<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, 1997.
[ ] 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)
DELAWARE 95-4476294
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 30, 1998, 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
175 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 30 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, Arizona and
Indiana having 20, 20 and 17 stores, respectively. The Company's remaining 75
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
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$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 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.
During the 1990's the rental-purchase industry has been consolidating.
The top ten operators account for approximately 45% of the industry at December
1997 compared to 38% a year ago. In the last four years more than 1,800 stores
have been purchased, merged or are awaiting previously announced combinations.
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. In 1995 only four of the top ten chains were publicly owned. As of
December 1997, six of the top ten companies were publicly owned with the three
largest accounting for over 31% of the industry. The following table identifies
the top ten chains.
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<TABLE>
<CAPTION>
RTO INDUSTRY'S LARGEST CHAINS Number Percentage
ESTIMATES AS OF DECEMBER, 1997 of of U.S.
Ownership Stores (1) Stores
--------- ---------- ------
<S> <C> <C> <C>
1. Rent-A-Center Public-ADRs(2) 1,469 18.4%
2. Renter's Choice Public (3) 766 9.6%
3. Aaron Rents Public (4) 282 3.5%
4. RTO, Inc. (Action TV) Private (6) 275 3.4%
5. Rent-Way, Inc. Public (5) 191 2.4%
6. CENTRAL RENTS, INC. PRIVATE 175 2.2%
7. Alrenco, Inc. Public (6) 165 2.1%
8. Champion RTO Private (5) 145 1.8%
9. Best Way Rental, Inc. Public 65 0.8%
10.Rainbow Rentals Private 62 0.8%
----- -----
Total 3,595 44.9%
===== =====
Total RTO Stores 8,000 100.0%
===== =====
</TABLE>
(1) Source: Publicly available information. Total industry store count
estimates range from 7,500 to 8,500 stores.
(2) Includes 63 franchised Rent-A-Center stores, 139 Remco Stores, and 103
U-Can Rent stores. Rent-A-Center is owned by THORN, plc.
(3) Includes 504 Company operated Renters Choice stores and 262 franchised
ColorTyme stores.
(4) Includes 181 Company operated and 101 franchised stores and includes the
recently completed acquisition of 40 RentMart stores. Excludes Aarons
Rents non rental-purchase stores.
(5) In January 1998, Rent-Way announced that it had completed the acquisition
of 50 stores from Ace T.V. Rentals. Rent-Way further announced that it
had signed a letter of intent to acquire the 145 store chain Champion
Rentals.
(6) On February 26, 1998, Alrenco, Inc. and RTO, Inc. announced the
completion of the merger of the two companies. The new company, which
will operate as Home Choice Lease or Own, will have a combined total of
440 stores.
The Company competes directly with other national and local
rental-purchase companies, and to a lesser extent with other discount retail
chains. Competition within the industry is based primarily on store location,
price, product selection and customer service. The Company's larger competitors
have significantly greater resources available to them than does the Company.
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STORE SYSTEM
At December 31, 1997, the Company operated 175 stores in 20 states
nationwide. The following table illustrates the number of stores in each state.
STORE LOCATIONS
<TABLE>
<S> <C> <C> <C>
Alaska 1 Louisiana 4
Arizona 20 Nevada 8
Arkansas 1 New Mexico 1
California 43 Ohio 20
Florida 2 Oklahoma 9
Georgia 2 South Carolina 5
Illinois 6 Tennessee 10
Indiana 17 Texas 7
Iowa 1 Virginia 4
Kentucky 7 West Virginia 7
---
175
===
</TABLE>
During the past three years, the number of stores operated dropped from
175 at the beginning of 1995 to a low of 165 at the end of 1996, and climbed to
175 by the end of 1997. The stores opened during this period reflect new store
openings and store acquisitions. Nineteen stores were merged, closed or sold
during the past three years.
<TABLE>
<CAPTION>
Store Openings and Closings
---------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Stores Open at Beginning of Year 175 167 165
Stores Opened and Acquired 5 1 13
Stores Merged, Closed or Sold (13) (3) (3)
---- ---- ----
Stores Open at End of Year 167 165 175
Net Increase (Decrease) in Stores (8) (2) 10
</TABLE>
The Company leases all of its facilities. Most of the leases provide
for three to five year terms with options to renew. The stores average
approximately 3,100 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 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 of 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",
"Central Options to Own" and "Rentronics." In California, Arizona and northern
Nevada the Company operates under the name "Central Rental and Purchase."
