other purposes of the Indenture), including
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other nonfinancial
obligation of any other Person, including any such obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or
such other obligation of such other Person (whether arising by virtue of
partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a correlative meaning.
"Guarantor Senior Indebtedness" means, with respect to a Subsidiary Guarantor,
the following obligations, whether outstanding on the date of the Indenture or
thereafter issued, without duplication: (i) any Guarantee of the Senior Credit
Facility by such Subsidiary Guarantor and all other Guarantees by such
Subsidiary Guarantor of Senior Indebtedness of the Company or Guarantor
Indebtedness for any other Subsidiary Guarantor; and (ii) all obligations
consisting of the principal of and premium, if any, and accrued and unpaid
interest (including interest accruing on or after the filling of any petition in
bankruptcy or for reorganization relating to the Subsidiary Guarantor regardless
of whether post filing interest is allowed in such proceeding) on, and fees and
other amounts owing in respect of, all other Indebtedness of the Subsidiary
Guarantor, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is expressly provided that the obligations
in respect of such Indebtedness are not senior in right of payment to the
obligations of such Subsidiary Guarantor under the Subsidiary Guarantee;
provided, however, that Guarantor Senior Indebtedness will not include (1) any
obligations of such Subsidiary Guarantor to another Subsidiary Guarantor or any
other Affiliate of the Subsidiary Guarantor or any such Affiliate's
Subsidiaries, (2) any liability for Federal, state, local, foreign or other
taxes owed or owing by such Subsidiary Guarantor, (3) any accounts payable or
other liability to trade creditors arising in the ordinary course of business
(including Guarantees thereof or instruments evidencing such liabilities) or
other current liabilities (other than current liabilities which constitute
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Bank Indebtedness or the current portion of any long-term Indebtedness which
would constitute Senior Indebtedness but for the operation of this clause (3),
(4) any Indebtedness, Guarantee or obligation of such Subsidiary Guarantor that
is expressly subordinate or junior to any other Indebtedness, Guarantee or
obligation of such Subsidiary Guarantor, including any Guarantor Senior
Subordinated Indebtedness and Guarantor Subordinated Obligations of such
Subsidiary Guarantor (5) Indebtedness which is represented by redeemable Capital
Stock or (6) that portion of any Indebtedness that is incurred in violation of
the Indenture. If any Designated Senior Indebtedness is disallowed, avoided or
subordinated pursuant to the provisions of Section 548 of Title 11 of the United
States Code or any applicable state fraudulent conveyance law, such Designated
Senior Indebtedness nevertheless will constitute Senior Indebtedness.
"Guarantor Senior Subordinated Indebtedness" means with respect to a Subsidiary
Guarantor, the obligations of such Subsidiary Guarantor under the Subsidiary
Guarantee and any other Indebtedness of such Subsidiary Guarantor (whether
outstanding on the Issue Date or thereafter incurred) that specifically provides
that such Indebtedness is to rank pari passu in right of payment with the
obligations of such Subsidiary Guarantor under the Subsidiary Guarantee and is
not expressly subordinated by its terms in right of payment to any Indebtedness
of such Subsidiary Guarantor which is not Guarantor Senior Indebtedness of such
Subsidiary Guarantor.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter incurred) which is expressly subordinate in right
of payment to the obligations of such Subsidiary Guarantor under its Subsidiary
Guarantee pursuant to a written agreement.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered in
the Register.
"Incur" means issue, assume, enter into any Guarantee of, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock of
a Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Subsidiary at the time it becomes a Subsidiary. Any Indebtedness issued
at a discount (including Indebtedness on which interest is payable through the
issuance of additional Indebtedness) shall be deemed incurred at the time of
original issuance of the Indebtedness at the initial accreted amount thereof.
"Indebtedness" means, with respect to any Person on any date of determination
(without duplication): (i) the principal of Indebtedness of such Person for
borrowed money, (ii) the principal of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all reimbursement
obligations of such Person, including reimbursement obligations in respect of
letters of credit or other similar instruments (the amount of such obligations
being equal at any time to the aggregate then undrawn and unexpired amount of
such letters of credit or other instruments plus the aggregate amount of
drawings thereunder that have not then been reimbursed), (iv) all obligations of
such Person to pay the deferred and unpaid purchase price of property or
services (except Trade
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Payables), which purchase price is due more than one year after the date of
placing such property in final service or taking final delivery and title
thereto or the completion of such services, (v) all Capitalized Lease
Obligations and Attributable Debt of such Person, (vi) the redemption, repayment
or other repurchase amount of such Person with respect to any Disqualified Stock
or (if such Person is a Subsidiary of the Company) any Preferred Stock of such
Subsidiary, but excluding, in each case, any accrued dividends (the amount of
such obligation to be equal at any time to the maximum fixed involuntary
redemption, repayment or repurchase price for such Capital Stock, or if such
Capital Stock has no fixed price, to the involuntary redemption, repayment or
repurchase price therefor calculated in accordance with the terms thereof as if
then redeemed, repaid or repurchased, and if such price is based upon or
measured by the fair market value of such Capital Stock, such fair market value
shall be as determined in good faith by the Board of Directors or the board of
directors of the issuer of such Capital Stock), (vii) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided, however, that the amount of
Indebtedness of such Person shall be the lesser of (A) the fair market value of
such asset at such date of determination and (B) the amount of such Indebtedness
of such other Persons, (viii) all Indebtedness of other Persons to the extent
Guaranteed by such Person, and (ix) to the extent not otherwise included in this
definition, net Hedging Obligations of such Person (such obligations to be equal
at any time to the termination value of such agreement or arrangement giving
rise to such Hedging Obligation that would be payable by such Person at such
time).
The amount of Indebtedness of any Person at any date shall be determined as set
forth above or otherwise provided in the Indenture, or otherwise in accordance
with GAAP.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement (including derivative agreements or arrangements) as to which
such Person is party or a beneficiary; provided, however, any such agreements
entered into in connection with the Notes shall not be included.
"Investment" in any Person by any other Person means any direct or indirect
advance, loan or other extension of credit (other than to customers, directors,
officers or employees of any Person in the ordinary course of business) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by, such Person. If the Company or any Restricted
Subsidiary of the Company sells or otherwise disposes of any Capital Stock of
any direct or indirect Restricted Subsidiary of the Company such that, after
giving effect to any such sale or disposition, such entity is no longer a
Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Capital Stock of such Subsidiary not sold or disposed of.
"Issue Date" means the date on which the Old Notes were originally issued
(August 18, 1998).
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"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc., and its successors.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations relating
to the properties or assets that are the subject of such Asset Disposition or
received in any other noncash form) therefrom, in each case net of (i) all
legal, title and recording tax expenses, commissions and other fees and expenses
incurred (including, without limitation, fees and expenses of legal counsel,
accountants and financial advisors), and all Federal, state, provincial, foreign
and local taxes required to be paid or accrued as a liability under GAAP, as a
consequence of such Asset Disposition, (ii) all payments made on any
Indebtedness that is secured by any assets subject to such Asset Disposition, in
accordance with the terms of any Lien upon such assets, or that must by its
terms, or in order to obtain a necessary consent to such Asset Disposition, or
by applicable law be repaid out of the proceeds from such Asset Disposition,
(iii) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition or to any other Person (other than the Company or any Restricted
Subsidiary) owning a beneficial interest in the assets disposed of in such Asset
Disposition and (iv) appropriate amounts to be provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with the
assets disposed of in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds" means, with respect to any issuance or sale of any
securities of the Company or any Subsidiary by the Company or any Subsidiary, or
any capital contribution, the cash proceeds of such issuance, sale or
contribution net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees actually incurred in connection with such issuance, sale or
contribution and net of taxes paid or payable as a result thereof.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor
any Restricted Subsidiary (a) provides any Guarantee or credit support of any
kind (including any undertaking, Guarantee, indemnity, agreement or instrument
that would constitute Indebtedness) or (b) is directly or indirectly liable (as
a guarantor or otherwise) and (ii) no default with respect to which (including
any rights that the holders thereof may have to take enforcement action against
an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of the Company or any Restricted Subsidiary
to declare a default under such other Indebtedness or cause the payment thereof
to be accelerated or payable prior to its stated maturity.
"Officer" means the Chief Executive Officer, President, Chief Financial Officer,
any Vice President, Controller, Secretary or Treasurer of the Company.
"Officer's Certificate" means a certificate signed by one Officer.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
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"Permitted Holders" means Apollo, J. Ernest Talley and Mark E. Speese, their
respective Affiliates and successors or assigns and any Person acting in the
capacity of an underwriter in connection with a public or private offering of
the Company's Capital Stock.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in any of the following: (i) a Restricted Subsidiary, the Company or
a Person that will, upon the making of such Investment, become a Restricted
Subsidiary; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary; (iii)
Temporary Cash Investments or Cash Equivalents; (iv) receivables owing to the
Company or any Restricted Subsidiary, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) securities or other Investments received
as consideration in connection with RTO Facility Swaps or in sales or other
dispositions of property or assets made in compliance with the covenant
described under "Certain Covenants -- Limitation on Sales of Assets;" (vi)
securities or other Investments received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
Subsidiary, or as a result of foreclosure, perfection or enforcement of any
Lien, or in satisfaction of judgments, including in connection with any
bankruptcy proceeding or other reorganization of another Person; (vii)
Investments in existence or made pursuant to legally binding written commitments
in existence on the Issue Date; (viii) Currency Agreements, Interest Rate
Agreements and related Hedging Obligations, which obligations are Incurred in
compliance with the covenant described under "-- Certain
Covenants -- Limitations on Indebtedness;" (ix) pledges or deposits (A) with
respect to leases or utilities provided to third parties in the ordinary course
of business or (B) otherwise described in the definition of "Permitted Liens;"
(x) Investments in a Related Business in an amount not to exceed $10 million in
the aggregate; and (xi) other Investments in an aggregate amount not to exceed
the sum of $10 million and the aggregate non-cash net proceeds received by the
Company from the issue or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Issue Date (other than non-cash proceeds from an
issuance or sale of such Capital Stock to a Subsidiary of the Company or an
employee stock ownership plan or similar trust); provided, however, that the
value of such non-cash net proceeds shall be as conclusively determined by the
Board of Directors in good faith, except that in the event the value of any
non-cash net proceeds shall be $25 million or more, the value shall be as
determined in writing by an independent investment banking firm of nationally
recognized standing.
"Permitted Liens" means: (i) Liens for taxes, assessments or other governmental
charges not yet delinquent or the nonpayment of which in the aggregate would not
be reasonably expected to have a material adverse effect on the Company and its
Restricted Subsidiaries, or that are being contested in good faith and by
appropriate proceedings if adequate reserves with respect thereto are maintained
on the books of the Company or such Subsidiary, as the case may be, in
accordance with GAAP; (ii) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other like Liens arising in the ordinary course of
business in respect of obligations that are not overdue for a period of more
than 60 days or that are bonded or that are being contested in good faith and by
appropriate proceedings; (iii) pledges, deposits or liens in connection with
workers'
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compensation, unemployment insurance and other social security legislation
and/or similar legislation or other insurance-related obligations (including,
without limitation, pledges or deposits securing liability to insurance carriers
under insurance or self-insurance arrangements); (iv) pledges, deposits or Liens
to secure the performance of bids, tenders, trade, government or other contracts
(other than for borrowed money), obligations for or under or in respect of
utilities, leases, licenses, statutory obligations, surety, judgment and appeal
bonds, performance bonds and other obligations of a like nature incurred in the
ordinary course of business; (v) easements (including reciprocal easement
agreements), rights-of-way, building, zoning and similar restrictions, utility
agreements, covenants, reservations, restrictions, encroachments, changes, and
other similar encumbrances or title defects incurred, or leases or subleases
granted to others, in the ordinary course of business, which do not in the
aggregate materially interfere with the ordinary conduct of the business of the
Company and its Subsidiaries, taken as a whole; (vi) Liens existing on, or
provided for under written arrangements existing on, the Issue Date, or (in the
case of any such Liens securing Indebtedness of the Company or any of its
Subsidiaries existing or arising under written arrangements existing on the
Issue Date) securing any Refinancing Indebtedness in respect of such
Indebtedness so long as the Lien securing such Refinancing Indebtedness is
limited to all or part of the same property or assets (plus improvements,
accessions, proceeds or dividends or distributions in respect thereof) that
secured (or under such written arrangements could secure) the original
Indebtedness; (vii) Liens securing Hedging Obligations incurred in compliance
with the covenant described under "-- Certain Covenants -- Limitation on
Indebtedness;" (viii) Liens arising out of judgments, decrees, orders or awards
in respect of which the Company shall in good faith be prosecuting an appeal or
proceedings for review which appeal or proceedings shall not have been finally
terminated, or the period within which such appeal or proceedings may be
initiated shall not have expired; (ix) Liens securing (A) Indebtedness incurred
in compliance with clause (b)(i), (b)(ii) or (b)(v) of the covenant described
under "-- Certain Covenants -- Limitation on Indebtedness," or clause (b)(iv)
thereof (other than Refinancing Indebtedness Incurred in respect of Indebtedness
described in paragraph (a) thereof) or (B) Bank Indebtedness; (x) Liens on
properties or assets of the Company securing Senior Indebtedness; (xi) Liens
existing on property or assets of a Person at the time such Person becomes a
Subsidiary of the Company (or at the time the Company or a Restricted Subsidiary
acquires such property or assets); provided, however, that such Liens are not
created in connection with, or in contemplation of, such other Person becoming
such a Subsidiary (or such acquisition of such property or assets), and that
such Liens are limited to all or part of the same property or assets (plus
improvements, accessions, proceeds or dividends or distributions in respect
thereof) that secured (or, under the written arrangements under which such Liens
arose, could secure) the obligations to which such Liens relate; (xii) Liens on
Capital Stock of an Unrestricted Subsidiary that secure Indebtedness or other
obligations of such Unrestricted Subsidiary; (xiii) Liens securing the Notes;
and (xiv) Liens securing Refinancing Indebtedness Incurred in respect of any
Indebtedness secured by, or securing any refinancing, refunding, extension,
renewal or replacement (in whole or in part) of any other obligation secured by,
any other Permitted Liens, provided that any such new Lien is limited to all or
part of the same property or assets (plus improvements, accessions, proceeds or
dividends or distributions in respect thereof) that secured (or, under the
written arrangements under which the original Lien arose, could secure) the
obligations to which such Liens relate.
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"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Purchase Money Obligations" means any Indebtedness of the Company or any
Restricted Subsidiary incurred to finance the acquisition, construction or
capital improvement of any property or business (including Indebtedness incurred
within 90 days following such acquisition or construction), including
Indebtedness of a Person existing at the time such Person becomes a Restricted
Subsidiary or assumed by the Company or a Restricted Subsidiary in connection
with the acquisition of assets from such Person; provided, however, that any
Lien on such Indebtedness shall not extend to any property other than the
property so acquired or constructed.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) (collectively, "refinances," and "refinanced" shall have
a correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary (to the extent
permitted in the Indenture) and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including Indebtedness
that refinances Refinancing Indebtedness; provided, however, that (i) the
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being refinanced, (ii) the Refinancing Indebtedness
has an Average Life at the time such Refinancing Indebtedness is Incurred that
is equal to or greater than the Average Life of the Indebtedness being
refinanced and (iii) such Refinancing Indebtedness is Incurred in an aggregate
principal amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the aggregate principal amount (or if
issued with original issue discount, the aggregate accreted value) then
outstanding of the Indebtedness being refinanced, plus fees, underwriting
discounts, premiums and other costs and expenses incurred in connection with
such Refinancing Indebtedness; provided further, however, that Refinancing
Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary that
refinances Indebtedness of the Company or (y) Indebtedness of the Company or a
Restricted Subsidiary that refinances Indebtedness of an Unrestricted
Subsidiary.
"Related Business" means those businesses, other than the car rental business,
in which the Company or any of its Subsidiaries is engaged on the date of the
Indenture or that are reasonably related or incidental thereto.
"Rent-A-Center Acquisition" means the acquisition of Rent-A-Center by the
Company.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Subsidiary" means Rent-A-Center, Inc. and ColorTyme, Inc.
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"Revolving Credit Facility" means the revolving credit facility under the Senior
Credit Facility (which may include any swing line or letter of credit facility
or subfacility thereunder).
"RTO Facility" means any facility through which the Company or any of its
Restricted Subsidiaries conducts the business of renting merchandise to its
customers and any facility through which a franchise of the Company or any of
its Subsidiaries conducts the business of renting merchandise to customers.
"RTO Facility Swap" means an exchange of assets (including Capital Stock of a
Subsidiary or the Company) of substantially equivalent fair market value, as
conclusively determined in good faith by the Board of Directors, by the Company
or a Restricted Subsidiary for one or more RTO Facilities or for cash, Capital
Stock, Indebtedness or other securities of any Person owning or operating one or
more RTO Facilities and primarily engaged in a Related Business; provided,
however, that any Net Cash Proceeds received by the Company or any Restricted
Subsidiary in connection with any such transaction must be applied in accordance
with the covenant described under "-- Certain Covenants -- Limitation on Sale of
Assets."
"Sale/Leaseback Transaction" means an arrangement relating to property now owned
or hereafter acquired by the Company or a Restricted Subsidiary whereby the
Company or such Restricted Subsidiary transfers such property to a Person and
the Company or such Restricted Subsidiary leases it from such Person, other than
leases (x) between the Company and a Restricted Subsidiary or (y) required to be
classified and accounted for as capitalized leases for financial reporting
purposes in accordance with GAAP.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a Lien.
"Senior Credit Agreement" means the credit agreement dated as of August 5, 1998,
among the Company, the banks and other financial institutions party thereto from
time to time, Comerica, N.A. as the documentation agent, NationsBank, N.A. as
syndication agent and Chase, as administrative agent, as such agreement may be
assumed by any successor in interest, and as such agreement may be amended,
supplemented, waived or otherwise modified from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid, increased or extended from
time to time (whether in whole or in part, whether with the original agent and
lenders or other agents and lenders or otherwise, and whether provided under the
original Senior Credit Agreement or otherwise).
"Senior Credit Facility" means the collective reference to the Senior Credit
Agreement, any Loan Documents (as defined therein), any notes and letters of
credit issued pursuant thereto and any guarantee and collateral agreement,
patent and trademark security agreement, mortgages, letter of credit
applications and other security agreements and collateral documents, and other
instruments and documents, executed and delivered pursuant to or in connection
with any of the foregoing, in each case as the same may be amended,
supplemented, waived or otherwise modified from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid, increased or extended from
time to time (whether in whole or in part, whether with the original agent and
lenders or other agents and lenders or otherwise, and whether provided under the
original Senior Credit Agreement or otherwise). Without limiting the generality
of the foregoing, the term
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"Senior Credit Facility" shall include any agreement (i) changing the maturity
of any Indebtedness incurred thereunder or contemplated thereby, (ii) adding
Subsidiaries of the Company as additional borrowers or guarantors thereunder,
(iii) increasing the amount of Indebtedness incurred thereunder or available to
be borrowed thereunder or (iv) otherwise altering the terms and conditions
thereof.
"Senior Indebtedness" means the following obligations, whether outstanding on
the date of the Indenture or thereafter issued, without duplication: (i) all
obligations consisting of Bank Indebtedness; and (ii) all obligations consisting
of the principal of and premium, if any, and accrued and unpaid interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company regardless of whether
postfiling interest is allowed in such proceeding) on, and fees and other
amounts owing in respect of, all other Indebtedness of the Company, unless, in
the instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that the obligations in respect of such Indebtedness
are not superior in right of payment to the Notes; provided, however, that
Senior Indebtedness shall not include (1) any obligation of the Company to any
Subsidiary or any other Affiliate of the Company, or any such Affiliate's
Subsidiaries, (2) any liability for Federal, state, foreign, local or other
taxes owed or owing by the Company, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
Guarantees thereof or instruments evidencing such liabilities) or other current
liabilities (other than current liabilities which constitute Bank Indebtedness
or the current portion of any long-term Indebtedness which would constitute
Senior Indebtedness but for the operation of this clause (3)), (4) any
Indebtedness, Guarantee or obligations of the Company that is expressly
subordinate or junior to any other Indebtedness, Guarantee or obligation of the
Company, (5) Indebtedness which is represented by redeemable Capital Stock or
(6) that portion of any Indebtedness that is incurred in violation of the
Indentures. If any Designated Senior Indebtedness is disallowed, avoided or
subordinated pursuant to the provisions of Section 548 of Title 11 of the United
States Code or any applicable state fraudulent conveyance law, such Designated
Senior Indebtedness nevertheless will constitute Senior Indebtedness.
"Senior Subordinated Indebtedness" means the Notes and any other Indebtedness of
the Company that (i) specifically provides that such Indebtedness is to rank
pari passu with the Notes or is otherwise entitled Senior Subordinated
Indebtedness and (ii) is not subordinated by its terms to any Indebtedness or
other obligation of the Company that is not Senior Indebtedness.
"Significant Subsidiary" means (i) each Subsidiary that for the most recent
fiscal year of such Subsidiary had consolidated revenues greater than $10.0
million or as at the end of such fiscal year had assets or liabilities greater
than $10.0 million and (ii) any group of Subsidiaries that, taken together,
would constitute a Significant Subsidiary.
"S&P" means Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc., and its successors.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the
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happening of any contingency beyond the control of the issuer unless such
contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the date of the Indenture or thereafter Incurred) which is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership or
other business entity of which more than 50% of the total voting power of shares
of Capital Stock or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) such Person or (ii) one or more Subsidiaries of
such Person.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
Notes by a Subsidiary Guarantor pursuant to the terms of the Indenture, and,
collectively, all such Guarantees. Each such Subsidiary Guarantee will be in the
form prescribed in the Indenture.
"Subsidiary Guarantor" means (i) Rent-A-Center, Inc. and ColorTyme, Inc. and
(ii) any Restricted Subsidiary created or acquired by the Company after the
Issue Date.
"Successor Company" shall have the meaning assigned thereto in clause (i) under
"-- Merger and Consolidation."
"Temporary Cash Investments" means any of the following: (i) any investment in
direct obligations (x) of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof or
(y) of any foreign country recognized by the United States of America rated at
least "A" by S&P or "A1" by Moody's, (ii) investments in time deposit accounts,
certificates of deposit and money market deposits maturing within 180 days of
the date of acquisition thereof issued by a bank or trust company that is
organized under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States of America having capital
and surplus aggregating in excess of $250 million (or the foreign currency
equivalent thereof) and whose long-term debt is rated "A" by S&P or "A-1" by
Moody's, (iii) repurchase obligations with a term of not more than 180 days for
underlying securities of the types described in clause (i) or (ii) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
Investments in commercial paper, maturing not more than 180 days after the date
of acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America or any
foreign country recognized by the United States of America with a rating at the
time as of which any Investment therein is made of "P-1" (or higher) according
to Moody's or "A-1" (or higher) according to S&P, (v) Investments in securities
with maturities of six months or less from the date of acquisition issued or
fully guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by S&P or "A" by Moody's, (vi) any money market deposit accounts
issued or offered by a domestic commercial bank or a commercial bank organized
and located in a country recognized by the United States of America, in each
case, having capital and surplus in excess of $250 million (or the foreign
currency equivalent thereof), or investments in money market funds complying
with the risk limiting conditions of
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Rule 2a-7 (or any short-term successor rule) of the SEC, under the Investment
Company Act of 1940, as amended, and (vii) similar short-term investments
approved by the Board of Directors in the ordinary course of business.
"Term Loan Facility" means the term loan facilities provided under the Senior
Credit Facility.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. sec.sec.77aaa-77bbbb) as
in effect on the date of the Indenture.
"Trade Payables" means, with respect to any Person, any accounts payable or any
indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Transactions," means collectively the Rent-A-Center Acquisition, the offering
of the Notes, the initial borrowings under the Senior Credit Facility, and all
other transactions relating to the Rent-A-Center Acquisition or the financing
thereof.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designated has total consolidated assets
of $10,000 or less or (B) if such Subsidiary has consolidated assets greater
than $10,000, then such designation would be permitted under "-- Certain
Covenants -- Limitation on Restricted Payments." The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that immediately after giving effect to such designation (x) the
Company could incur at least $1.00 of additional Indebtedness under paragraph
(a) in the covenant described under "-- Certain Covenants -- Limitation on
Indebtedness" and (y) no Default or Event of Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced to
the Trustee by promptly filing with the Trustee a copy of the resolution of the
Company's Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"Voting Stock" of an entity means all classes of Capital Stock of such entity
then outstanding and normally entitled to vote in the election of directors or
all interests in such entity with the ability to control the management or
actions of such entity.
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"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all the
Capital Stock of which (other than directors' qualifying shares) is owned by the
Company or another Wholly Owned Subsidiary.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
Except as set forth below, the exchange notes will be represented by one
permanent global registered note in global form, without interest coupons (the
"Global Note"). The Global Note will be deposited with, or on behalf of, The
Depository Trust Company ("DTC") and registered in the name of Cede & Co., as
nominee of DTC, or will remain in the custody of the Trustee pursuant to the
FAST Balance Certificate Agreement between DTC and the Trustee.
The descriptions of the operations and procedures of DTC, Euroclear and Cedel
set forth below are provided solely as a matter of convenience. These operations
and procedures are solely within the control of the respective settlement
systems and are subject to change by them from time to time. Neither Renters
Choice nor the Initial Purchasers takes any responsibility for these operations
or procedures, and investors are urged to contact the relevant system or its
participants directly to discuss these matters.
DTC has advised Renters Choice that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a "banking organization"
within the meaning of the New York Banking Law, (iii) a member of the Federal
Reserve System, (iv) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (v) a "clearing agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants (collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates. DTC's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Indirect access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. Investors who are not
Participants may beneficially own securities held by or on behalf of DTC only
through Participants or Indirect Participants.
Renters Choice expects that pursuant to procedures established by DTC (i) upon
deposit of each Global Note, DTC will credit the accounts of Participants
designated by the Initial Purchasers with an interest in the Global Note and
(ii) ownership of the Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the interests of Participants) and the records of Participants and the
Indirect Participants (with respect to the interests of persons other than
Participants).
The laws of some jurisdictions may require that certain purchasers of securities
take physical delivery of such securities in definitive form. Accordingly, the
ability to transfer interests in the Notes represented by a Global Note to such
persons may be limited. In addition, because DTC can act only on behalf of its
Participants, who in turn act on behalf of persons who hold interests through
Participants, the ability of a person having an
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interest in notes represented by a Global Note to pledge or transfer such
interest to persons or entities that do not participate in DTC's system, or to
otherwise take actions in respect of such interest, may be affected by the lack
of a physical definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of a Global Note, DTC or
such nominee, as the case may be, will be considered the sole owner or holder of
the notes represented by the Global Note for all purposes under the Indenture.
