<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-81370
CENTRAL RENTS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 95-4476294
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
5480 East Ferguson Drive
Commerce, California 90022
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(Address of principal executive offices)
(213) 720-8700
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(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
---- ----
Number of shares outstanding as of November 13, 1996: 551,045.
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CENTRAL RENTS, INC.
FORM 10-Q
INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Condensed Balance Sheets at September 30, 1996 and December 31, 1995 . . . . . . . . . . 1
Condensed Statements of Operations for the Three and Nine Months Ended September 30,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 . 3
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . 7
PART II. OTHER INFORMATION
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CENTRAL RENTS, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
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<CAPTION>
September 30, December 31,
1996 1995
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<S> <C> <C>
A S S E T S
Cash and cash equivalents $ 584 $ 1,560
Short-term investments 18,846 12,992
Receivables and prepaid expenses 2,287 2,062
Income tax receivable - related party 864 1,050
Rental merchandise, net 29,608 34,583
Property and equipment, net 3,028 3,372
Deferred financing costs, net 2,039 2,287
Noncompete agreement, net 2,025 5,975
Customer rental agreements, net - 246
Excess of cost over net assets acquired, net 6,922 6,931
Deferred income taxes 8,681 8,549
Other assets 225 330
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Total assets $75,109 $79,937
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 4,127 $10,223
Accrued expenses 7,142 6,176
Due to related parties 232 760
Accrued interest 2,253 322
Long-term notes 58,026 57,820
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Total liabilities 71,780 75,301
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Stockholders' equity:
Preferred stock, $.01 par value,
100 shares authorized; no shares issued - -
Common stock, $.01 par value, 2,000,000 shares authorized;
551,045 shares issued and outstanding 6 6
Additional paid-in capital 22,944 22,944
Retained earnings (deficit) (19,621) (18,314)
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Total stockholders' equity 3,329 4,636
------- -------
Total liabilities and stockholders' equity $75,109 $79,937
======= =======
</TABLE>
See notes to condensed financial statements.
1
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CENTRAL RENTS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE DATA)
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<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Revenues $26,468 $29,318 $82,635 $90,015
Costs and expenses:
Selling, general and administrative 15,084 15,616 45,910 46,685
Depreciation and amortization -
Rental merchandise 7,773 9,275 24,503 27,579
Property and equipment 374 368 1,176 1,121
Other 936 888 2,915 2,722
------- ------- ------- -------
24,167 26,147 74,504 78,107
------- ------- ------- -------
Income before interest, taxes and
amortization of intangibles 2,301 3,171 8,131 11,908
------- ------- ------- -------
Amortization of intangibles:
Amortization of customer rental agreements 71 1,447 246 7,509
Amortization of noncompete agreement 750 1,750 3,950 6,525
Amortization of excess of cost over net assets acquired 62 84 184 252
------- ------- ------- -------
883 3,281 4,380 14,286
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Income (loss) from operations 1,418 (110) 3,751 (2,378)
Interest income (expense), net (1,882) (1,895) (5,697) (5,614)
------- ------- ------- -------
Loss before income taxes (464) (2,005) (1,946) (7,992)
Income tax benefit 144 730 639 2,930
------- ------- ------- -------
Net loss $ (320) $(1,275) $(1,307) $(5,062)
======= ======= ======= =======
Per share data:
Net loss per common share $(0.58) $(2.32) $(2.37) $(9.39)
====== ====== ====== ======
Weighted average common shares outstanding 551 549 551 539
====== ====== ====== ======
See notes to condensed financial statements.