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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 45% of the Company's revenue,
whereas appliances, furniture and accessories account for 23%, 25% and 7%,
respectively. The Company's stores maintain 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 1997 and 1996. 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 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, washers, dryers,
microwave ovens, freezers and ranges. Washers and dryers remain the most popular
products in this 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 1997 and 1996 the Company was
able to expand some of its stores and therefore increase the amount of square
footage allocated to furniture vignettes. This expansion has helped to increase
revenues from furniture as a percentage of total revenues from approximately 24%
in 1996 to approximately 25% in 1997.
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 30
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 30 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 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
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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.
GENERAL ECONOMIC RISK
The economic risks associated with the Company's business run counter
to the general economy. In a period of mild slowdown or recession the Company
generally experiences stronger demand for its products and services because a
greater number of potential customers are without access to traditional credit
sources. Conversely, in a period of economic growth or expansion, the Company
tends to see a reduction in the demand for its products and services. A
sustained period of strong economic growth or a severe depression could
materially affect the Company's financial condition and results of operations.
DEPENDENCE ON CALIFORNIA MARKET
Approximately 25% of the Company's stores are located, and
approximately 26% of revenues are generated in California. Therefore, the
Company's performance depends upon economic conditions in California, and may be
adversely affected by social factors or natural disasters in California. A
period of sustained economic growth or a severe depression in the California
economy could have a material adverse effect on the Company's results of
operations and financial condition.
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ADVERTISING
A significant portion of the Company's advertising expenditures have
been 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 expenditures,
followed to a lesser degree by newspaper and point-of-sale merchandising. During
1997, 1996 and 1995 the Company's advertising expenditures totaled $6,668,000,
$5,822,000 and $5,394,000 or 6.4%, 5.4% and 4.6% of revenue, respectively.
EMPLOYEES
The Company currently has 580 hourly employees and 230 salaried
employees and provides its employees with a benefit package believed to be
comparable to what other companies in the industry provide their employees.
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
FEDERAL REGULATION
Although certain proposed federal regulations are under consideration,
no federal legislation has been enacted regulating rental-purchase transactions.
As of the date hereof, two bills have been introduced in Congress that would
regulate the rental-purchase industry. One of the bills is supported by the
Association of Progressive Rental Organizations ("APRO") and mandates certain
disclosures to customers similar to those required by most state legislation.
The Company does not believe that this bill, if enacted, would have a material
adverse effect upon its operations.
The other bill includes certain credit sale requirements and would
subject rental-purchase transactions to interest rate, finance charge and fee
limitations, as well as the Federal Truth in Lending Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Fair Credit
Reporting Act. This bill would also require the Company to make certain
disclosures to customers about the terms of the rental-purchase transaction. The
Company believes that in the event federal legislation is enacted regulating
rental-purchase transactions as credit sales, the Company would be able to adapt
to the new laws by repositioning itself as a rent-to-rent business. However,
there can be no assurance that the proposed legislation, if enacted, would not
have a material adverse effect on the business of the Company.
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STATE REGULATION
Various states have regulated the industry. APRO and its member
businesses have worked to see laws implemented in 45 states that regulate the
rental-purchase industry. These laws require the companies to provide certain
disclosures to customers regarding the terms of the rental-purchase transaction.
Only Alaska, Montana, New Jersey, North Carolina and Wisconsin have not passed
positive rental-purchase legislation. Of the states without rental-purchase
legislation, the Company only operates in Alaska. Management believes that the
operations of the Company are in material compliance with applicable state
rental-purchase laws.
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 used the income forecasting method of depreciation for tax
accounting, and management believes that this method has been widely used
throughout the rental-purchase industry prior to the publication of this revenue
ruling. The Company received consent from the IRS and converted to the MACRS
method of depreciation for tax accounting purposes effective January 1, 1996.
