<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 33-81370
CENTRAL RENTS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4476294
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
</TABLE>
5480 EAST FERGUSON DRIVE, COMMERCE, CA 90022
(Address of principal executive offices) (zip code)
Registrant's Telephone Number, Including Area Code: (213) 720-8700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X] Not Applicable
At March 28, 1997, the number of outstanding shares of Common Stock of the
Registrant was 617,045.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Company's Registration
Statement filed on July 11, 1994 on Form S-1 as amended (No.33-81370).
<PAGE> 2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Certain matters discussed in this report may constitute forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 (the "Reform Act") and as such may involve risks and
uncertainties. These forward-looking statements relate to, among other things,
expectations of the business environment in which Central Rents, Inc. (the
"Company") operates, projections of future performance, and perceived
opportunities in the market. The Company's actual results, performance, or
achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements.
COMPANY OVERVIEW
The Company operates rental-purchase stores in the United States with
165 stores in 20 states. The Company rents a broad range of consumer products,
including electronics, jewelry, appliances and furniture. Management believes
that the most attractive features of its rental-purchase program are the ability
of the Company to offer customers quality name-brand products without the
requirements of a down payment, security deposit or formal credit check, while
providing the customer with the opportunity to return the product at the
customer's option without penalty or recourse.
The typical rental-purchase customer is between 18 and 45 years old,
rents his or her place of residence, has a household income below $30,000 and
does not have easy access to credit. The customer enters into a weekly or
monthly rental-purchase agreement which renews automatically upon receipt of
additional payments. Ownership of the rental merchandise only transfers to the
customer when the customer has renewed the rental-purchase agreement, and
continuously made payments, generally for a period of 12 to 27 months. Based on
Company and industry data, management believes that approximately 80% of
customers do not renew the agreement, and return the product, usually within
three to five months. As a result, a majority of the Company's transactions can
be viewed as short-term rentals. The customer usually chooses not to renew the
agreement because of the customer's financial situation or because the
customer's need for the product changes.
The Company operates 43 stores in California with Ohio, Indiana and
Arizona having 20, 17 and 16 stores, respectively. The Company's remaining 69
stores are located throughout the southern, southwestern and midwestern states.
The Company operated in 1994 as two businesses, RTO Enterprises, Inc., through
its wholly-owned subsidiary RTO, Inc. (collectively referred to as "RTO") and
WBC Holdings, Inc. ("WBC"). RTO was headquartered in Deerfield, Illinois until
January 1995 when the Company relocated RTO's corporate office to the Company's
headquarters in Commerce, California. WBC was headquartered in Houston, Texas.
The Company moved most of WBC's operations to Commerce, California in the first
quarter of 1995 and closed WBC's Houston office in June 1995. The Company
effected a statutory merger of RTO and WBC into the Company in April 1995.
The Company was formed by Banner Holdings, Inc. ("Banner") and Central
Rents Holding, Inc. ("Holdings") to acquire RTO and WBC for a purchase price of
$60.0 million. The acquisition of the outstanding stock and notes of RTO and
WBC (the "Acquisition") was completed on June 3, 1994. In connection with the
Acquisition, on June 3, 1994, the Company issued Units (the "Units"),
consisting of $60.0 million principal amount of Notes (the "Notes") and
Warrants (the "Warrants") to purchase 60,000 shares of Common Stock of the
Company, pursuant to exemptions from, or in transactions not subject to the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act") and applicable state securities laws (the "Offering"). The
Notes were purchased by Jefferies & Company, Inc. (the "Initial Purchaser") at
a price equal to 96.3% of the aggregate principal amount thereof. The Initial
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Purchaser subsequently resold some of the Notes to "Qualified Institutional
Buyers" (as defined in Rule 501 (A) (1), (2), (3) or (7) under the Securities
Act). Holdings contributed $20.0 million in equity to the Company (the "Equity
Contribution").
THE RENTAL-PURCHASE INDUSTRY
The rental-purchase industry began in the 1960s, offering an
alternative to consumers who were unable to finance major household purchases.
The industry grew rapidly in the 1970's and early 1980's due to pent-up demand
for consumer products, including electronics and appliances. To a certain
extent, this rapid growth occurred without corresponding investment in the
infrastructure and personnel necessary to control growth. Many new competitors
had appeared in the rental-purchase business as a result of the dramatic growth
in demand, the low barriers to entry and the relative ease of obtaining
financing from major lenders. When market growth slowed in the late 1980's,
the lack of professional management, increased competition, growth and high
debt loads led to financial defaults which, in turn, resulted in the control of
many companies passing to their creditors.
The rental-purchase industry is highly fragmented with approximately
38% of the industry owned or operated by the top ten operators. Significant
consolidation has occurred over the last three years with approximately 1,400
stores purchased over this time frame. Therefore, most of the change in the
competitive environment has occurred through a change in ownership instead of
through new store openings. Another significant change in the industry is the
change in ownership of the larger companies. Last year only four of the top
ten chains were publicly owned. As of this writing, six of the top ten
companies are publicly owned with the three largest accounting for just over
28% of the industry. The following table identifies the top ten chains.
<TABLE>
<CAPTION>
RTO INDUSTRY'S LARGEST CHAINS Number Percentage
ESTIMATES AS OF JANUARY, 1997 of of U.S.
Ownership Stores Stores
--------- ------ ------
<S> <C> <C> <C>
1. Rent-A-Center Public-ADRs(1) 1,411 17.0%
2. Renter's Choice Public (2) 716 8.6%
3. Aaron Rents Public (3) 200 2.4%
4. CENTRAL RENTS, INC. PRIVATE 165 2.0%
5. Alrenco, Inc. Public 158 1.9%
6. Rent-Way, Inc. Public 123 1.5%
7. Champion RTO Private 120 1.4%
8. RTO, Inc. (Action TV) Private 117 1.4%
9. Best Way Rental, Inc. Public 62 0.7%
10.Rainbow Rentals Private 58 0.7%
----- -----
Total 3,130 37.8%
===== =====
Total RTO Stores 8,300 100.0%
===== =====
</TABLE>
(1) Includes 62 Rent-A-Center franchise stores, 146 Remco stores and 50
U-Can-Rent stores
(2) Includes 295 ColorTyme franchise stores
(3) Includes 65 franchise stores.
Source: Robinson-Humphrey Company, Inc.
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STORE SYSTEM
At December 31, 1996, the Company operated 165 stores in 20 states
nationwide. The following table illustrates the number of stores in each
state.
<TABLE>
<S> <C> <C> <C>
STORE LOCATIONS
Alaska 1 Louisiana 4
Arizona 16 Nevada 3
Arkansas 1 New Mexico 1
California 43 Ohio 20
Florida 2 Oklahoma 9
Georgia 3 South Carolina 5
Illinois 6 Tennessee 9
Indiana 17 Texas 6
Iowa 1 Virginia 4
Kentucky 7 West Virginia 7
---
165
===
</TABLE>
During the past three years, the number of stores operated has
decreased from 176 at the beginning of 1994 to 165 at the end of 1996. The
stores opened during this period reflect new store openings and store
acquisitions. Twenty stores were merged, closed or sold during the past three
years.
<TABLE>
<CAPTION>
Store Openings and Closings
---------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Open At Beginning of Year 176 175 167
Stores Opened and Acquired 3 5 1
Stores Merged, Closed or Sold (4) (13) (3)
--- ---- ---
Stores Open at End of Year 175 167 165
Net Decrease in Stores (1) (8) (2)
</TABLE>
The Company leases all of its facilities and most of the leases
provide for one to five year terms with options to renew. The stores average
approximately 3,000 to 3,500 square feet in floor space consisting primarily of
merchandise display areas with a limited storage space for inventory. Most of
the stores' merchandise available for rental is therefore on display. The
typical store operation utilizes a manager, an assistant manager, two to three
account managers, a delivery driver and occasionally a customer service
representative or cashier. Store locations are selected based upon a study of
potential customers within a five mile radius of a potential site, the location
of competitors, customer traffic for the site, accessibility and cost. Stores
are typically located in or near low to middle income neighborhoods. The
Company prefers to locate its stores in strip shopping centers with a large
anchor tenant and other suitable tenants. Before a new site is selected or a
lease negotiated, the Company performs a demographic study which highlights the
median income, housing, and other factors that affect the buying patterns for
potential rental-purchase customers in the area. The stores are generally open
six days per week. Currently, the Company operates under the names "RTO", "RTO
Rents" and "Rentronics." In
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California and Arizona, the Company operates under the name "Central Rental and
Purchase."
STORE OPERATIONS
Products and Suppliers
The Company typically rents products to customers in four broad
categories: electronics, appliances, furniture and accessories. Electronic
products generally account for approximately 49% of the Company's revenue,
whereas appliances, furniture and accessories account for 22%, 24% and 5%
respectively. The Company's stores maintain a sufficient inventory to offer
customers a choice of models, styles and brands.