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2
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CENTRAL RENTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
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<CAPTION>
Nine Months Ended
September 30,
---------------------
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,307) $ (5,062)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation of rental merchandise 24,503 27,579
Depreciation and amortization of property and equipment 1,176 1,121
Amortization of intangibles 4,380 14,286
Amortization of debt discount 206 206
Amortization of deferred financing costs 248 223
Proceeds from sale of rental merchandise 4,056 4,385
Gain on sale of rental merchandise and other (1,215) (1,707)
Deferred income taxes (132) (2,930)
Changes in operating assets and liabilities, net of the effect of
businesses acquired:
Decrease (increase) in receivables, prepaid expenses and
other assets (120) 104
Decrease in income tax receivable - related party 186 -
Purchase of rental merchandise (24,161) (30,946)
Decrease in accounts payable (6,096) (2,804)
Decrease in amounts due to related parties (528) (263)
Increase (decrease) in accrued expenses 2,583 (633)
Increase in accrued interest 1,931 1,949
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Net cash provided by operating activities 5,710 5,508
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Cash flows from investing activities:
Purchase of property and equipment (832) (1,540)
Proceeds from sale of rental stores - 515
Increase in short-term investments (5,854) (513)
Acquisition related costs - (2,908)
Net cash used in investing activities
-------- ---------
(6,686) (4,446)
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Cash flows from financing activities:
Deferred financing costs - (176)
Proceeds from issuance of common stock - 750
Dividends paid - -
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Net cash provided (used) by financing activities - 574
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Net increase (decrease) in cash and cash equivalents (976) 1,636
Cash and cash equivalents, beginning of period 1,560 3,543
-------- ---------
Cash and cash equivalents, end of period $ 584 $ 5,179
======== =========
Cash paid during the period for:
Interest $ 3,934 $ 3,952
Income taxes 460 1,007
</TABLE>
See notes to condensed financial statements.
3
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CENTRAL RENTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying condensed financial statements of Central Rents, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of the Company's financial condition and operating
results for the interim periods presented have been included. Operating
results for the quarter are not necessarily indicative of the results that may
be expected for the year. These interim financial statements should be read in
conjunction with the Form 10-K for the year ended December 31, 1995, including
the financial statements and notes contained therein, filed with the Securities
and Exchange Commission.
On March 17, 1994, the Company was incorporated in Delaware. The Company
is a wholly owned subsidiary of Central Rents Holding, Inc. which is a wholly
owned subsidiary of Banner Holdings, Inc. ("Banner"). On June 3, 1994, the
Company acquired all of the outstanding stock of RTO Enterprises, Inc., ("RTO")
and WBC Holdings, Inc. ("WBC") for a purchase price of approximately
$60,000,000 in cash (the "Acquisition"), in a transaction accounted for as a
purchase. 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.
Certain reclassification have been made to previously reported amounts to
conform with the current financial presentation in 1996.
B. Earnings Per Common Share
Earnings per common share have been computed on the basis of the weighted
average number of common shares outstanding. There were no common stock
equivalents for the periods presented, as they were antidilutive.
C. 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, is
nonrefundable and is recognized as revenue when collected. Ownership of the
rental items passes to the customer when the customer makes the required number
of rental payments stipulated by the agreement (generally 78 weekly or 18
monthly payments). Revenues also include cash received for outright sales of
previously rented merchandise and the final rental payments immediately
preceding the passage of title to the respective customers.
Rental merchandise is recorded at cost with lives ranging primarily from 12
to 27 months.
D. Amortization of Intangibles
In connection with the Acquisition, one of the sellers entered into a
noncompete agreement with the Company. The noncompete agreement is amortized
over a period of 3 years. Amortization of the noncompete agreement is 50% in
year one, 35% in year two and 15% in year three.
The excess of cost over net assets acquired, which relates to the
Acquisition of RTO and WBC, is currently being amortized on a straight- line
basis over a period of 30 years. The purchase allocation may 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.
4
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CENTRAL RENTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
E. Long-term Notes and Revolving Line of Credit
The Company funded the purchase price of the Acquisition from the proceeds
of an offering of units (the "Offering"), consisting of $60,000,000 principal
amount of 12 7/8% Senior Notes due 2003 (the "Notes") and warrants to purchase
60,000 shares of common stock of the Company, at an exercise price of $.01 per
share. The Offering was made in reliance upon exemptions from the registration
requirements of the Securities Act of 1933, as amended and applicable state
securities laws. Additional warrants to purchase 6,000 shares of common stock
of the Company, at an exercise price of $.01 per share, were issued to
Jefferies & Company, Inc., the initial purchaser of the Notes. Of the total
proceeds, $57,389,000 was allocated to Notes and $2,200,000 was allocated to
the issuance of warrants.