Management believes it is more likely than not that it will realize the
net deferred tax assets recorded on the accompanying financial statements and
accordingly no valuation allowance has been provided. This conclusion is based
on the expectation of future taxable income relating to the potential sale or
disposition of all or a part of the assets of the Company some time in the
future, or through taking the Company public providing for additional capital
for growth and expansion. If the Company is unable to generate sufficient
taxable income through operating results or dispositions and alternative
strategies are not viable, then the establishment of a valuation allowance may
be necessary.
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 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company was involved in certain legal proceedings during 1997 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.
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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, Except Per Share Data, 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>
(Unaudited)
RTO & WBC
Predecessor
Company
(Unaudited) Historical
Pro Forma Combined
Actual Actual Actual --------- --------
1997 1996 1995(3) 1994 1993
---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues $ 103.5 $ 108.8 $ 118.0 $ 121.3 $ 120.3
Store operating profit 15.6 20.6 25.4 27.5 25.5
General and administrative expenses 10.2 10.8 11.2 12.7 12.9
Income before interest, taxes and
amortization of intangibles 5.4 9.9 14.2 14.8 12.6
Amortization of intangibles 1.5 5.2 19.6 27.8 0.7
Net income (loss) (2.9) (1.8) (9.2) (13.2) 6.7
Basic net loss per share $ (4.79) $ (3.34) $(16.89) $(24.64) --
Diluted net loss per share (4.79) (3.34) (16.89) (24.64)
Weighted average shares outstanding 607 551 542 534 --
Number of stores at year end or
period end 175 165 167 175 176
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 basic net loss per share $(27.24)
Unaudited Pro forma diluted net loss per share $(27.24)
Unaudited Pro forma weighted average shares
outstanding 534
Balance Sheet Data(2):
Cash and cash equivalents $ 5.7 $ 12.8 $ 14.6 $ 15.8 $ 1.6
Rental merchandise, net 36.7 34.4 34.6 34.1 31.1
Intangibles, net 6.6 8.1 13.2 28.4 10.6
Total assets 67.8 72.5 79.9 89.0 57.4
Total long-term debt 58.4 58.1 57.8 57.5 22.6
Redeemable preferred stock -- -- -- -- 12.1
Stockholders' equity (deficit) (2.1) 2.8 4.6 13.0 6.6
</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.
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(2) Balance sheet data at December 31, 1997, 1996 and 1995 represents the
historical audited financial data for Central Rents, Inc., see
Financial Statements and related notes. Balance sheet data also
represents unaudited proforma financial data at December 31, 1994, and
unaudited historical combined financial data at December 31, 1993.
(3) 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Financial Statements of Central Rents, Inc., and related notes.
RESULTS OF OPERATIONS
This discussion and analysis compares the results of operations of the
Company during the years ended 1997 with 1996 and 1996 with 1995.
The revenues; store operating profit; general and administrative
expenses; income before interest, taxes and amortization of intangibles;
interest, taxes, and amortization of intangibles; net loss; and number of stores
of the Company were as follows for the periods indicated below. (Dollars in
Millions):
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $103.5 100.0% $108.8 100.0% $118.0 100.0%
Store operating profit 15.6 15.0 20.6 19.0 25.4 21.6
Field and corporate
general and
administrative expenses 10.2 9.9 10.8 9.9 11.2 9.5
Income before interest,
taxes and amortization
of intangibles 5.4 5.2 9.9 9.1 14.2 12.0
Interest, taxes and
amortization of
intangibles 8.3 8.0 11.7 10.8 23.4 19.8
Net loss (2.9) (2.8) (1.8) (1.7) (9.2) (7.8)
Number of stores at
year end 175 165 167
</TABLE>
12
<PAGE> 13
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1996.
Revenues. Total revenues decreased $5.3 million or 4.9% to $103.5
million for the year ended December 31, 1997 from $108.8 million for 1996. The
decrease in revenues is primarily the result of a decrease in units on rent
combined with a decrease in the average revenue per unit. The decrease in units
on rent is a result of increased competition largely in the eastern and central
states which was partially offset by a gain in units on rent in the western
states. A value oriented third quarter promotion slowed the deterioration of
units on rent, however, it resulted in a lower average revenue per unit. New
stores opened during the year contributed $0.6 million of revenues.