Except as provided below, owners of beneficial interests in a Global Note will
not be entitled to have notes represented by such Global Note registered in
their names, will not receive or be entitled to receive physical delivery of
Certificated Notes, and will not be considered the owners or holders thereof
under the Indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the Trustee thereunder. Accordingly, each
holder owning a beneficial interest in a Global Note must rely on the procedures
of DTC and, if such holder is not a Participant or an Indirect Participant, on
the procedures of the Participant through which such holder owns its interest,
to exercise any rights of a holder of notes under the Indenture or such Global
Note. Renters Choice understands that under existing industry practice, in the
event that Renters Choice requests any action of holders of notes, or a holder
that is an owner of a beneficial interest in a Global Note desires to take any
action that DTC, as the holder of such Global Note, is entitled to take, DTC
would authorize the Participants to take such action and the Participants would
authorize holders owning through such Participants to take such action or would
otherwise act upon the instruction of such holders. Neither Renters Choice nor
the Trustee will have any responsibility or liability for any aspect of the
records relating to or payments made on account of notes by DTC, or for
maintaining, supervising or reviewing any records of DTC relating to such notes.
Payments with respect to the principal of, and premium, if any, Liquidated
Damages, if any, and interest on, any notes represented by a Global Note
registered in the name of DTC or its nominee on the applicable record date will
be payable by the Trustee to or at the direction of DTC or its nominee in its
capacity as the registered holder of the Global Note representing such notes
under the Indenture. Under the terms of the Indenture, Renters Choice and the
Trustee may treat the persons in whose names the notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving payment
thereon and for any and all other purposes whatsoever. Accordingly, neither
Renters Choice nor the Trustee has or will have any responsibility or liability
for the payment of such amounts to owners of beneficial interests in a Global
Note (including principal, premium, if any, Liquidated Damages, if any, and
interest). Payments by the Participants and the Indirect Participants to the
owners of beneficial interests in a Global Note will be governed by standing
instructions and customary industry practice and will be the responsibility of
the Participants or the Indirect Participants and DTC.
Transfers between Participants in DTC will be effected in accordance with DTC's
procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the notes,
cross-market transfers between the Participants in DTC, on the one hand, and
Euroclear or Cedel participants, on the other hand, will be effected through DTC
in accordance with DTC's
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rules on behalf of Euroclear or Cedel, as the case may be, by its respective
depositary; however, such cross-market transactions will require delivery of
instructions to Euroclear or Cedel, as the case may be, by the counter party in
such system in accordance with the rules and procedures and within the
established deadlines (Brussels time) of such system. Euroclear or Cedel, as the
case may be, will, if the transaction meets its settlement requirements, deliver
instructions to its respective depositary to take action to effect final
settlement on its behalf by delivering or receiving interests in the relevant
Global Notes in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. Euroclear
participants and Cedel participants may not deliver instructions directly to the
depositaries for Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or Cedel
participant purchasing an interest in a Global Note from a Participant in DTC
will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear and Cedel) immediately following the
settlement date of DTC. Cash received in Euroclear or Cedel as a result of sales
of interest in a Global Security by or through a Euroclear or Cedel participant
to a Participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Cedel cash account only
as of the business day for Euroclear or Cedel following DTC's settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among participants in DTC,
Euroclear and Cedel, they are under no obligation to perform or to continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither Renters Choice nor the Trustee will have any responsibility for the
performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED NOTES
If (i) Renters Choice notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation, (ii) Renters Choice, at
its option, notifies the Trustee in writing that it elects to cause the issuance
of Notes in definitive form under the Indenture, or (iii) upon the occurrence of
certain other events as provided in the Indenture, then, upon surrender by DTC
of the Global Notes, Certificated Notes will be issued to each person that DTC
identifies as the beneficial owner of the Notes represented by the Global Notes.
Upon any such issuance, the Trustee is required to register such Certificated
Notes in the name of such person or persons (or the nominee of any thereof) and
cause the same to be delivered thereto.
Neither Renters Choice nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the notes to be issued).
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OLD NOTES EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
Renters Choice and the Initial Purchasers entered into the Exchange and
Registration Rights Agreement on August 18, 1998. Pursuant to the Exchange and
Registration Rights Agreement, Renters Choice agreed to (i) file with the SEC on
or prior to 60 days after the Issue Date a registration statement (the "Exchange
Offer Registration Statement"), relating to the exchange offer for the old notes
under the Securities Act and (ii) use its reasonable efforts to cause the
exchange offer Registration Statement to be declared effective under the
Securities Act within 150 days after the Issue Date. As soon as practicable
after the effectiveness of the Exchange Offer Registration Statement, Renters
Choice will offer to the holders of Transfer Restricted Securities (as defined
below), who are not prohibited by any law or policy of the SEC from
participating in the exchange offer, the opportunity to exchange their Transfer
Restricted Securities for an issue of the exchange notes which are identical in
all material respects to the old notes (except that the exchange notes will not
contain terms with respect to transfer restrictions) and that would be
registered under the Securities Act. Renters Choice will keep the exchange offer
open for not less than 30 days (or longer, if required by applicable law) after
the date on which notice of the exchange offer is mailed to the holders of the
notes.
If (i) because of any change in law or applicable interpretations thereof by the
staff of the SEC, Renters Choice is not permitted to effect the exchange offer
as contemplated hereby; (ii) any old notes validly tendered pursuant to the
exchange offer are not exchanged for exchange notes within 180 days after the
Issue Date; (iii) any Initial Purchaser so requests with respect to old notes
not eligible to be exchanged for exchange notes in the exchange offer; (iv) any
applicable law or interpretations do not permit any Holder of old notes to
participate in the exchange offer; (v) any Holder of old notes that participates
in the exchange offer does not receive freely transferable exchange notes in
exchange for tendered old notes; or (vi) Renters Choice so elects, then Renters
Choice will file with the SEC the Shelf Registration Statement to cover resales
of Transfer Restricted Securities by such Holders who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. For purposes of the foregoing, "Transfer Restricted
Securities" means each old note until (i) the date on which such old note has
been exchanged for a freely transferable exchange note in the exchange offer;
(ii) the date on which such old note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement, or (iii) the date on which such old note is distributed to the public
pursuant to Rule 144 under the Securities Act or is salable pursuant to Rule
144(k) under the Securities Act.
Renters Choice will use its reasonable efforts to have the Exchange Offer
Registration Statement or, if applicable, the Shelf Registration Statement
declared effective by the SEC as promptly as practicable after the filing
thereof. Unless the exchange offer would not be permitted by a policy of the
SEC, Renters Choice will commence the exchange offer and use its reasonable
efforts to consummate the exchange offer as promptly as practicable, but in any
event prior to 180 days after the Issue Date. If necessary, Renters Choice will
use its commercially reasonable efforts to keep the Shelf Registration Statement
effective for a period of two years after the Issue Date.
If (i) the applicable Exchange Offer Registration Statement or, if applicable,
the Shelf Registration Statement, is not filed with the SEC on or prior to 60
days after the Issue Date; (ii) the applicable Exchange Offer Registration
Statement or, if applicable, the
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<PAGE> 157
Shelf Registration Statement, is not declared effective within 150 days after
the Issue Date; (iii) the exchange offer is not consummated on or prior to 180
days after the Issue Date; or (iv) the Shelf Registration Statement is filed and
declared effective within 150 days after the Issue Date but shall thereafter
cease to be effective (at any time that Renters Choice is obligated to maintain
the effectiveness thereof) without being succeeded within 45 days by an
additional Registration Statement filed and declared effective (each such event
referred to in clauses (i) through (iv), a "Registration Default"), Renters
Choice will be obligated to pay liquidated damages to each Holder of Transfer
Restricted Securities, during the period of one or more such Registration
Defaults, in an amount equal to $0.192 per week per $1,000 principal amount of
the notes constituting Transfer Restricted Securities held by such Holder until
the applicable Registration Statement is filed, the Exchange Offer Registration
Statement is declared effective and the exchange offer is consummated or the
Shelf Registration Statement is declared effective or again becomes effective,
as the case may be. All accrued liquidated damages shall be paid to Holders in
the same manner as interest payments on the notes on semi-annual payment dates
which correspond to interest payment dates for the notes. The accrual of
liquidated damages will cease on the day on which all Registration Defaults are
cured.
The Exchange and Registration Rights Agreement also provides that Renters Choice
shall (i) make available for a period of 180 days after the consummation of the
exchange offer a prospectus meeting the requirements of the Securities Act to
any broker-dealer for use in connection with any resale of any such exchange
notes, and (ii) pay all expenses incident to the exchange offer (including the
expense of one counsel to the Holders of the notes) and will indemnify certain
Holders of the notes (including any broker-dealer) against certain liabilities,
including liabilities under the Securities Act. A broker-dealer that delivers
such a prospectus to purchasers in connection with such resales will be subject
to certain of the civil liability provisions under the Securities Act and will
be bound by the provisions of the Exchange and Registration Rights Agreement
(including certain indemnification rights and obligations).
Each Holder of old notes who wishes to exchange such old notes for exchange
notes in the exchange offer will be required to make certain representations,
including representations that (i) any exchange notes to be received by it will
be acquired in the ordinary course of its business; (ii) it has no arrangement
or understanding with any person to participate in the distribution of the
exchange notes; and (iii) it is not an "affiliate" (as defined in Rule 405 under
the Securities Act) of Renters Choice, or if it is an affiliate, that it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
If the Holder is not a broker-dealer, it will be required to represent that it
is not engaged in, and does not intend to engage in, the distribution of the
exchange notes. If the Holder is a broker-dealer that will receive exchange
notes for its own account in exchange for notes that were acquired as a result
of market-making activities or other trading activities (an "Exchanging
Dealer"), it will be required to acknowledge that it will deliver a prospectus
in connection with any resale of such exchange notes.
Holders of the old notes will be required to make certain representations to
Renters Choice (as described above) in order to participate in the exchange
offer and will be required to deliver information to be used in connection with
the Shelf Registration Statement and benefit from the provisions regarding
liquidated damages set forth in the
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preceding paragraphs. A Holder who sells old notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Exchange and Registration Rights Agreement which are
applicable to such a Holder (including certain indemnification obligations).
For so long as the old notes are outstanding, Renters Choice will continue to
provide to Holders of the old notes and to prospective purchasers of the old
notes the information required by Rule 144A(d)(4) under the Securities Act.
The foregoing description of the Exchange and Registration Rights Agreement is a
summary only, does not purport to be complete and is qualified in its entirety
by reference to all provisions of the Exchange and Registration Rights Agreement
which is filed as an exhibit to the Registration Statement of which this
prospectus is a part. However, Renters Choice believes that this prospectus
disclosure presents the material terms of the Exchange and Registration Rights
Agreement.
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CERTAIN U. S. FEDERAL
INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of certain U. S. federal income tax consequences
associated with the exchange of old notes for exchange notes pursuant to the
exchange offer, and does not purport to be a complete analysis of all potential
tax effects. This summary is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed regulations thereunder, published
rulings and court decisions, all as in effect and existing on the date hereof
and all of which are subject to change at any time, which change may be
retroactive. This summary is not binding on the Internal Revenue Service or on
the courts, and no ruling will be requested from the Internal Revenue Service on
any issues described below. There can be no assurance that the Internal Revenue
Service will not take a different position concerning the matters discussed
below.
This summary applies only to those persons who are the initial holders of old
notes, who acquired old notes for cash and who hold old notes as capital assets,
and assumes that the old notes were not issued with "original issue discount,"
as defined in the Code. It does not address the tax consequences to taxpayers
who are subject to special rules (such as financial institutions, tax-exempt
organizations, insurance companies and persons who are not "U.S. Holders"), or
the effect of any applicable U.S. federal estate and gift tax laws or state,
local or foreign tax laws. For purposes of this summary, a "U.S. Holder" means a
beneficial owner of a note who purchased the notes pursuant to the Offering that
is for U.S. federal income tax purposes (i) a citizen or resident of the United
States; (ii) a corporation, partnership or other entity created or organized in
or under the laws of the United States or any political subdivision thereof;
(iii) an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or (iv) a trust if (A) a court within the United
States is able to exercise primary supervision over the administration of the
trust and (B) one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust.
EXCHANGE OFFER
The exchange of old notes for exchange notes pursuant to the exchange offer
should not constitute a taxable exchange for U.S. federal income tax purposes.
Accordingly, a U.S. Holder should not recognize gain or loss upon the receipt of
exchange notes pursuant to the exchange offer, and a U.S. Holder should be
required to include interest on the exchange notes in gross income in the manner
and to the extent interest income was includible under the old notes. A U.S.
Holder's holding period for the exchange notes should include the holding period
of the old notes exchanged therefor, and such holder's adjusted basis in the
exchange notes should be the same as the basis of the old notes exchanged
therefor immediately before the exchange.
The foregoing discussion is included herein for general information only.
Accordingly, each holder should consult with its own tax advisors concerning the
tax consequences of the exchange offer with respect to its particular situation,
including the application and effect of state, local and foreign income and
other tax laws.
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PLAN OF DISTRIBUTION
Based on interpretations by the SEC set forth in no-action letters issued to
third parties, Renters Choice believes that exchange notes issued pursuant to
the exchange offer in exchange for the old notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "affiliate" of Renters Choice within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired notes directly from Renters
Choice or (iii) broker-dealers who acquired notes as a result of market-making
or other trading activities) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such exchange
notes are acquired in the ordinary course of such holders' business, and such
holders are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of such exchange notes; provided that broker-dealers ("Participating
Broker-Dealers") receiving exchange notes in the exchange offer will be subject
to a prospectus delivery requirement with respect to resales of such exchange
notes. To date, the SEC has taken the position that Participating Broker-Dealers
may fulfill their prospectus delivery requirements with respect to transactions
involving an exchange of securities such as the exchange pursuant to the
exchange offer (other than a resale of an unsold allotment from the sale of the
old notes to the Initial Purchasers) with the prospectus contained in the
Exchange Offer Registration Statement. Pursuant to the Exchange and Registration
Rights Agreement, Renters Choice has agreed to permit Participating
Broker-Dealers to use this prospectus in connection with the resale of such
exchange notes. Renters Choice has agreed that, for a period of 180 days after
the Expiration Date, it will make this prospectus, and any amendment or
supplement to this prospectus, available to any broker-dealer that requests such
documents in the letter of transmittal.
Each holder of the old notes who wishes to exchange its old notes for exchange
notes in the exchange offer will be required to make certain representations to
Renters Choice as set forth in "The Exchange Offer -- Purpose and Effect of the
Exchange Offer."
Each broker-dealer that receives exchange notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange notes received in exchange for old notes
where such old notes were acquired as a result of market-making activities or
other trading activities. Renters Choice has agreed that, for a period of 180
days after the consummation of the exchange offer, it will use its commercially
reasonable efforts to make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until [ , 1999,] all dealers effecting transactions in
the exchange notes may be required to deliver a prospectus.
Renters Choice will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who
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may receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the consummation of the exchange offer, Renters
Choice will promptly send additional copies of this prospectus and any amendment
or supplement to this prospectus to any broker-dealer that requests such
documents in the letter of transmittal. Renters Choice has agreed to pay all
expenses incident to the exchange offer (including the expenses of one counsel
for the Holders of the notes) other than commissions or concessions of any
broker-dealers and will indemnify the Holders of the Securities (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
EXPERTS
The audited financial statements of Renters Choice included in this prospectus
for the years ended December 31, 1995, 1996 and 1997 have been audited by Grant
Thornton LLP, independent certified public accountants, as stated in their
reports included herein.
The consolidated financial statements of THORN Americas, Inc. and subsidiaries
at March 31, 1998 and 1997, and for each of the three years in the period ended
March 31, 1998, appearing in this prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The audited financial statements of Central Rents, Inc. included in this
prospectus for the years ended December 31, 1995, 1996 and 1997 have been
audited by Arthur Andersen LLP, independent public accountants, as stated in
their reports included herein.
LEGAL MATTERS
The validity of the exchange notes offered hereby will be passed upon for
Renters Choice by Winstead Sechrest & Minick P.C., Dallas, Texas.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF RENTERS CHOICE, INC. AND
SUBSIDIARIES
Report of Independent Certified Public Accountants........ F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997 and September 30, 1998 (unaudited)................ F-3
Consolidated Statements of Earnings for the years ended
December 31, 1995, 1996 and 1997 and the nine month
periods ended September 30, 1997 and 1998
(unaudited)............................................ F-4
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997 and the
nine month period ended September 30, 1998
(unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and the nine month
periods ended September 30, 1997 and 1998
(unaudited)............................................ F-6
Notes to Consolidated Financial Statements................ F-8
FINANCIAL STATEMENTS OF THORN AMERICAS, INC. AND
SUBSIDIARIES
Report of Independent Auditors............................ F-26
Consolidated Balance Sheets as of March 31, 1997 and 1998
and June 30, 1998 (unaudited).......................... F-27
Consolidated Statements of Operations for the years ended
March 31, 1996, 1997 and 1998 and the three month
periods ended June 30, 1997 and 1998 (unaudited)....... F-29
Consolidated Statements of Stockholder's Equity for the
years ended March 31, 1996, 1997 and 1998 and the three
month period ended June 30, 1998 (unaudited)........... F-30
Consolidated Statements of Cash Flows for the years ended
March 31, 1996, 1997 and 1998 and the three month
periods ended June 30, 1997 and 1998 (unaudited)....... F-31
Notes to Consolidated Financial Statements................ F-33
FINANCIAL STATEMENTS OF CENTRAL RENTS, INC.
Report of Independent Public Accountants.................. F-45
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)................................... F-46
Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and the three month periods ended
March 31, 1997 and 1998 (unaudited).................... F-47
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 and the three
month period ended March 31, 1998 (unaudited).......... F-48
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and the three month periods ended
March 31, 1997 and 1998 (unaudited).................... F-49
Notes to Financial Statements............................. F-50
</TABLE>
F-1
<PAGE> 163
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Renters Choice, Inc.
We have audited the accompanying consolidated balance sheets of Renters Choice,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Renters Choice,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
February 12, 1998
F-2
<PAGE> 164
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 5,920 $ 4,744 $ 90,483
Rental merchandise, net
On rent........................................... 71,620 89,007 371,018
Held for rent..................................... 23,490 23,752 110,963
Accounts receivable -- trade........................ 3,021 2,839 2,676
Prepaid expenses and other assets................... 4,369 3,164 89,646
Property assets, net................................ 12,716 17,700 89,001
Deferred income taxes............................... 6,138 6,479 163,109
Intangible assets, net.............................. 47,193 61,183 695,266
Due from seller of acquired business................ -- -- 34,651
-------- -------- ----------
$174,467 $208,868 $1,646,813
======== ======== ==========
LIABILITIES
Senior term debt.................................. $ 14,435 $ 26,280 $ 716,880
Subordinated notes payable........................ -- -- 175,000
Accounts payable -- trade......................... 17,047 11,935 93,173
Accrued liabilities............................... 12,924 17,008 250,877
Other debt........................................ 4,558 892 1,032
Preferred dividends payable....................... -- -- 1,496
-------- -------- ----------
48,964 56,115 1,238,458
COMMITMENTS AND CONTINGENCIES....................... -- -- --
PREFERRED STOCK
Redeemable preferred stock, net of placement
costs, $0.01 par value, 5,000,000 shares
authorized; 260,000 shares issued and
outstanding..................................... -- -- 259,476
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 50,000,000 shares
authorized; 24,791,085 and 24,904,721 shares
issued in 1996 and 1997, respectively, and
25,053,233 shares at September 30, 1998......... 248 249 251
Additional paid-in capital........................ 98,010 99,381 100,973
Retained earnings................................. 27,245 53,123 72,655
-------- -------- ----------
125,503 152,753 173,879
Treasury stock, 990,099 shares at cost............ -- -- (25,000)
-------- -------- ----------
125,503 152,753 148,879
-------- -------- ----------
$174,467 $208,868 $1,646,813
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 165
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue
Store
Rentals and fees........................ $126,264 $198,486 $275,344 $200,970 $400,793
Merchandise sales....................... 6,383 10,604 14,125 10,774 24,329
Other................................... 642 687 679 525 2,094
Franchise
Merchandise sales....................... -- 25,229 37,385 23,971 28,440
Royalty income and fees................. -- 2,959 4,008 3,013 3,777
-------- -------- -------- -------- --------
133,289 237,965 331,541 239,253 459,433
Operating expenses
Direct store expenses
Depreciation of rental merchandise...... 29,640 42,978 57,223 42,271 91,382
Cost of merchandise sold................ 4,954 8,357 11,365 8,355 16,600
Salaries and other expenses............. 70,012 116,577 162,458 119,339 238,577
Franchise operating expense
Cost of merchandise sales............... -- 24,010 35,841 22,929 27,318
-------- -------- -------- -------- --------
104,606 191,922 266,887 192,894 373,877
General and administrative expenses........ 5,766 10,111 13,304 9,597 18,054
Amortization of intangibles................ 3,109 4,891 5,412 4,016 7,767
-------- -------- -------- -------- --------
Total operating expenses........... 113,481 206,924 285,603 206,507 399,698
-------- -------- -------- -------- --------
Operating profit................... 19,808 31,041 45,938 32,746 59,735
Interest expense............................. 2,202 606 2,194 1,402 18,469
Nonrecurring financing costs................. -- -- -- -- 5,017
Interest income.............................. (890) (667) (304) (256) (1,932)
-------- -------- -------- -------- --------
Earnings before income taxes....... 18,496 31,102 44,048 31,600 38,181
Income tax expense........................... 7,784 13,076 18,170 13,108 17,153
-------- -------- -------- -------- --------
NET EARNINGS....................... 10,712 18,026 25,878 18,492 21,028
Preferred dividends.......................... -- -- -- -- 1,496
-------- -------- -------- -------- --------
NET EARNINGS ALLOCABLE TO COMMON
STOCKHOLDERS.................... $ 10,712 $ 18,026 $ 25,878 $ 18,492 $ 19,532
======== ======== ======== ======== ========
Basic earnings per share..................... $ 0.52 $ 0.73 $ 1.04 $ 0.74 $ 0.79
======== ======== ======== ======== ========
Diluted earnings per share................... $ 0.52 $ 0.72 $ 1.03 $ 0.74 $ 0.78
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 166
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNAMORTIZED
COMMON STOCK ADDITIONAL VALUE
---------------- PAID-IN RETAINED OF STOCK TREASURY
SHARES AMOUNT CAPITAL EARNINGS AWARD STOCK TOTAL
------ ------ ---------- -------- ----------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995............. 4,300... $ 43 $ 116 $ 9,126 $ -- $ -- $ 9,285
Net earnings......................... -- -- -- 10,712 -- -- 10,712
Dividends paid....................... -- -- -- (1,493) -- -- (1,493)
Contribution of undistributed S
corporation earnings............... -- -- 9,126 (9,126) -- -- --
Initial public offering of common
stock.............................. 2,587 26 23,370 -- -- -- 23,396
Issuance of common stock under stock
option plan........................ 1 -- 10 -- -- -- 10
Three-for-two common stock split
effected in the form of a
dividend........................... 3,444 34 (34) -- -- -- --
Two-for-one common stock split
effected in the form of a
dividend........................... 10,333 103 (103) -- -- -- --
Stock award.......................... 63 1 960 -- (961) -- --
Amortization of stock award.......... -- -- -- -- 63 -- 63
Public offering of common stock...... 3,650 37 54,474 -- -- -- 54,511
------ ---- -------- ------- ----- -------- --------
Balance at December 31, 1995........... 24,378 244 87,919 9,219 (898) -- 96,484
Net earnings......................... -- -- -- 18,026 -- -- 18,026
Amortization of stock award.......... -- -- -- -- 322 -- 322
Termination of stock award........... (37) -- (576) -- 576 -- --
Exercise of stock options............ 107 1 695 -- -- -- 696
Tax benefits related to exercise of
stock options...................... -- -- 460 -- -- -- 460
Acquisition of ColorTyme, Inc........ 343 3 9,512 -- -- -- 9,515
------ ---- -------- ------- ----- -------- --------
Balance at December 31, 1996........... 24,791 248 98,010 27,245 -- -- 125,503
Net earnings......................... -- -- -- 25,878 -- -- 25,878
Exercise of stock options............ 114 1 950 -- -- -- 951
Tax benefits related to exercise of
stock options...................... -- -- 421 -- -- -- 421
------ ---- -------- ------- ----- -------- --------
Balance at December 31, 1997........... 24,905 249 99,381 53,123 -- -- 152,753
Net earnings (Unaudited)............. -- -- -- 21,028 -- -- 21,028
Preferred dividends (Unaudited)...... -- -- -- (1,496) -- -- (1,496)
Purchase of treasury stock
(Unaudited)........................ -- -- -- -- -- (25,000) (25,000)
Exercise of stock options
(Unaudited)........................ 148 2 1,592 -- -- -- 1,594
------ ---- -------- ------- ----- -------- --------
Balance at September 30, 1998
(Unaudited).......................... 25,053 $251 $100,973 $72,655 $ -- $(25,000) $148,879
====== ==== ======== ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 167
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings.............................. $ 10,712 $ 18,026 $ 25,878 $ 18,492 $ 19,532
Adjustments to reconcile net earnings to
net cash provided by (used in) operating
activities
Depreciation of rental merchandise...... 29,640 42,978 57,223 42,271 91,382
Depreciation of property assets......... 2,130 3,680 5,601 3,985 10,539
Amortization of intangibles............. 3,109 4,891 5,412 4,017 7,767
Nonrecurring charges -- financing
costs................................. -- -- -- -- 5,017
Nonrecurring charges -- assets related
to name change........................ -- -- -- -- 2,451
Amortization of financing fees.......... -- -- -- -- 546
Deferred income taxes................... 1,406 4,961 (341) -- 1,826
Other................................... (91) 24 -- (5) --
Changes in operating assets and
liabilities, net of effects of
acquisitions
Rental merchandise...................... (39,220) (64,927) (64,346) (48,262) (98,839)
Accounts receivable -- trade............ -- (602) 182 495 464
Prepaid expenses and other assets....... (2,636) 524 1,252 544 (19,036)
Accounts payable -- trade............... (28) 10,745 (5,112) (5,539) 20,812
Accrued liabilities..................... 183 (939) 3,033 5,643 (74,320)
-------- -------- -------- -------- ---------
Net cash provided by (used in)
operating activities............. 5,205 19,361 28,782 21,641 (31,859)
Cash flows from investing activities
Purchase of property assets............... (3,473) (8,187) (10,446) (7,636) (9,732)
Proceeds from sale of property assets..... 414 303 376 219 1,029
Acquisitions of businesses, net of cash
acquired of $56,028 in 1998............. (21,680) (28,367) (30,491) (29,274) (946,117)
-------- -------- -------- -------- ---------
Net cash used in investing
activities....................... (24,739) (36,251) (40,561) (36,691) (954,820)
Cash flows from financing activities
Purchase of treasury stock................ -- -- -- -- (25,000)
Financing fees paid....................... -- -- -- -- (29,035)
Proceeds from issuance of preferred
stock................................... -- -- -- -- 259,476
Proceeds from public stock offerings...... 77,907 -- -- -- --
Exercise of stock options................. 10 696 951 752 1,594
Distributions to stockholders............. (1,493) -- -- -- --
Proceeds from debt........................ 33,083 37,733 80,656 71,290 1,250,863
Repayments of debt........................ (49,843) (72,278) (71,004) (56,631) (385,480)
Repayments of note payable to
stockholder............................. (6,250) -- -- -- --
Sale of notes receivable.................. -- 21,338 -- -- --
-------- -------- -------- -------- ---------
Net cash provided by (used in)
financing activities............. 53,414 (12,511) 10,603 15,411 1,072,418
-------- -------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................. 33,880 (29,401) (1,176) 361 85,739
Cash and cash equivalents at beginning of
year...................................... 1,441 35,321 5,920 5,920 4,744
-------- -------- -------- -------- ---------
Cash and cash equivalents at end of year.... $ 35,321 $ 5,920 $ 4,744 $ 6,281 $ 90,483
======== ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 168
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1995 1996 1997 1997 1998
------ ------ ------- ------- -------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest........................ $1,711 $ 929 $ 1,962 $ 1,417 $11,102
Income taxes.................... $7,764 $8,426 $13,983 $10,316 $10,297
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
In conjunction with the businesses acquired, liabilities were assumed as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- -----------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Fair value of assets
acquired................... $ 68,285 $ 57,223 $ 30,491 $ 29,274 $ 1,348,831
Stock and options issued..... -- (9,515) -- -- --
Cash paid.................... (21,680) (28,367) (30,491) (29,274) (1,002,145)
-------- -------- -------- -------- -----------
Liabilities
assumed......... $ 46,605 $ 19,341 $ -- $ -- $ 346,686
======== ======== ======== ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 169
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
Principles of Consolidation and Nature of Operations
The accompanying financial statements include the accounts of Renters Choice,
Inc. (Renters Choice) and its franchise subsidiaries ColorTyme, Inc. (ColorTyme)
(collectively, the Company). All significant intercompany accounts and
transactions have been eliminated. Renters Choice leases household durable goods
to customers on a rent-to-own basis. At December 31, 1997, the Company operated
504 stores which were located throughout the United States and the Commonwealth
of Puerto Rico (sixteen stores).