The Notes bear interest at the rate of 12 7/8% per annum payable
semi-annually on December 15 and June 15. The Notes are not redeemable prior
to June 15, 1999, except that prior to June 15, 1997, the Company may redeem at
its option, with any new proceeds received by the Company from an initial
public offering of common stock of the Company or a parent company of the
Company up to one-third of the initial aggregate principal amount of the Notes,
provided that at least two-thirds of the initial aggregate principal amount of
the Notes remains outstanding immediately after the occurrence of such
redemption, at the redemption price as defined plus accrued and unpaid
interest to the date of redemption. On or after June 15, 1999, the 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.
On May 11, 1995, the Company entered into a three year $25,000,000
revolving line of credit agreement with Wells Fargo Bank (the "Line of
Credit"). In November 1996, the Company and Wells Fargo Bank amended the Line
of Credit in order to reduce the available borrowings under the Line of Credit
to $12,500,000. The Line of Credit is subject to an annual commitment fee
payable to the bank on a quarterly basis of 0.5% of the unused borrowings. The
Line of Credit is collateralized by substantially all of the rental merchandise
of the Company and bears interest at prime plus 1%. The Line of Credit
includes various financial and other covenants which, among other things,
provides that borrowings cannot exceed an amount equal to 50% of the aggregate
book value of the Company's rental merchandise. There are no borrowings under
the Line of Credit.
F. 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 can be automatically extended
for successive one-year terms through June 3, 2004 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 the nine months ended
September 30, 1996, the Company purchased $208,000 of product from Banner in
connection with the Administrative Services Agreement which sum is included in
amounts due to related parties at September 30, 1996. The Company has not
incurred any material common costs or expenses to be allocated during the nine
months ended September 30, 1996 in connection with the Administrative Services
Agreement.
5
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CENTRAL RENTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
F. Related Party Transactions (continued)
The Company and G.M. Cypres & Co. 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
entered into by the Company in connection with the issuance of the Notes, 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 paid under the terms of the Consulting Agreement totalled
$281,250 for the nine months ended September 30, 1996.
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 for the nine months ended September 30, 1996
totalled $90,000.
6
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CENTRAL RENTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
This discussion and analysis highlights the results of operations of the
Company during the three and nine months ended September 30, 1996 and 1995.
The revenue, store operating profit, field and corporate general and
administrative expenses, income before interest, taxes and amortization of
intangibles, net loss and number of stores of the Company were as follows for
the three and nine months ended September 30, 1996 and 1995 ($ in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . $26.5 100% $29.3 100% $82.6 100% $90.0 100%
Store operating profit . . . . . . . . 4.9 18.5 6.0 20.5 16.2 19.6 20.2 22.4
Field and corporate general and
administrative expenses . . . . . 2.6 9.8 2.8 9.6 8.1 9.8 8.3 9.2
Income before interest, taxes and
amortization of intangibles . . . 2.3 8.7 3.2 10.9 8.1 9.8 11.9 13.2
Net loss . . . . . . . . . . . . . . . (0.3) (1.1) (1.3) (4.4) (1.3) (1.6) (5.1) (5.7)
Number of stores (at end of period) 166 170 166 170
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995.
Revenues. During the three month period ended September 30, 1996,
total units on rent decreased 8.0% . This decrease resulted in a revenue
decrease of $2.8 million or 9.6%, to $26.5 million for the three months ended
September 30, 1996 from $29.3 million for the three months in 1995.
Approximately $0.5 million of the revenue decrease for the three months ended
September 30, 1996 was due to fewer stores in operation in California during
this period in 1996 as compared to the same period in 1995. Management believes
the decline in the number of units on rent is a result of weakness in the
consumer electronics and appliance marketplace coupled with increased
competition.