The Company uses only top brand suppliers such as JVC, Whirlpool, GE
Appliances, Zenith, Sanyo Fisher, Toshiba, Magnavox, Ashley, Douglas and
Pilliod. No supplier accounted for more than 17% of merchandise purchased by
the Company during 1996 and 1995. Although the Company presently expects to
continue relationships with its existing suppliers, there are numerous sources
of products, and the Company does not believe its operations are significantly
dependent on any one or more of its present suppliers.
Electronics. Electronic products include televisions, videocassette
recorders and stereos. Competition within the electronics industry for market
share coupled with continued product innovations by the manufacturers have
combined to keep electronic product costs very competitive. Product
innovations have remained strong, but manufacturers have not introduced any
exciting new products in recent years. Additionally, intense competition among
the larger discount retailers, such as Best Buy and Circuit City, have brought
many of the low end electronics products like videocassette recorders and small
portable televisions within reach of the traditional rent-to-own customer on a
cash or credit sale basis.
Appliances. Appliances include refrigerators, washing machines,
dryers, microwave ovens, freezers and ranges. Washers and dryers remain the
most popular appliance in the category.
Furniture. Furniture is a popular rental-purchase product. Furniture
vignettes enable customers to visualize how the product will look in their
homes and provide a showcase for accessories. During 1996 the Company was able
to expand some of its stores and therefore increase the amount of square
footage allocable to furniture vignettes. This expansion has helped to
increase revenues from furniture as a percentage of total revenues from
approximately 20% in 1995 to approximately 24% in 1996.
Accessories. Accessories include pictures, plants, lamps, tables and
jewelry.
Fee-Based Services. Fees provide a further source of revenue. The
Company charges for the reinstatement of terminated accounts, new account
application processing, delivery services and returned checks. The Company
also collects loss/damage waiver fees from customers desiring such product
protection or offers a "club program" which also provides such product
protection. The fees are standard in the industry and are often specifically
regulated by state law.
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Product Life Cycle
The customer enters into a weekly or monthly rental-purchase
agreement, which renews automatically upon receipt of additional payments.
Ownership of the rental merchandise transfers to the customer if the customer
has continuously renewed the rental-purchase agreement, generally, for a period
of 12 to 27 months. Based on Company and industry data, management believes
that approximately 80% of customers do not renew the agreement and return the
product, usually within three to five months. As a result, a majority of the
Company's transactions can be viewed as short-term rentals. The customer
usually chooses not to renew the agreement because the customer's financial
situation or need for the product changes. The Company's minimum required
rental term is for one week or one month. Management believes that the average
period of time for which customers rent merchandise from the Company is
approximately three months. Typically a product is returned and rented four
times during its life cycle. Each of these rental periods requires delivery
and pickup of the product, weekly or monthly payment processing and, in some
cases, repair and refurbishment of the product. These numerous transactions,
in addition to the Company foregoing a traditional credit check and its
unconditional repair and replacement programs, result in high operating
expenses, thus requiring higher aggregate payments than are charged by an
installment purchase or credit retailer.
Rental Contracts
Merchandise is provided to customers under written rental agreements
which set forth the terms and conditions of the transactions. Since legal
requirements vary by state, agreements are customized accordingly. The rental
agreement is ordinarily signed at the store, but may be signed at the
customer's residence if the customer orders the product by telephone and
requests home delivery. The rental-purchase application requires that
potential customers provide sufficient personal information to allow the
Company to verify their source of income. References provided by the customer
are contacted to verify the customer's application. The process usually takes
less than an hour. The agreement's terms and conditions are thoroughly
explained to the customer. The customer enters into a weekly or monthly
rental-purchase agreement which renews automatically upon receipt of additional
payments. Rental payments are generally made in cash or by money order and
occasionally by check. Ownership of the rental merchandise transfers to the
customer if the customer continually renews the rental-purchase agreement for
the duration of the payment schedule, generally, for a period of 12 to 27
months. If a customer does not renew the agreement, the merchandise is
returned to the store and, provided it is in merchantable condition, is
available for rent to another customer. If the condition of the merchandise is
deemed inadequate for rental, it is either sold outright or removed from the
store's inventory.
Services
The Company generally delivers and installs the product for the
customer. The Company retains title to the merchandise during the term of the
rental agreement and provides any required service or repair without charge,
except for damage in excess of normal wear and tear. If the product cannot be
repaired at the customer's residence, the Company provides either a loaner
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while the product is being repaired or the customer can terminate the
rental-purchase agreement. Under the rental agreements, the customer is fully
liable for damage, loss or destruction of the merchandise unless the customer
purchases either an optional rental property loss/damage waiver for product
protection, in the case of an unexpected event, or is a member of a Company
offered club program providing such protection. Most of the products offered
by the Company are covered by a manufacturer's warranty for varying periods,
which, subject to the terms of the warranty, is transferred to the customer
upon the customer's obtaining ownership.
Collections
One of the critical success factors in the rental-purchase industry is
a good collections practice. Collection of payments increases the revenue per
product with only limited associated costs, decreases the likelihood of default
and reduces chargeoffs. A chargeoff occurs when a unit is lost, damaged beyond
repair or not returned by the customer. In the event a customer fails to make
a rental payment when due, store management will telephone the customer within
twenty-four hours and ask that the rental be paid promptly. A rental agreement
is considered terminated when the customer fails to make a payment when due for
the next rental period. The Company charges a fee for reinstating a rental
agreement which has been terminated. By the 7th day following termination,
with respect to the weekly customer, or the 15th day following termination,
with respect to the monthly customer, the Company attempts to recover the
rental merchandise. Historically, the majority of customers who no longer wish
or are able to rent the product, contact the store to arrange the product's
return, or return it themselves.
Customers
The typical rental-purchase customer is between 18 and 45 years old,
rents his or her place of residence and has an annual household income below
$30,000. Such consumers do not have easy access to credit, prefer the
convenience and service associated with a rental-purchase transaction and value
the ability to return the product without penalty.
Advertising
A significant portion of the Company's advertising budget is for
television media. Management believes such advertising benefits its marketing
because of increased name recognition. Direct mail advertising is used
frequently for special sales events which promote selected products. The
yellow pages also account for a significant portion of the advertising budget,
followed to a lesser degree by newspaper and point-of-sale merchandising.
During 1996, 1995 and 1994 the Company's advertising expenditures totaled
$5,822,000, $5,394,000 and $2,009,000 or 5.4%, 4.6% and 2.9% of revenue,
respectively.
Employees
The Company currently has 888 hourly employees and 332 salaried
employees and provides its employees with standard benefits.
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Competition
The rental-purchase industry is highly competitive. The largest national
competitor has significantly greater resources than the Company. Competitive
factors include service, product line, store location, advertising and, to a
lesser extent, price. In addition, competition exists from other sources, such
as retail stores and rental stores offering short-term rental without purchase
options. Competition may arise from new sources having the expertise and
resources to enter the Company's markets either through expansion of operations
or acquisitions. With respect to consumers who are able to purchase a product
for cash or on credit, the Company also competes with department stores,
discount stores and retail outlets. These competitors may offer an installment
sales program or may simply compete on the basis of products and price.
GOVERNMENT REGULATION
Regulation
At various times since 1982, federal legislation which would have
regulated the rental-purchase industry has been introduced into one or both
houses of Congress. To date, no such legislation has been enacted by Congress.
Two bills were introduced into the House of Representatives; H.R. 2820 (the
"Watts Bill") and H.R. 3003 (the "Gonzales Bill"). Both of these bills died
when the last Congressional session ended. No new legislation has been
introduced in the current session of Congress.
Various states have regulated the industry. At present, there are 43
states, including, California, which have legislation regulating rental-purchase
transactions including all of the states in which the Company operates. The
Company's stores have continued to operate profitably even though they are
subject to such rental-purchase regulations. The overwhelming majority of the
state legislation requires industry participants to provide certain disclosures
and varying consumer protection to its customers (the "Disclosure
Requirements"). Legislation modeled after the Disclosure Requirements was
enacted in California and became effective January 1, 1995 and was enacted in
Arizona and became effective January 1, 1996. In three states in which the
Company does not operate, legislation or judicial decisions have regulated
rental-purchase transactions by treating the rental-purchase agreement as a
credit sale subject to interest rate limitations, where applicable, and imposing
other related requirements.
Tax Issues
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 been using 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. The Company received consent from the IRS
and converted to the MACRS method of depreciation for tax accounting purposes
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effective January 1, 1996.
ITEM 2. PROPERTIES
The Company currently leases all of its stores, corporate headquarters
and other facilities. Compliance with federal, state and local laws and
regulations governing pollution and protection of the environment did not have
any material effect upon the financial condition or the results of operations
of the Company during 1996.