ColorTyme is a nationwide franchisor of television, stereo and furniture rental
centers. ColorTyme's primary source of revenues is the sale of rental equipment
to its franchisees, who, in turn, offer the equipment to the general public for
rent or purchase under a rent-to-own program. The balance of ColorTyme's
revenues are generated primarily from royalties based on the franchisee's
monthly gross revenues. At December 31, 1997, there were approximately 262
franchised rental centers operating in 37 states.
Segment Disclosures
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The Company adopted SFAS
131 in 1998. The Company's only segments which require separate disclosure under
the reporting guidelines of SFAS 131 are its rent-to-own and franchise
operations.
Rental Merchandise
Rental merchandise is carried at the lower of depreciated cost or net realizable
value. Depreciation is provided using the income forecasting method which is
intended to match as closely as practicable the recognition of depreciation
expense with the consumption of the rental merchandise, and assumes no salvage
value. The consumption of rental merchandise occurs during periods of rental and
directly coincides with the receipt of rental revenue over the rental-purchase
agreement period, generally 18 to 24 months. Under the income forecasting
method, merchandise held for rent is not depreciated, and merchandise on rent is
depreciated in the proportion of rents received to total rents provided in the
rental contract, which is an activity based method similar to the units of
production method.
F-8
<PAGE> 170
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS -- (CONTINUED)
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include all highly liquid
investments with an original maturity of three months or less.
Rental Revenue and Fees
Merchandise is rented to customers pursuant to rental-purchase agreements which
provide for weekly or monthly rental terms with nonrefundable rental payments.
Generally, the customer has the right to acquire title either through a purchase
option or through payment of all required rentals. Rental revenue and fees are
recognized over the rental term. No revenue is accrued because the customer can
cancel the rental contract at any time and the Company cannot enforce collection
for nonpayment of rents. A provision is made for estimated losses of rental
merchandise damaged or not returned by customers.
ColorTyme's revenue from the sale of rental equipment is recognized upon
shipment of the equipment to the franchisee.
Property Assets and Related Depreciation
Furniture, equipment and vehicles are stated at cost. Depreciation is provided
over the estimated useful lives of the respective assets (generally five years)
by the straight-line method. Leasehold improvements are amortized over the term
of the applicable leases by the straight-line method.
Intangible Assets and Amortization
Intangible assets are stated at cost less accumulated amortization calculated by
the straight-line method.
Accounting for Impairment of Long-Lived Assets
The Company evaluates all long-lived assets, including all intangible assets,
for impairment whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable. Impairment is recognized when the
carrying amounts of such assets cannot be recovered by the undiscounted net cash
flows they will generate. Impairment is measured as the amount by which the
carrying value of the asset exceeds the fair value. Fair value is based on
management's knowledge of current market conditions or the present value of
estimated expected future cash flows.
Income Taxes
Effective January 1, 1995, the Company terminated its S corporation status and
became a C corporation and, therefore, is subject to Federal income taxes. The
Company provides
F-9
<PAGE> 171
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS -- (CONTINUED)
deferred taxes for temporary differences between the tax and financial reporting
bases of assets and liabilities at the rate expected to be in effect when taxes
become payable.
Earnings Per Share and Stock Splits
Effective for the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS 128), which
requires the computation of basic and diluted earnings per share. The provisions
of SFAS 128 have been applied retroactively to all periods presented herein.
Basic earnings per share are based upon the weighted average number of common
shares outstanding during each period presented. Diluted earnings per share are
based upon the weighted average number of common shares outstanding during the
period, plus the assumed exercise of stock options at the beginning of the year.
In June 1995, the Company effected a 3-for-2 split of its common stock through
the distribution of one-half additional share of common stock as a dividend with
respect to each outstanding share of common stock.
On September 11, 1995, the Board of Directors approved a 2-for-1 stock split, to
be effected as a 100% stock dividend for shareholders of record as of September
29, 1995.
All share and per share data has been retroactively restated to reflect these
transactions.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expense was $6.4 million, $10.6 million and $13.7 million
in 1995, 1996 and 1997, respectively; and $10.0 million (unaudited) and $13.0
million (unaudited) for the nine months ended September 30, 1997 and 1998,
respectively.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire that stock.
F-10
<PAGE> 172
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS -- (CONTINUED)
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues during the reporting period. Actual results could differ from those
estimates.
Interim Financial Statements
In the opinion of management, the unaudited interim financial statements as of
September 30, 1998 and for the nine months ended September 30, 1997 and 1998
include all adjustments, consisting only of those of a normal recurring nature,
necessary to present fairly the Company's financial position as of September 30,
1998 and the results of its operations and cash flows for the nine months
periods ended September 30, 1997 and 1998. The results of operations for the
nine months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income". This Statement establishes
standards for reporting and display of comprehensive income and its components.
The only component of comprehensive income for the three years in the period
ended December 31, 1997 and the nine month periods ended September 30, 1997 and
1998, was net earnings as reported in the Consolidated Statements of Earnings.
Reclassifications
Certain reclassifications have been made to conform to the 1997 presentation.
NOTE B -- ACQUISITIONS
On May 28, 1998, the Company completed its acquisition of the assets of 176
Central Rents, Inc. stores for approximately $100 million (Unaudited).
On August 5, 1998, the Company acquired all of the outstanding common stock of
THORN Americas, Inc. (1,404 company-owned stores) for approximately $900 million
in cash. The acquisition was financed via $720 million in variable rate senior
debt maturing in 6 to 8 1/2 years, $175 million of 11% senior subordinated debt
maturing in 11 years, and $260 million of redeemable, convertible preferred
stock. As a result of the transaction, the Company recorded goodwill of
approximately $565 million, to be amortized over its estimated useful life of 30
years. The purchase agreement provided for a purchase price
F-11
<PAGE> 173
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- ACQUISITIONS -- (CONTINUED)
adjustment based on the change in closing adjusted net worth at the acquisition
date, as defined in the agreement. The adjustment is not expected to be
material. (Unaudited).
During 1997, the Company acquired the assets of 76 stores in eighteen separate
transactions for approximately $30.5 million in cash.
On May 15, 1996 the Company acquired all the outstanding common stock of
ColorTyme for $14.5 million, including acquisition costs, comprised of cash of
$4.7 million and 343,175 shares of the Company's common stock and 314,000
options for the Company's common stock valued at $3.0 million.
Immediately following the purchase of ColorTyme by the Company, ColorTyme sold
its loan portfolio (with certain recourse provisions) to a third party for
approximately $21.7 million. No gain or loss was recognized on the sale.
ColorTyme simultaneously paid off notes payable owed to a finance company of
approximately $13.2 million.
The Company acquired the assets of an additional ninety-four stores in
twenty-three transactions during 1996, for approximately $25.6 million in cash
and $1.8 million in notes.
In April 1995, the Company acquired 72 stores from Crown Leasing Corporation and
certain of its affiliates (Crown) for a cash purchase price of approximately
$20.6 million.
In September 1995, the Company completed the acquisition of 135 rent-to-own
stores through the purchase of the common stock of Pro Rental, doing business as
Magic Rent-to-Own and Kelway Rent-to-Own. The total purchase price was
approximately $38.4 million, which was paid in cash and notes.
All acquisitions have been accounted for as purchases and the operating results
of the acquired stores have been included in the financial statements of the
Company since their acquisition.
The following unaudited pro forma information combines the results of operations
as if the acquisitions had been consummated as of the beginning of the period in
which the acquisition occurred, and as of the beginning of the immediately
preceding period, after
F-12
<PAGE> 174
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- ACQUISITIONS -- (CONTINUED)
including the impact of adjustments for amortization of intangibles and interest
expense on acquisition borrowings:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------------
1996 1997 1997 1998
---------- ---------- ---------- ------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue..................... $291,555 $339,809 $977,513 $1,027,581
Net earnings allocable to
common stockholders....... $ 18,833 $ 25,866 $ 16,995 $ 17,547
Basic earnings per common
share..................... $ 0.76 $ 1.04 $ .68 $ .71
Diluted earnings per common
share..................... $ 0.75 $ 1.03 $ .68 $ .70
</TABLE>
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of operating results that would have occurred
had the acquisition been consummated as of the above dates, nor are they
necessarily indicative of future operating results.
NOTE C -- RENTAL MERCHANDISE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
On rent
Cost............................... $109,663 $142,408 $441,467
Less accumulated depreciation...... 38,043 53,401 70,449
-------- -------- --------
$ 71,620 $ 89,007 $371,018
======== ======== ========
Held for rent
Cost............................... $ 27,805 $ 29,975 $116,975
Less accumulated depreciation...... 4,315 6,223 6,012
-------- -------- --------
$ 23,490 $ 23,752 $110,963
======== ======== ========
</TABLE>
F-13
<PAGE> 175
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- PROPERTY ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Furniture and equipment............... $ 9,259 $ 13,115 $ 21,780
Delivery vehicles..................... 2,711 2,608 41,603
Building and leasehold improvements... 8,542 14,499 30,345
Construction in progress.............. 236 547 11,482
------- -------- --------
20,748 30,769 105,210
Accumulated depreciation.............. (8,032) (13,069) (16,209)
------- -------- --------
$12,716 $ 17,700 $ 89,001
======= ======== ========
</TABLE>
NOTE E -- INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
AMORTIZATION ----------------- SEPTEMBER 30,
PERIOD 1996 1997 1998
------------ ------- ------- -------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Customer rental
agreements.............. 18 months $ 2,537 $ 1,773 $ 1,117
Noncompete agreements..... 2-5 years 2,892 3,652 4,902
Consulting agreement...... 4 years 2,918 -- --
Franchise network......... 10 years 3,000 3,000 3,000
Goodwill.................. 20-30 years 43,933 61,228 701,765
------- ------- --------
55,280 69,653 710,784
Less accumulated
amortization............ 8,087 8,470 15,518
------- ------- --------
$47,193 $61,183 $695,266
======= ======= ========
</TABLE>
Customer rental agreements represent the projected cash flows less servicing
costs from open customer contracts of acquired stores at acquisition date and
are amortized over the average stated term of the customer contract, 18 months.
Noncompete agreements and the consulting agreement are amortized over the life
of the respective agreements.
NOTE F -- REVOLVING CREDIT AGREEMENT
On November 27, 1996, the Company entered into a $90 million three-year
revolving credit agreement with a group of banks. Borrowings under the facility
bear interest at a rate equal to a designated prime rate (8.50% at December 31,
1997) or 1.10% to 1.65% over LIBOR (5.75% at December 31, 1997) at the Company's
option. Borrowings are
F-14
<PAGE> 176
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- REVOLVING CREDIT AGREEMENT -- (CONTINUED)
collateralized by a lien on substantially all of the Company's assets. A
commitment fee equal to .30% to .50% of the unused portion of the term loan
facility is payable quarterly. The weighted average interest rate under this
facility was 6.7% and 7.0% for the years ended December 31, 1996 and 1997,
respectively. The credit facility includes certain net worth and fixed charge
coverage requirements, as well as covenants which restrict additional
indebtedness and the disposition of assets not in the ordinary course of
business. At December 31, 1997, the Company has $64.5 million available under
the agreement.
NOTE G -- ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Taxes other than income................ $ 2,872 $ 3,700 $ 11,018
Income taxes payable................... -- 1,762 5,541
Accrued litigation costs............... 4,114 4,038 129,067
Accrued insurance costs................ 1,859 3,033 18,978
Accrued compensation and other......... 4,079 4,475 86,273
------- ------- --------
$12,924 $17,008 $250,877
======= ======= ========
</TABLE>
NOTE H -- OTHER DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1996 1997 1998
------ ---- -------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Obligation payable under noncompete
agreement, due in 24 monthly
installments of $125 commencing April 1,
1996, with interest imputed at 5.32%.... $1,826 $ -- $ --
Obligation payable under consulting
agreement, in 96 monthly installments of
$33.3 commencing May 1, 1993, with
interest imputed at 5.32%............... 1,545 -- --
Obligations under noncompete agreements,
due in 60 monthly installments of $32.5
commencing September 1, 1995 with
interest imputed at 8.75%............... 1,187 892 653
Other..................................... -- -- 379
------ ---- ------
$4,558 $892 $1,032
====== ==== ======
</TABLE>
F-15
<PAGE> 177
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- OTHER DEBT -- (CONTINUED)
The following are scheduled maturities of debt at December 31, 1997
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1998....................................................... $289
1999....................................................... 351
2000....................................................... 252
----
$892
====
</TABLE>
NOTE I -- INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current
Federal................................... $3,837 $ 5,262 $15,028
State..................................... 1,227 1,297 1,911
Foreign................................... 1,314 1,556 1,572
------ ------- -------
Total current..................... 6,378 8,115 18,511
------ ------- -------
Deferred
Federal................................... 1,238 3,866 (351)
State..................................... 168 1,095 10
------ ------- -------
Total deferred.................... 1,406 4,961 (341)
------ ------- -------
Total............................. $7,784 $13,076 $18,170
====== ======= =======
</TABLE>
F-16
<PAGE> 178
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- INCOME TAXES -- (CONTINUED)
The income tax provision reconciled to the tax computed at the statutory Federal
rate is:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate............................... 34.0% 34.0% 35.0%
State income taxes, net of federal benefit.......... 4.9 5.1 4.6
Effect of foreign operations, net of foreign tax
credits........................................... 1.0 0.5 0.4
Goodwill amortization............................... 0.7 1.8 1.1
Other, net.......................................... 1.5 0.6 0.2
---- ---- ----
Total..................................... 42.1% 42.0% 41.3%
==== ==== ====
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards
Federal........................................ $ 4,595 $ 4,202
State.......................................... 3,103 2,614
Accrued expenses.................................. 1,957 4,267
Intangible assets................................. 835 1,079
Property assets................................... 166 783
Alternative minimum tax carryforward.............. 463 463
Other............................................. 676 124
------- -------
11,795 13,532
Less valuation allowance.......................... 3,418 2,930
------- -------
8,377 10,602
Deferred tax liability
Rental merchandise................................ 2,239 4,123
------- -------
Net deferred tax asset.................... $ 6,138 $ 6,479
======= =======
</TABLE>
The Company has Federal net operating loss carryforwards of approximately $10.8
million at December 31, 1997 which were acquired in connection with purchased
companies. The use of Federal carryforwards which expire between 2005 and 2010
are limited to approximately $3.5 million per year. Because of uncertainties
with respect to allocation of
F-17
<PAGE> 179
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- INCOME TAXES -- (CONTINUED)
future taxable income to the various states, a valuation allowance has been
provided against these carryforwards. If utilized, the tax benefit will reduce
goodwill.
NOTE J -- COMMITMENTS AND CONTINGENCIES
The Company leases its office and store facilities and certain delivery
vehicles. Rental expense was $9.4 million, $15.7 million and $22.0 million for
1995, 1996 and 1997, respectively; and $13.1 million (unaudited) and $17.6
million (unaudited) for the nine months ended September 30, 1997 and 1998,
respectively. Future minimum rental payments under operating leases with
remaining noncancellable lease terms in excess of one year at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS
------------ OF DOLLARS)
<S> <C>
1998................................................... $15,026
1999................................................... 12,592
2000................................................... 9,699
2001................................................... 6,797
2002................................................... 2,833
Thereafter............................................. 1,235
-------
$48,182
=======
</TABLE>
The Company has agreed to indemnify its original stockholders against any
additional income tax liabilities incurred by them attributable to the Company's
operations during taxable periods in which the Company was an S Corporation.
The Company is one of the defendants in a class action lawsuit which alleges
that certain rent-to-own contracts entered into between Crown and the plaintiffs
included fees and expenses that violated the New Jersey Consumer Fraud Act and
the New Jersey Retail Installment Sales Act. The plaintiffs have obtained
summary judgment against Crown, reserving damages for trial. Crown and its
controlling shareholders have agreed to indemnify the Company against any losses
it may incur relating to the litigation under the terms of the Asset Purchase
Agreement between Crown and the Company. Although the Company believes it has
taken appropriate steps to defend itself, the ultimate outcome of this lawsuit
cannot presently be determined.
At December 31, 1997, the Company was a defendant in another class action
lawsuit in New Jersey alleging violations of the New Jersey Consumer Fraud Act,
Retail Installment Sales Act and usury laws, among other things. The litigation
sought treble the amount of damages, if any, incurred by the plaintiff class,
punitive damages, interest, attorneys fees and certain injunctive relief. The
Company removed the case to federal court on January 21, 1998, and was then
advised by the plaintiffs' attorney that the plaintiff no
F-18
<PAGE> 180
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
longer wished to serve as class representative. Papers were filed seeking in
January 1998 seeking court approval for the withdrawal of the complaint.
Management believes that it is probable that plaintiffs' attorney will file a
similar complaint on behalf of a new class representative. The ultimate outcome
of this lawsuit cannot presently be determined.
The Company is also involved in various other legal proceedings, claims and
litigation arising in the ordinary course of business. Although occasional
adverse decisions or settlements may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
NOTE K -- STOCK BASED COMPENSATION
In November 1994, the Company established a long-term incentive plan (the Plan)
for the benefit of certain key employees and directors. Under the plan, up to
2,000,000 shares of the Company's shares are reserved for issuance under stock
options, stock appreciation rights or restricted stock grants. Options granted
to employees under the plan become exercisable over a period of one to five
years from the date of grant and may be exercised up to a maximum of 10 years
from date of grant. Options granted to directors are exercisable immediately. In
1995, the Company granted a stock award to an employee for 62,500 shares of
common stock subject to forfeiture on termination of employment in certain
circumstances. At the date of grant, the fair value of such shares was $960,938.
Compensation charged to earnings was $63,000 and $320,000 in 1995 and 1996,
respectively. Upon termination of employment in 1996, 37,500 shares were
forfeitured in a negotiated settlement with the Company. There have been no
grants of stock appreciation rights and all options had been granted with fixed
prices. At December 31, 1997, there were 443,125 shares reserved for issuance
under the Plan.
The Company has adopted only the disclosure provisions of SFAS 123 for employee
stock options and continues to apply APB 25 for stock options granted under the
Plan. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. Compensation
costs for all other stock-based compensation is accounted for under SFAS 123. If
the Company had elected to recognize compensation expense based upon the fair
value at the grant date for options under the Plan consistent with the
methodology prescribed by SFAS 123, the Company's 1997, 1996 and 1995 net
earnings and earnings per share would be reduced to the pro forma amounts
indicated as follows:
F-19
<PAGE> 181
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- STOCK BASED COMPENSATION -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net earnings
As reported.................................. $10,712 $18,026 $25,878
Pro forma.................................... $10,494 $16,469 $23,967
Basic earnings per common share
As reported.................................. $ 0.52 $ 0.73 $ 1.04
Pro forma.................................... $ 0.51 $ 0.67 $ 0.96
Diluted earnings per common share
As reported.................................. $ 0.52 $ 0.72 $ 1.03
Pro forma.................................... $ 0.51 $ 0.66 $ 0.95
</TABLE>
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 50 percent; risk-free interest rates ranging
from 5.75 to 6.92 percent; no dividend yield; and expected lives of seven years.
F-20
<PAGE> 182
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- STOCK BASED COMPENSATION -- (CONTINUED)
Additional information with respect to options outstanding under the Plan at
December 31, 1997, and changes for each of the three years in the period then
ended was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year............... -- $ -- 906,000 $ 7.10 1,142,050 $15.74
Granted................. 1,204,500 8.75 695,000 22.22 859,000 16.54
Exercised............... (3,000) 3.34 (109,700) 7.45 (113,925) 8.39
Forfeited............... (295,500) 8.00 (349,250) 13.81 (562,875) 17.13
--------- --------- ---------
Outstanding at end of
year.................. 906,000 $9.02 1,142,050 $15.74 1,324,250 $16.39
========= ========= =========
Options exercisable at
end of year........... 24,000 $3.34 127,800 $ 9.64 282,375 $14.53
Weighted average fair
value per share of
options granted during
1995, 1996 and 1997,
all of which were
granted at market..... $5.25 $13.35 $ 9.93
</TABLE>
Information about stock options outstanding at December 31, 1997 is summarized
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
------------------------ ----------- ---------------- ----------------
<S> <C> <C> <C>
$3.34 to $6.67..................... 293,625 7.35 years $ 6.47
$6.68 to $18.50.................... 523,125 8.76 years $14.70
$18.51 to $26.75................... 507,500 9.05 years $23.88
---------
1,324,250
=========
</TABLE>
F-21
<PAGE> 183
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- STOCK BASED COMPENSATION -- (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
------------------------------
NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
------------------------ ----------- ----------------
<S> <C> <C>
$3.34 to $6.67..................................... 94,125 $ 6.03
$6.68 to $18.50.................................... 126,000 $14.83
$18.51 to $26.75................................... 62,250 $26.75
-------
282,375
=======
</TABLE>
NOTE L -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents and debt.
For variable rate debt that reprices frequently and entails no significant
change in credit risk, fair values are based on the carrying values. The fair
values of other debt is estimated based on discounted cash flow analysis using
interest rates currently offered for loans with similar terms to borrowers of
similar credit quality. The carrying amount of cash and cash equivalents and
debt approximates fair value at December 31, 1996 and 1997, and September 30,
1998 (unaudited).
NOTE M -- EARNINGS PER SHARE
Summarized basic and diluted earnings per common share were calculated as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------
NET PER SHARE
EARNINGS SHARES AMOUNT
-------- ------ ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Basic earnings per common share............ $10,712 20,583 $0.52
Effect of dilutive stock options........... -- 211
------- ------
Diluted earnings per common share.......... $10,712 20,794 $0.52
======= ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------
NET PER SHARE
EARNINGS SHARES AMOUNT
-------- ------ ---------
<S> <C> <C> <C>
Basic earnings per common share............ $18,026 24,656 $0.73
Effect of dilutive stock options........... -- 409
------- ------
Diluted earnings per common share.......... $18,026 25,065 $0.72
======= ======
</TABLE>
F-22
<PAGE> 184
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- EARNINGS PER SHARE -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------
NET PER SHARE
EARNINGS SHARES AMOUNT
-------- ------ ---------
<S> <C> <C> <C>
Basic earnings per common share............ $25,878 24,844 $1.04
Effect of dilutive stock options........... -- 350
------- ------
Diluted earnings per common share.......... $25,878 25,194 $1.03
======= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
-----------------------------
(UNAUDITED)
NET
EARNINGS SHARES PER SHARE
-------- ------ ---------
<S> <C> <C> <C>
Basic earnings per common share............ $18,492 24,825 $0.74
Effect of dilutive stock options........... -- 387
------- ------
Diluted earnings per share................. $18,492 25,212 $0.74
======= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
-----------------------------
(UNAUDITED)
EARNINGS SHARES PER SHARE
-------- ------ ---------
<S> <C> <C> <C>
Basic earnings per share:
Net earnings............................. $21,028
Less: Preferred dividends................ (1,496)
-------
Net earnings allocable to common
stockholders.......................... 19,532 24,910 $0.79
=====
Diluted earnings per share:
Add: Preferred dividends................. 1,496
Add: Effect of dilutive stock options.... 232
Add: Weighted average convertible
preferred shares...................... 1,892
------- ------
$21,028 27,034 $0.78
======= ====== =====
</TABLE>
F-23
<PAGE> 185
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- UNAUDITED QUARTERLY DATA
Summarized quarterly financial data for 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Revenue.......................... $49,002 $57,756 $60,025 $71,182
Operating profit................. 6,344 7,558 7,957 9,183
Net earnings..................... 3,617 4,369 4,729 5,311
Basic earnings per share......... 0.15 0.18 0.19 0.21
Diluted earnings per share....... $ 0.15 $ 0.17 $ 0.19 $ 0.21
</TABLE>
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Revenue.......................... $74,587 $80,803 $83,864 $92,288
Operating profit................. 9,639 11,341 11,766 13,192
Net earnings..................... 5,412 6,357 6,724 7,385
Basic earnings per share......... 0.22 0.25 0.27 0.30
Diluted earnings per share....... $ 0.22 $ 0.25 $ 0.27 $ 0.29
</TABLE>
NOTE O -- SUBSIDIARY GUARANTORS (UNAUDITED)
Pursuant to the terms of the indenture relating to the 11% Senior Subordinated
Notes, dated August 18, 1998, due 2008, the direct and wholly owned subsidiaries
of Renters Choice, Inc., consisting of ColorTyme, Inc. (which was acquired in
May, 1996), and Thorn Americas, Inc. (which was acquired in August, 1998)
(collectively, the Guarantors), have fully, jointly and severally, and
unconditionally guaranteed the obligations of Renters Choice, Inc. with respect
to these notes. The only direct or indirect subsidiaries of the Company that are
not Guarantors are inconsequential subsidiaries. There are no restrictions on
the ability of any of the Guarantors to transfer funds to Renters Choice, Inc.
in the form of loans, advances or dividends, except as provided by applicable
law.
Accordingly, set forth below is certain summarized combined financial
information (within the meaning of Rule 1-02(bb) of Regulation S-X) for the
Guarantors, as of and for the year ended December 31, 1996 and 1997, and as of
and for the nine months ended September 30, 1997 and 1998. Separate financial
statements and other disclosures concerning the Guarantors have not been
included because management believes that they are not material to investors.
F-24
<PAGE> 186
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- --------------------
1996 1997 1997 1998
------- ------- ------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Rental merchandise, net............ $ -- $ -- $ -- $ 339,741
Intangible assets, net............. 4,513 3,485 4,208 568,188
Total assets....................... 12,149 11,866 10,002 1,161,026
Total debt......................... -- -- -- 802,009
Total liabilities.................. 6,554 2,747 7,141 1,078,864
Total revenues..................... 28,322 42,036 26,985 179,537
Direct store expenses.............. -- -- -- 123,155
Franchise operating expense........ 28,062 36,301 22,929 27,317
Net earnings....................... 1,477 2,018 1,413 3,065
</TABLE>
F-25
<PAGE> 187
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
THORN Americas, Inc.