Store Operating Profit. Store operating profit decreased $1.1 million or
18.3%, to $4.9 million for the three months ended September 30, 1996 from $6.0
million for the three months in 1995. The decrease in store operating profit
was primarily the result of a decrease in gross profit of approximately $1.5
million as a result of lower revenues in the three months ended September 30,
1996 as compared to 1995 offset by a $0.4 million decrease in store operating
expenses. Total store operating expenses as a percentage of revenue increased
to 51.2% of revenues in the three months ended September 30, 1996 from 47.8%
for the same period in 1995. This increase was primarily due to the fixed cost
nature of many of the key components of the Company's store operating expenses
including payroll, fringe benefits and occupancy costs. Store operating profit
as a percentage of revenue decreased to 18.5% of revenues for the three months
ended September 30, 1996 from 20.5% for the same period in 1995.
7
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Comparable Stores. Comparable store revenues decreased $2.6 million or
9.0%, to $26.2 million for the three months ended September 30, 1996 from $28.8
million for the three months in 1995. The decrease in comparable store
revenues was primarily the result of a decrease in units on rent for the three
months ended September 30, 1996 as compared to the same period in 1995.
Comparable store operating profit decreased $1.0 million or 16.9%, to $4.9
million for the three months ended September 30, 1996 from $5.9 million for the
same period in 1995. The decrease in comparable store operating profit was
primarily the result of a decrease in same store gross profit as a result of
lower units on rent in 1996 without a corresponding decrease in store operating
expenses as previously discussed.
Field and Corporate General and Administrative Expenses. Field and
corporate general and administrative expenses decreased by $0.2 million or
7.1%, to $2.6 million for the three months ended September 30, 1996 from $2.8
million for the three months in 1995. The decrease in field and corporate
administrative expenses was primarily due to a decrease in payroll related
expenses. Field and corporate general and administrative expenses for the
three months ended September 30, 1996 as a percentage of revenue increased to
9.8% from 9.6% for the same period in 1995.
Income Before Interest, Taxes and Amortization of Intangibles. Income
before interest, taxes and amortization of intangibles decreased $0.9 million
or 28.1%, to $2.3 million for the three months ended September 30, 1996 from
$3.2 million for the three months in 1995. The decrease in income before
interest, taxes and amortization of intangibles is primarily the result of the
decrease in store operating profit for the three months ended September 30,
1996 as compared to the same period in 1995. Income before interest, taxes and
amortization of intangibles as a percentage of revenue decreased to 8.7% for
the three months ended September 30, 1996 from 10.9% for the three months in
1995.
Net Loss. Net loss decreased $1.0 million or 76.9% to $0.3 million for the
three months ended September 30, 1996 from $1.3 million for the three months in
1995. Net loss as a percentage of revenue decreased to 1.1% for the three
months ended September 30, 1996 from 4.4% for the three months in 1995. This
decrease was primarily due to a reduction in amortization expense of customer
rental agreements and the noncompete agreement offset by a decrease in store
operating profit.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995.
Revenues. During the nine month period ended September 30, 1996, total
units on rent decreased 13.4% . This decrease resulted in a revenue decrease
of $7.4 million or 8.2%, to $82.6 million for the nine months ended September
30, 1996 from $90.0 million for the nine months in 1995. Approximately $2.4
million of the revenue decrease for the nine months ended September 30, 1996
was primarily due to fewer stores in operation in California during this period
in 1996 as compared to the same period in 1995. Management believes the
decline in the number of units on rent is a result of weakness in the consumer
electronics and appliance marketplace coupled with increased competition.
Store Operating Profit. Store operating profit decreased $4.0 million or
19.8%, to $16.2 million for the nine months ended September 30, 1996 from $20.2
million for the nine months in 1995. The decrease in store operating profit
was primarily the result of a decrease in gross profit of approximately $4.2
million as a result of lower revenues in the nine months ended September 30,
1996 as compared to 1995 offset by a $0.2 million decrease in store operating
expenses. Total store operating expenses as a percentage of revenue increased
to 49.7% of revenues in the nine months ended September 30, 1996 from 46.0% for
the same period in 1995. This increase was primarily due to the fixed cost
nature of many of the key components of the Company's store operating expenses
including payroll, fringe benefits and occupancy costs. Store operating profit
as a percentage of revenue decreased to 19.6% of revenues for the nine months
ended September 30, 1996 from 22.4% for the same period in 1995.