ITEM 3. LEGAL PROCEEDINGS
The Company was involved in certain legal proceedings during 1996 in
the normal course of business. The outcome of these matters will not have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no established trading market for the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(Dollars in Millions, Shares in Thousands)
The following table summarizes certain selected financial data of the Company
and should be read in conjunction with the historical Financial Statements of
Central Rents, Inc., and related notes:
<TABLE>
<CAPTION>
RTO & WBC
(Unaudited) Predecessor Company
Pro Historical Combined
Actual Actual Forma -------------------
1996 1995 1994 1993 1992
---- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues $108.8 $118.0 $121.3 $120.3 $119.4
Store operating profit 20.6 25.4 27.5 25.5 23.7
General and administrative expenses 10.8 11.2 12.7 12.9 11.3
Income before interest, taxes and
amortization of intangibles 9.9 14.2 14.8 12.6 12.4
Amortization of intangibles 5.2 19.6 27.8 0.7 0.7
Net income (loss) (1.8) (9.2) (13.2) 6.7 5.7
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Net loss per share $(3.34) $(16.89) $(24.64)
Weighted average shares outstanding 551 542 534 -- --
Number of stores at year end or
period end 165 167 175 176 179
Unaudited Pro Forma Data(1):
Unaudited pro forma income before interest,
taxes and amortization of
intangibles $ 13.0
Unaudited pro forma net loss (14.5)
Unaudited pro forma net loss per share $(27.24)
Unaudited pro forma weighted average shares
outstanding 534
Balance Sheet Data(2):
Cash, cash equivalents and short
term investments $12.8 $ 14.6 $ 15.8 $ 1.6 $ 2.2
Rental merchandise, net 34.4 34.6 34.1 31.1 29.2
Intangibles, net 8.1 13.2 28.4 10.6 14.2
Total assets 72.5 79.9 89.0 57.4 52.3
Total long-term debt 58.1 57.8 57.5 22.6 24.6
Redeemable preferred stock -- -- -- 12.1 13.1
Stockholders' equity 2.8 4.6 13.0 6.6 1.0
</TABLE>
(1) Adjustments were made to 1993 amounts for changes in interest expense
attributable to the issuance of long-term notes to finance the
acquisition of RTO and WBC, the estimated increases in depreciation
and amortization of the revalued assets and intangibles and other pro
forma adjustments.
(2) Balance sheet data at December 31, 1996, 1995 and 1994 represents the
historical audited financial data for Central Rents, Inc., see
Financial Statements and related notes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Prior to 1995, RTO and WBC were operated as independent businesses.
For purposes of presenting the historical combined results of the predecessor
companies in this Form 10-K, the financial statements of RTO and WBC have been
combined. The following discussion should be read in conjunction with the
Financial Statements of Central Rents, Inc., and related notes and financial
information of RTO and WBC as reflected in such notes.
RESULTS OF OPERATIONS
This discussion and analysis compares the results of operations of the
Company during the years ended 1996 with 1995 and 1995 with the unaudited pro
forma results of operations of the Company during the year ended 1994. The
unaudited pro forma consolidated results of operations for the year ended 1994
reflect the
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operations of RTO and WBC as if they were acquired as of January 1, 1994, as
opposed to the date of acquisition, which was June 3, 1994. Adjustments have
been made for changes in interest expense attributable to the issuance of
long-term notes to finance the acquisition of RTO and WBC, the estimated
increases in depreciation and amortization of the revalued assets and
intangibles and other pro forma adjustments.
Effective January 1, 1995, the Company changed its year end to a
calendar year ending on December 31. In 1994, the pro forma results of
operations included the results of operations of RTO for the 52 week fiscal
year ended December 31, 1994 and WBC for the 53 week fiscal year ended December
31, 1994.
The revenue, store operating profit, general and administrative
expenses, income before interest, taxes and amortization of intangibles, net
income (loss) and number of stores of the Company were as follows for the
periods indicated below ($ in Millions):
<TABLE>
<CAPTION>
(Unaudited)
Pro Forma
December 31, December 31, December 31,
1996 1995 1994
----------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $108.8 100.0% $118.0 100.0% $121.3 100.0%
Store operating profit 20.6 19.0 25.4 21.6 27.5 22.7
Field and corporate
general and
administrative expenses 10.8 9.9 11.2 9.5 12.7 10.5
Income before interest,
taxes and amortization
of intangibles 9.9 9.1 14.2 12.0 14.8 12.2
Amortization of
intangibles 5.2 4.8 19.6 16.6 27.8 22.9
Net income (loss) (1.8) (1.7) (9.2) (7.8) (13.2) (10.9)
Number of stores at
year end or period end 165 167 175
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1995.
Revenues. During the year ended December 31, 1996, total units on
rent decreased 11.0%. This decrease resulted in a revenue decrease of $9.3
million or 7.8% to $108.8 million for the year ended December 31, 1996 from
$118.0 million for 1995. Approximately $2.7 million of the revenue decrease
for the year ended December 31, 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, primarily in its operations in the eastern
and central states.
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In addition, consolidation within the rental-purchase industry over
the last several years, especially in the eastern and central states has
significantly increased the competitive climate in those states and contributed
to the general deterioration in the number of units on rent and resultant
revenue declines.
Store Operating Profit. Store operating profit decreased $4.7 million
or 18.7%, to $20.6 million for the year ended December 31, 1996 from $25.4
million for 1995. The decrease in store operating profit was primarily the
result of a decrease in gross profit of approximately $5.3 million as a result
of lower revenues in the year ended December 31, 1996 as compared to 1995
offset by a $0.6 million decrease in store operating expenses. Total store
operating expenses as a percentage of revenue increased to 50.5% of revenues in
the year ended December 31, 1996 from 47.0% 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 19.0% of revenues for the year ended December 31, 1996
from 21.5% for the same period in 1995.
Comparable Stores. Comparable store revenues decreased $8.2 million
or 7.2%, to $105.9 million for the year ended December 31, 1996 from $114.0
million for 1995. The decrease in comparable store revenues was primarily the
result of a decrease in units on rent for the year ended December 31, 1996 as
compared to 1995. Comparable store operating profit decreased $5.0 million or
19.9%, to $20.4 million for the year ended December 31, 1996 from $25.4 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 $0.4 million or 3.9%,
to $10.8 million for the year ended December 31, 1996 from $11.2 million in
1995. The decrease in field and corporate general and administrative expenses
was primarily the result of a decrease in payroll related expenses due to
headcount. Field and corporate general and administrative expenses for year
ended December 31, 1996 as a percentage of revenue increased to 9.9% from 9.5%
in 1995.
Income Before Interest, Taxes and Amortization of Intangibles. Income
before interest, taxes and amortization of intangibles decreased $4.3 million
or 30.3%, to $9.9 million for the year ended December 31, 1996 from $14.2
million for the year ended 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 year ended December 31, 1996 as compared to the same
period in 1995. Income before interest, taxes and amortization of intangibles
as a percentage of revenue decreased to 9.1% for the year ended December 31,
1996 from 12.0% in 1995.
Net Loss. Net loss decreased $7.3 million or 79.9% to $1.8 million
for the year ended December 31, 1996 from $9.2 million for 1995. Net loss as a
percentage of revenue decreased to 1.7% for the year ended December 31, 1996
11
<PAGE> 13
from 7.8% for 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.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH UNAUDITED PRO FORMA RESULTS OF
OPERATIONS OF RTO FOR THE 52 WEEKS ENDED DECEMBER 31, 1994 AND WBC FOR THE 53
WEEKS ENDED DECEMBER 31, 1994
Revenues. Total revenues decreased $3.3 million or 2.7%, to $118.0
million for the year ended December 31, 1995 from $121.3 million in 1994.
Revenues in California stores decreased by $3.5 million or 10.4% to $30.5
million for the year ended December 31, 1995 from $34.0 million in 1994. This
decrease is the result of a decrease in units on rent due to the general
weakness in the California economy and the impact of California legislation
regulating rental-purchase transactions which became effective on January 1,
1995 (the "California Legislation"). Under the California Legislation, the
Company's ability to collect certain types of fees, including loss/damage
waiver fees was limited. In January 1995, the Company introduced an "Advantage
Plus" program which allows the Company to offer certain services permitted
under the California Legislation in addition to promotional discounts. This
new program helped to offset some of the loss of fees experienced as a result
of the California Legislation. The impact of the California Legislation
resulted in a decrease in fee revenues of $1.2 million in 1995.
Store Operating Profit. Store operating profit decreased by $2.1
million or 7.7%, to $25.4 million for the year ended December 31, 1995 from
$27.5 million in 1994. The decrease in store operating profit was primarily
the result of a decrease in units on rent in California and a decrease of $1.2
million in store operating profit as a result of the California Legislation.