We have audited the accompanying consolidated balance sheets of THORN Americas,
Inc. and subsidiaries as of March 31, 1997 and 1998, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended March 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of THORN
Americas, Inc. and subsidiaries at March 31, 1997 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
April 24, 1998
except for Note 14, as to which
the date is June 25, 1998
Wichita, Kansas
F-26
<PAGE> 188
THORN AMERICAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
----------------------- JUNE 30
1997 1998 1998
---------- ---------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Cash....................................... $ 26,077 $ 23,755 $ 27,486
Accounts receivable -- other............... 10,339 26,937 22,322
Accounts receivable -- affiliated
companies, net........................... 62,101 15,024 702
Prepaid expenses........................... 9,169 8,114 8,555
Deferred income taxes...................... 21,209 21,113 21,113
Merchandise and auto inventory............. 38,231 39,443 43,068
Rental merchandise, at cost................ 509,183 521,482 539,539
Less accumulated depreciation.............. 233,171 228,517 235,857
---------- ---------- ----------
Net rental merchandise........... 276,012 292,965 303,682
Property and equipment, at cost
Land and building........................ 19,810 22,855 22,971
Furniture and equipment.................. 84,083 95,594 98,189
Transportation and equipment............. 86,140 87,494 87,851
Leasehold improvements................... 59,206 63,593 73,616
---------- ---------- ----------
249,239 269,536 282,627
Less accumulated depreciation and
amortization.......................... 130,736 146,016 152,475
---------- ---------- ----------
Net property and equipment....... 118,503 123,520 130,152
Goodwill, less accumulated
amortization.......................... 499,471 479,636 479,517
Other assets, less accumulated
amortization............................. 47,168 48,602 49,199
---------- ---------- ----------
$1,108,280 $1,079,109 $1,085,796
========== ========== ==========
</TABLE>
See accompanying notes.
F-27
<PAGE> 189
<TABLE>
<CAPTION>
MARCH 31
----------------------- JUNE 30
1997 1998 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Liabilities and Stockholder's Equity
Accounts payable........................... $ 62,222 $ 31,717 $ 41,334
Accrued expenses:
Salaries, wages and fringe benefits...... 31,523 32,492 31,305
Other.................................... 18,948 9,047 9,495
Other liabilities.......................... 40,776 52,986 47,383
Accrued incentives......................... 1,550 2,161 1,853
Long term loans from affiliates............ 714,235 714,223 714,663
---------- ---------- ----------
Total liabilities................ 869,254 842,626 846,033
---------- ---------- ----------
Stockholder's equity:
Common stock of $1 par value; 1,000
shares authorized, issued and
outstanding........................... 1 1 1
Additional paid-in capital............... 334,681 334,681 334,681
Retained deficit......................... (95,656) (98,199) (94,919)
---------- ---------- ----------
Total stockholder's equity....... 239,026 236,483 239,763
---------- ---------- ----------
$1,108,280 $1,079,109 $1,085,796
========== ========== ==========
</TABLE>
See accompanying notes.
F-28
<PAGE> 190
THORN AMERICAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED MARCH 31 ENDED JUNE 30
------------------------------ -------------------
1996 1997 1998 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenues and
fees.................. $819,452 $850,773 $819,949 $208,444 $214,514
Sale of merchandise and
autos................. 64,628 60,249 62,712 12,611 15,141
Franchise income......... 5,364 2,366 2,266 582 560
Other income............. 8,483 13,483 19,077 4,004 5,206
-------- -------- -------- -------- --------
Total revenues... 897,927 926,871 904,004 225,641 235,421
-------- -------- -------- -------- --------
Costs and operating
expenses:
Cost of sales............ 43,345 39,793 45,574 8,524 12,503
Depreciation and
amortization:
Rental merchandise.... 257,383 260,433 244,572 62,852 62,886
Goodwill.............. 19,097 23,164 24,044 6,014 5,884
Other................. 33,139 35,921 32,825 8,584 8,648
Salaries, wages and
fringe benefits....... 255,768 272,242 279,796 68,488 72,960
Advertising.............. 33,895 30,284 30,320 8,059 8,188
Property costs........... 52,393 59,244 61,643 15,054 14,886
Other operating
expenses.............. 116,289 143,487 117,597 27,541 29,579
Restructuring charges.... 12,600 -- 12,292 -- --
-------- -------- -------- -------- --------
Total costs and
operating
expenses...... 823,909 864,568 848,663 205,116 215,534
-------- -------- -------- -------- --------
Operating
income........ 74,018 62,303 55,341 20,525 19,887
-------- -------- -------- -------- --------
Other (income) expense:
Interest:
Related parties,
net................. 79,692 53,078 45,961 10,888 11,271
Other interest, net... 515 (427) 223 (63) (80)
Other.................... 101 (254) (88) (81) 72
-------- -------- -------- -------- --------
80,308 52,397 46,096 10,744 11,263
-------- -------- -------- -------- --------
Income (loss)
before income
taxes......... (6,290) 9,906 9,245 9,781 8,624
Income taxes............. 6,771 13,880 7,760 5,950 5,344
-------- -------- -------- -------- --------
Net income
(loss)........ $(13,061) $ (3,974) $ 1,485 $ 3,831 $ 3,280
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-29
<PAGE> 191
THORN AMERICAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL PAID-IN RETAINED STOCKHOLDER'S
COMMON STOCK CAPITAL DEFICIT EQUITY
------------ ------------------ -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at March 31, 1995
As previously
reported............. $1 $180,210 $(75,636) $104,575
Adjustment for
reorganization/
demerger............. -- -- (2,985) (2,985)
-- -------- -------- --------
Adjusted balance........ 1 180,210 (78,621) 101,590
Net loss................ -- -- (13,061) (13,061)
-- -------- -------- --------
Balance at March 31,
1996.................... 1 180,210 (91,682) 88,529
Net loss................ -- -- (3,974) (3,974)
Capital contributed by
Parent............... -- 154,471 -- 154,471
-- -------- -------- --------
Balance at March 31,
1997.................... 1 334,681 (95,656) 239,026
Net income.............. -- -- 1,485 1,485
Advance to
unconsolidated New
Zealand division..... -- -- (4,028) (4,028)
-- -------- -------- --------
Balance at March 31,
1998.................... 1 334,681 (98,199) 236,483
Net income
(unaudited).......... -- -- 3,280 3,280
-- -------- -------- --------
Balance at June 30, 1998
(unaudited)............. $1 $334,681 $(94,919) $239,763
== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 192
THORN AMERICAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED MARCH 31 ENDED JUNE 30
--------------------------------- -------------------
1996 1997 1998 1997 1998
--------- --------- --------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ (13,061) $ (3,974) $ 1,485 $ 3,831 $ 3,280
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Rental merchandise losses............. 9,463 11,152 10,126 1,054 2,656
Depreciation and amortization......... 309,619 319,518 301,441 77,450 77,418
Interest added to principal balance,
loan from affiliates................ 88,891 34,468 -- -- --
Deferred income taxes................. (5,341) (10,277) 96 -- --
Restructuring charges................. 7,814 -- 6,851 -- --
Changes in operating assets and
liabilities net of effects from
business combinations:
Accounts receivable -- other........ (407) (3,930) (16,598) 8,297 4,615
Accounts receivable -- affiliated
companies......................... 21,826 480 (480) -- --
Prepaid expenses.................... (3,697) 1,604 1,055 316 (441)
Merchandise and auto inventory...... (6,622) (9,443) (1,212) 7,682 (3,625)
Accounts payable.................... 12,748 11,112 (30,505) (22,860) 9,617
Accrued expenses, other liabilities
and accrued incentives............ 4,968 32,954 (3,100) (3,059) (6,650)
--------- --------- --------- -------- --------
Net cash provided by operating
activities...................... 426,201 383,664 269,159 72,711 86,870
Cash flows from investing activities:
Proceeds from sale of rental
merchandise........................... 43,858 50,998 39,474 9,441 8,040
Net funds received from affiliated
company............................... 17,427 141,672 47,557 914 14,322
Advance to unconsolidated New Zealand
division.............................. -- -- (4,028) -- --
Acquisition of rental merchandise....... (299,704) (289,483) (306,792) (64,506) (83,320)
Acquisition of property and equipment... (44,642) (32,306) (38,077) (5,630) (15,454)
Acquisition of rental companies, net of
cash acquired......................... (124,577) (21,073) (7,626) (1,448) (4,040)
Decrease in undistributed IRB funds..... 2,250 -- -- -- --
Purchase of Minority Interest............. -- -- -- -- (3,000)
Other................................... (10,330) (10,658) (1,977) (752) (127)
--------- --------- --------- -------- --------
Net cash used by investing
activities...................... $(415,718) $(160,850) $(271,469) $(61,981) $(83,579)
</TABLE>
Continued on following page.
F-31
<PAGE> 193
THORN AMERICAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED MARCH 31, ENDED JUNE 30,
----------------------------- -----------------
1996 1997 1998 1997 1998
------- --------- ------- ------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Advances from parent............ $ -- $ -- $ -- $ 592 $ 440
Repayment of bond obligations... (1,740) (7,322) -- -- --
Repayments of loan from
parent....................... -- (208,640) (12) -- --
------- --------- ------- ------- -------
Net cash used by
financing
activities............ (1,740) (215,962) (12) 592 440
------- --------- ------- ------- -------
Net increase (decrease) in cash... 8,743 6,852 (2,322) 11,322 3,731
Cash at beginning of year......... 10,482 19,225 26,077 26,077 23,755
------- --------- ------- ------- -------
Cash at end of year............... $19,225 $ 26,077 $23,755 $37,399 $27,486
======= ========= ======= ======= =======
Supplemental disclosure of cash
flow information
Cash paid during the year for:
Interest........................ $ 4,862 $ 30,431 $48,709 $11,476 $11,502
Income taxes.................... 4,295 17,102 23,991 9,265 252
</TABLE>
Supplemental schedule of noncash financing activities
During fiscal 1997, as part of the demerger transaction, the Company received a
capital contribution of $154,471 related to a reduction of affiliated
indebtedness.
Disclosure of accounting policies
For purposes of the statement of cash flows, the Company considers cash and cash
equivalents to include currency on hand, demand deposits and short-term
investments with a maturity of three months or less with banks or other
financial institutions.
F-32
<PAGE> 194
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
MARCH 31, 1996, 1997 AND 1998
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE THREE-MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Principles of Consolidated Financial Statements
Prior to April 1996, THORN Americas, Inc. (TA) was a wholly-owned subsidiary of
THORN EMI North America Holdings, Inc. (TEMINAH) and TEMINAH was an indirectly
wholly-owned subsidiary of THORN EMI plc., a United Kingdom limited liability
company. Effective August 19, 1996, the demerger and reorganization of the THORN
EMI group was completed and the rental, rental-purchase and related businesses
of THORN EMI group were transferred to THORN plc. (THORN), a newly formed United
Kingdom limited liability company. As a result of this demerger and
reorganization, TA became a wholly owned subsidiary of THORN International BV,
(hereinafter referred to as the "Parent"). The Parent is an indirectly
wholly-owned subsidiary of THORN. The consolidated financial statements include
the accounts of THORN Americas, Inc. and its wholly-owned subsidiaries, except
for the net assets and operations of its New Zealand division, which had net
assets at March 31, 1997 and 1998 of $7,608 and $10,242, respectively,
hereinafter referred to collectively as the Company. All significant
intercompany balances and transactions have been eliminated in consolidation.
THORN Americas, Inc., dba Rent-A-Center, Remco America, Inc. (Remco), U-Can
Rent, and THORN Services International (TSI) operate approximately 1,400
rent-to-own stores throughout the United States. Rent-A-Center, Remco and U-Can
Rent principally rent consumer electronics, appliances and furniture on a short
or long term basis. Ownership of the merchandise may be transferred to the
consumer when rented on a long term basis, usually 6 to 30 months. TSI services
the rental merchandise and provides warehouse and merchandise distribution
services to the Rent-A-Center, Remco and U-Can Rent stores.
During fiscal 1998, the Company began testing a used auto sales business, under
the tradename AdvantEDGE Quality Cars. This proposition offers a retail
transaction on the sale of used autos with installment financing available
through the Company.
Certain reclassifications have been made in the 1996 and 1997 consolidated
financial statements to conform with the 1998 format.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-33
<PAGE> 195
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Merchandise and Auto Inventory
Merchandise inventory consists primarily of rental merchandise which is
temporarily stored in distribution centers awaiting assignment to a store.
Rental merchandise inventory is stated at average cost. In fiscal 1998,
merchandise and auto inventory also includes inventory associated with the
Company's auto business. Auto inventory is stated at actual cost.
Rental Merchandise, Related Rental Revenues and Depreciation
Rental merchandise is rented to customers pursuant to rental agreements which
generally provide for either weekly or monthly rental terms, with rental
payments collected in advance. The rental agreements may be terminated at any
time by the customers, and if terminated, the rental merchandise is returned to
the Company. Rental revenue is recognized as collected. This approximates, in
all material respects, the revenue that would be reflected if rental revenue was
recognized over the term of the agreements.
Merchandise rented to customers or available for rent is classified in the
consolidated balance sheets as rental merchandise and is being depreciated on a
straight-line basis over various periods ranging from 6 to 30 months (a majority
of rental merchandise is depreciated over 18 to 24 month periods), and assumes a
salvage value on each item of approximately one month of depreciation.
Depreciation and Amortization
Depreciation of furniture and equipment, transportation equipment and buildings
is computed on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized on a straight-line basis over the
term of the related leases.
Goodwill
Goodwill represents the excess of cost over the fair value of the net assets of
businesses acquired and is amortized on the straight-line method over periods
ranging from 2 to 40 years. Accumulated amortization of goodwill was $149,210
and $173,254 at March 31, 1997 and 1998, respectively.
Other Assets
Other assets consist of territory rights, covenants not to compete, deferred
software costs, and other tangible and intangible amounts. Other assets, which
are amortizable, are amortized using the straight-line method over periods
ranging from 3 to 25 years. Accumulated amortization of these assets was $14,797
and $17,091 at March 31, 1997 and 1998, respectively.
F-34
<PAGE> 196
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Sale of Merchandise and Autos
Sale of merchandise and autos consists primarily of sales of used rental
merchandise, including proceeds from early payoffs of rental purchase contracts,
and automobile sales in connection with the Company's auto business which opened
in fiscal 1998.
Accounting for Impairment of Long-Lived Assets
The Company evaluates all long-lived assets, including all intangible and other
assets, for impairment whenever events or changes in circumstances indicate that
the carrying amounts may not be recoverable. Impairment is recognized when the
carrying amounts of such assets cannot be recovered by the undiscounted future
net cash flows likely to be generated. Impairment is measured as the amount by
which the carrying value of the asset exceeds the fair value. Fair value is
based on management's knowledge of current market conditions or the present
value of estimated expected future cash flows.
Advertising Costs
Costs incurred for communicating and producing advertising are expensed the
first time the advertising occurs. During fiscal 1996, 1997 and 1998,
advertising expense was $33,895, $30,284 and $30,320, respectively.
Stock-based Compensation
The Company participates in stock option and share rights plans sponsored by
THORN that provide for the granting of stock options (Thorn Share Option Plan)
to exempt level employees and share rights (Share Appreciation Rights Plan) to
certain key executives of the Company. The stock options and share rights, which
are associated with THORN stock, are typically issued annually and vest over a
three year period, subject to certain performance criteria. Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based
Compensation," encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company
applies APB Opinion 25 "Accounting for Stock Issued to Employees" in accounting
for stock options.
Concentration of Credit Risk
The Company's financial instruments that were exposed to concentrations of
credit risk consist primarily of cash. The Company places its funds into high
credit quality financial institutions and, at times, such funds may be in excess
of the Federal Depository insurance limit.
F-35
<PAGE> 197
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Unaudited Interim Financial Data
The interim financial data at June 30, 1998, and for the three-month periods
ended June 30, 1997 and 1998, included herein, are unaudited and, in the opinion
of management, reflect all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of financial position and the
results of operations and cash flows for such interim periods.
2. ACQUISITIONS AND MERGERS
The Company maintains an ongoing program to acquire selected rental operations.
During fiscal 1998, the Company acquired in purchase transactions eight rental
operations for an aggregate $7,626 net of cash acquired, of which $4,209 was
accounted for as goodwill. During fiscal 1997, the Company acquired in purchase
transactions twelve rental operations for an aggregate $21,073 net of cash
acquired, of which $15,292 was accounted for as goodwill. During fiscal 1996,
the Company acquired in purchase transactions seven rental operations for an
aggregate $124,577 net of cash acquired, of which $85,363 was accounted for as
goodwill. The operations of the stores are included in the Company's
consolidated financial statements beginning on the date of acquisition. The
Company is continuing to consider the acquisition of additional rental
operations.
On August 19, 1996 the demerger of the THORN EMI group was completed and the
rental, rental-purchase and related businesses of the THORN EMI group were
transferred to THORN plc. This resulted in, among other things, the Company
acquiring 100 percent of the common stock of Remco Americas, Inc. in exchange
for the Company's twelve percent investment interest in the common stock of an
affiliated company, Thorn EMI North America, Inc. (TENA). The Company's
investment in TENA was accounted for under the cost method of accounting and had
a net book carrying value of $50,000. The affiliates from which this common
stock and these net assets were purchased were under the common control of the
Company's indirect parent at the time of the transaction and accordingly, the
assets and liabilities were recorded at their historical cost in a manner
similar to that of a pooling of interest. The accompanying financial statements
include the accounts and operations of these affiliates as if they were a part
of the Company at the beginning of fiscal 1996.
3. LOANS FROM AFFILIATES
Prior to the demerger, the Company had entered into a loan agreement with
TEMINAH which required the Company to pay to TEMINAH $2,129,280 on July 2, 2004.
This amount consisted of principal plus interest compounded at ten percent (10%)
per year. As a part of the demerger transaction the Company and an affiliated
company, Thorn Finance, plc. (TFP), refinanced the loan agreement, requiring the
Company to pay TFP $710,818 together with all accrued and unpaid interest on the
unpaid balance on July 2, 2010. In connection with this refinancing the Company
paid $200,000 on the original note. In
F-36
<PAGE> 198
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3. LOANS FROM AFFILIATES -- (CONTINUED)
addition, $50,000 of this note was forgiven by TEMINAH and recorded as a
contribution of capital in the accompanying statement of stockholders' equity.
During fiscal 1998, interest accrues at a variable rate equal to 120% of the
"Applicable Federal Rate" (AFR), designated as "Compounding Monthly," for debt
instruments with a maturity of less than three years (6.3% at March 31, 1998).
During fiscal 1997, the interest rate was equal to fifty (50) basis points above
the AFR (6.18% at March 31, 1997). The terms of the agreement allow the Company
to prepay the note in part or in full, without premium or penalty. The balance
on the note payable to TFP, at March 31, 1997 and 1998 was $714,235 and
$714,223, respectively.
4. ACCOUNTS RECEIVABLE -- AFFILIATED COMPANIES
Accounts receivable from affiliated companies includes income taxes payable to
Parent of $480 at March 31, 1997 (see Note 9). These balances are not subject to
interest. The Company has short term loans receivable outstanding from TFP
totaling $65,000 and $15,000 as of March 31, 1997 and 1998, respectively. Other
intercompany receivables/ (payables) with affiliated companies totaled $(2,419)
and $24 as of March 31, 1997 and 1998, respectively. The year-end net receivable
balances are not subject to specified settlement terms.
Prior to the demerger transaction, advances to or from affiliated companies were
made as working capital was available or needed. The Company received interest
at 125% of the monthly applicable federal rate on the deposited funds. After the
demerger transaction the Company continues to earn interest on its excess cash
invested with THORN at rates commensurate with short term interest rates
available in major U.S. banking markets.
5. COMMITMENTS
The Company leases its store and distribution facilities. Management expects, in
the normal course of business, that leases which expire will be renewed or
replaced by other leases. At March 31, 1998, the approximate future annual
minimum rental payments required under these noncancelable operating leases were
as follows:
<TABLE>
<S> <C>
1999................................................. $39,886
2000................................................. 28,625
2001................................................. 14,344
2002................................................. 6,114
2003................................................. 2,475
Thereafter........................................... 2,327
-------
Total minimum payments required............ $93,771
=======
</TABLE>
F-37
<PAGE> 199
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. COMMITMENTS -- (CONTINUED)
Rent expense under noncancelable operating leases for fiscal 1996, 1997, and
1998 was approximately $41,197, $45,973 and $47,590, respectively.
6. INCENTIVE PLANS
The Company has long-term incentive plans for key executives. Payments are
contingent upon the Company meeting long-term financial objectives based upon
three-year operating cycles. Expense associated with such plans during fiscal
1996, 1997 and 1998 totaled $440, $797 and $1,072, respectively. The expected
obligations under these plans at March 31, 1997 and 1998 were $1,550 and $2,161,
respectively.
7. SAVINGS PLANS
The Company has a trusteed savings plan for the benefit of eligible employees.
The plan provides for the participants to make voluntary contributions to the
plan ranging from 1% to 20% of their gross compensation which is matched by the
Company at a rate each year as determined by the Company's Board of Directors.
The Company may, at its sole discretion, match 100% of the amount contributed by
the participant up to 4% of the employee's annual gross compensation.
Effective January 1, 1998, the Company offered a nonqualified saving plan (NSP)
for certain designated employees who are within a select group of key management
or highly compensated employees. Employees eligible to participate in the NSP
may elect to defer up to a maximum of 80% of their salary and up to a maximum of
100% of incentive bonuses. The Company will make a matching deferred
contribution of up to 15% of the employee's contribution, not to exceed $15 per
employee per plan year.
During fiscal 1996, 1997, and 1998 the expense related to these plans, net of
forfeitures, amounted to $3,554, $3,359 and $3,295, respectively.
8. STOCK-BASED COMPENSATION PLANS
In fiscal 1997, the Company adopted the disclosure-only provisions of SFAS 123.
SFAS 123 encourages entities to adopt a fair value-based method of accounting
for employee stock compensation plans, but allows companies to continue to
account for those plans using the accounting proscribed by APB 25. The Company
has elected to account for stock based compensation using APB 25, while making
the required pro forma disclosures of net earnings as if the fair value-based
method had been applied.
Accordingly, no compensation expense has been recorded for the stock option or
share rights plans. Had the compensation cost for stock based compensation plans
been determined using the fair value method of accounting consistent with SFAS
123, there would have been no significant effect on the Company's net income.
The Black-Scholes option-pricing model was used to determine the fair value on
the date of grant for the
F-38
<PAGE> 200
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
8. STOCK-BASED COMPENSATION PLANS -- (CONTINUED)
stock options and share rights. As of March 31, 1998 there were awards for
9,961,904 shares outstanding.
SFAS 123 requires certain disclosures to be made about the pricing model
assumptions used, exercisable options, option activity, weighted average price
per option and option exercise price range for each income statement period.
Since the stock option and share rights activity relates only to THORN's
stockholders' equity, this information is not presented for the Company.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- ------
<S> <C> <C> <C>
Current:
Federal.................................... $ 8,576 $ 17,487 $7,050
State...................................... 3,536 6,670 614
------- -------- ------
Total current.................... 12,112 24,157 7,664
------- -------- ------
Deferred:
Federal.................................... (4,384) (7,998) (532)
State...................................... (957) (2,279) 628
------- -------- ------
Total deferred................... (5,341) (10,277) 96
------- -------- ------
$ 6,771 $ 13,880 $7,760
======= ======== ======
</TABLE>
Prior to the demerger, the Company filed a consolidated federal tax return with
TEMINAH and calculated its tax provision in accordance with TEMINAH's tax
allocation policy, which provides for calculations on a stand-alone basis with
any tax liability or benefit recorded as a payable to or receivable from
TEMINAH. Post-demerger, the Company files a consolidated federal tax return with
its U.S. subsidiaries and calculates its tax liability based upon income for the
applicable periods. During fiscal 1997 in connection with the demerger, TEMINAH
forgave $8,721 in tax liability owed to them from the Company. This reduction in
liability was treated as a capital contribution by TEMINAH and recorded as an
increase in paid-in capital by the Company.
F-39
<PAGE> 201
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
9. INCOME TAXES -- (CONTINUED)
The income tax provision differed from the amount computed by applying the U.S.
federal income tax rate of 35% for fiscal 1997 and 1998 to income before income
taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense............ $(2,202) $ 3,466 $ 3,236
Increase (reduction) in income taxes
resulting from:
Amortization of non-deductible goodwill.... 5,336 6,149 6,123
State and local income tax, net of federal
income tax benefit....................... 2,298 4,336 807
Reduction of valuation allowance........... -- -- (1,400)
Other, net................................. 1,339 (71) (1,006)
------- ------- -------
$ 6,771 $13,880 $ 7,760
======= ======= =======
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Reserves for contingencies and restructuring.......... $10,836 $19,704
Reserves for self-insurance and accrued liabilities... 9,997 11,378
Alternative minimum tax credit carryforward........... -- 6,674
Property and equipment................................ 5,146 10,377
Other................................................. 4,324 5,520
------- -------
Total deferred tax assets..................... 30,303 53,653
Deferred tax liabilities:
Rental assets......................................... $ 4,875 $26,811
Other................................................. 4,219 5,729
------- -------
Total deferred tax liabilities................ 9,094 32,540
------- -------
Net deferred tax assets....................... $21,209 $21,113
======= =======
</TABLE>
The alternative minimum tax credit carryforward has no expiration date.
10. CONTINGENCIES
The Company is a defendant in a number of class or alleged class action cases
relating to Rent-A-Center's rental-purchase or rent-to-rent agreements as
detailed below. Each claim is being adjudicated in the context of the relevant
state law which is different in each
F-40
<PAGE> 202
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
10. CONTINGENCIES -- (CONTINUED)
state. The first five cases referred to below, which seek to recharacterize the
transaction from a lease to a credit sale, were filed prior to 1995. Of the
remaining four cases, two, filed in late 1997 and early 1998, seek to challenge
compliance with the relevant rental-purchase statutes. The remaining two cases,
filed in early 1998, seek to challenge the reinstatement fee and in addition,
one of the cases alleges that the Liability Damage Waiver (LDW) charge is
excessive.
The Company is a defendant in a class action alleging that Rent-A-Center's
rental-purchase agreements are credit sales and do not comply with the
requirements of the Minnesota Consumer Protection Statutes and Usury Law.
Summary judgment was entered as to liability and was affirmed by the U.S. Eighth
Circuit Court of Appeals. The District Court found that the remedy available to
the class members would be full recovery of all amounts paid for customers who
returned their property and recovery of only the alleged interest for those
customers who did not return their property.
Final Judgment as to damages was issued April 15, 1998, in the amount of $29,898
plus interest, although the court is considering the plaintiffs' request for an
additional $1,630. The Company will appeal such award of damages and will be
required to post a bond in connection therewith. The Company no longer offers
its rental-purchase transaction in this state.
The Company and five of its present or former officers are defendants in a
Pennsylvania alleged class action resulting from the consolidation of two
existing proposed class actions. A third class action lawsuit in Pennsylvania
has been stayed pending the outcome of the consolidated action and is
incorporated into the settlement relating to that consolidated action. The
consolidated action alleges that Rent-A-Center's rental agreements violate the
Pennsylvania Goods and Services Installment Sales Act and the federal Racketeer
Influenced and Corrupt Organization Act (RICO). A motion for a nationwide class
certification has been denied by the court with the provision that plaintiffs
may attempt to amend their complaint. A settlement in the amount of $9,350 has
been reached with the plaintiffs. A final hearing to obtain the Court's approval
was held June 17, 1998, and the Court approved the settlement July 8, 1998.