Comparable Stores. Comparable store revenues decreased $6.3 million or
7.3%, to $80.4 million for the nine months ended September 30, 1996 from $86.7
million for the nine months in 1995. The decrease in comparable store revenues
was primarily the result of a decrease in units on rent for the nine months
ended September 30, 1996 as compared to the same period in 1995. Comparable
store operating profit decreased $4.1 million or 20.4%, to $16.0 million for
the nine months ended September 30, 1996 from $20.1 million for the same period
in 1995. The decrease in comparable store operating profit was primarily the
result of a decrease in same store gross profit as a result of lower units on
rent in 1996 without a corresponding decrease in store operating expenses as
previously discussed.
8
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Field and Corporate General and Administrative Expenses. Field and
corporate general and administrative expenses decreased by $0.2 million or
2.4%, to $8.1 million for the nine months ended September 30, 1996 from $8.3
million for the nine months in 1995. The decrease in field and corporate
administrative expenses was primarily the result of a decrease in payroll
related expenses. Field and corporate general and administrative expenses
for the nine months ended September 30, 1996 as a percentage of revenue
increased to 9.8% from 9.2% for the same period in 1995.
Income Before Interest, Taxes and Amortization of Intangibles. Income
before interest, taxes and amortization of intangibles decreased $3.8 million
or 31.9%, to $8.1 million for the nine months ended September 30, 1996 from
$11.9 million for the nine months in 1995. The decrease in income before
interest, taxes and amortization of intangibles is primarily the result of the
decrease in store operating profit for the nine months ended September 30, 1996
as compared to the same period in 1995. Income before interest, taxes and
amortization of intangibles as a percentage of revenue decreased to 9.8% for
the nine months ended September 30, 1996 from 13.2% for the nine months in
1995.
Net Loss. Net loss decreased $3.8 million or 74.5% to $1.3 million for the
nine months ended September 30, 1996 from $5.1 million for the nine months in
1995. Net loss as a percentage of revenue decreased to 1.6% for the nine
months ended September 30, 1996 from 5.7% for the nine months in 1995. This
decrease was primarily due to a reduction in amortization expense of customer
rental agreements and the noncompete agreement offset by a decrease in store
operating profit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital expenditures are purchases of rental
merchandise throughout the year to replace rental merchandise which has been
sold or charged-off. Total purchases of rental merchandise were $24.2 million
during the nine months ended September 30, 1996. The Company's other capital
expenditures consist of purchases of property, fixtures and office equipment,
including store improvements. Total combined capital expenditures on these
items for the nine months ended June 30, 1996 totalled $0.8 million.
The Company's long-term notes (the "Notes") of $60,000,000 were issued in
connection with the acquisition of RTO and WBC in June 1994 and bear interest
at the rate of 12 7/8% per annum payable semiannually on December 15 and June
15. The Notes are not redeemable prior to June 15, 1999, except that prior to
June 15, 1997, the Company may redeem at its option, with the net proceeds
received by the Company from an initial public offering of common stock of the
Company or a parent company of the Company, up to one-third of the initial
aggregate principal amount of the Notes, provided that at least two-thirds of
the initial aggregate principal amount of the Notes remains outstanding
immediately after the occurrence of such redemption, at the redemption price as
defined plus accrued and unpaid interest to the date of redemption. On or
after June 15, 1999, the 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.
On May 11, 1995, the Company entered into a three year $25,000,000
revolving line of credit with Wells Fargo Bank (the "Line of Credit"). In
November 1996, the Company and Wells Fargo Bank amended the Line of Credit in
order to reduce the available borrowings under the Line of Credit to
$12,500,000. The Line of Credit is subject to an annual commitment fee payable
to the bank on a quarterly basis of 0.5% of the unused borrowings. The Line of
Credit is collateralized by substantially all of the rental merchandise of the
Company and bears interest at prime plus 1%. The Line of Credit includes
various financial and other covenants which, among other things, provide that
borrowings by the Company may not exceed an amount equal to 50% of the
aggregate book value of the Company's rental merchandise. There are no
borrowings under the Line of Credit at September 30, 1996.