In addition to California, the Company's fourth quarter results of operations
were adversely effected by the loss of units on rent in non-California stores,
primarily in Ohio. As a result of these factors, units on rent at December 31,
1995 are approximately 2.8% less than the comparable 1994 period. The Company's
depreciation of rental merchandise increased to 31.1% of revenues in 1995 as
compared to 30.2% in 1994. This increase in depreciation of rental merchandise
as a percentage of revenues is attributable to higher inventory levels in 1995
from the expansion of the Company's product mix to higher priced merchandise
without a corresponding increase in revenues. This resulted in a decrease in
store operating profit of $0.9 million in non-California stores. Store
operating profit was favorably impacted from conforming the Company's
depreciation policies for its rental merchandise as discussed in Note 3 to the
Financial Statements. The net impact of this depreciation change was to
decrease depreciation of rental merchandise by $1.1 million for the year ended
December 31, 1995.
Management believes the decrease in revenues and store operating
profit in its California stores was as a result of the general weakness in the
California economy, competitive pressures and the impact of the California
Legislation. As a result, the Company charged-off $3.0 million of excess cost
over net assets acquired relating to its California operations as of December
31, 1995.
12
<PAGE> 14
Comparable Stores. During 1995, the Company opened three new stores,
purchased two stores from competitors, purchased rental agreements from two
competitors and transferred the agreements to existing stores and closed, sold
or merged thirteen stores. Comparable store revenues decreased $3.3 million or
2.8%, to $114.7 million for the year ended December 31, 1995 from $118.0
million in 1994. Comparable store operating profit decreased by $2.1 million or
7.7%, to $25.2 million for the year ended December 31, 1995 from $27.3 million
in 1994. This decrease was primarily the result of a decrease in units on rent
in California, the impact of the new California Legislation and the expansion
of the Company's product mix to higher priced merchandise without a
corresponding increase in revenues.
Field and Corporate General and Administrative Expenses. Field and
corporate general and administrative expenses decreased by $1.5 million or
11.9%, to $11.2 million for the year ended December 31, 1995 from $12.7 million
in 1994. Field and corporate general and administrative expenses for the year
ended December 31, 1995 as a percentage of revenue decreased to 9.5% from 10.5%
in 1994. The decrease in field and corporate general and administrative
expenses is primarily the results of cost savings associated with the
relocation and consolidation of RTO's and WBC's corporate offices to the
Company's headquarters in Commerce, California.
Income Before Interest, Taxes and Amortization of Intangibles. Income
before interest, taxes and amortization of intangibles decreased $0.6 million
or 4.1% to $14.2 million for the year ended December 31, 1995 from $14.8
million in 1994. Income before interest, taxes and amortization of intangibles
as a percentage of revenue decreased to 12.0% for the year ended December 31,
1995 from 12.2% in 1994. The decrease in income before interest, taxes and
amortization of intangibles was primarily the result of a decrease in units on
rent in California, the impact of the new California legislation and the
increase in depreciation of rental merchandise.
Net Loss. Net loss decreased $4.0 million or 30.3% to $9.2 million
for the year ended December 31, 1995 from $13.2 million in 1994. Net loss as a
percentage of revenue decreased to 7.8% for the year ended December 31, 1995
from 10.9% in 1994. The decrease in net loss in 1995 is primarily the result
of a decrease in amortization expense of intangibles, see Note 3 to the
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are purchases of rental
merchandise throughout the year to replace rental merchandise which has been
rented to term, sold or charged-off. Total purchases of rental merchandise
were $37.2 million, $43.6 million and $42.2 million during the years ended
December 31, 1996 and 1995 and the unaudited pro forma period ended
December 31, 1994.
The Company's other capital requirements consist of purchases of
property, plant and equipment, including store improvements and office
equipment. Total combined capital expenditures for these items for the years
ended December 31, 1996 and 1995 totaled $1.0 million and $2.1 million,
respectively and $.9 million for the unaudited pro forma period ended December
31, 1994.
13
<PAGE> 15
On June 3, 1994, the Company acquired all of the outstanding stock of
RTO and WBC for a purchase price of approximately $60,000,000 in cash, in a
transaction accounted for as a purchase. The Company funded the acquisition of
RTO and WBC from the proceeds of the offering of Units on June 3, 1994,
consisting of $60,000,000 principal amount of Notes (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 and applicable state securities
laws. In addition, the Company received an equity contribution of $20,000,000
from selling its common stock to Central Rents Holding, Inc., the Company's
parent company. 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 the Notes and $2,200,000 was allocated
to the issuance of the Warrants.
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 New Notes (the "New Notes") in exchange for the outstanding Notes was
declared effective by the Securities and Exchange Commission (the "Exchange
Offer"). Upon its effectiveness, the Company commenced an Exchange Offer,
pursuant to which all of the outstanding Notes were tendered and exchanged on
or prior to 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. The
New Notes are not redeemable prior to June 15, 1999. However, prior to June
15, 1997, the Company may, at its option, redeem 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 New Notes, provided that at least two-thirds of the
initial aggregate principal amount of the New Notes remains outstanding
immediately after the occurrence of such redemption, at the redemption price
plus accrued and unpaid interest to the date of redemption. On or after June
15, 1999, the New Notes will be redeemable at the option of the Company, in
whole or in part, at various defined redemption prices 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 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 by the Company may not exceed 50% of the aggregate book value of the
Company's rental merchandise. As of December 31, 1996, there were no
borrowings under the Line of Credit.
14
<PAGE> 16
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.
On January 7, 1997 the Company declared a cash dividend in the amount
of $2,000,000 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.
Subsequently, all Warrant holders exercised their option to convert the
Warrants into the Company's common stock in order to receive the cash dividend.
On March 5, 1997 the dividend in the amount of $3.24 per share was paid.
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, 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 further expansion during 1997 and in subsequent years
through new store openings and acquisitions. The Company expects to open new
stores in 1997 and remodel a substantial number of existing stores. The
Company does not have any mandatory debt amortization requirements until the
year 2003.
INFLATION
During the past two years, the cost of rental merchandise, lease
rental expense and salaries and wages have increased modestly. These increases
have not had a significant effect on the results of operations because the
Company has been able to charge commensurately higher rentals for its
merchandise.
SEASONALITY
The Company's business is slightly seasonal, with an increase in
rentals during the Christmas season.
15
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Central Rents, Inc.
Report of Independent Public Accountants 17
Balance Sheets as of December 31, 1996 and 1995 18
Statements of Operations For The Years Ended December 31, 1996 and 1995
and period June 4, 1994 through December 31, 1994 19
Statements of Stockholders' Equity For The Years Ended December 31,
1996 and 1995 and period June 4, 1994 through December 31, 1994 20
Statements of Cash Flows For The Years Ended December 31, 1996 and 1995
and period June 4, 1994 through December 31, 1994 21
Notes to Financial Statements 22
</TABLE>
16
<PAGE> 18
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, 1996 and 1995, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1996 and 1995 and the period June 4, 1994 through December
31, 1994. 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, 1996 and 1995, and the results of its operations and its
cash flows for the years ended December 31, 1996 and 1995 and the period June
4, 1994 through December 31, 1994 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 11, 1997
17
<PAGE> 19
CENTRAL RENTS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
----- -----
A S S E T S
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 883 $ 1,560
SHORT-TERM INVESTMENTS 11,925 12,992
RECEIVABLES AND PREPAID EXPENSES 2,348 2,062
INCOME TAX RECEIVABLE - RELATED PARTY 1,871 1,050
RENTAL MERCHANDISE, at cost 66,289 66,443
Less - Accumulated depreciation (31,908) (31,860)
-------- --------
34,381 34,583
PROPERTY AND EQUIPMENT, at cost
Leasehold improvements 3,190 2,834
Furniture and equipment 2,037 2,381
Vehicles 134 128
------- ------
5,361 5,343
Less - Accumulated depreciation (2,834) (1,971)
------- -------
2,527 3,372
DEFERRED FINANCING COSTS, net 1,957 2,287
NONCOMPETE AGREEMENT, net 1,275 5,975
CUSTOMER RENTAL AGREEMENTS, net - 246
EXCESS OF COST OVER NET ASSETS ACQUIRED, net 6,861 6,931
DEFERRED INCOME TAXES, net 8,156 8,549
OTHER ASSETS 279 330
------- -------
Total assets $72,463 $79,937
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE $5,332 $10,223
ACCRUED EXPENSES 5,682 6,176
DUE TO RELATED PARTIES 237 760
ACCRUED INTEREST 322 322
LONG-TERM NOTES 58,094 57,820
------- -------
Total liabilities 69,667 75,301
------- -------
COMMITMENTS AND CONTINGENCIES
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 in 1996 and 1995 6 6
Additional paid-in capital 22,944 22,944
Retained deficit (20,154) (18,314)
------- -------
Total stockholders' equity 2,796 4,636
------- -------
Total liabilities and stockholders' equity $72,463 $79,937
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 20