The class action filed in 1994 in Federal Court in Wisconsin was dismissed for
lack of jurisdiction on October 20, 1997. The plaintiffs have re-filed the case
in a Wisconsin state court. The new complaint alleges that Rent-A-Center's
rental purchase agreements should be deemed consumer credit sales under the
Wisconsin Consumer Act, violated Wisconsin's Usury law and violated the
Wisconsin Deceptive Practices Act. The Court entered an order July 7, 1998
granting the plaintiff's motion for class certification and denying the
Company's M>s motion for partial summary judgment. A pre-trial conference is
scheduled August 26, 1998. The Company will defend the new claim vigorously.
The Company is a defendant in a class action alleging that Rent-A-Center's
rental-purchase agreements are credit sales and do not comply with the
requirements of
F-41
<PAGE> 203
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
10. CONTINGENCIES -- (CONTINUED)
the New Jersey Retail Installment Sales Act and violate the New Jersey Consumer
Fraud Act and Usury law. In January 1997, summary judgment was granted in favor
of the plaintiffs in this case as to violation of the Retail Installment Sales
Act and the Consumer Fraud Act; the Court denied the plaintiff's motion on the
usury count. However, in September 1997, the Court granted the plaintiff's
motion for summary judgment on damages for breach of the Retail Installment
Sales Act and the Consumer Fraud Act, adopting the plaintiff's formula of 40% of
all rental payments, being the time differential interest equivalent, plus
reinstatement fees. This amount was trebled pursuant to the Consumer Fraud Act.
Judgment has now been entered for an amount of $100,000 subject to further
accounting. Initially, a bond was posted for this amount, and pursuant to
further accounting was increased by $63,000 to cover potential damages through
April, 1999. The injunction to prevent Rent-A-Center from continuing to trade
has been stayed pending the appeal. The Company is appealing this decision to
the New Jersey Court of Appeals and intends to pursue all further legal
proceedings as appropriate.
The Company is a defendant in a class action alleging that Rent-A-Center
violated the Texas Usury Law, the Texas Insurance Law and the Texas Deceptive
and Unfair Trade Practices Act. Texas law presently provides that rental
purchase agreements are not credit sales. There have been no developments in
this case since 1994 and damages are unspecified.
The following information relates to those claims not seeking
recharacterization:
The Company is a defendant in an alleged class action in New York. The case has
been removed to Federal Court. The complaint alleges that Rent-A-Center engaged
in deceptive or unfair acts in contravention of the New York Personal Property
Law (the Rent-to-Own Program Law), as well as provisions of the General Business
Law relating to consumer protection for deceptive acts and practices and false
advertising. The plaintiffs seek both compensatory and punitive damages.
The Company is a defendant in an alleged class action filed in Massachusetts.
This claim alleges that Rent-A-Center's transactions and advertising failed to
comply with the Massachusetts rental purchase statute and are deceptive under
the Massachusetts Consumer Protection Act. The plaintiffs seek both compensatory
and punitive damages.
The Company is a defendant in two alleged class actions filed in the State of
Alabama which were filed in January and March, 1998. These claims allege that
Rent-A-Center's reinstatement fee constitutes an illegal penalty and that
charging such fee constitutes breach of contract. A second claim was added to
the second class action alleging the LDW charge is excessive. The plaintiffs
seek compensatory damages only.
The claims described above, where not concluded, are being vigorously defended.
However, management believes that a loss will be incurred in some of the cases
and although a specific amount cannot be estimated due to an inability to
reasonably estimate potential losses and potential appellate decisions reversing
in whole or in part outstanding lower
F-42
<PAGE> 204
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
10. CONTINGENCIES -- (CONTINUED)
court judgments, the Company has accrued $34,500 in the accompanying financial
statements. If the courts in these actions were to hold that the Company's
rental or rental-purchase transactions constitute credit sales, the Company
would seek to adapt its agreements, where this has not already occurred, so that
they would not be so treated under relevant state laws. Management believes that
a final unfavorable outcome in any one of these actions, except for that in
Texas, would not have a material adverse effect on the Company's ongoing
business. There can be no assurance, however, that final unfavorable outcomes in
any of these actions would not have a material effect on the Company's financial
condition or results of operations in the year of final adjudication.
The Company is a defendant in an action filed in the Federal District Court in
Missouri alleging a policy of racial discrimination against a nationwide class
of African-Americans who applied for employment, are currently employed or were
formerly employed. The Company denies the allegations and will vigorously oppose
certification of a nationwide class. Attempts to certify a nationwide class in a
racial discrimination case filed in the Federal District Court in Kansas were
dismissed last year.
The Company's management is not aware of any additional legal or arbitration
proceedings pending or threatened against the Company which may have any
liability significantly in excess of provisions in the accounts.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at March 31, 1998 are as
follows:
Loans from affiliated company: It was not practicable to estimate the fair value
of the Company's loans from its affiliates because no quoted market prices exist
for these unique instruments and there is no intent by management to retire the
debts.
12. OFF-BALANCE SHEET RISK
Letters of credit are issued by the Company during the ordinary course of
business through banks as required by certain vendor contracts. As of March 31,
1997 and 1998, the Company had outstanding irrevocable stand-by letters of
credit for $27,336 and $66,842, respectively.
Subsequent to March 31, 1998, the Company secured a bond in the amount of
$32,786 and canceled its previously outstanding stand-by letter of credit in the
amount of $4,000, in connection with a class action lawsuit in Minnesota (see
Note 10). The Company and THORN are both guarantors of the bond.
The Company has secured a bond in the amount of $100,000 in connection with a
class action lawsuit in New Jersey (See Note 10). The Company and THORN are both
guarantors of the bond.
F-43
<PAGE> 205
THORN AMERICAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
12. OFF-BALANCE SHEET RISK -- (CONTINUED)
The Company has a $20,000 unused line of credit with a financial institution.
13. RESTRUCTURING CHARGES
During fiscal 1998, the Company discontinued its new concept tests related to
its credit retail and check-cashing businesses, closed certain nonperforming
rental purchase stores and reorganized certain administrative support functions
resulting in a charge to operating income of $12,292. Such restructuring charges
include asset valuation reductions of approximately $3,750, future rent
obligations of approximately $2,250, employee severance costs of approximately
$5,250 and other costs of approximately $1,042. As of March 31, 1998, $6,851 of
total restructuring charges remained in accrued liabilities.
During 1996, the Company recorded restructuring charges of $12,600 related to
consolidation of offices and reductions in the number of employees. These
charges were primarily made up of the expected costs of employee separations.
There was no remaining liability at March 31, 1998.
14. MERGER TRANSACTION
On June 17, 1998 THORN announced that it has entered into an agreement to sell
the Company to Renters Choice, Inc., a publicly held rent-to-own company for
approximately $900,000 subject to shareholder and Federal Trade Commission
approval. A closing date for the transaction has not yet been determined.
15. SUBSEQUENT EVENT (UNAUDITED)
In August 1998, subsequent to its change of control, the Company reached a
tentative settlement with the plaintiffs in Wisconsin, in the amount of $16.25
million. Such amount is not accrued in the June 30, 1998 financial statements.
F-44
<PAGE> 206
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
Central Rents, Inc.
We have audited the accompanying balance sheets of Central Rents, Inc. (a
Delaware corporation) as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 1997, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Central Rents, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1997, 1996 and 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 19, 1998
F-45
<PAGE> 207
CENTRAL RENTS, INC.
BALANCE SHEETS
DECEMBER 31, 1996, 1997 AND MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents................................... $ 12,808 $ 5,739 $ 11,526
Receivables and Prepaid Expenses............................ 2,348 2,396 2,016
Due from Related Parties.................................... -- 115 --
Income Tax Receivable -- Related Party...................... 1,871 -- --
Rental Merchandise, at cost................................. 66,289 68,205 63,344
Less -- Accumulated depreciation.......................... (31,908) (31,461) (31,621)
-------- -------- --------
34,381 36,744 31,723
Property and Equipment, at cost
Leasehold improvements.................................... 3,355 4,905 5,880
Furniture and equipment................................... 2,037 2,981 4,256
Vehicles.................................................. 134 73 57
-------- -------- --------
5,526 7,959 10,193
Less -- Accumulated depreciation.......................... (2,834) (4,127) (6,622)
-------- -------- --------
2,692 3,832 3,571
Deferred Financing Costs, net............................... 1,957 1,603 1,535
Noncompete Agreement, net................................... 1,275 -- --
Excess of Cost over Net Assets Acquired, net................ 6,861 6,611 6,549
Deferred Income Taxes....................................... 8,156 10,595 11,045
Other Assets................................................ 114 125 131
-------- -------- --------
Total Assets........................................ $ 72,463 $ 67,760 $ 68,096
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts Payable............................................ $ 5,332 $ 4,688 $ 2,715
Accrued Expenses............................................ 5,682 6,058 7,380
Due to Related Parties...................................... 237 -- --
Income Tax Payable -- Related Party......................... -- 434 249
Accrued Interest............................................ 322 322 2,253
Long-term Notes............................................. 58,094 58,368 58,437
-------- -------- --------
Total liabilities................................... 69,667 69,870 71,034
-------- -------- --------
Commitments and Contingencies............................... -- -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 100 shares authorized; no
shares issued........................................... -- -- --
Common stock, $.01 par value, 2,000,000 shares authorized;
551,045, 617,045 and 617,045 shares issued and
outstanding in 1996, 1997 and 1998 (unaudited),
respectively............................................ 6 7 7
Additional paid-in capital................................ 22,944 22,944 22,944
Retained deficit.......................................... (20,154) (25,061) (25,889)
-------- -------- --------
Total stockholders' equity (deficit)................ 2,796 (2,110) (2,938)
-------- -------- --------
Total liabilities and stockholders' equity
(deficit)........................................... $ 72,463 $ 67,760 $ 68,096
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE> 208
CENTRAL RENTS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE UNAUDITED PERIODS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------- ------------------
1995 1996 1997 1997 1998
-------- -------- ------- -------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenues............ $112,243 $103,382 $98,582 $ 23,528 $21,935
Sales of merchandise....... 5,736 5,243 4,847 1,146 1,484
Other revenue.............. 65 152 114 2,062 1,782
-------- -------- ------- -------- -------
118,044 108,777 103,543 26,736 25,201
-------- -------- ------- -------- -------
Costs and Expenses:
Selling, general and
administrative.......... 61,991 61,475 62,544 15,682 15,196
Cost of merchandise sold... 3,658 3,852 3,520 1,098 1,058
Depreciation and
amortization
Rental merchandise...... 36,694 32,045 30,407 7,660 7,664
Property and
equipment............. 1,541 1,538 1,711 367 517
-------- -------- ------- -------- -------
103,884 98,910 98,182 24,807 24,435
-------- -------- ------- -------- -------
Income before interest, taxes
and amortization of
intangibles................ 14,160 9,867 5,361 1,929 766
Amortization of
intangibles................ 19,601 5,192 1,545 818 65
-------- -------- ------- -------- -------
Income (loss) from
operations................. (5,441) 4,675 3,816 1,111 701
Interest expense, net........ (7,464) (7,555) (7,849) (1,914) (1,979)
-------- -------- ------- -------- -------
Loss before income tax
benefit.................... (12,905) (2,880) (4,033) (803) (1,278)
Income tax benefit........... 3,750 1,040 1,126 289 450
-------- -------- ------- -------- -------
Net loss........... $ (9,155) $ (1,840) $(2,907) $ (514) $ (828)
======== ======== ======= ======== =======
Per share data:
Basic net loss per common
share...................... $ (16.89) $ (3.34) $ (4.79) $ (0.89) $ (1.34)
======== ======== ======= ======== =======
Diluted net loss per common
share...................... $ (16.89) $ (3.34) $ (4.79) $ (0.89) $ (1.34)
======== ======== ======= ======== =======
Weighted average common
shares outstanding......... 541,985 551,045 606,557 575,000 617,045
======== ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE> 209
CENTRAL RENTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
FOR THE PERIOD ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- RETAINED
PAID-IN EARNINGS
SHARES PAR VALUE CAPITAL (DEFICIT) TOTAL
------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.... 534,000 $ 5 $22,195 $ (9,159) $13,041
Issuance of common stock.... 17,045 1 749 -- 750
Net loss for the year ended
December 31, 1995........ -- -- -- (9,155) (9,155)
------- --- ------- -------- -------
BALANCE, December 31,
1995........................ 551,045 6 22,944 (18,314) 4,636
Net loss for the year ended
December 31, 1996........ -- -- -- (1,840) (1,840)
------- --- ------- -------- -------
BALANCE, December 31, 1996.... 551,045 6 22,944 (20,154) 2,796
------- --- ------- -------- -------
Dividends paid.............. -- -- (2,000) (2,000)
Exercise of stock
warrants................. 66,000 1 -- -- 1
Net loss for the year ended
December 31, 1997........ -- -- -- (2,907) (2,907)
------- --- ------- -------- -------
BALANCE, December 31, 1997.... 617,045 7 22,944 (25,061) (2,110)
------- --- ------- -------- -------
Net loss for the unaudited
period ended March 31,
1998..................... -- -- -- (828) (828)
------- --- ------- -------- -------
BALANCE, March 31, 1998
(unaudited)................. 617,045 $ 7 $22,944 $(25,889) $(2,938)
======= === ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE> 210
CENTRAL RENTS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE UNAUDITED PERIODS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------ -----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (9,155) $ (1,840) $ (2,907) $ (514) $ (828)
Adjustments to reconcile net loss to net
cash (used) provided by operating
activities:
Depreciation of rental merchandise........ 36,694 32,045 30,407 7,660 7,664
Depreciation of property and equipment.... 1,541 1,538 1,711 367 517
Deferred income tax benefit............... (3,950) (26) (1,286) (289) (450)
Amortization of intangibles............... 19,601 5,192 1,545 818 65
Amortization of debt discount............. 274 274 274 68 69
Amortization of deferred financing
costs................................... 316 330 163 83 68
Changes in operating assets and
liabilities, net of the effect of
businesses acquired:
Decrease (increase) in receivables,
prepaid expenses and other assets.... 742 (354) (59) 608 371
Decrease (increase) in due from related
parties.............................. -- -- (115) -- 115
Decrease (increase) in income tax
receivable -- related party.......... (1,050) (821) 1,871 (2) --
Increase in rental merchandise,
(purchases and retirement), net...... (41,095) (31,561) (32,865) (6,900) (2,643)
Decrease in deferred financing costs.... -- -- 191 -- --
Increase (decrease) in accounts
payable.............................. 1,677 (4,891) (644) (2,813) (1,973)
Increase (decrease) in accrued
expenses............................. (856) (494) 377 266 1,322
Increase in accrued interest............ -- -- -- 1,931 1,931
(Decrease) increase in due to related
parties.............................. (136) (523) (237) 116 (185)
Decrease in income taxes payable --
related party........................ -- -- (715) -- --
Increase in income taxes payable........ -- 419 -- -- --
-------- -------- -------- ------- -------
Net cash (used) provided by operating
activities......................... 4,603 (712) (2,289) 1,399 6,043
-------- -------- -------- ------- -------
Cash flows from investing activities:
Proceeds from store sales................... 515 -- 95 -- --
Purchase of property and equipment.......... (2,114) (1,032) (2,851) (1,094) (256)
Purchase of rental agreements and stores.... (1,110) -- (24) (24) --
Purchase of rent-to-own and WBC, net of cash
acquired.................................. (3,669) -- -- -- --
-------- -------- -------- ------- -------
Net cash (used) provided by investing
activities......................... (6,378) (1,032) (2,780) (1,118) (256)
-------- -------- -------- ------- -------
Cash flows from financing activities:
Dividends paid.............................. -- -- (2,000) (2,000) --
Proceeds from issuance of common stock...... 750 -- -- -- --
Debt issuance costs......................... (176) -- -- -- --
-------- -------- -------- ------- -------
Net cash (used) provided by financing
activities.................................. 574 -- (2,000) (2,000) --
-------- -------- -------- ------- -------
Net decrease in cash and cash equivalents..... (1,201) (1,744) (7,069) (1,719) 5,787
Cash and cash equivalents, beginning of
year........................................ 15,753 14,552 12,808 12,808 5,739
-------- -------- -------- ------- -------
Cash and cash equivalents, end of year........ $ 14,552 $ 12,808 $ 5,739 $11,089 $11,526
======== ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes................................ $ 1,271 $ 1,190 $ 160 $ 22 $ 3
Interest.................................... $ 7,725 $ 7,852 $ 7,784 $ 430 $ 436
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 211
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. HISTORY AND BUSINESS ACTIVITY
Central Rents, Inc. (the "Company") was incorporated in the State of Delaware on
March 17, 1994 to acquire RTO Enterprises, Inc. ("RTO") and WBC Holdings, Inc.
("WBC"). The Company is a wholly-owned subsidiary of Central Rents Holding, Inc.
which is a wholly-owned subsidiary of Banner Holdings, Inc. ("Banner"), its
ultimate parent company. All activity of the Company prior to the acquisition of
RTO and WBC ("Acquisition") related to its formation, including an infusion of
$20,000,000 of cash equity in exchange for the issuance of 534,000 shares of
common stock. On April 28, 1995, RTO and WBC were merged into the Company
pursuant to a statutory merger effected in accordance with the provisions of the
Delaware General Corporation Laws.
The Company's predecessors have been engaged in the rental-purchase industry
since 1968. As of December 31, 1997, the Company operated 175 rental-purchase
stores in 20 states throughout the United States. The stores rent a broad range
of consumer products, including electronics, major appliances, jewelry and
furniture.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Rental Merchandise, Depreciation and Revenue Recognition
Rental merchandise is rented by customers through rental-purchase agreements
providing for weekly or monthly payments. The agreements automatically renew
with each payment. Rent is collected in advance at the beginning of each rental
period, is nonrefundable and is recognized as revenue when collected. This
approximates, in all material respects, the revenue that would be reflected if
rental revenue was recognized over the term of the agreements. Ownership of the
rental items passes to the customer when the customer makes the requisite number
of rental payments stipulated by the agreement, generally 12 to 30 monthly
payments. In the accompanying statements of operations, sales of merchandise
primarily includes cash received for outright sales of previously rented
merchandise and final rental payments immediately preceding the passage of title
to the respective customers. Cost of merchandise sold represents the
undepreciated cost of merchandise on the date of sale.
Rental merchandise is recorded at cost. The Company has determined that the
estimated useful lives of its rental merchandise averaged approximately 22
months, with no salvage value, and such period is used for depreciation
purposes.
Property and Equipment
Property and equipment, including leasehold improvements, are recorded at cost.
Additions, improvements and renewals which significantly add to the asset value
or extend the life of the asset are capitalized. Expenditures for maintenance
and repairs are expensed as such costs are incurred.
F-50
<PAGE> 212
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The Company uses the straight-line method for recording depreciation. The
estimated useful lives used in computing depreciation for financial reporting
purposes are as follows:
<TABLE>
<S> <C>
Leasehold improvements............................... Life of lease
Furniture and equipment.............................. 3-7 years
Vehicles............................................. 3 years
</TABLE>
Deferred Financing Costs
Deferred financing costs represent debt issuance costs and are amortized using
the interest method over the term of the long-term notes. As of December 31,
1996 and 1997 and as of the unaudited period ending March 31, 1998, accumulated
amortization amounted to $817,000, $980,000 and $1,047,000, respectively.
Advertising
The Company generally expenses production cost of print and television
advertisements as of the first date the advertisements takes place unless they
are expected to benefit future periods. Advertising expenses included in
selling, general and administrative expenses were $5,394,000 in 1995, $5,822,000
in 1996, $6,668,000 in 1997, and $1,570,000 and $1,204,000 for unaudited periods
ending March 31, 1997 and 1998, respectively.
Noncompete Agreement
In connection with the Acquisition, one of the sellers entered into a noncompete
agreement with the Company. The noncompete agreement was amortized over its
contractual life of 3 years. Amortization of the noncompete agreement was 50% in
year one, 35% in year two and 15% in year three. As of December 31, 1996 and
1997, and as of the unaudited period ending March 31, 1998, accumulated
amortization amounted to $18,725,000, $20,000,000 and $20,000,000, respectively.
The agreement was fully amortized at June 30, 1997.
Accounting for Impairment of Long-Lived Assets
The Company evaluates all long-lived assets, including all intangible and other
assets, for impairment whenever events or changes in circumstances indicate that
the carrying amounts may not be recoverable. Impairment is recognized when the
carrying amounts of such assets cannot be recovered by the undiscounted future
net cash flows likely to be generated. Impairment is measured as the amount by
which the carrying value of the asset exceeds the fair value. Fair value is
based on management's knowledge of current market conditions or the present
value of estimated expected future cash flows.
F-51
<PAGE> 213
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired, which relates to the acquisition of
rent-to-own and WBC and other stores in 1995, is being amortized on a
straight-line basis over a period of 30 years. The purchase price is subject to
change upon the resolution of certain issues with the seller. The Company
periodically reviews the excess of cost over net assets acquired to assess
recoverability. Impairment would be recognized in operating results if a
permanent diminution in value were to occur. At year end, 1995, the Company
specifically reviewed the excess of cost over net assets acquired related to its
California operations. The Company undertook such a review in light of much
lower operating results experienced by these operations, due in a large part to
the new California legislation regulating rental-purchase transactions which
became effective on January 1, 1995 (the "California Legislation"). The
California Legislation limited the Company's ability to collect certain types of
fees. Based upon the then current economic environment and future outlook, the
Company determined that approximately $3.0 million of excess of cost over net
assets acquired related to its California operations had been impaired and
therefore such amount was charged-off as of December 31, 1995. As of December
31, 1996 and 1997 and as of the unaudited period ending March 31, 1998,
accumulated amortization amounted to $3,712,000, $3,960,000 and $4,022,000,
respectively.
Cash and Cash Equivalents
The Company invests excess cash from operations in short-term investment grade
commercial paper and repurchase agreements. The Company considers all highly
liquid debt instruments purchased with an original maturity date of three months
or less to be cash equivalents.
Concentration of Credit Risk
The Company places its temporary cash and cash investments with high quality
financial institutions. Management monitors the financial creditworthiness of
these financial institutions. At times, such investments may be in excess of
insured limits.
Long-term Notes
The fair value of the Company's long-term notes is estimated as required by
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments". The fair value is based on the quoted market
prices for the same or similar issues. Management believes that the fair value
of its long-term notes approximates the carrying value as of December 31, 1996
and 1997 and as of the unaudited period ending March 31, 1998.
F-52
<PAGE> 214
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires the use of the liability method of accounting for income taxes.
Deferred taxes are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect.
The Company and Banner have entered into a tax sharing agreement which provides,
among other things, for the sharing of federal consolidated and state combined
income tax liabilities and refunds. Under the tax sharing agreement, payments
and refunds will be calculated by the Company on a separate company basis. The
Company will repay Banner $434,000 due to limitations that apply to loss
carryovers on a separate company basis due to a change in the method used in
allocating the tax liabilities in the prior years. The Company recorded an
income tax benefit in 1995, 1996 and 1997 of $3,750,000, $1,040,000 and
$1,126,000, respectively, and income taxes receivable from Banner of $1,871,000
at December 31, 1996 and income taxes payable to Banner of $434,000 at December
31, 1997.
Earnings Per Share
Earnings per common share is computed using the weighted average number of
shares outstanding and dilutive common stock equivalents (options and warrants).
No common stock equivalents were used in the computation as the impact would be
anti-dilutive.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of Enterprise and Related Information" ("SFAS 131") in fiscal year
1997. The Company adopted SFAS 128 in 1997 and will adopt SFAS 130 and 131 in
1998. The Company does not expect that the adoption of SFAS 130 and SFAS 131
will have a material effect on its financial position or its results of
operations for the year ended December 31, 1998.
F-53
<PAGE> 215
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
As described above, the Company reports earnings per share according to the
provisions of SFAS 128. The following table presents a reconciliation of basic
earnings per share and diluted earnings per share. The denominator of diluted
earnings per share includes the effect of dilutive common stock equivalents.
There were no potentially dilutive securities that were outstanding at December
31, 1997 and as of the unaudited period ended March 31, 1998.
<TABLE>
<CAPTION>
BASIC EARNINGS DILUTED EARNINGS
PER SHARE PER SHARE
--------------- -----------------
(DOLLARS IN THOUSANDS EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
For the Year Ended December 31, 1995
Numerator -- net loss................... $ (9,155) $ (9,155)
Denominator -- weighted average shares
outstanding.......................... 541,985 541,985
Loss per share.......................... $ (16.89) $ (16.89)
For the Year Ended December 31, 1996
Numerator -- net loss................... $ (1,840) $ (1,840)
Denominator -- weighted average shares
outstanding.......................... 551,045 551,045
Loss per share.......................... $ (3.34) $ (3.34)
For the Year Ended December 31, 1997
Numerator -- net loss................... $ (2,907) $ (2,907)
Denominator -- weighted average shares
outstanding.......................... 606,557 606,557
Loss per share.......................... $ (4.79) $ (4.79)
For the Period Ended March 31, 1997
(Unaudited)
Numerator -- net loss................... $ (514) $ (514)
Denominator -- weighted average shares
outstanding.......................... 575,000 575,000
Loss per share.......................... $ (0.89) $ (0.89)
For the Period Ended March 31, 1998
(Unaudited)
Numerator -- net loss................... $ (828) $ (828)
Denominator -- weighted average shares
outstanding.......................... 617,045 617,045
Loss per share.......................... $ (1.34) $ (1.34)
</TABLE>
F-54
<PAGE> 216
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Balance Sheet Presentation
The Company's balance sheet is presented on a non-classified basis consistent
with industry practice.
Use of Estimates
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts, generally not by material amounts. Management
believes that these estimates and assumptions provide a reasonable basis for the
fair presentation of the Company's financial position and results of operations.
Included in the accompanying balance sheet is a deferred tax asset of $10.6
million as of December 31, 1997 and $11.1 million as of the unaudited period
ended March 31,1998. Management believes it is more likely than not that it will
realize the net deferred tax assets. The Company expects to realize this
recorded deferred tax asset through the potential disposition of all or a part
of the assets of the Company some time in the future, or through taking the
Company public providing for additional capital for growth and expansion.
Reclassifications
Certain reclassifications have been made to previously reported amounts to
conform to the current year presentation.
3. LONG-TERM NOTES
The Company funded the purchase price for the stock and notes of RTO and WBC
from the proceeds of an offering of Units (the "Offering"), consisting of
$60,000,000 principal amount of Senior Notes and Warrants to purchase 60,000
shares of common stock of the Company. The long-term notes were issued at a
price equal to 96.3% of the aggregate principal amount. Of the total proceeds,
$57,389,000 was allocated to Notes and $2,200,000 was allocated to the issuance
of Warrants. On or before February 28, 1997, all Warrant holders exercised their
option to convert the Warrants into the Company's common stock.