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.
In August 1996, the Company rescinded the $2.0 million dividend it declared
and paid on January 16, 1996. The Company's parent company and the outside
institutional investor have returned the dividend payment they previously
received.
9
<PAGE> 12
The Internal Revenue Service (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 forecasting 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. Effective January 1, 1996, the Company intends to convert to
the MACRS method of depreciation for tax accounting purposes only. The Company
filed an application to change its method of depreciation for tax purposes with
the IRS and received the IRS's consent to implement the change. Management
believes that the Company's conversion to MACRS will not significantly impact
the Company's financial condition and results of operations.
The Company's primary sources of liquidity are expected to be its cash flow
from operations and the excess cash and short-term investments currently
available. Management intends to use the Company's excess cash balances and
Line of Credit to expand its operations through acquisitions and new store
openings. Since the acquisition of RTO and WBC, the Company has consolidated
stores that operated in overlapping geographic markets and sold certain other
stores that were not located within the Company's targeted geographic markets.
The Company is evaluating several strategic geographic regions in which it
could strengthen its market position for expansion during 1996 and in
subsequent years through new store openings and acquisitions. The Company does
not have any mandatory debt amortization requirements until the year 2003.
10
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment to Credit Agreement by and between Central Rents,
Inc. as Borrower and Wells Fargo Bank National Association, as
Bank, dated November 4, 1996
(b) Reports
No reports on Form 8-K were required to be filed by the Company
during the three months ended September 30, 1996.
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL RENTS, INC.
November 13, 1996 /s/ DEREK S. STAMPER
--------------------------
Derek S. Stamper
President
November 13, 1996 /s/ A. KEITH WALL
-------------------------------
A. Keith Wall
Chief Financial Officer
(Principal Accounting Officer)
12
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- ------ ----------- --------
<S> <C> <C>
10.1 First Amendment to Credit Agreement by and between Central Rents, Inc.
as Borrower and Wells Fargo Bank National Association, as Bank, dated
November 4, 1996
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO
CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "First Amendment") is
entered into as of November 4, 1996 by and between CENTRAL RENTS, INC., a
Delaware corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION,
a national banking association, as the "Lender" under the Credit Agreement
defined below.
RECITALS
--------
A. Borrower and Lender are parties to that certain Credit Agreement,
dated as of May 9, 1995 (the "Credit Agreement"), pursuant to which Lender
agreed to make available to Borrower certain credit facilities.
B. Borrower and Lender have agreed to reduce Lender's commitment to
lend to Borrower.
NOW, THEREFORE, in consideration of the above Recitals which, by this
reference, are incorporated into the Agreement set forth below, and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
AGREEMENT
---------
1. DEFINED TERMS. Initially capitalized terms used but not defined in
this first Amendment shall have the meanings assigned to such terms in the
Credit Agreement.
2. AMENDMENTS TO SECTION 1.01 OF THE CREDIT AGREEMENT. Borrower and
lender agree that Section 1.01 of the Credit Agreement shall be revised in
relevant part as follows:
(a) The definition of "Borrowing Base" shall be revised by deleting
the words "Fifteen Million Dollars ($15,000,000)" therein and substituting
therefor the words "Twelve Million Five Hundred Thousand Dollars ($12,500,000)".
(b) The definition of "Commitment" shall be revised by deleting
the words "Twenty-Five Million Dollars ($25,000,000)" therein and substituting
therefor the words "Twelve Million Five Hundred Thousand Dollars ($12,500,000)".
(c) The definition of "Letter of Credit Amount" shall be revised
by deleting the words "One Million Dollars ($1,000,000)" therein and
substituting therefor the words "Three Million Dollars ($3,000,000)".