CENTRAL RENTS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
PERIOD JUNE 4, 1994 THROUGH DECEMBER 31, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Rental revenues $103,382 $112,243 $66,485
Sales of merchandise 5,243 5,736 3,109
Other revenue 152 65 28
-------- ------- -------
108,777 118,044 69,622
-------- ------- -------
COSTS AND EXPENSES:
Selling, general and administrative 61,475 61,991 37,461
Cost of merchandise sold 3,852 3,658 1,783
Depreciation and amortization
Rental merchandise 32,045 36,694 21,443
Property and equipment 1,538 1,541 895
-------- ------- -------
98,910 103,884 61,582
-------- ------- -------
INCOME BEFORE INTEREST, TAXES AND
AMORTIZATION OF INTANGIBLES 9,867 14,160 8,040
AMORTIZATION OF INTANGIBLES 5,192 19,601 18,158
-------- ------- -------
INCOME (LOSS) FROM OPERATIONS 4,675 (5,441) (10,118)
INTEREST EXPENSE, net (7,555) (7,464) (4,434)
-------- ------- -------
LOSS BEFORE INCOME TAXES (2,880) (12,905) (14,552)
INCOME TAX BENEFIT 1,040 3,750 5,393
-------- ------- -------
NET LOSS $ (1,840) $ (9,155) $ (9,159)
======= ======= =======
Per share data:
Net loss per common share $(3.34) $(16.89) $(17.15)
======= ======= =======
Weighted average common shares outstanding 551,045 541,985 534,000
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 21
CENTRAL RENTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND PERIOD JUNE 4, 1994 THROUGH
DECEMBER 31, 1994 (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
PAID-IN RETAINED
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
-------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
BALANCE, June 4, 1994 534,000 $5 $19,995 $ - $20,000
Issuance of stock warrants 2,200 2,200
Net loss for the period June 4, 1994 through
December 31, 1994 (9,159) (9,159)
------- -- ------- ------ ------
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
======= == ======= ========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 22
CENTRAL RENTS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD JUNE 4, 1994
THROUGH DECEMBER 31, 1994 (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,840) $ (9,155) $ (9,159)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation of rental merchandise 32,045 36,694 21,443
Depreciation of property and equipment 1,538 1,541 895
Increase in deferred income taxes (26) (3,950) (5,722)
Amortization of noncompete agreement 4,700 8,275 5,750
Amortization of customer rental agreements 246 7,987 12,281
Amortization of excess of cost over net assets acquired 246 3,339 127
Amortization of debt discount 274 274 157
Amortization of deferred financing costs 330 316 156
Amortization of discount earned on investments - (212)
Changes in operating assets and liabilities, net
of the effect of businesses acquired:
Decrease (increase) in receivables, prepaid expenses
and other assets (354) 742 (666)
Increase in income tax receivable - related party (821) (1,050) -
Increase in rental merchandise, net (31,561) (41,095) (25,227)
Increase (decrease) in accounts payable (4,891) 1,677 4,597
Decrease in accrued expenses (494) (856) (201)
Increase in accrued interest - - 322
Increase (decrease) in due to related parties (523) (136) 219
Increase (decrease) in income taxes payable 419 - (475)
------ ------- -------
Net cash provided (used) by operating activities (712) 4,603 4,285
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from store sales - 515 -
Purchase of property and equipment (1,032) (2,114) (938)
Redemption (purchase) of short-term investments 1,067 (782) (11,998)
Purchase of rental agreements and stores - (1,110) -
Purchase of RTO and WBC, net of cash acquired - (3,669) (64,812)
------- ------- -------
Net cash provided (used) by investing activities 35 (7,160) (77,748)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of warrants - - 2,200
Proceeds from issuance of long-term notes - - 57,389
Proceeds from issuance of common stock - 750 -
Debt issuance costs - (176) (2,583)
------ ------- -------
Net cash provided by financing activities - 574 57,006
------ ------- -------
Net decrease in cash and cash equivalents (677) (1,983) (16,457)
Cash and cash equivalents, beginning of period 1,560 3,543 20,000
------ ------- -------
Cash and cash equivalents, end of period $ 883 $ 1,560 $ 3,543
====== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $1,190 $ 1,271 $ 804
Interest $7,852 $ 7,725 $ 4,120
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 23
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 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. The results of operations of RTO and WBC are included in the
accompanying statement of operations since the date of acquisition (see Note
2).
The Company's predecessors have been engaged in the rental-purchase
industry since 1968. As of December 31, 1996, the Company operated 165
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. ACQUISITION OF RTO AND WBC:
On June 3, 1994, the Company acquired all of the outstanding stock and
notes of RTO and WBC for a purchase price of approximately $60,000,000 in cash
(the "Acquisition"), in a transaction accounted for as a purchase. The Company
funded the purchase price for the stock of RTO and WBC 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 (the "Securities Act")
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 the Notes and $2,200,000
was allocated to the issuance of warrants based upon estimates from an
independent investment banker.
The following summary, prepared on an unaudited pro forma basis, presents
the revenues, net loss and per share amounts as if the acquisition of RTO and
WBC had taken place at the beginning of 1994, after including adjustments for
changes in interest expense attributable to the issuance of long-term notes to
finance the acquisition, the estimated increase in depreciation and amortization
of the revalued assets and intangibles and other pro forma adjustments.
22
<PAGE> 24
2. ACQUISITION OF RTO AND WBC, CONTINUED:
<TABLE>
<CAPTION>
1994
---------------
<S> <C>
Revenues $121,272,000
Net Loss $(13,158,000)
Net loss per common share $ (24.64)
</TABLE>
The unaudited 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 beginning of 1994,
nor are they necessarily indicative of future operating results.
3. 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, is
nonrefundable and is recognized as revenue when collected. Ownership of the
rental items passes to the customer when the customer makes the requisite
number of rental payments stipulated by the agreement, generally 78 weekly or
18 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. Prior to the Acquisition, RTO and
WBC had two different depreciation policies for rental merchandise with lives
ranging from 12 to 27 months. After the acquisition, the Company commenced an
analysis to determine the fair value of rental merchandise acquired. The
Company's analysis of the fair value of rental merchandise resulted in a net
decrease in rental merchandise and a corresponding increase in goodwill as of
the date of the Acquisition of approximately $3,100,000. The Company also
conducted an analysis after the acquisition to conform its depreciation method
to one uniform method. This analysis was completed whereby, effective January
1, 1995, the Company determined that the estimated useful lives of its rental
merchandise averaged approximately 22 months. The net impact of this change on
the results of operations was to decrease net loss before tax by approximately
$1,100,000 for the year ended December 31, 1995.
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.
23
<PAGE> 25
3. 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 5-7 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 1995, accumulated amortization amounted to $802,000 and $472,000
respectively.
Advertising
The Company generally expenses production cost of print and television
advertisements as of the first date the advertisements take place unless they
are expected to benefit future periods. Advertising expenses included in
selling, administrative and general expenses were $5,822,000 in 1996,
$5,394,000 in 1995 and $2,009,000 in 1994.
Noncompete Agreement
In connection with the Acquisition, one of the sellers entered into a
noncompete agreement with the Company. The noncompete agreement is being
amortized over its contractual life of 3 years. Amortization of the noncompete
agreement is 50% in year one, 35% in year two and 15% in year three. As of
December 31, 1996 and 1995, accumulated amortization amounted to $18,725,000
and $14,025,000, respectively.
Customer Rental Agreement
Customer rental agreements represent the projected value of open customer
rental-purchase agreements of the acquired stores at the acquisition date and
are being amortized over the average stated term of the agreements,
approximately 18 months. In 1995, the Company purchased approximately $514,000
of customer rental agreements from two competitors and transferred the
agreements to existing stores. Amortization expense is calculated on an
accelerated basis using the sum of the month digits over 18 months. As of
December 31, 1996 and 1995, accumulated amortization amounted to $20,514,000
and $20,268,000, respectively. The customer rental agreements have been fully
amortized as of December 31, 1996.
Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired, which relates to the
acquisition of RTO and WBC and other stores in 1995, is being amortized on a
straight-line basis over a period of 30 years. The purchase allocation 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. 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
24
<PAGE> 26
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 1995, accumulated amortization amounted to $3,712,000 and
$3,466,000, respectively. The Company periodically reviews the excess of cost
over net assets acquired to assess recoverability pursuant to the terms of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". Impairment
would be recognized in operating results if a permanent diminution in value were
to occur.
Cash and Cash Equivalents
The Company invests excess cash from operations in short-term investment
grade commercial paper. The Company considers all highly liquid debt
instruments purchased with an original maturity date of three months or less to
be cash equivalents.
Short-term Investments
Short-term investments are recorded at cost which approximates fair value
and consists of commercial paper and repurchase agreements.
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.
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 for the year in which the differences are expected to
reverse.