On September 28, 1994, the Company's Registration Statement under the Securities
Act relating to the issuance by the Company of $60,000,000 principal amount of
12 7/8% Series B Senior Notes due 2003 (the "New Notes") in exchange for the
outstanding Notes (the "Exchange Offer") was declared effective by the
Securities and Exchange Commission. Upon its effectiveness, the Company
commenced the Exchange Offer, pursuant to which all of the outstanding Notes
were tendered and exchanged on or prior to
F-55
<PAGE> 217
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM NOTES -- (CONTINUED)
October 28, 1994. The terms of the New Notes and the Notes are identical in all
material respects, except for certain transfer restrictions and registration
rights relating to the Notes.
The New Notes bear interest at the rate of 12 7/8% per annum payable
semi-annually on December 15 and June 15, commencing December 15, 1994. On or
after June 15, 1999, the New Notes will be redeemable at the option of the
Company, in whole or in part, at the redemption prices as defined plus accrued
and unpaid interest to the date of redemption.
In connection with the issuance of the Notes, the Company executed an indenture
dated June 3, 1994 (the "Indenture"). The Indenture contains certain covenants
that, among other things, limit the ability of the Company and its subsidiaries
to incur additional Indebtedness (as defined), pay dividends in excess of $2.0
million or make certain other Restricted Payments (as defined), enter into
certain transactions with affiliates, sell assets or enter into certain mergers
and consolidations. In addition, under certain circumstances, the Company is
required to offer to purchase the long-term notes at a price equal to 100% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase, with proceeds from certain asset sales (as defined). Interest
expense on the New Notes amounted to $7,725,000 in 1995, 1996 and 1997 and
$2,067,000 for the unaudited period ended March 31, 1997 and 1998.
On May 10, 1997, the Company canceled a revolving line of credit agreement with
Wells Fargo Bank (the "Line of Credit") which was entered into on May 9, 1995.
The Line of Credit was subject to an annual commitment fee payable to the bank
on a quarterly basis of 0.5% of the unused borrowings.
4. COMMITMENTS AND CONTINGENCIES
Leases
The Company has various operating leases, which generally have an initial lease
term of 18 to 60 months. The operating leases are for office facilities, store
locations, rental of vehicles, office equipment and various other assets.
Generally leases for store locations contain renewal options for periods up to
six years. Rental expenses related to these leases during 1995, 1996 and 1997
and for the unaudited periods ending March 31, 1997 and 1998 amounted to
$7,667,000, $6,755,000, $7,545,000, $1,809,000 and $2,174,000,
F-56
<PAGE> 218
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
respectively. The future minimum annual rental commitments under operating
leases which have initial noncancelable lease terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, VEHICLES REAL ESTATE TOTAL
- --------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
1998............................. $2,236,000 $ 5,911,000 $ 8,147,000
1999............................. 1,604,000 3,969,000 5,573,000
2000............................. 1,208,000 3,047,000 4,255,000
2001............................. 313,000 1,595,000 1,908,000
2002............................. 1,000 1,046,000 1,047,000
Thereafter....................... -- 360,000 360,000
---------- ----------- -----------
$5,362,000 $15,928,000 $21,290,000
========== =========== ===========
</TABLE>
Litigation
The Company is a party to legal proceedings arising in the normal course of
business. Based on consultation with legal counsel and on the facts currently
available, it is management's opinion that the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
Letters of Credit
The Company utilizes standby letters of credit to satisfy property and vehicle
insurance security deposit requirements. These letters of credit are irrevocable
and have one-year renewable terms. Outstanding standby letters of credit as of
December 31, 1996 and 1997 were $200,000 and $862,000, respectively, and
$1,162,000 as of the unaudited period ended March 31, 1998.
F-57
<PAGE> 219
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The benefit for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal....................... $ 36,000 $(1,061,000) $ --
State and local............... 164,000 47,000 160,000
----------- ----------- -----------
200,000 (1,014,000) 160,000
----------- ----------- -----------
Deferred:
Federal....................... (3,150,000) (20,000) (660,000)
State and local............... (800,000) (6,000) (626,000)
----------- ----------- -----------
(3,950,000) (26,000) (1,286,000)
----------- ----------- -----------
Total tax benefit..... $(3,750,000) $(1,040,000) $(1,126,000)
=========== =========== ===========
</TABLE>
The benefit for income taxes differs from the amount obtained by applying the
federal statutory income tax rate to the loss before income taxes as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Expected provision (benefit) for federal income
taxes........................................ (35.0)% (35.0)% (35.0)%
State taxes -- net of federal deduction........ (.1) (5.2) (7.8)
Nondeductible and other items.................. 6.1 4.1 14.9
----- ----- -----
(29.0)% (36.1)% (27.9)%
===== ===== =====
</TABLE>
F-58
<PAGE> 220
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES -- (CONTINUED)
The primary components of temporary differences which give rise to deferred
taxes at December 31, 1997 and 1996 are:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Deferred Tax Assets:
Depreciation of fixed assets................ $1,331,000 $ 1,082,000
Reserves and other accrued expenses......... 1,585,000 1,542,000
Noncompete agreement amortization........... 6,200,000 6,411,000
Operating loss carry forward................ -- 3,901,000
Other....................................... 304,000 573,000
---------- -----------
Total deferred tax assets........... 9,420,000 13,509,000
Deferred Tax Liabilities:
Rental merchandise.......................... (601,000) (648,000)
State income tax............................ (474,000) (755,000)
Other....................................... (189,000) (1,511,000)
---------- -----------
Net deferred tax assets............. $8,156,000 $10,595,000
========== ===========
</TABLE>
The Internal Revenue Service ("IRS") has examined certain of the Company's
former subsidiaries. In connection with the Acquisition, the sellers entered
into an agreement to indemnify the Company for income tax liabilities of RTO and
WBC attributable to pre-acquisition tax periods. The results of these audits did
not have a material adverse effect on the financial position of the Company.
The IRS published a revenue ruling in July 1995 providing that the Modified
Accelerated Cost Recovery System ("MACRS") is the appropriate depreciation
method for rental purchase merchandise. The Company has used the income forecast
method of depreciation for tax accounting, and management believes that this
method has been widely used throughout the rental-purchase industry prior to the
publication of this revenue ruling. The Company received permission from the IRS
and converted to the MACRS method of depreciation for tax accounting purposes
only, effective January 1, 1996. This change in tax accounting method will
require the Company to increase taxable income in future years in order to
recapture depreciation deductions previously claimed on the Company's tax
returns taken under the income forecast method of depreciation in advance of the
time at which such deductions may have been allowable under the MACRS
depreciation method. Management believes that the adoption of MACRS will not
significantly impact the Company's financial position and results of operations.
The Company provides taxes on a separate company basis pursuant to its tax
sharing agreement. Management believes it is more likely than not that it will
realize the net deferred tax assets and accordingly no valuation allowance has
been provided. This conclusion is based on the expectation of future taxable
income relating to the potential
F-59
<PAGE> 221
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES -- (CONTINUED)
disposition of all or a part of the assets of the Company or through taking the
Company public providing for additional capital for growth and expansion. If the
Company is unable to generate sufficient taxable income through operating
results or dispositions and alternative strategies are not viable, then the
establishment of a valuation allowance may be necessary.
The Company has federal net operating loss carryforwards of approximately
$10,400,000 of which $1,288,000 expires in 2010, $2,295,000 expires in 2011 and
$6,817,000 expires in 2012. At December 31, 1997, the Company has state net
operating loss carryforwards of approximately $4,070,000 which expire at various
times and various amounts through the year 2012.
6. RELATED PARTY TRANSACTIONS
The Company has entered into an Administrative Services Agreement (the
"Administrative Services Agreement") with Banner pursuant to which Banner or one
of the other Banner subsidiaries, other than the Company, provides purchasing,
advertising, accounting, insurance, health and other benefits, real estate,
management information systems, and other services to the Company. The Company
is required to reimburse Banner for its allocable share of direct and overhead
costs determined on the basis of the Company's percentage utilization of the
applicable services contemplated by the Administrative Services Agreement. The
Administrative Services Agreement had an initial term of two years beginning
June 3, 1994 and will be automatically extended for up to eight successive
one-year terms after the end of the initial term unless the Company gives at
least 30 days prior notice at the end of the then current term that the
Administrative Services Agreement will terminate. As long as Banner or any other
Banner subsidiary beneficially owns more than 50% of the voting stock of the
Company, the Administrative Services Agreement shall not be terminable by Banner
or any other Banner subsidiary as a result of any breach of the Administrative
Services Agreement by the Company. During 1995, 1996 and 1997, and during the
unaudited periods ending March 31, 1997 and 1998, the Company purchased
$1,927,000, $640,000, $883,000, $0 and $201,000, respectively, of merchandise
from Banner's Central Electric, a wholly owned subsidiary of Banner. The Company
has not incurred any material common costs or expenses to be allocated during
1995, 1996 and 1997 and during the unaudited periods ending March 31, 1997 and
1998 in connection with the Administrative Services Agreement.
F-60
<PAGE> 222
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTY TRANSACTIONS -- (CONTINUED)
The receivable from (payable to) related parties as of December 31, 1996 and
1997 and for the unaudited period ended March 31, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1996 1997 1998
---------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Banner Holdings.......................... $2,371,000 $(434,000) $(200,000)
Banner Central Electric.................. (656,000) 178,000 14,000
G. M. Cypres & Co. ...................... (61,000) (63,000) (63,000)
Banner Central Electric Properties....... (20,000) -- --
---------- --------- ---------
$1,634,000 $(319,000) $(249,000)
========== ========= =========
</TABLE>
The Company and G. M. Cypres & Co., a related party through common ownership,
entered into an agreement (the "Consulting Agreement") pursuant to which G. M.
Cypres & Co. or its designee provides consulting, investment banking or similar
services to the Company in consideration for the payment of certain fees and
expenses, including an annual management fee (the "Management Fee"). Under the
terms of the Indenture, the fees and expenses payable under the Consulting
Agreement must be reasonable and customary, and the Management Fee shall not
exceed $375,000 per year. Management Fees charged under the terms of the
Consulting Agreement totaled $375,000 for the years ended December 31, 1995,
1996 and 1997 and $93,750 for the unaudited periods ending March 31, 1997 and
1998.
Effective January 1, 1995, the Company entered into a triple net lease agreement
with BCE Properties II, Inc., a related party of the Company through common
ownership, for office space at the Company's corporate headquarters. The lease
provides, among other things, for monthly rent of $10,000 through December 31,
2005. Rent expense under the terms of the lease totaled $120,000 for the years
ended December 31, 1995, 1996 and 1997 and $30,000 for the unaudited periods
ending March 31, 1997 and 1998.
Management believes that all related party transactions were consummated on
terms comparable to terms that could have been negotiated with third parties.
7. RETIREMENT SAVINGS PLAN
As of December 31, 1995 the Company terminated a 401(k) defined contribution
plan covering substantially all employees of one of the Company's subsidiaries.
The Company matched the first 6% of eligible compensation contributed by the
participants at a rate of 25%. During 1995, the Company contributed $49,000 to
the plan.
The Company established a new 401(k) defined contribution plan in October 1997.
The Company did not match employee contributions and had no other expenses
related to the plan.
F-61
<PAGE> 223
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. STORE SALES AND CLOSINGS
During 1995, the Company purchased rental agreements from two competitors and
transferred the agreements to existing stores, purchased two stores, closed one
store and sold six stores that were not located within the Company's targeted
geographic markets.
During 1996, the Company opened one new store and closed three stores and
transferred the agreements of the closed stores into other operating stores in
the area.
During 1997, the Company opened 13 new stores, sold the assets of one store,
closed two stores and transferred their agreements into other operating stores
in the area.
During the unaudited period ending March 31, 1998, the Company opened one new
store.
9. STOCK TRANSACTIONS
Issuance of Common Stock
On July 14, 1995 an outside institutional investor purchased 17,045 shares of
common stock of the Company at a price of $44.00 per share for an aggregate
purchase price of $750,000. The shares were issued pursuant to the terms of a
letter agreement which places certain restrictions on the purchaser's ability to
transfer the issued shares of stock.
As of February 28, 1997 all Warrant holders exercised their option to convert
the Warrants into the Company's common stock. 66,000 shares of stock were issued
for the Warrants at an exercise price of $.01 per share; 60,000 relating to the
initial offering and an additional 6,000 issued to the initial purchaser of the
Notes.
Stock Options
In 1994 the Board of Directors adopted a Stock Option Plan (the "1994 Plan"), to
grant to certain key employees of the Company options to purchase shares of the
common stock of the Company at fair market value. A percentage of the options
vest on each year provided that the Company meets or exceeds certain financial
performance standards during such year. If those standards are not attained in
such year, that portion of the option that would have vested may vest in the
year the Company does meet those standards. Management believes that those
standards will be attained in future years, before the options expire in the
year 2004, and therefore there is a potential that the options will be
exercisable. The stock options granted pursuant to the 1994 Plan cannot exceed
15% of the fully diluted shares of common stock of the Company. As of December
31, 1996 and 1997 and for the unaudited period ending March 31, 1998, there were
90,000 shares of common stock reserved for the 1994 Plan.
F-62
<PAGE> 224
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK TRANSACTIONS -- (CONTINUED)
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
EXERCISE
PRICE
STOCK PER
OPTIONS SHARE
------- --------
<S> <C> <C>
Outstanding at December 31, 1995..................... 24,000 $37.45
Granted............................................ 17,000 37.45
Expired or canceled................................ (11,000) 37.45
Exercised.......................................... --
-------
Outstanding at December 31, 1996..................... 30,000 37.45
Granted............................................ -- 37.45
Expired or canceled................................ (18,000) 37.45
Exercised.......................................... --
-------
Outstanding at December 31, 1997 and for the
unaudited period ending March 31, 1998............. 12,000 37.45
=======
Options exercisable at December 31, 1997 and for the
unaudited period ending March 31, 1998............. --
=======
</TABLE>
In October 1995, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 defines a fair value based method of
accounting for employee stock compensation plans, but allows for the
continuation of the intrinsic value based method of accounting to measure
compensation cost prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). For companies electing
not to change their accounting, SFAS 123 requires pro-forma disclosures of
earnings and earnings per share as if the change in accounting provision of SFAS
123 has been adopted.
The Company has elected to continue to utilize the accounting method prescribed
by APB 25, under which no compensation cost has been recognized, and adopt the
disclosure requirements of SFAS 123. As a result, SFAS 123 has no effect on the
financial condition or results of operations of the Company at December 31, 1996
and 1997 and for the unaudited period ending March 31, 1998.
F-63
<PAGE> 225
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK TRANSACTIONS -- (CONTINUED)
Had compensation cost for this plan been determined consistent with SFAS 123,
the Company's net income and earnings per share would have been reduced to the
following pro-forma amounts.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------- ---------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net loss............. As Reported $(9,155,000) $(1,840,000) $(2,907,000) $(514,000) $(828,000)
Pro Forma $(9,198,000) $(1,889,000) $(2,929,000) $(536,000) $(850,000)
Basic EPS............ As Reported $ (16.89) $ (3.34) $ (4.79) $ (0.89) $ (1.34)
Pro Forma $ (16.97) $ (3.43) $ (4.83) $ (0.93) $ (1.38)
Diluted EPS.......... As Reported $ (16.89) $ (3.34) $ (4.79) $ (0.89) $ (1.34)
Pro Forma $ (16.97) $ (3.43) $ (4.83) $ (0.93) $ (1.38)
</TABLE>
The fair value of each option grant is estimated on the date of grant using an
option pricing model with the following weighted-average assumptions used for
grants: dividend yield of 0.0%, volatility of 0.0%, risk-free interest rate of
6.5% and expected lives of 5 years.
On January 7, 1997 the Company declared a cash dividend on its common stock to
be paid to the holders of record of the Company's common stock as of February
28, 1997 payable on March 5, 1997.
Dividends
On March 5, 1997, the Company paid a total cash dividend of $2.0 million to the
holders of its common stock at $3.24 per share.
10. QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
INCOME BASIC DILUTED
TOTAL FROM NET NET LOSS NET LOSS
REVENUES OPERATIONS LOSS PER SHARE PER SHARE
-------- ---------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1996........... $26,142 $ 924 $ (533) $ (.97) $ (.97)
September 30, 1996.......... $26,468 $1,418 $ (320) $ (.58) $ (.58)
June 30, 1996............... $27,767 $1,331 $ (369) $ (.67) $ (.67)
March 31, 1996.............. $28,400 $1,002 $ (618) $(1.12) $(1.12)
December 31, 1996........... $25,029 $1,113 $ (826) $(1.36) $(1.36)
September 30, 1997.......... $25,409 $ 170 $(1,191) $(1.93) $(1.93)
June 30, 1997............... $26,394 $1,422 $ (376) $ (.61) $ (.61)
March 31, 1997.............. $26,736 $1,111 $ (514) $ (.89) $ (.89)
March 31, 1998.............. $25,201 $ 701 $ (828) $(1.34) $(1.34)
</TABLE>
F-64
<PAGE> 226
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENT
The Company entered into an Asset Purchase Agreement dated May 1, 1998 with
Renters Choice, Inc. ("Renters"), Central Rents Holding, Inc. and Banner
pursuant to which substantially all of the assets of the Company will be sold to
Renters for approximately $102,400,000. Completion of the transaction occurred
on May 28, 1998 after obtaining necessary regulatory approvals and certain third
party approvals and various other closing conditions.
F-65
<PAGE> 227
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY RENTERS CHOICE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF RENTERS CHOICE
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Where Can You Find More
Information........................ 20
Forward-Looking Statements........... 20
Risk Factors......................... 21
Use of Proceeds of the Exchange
Notes.............................. 27
Capitalization....................... 28
The Exchange Offer................... 29
Unaudited Pro Forma Combined
Financial Information.............. 39
Renters Choice, Inc. Selected
Historical Financial Data.......... 54
Rent-A-Center, Inc. Selected
Historical Financial Data.......... 57
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 60
Business............................. 77
Management........................... 96
Security Ownership of Certain
Beneficial Owners and Management... 105
Certain Transactions of Renters
Choice............................. 106
Description of Capital Stock......... 107
Description of Other Indebtedness.... 112
Description of the Notes and
Guarantees......................... 113
Old Notes Exchange and Registration
Rights Agreement................... 156
Certain U.S. Federal Income Tax
Consequences....................... 159
Plan of Distribution................. 160
Experts.............................. 161
Legal Matters........................ 161
Index to Financial Statements........ F-1
</TABLE>
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RENTERS CHOICE, INC.
RENT-A-CENTER, INC.
COLORTYME, INC.
OFFER TO EXCHANGE
11% SENIOR
SUBORDINATED NOTES
DUE 2008
FOR ALL OUTSTANDING
11% SENIOR SUBORDINATED NOTES
DUE 2008
---------------------------------
PROSPECTUS
---------------------------------
, 1998
------------------------------------------------------
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<PAGE> 228
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law
Section 145(a) of the DGCL provides that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
Section 145(b) of the DGCL provides that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL provides that any indemnification under subsections
(a) and (b) of Section 145 (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of Section 145. Such determination shall be made (1) by
the board of directors by a majority vote of a quorum consisting of directors
who were not parties to such action, suit or proceeding, or (2) if
II-1
<PAGE> 229
such a quorum is not obtainable, or, even if obtainable, if a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys' fees)
incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in Section 145. Such
expenses (including attorneys' fees) incurred by other employees and agents may
be so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
The Amended and Restated Certificate of Incorporation of the Company provides
that a director of the Company shall not be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the company or its stockholders, (ii) for acts or occasions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock purchases
or redemptions or (iv) for any transaction from which the director derived an
improper personal benefit. If the DGCL is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the Company, in addition to the limitation on personal liability
provided in the Amended and Restated Certificate of incorporation, will be
limited to the fullest extent permitted by the DGCL, as amended. Further, any
repeal or modification of such provision of the Amended and restated Certificate
of Incorporation by the stockholders of the Company will be prospective only,
and will not adversely affect any limitation on the personal liability of a
director of the Company arising from an act or omission occurring prior to the
time of such repeal or modification.
AMENDED AND RESTATED BYLAWS
The Amended and Restated Bylaws of the Company provide that each person who at
any time is or was a director of the Company, and is threatened to be or is made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, arbitrative or investigative (a
"Proceeding"), by reason of the fact that such person is or was a director of
the company, or is or was serving at the request of the Company as a director,
officer, partner, venturer, proprietor, member, employee, trustee, agent or
similar functionary of another domestic or foreign corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan or other
for-profit or non-profit enterprise, whether the basis of a Proceeding is
alleged action in such person's official capacity or in another capacity while
holding such office, shall be indemnified and held harmless by the Company to
the fullest extent authorized by the DGCL or any other applicable law as may
from time to time be in effect (but, in the case of any such amendment or
enactment, only to the extent that such amendment or statute permits the Company
to provide broader indemnification rights than such law prior to such amendment
II-2
<PAGE> 230
or enactment permitted the Company to provide), against all expense, liability
and loss (including, without limitation, court costs and attorneys' fees,
judgments, fines, excise taxes or penalties, and amounts paid or to be paid in
settlement) actually and reasonably incurred or suffered by such person in
connection with a Proceeding, so long as a majority of a quorum of disinterested
directors, the stockholders or legal counsel through a written opinion
determines that such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and in
the case of a criminal Proceeding, such person had no reasonable cause to
believe his conduct was unlawful. Such indemnification shall continue as to a
person who has ceased to serve in the capacity which initially entitled such
person to indemnity thereunder and shall inure to the benefit of his or her
heirs, executors and administrators. The Amended and Restated Bylaws also
contain certain provisions designed to facilitate receipt of such benefits by
any such persons, including the prepayment of any such benefit.
Indemnification Agreements
The Company has also entered into Indemnification Agreements pursuant to which
it has agreed to indemnify certain of its directors and officers against
judgments, claims, damages, losses and expenses incurred as a result of the fact
that any director or officer, in his capacity as such, is made or threatened to
be made a party to any suit or proceeding. Such persons will be indemnified to
the fullest extent now or hereafter permitted by the DGCL. The Indemnification
Agreements also provide for the advancement of certain expenses to such
directors and officers in connection with any such suit or proceeding.
Insurance
The Company has obtained a directors' and officers' liability insurance policy
insuring its directors and officers against losses resulting from wrongful acts
committed by them in their capacities as directors and officers of the company,
including liabilities arising under the Securities Act.
II-3
<PAGE> 231
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1* -- Purchase Agreement, dated August 13, 1998, by and among
Renters Choice, Inc., Chase Securities Inc., Bear,
Stearns & Co. Inc., Credit Suisse First Boston
Corporation and NationsBank Montgomery Securities LLC
2.1(1) -- Agreement and Plan of Reorganization dated May 15, 1996,
among Renters Choice, Inc., ColorTyme, Inc., and CT
Acquisition Corporation (Pursuant to the rules of the
Commission, the schedules and exhibits have been omitted.
Upon the request of the Commission, Renters Choice will
supplementally supply such schedules and exhibits to the
Commission.)
2.2(2) -- Asset Purchase Agreement, dated May 1, 1998, by and among
Renters Choice, Inc., Central Rents, Inc., Central Rents
Holding, Inc. and Banner Holdings, Inc. (Pursuant to the
rules of the Commission, the schedules and exhibits have
been omitted. Upon the request of the Commission, Renters
Choice will supplementally supply such schedules and
exhibits to the Commission.)
2.3(3) -- Letter Agreement, dated as of May 26, 1998, by and among
Renters Choice, Inc., Central Rents, Inc., Central Rents
Holding, Inc. and Banner Holdings, Inc. (Pursuant to the
rules of the Commission, the schedules and exhibits have
been omitted. Upon the request of the Commission, Renters
Choice will supplementally supply such schedules and
exhibits to the Commission.)
2.4(4) -- Stock Purchase Agreement, dated as of June 16, 1998,
among Renters Choice, Inc., Thorn International BV and
Thorn plc (Pursuant to the rules of the Commission, the
schedules and exhibits have been omitted. Upon the
request of the Commission, the Company will
supplementally supply such schedules and exhibits to the
Commission.)
3.1(5) -- Amended and Restated Certificate of Incorporation of
Renters Choice
3.2(6) -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Renters Choice
3.3(7) -- Amended and Restated Bylaws of Renters Choice
3.4(8) -- Amendment to the Amended and Restated Bylaws of Renters
Choice
3.5*** -- Certificate of Incorporation of Rent-A-Center, Inc.
3.6*** -- Articles of Incorporation of ColorTyme, Inc.
3.7*** -- Bylaws of Rent-A-Center, Inc.
3.8*** -- Bylaws of ColorTyme, Inc.
4.1(9) -- Form of Certificate evidencing Common Stock
</TABLE>
II-4
<PAGE> 232
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
4.2(10) -- Certificate of Designations, Preferences and Relative
Rights and Limitations of Series A Preferred Stock of
Renters Choice, Inc.
4.3(11) -- Certificate of Designations, Preferences and Relative
Rights and Limitations of Series B Preferred Stock of
Renters Choice, Inc.
4.4* -- Indenture, dated as of August 18, 1998, by and among
Renters Choice, Inc., as Issuer, ColorTyme, Inc. and
Rent-A-Center, Inc., as Subsidiary Guarantors, and IBJ
Schroder Bank & Trust Company, as Trustee
4.5*** -- Form of Certificate evidencing Series A Preferred Stock
5.1*** -- Opinion of Winstead Sechrest & Minick P.C. regarding
legality of the securities offered.
10.1(12) -- Amended and Restated 1994 Renters Choice, Inc. Long-Term
Incentive Plan
10.2(13) -- Revolving Credit Agreement dated as of November 27, 1996
between Comerica Bank, as agent, Renters Choice, Inc. and
certain other lenders
10.3(14) -- Portfolio Acquisition Agreement dated May 15, 1996, by
and among Renters Choice, Inc., ColorTyme Financial
Services, Inc., and STI Credit Corporation
10.4(15) -- Employment Agreement, dated March 28, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
10.5(16) -- Stock Option Agreement, dated April 1, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
10.6(17) -- Credit Agreement, dated August 5, 1998, among Renters
Choice, Inc., Comerica Bank, as Documentation Agent,
NationsBank N.A., as Syndication Agent, and The Chase
Manhattan Bank, as Administrative Agent, and certain
other lenders
10.7(18) -- Guarantee and Collateral Agreement, dated August 5, 1998,
made by Renters Choice, Inc., and certain of its
Subsidiaries in favor of the Chase Manhattan Bank, as
Administrative Agent
10.8(19) -- $175,000,000 Senior Subordinated Credit Agreement, dated
as of August 5, 1998, among Renters Choice, Inc., certain
other lenders and the Chase Manhattan Bank
10.9(20) -- Stockholders Agreement, dated as of August 5, 1998, by
and among Apollo Investment Fund IV, L.P., Apollo
Overseas Partners IV, L.P., J. Ernest Talley, Mark E.
Speese, Renters Choice, Inc., and certain other persons
10.10(21) -- Registration Rights Agreement, dated August 5, 1998, by
and between Renters Choice, Inc., Apollo Investment Fund
IV, L.P., and Apollo Overseas Partners IV, L.P., related
to the Series A Convertible Preferred Stock
10.11(22) -- Registration Rights Agreement, dated August 5, 1998, by
and between Renters Choice, Inc., Apollo Investment Fund
IV, L.P., and Apollo Overseas Partners IV, L.P., related
to the Series B Convertible Preferred Stock
</TABLE>
II-5
<PAGE> 233
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.13(23) -- Stock Purchase Agreement, dated August 5, 1998, among
Renters Choice, Inc., Apollo Investment Fund IV, L.P. and
Apollo Overseas Partners IV, L.P.