Store Operating Profit. Store operating profit decreased $5.0 million
or 24.3% to $15.6 million for the year ended December 31, 1997 compared to $20.6
million for the year ended December 31, 1996. The decrease in store operating
profit was primarily the result of a decrease in gross profit of approximately
$3.7 million as a result of lower revenues for the year ended December 31, 1997
as compared to 1996 combined with an increase of $1.3 million in store operating
expenses. Total store operating expenses as a percentage of revenue increased to
54.3% of revenues for the year ended December 31, 1997 from 50.5% for 1996. The
increase in store operating expenses was primarily due to opening new stores and
higher spending on electronic media such as television and radio. Store
operating profit as a percentage of revenue decreased to 15.0% of revenues for
the year ended December 31, 1997 from 19.0% for 1996. Operating expenses related
to stores which opened during 1997 were $1.4 million, partially offset by gross
profit of $0.4 million, resulting in a net negative impact on store operating
profit of approximately $1.0 million. New stores incur operating losses prior to
and generally for one to two years after opening.
Comparable Stores. Comparable store revenues decreased $4.8 million or
4.6%, to $100.2 million for the year ended December 31, 1997 from $105.0 million
in 1996. The decrease in comparable store revenues was primarily the result of
the decline in units on rent combined with a lower average rent per unit.
Comparable store operating profit decreased $4.0 million or 19.5% to $16.5
million for the year ended December 31, 1997 compared to $20.5 million for the
year ended December 31, 1996. The decrease in comparable store operating profit
was primarily the result of a decrease in same store gross profit.
Field and Corporate General and Administrative Expenses. Field and
corporate general and administrative expenses decreased $0.6 million or 5.6%, to
$10.2 million for the year ended December 31, 1997 from $10.8 million in 1996.
Field and corporate general and administrative expenses for the year ended
December 31, 1997 were 9.9% of revenue compared to 9.9% for 1996. The dollar
savings were primarily due to reductions in headcount offset by severance and
other one-time charges of approximately $0.4 million.
Income Before Interest, Taxes and Amortization of Intangibles. Income
before interest, taxes and amortization of intangibles decreased $4.5 million or
45.5%, to $5.4 million for the year ended December 31, 1997 from $9.9 million
for 1996. The decrease was primarily the result of lower store operating profit
offset by reductions in field and corporate general and administrative expenses.
Income before interest, taxes and amortization of intangibles as a percentage of
revenue decreased to 5.2% for the year ended December 31, 1997 from 9.1% for
1996.
13
<PAGE> 14
Interest, Taxes, and Amortization of Intangibles. Interest, taxes and
amortization of intangibles decreased by $3.4 million or 29.1% to $8.3 million
for the year ended December 31, 1997 from $11.7 million in 1996. The decrease
was primarily the result of the lower amortization expense in 1997 due to
intangible assets that were fully amortized by the middle of 1997. Interest,
taxes, and amortization of intangibles for the year ended December 31, 1997 were
8.0% as a percentage of revenue compared to 10.8% for 1996.
Net Loss. Net loss increased $1.1 million or 61.1% to $2.9 million for
the year ended December 31, 1997 from $1.8 million for 1996. Net loss as a
percentage of revenue increased to 2.8% from 1.7%.
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 was a result of weakness in
the consumer electronics and appliance marketplace coupled with increased
competition, primarily in its operations in the eastern and central stores.
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
14
<PAGE> 15
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 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.
Interest, Taxes, and Amortization of Intangibles. Interest, taxes, and
amortization of intangibles decreased by $11.7 million or 50.0% to $11.7 million
for the year ended December 31, 1996 from $23.4 million in 1995. The decrease
was primarily the result of the lower amortization expense in 1996 due to the
reduced rate of amortization. Interest, taxes, and amortization of intangibles
for the year ended December 31, 1996 were 10.8% as a percentage of revenue
compared to 19.8% for 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
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.
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
$37.5 million, $37.2 million and $43.6 million during the years ended December
31, 1997, 1996 and 1995, respectively.
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, 1997, 1996 and 1995 totaled $2.9 million, $1.0 million and
$2.1 million, respectively.
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 and Warrants to purchase
15
<PAGE> 16
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
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. 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 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.
On May 10, 1997, the Company canceled a revolving line of credit
agreement with Wells Fargo Bank (the "Line of Credit") which was entered into on
May 9, 1995. The Line of Credit was subject to an annual commitment fee payable
to the bank on a quarterly basis of 0.5% of the unused borrowings.