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 among Banner and its subsidiaries based on
their allocable
25
<PAGE> 27
share of such tax liabilities. Under the tax sharing agreement, payments by
subsidiaries of Banner will not exceed the amounts they would be required to pay
if their tax liabilities were calculated on a separate company basis. In
connection with this agreement, the Company recorded an income tax benefit in
1996, 1995 and 1994 of $1,040,000, $3,750,000 and $5,393,000 and income taxes
receivable from Banner of $1,871,000, $1,050,000 and $202,000 at December 31,
1996, 1995 and 1994, respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 share equivalents were used in the computation as the
impact would be anti-dilutive.
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, revenue 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
$8.2 million as of December 31, 1996. Realization of that asset is dependent
upon the Company generating sufficient future taxable income. The Company
expects to realize the recorded deferred tax asset through future operating
income. See Note 6 relating to income taxes.
Reclassifications
Certain reclassifications have been made to previously reported
amounts to conform to the current year presentation.
4. LONG-TERM NOTES:
The Company funded the purchase price for the stock and notes of RTO and WBC
from the proceeds of the Offering (see Note 2). 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 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
26
<PAGE> 28
Offer, pursuant to which all of the outstanding Notes were tendered and
exchanged on or prior to 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. The New
Notes are not redeemable prior to June 15, 1999, except that prior to June 15,
1997, the Company, at its option, may redeem 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 New Notes, provided that at least two-thirds of the initial
aggregate principal amount of the New Notes remains outstanding immediately
after the occurrence of such redemption. 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.
The payment of principal and interest on the New Notes are unconditionally
guaranteed by RTO and WBC, (collectively, the "Subsidiary Guarantors").
In connection with the issuance of the Notes, the Company executed an
indenture dated June 3, 1994 (the "Indenture"). Pursuant to the Indenture, the
Subsidiary Guarantors unconditionally guaranteed, jointly and severally, the
full and prompt performance of the Company's obligations under the Indenture,
including the payment of principal and interest on the Old Notes. 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 1996 and 1995 and $4,442,000 in 1994.
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 Line of Credit was amended to reduce the available borrowings
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 50% of the aggregate book value of the Company's rental
merchandise. As of December 31, 1996, there were no borrowings under the Line
of Credit.
5. 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 1996, 1995 and 1994
amounted to
27
<PAGE> 29
$5,541,000, $5,532,000 and $3,289,000, 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,
------------
<S> <C>
1997 $ 4,213,000
1998 2,795,000
1999 1,865,000
2000 1,166,000
2001 408,000
Thereafter -
-----------
$10,447,000
===========
</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.
6. INCOME TAXES:
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $(1,061,000) $ 36,000 $ 103,000
State and local 47,000 164,000 226,000
----------- ----------- -----------
(1,014,000) 200,000 329,000
----------- ----------- -----------
Deferred:
Federal (20,000) (3,150,000) (4,549,000)
State and local (6,000) (800,000) (1,173,000)
----------- ----------- -----------
(26,000) (3,950,000) (5,722,000)
----------- ----------- -----------
Total tax (benefit) $(1,040,000) $(3,750,000) $(5,393,000)
=========== =========== ===========
</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>
1996 1995 1994
---- ------ ------
<S> <C> <C> <C>
Expected provision (benefit) for federal income taxes (35.0)% (35.0)% (35.0)%
State taxes - net of federal benefit (5.2) (.1) (2.2)
Nondeductible and other items 4.1 6.0 0.1
----- ----- -----
(36.1)% (29.1)% (37.1)%
===== ===== =====
</TABLE>
28
<PAGE> 30
The primary components of temporary differences which give rise to
deferred taxes at December 31, 1996 and 1995 are:
<TABLE>
1996 1995
------ ----
<S> <C> <C>
Deferred Tax Assets:
Depreciation of Fixed Assets $ 1,331,000 $2,060,000
Reserves and other accrued expenses 1,585,000 1,556,000
Noncompete agreement amortization 6,200,000 4,658,000
Other 304,000 275,000
----------- ----------
Total deferred tax assets 9,420,000 8,549,000
Deferred Tax Liabilities:
Depreciation of Rental Merchandise (601,000) -
Other (663,000) -
----------- ----------
Net deferred tax asset $ 8,156,000 $8,549,000
=========== ==========
</TABLE>
The deferred tax expense (benefit) during 1996, 1995 and 1994 is comprised
of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ------- ------
<S> <C> <C> <C>
Depreciation and amortization $ 1,330,000 $ 217,000 $ (18,000)
Reserves and other accrued expenses (29,000) 1,975,000 (69,000)
Customer rental agreements - (3,011,000) (4,789,000)
Noncompete agreement (1,542,000) (2,706,000) (1,939,000)
Other 215,000 (425,000) 1,093,000
----------- ----------- -----------
Total deferred (benefit) $ (26,000) $(3,950,000) $(5,722,000)
=========== =========== ===========
</TABLE>
The Internal Revenue Service ("IRS") has examined certain of the
Company's former subsidiaries. The examination resulted in a deficiency notice
for one of the former subsidiaries and an examination report for the other
former subsidiary. The seller has filed a petition with the U.S. Tax Court
contesting the deficiency notice. 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.
Management believes the adjustments as a result of these proceedings will not
have a material effect on the financial position of the Company and the
sellers indemnification will be sufficient to cover the tax liabilities, if any,
as a result of the audits.
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 had been using
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 would 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.
As a result of a reorganization transaction during 1996, certain
members deconsolidated from the federal income tax return in which the Company
is a member. Due to this change, the realization of the net deferred tax asset
is dependent upon future earnings of the remaining members of the consolidated
group. Management believes it is more likely than not that the net deferred tax
asset will be realized and accordingly no valuation allowance has been provided.
7. 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
29
<PAGE> 31
services contemplated by the Administrative Services Agreement. The
Administrative Services Agreement has 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 1996, 1995, and 1994
the Company purchased $640,000, $1,927,000 and $547,000, respectively, of
merchandise from Banner in connection with the Administrative Services
Agreement. The Company has not incurred any material common costs or expenses
to be allocated during 1996, 1995 and 1994 in connection with the
Administrative Services Agreement.
The balance receivable from (payable to) related parties as of December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Banner Holdings $ 500,000 $ -
Banner Central Electric (656,000) (403,000)
G. M. Cypres & Co. (61,000) (219,000)
Banner Central Electric Properties (20,000) (138,000)
--------- --------
$(237,000) ($760,000)
========= ========
</TABLE>
In connection with the consummation of the Acquisition and the
Offering, the Company paid G. M. Cypres & Co., a related party through common
ownership of the Company, an investment banking fee of $850,000 and reimbursed
its expenses in connection with the Acquisition and the Offering. In addition,
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, 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 accrued under the terms of the Consulting Agreement totaled
$375,000 for the years ended December 31, 1996 and 1995 and $218,750 for the
period from June 4, 1994 through December 31, 1994.
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, 1996 and 1995.
Management believes that all related party transactions were
consummated on terms comparable to terms that could have been negotiated with
third parties.
8. RETIREMENT SAVINGS PLAN:
The Company had 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 and 1994, the Company contributed $49,000 and
$27,000 to the plan, respectively. The plan was terminated as of December 31,
1995.
9. STORE SALES AND CLOSING:
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 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.
30
<PAGE> 32
During 1994, the Company purchased rental agreements from a competitor
and transferred the agreements to an existing store, closed one store and
transferred all idle inventory and rental agreements to a nearby store. The
Company also exchanged three of its stores for two stores of a competitor which
in the opinion of management strengthens the Company's presence in existing
market places.
10. 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.
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. 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 1995, there were
90,000 shares of common stock reserved for the 1994 Plan.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Exercise
Stock Options Price Per Share
------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1994 21,000 $37.45
Granted -
Expired or cancelled -
Exercised -
------
Outstanding at December 31, 1995 21,000 37.45
Granted 17,000 37.45
Expired or cancelled (11,000) 37.45
Exercised -
-------
Outstanding at December 31, 1996 27,000 37.45
=======
Options exercisable at December 31, 1996 0
=======
</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 earning 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. Had compensation cost for this plan been determined
consistent with the fair value method under SFAS 123, the impact to the Company
would have been immaterial.
31
<PAGE> 33
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. On or before February 28, 1997,
all Warrant holders exercised their option to convert the Warrants into the
Company's common stock in order to receive the cash dividend.
Dividends
On March 5, 1997, the Company paid a total cash dividend of $2.0
million or $3.24 per share to the holders of its common stock.