10.14* -- Exchange and Registration Rights Agreement, dated August
18, 1998, by and among Renters Choice, Inc. and Chase
Securities Inc., Bear, Stearns & Co. Inc., NationsBank
Montgomery Securities LLC and Credit Suisse First Boston
Corporation
21.1* -- Subsidiaries of Registrant
23.1** -- Consent of Grant Thornton LLP
23.2** -- Consent of Ernst & Young LLP
23.3** -- Consent of Arthur Andersen LLP
23.4* -- Consent of Winstead Sechrest & Minick P.C. (included as
part of its opinion filed as Exhibits 5.1 and 8.1)
24.1* -- Power of Attorney (included on signature page of this
S-4)
25.1** -- Statement of eligibility of IBJ Schroder Bank & Trust
Company to act as Trustee
99.1** -- Form of Letter of Transmittal
</TABLE>
- -------------------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
(1) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current
Report on Form 8-K dated May 15, 1996
(2) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current
Report on Form 8-K dated May 28, 1998
(3) Incorporated herein by reference to Exhibit 2.2 to the registrant's Current
Report on Form 8-K dated May 15, 1996
(4) Incorporated herein by reference to Exhibit 2.9 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(5) Incorporated herein by reference to Exhibit 3.2 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1994
(6) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
(7) Incorporated herein by reference to Exhibit 3.4 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1994
(8) Incorporated herein by reference to Exhibit 3.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(9) Incorporated herein by reference to Exhibit 4.1 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(10) Incorporated herein by reference to Exhibit 4.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
II-6
<PAGE> 234
(11) Incorporated herein by reference to Exhibit 4.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(12) Incorporated herein by reference to Exhibit 99.1 to the registrant's
Registration Statement on Form S-8 (File No. 333- 53471)
(13) Incorporated herein by reference to Exhibit 10.2 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1996
(14) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
(15) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(16) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(17) Incorporated herein by reference to Exhibit 10.18 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(18) Incorporated herein by reference to Exhibit 10.19 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(19) Incorporated herein by reference to Exhibit 10.20 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(20) Incorporated herein by reference to Exhibit 10.21 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(21) Incorporated herein by reference to Exhibit 10.22 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(22) Incorporated herein by reference to Exhibit 10.23 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(23) Incorporated herein by reference to Exhibit 2.10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
II-7
<PAGE> 235
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that insofar as indemnification
for liabilities arising under the Securities Act of 1933, as amended (the "Act")
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim of indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
SEC by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration
II-8
<PAGE> 236
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering
or throughout a continuous offering. Financial statements and information
otherwise required by Section 10(a)(3) of the Act need not be furnished,
provided, that the registrant includes in the prospectus, by means of a
post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or Rule 3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with or
furnished to the SEC by the registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference on the Form F-3.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the SEC under Section 305(b)(2) of the Act.
(e) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-9
<PAGE> 237
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on December 11, 1998.
RENTERS CHOICE, INC.
By: /s/ MARK E. SPEESE
-----------------------------------
Mark E. Speese
President
and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board December 11, 1998
- ------------------------------------------ and Chief Executive
J. Ernest Talley Officer (Principal
Executive Officer)
/s/ MARK E. SPEESE President, Chief December 11, 1998
- ------------------------------------------ Operating Officer and
Mark E. Speese Director
* Senior Vice December 11, 1998
- ------------------------------------------ President -- Finance
Danny Z. Wilbanks and Chief Financial
Officer (Principal
Financial and
Accounting Officer)
* Director December 11, 1998
- ------------------------------------------
J.V. Lentell
* Director December 11, 1998
- ------------------------------------------
Joseph V. Mariner
* Director December 11, 1998
- ------------------------------------------
Rex W. Thompson
* Director December 11, 1998
- ------------------------------------------
Laurence M. Berg
* Director December 11, 1998
- ------------------------------------------
Peter P. Copses
*By: /s/ MARK E. SPEESE
--------------------------------------
Mark E. Speese
Attorney-in-fact
</TABLE>
II-10
<PAGE> 238
SUBSIDIARY GUARANTORS:
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on December 11, 1998.
RENT-A-CENTER, INC.
By: /s/ MARK E. SPEESE
-----------------------------------
Mark E. Speese
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President (Principal December 11, 1998
- ------------------------------------------ Executive Officer) and
J. Ernest Talley Director
/s/ MARK E. SPEESE Vice President and December 11, 1998
- ------------------------------------------ Director
Mark E. Speese
* Vice President, December 11, 1998
- ------------------------------------------ Secretary, Treasurer
Danny Z. Wilbanks (Principal Financial
and Accounting Officer)
and Director
*By: /s/ MARK E. SPEESE
--------------------------------------
Mark E. Speese
Attorney-in-fact
</TABLE>
II-11
<PAGE> 239
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on December 11, 1998.
COLORTYME, INC.
By: /s/ MARK E. SPEESE
-----------------------------------
Mark E. Speese
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President and Chief December 11, 1998
- ------------------------------------------ Executive Officer
Mitchell E. Fadel (Principal Executive
Officer)
* Director December 11, 1998
- ------------------------------------------
J. Ernest Talley
/s/ MARK E. SPEESE Vice President and December 11, 1998
- ------------------------------------------ Director
Mark E. Speese
* Secretary (Principal December 11, 1998
- ------------------------------------------ Financial and
Danny Z. Wilbanks Accounting Officer)
*By: /s/ MARK E. SPEESE
--------------------------------------
Mark E. Speese
Attorney-in-fact
</TABLE>
II-12
<PAGE> 240
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1* -- Purchase Agreement, dated August 13, 1998, by and among
Renters Choice, Inc., Chase Securities Inc., Bear,
Stearns & Co. Inc., Credit Suisse First Boston
Corporation and NationsBank Montgomery Securities LLC
2.1(1) -- Agreement and Plan of Reorganization dated May 15, 1996,
among Renters Choice, Inc., ColorTyme, Inc., and CT
Acquisition Corporation (Pursuant to the rules of the
Commission, the schedules and exhibits have been omitted.
Upon the request of the Commission, Renters Choice will
supplementally supply such schedules and exhibits to the
Commission.)
2.2(2) -- Asset Purchase Agreement, dated May 1, 1998, by and among
Renters Choice, Inc., Central Rents, Inc., Central Rents
Holding, Inc. and Banner Holdings, Inc. (Pursuant to the
rules of the Commission, the schedules and exhibits have
been omitted. Upon the request of the Commission, Renters
Choice will supplementally supply such schedules and
exhibits to the Commission.)
2.3(3) -- Letter Agreement, dated as of May 26, 1998, by and among
Renters Choice, Inc., Central Rents, Inc., Central Rents
Holding, Inc. and Banner Holdings, Inc. (Pursuant to the
rules of the Commission, the schedules and exhibits have
been omitted. Upon the request of the Commission, Renters
Choice will supplementally supply such schedules and
exhibits to the Commission.)
2.4(4) -- Stock Purchase Agreement, dated as of June 16, 1998,
among Renters Choice, Inc., Thorn International BV and
Thorn plc (Pursuant to the rules of the Commission, the
schedules and exhibits have been omitted. Upon the
request of the Commission, the Company will
supplementally supply such schedules and exhibits to the
Commission.)
3.1(5) -- Amended and Restated Certificate of Incorporation of
Renters Choice
3.2(6) -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Renters Choice
3.3(7) -- Amended and Restated Bylaws of Renters Choice
3.4(8) -- Amendment to the Amended and Restated Bylaws of Renters
Choice
3.5*** -- Certificate of Incorporation of Rent-A-Center, Inc.
3.6*** -- Articles of Incorporation of ColorTyme, Inc.
3.7*** -- Bylaws of Rent-A-Center, Inc.
3.8*** -- Bylaws of ColorTyme, Inc.
4.1(9) -- Form of Certificate evidencing Common Stock
</TABLE>
<PAGE> 241
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
4.2(10) -- Certificate of Designations, Preferences and Relative
Rights and Limitations of Series A Preferred Stock of
Renters Choice, Inc.
4.3(11) -- Certificate of Designations, Preferences and Relative
Rights and Limitations of Series B Preferred Stock of
Renters Choice, Inc.
4.4* -- Indenture, dated as of August 18, 1998, by and among
Renters Choice, Inc., as Issuer, ColorTyme, Inc. and
Rent-A-Center, Inc., as Subsidiary Guarantors, and IBJ
Schroder Bank & Trust Company, as Trustee
4.5*** -- Form of Certificate evidencing Series A Preferred Stock
5.1*** -- Opinion of Winstead Sechrest & Minick P.C. regarding
legality of the securities offered.
10.1(12) -- Amended and Restated 1994 Renters Choice, Inc. Long-Term
Incentive Plan
10.2(13) -- Revolving Credit Agreement dated as of November 27, 1996
between Comerica Bank, as agent, Renters Choice, Inc. and
certain other lenders
10.3(14) -- Portfolio Acquisition Agreement dated May 15, 1996, by
and among Renters Choice, Inc., ColorTyme Financial
Services, Inc., and STI Credit Corporation
10.4(15) -- Employment Agreement, dated March 28, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
10.5(16) -- Stock Option Agreement, dated April 1, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
10.6(17) -- Credit Agreement, dated August 5, 1998, among Renters
Choice, Inc., Comerica Bank, as Documentation Agent,
NationsBank N.A., as Syndication Agent, and The Chase
Manhattan Bank, as Administrative Agent, and certain
other lenders
10.7(18) -- Guarantee and Collateral Agreement, dated August 5, 1998,
made by Renters Choice, Inc., and certain of its
Subsidiaries in favor of the Chase Manhattan Bank, as
Administrative Agent
10.8(19) -- $175,000,000 Senior Subordinated Credit Agreement, dated
as of August 5, 1998, among Renters Choice, Inc., certain
other lenders and the Chase Manhattan Bank
10.9(20) -- Stockholders Agreement, dated as of August 5, 1998, by
and among Apollo Investment Fund IV, L.P., Apollo
Overseas Partners IV, L.P., J. Ernest Talley, Mark E.
Speese, Renters Choice, Inc., and certain other persons
10.10(21) -- Registration Rights Agreement, dated August 5, 1998, by
and between Renters Choice, Inc., Apollo Investment Fund
IV, L.P., and Apollo Overseas Partners IV, L.P., related
to the Series A Convertible Preferred Stock
10.11(22) -- Registration Rights Agreement, dated August 5, 1998, by
and between Renters Choice, Inc., Apollo Investment Fund
IV, L.P., and Apollo Overseas Partners IV, L.P., related
to the Series B Convertible Preferred Stock
</TABLE>
<PAGE> 242
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.13(23) -- Stock Purchase Agreement, dated August 5, 1998, among
Renters Choice, Inc., Apollo Investment Fund IV, L.P. and
Apollo Overseas Partners IV, L.P.
10.14* -- Exchange and Registration Rights Agreement, dated August
18, 1998, by and among Renters Choice, Inc. and Chase
Securities Inc., Bear, Stearns & Co. Inc., NationsBank
Montgomery Securities LLC and Credit Suisse First Boston
Corporation
21.1* -- Subsidiaries of Registrant
23.1** -- Consent of Grant Thornton LLP
23.2** -- Consent of Ernst & Young LLP
23.3** -- Consent of Arthur Andersen LLP
23.4* -- Consent of Winstead Sechrest & Minick P.C. (included as
part of its opinion filed as Exhibits 5.1 and 8.1)
24.1* -- Power of Attorney (included on signature page of this
S-4)
25.1** -- Statement of eligibility of IBJ Schroder Bank & Trust
Company to act as Trustee
99.1** -- Form of Letter of Transmittal
</TABLE>
- -------------------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
(1) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current
Report on Form 8-K dated May 15, 1996
(2) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current
Report on Form 8-K dated May 28, 1998
(3) Incorporated herein by reference to Exhibit 2.2 to the registrant's Current
Report on Form 8-K dated May 15, 1996
(4) Incorporated herein by reference to Exhibit 2.9 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(5) Incorporated herein by reference to Exhibit 3.2 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1994
(6) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
(7) Incorporated herein by reference to Exhibit 3.4 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1994
(8) Incorporated herein by reference to Exhibit 3.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(9) Incorporated herein by reference to Exhibit 4.1 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(10) Incorporated herein by reference to Exhibit 4.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
<PAGE> 243
(11) Incorporated herein by reference to Exhibit 4.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(12) Incorporated herein by reference to Exhibit 99.1 to the registrant's
Registration Statement on Form S-8 (File No. 333- 53471)
(13) Incorporated herein by reference to Exhibit 10.2 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1996
(14) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
(15) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(16) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(17) Incorporated herein by reference to Exhibit 10.18 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(18) Incorporated herein by reference to Exhibit 10.19 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(19) Incorporated herein by reference to Exhibit 10.20 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(20) Incorporated herein by reference to Exhibit 10.21 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(21) Incorporated herein by reference to Exhibit 10.22 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(22) Incorporated herein by reference to Exhibit 10.23 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(23) Incorporated herein by reference to Exhibit 2.10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 12, 1998, accompanying the consolidated
financial statements of Renters Choice, Inc. and Subsidiaries contained in the
Registration Statement on Form S-4 and Prospectus. We consent to the use of the
aforementioned report in this Registration Statement on Form S-4 and Prospectus,
and to the use of our name as it appears under the caption "Experts".
GRANT THORNTON LLP
Dallas, Texas
December 11, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 24, 1998 (except for Note 14, as to which the date
is June 25, 1998), with respect to the consolidated financial statements of
THORN Americas, Inc. and subsidiaries included in the Registration Statement
(Form S-4) and related Prospectus of Renters Choice, Inc. for the registration
of $175,000,000, 11% Senior Subordinated Notes due 2008.
ERNST & YOUNG LLP
Wichita, Kansas
December 10, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 19, 1998 included in this Amendment No. 1 to Form S-4 Registration
Statement of Renters Choice, Inc., Rent-A-Center, Inc. and ColorTyme, Inc. and
to all references to our Firm included in this registration statement No.
333-65787.
ARTHUR ANDERSEN LLP
Los Angeles, California
December 10, 1998
<PAGE> 1
EXHIBIT 25.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
[ ] CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
---------------------
IBJ SCHRODER BANK & TRUST COMPANY
(Exact name of trustee as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 13-6022258
(Jurisdiction of incorporation (I.R.S. employer
or organization if not a U.S. national bank) identification No.)
ONE STATE STREET, NEW YORK, NEW YORK 10004
(Address of principal executive offices) (Zip code)
</TABLE>
LUIS PEREZ, ASSISTANT VICE PRESIDENT
IBJ SCHRODER BANK & TRUST COMPANY
ONE STATE STREET
NEW YORK, NEW YORK 10004
(212) 858-2000
(Name, address and telephone number of agent for service)
RENTERS CHOICE, INC.
RENT-A-CENTER, INC.
COLORTYME, INC.
(Exact names of obligor as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 48-1024367
DELAWARE 48-0959188
TEXAS 75-2651408
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
RENTERS CHOICE, INC.
13800 MONTFORT DRIVE, SUITE 300
DALLAS, TEXAS 75240
RENT-A-CENTER, INC.
8200 EAST THORN DRIVE
WICHITA, KANSAS 67226
COLORTYME, INC.
1231 GREENWAY DRIVE, SUITE 900
IRVING, TEXAS 75038
(Address of principal executive offices) (Zip code)
</TABLE>
11% SENIOR SUBORDINATED NOTES DUE 2008
(Title of indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
ITEM 1. GENERAL INFORMATION
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
New York State Banking Department
Two Rector Street
New York, New York
Federal Deposit Insurance Corporation
Washington, D.C.
Federal Reserve Bank of New York
Second District,
33 Liberty Street
New York, New York
(b) Whether it is authorized to exercise corporate trust powers.
Yes
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each such affiliation.
The obligor is not an affiliate of the trustee.
ITEM 13. DEFAULTS BY THE OBLIGOR.
(a) State whether there is or has been a default with respect to the
securities under this indenture. Explain the nature of any such default.
None
(b) If the trustee is a trustee under another indenture under which any
other securities, or certificates of interest or participation in any other
securities, of the obligors are outstanding, or is trustee for more than
one outstanding series of securities under the indenture, state whether
there has been a default under any such indenture or series, identify the
indenture or series affected, and explain the nature of any such default.
None
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as part of this statement of eligibility.
*1. A copy of the Charter of IBJ Schroder Bank & Trust Company as amended
to date. (See Exhibit I A to Form T-1, Securities and Exchange Commission
File No. 22-18460).
2
<PAGE> 3
*2. A copy of the Certificate of Authority of the trustee to Commence
Business (Included in Exhibit 1 above).
*3. A copy of the Authorization of the trustee to exercise corporate trust
powers, as amended to date (See Exhibit 4 to Form T-1, Securities and
Exchange Commission File No. 22-19146).
*4. A copy of the existing By-Laws of the trustee, as amended to date (See
Exhibit 4 to Form T-1, Securities and Exchange Commission File No.
22-19146).
5. Not Applicable
6. The consent of United States institutional trustee required by Section
321(b) of the Act.
7. A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority.
- -------------------------
* The Exhibits thus designated are incorporated herein by reference as exhibits
hereto. Following the description of such Exhibits is a reference to the copy
of the Exhibit heretofore filed with the Securities and Exchange Commission,
to which there have been no amendments or changes.
3
<PAGE> 4
NOTE
In answering any item in this Statement of Eligibility which relates to matters
peculiarly within the knowledge of the obligor and its directors or officers,
the trustee has relied upon information furnished to it by the obligor.
Inasmuch as this Form T-1 is filed prior to the ascertainment by the trustee of
all facts on which to base responsive answers to Item 2, the answer to said Item
is based on incomplete information.
Item 2, may, however, be considered as correct unless amended by an amendment to
this Form T-1.
Pursuant to General Instruction B, the trustee has responded to Items 1, 2 and
16 of this form since to the best knowledge of the trustee as indicated in Item
13, the obligor is not in default under any indenture under which the applicant
is trustee.
4
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee,
IBJ Schroder Bank & Trust Company, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
& qualification to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, and State of New York, on the 3rd day
of December, 1998.
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ LUIS PEREZ
--------------------------------------
Luis Perez
Assistant Vice President
5
<PAGE> 6
EXHIBIT 6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939, as amended, in connection with the issuance by Renters Choice, Inc., of
its 11% Senior Subordinated Notes 2008, we hereby consent that reports of
examinations by Federal, State, Territorial, or District authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
request therefor.
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ LUIS PEREZ
--------------------------------------
Luis Perez
Assistant Vice President
Dated: December 3, 1998
6
<PAGE> 7
EXHIBIT 7
CONSOLIDATED REPORT OF CONDITION
OF IBJ SCHRODER BANK & TRUST COMPANY
OF NEW YORK, NEW YORK
AND FOREIGN AND DOMESTIC SUBSIDIARIES
REPORT AS OF SEPTEMBER 30,1998
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
IN THOUSANDS
--------------
<S> <C> <C> <C> <C>
ASSETS
1. Cash and balance due from depository institutions:
a. Non-interest-bearing balances and currency and coin.......... $ 42,702
b. Interest-bearing balances.................................... $ 13,444
2. Securities
a. Held-to-maturity securities.................................. $ 191,921
b. Available-for-sale securities................................ $ 118,931
3. Federal funds sold and securities purchased under agreements to
resell in domestic offices of the bank and of its Edge and
Agreement subsidiaries and in IBFs:
Federal Funds sold and Securities purchased under agreements to
resell............................................................ $ 79,838
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income......... $1,938,005
b. LESS: Allowance for loan and lease losses........ $ 63,361
c. LESS: Allocated transfer risk reserve............ $ -0-
d. Loans and leases, net of unearned income, allowance, and
reserve...................................................... $1,874,644
5. Trading assets held in trading accounts........................... $ 462
6. Premises and fixed assets (including capitalized leases).......... $ 1,922
7. Other real estate owned........................................... $ 819
8. Investments in unconsolidated subsidiaries and associated
companies......................................................... $ -0-
9. Customers' liability to this bank on acceptances outstanding...... $ 371
10. Intangible assets................................................. $ 11,167
11. Other assets...................................................... $ 68,097
12. TOTAL ASSETS...................................................... $2,404,318
</TABLE>
7
<PAGE> 8
CONSOLIDATED REPORT OF CONDITION
OF IBJ SCHRODER BANK & TRUST COMPANY
OF NEW YORK, NEW YORK
AND FOREIGN AND DOMESTIC SUBSIDIARIES
REPORT AS OF SEPTEMBER 30,1998, CONTINUED
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
IN THOUSANDS
--------------
<S> <C> <C> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices.......................................... $ 682,904
(1) Noninterest-bearing.......................... $ 135,253
(2) Interest-bearing............................. $ 547,651
b. In foreign offices, Edge and Agreement subsidiaries, and
IBFs......................................................... $1,154,887
(1) Noninterest-bearing.......................... $ 17,024
(2) Interest-bearing............................. $1,137,863
14. Federal funds purchased and securities sold under agreements to
repurchase in domestic offices of the bank and of its Edge and
Agreement subsidiaries, and in IBFs:
Federal Funds purchased and Securities sold under agreements to
repurchase........................................................ $ 91,000
15. a. Demand notes issued to the U.S. Treasury..................... $ 12,693
b. Trading Liabilities.......................................... $ 239
16. Other borrowed money:
a. With a remaining maturity of one year or less................ $ 31,002
b. With a remaining maturity of more than one year.............. $ 1,375
c. With a remaining maturity of more than three years........... $ 1,550
17. Not applicable
18. Bank's liability on acceptances executed and outstanding.......... $ 371
19. Subordinated notes and debentures................................. $ 100,000
20. Other liabilities................................................. $ 76,658
21. TOTAL LIABILITIES................................................. $2,152,679
22. Limited-life preferred stock and related surplus.................. $ N/A
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus..................... $ -0-
24. Common stock...................................................... $ 29,649
25. Surplus (exclude all surplus related to preferred stock).......... $ 217,008
26. a. Undivided profits and capital reserves....................... $ 4,112
b. Net unrealized gains (losses) on available-for-sale
securities................................................... $ 870
27. Cumulative foreign currency translation adjustments............... $ -0-
28. TOTAL EQUITY CAPITAL.............................................. $ 251,639
29. TOTAL LIABILITIES AND EQUITY CAPITAL.............................. $2,404,318
</TABLE>
8
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
TO TENDER 11% SENIOR SUBORDINATED NOTES DUE 2008
OF
RENTERS CHOICE, INC.
PURSUANT TO THE PROSPECTUS
DATED , 1999
BY
RENTERS CHOICE, INC.
THE OFFER TO EXCHANGE WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED TO A DATE NOT LATER THAN , 1998
(THE "EXPIRATION DATE"). TENDERED NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO
THE EXPIRATION DATE.
TO THE EXCHANGE AGENT:
IBJ SCHRODER BANK & TRUST COMPANY
<TABLE>
<S> <C>
By Registered or Certified Mail or by Overnight By Hand:
Courier:
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
P. O. Box 84 One State Street
Bowling Green Station New York, New York 10004
New York, New York 10274-0084 Attn: Securities Processing Window,
Attn: Reorganization Operations Dept. Subcellar One, (SC-1)
Facsimile Transmission Number: Confirm by Telephone:
(212) 858-2611 (212) 858-2103
</TABLE>
Delivery of this instrument to an address other than as set forth above
will not constitute a valid delivery. The accompanying instructions should be
read carefully before this Letter of Transmittal is completed.
The undersigned acknowledges that the undersigned has received and reviewed
the Prospectus dated , 1999 (the "Prospectus") of Renters Choice,
Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal
(the "Letter of Transmittal"), which together constitute the Company's offer to
exchange (the "Exchange Offer") $1,000 principal amount of 11% Senior
Subordinated Notes due 2008 (the "Exchange Notes") for each $1,000 principal
amount of its outstanding 11% Senior Subordinated Notes due 2008 (the "Old
Notes") as set forth in the Prospectus. The Old Notes that are not exchanged
will remain restricted securities and may be resold only (i) to the Company,
(ii) pursuant to Rule 144A or Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"), (iii) outside the United States to a foreign
person pursuant to the requirements of Rule 904 under the Securities Act, or
(iv) pursuant to an effective registration statement under the Securities Act.
See "The Exchange Offer -- Consequences of Failure to Exchange" in the
Prospectus.
Upon the terms and subject to the conditions set forth in the Prospectus
and in this Letter of Transmittal, the Company will exchange $1,000 principal
amount of the Exchange Notes, registered under the Securities Act pursuant to a
registration statement on Form S-4 filed by the Company, for each $1,000
principal amount of its outstanding Old Notes
<PAGE> 2
properly delivered by a Holder thereof to IBJ Schroder Bank & Trust Company, as
exchange agent (the "Exchange Agent"), and not withdrawn on or prior to the
Expiration Date. No Holder may withdraw a tender following the Expiration Date.
In order to be entitled to receive the Exchange Notes, a tendering Holder must
properly tender the Old Notes to the Exchange Agent, and not withdraw such
tender, on or prior to the Expiration Date. If a Holder's Old Notes are not
properly tendered by the Expiration Date pursuant to the Exchange Offer, such
Holder will not receive Exchange Notes.
By executing the Letter of Transmittal, the undersigned represents to the
Company that, among other things, (i) the Exchange Notes to be acquired by the
Holder of the Old Note in connection with the Exchange Offer are being acquired
by the Holder in the ordinary course of business of the Holder, (ii) the Holder
has no arrangement or understanding with any person to participate in the
distribution of Exchange Notes, (iii) the Holder acknowledges and agrees that
any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on the
position of the staff of the Commission set forth in no-action letters (see "The
Exchange Offer -- Resale of Exchange Notes"), (iv) the Holder understands that a
secondary resale transaction described in clause (iii) above and any resales of
Exchange Notes obtained by such Holder in exchange for Old Notes acquired by
such Holder directly from the Company should be covered by an effective
registration statement containing the selling securityholder information
required by Item 507 of Regulation S-K of the Securities and Exchange Commission
(the "Commission"), and (v) the Holder is not an "affiliate," as defined in Rule
405 under the Securities Act, of the Company. If the Holder is a broker-dealer
that will receive Exchange Notes for its own account in exchange for Old Notes
that were acquired as a result of market-making activities or other trading
activities, by executing this Letter of Transmittal, the Holder acknowledges
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. However, by so acknowledging and by delivering a prospectus, the Holder
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. See "The Exchange Offer -- Procedures for Tendering."
The Exchange Offer may be extended, terminated, amended or consummated as
provided in the Prospectus. During any such extension of the Exchange Offer, all
Old Notes previously tendered and not withdrawn pursuant to such Exchange Offer
will remain subject to the Exchange Offer and may be accepted thereafter for
exchange by the Company.
No alternative, conditional or contingent tenders will be accepted. A
tendering Holder, by execution of this Letter of Transmittal, or facsimile
hereof, waives all rights to receive notice of acceptance of such Holder's Old
Notes for exchange. Capitalized terms used but not defined herein have the
meanings given to them in the Prospectus.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE CHECKING ANY BOX BELOW
This Letter of Transmittal is to be completed by Holders of Old Notes if
certificates representing such Old Notes are to be forwarded herewith or if
delivery of such certificates are to be made by book-entry transfer to the
account maintained by the Exchange Agent at the Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures set forth in the
Prospectus under the caption "The Exchange Offer -- Procedures for Tendering."