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 believes that the Company has adequate resources to
replenish its rental merchandise and to fund other capital expenditure
requirements in 1998. Management expects to conserve the Company's cash
resources for the foreseeable future by scaling back new store development.
Instead, limited cash resources will be used to remodel existing stores. 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 does not
have any mandatory debt retirements until the year 2003.
16
<PAGE> 17
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.
SEASONALITY
The Company's business is slightly seasonal, with an increase in
rentals during the Christmas season.
EARNINGS PER SHARE
Earnings per common share is computed using the weighted average number
of shares outstanding and dilutive common stock equivalents (options and
warrants). No common stock equivalents were used in the computation as the
impact would be anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of Enterprise and Related Information" ("SFAS 131") in fiscal year
1997. The Company adopted SFAS 128 in 1997 and will adopt SFAS 130 and 131 in
1998. The Company does not expect that the adoption of SFAS 130 and SFAS 131
will have a material effect on its financial position or its results of
operations for the year ended December 31, 1998.
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.
YEAR 2000
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 compliance. Based on present
information, the Company believes that it will be able to achieve such Year 2000
compliance through a combination or modification of some existing programs and
systems, or the replacement of other programs and systems with new programs and
systems that are already Year 2000 compliant. The total future cost of achieving
Year 2000 compliance is estimated to be less than $300,000.
17
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Central Rents, Inc.
Report of Independent Public Accountants 19
Balance Sheets as of December 31, 1997 and 1996 20
Statements of Operations For The Years Ended December 31, 1997, 1996 and 1995 21
Statements of Stockholders' Equity (Deficit) For The Years Ended December 31,
1997, 1996 and 1995 22
Statements of Cash Flows For The Years Ended December 31, 1997, 1996 and 1995 23
Notes to Financial Statements 24
</TABLE>
18
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
Central Rents, Inc.:
We have audited the accompanying balance sheets of Central Rents, Inc.
(a Delaware corporation) as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 1997, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Central Rents, Inc.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years ended December 31, 1997, 1996 and 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 19, 1998
19
<PAGE> 20
CENTRAL RENTS, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 5,739 $ 12,808
RECEIVABLES AND PREPAID EXPENSES 2,396 2,348
DUE FROM RELATED PARTIES 115 --
INCOME TAX RECEIVABLE - RELATED PARTY -- 1,871
RENTAL MERCHANDISE, at cost 68,205 66,289
Less - Accumulated depreciation (31,461) (31,908)
-------- --------
36,744 34,381
PROPERTY AND EQUIPMENT, at cost
Leasehold improvements 4,905 3,355
Furniture and equipment 2,981 2,037
Vehicles 73 134
-------- --------
7,959 5,526
Less - Accumulated depreciation (4,127) (2,834)
-------- --------
3,832 2,692
DEFERRED FINANCING COSTS, net 1,603 1,957
NONCOMPETE AGREEMENT, net -- 1,275
EXCESS OF COST OVER NET ASSETS ACQUIRED, net 6,611 6,861
DEFERRED INCOME TAXES 10,595 8,156
OTHER ASSETS 125 114
-------- --------
Total assets $ 67,760 $ 72,463
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
ACCOUNTS PAYABLE $ 4,688 $ 5,332
ACCRUED EXPENSES 6,058 5,682
DUE TO RELATED PARTIES -- 237
INCOME TAX PAYABLE - RELATED PARTY 434 --
ACCRUED INTEREST 322 322
LONG-TERM NOTES 58,368 58,094
-------- --------
Total liabilities 69,870 69,667
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value,
100 shares authorized; no shares issued -- --
Common stock, $.01 par value, 2,000,000 shares
authorized; 617,045 and 551,045 shares issued
and outstanding in 1997 and 1996, respectively 7 6
Additional paid-in capital 22,944 22,944
Retained deficit (25,061) (20,154)
-------- --------
Total stockholders' equity (deficit) (2,110) 2,796
-------- --------
Total liabilities and stockholders'