32
<PAGE> 34
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data of the Company from the date of
acquisition of RTO and WBC is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Total Income/(Loss) Net Net Loss
Revenues from Operations Loss Per Share
-------- --------------- ------ ---------
<S> <C> <C> <C> <C>
March 31, 1996 $28,400 $ 1,002 $ (618) $(1.12)
June 30, 1996 27,767 1,331 (369) (.67)
September 30, 1996 26,468 1,418 (320) (.58)
December 31, 1996 26,142 924 (533) (.97)
March 31, 1995 30,183 (1,835) (2,330) (4.36)
June 30, 1995 30,514 (433) (1,457) (2.73)
September 30, 1995 29,318 (110) (1,275) (2.32)
December 31, 1995 28,029 (3,063) (4,093) (7.48)
June 30, 1994(1) 6,526 (1,976) (1,622) (3.04)
September 30, 1994 28,352 (5,167) (4,472) (8.37)
December 31, 1994 34,744 (2,975) (3,065) (5.74)
</TABLE>
(1) Includes the operations of RTO and WBC for the period from June 4, 1994
(date of acquisition) through June 30, 1994.
33
<PAGE> 35
12. OTHER SUPPLEMENTAL DATA:
Predecessor financial statements of RTO and WBC have been presented for the
periods indicated and reflect their historical results of operations prior to
the Company's acquisition of RTO and WBC on June 3,1994.
RTO ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE PERIOD JANUARY 2, 1994 THROUGH JUNE 3, 1994
<TABLE>
<CAPTION>
1994
-------
<S> <C>
REVENUES:
Rental revenues $31,761
Sale of merchandise 1,724
Other revenue 17
------
33,502
------
COSTS AND EXPENSES:
Selling, general and administration 17,518
Cost of merchandise sold 910
Depreciation and amortization
Rental merchandise 10,408
Property and equipment 398
Goodwill 253
------
29,487
------
INCOME FROM OPERATIONS 4,015
INTEREST EXPENSE 2
-----
INCOME BEFORE INCOME TAXES AND CHARGES
IN LIEU OF TAXES 4,013
INCOME TAXES AND CHARGES
IN LIEU OF TAXES 1,855
-----
NET INCOME $ 2,158
======
</TABLE>
34
<PAGE> 36
12. OTHER SUPPLEMENTAL DATA, CONTINUED:
RTO ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE PERIOD JANUARY 2, 1994 THROUGH JUNE 3, 1994
<TABLE>
<CAPTION>
1994
-------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,158
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment and goodwill 1,151
Depreciation of rental merchandise 11,318
Changes in operating assets and liabilities,
net of the effect of businesses acquired:
Increase in prepaid expenses (137)
Increase in rental merchandise (11,009)
Decrease in accounts payable (834)
Increase in accrued expenses 2,581
-------
Net cash provided by operating activities 5,228
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (155)
-------
Net cash used in investing activities (155)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to former shareholders (59)
Repayment of revolving loans (5,967)
-------
Net cash used in financing activities (6,026)
-------
Net decrease in cash (953)
Cash, beginning of period 967
----
Cash, end of period $ 14
====
</TABLE>
35
<PAGE> 37
WBC HOLDINGS, INC.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE PERIOD DECEMBER 26, 1993 THROUGH JUNE 3, 1994
<TABLE>
<CAPTION>
1994
-------
<S> <C>
REVENUES:
Rental revenues $17,231
Sale of merchandise 898
Other revenue 19
-------
18,148
-------
COSTS AND EXPENSES:
Selling, general and administrative 10,183
Cost of merchandise sold 414
Depreciation and amortization
Rental merchandise 4,767
Property and equipment 284
-------
15,648
-------
INCOME FROM OPERATIONS 2,500
INTEREST EXPENSE 88
------
INCOME BEFORE INCOME TAXES 2,412
INCOME TAXES 941
------
NET INCOME 1,471
DIVIDENDS ON REDEEMABLE PREFERRED STOCK 32
------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $1,439
======
</TABLE>
36
<PAGE> 38
WBC HOLDINGS, INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE PERIOD DECEMBER 26, 1993 THROUGH JUNE 3, 1994
<TABLE>
<CAPTION>
1994
------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,471
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of rental merchandise 4,517
Depreciation and amortization of property
and equipment 284
Gain on sale of property and equipment (12)
Loss on write-off of rental merchandise 467
Deferred income taxes 975
Changes in operating assets and liabilities,
net of the effect of businesses acquired:
Decrease in receivables and
prepaid expenses 325
Increase in rental merchandise (3,804)
Increase in other assets (73)
Decrease in accounts payable (1,510)
Decrease in other accrued expenses (720)
Decrease in accrued interest and
deferred credit (793)
-------
Net cash provided by operating activities 1,127
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (97)
Proceeds from sale of property and equipment 14
-------
Net cash used in investing activities (83)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of revolving line
of credit and term note (195)
Redemption of preferred stock (1,025)
Payments of dividends (182)
-------
Net cash used in financing activities (1,402)
-------
Net decrease in cash and cash equivalents (358)
Cash and cash equivalents, beginning of period 651
-------
Cash and cash equivalents, end of period $ 293
=======
</TABLE>
37
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following list sets forth information concerning directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gary M. Cypres 53 Chairman of the Board and Chief
Executive Officer
Derek S. Stamper 41 President
Brian Cohen 37 Senior Vice President, General
Counsel, Corporate Secretary and
Director
Armida Espinoza 48 Vice President, Human Resources
A. Keith Wall 44 Vice President, Chief Financial
Officer
</TABLE>
Set forth below is additional information regarding the Company's
directors and officers.
GARY M. CYPRES is Chairman of the Board of Directors and Chief
Executive Officer of Central Rents, Inc. Mr. Cypres also served as President
of Central Rents, Inc. from June 3, 1994 until January 4, 1995. Mr. Cypres has
had an extensive business career including, as Chief Financial Officer of the
Signal Companies and as Senior Vice President of Finance at Wheelabrator-Frye
Inc. At the Signal Companies, he played a key role in the sale of Golden West
Broadcasting and Mack Trucks and the restructuring of Ampex Corporation and UPO
Inc. Mr. Cypres also was instrumental in The Signal Companies' $5.0 billion
merger with the Allied Corporation. Mr. Cypres joined Wheelabrator in 1973,
after working for Arthur Andersen & Co. for six years, and remained there until
1983 when Wheelabrator was acquired by The Signal Companies in a $1 billion
transaction. Thereafter, Mr. Cypres formed his own investment banking firm, G.
M. Cypres & Co., which has advised such companies as the Henley Group, Pullman
Company, the Fisher Scientific Group and Wheelabrator Technologies regarding
their financial planning and merger and acquisitions activities, and the
management groups of Henley Manufacturing and the Pullman Company when they
were taken private. Mr. Cypres is a retired member of the Board of Trustees
and a former faculty member of The Amos Tuck School of Business at Dartmouth
College.
DEREK S. STAMPER became President of Central Rents, Inc. on February
16, 1996. Mr. Stamper was previously Senior Vice President of Operations of
the Company. Mr. Stamper joined the Company on October 30, 1995. Prior to
joining the Company, Mr. Stamper was Vice President of Operations of Remco
America, Inc. where he was
38
<PAGE> 40
responsible for operating 119 corporate-owned store locations. Mr. Stamper
joined Remco America, Inc. in 1982 and held progressively more responsible
operational management positions.
BRIAN S. COHEN is Senior Vice President, General Counsel, Corporate
Secretary and a Director of Central Rents, Inc. Mr. Cohen holds the same
position at Banner Holdings, Inc. and each of its direct and indirect
subsidiaries, including Central Rents Holding, Inc. Mr. Cohen joined the
Banner group of companies at the end of September 1994. Prior to joining the
Company, Mr. Cohen was a corporate and securities lawyer with Strook & Strook &
Lavan, resident in its Los Angeles office. Mr. Cohen obtained his law degree
from the University of Southern California Law Center and obtained his B.S.
degree in Business Administration from the University of California, Berkeley.
Mr. Cohen left the Company on February 7, 1997.
ARMIDA ESPNOZA became Vice President, Human Resources on February 1,
1996. Ms. Espinoza was previously Corporate Director of Human Resources. Ms.
Espinoza joined the Company on February 20, 1995. Prior to joining the
Company, Ms. Espinoza was Vice President of Human Resources for Checks In The
Mail, Inc. She has also held operational and senior executive positions with
Rohr Industries, Westinghouse Electric, Inc. and May Department Stores. Ms.
Espinoza passed away on December 22, 1996.
A. KEITH WALL is the Vice President, Chief Financial Officer of Central
Rents, Inc. He joined the Company on June 17, 1996. Previously Mr. Wall was
employed as Vice President, Controller of Thorn Americas, Inc. the operator of
Rent-A-Center. Prior to that he was Vice President, Chief Financial Officer of
Remco America, Inc. a subsidiary of Thorn Americas, Inc. Before joining Remco
Mr. Wall held a variety of senior level management positions in several
different food service companies including Western Sizzlin, Inc. and Taco Bell
Corp.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the two other most highly compensated
executive officers for services in all capacities to the Company for the fiscal
year ended 1996 (the "Named Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
NAME(1) YEAR SALARY($) BONUS($)(2) OPTIONS(#)(4) COMPENSATION(5)
------- ---- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Gary M. Cypres(3) 1996 N/A N/A N/A -
1995 N/A N/A N/A -
1994 N/A N/A N/A -
Derek Stamper 1996 $140,000 N/A 11,000 $58,015
1995 22,504 N/A N/A
Brian S. Cohen 1996 $150,000 N/A N/A -
1995 150,000 N/A N/A -
1994 19,886 N/A 4,000 -
</TABLE>
39
<PAGE> 41
(1) Principal position see Item 10 of this Form 10-K.