Holders whose certificates representing the Old Notes are not immediately
available or who cannot deliver certificates and all other required documents to
the Exchange Agent or complete the procedure for book-entry transfer on or prior
to the Expiration Date may nevertheless tender Old Notes pursuant to the
guaranteed delivery procedure set forth in the Prospectus under the caption "The
Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2 below.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent. In order to ensure participation in the Exchange
Offer, Old Notes must be properly tendered on or before the Expiration Date.
List below the Old Notes that are to be tendered pursuant to this Letter of
Transmittal. If the space below is inadequate, list the information requested
below on a separate signed schedule and affix the original signed schedule to
this Letter of Transmittal.
2
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF NOTES TENDERED
- -----------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED AGGREGATE PRINCIPAL PRINCIPAL
HOLDER(S) CERTIFICATE AMOUNT REPRESENTED AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)(1) BY CERTIFICATE(S) TENDERED(2)
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL PRINCIPAL AMOUNT TENDERED
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Need not be completed by Holders who tender by book-entry.
(2) Unless otherwise indicated in this column, any tendering Holder will be
deemed to have tendered the entire principal amount represented by the Old
Notes indicated in the column labeled "Aggregate Principal Amount
Represented by Certificate(s)." See Instruction 5.
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
[ ]CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
[ ]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN A BOOK-
ENTRY TRANSFER FACILITY MAY DELIVER NOTES BY BOOK-ENTRY TRANSFER):
Name of Tendering Institution:
- --------------------------------------------------------------------------------
Account Number:
- --------------------------------------------------------------------------------
Transaction Code Number:
- --------------------------------------------------------------------------------
[ ]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Holder(s):
- --------------------------------------------------------------------------------
Window Ticket Number (if any):
- --------------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
- -----------------------------------------------------------------
Name of Eligible Institution that guaranteed delivery:
- ----------------------------------------------------------------
[ ] Check box if delivered by Book-Entry Transfer
Account Number:
- --------------------------------------------------------------------------------
Transaction Code Number:
- --------------------------------------------------------------------------------
3
<PAGE> 4
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Only Holders are entitled to tender their Old Notes in the Exchange Offer.
Any financial institution that is a participant in the Book-Entry Transfer
Facility's system and whose name appears on a security position listing as the
record owner of the Old Notes and who wishes to make book-entry delivery of Old
Notes as described above must complete and execute a participant's letter (which
will be distributed to participants by the Book-Entry Transfer Facility)
instructing the Book-Entry Transfer Facility's nominee to complete and sign the
power of attorney attached thereto. Persons who are beneficial owners of Old
Notes but are not Holders and who seek to tender Old Notes should (i) contact
the Holder of such Old Notes and instruct such Holder to tender on his behalf,
(ii) obtain and include with this Letter of Transmittal Old Notes properly
endorsed for transfer by the Holder, with signatures on the endorsement
guaranteed by a firm that is a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act which is a member of one of the recognized signature
guarantee programs identified in the Letter of Transmittal (each, an "Eligible
Institution") or (iii) effect a record transfer of such Old Notes from the
Holder to such beneficial owner and comply with the requirements applicable to
Holders for tendering Old Notes prior to 5:00 P.M., New York City time, on the
Expiration Date.
HOLDERS WHO WISH TO RECEIVE THE EXCHANGE NOTES MUST TENDER THEIR OLD NOTES
ON OR PRIOR TO THE EXPIRATION DATE. See "The Exchange Offer -- Procedures for
Tendering" in the Prospectus.
4
<PAGE> 5
To: Renters Choice, Inc. (the "Company")
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company, the Old Notes indicated above.
Subject to, and effective upon, acceptance for exchange of the Old Notes
tendered herewith, the undersigned hereby sells, assigns and transfers to or
upon the order of the Company, all right, title and interest in and to all such
Old Notes tendered hereby. The undersigned hereby irrevocably constitutes and
appoints the Exchange Agent the true and lawful agent and attorney-in-fact of
the undersigned (with full knowledge that the Exchange Agent also acts as agent
of the Company) with respect to such Old Notes, with full power of substitution
and resubstitution (such power of attorney being deemed to be an irrevocable
power coupled with an interest) to (a) deliver certificates representing such
Old Notes, or transfer ownership of such Old Notes on the account books
maintained by the Book-Entry Transfer Facility, together, in each such case,
with all accompanying evidences of transfer and authenticity to or upon the
order of the Company, (b) present such Old Notes for transfer on the relevant
register and (c) receive all benefits or otherwise exercise all rights of
beneficial ownership of such Old Notes (except that the Exchange Agent will have
no rights to or control, except as agent for the Company, for the Exchange Notes
delivered in connection with the Exchange Offer) all in accordance with the
terms of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS
FULL POWER AND AUTHORITY TO TENDER, SELL, ASSIGN AND TRANSFER THE OLD NOTES
TENDERED HEREBY AND, THAT WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE COMPANY
WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND CLEAR OF
ALL SECURITY INTERESTS, LIENS, RESTRICTIONS, CLAIMS, CHARGES, ENCUMBRANCES,
CONDITIONAL SALES AGREEMENTS OR OTHER OBLIGATIONS RELATING TO THE SALE OR
TRANSFER THEREOF, AND NOT BE SUBJECT TO ANY ADVERSE CLAIM. THE UNDERSIGNED WILL,
UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS DEEMED BY THE
EXCHANGE AGENT OR THE COMPANY TO BE NECESSARY OR DESIRABLE TO COMPLETE THE
ASSIGNMENT, TRANSFER AND PURCHASE OF THE OLD NOTES TENDERED HEREBY. THE
UNDERSIGNED HAS READ AND AGREES TO ALL OF THE TERMS AND CONDITIONS OF THE
EXCHANGE OFFER. DELIVERY OF ENCLOSED OLD NOTES SHALL BE EFFECTED, AND RISK OF
LOSS AND TITLE TO SUCH OLD NOTES SHALL PASS, ONLY UPON PROPER DELIVERY THEREOF
TO THE EXCHANGE AGENT.
All authority conferred or agreed to be conferred pursuant to this Letter
of Transmittal and every obligation of the undersigned hereunder shall be
binding upon the successors, assigns, heirs, executors, administrators, trustees
in bankruptcy, and personal and legal representatives of the undersigned and
shall not be affected by, and shall survive, the death or incapacity of the
undersigned. Old Notes properly tendered may be withdrawn at any time prior to
the Expiration Date. Holders will receive the Exchange Notes only if their
tenders have been properly delivered on or prior to the Expiration Date and not
revoked on or prior to the Expiration Date.
Old Notes may not be withdrawn after the Expiration Date unless the
Exchange Offer with respect to such Old Notes is terminated without any Old
Notes being accepted for exchange thereunder. In the event of such a
termination, such Old Notes tendered by the undersigned will be returned to the
undersigned as promptly as practicable.
The Exchange Offer is subject to a number of conditions, each of which may
be waived or modified by the Company, in whole or in part, at any time and from
time to time, as described in the Prospectus under the caption "The Exchange
Offer -- Certain Conditions to the Exchange Offer." The undersigned recognizes
that as a result of such conditions the Company may not be required to accept
the Old Notes properly tendered hereby. In such event, the tendered Old Notes
not accepted for exchange will be returned to the undersigned without cost to
the undersigned as soon as practicable following the earlier to occur of the
Expiration Date or the date on which the Exchange Offer with respect to such
issue is terminated without any Old Notes being purchased thereunder, at the
address shown below the undersigned's signature(s) unless otherwise indicated
under "Special Issuance Instructions" below.
Unless otherwise indicated under "Special Issuance Instructions" below, the
Exchange Agent will issue the Exchange Notes for any Old Notes tendered hereby
that are accepted for exchange, and/or return any certificates representing Old
Notes not tendered or not accepted for exchange in the name(s) of the Holder(s)
appearing under "Description of Securities Tendered." Similarly, unless
otherwise indicated under "Special Delivery Instructions," the Exchange Notes,
and/or any certificates representing Old Notes not tendered or not accepted for
exchange (and accompanying documents, as appropriate) to be returned will be
sent to the address(es) of the Holder(s) appearing under "Description of
Securities Tendered." In the event that both the Special Issuance Instructions
and the Special Delivery Instructions are completed, the Exchange Notes will be
issued, if applicable, and the certificates representing any Old
5
<PAGE> 6
Notes not tendered or not accepted for exchange (and any accompanying documents,
as appropriate) will be returned in the name of, and delivered to, the person or
persons so indicated. Unless otherwise indicated under "Special Issuance
Instructions," in the case of a book-entry delivery of Old Notes, the account
maintained at the Book-Entry Transfer Facility indicated above will be credited
with any Old Notes not tendered or not accepted for exchange. The undersigned
recognizes that neither the Exchange Agent nor the Company, has any obligation
pursuant to the Special Issuance Instructions to transfer any Old Notes from the
name of the Holder thereof if the Company does not accept for exchange any of
the Old Notes so tendered.
6
<PAGE> 7
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the certificates representing the Exchange Notes and/or
certificates representing Old Notes not accepted for exchange are to be issued
in the name of someone other than the undersigned, or if Old Notes delivered by
book-entry transfer not accepted for exchange are to be returned by credit to an
account maintained at a Book-Entry Transfer Facility other than the account
indicated above.
Issue Certificate(s) to:
Name:
- ----------------------------------------------
(Please Print)
Address:
- --------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
(Including Zip Code)
- ------------------------------------------------------
(Taxpayer Identification or Social Security Number)
[ ] Credit unaccepted Old Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility account set forth below:
- ------------------------------------------------------
(Account Number)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the Exchange Notes and/or certificates representing Old
Notes not accepted for exchange are to be sent to someone other than the
undersigned or to the undersigned at an address other than that shown above.
Mail Certificate(s) to:
Name:
- ----------------------------------------------
(Please Print)
Address:
- --------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
(Including Zip Code)
- ------------------------------------------------------
(Taxpayer Identification or Social Security Number)
7
<PAGE> 8
SIGNATURES
HOLDERS OF OLD NOTES
SIGN HERE
IMPORTANT: COMPLETE AND SIGN THE SUBSTITUTE FORM W-9 IN
THIS LETTER OF TRANSMITTAL
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Signature(s) of Holder(s) of Notes)
Date:
- ------------------------------------, 1997
(Must be signed by the Holder(s) exactly as name(s) appear(s) on
certificate(s) representing the Old Notes or on a security position listing or
by person(s) authorized to become Holder(s) by certificates and documents
transmitted herewith. If signature is by attorney-in-fact, executor,
administrator, trustee, guardian, officer of a corporation or other person
acting in a fiduciary or representative capacity, please provide the following
information and see Instruction 6.)
Capacity (Full Title):
- --------------------------------------------------------------------------------
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Type or Print)
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number
- --------------------------------------------------------------------------------
Tax Identification or Social Security No.
- ---------------------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED -- SEE INSTRUCTIONS 1 AND 6)
- --------------------------------------------------------------------------------
(Authorized Signature)
Name:
- --------------------------------------------------------------------------------
(Please Type or Print)
- --------------------------------------------------------------------------------
(Title)
- --------------------------------------------------------------------------------
(Name of Firm)
- --------------------------------------------------------------------------------
(Address -- Include Zip Code)
- --------------------------------------------------------------------------------
(Area Code and Telephone Number)
Date:
- ------------------------------------
8
<PAGE> 9
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. Signatures on this Letter of Transmittal need
not be guaranteed if the Old Notes tendered hereby are tendered (a) by the
registered Holder(s) (which term, for purposes of this document, shall include
any participant in the Book-Entry Transfer Facility's system and whose name
appears on a security position listing as the record owner of the Old Notes)
thereof, unless such Holder has completed either the box entitled "Special
Payment Instructions" or the box entitled "Special Delivery Instructions" on the
preceding page, or (b) for the account of a firm that is a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (each, an "Eligible Institution"). In all other cases, all
signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution. Persons who are beneficial owners of Old Notes but are not Holders
and who seek to tender Old Notes should (i) contact the Holder of such Old Notes
and instruct such Holder to tender on his behalf, (ii) obtain and include with
this Letter of Transmittal, Old Notes properly endorsed for transfer by the
Holder, with signatures on the endorsement guaranteed by an Eligible Institution
or (iii) effect a record transfer of such Old Notes from the Holder to such
beneficial owner and comply with the requirements applicable to Holders for
tendering Old Notes on or prior to the Expiration Date. See Instruction 6.
2. REQUIREMENTS OF TENDER. This Letter of Transmittal is to be completed by
Holders either if certificates are to be forwarded herewith or if delivery of
Old Notes is to be made pursuant to the procedures for book-entry transfer set
forth in the Prospectus under the caption "The Exchange Offer -- Procedures for
Tendering." For a Holder to properly tender Old Notes pursuant to the Exchange
Offer, a properly completed and duly executed Letter of Transmittal (or a
facsimile thereof), together with any signature guarantees and any other
documents required by these Instructions, must be received by the Exchange Agent
at one of the addresses set forth herein on or prior to the Expiration Date and
either (i) certificates representing such Old Notes must be received by the
Exchange Agent at such address or (ii) such Old Notes must be transferred
pursuant to the procedures for book-entry transfer described in the Prospectus
under the caption "The Exchange Offer -- Procedures for Tendering" and a
Book-Entry Confirmation must be received by the Exchange Agent, in each case, on
or prior to the Expiration Date. A Holder who desires to tender Old Notes and
who cannot comply with procedures set forth herein for tender on a timely basis
or whose Old Notes are not immediately available must comply with the guaranteed
delivery procedures described below.
Holders whose certificates representing Old Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent or complete the procedures for book-entry
transfer prior to the Expiration Date may tender their Old Notes by properly
completing and duly executing the Notice of Guaranteed Delivery pursuant to the
guaranteed delivery procedure set forth in the Prospectus under the caption "The
Exchange Offer -- Guaranteed Delivery Procedures." Pursuant to such procedures,
(a) the tender must be made by or through an Eligible Institution; (b) a Notice
of Guaranteed Delivery, substantially in the form provided herewith, properly
completed and duly executed, must be received by the Exchange Agent as provided
below on or prior to the Expiration Date; and (c) the certificates representing
all tendered Old Notes, or a Book-Entry Confirmation with respect to all
tendered Old Notes, together with this Letter of Transmittal, properly completed
and duly executed, and any required signature guarantees and all other documents
required by the Letter of Transmittal, must be received by the Exchange Agent
within three New York Stock Exchange trading days after the date of execution of
the Notice of Guaranteed Delivery.
THE METHOD OF DELIVERY OF CERTIFICATES REPRESENTING OLD NOTES, THIS LETTER
OF TRANSMITTAL, REQUIRED SIGNATURE GUARANTEES AND ANY OTHER REQUIRED DOCUMENTS,
INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION
AND RISK OF THE TENDERING HOLDER AND DELIVERY WILL BE DEEMED MADE WHEN ACTUALLY
RECEIVED BY THE EXCHANGE AGENT. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED
TO ENSURE TIMELY DELIVERY.
All tendering Holders, by execution of this Letter of Transmittal waive any
right to any notice of the acceptance of their Old Notes for exchange.
9
<PAGE> 10
3. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS. Tenders of Old Notes
may be withdrawn at any time until the Expiration Date. Tendered Old Notes may
not be withdrawn on or after the Expiration Date, unless the Exchange Offer is
terminated without any Old Notes being accepted for exchange thereunder. In the
event of such termination, such Old Notes will be returned to the tendering
Holder as promptly as practicable.
Any Holder of Old Notes who has tendered Old Notes or who succeeds to the
record ownership of Old Notes in respect of which such tenders have previously
been given may withdraw such Old Notes on or prior to the Expiration Date by
delivery of a written notice of withdrawal subject to the limitations described
herein. To be effective, a written or facsimile transmission notice of
withdrawal of a tender must (i) be received by the Exchange Agent, at the
addresses specified on the back cover of this Letter of Transmittal on or before
the Expiration Date, (ii) specify the name of the Holder of the Old Notes to be
withdrawn, (iii) contain the description of the Old Notes to be withdrawn, the
certificate numbers shown on the particular certificates representing such Old
Notes and the aggregate principal amount represented by such Old Notes and (iv)
be signed by the Holder of such Old Notes in the same manner as the original
signature on the Letter of Transmittal (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee register the transfer of relevant Old Notes into the name of the person
withdrawing such Old Notes. The signature(s) on the notice of withdrawal of any
tendered Old Notes must be guaranteed by an Eligible Institution unless the
relevant Old Notes have been tendered for the account of an Eligible
Institution. If the Old Notes to be withdrawn have been delivered or otherwise
identified to the Exchange Agent, a signed notice of withdrawal is effective
immediately upon receipt by the Exchange Agent of written or facsimile
transmission of the notice of withdrawal even if physical release is not yet
effected. A withdrawal of Notes can only be accomplished in accordance with the
foregoing procedures. No Holder may withdraw Old Notes following the Expiration
Date.
All questions as to the validity, form and eligibility (including the time
of receipt) of notices of withdrawal will be determined by the Company, whose
determination will be final and binding on all parties. A purported notice of
withdrawal that is not received by the Exchange Agent in a timely fashion will
not be effective to withdraw tendered Old Notes. Any Old Notes that have been
tendered but that are not accepted for exchange will be returned to the Holder
thereof without cost to such Holder as soon as practicable following the
Expiration Date.
A withdrawal of a tender of Old Notes may not be rescinded and any Old
Notes properly withdrawn will not be deemed to be validly tendered for purposes
of the Exchange Offer and no Exchange Notes will be issued with respect thereto.
However, withdrawn Old Notes may be retendered by repeating one of the
procedures described in Instruction 2 above at any time on or prior to the
Expiration Date.
4. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY
BOOK-ENTRY TRANSFER). If less than the entire principal amount of any Old Notes
evidenced by a submitted certificate is tendered, the tendering holder should
fill in the applicable principal amount of the Old Notes that are to be tendered
in the box entitled "Description of Old Notes Tendered." The entire principal
amount represented by the certificates for all Old Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
If the entire principal amount of all Old Notes is not tendered or not accepted
for payment, new certificate(s) representing the remainder of the principal
amount of the Old Notes that were evidenced by the old certificate(s) will be
sent to the Holder, unless otherwise provided in the boxes entitled "Special
Payment Instructions" or "Special Delivery Instructions" above, as soon as
practicable after the expiration of the Exchange Offer.
5. SIGNATURES ON THIS LETTER OF TRANSMITTAL; ENDORSEMENTS. If this Letter
of Transmittal is signed by the Holder(s) of the Old Notes tendered hereby, the
signature(s) must correspond exactly with the name(s) as written on the face of
the certificate(s) without alteration, enlargement or any change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal. If any
tendered Old Notes are registered in different names on several certificates, it
will be necessary to complete, sign and submit as many separate Letters of
Transmittal as there are names in which certificates are held.
If this Letter of Transmittal or any certificates are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate
10
<PAGE> 11
when signing, and proper evidence satisfactory to the Company of their authority
so to act must be submitted, unless waived by the Company.
If this Letter of Transmittal is signed by the Holder(s) of the Old Notes
listed and transmitted hereby, no endorsements of certificates are required
unless payment is to be made to, or certificates for Old Notes not tendered or
not accepted for purchase are to be issued to, a person other than the
Holder(s). Signatures on such certificates must be guaranteed by an Eligible
Institution (unless signed by an Eligible Institution).
If this Letter of Transmittal is signed by a person other than the
Holder(s) of the Old Notes listed, the certificates representing such Notes must
be properly endorsed for transfer by the Holder, together with a properly
completed irrevocable proxy that authorizes such person to consent to the
Proposed Amendments on behalf of such Holder, with signatures on the endorsement
guaranteed by an Eligible Institution.
6. TRANSFER TAXES. The Company will pay or cause to be paid any transfer
taxes with respect to the transfer and sale of Old Notes to it or its order
pursuant to the Exchange Offer. If, however, the Exchange Notes are to be
registered in the name of any person other than the Holder(s), or if tendered
certificates are registered in the name of any person other than the person(s)
signing this Letter of Transmittal, the amount of any transfer taxes (whether
imposed on the Holder(s) or such other person) payable on account of the
transfer to such person will be deducted from the interest paid on the Exchange
offer unless satisfactory evidence of the payment of such taxes or exemption
therefrom is submitted.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the certificates listed in this Letter of
Transmittal.
7. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If Exchange Notes are to be
issued in the name of, and/or certificates representing Old Notes not accepted
for exchange are to be returned to, a person other than the person(s) signing
this Letter of Transmittal or if Exchange Notes are to be sent and/or such
certificates are to be returned to a person other than the person(s) signing
this Letter of Transmittal or to an address other than that shown above, the
appropriate boxes on this Letter of Transmittal should be completed. Holders
delivering Old Notes by book-entry transfer may request that Old Notes not
accepted for payment be credited to such account maintained at a Book-Entry
Transfer Facility as such Holder(s) may designate hereon. If no such
instructions are given, such Old Notes not accepted for payment will be returned
by crediting the account at the Book-Entry Transfer Facility designated above.
8. WAIVER OF CONDITIONS. To the extent permitted by applicable law, the
Company reserves the right to waive any and all conditions to the Exchange Offer
and accept for exchange any Old Notes tendered.
9. TAX IDENTIFICATION NUMBER AND BACKUP WITHHOLDING. Federal income tax law
generally requires that a Holder whose tendered Old Notes are accepted for
exchange, or such Holder's assignee (in either case, the "Payee"), provide the
Company (the "Payor"), with the Holder's correct Taxpayer Identification Number
("TIN"), which, in the case of a Payee who is an individual, is his or her
social security number. If the Payor is not provided with the correct TIN or an
adequate basis for an exemption, such Payee may be subject to a $50 penalty
imposed by the Internal Revenue Service and backup withholding in an amount
equal to [31%] of the interest paid on the Exchange Offer. If withholding
results in an overpayment of taxes, a refund may be obtained.
To prevent backup withholding, each Payee must provide his correct TIN by
completing the "Substitute Form W-9" set forth herein, certifying that the TIN
provided is correct (or that such Payee is awaiting a TIN) and that (i) the
Payee is exempt from backup withholding, (ii) the Payee has not been notified by
the Internal Revenue Service that he is subject to backup withholding as a
result of a failure to report all interest or dividends, or (iii) the Internal
Revenue Service has notified the Payee that he is no longer subject to backup
withholding.
If the Payee does not have a TIN, such Payee should consult the enclosed
Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9 (the "W-9 Guidelines") for instructions on applying for a TIN, write
"Applied For" in the space for the TIN in Part I of the Substitute Form W-9, and
sign and date the Substitute Form W-9 and the Certificate of Awaiting Taxpayer
Identification Number set forth herein. Note: Writing "Applied For" on the form
means that the Payee has already applied for a TIN or that such Payee intends to
apply for one in the near future.
11
<PAGE> 12
If the Old Notes are held in more than one name or are not in the name of
the actual owner, consult the W-9 Guidelines for information on which TIN to
report.
Exempt Payees (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements. To prevent possible erroneous backup withholding, an exempt Payee
should write "Exempt" in Part 2 of Substitute Form W-9. See the W-9 Guidelines
for additional instructions. In order for a nonresident alien or foreign entity
to qualify as exempt, such person must submit a completed Form W-8, "Certificate
of Foreign Status."
10. MUTILATED, LOST, STOLEN OR DESTROYED SECURITIES. Any Holder whose Old
Notes have been mutilated, lost, stolen or destroyed should contact the Exchange
Agent at one of the addresses indicated above for further instructions.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance
may be directed to the Dealer Manager at its address set forth below or from the
tendering Holder's broker, dealer, commercial bank or trust company. Additional
copies of the Prospectus, this Letter of Transmittal, the Notice of Guaranteed
Delivery, and the Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9 may be obtained from the Exchange Agent.
IMPORTANT: THIS LETTER OF TRANSMITTAL, TOGETHER WITH CERTIFICATES FOR, OR
CONFIRMATION OF BOOK-ENTRY TRANSFER WITH RESPECT TO, ANY TENDERED OLD NOTES,
WITH ANY REQUIRED SIGNATURE GUARANTEES AND ALL OTHER REQUIRED DOCUMENTS MUST BE
RECEIVED BY THE EXCHANGE AGENT, OR THE NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE EXCHANGE AGENT, PRIOR TO THE EXPIRATION DATE.
12
<PAGE> 13
TO BE COMPLETED BY ALL PAYEES
(SEE INSTRUCTION 9)
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: IBJ SCHRODER BANK & TRUST COMPANY
- --------------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE
Name: -----------------------------------------------------------------------------------
FORM W-9
Address:---------------------------------------------------------------------------------
DEPARTMENT OF THE TREASURY (Number and Street)
INTERNAL REVENUE SERVICE -------------------------------------------------------------------------------------------
(City) (State) (Zip Code)
---------------------------------------------------------------------------------------------
PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT
PAYOR'S REQUEST FOR RIGHT AND CERTIFY BY SIGNING AND DATING BELOW TIN ------------------------------
TAXPAYER IDENTIFICATION (Social Security Number or
NUMBER (TIN) AND Employer Identification Number)
CERTIFICATION
---------------------------------------------------------------------------------------------
PART 2 -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING PLEASE WRITE "EXEMPT" HERE
(SEE INSTRUCTIONS) -------------------------------------------------------------
---------------------------------------------------------------------------------------------
PART 3 -- CERTIFICATION UNDER PENALTIES OF PERJURY. I CERTIFY THAT (1) The number shown on
this form is my correct TIN (or I am waiting for a number to be issued to me), and (2) I am
not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I
have not been notified by the Internal Revenue Service (the "IRS") that I am subject to
backup withholding as a result of a failure to report all interest or dividends or (c) the
IRS has notified me that I am no longer subject to backup withholding.
SIGNATURE -------------------------------------- DATE----------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
You must Cross out Part 2 above if you have been notified by the IRS that
you are currently subject to backup withholding because of underreporting
interest or dividends on your tax return.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU WROTE "APPLIED FOR"
IN PART 1 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and that I have mailed or delivered an application to
receive a taxpayer identification number of the appropriate Internal Revenue
Service Center or Social Security Administration Office (or I intend to mail or
deliver an application in the near future). I understand that if I do not
provide a taxpayer identification number to the Payor, the Payor is required to
withhold 31 percent of all cash payments made to me until I provide a number.
SIGNATURE
- ------------------------------------------------------------- DATE
- ---------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31 PERCENT OF ANY CASH PAYMENTS. PLEASE REVIEW THE ENCLOSED GUIDELINES
FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM 2-9
FOR ADDITIONAL DETAILS.
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THE EXCHANGE AGENT IS:
IBJ SCHRODER BANK & TRUST COMPANY
<TABLE>
<S> <C>
By Registered or Certified Mail or by Overnight By Hand:
Courier:
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
P. O. Box 84 One State Street
Bowling Green Station New York, New York 10004
New York, New York 10274-0084 Attn: Securities Processing Window,
Attn: Reorganization Operations Dept. Subcellar One, (SC-1)
Facsimile Transmission Number: Confirm by Telephone:
(212) 858-2611 (212) 858-2103
</TABLE>
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