<PAGE> 2
3. AMENDMENT OF NOTE. Borrower and Lender agree that the Note shall
be, and hereby is, amended in all respects necessary to reflect a reduction in
the original principal amount thereof from Twenty-Five Million Dollars
($25,000,000) to Twelve Million Five Hundred Thousand Dollars ($12,500,000).
4. REFERENCES. All references in the Credit Agreement to "this
Credit Agreement", "hereof", "herein", "hereto", or words of similar import, and
all references in all other Loan Documents to "the Credit Agreement" shall be,
and shall be deemed to be for all purposes, references to the Credit agreement
as amended by this First Amendment.
5. CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS OTHERWISE NOT
AFFECTED. Except as expressly amended pursuant to this First Amendment, the
Credit Agreement and each of the other Loan Documents shall remain unchanged and
in full force and effect and are hereby ratified and confirmed in all respects.
Lender continues to reserve any and all of its rights and remedies under the
Credit Agreement and each of the other Loan Documents, and no failure, delay or
discontinuance on the part of Lender in exercising any right, power or remedy
thereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy. This First
Amendment and the Credit Agreement shall be read together, as one document.
6. BINDING EFFECT. This First Amendment shall be binding upon,
inure to the benefit of and be enforceable by Borrower and Lender and their
respective successors and assigns as permitted pursuant to the Credit Agreement.
7. GOVERNING LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, EXCEPT TO THE
EXTENT THAT LENDER HAS GREATER RIGHTS OR REMEDIES UNDER FEDERAL LAW, WHETHER AS
A NATIONAL BANK OR OTHERWISE, IN WHICH CASE SUCH CHOICE OF CALIFORNIA LAW SHALL
NOT BE DEEMED TO DEPRIVE LENDER OF SUCH RIGHTS AND REMEDIES AS MAY BE AVAILABLE
UNDER FEDERAL LAW.
8. COUNTERPARTS. This First Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute but one and the same First Amendment.
9. EXPENSES. The Borrower acknowledges that, pursuant to section
8.01 of the Credit Agreement, all costs and expenses in connection with this
First Amendment shall be Bank Expenses to be paid by Borrower, and Borrower
hereby
2
<PAGE> 3
agrees to reimburse Lender for all such costs and expenses promptly upon
Lender's request for payment.
IN WITNESS WHEREOF, the parties hereto have duly executed this First
Amendment, as of the date first above written.
CENTRAL RENTS, INC., a Delaware
corporation
By: /s/ A. KEITH WALL
---------------------------
A. Keith Wall
Its: CHIEF FINANCIAL OFFICER
WELLS FARGO BANK, NATIONAL
ASSOCIATION, a national banking
association
By: /s/ PERRY MORETH
---------------------------
Perry Moreth
Its: Vice President
3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 19,430
<SECURITIES> 0
<RECEIVABLES> 3,151
<ALLOWANCES> 0
<INVENTORY> 29,608<F1>
<CURRENT-ASSETS> 0
<PP&E> 3,028
<DEPRECIATION> 0
<TOTAL-ASSETS> 75,109
<CURRENT-LIABILITIES> 0
<BONDS> 58,026
0
0
<COMMON> 6
<OTHER-SE> 3,323
<TOTAL-LIABILITY-AND-EQUITY> 75,109
<SALES> 0
<TOTAL-REVENUES> 82,635
<CGS> 0
<TOTAL-COSTS> 74,504
<OTHER-EXPENSES> 4,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,697
<INCOME-PRETAX> (1,946)
<INCOME-TAX> (639)
<INCOME-CONTINUING> (1,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,307)
<EPS-PRIMARY> (2.37)
<EPS-DILUTED> (2.37)
<FN>
<F1>RENTAL MERCHANDISE HAS BEEN CLASSIFIED AS INVENTORY FOR PURPOSES OF THIS
SCHEDULE AND HAS BEEN SHOWN NET OF ACCUMULATED DEPRECIATION. PP&E HAS BEEN
PRESENTED NET OF ACCUMULATED DEPRECIATION. THE FINANCIAL STATEMENTS ARE
PRESENTED WITH AN UNCLASSIFIED BALANCE SHEET.
</FN>
</TABLE>