(2) Bonuses are based on Company performance. Mr. Stamper has been
granted a $50,000 advance against future bonuses as part of his
relocation package.
(3) Gary M. Cypres became Chairman and President of the Company on June 3,
1994. Mr. Cypres relinquished his title as President on January 4,
1995. Mr. Cypres did not receive any compensation from the Company
for the services he rendered as the Company's Chairman of the Board
and President. The Company and G. M. Cypres & Co. have entered into a
Consulting Agreement, pursuant to which a Management Fee is paid to G.
M. Cypres & Co. The fees and expenses payable under the Management
Fee cannot exceed $375,000 in any fiscal year. During 1996, 1995 and
1994, Management Fees charged by G. M. Cypres & Co. were $375,000,
$375,000 and $218,750, respectively.
(4) Such options were granted to certain key employees on December 1, 1994
under the Company's 1994 Stock Option Plan. See "Stock Options".
(5) The Named Officers received compensation in the form of personal
benefits including automobile allowances or Company cars, moving
expenses and premiums for disability insurance. None other than those
identified received more than $50,000 or 10% of their annual
compensation.
STOCK OPTIONS
The Company's 1994 Stock Option Plan (the "1994 Plan") was adopted by
the sole shareholder of the Company on December 1, 1994 and is intended to
advance the interests of the Company by encouraging stock ownership on the part
of key employees. The 1994 Plan provides for the issuance of both "incentive"
and "non-qualified" stock options to full-time salaried officers and employees.
All options are granted at an exercise price of not less than 100% of the fair
market value of the stock on the date of grant. Each option expires not later
than ten (10) years from the date the option was granted. Options are
exercisable in installments as provided in individual stock option agreements;
provided, however, that if an optionee fails to exercise his or her rights
under the options within the year such rights arise, the optionee may
accumulate them and exercise the same at any time thereafter during the term of
the option. The stock options granted pursuant to the 1994 Plan cannot exceed
15% of the fully diluted shares of Common Stock of the Company. The individual
stock option agreements provide that annual vesting is linked to the cash flow
and other financial criteria of the Company. The individual stock option
agreements also contain a provision permitting the Company to redeem the
optionee's stock options if the stock option agreements or the exercise of
options pursuant to the stock option agreements would impair the Company's
ability to file tax returns as part of a consolidated tax group. As of
December 31, 1996 the Company had options outstanding to purchase a total of
27,000 shares of its Common Stock under the 1994 Plan.
The following table furnishes certain information regarding stock
options granted in 1996 to the executive officers named in the Summary
Compensation Table:
40
<PAGE> 42
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------
PERCENT
NUMBER OF OF TOTAL
SECURITIES OPTIONS GRANT
UNDERLYING GRANTED TO EXERCISE DATE
OPTIONS EMPLOYEES PRICE EXPIRATION PRESENT
NAME GRANTED(#)(1) IN 1996 ($/SHARE)(2) DATE VALUE(3)
---- ------------- ---------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Derek S. Stamper 11,000 64.7% $37.45 3-25-06 -
Keith Wall 6,000 35.3% $37.45 6-16-06 -
</TABLE>
(1) Such options were granted under the Company's 1994 Stock Option Plan.
Such options vest as a percentage over five years subject to the
satisfaction of certain financial standards based on the financial
performance of the Company during the applicable year. Such options
are subject to early termination under certain circumstances relating
to termination of employment.
(2) The exercise price per share was predetermined in accordance with the
terms of the offering at $37.45 per share which management believes
approximates the fair market value of the price per share of common
stock.
(3) The Company has not performed this calculation because there is no
public market for the Company's common stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company hereby incorporates by reference pursuant to Rule 12(b)-23
of the Securities Exchange Act of 1934 the Registration Statement filed on July
11, 1994 on Form S-1 to register 12 7/8% Senior Notes due 2003 "Certain
Relationships and Related Transactions" p. 50- 52 of the prospectus contained
therein.
41
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules:
<TABLE>
<CAPTION>
(1) Financial Statements: PAGES
-----
<S> <C>
Central Rents, Inc.
Report of Independent Public Accountants 17
Balance Sheets as of December 31, 1996 and 1995 18
Statements of Operations For The Years Ended 19
December 31, 1996 and 1995 and period June 4, 1994
through December 31, 1994
Statements of Stockholders' Equity For The Years Ended 20
December 31, 1996 and 1995 and period June 4, 1994
through December 31, 1994
Statements of Cash Flows For The Years Ended December 21
31, 1996 and 1995 and period June 4, 1994 through
December 31, 1994
Notes to Financial Statements 22
</TABLE>
(2) Financial Statement Schedules:
No schedules are provided since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Company's
consolidated financial statements and notes thereto.
(b) The Company did not file any reports on Form 8-K during the last
quarter of its fiscal year ended December 31, 1996.
42
<PAGE> 44
(3) Exhibits
<TABLE>
<CAPTION> SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ------------
<S> <C>
3.1(a) Amended and Restated Certificate of Incorporation
of Central Rents, Inc.*
4.1 Purchase Agreement dated June 3, 1994*
4.2 Registration Rights Agreement dated June 3, 1994*
4.3 Indenture dated June 3, 1994*
4.4 Form of Series A Note (Included in Exhibit 4.3)*
4.5 Form of Series B Note (Included in Exhibit 4.3)*
4.6 Warrant Agreement dated June 3, 1994*
10.1 Tax Sharing Agreement*
10.2 Administrative Services Agreement*
10.3 Consulting Agreement*
10.4 Central Rents, Inc. Vehicle Lease Agreement**
10.5 Central Rents, Inc. 1994 Stock Option Plan**
10.6 Credit Agreement by and between Central Rents, Inc.
as Borrower and Wells Fargo Bank National Association,
as Bank, dated May 11, 1995.***
10.7 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. ****
11.1 Computation of Earnings Per Share
</TABLE>
* Incorporated by reference from the Company's Registration Statement
on Form S-1 (No. 33-81370)
** Incorporated by reference from the Company's Form 10-K for the fiscal
year ended December 31, 1994.
*** Incorporated by reference from the Company's Form 10-Q for the
quarterly period ended March 31, 1995.
**** Incorporated by reference from the Company's Form 10Q for the
quarterly period ended September 30, 1996.
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTRAL RENTS, INC.
<TABLE>
<S> <C> <C>
By /s/ Gary M. Cypres Chairman of the Board, March 28, 1997
------------------- Chief Executive Officer
Gary M. Cypres
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ Derek S. Stamper President March 28, 1997
--------------------
Derek S. Stamper
/s/ A. Keith Wall Vice President, March 28, 1997
----------------- Chief Financial Officer
A. Keith Wall
</TABLE>
44
<PAGE> 1
EXHIBIT 11.1
CENTRAL RENTS, INC.
COMPUTATION OF EARNING PER SHARE
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995 AND THE PERIOD JUNE 4, 1994 THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------ --------- ---------
<S> <C> <C> <C>
Net loss applicable to common shares $ (1,840) $ (9,155) $ (9,159)
========= ======== ========
Common shares outstanding at beginning of period 551,045 534,000 534,000
Issuance of common shares, weighted average - 7,985 -
Dilutive effect of exercise of options outstanding - - -
--------- -------- --------
Weighted average common shares outstanding 551,045 541,985 534,000
======= ======== ========
Net loss per common share $(3.34) $(16.89) $(17.15)
======== ======== ========
</TABLE>
45
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,808
<SECURITIES> 0
<RECEIVABLES> 4,219
<ALLOWANCES> 0
<INVENTORY> 34,381
<CURRENT-ASSETS> 0
<PP&E> 5,361
<DEPRECIATION> 2,834
<TOTAL-ASSETS> 72,463
<CURRENT-LIABILITIES> 0
<BONDS> 58,094
0
0
<COMMON> 6
<OTHER-SE> 2,790
<TOTAL-LIABILITY-AND-EQUITY> 72,463
<SALES> 0
<TOTAL-REVENUES> 108,777
<CGS> 3,852
<TOTAL-COSTS> 98,910
<OTHER-EXPENSES> 5,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,555
<INCOME-PRETAX> (2,880)
<INCOME-TAX> 1,040
<INCOME-CONTINUING> (1,840)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,840)
<EPS-PRIMARY> (3.34)
<EPS-DILUTED> (3.34)
</TABLE>