equity (deficit) $ 67,760 $ 72,463
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 21
CENTRAL RENTS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Rental revenues $ 98,582 $ 103,382 $ 112,243
Sales of merchandise 4,847 5,243 5,736
Other revenue 114 152 65
--------- --------- ---------
103,543 108,777 118,044
--------- --------- ---------
COSTS AND EXPENSES:
Selling, general and administrative 62,544 61,475 61,991
Cost of merchandise sold 3,520 3,852 3,658
Depreciation and amortization
Rental merchandise 30,407 32,045 36,694
Property and equipment 1,711 1,538 1,541
--------- --------- ---------
98,182 98,910 103,884
--------- --------- ---------
INCOME BEFORE INTEREST, TAXES AND
AMORTIZATION OF INTANGIBLES 5,361 9,867 14,160
AMORTIZATION OF INTANGIBLES 1,545 5,192 19,601
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 3,816 4,675 (5,441)
INTEREST EXPENSE, net (7,849) (7,555) (7,464)
--------- --------- ---------
LOSS BEFORE INCOME TAX BENEFIT (4,033) (2,880) (12,905)
INCOME TAX BENEFIT 1,126 1,040 3,750
--------- --------- ---------
NET LOSS $ (2,907) $ (1,840) $ (9,155)
========= ========= =========
Per share data:
Basic net loss per common share $ (4.79) $ (3.34) $ (16.89)
========= ========= =========
Diluted net loss per common share $ (4.79) $ (3.34) $ (16.89)
========= ========= =========
Weighted average common shares outstanding 606,557 551,045 541,985
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
CENTRAL RENTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED
PAID-IN EARNINGS
SHARES PAR VALUE CAPITAL (DEFICIT) TOTAL
------ --------- ------- --------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 534,000 $ 5 $ 22,195 $ (9,159) $ 13,041
Issuance of common stock 17,045 1 749 -- 750
Net loss for the year ended December 31, 1995 -- -- -- (9,155) (9,155)
-------- ----- -------- -------- --------
BALANCE, December 31, 1995 551,045 6 22,944 (18,314) 4,636
Net loss for the year ended December 31, 1996 -- -- -- (1,840) (1,840)
-------- ----- -------- -------- --------
BALANCE, December 31, 1996 551,045 6 22,944 (20,154) $ 2,796
-------- ----- -------- -------- --------
Dividends paid -- -- (2,000) (2,000)
Exercise of stock warrants 66,000 1 -- -- 1
Net loss for the year ended December 31, 1997 -- -- -- (2,907) (2,907)
-------- ----- -------- -------- --------
BALANCE, December 31, 1997 617,045 $ 7 $ 22,944 $(25,061) $ (2,110)
======== ===== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 23
CENTRAL RENTS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,907) $ (1,840) $ (9,155)
Adjustments to reconcile net loss to net cash (used)
provided by operating activities:
Depreciation of rental merchandise 30,407 32,045 36,694
Depreciation of property and equipment 1,711 1,538 1,541
Deferred income tax benefit (1,286) (26) (3,950)
Amortization of intangibles 1,545 5,192 19,601
Amortization of debt discount 274 274 274
Amortization of deferred financing costs 163 330 316
Changes in operating assets and liabilities, net of the effect of
businesses acquired:
Decrease (increase) in receivables, prepaid expenses
and other assets (59) (354) 742
Increase in due from related parties (115) -- --
Decrease (increase) in income tax receivable -
related party 1,871 (821) (1,050)
Increase in rental merchandise, (purchases
and retirement), net (32,865) (31,561) (41,095)
Decrease in deferred financing costs 191 -- --
Increase (decrease) in accounts payable (644) (4,891) 1,677
Increase (decrease) in accrued expenses 377 (494) (856)
Decrease in due to related parties (237) (523) (136)
Decrease in income taxes payable - related party (715) -- --
Increase in income taxes payable -- 419 --
-------- -------- --------
Net cash (used) provided by operating activities (2,289) (712) 4,603
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from store sales 95 -- 515
Purchase of property and equipment (2,851) (1,032) (2,114)
Purchase of rental agreements and stores (24) -- (1,110)
Purchase of RTO and WBC, net of cash acquired -- (3,669)
-------- -------- --------
Net cash (used) provided by investing activities (2,780) (1,032) (6,378)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,000) -- --
Proceeds from issuance of common stock -- -- 750
Debt issuance costs -- -- (176)
-------- -------- --------
Net cash (used) provided by financing activities (2,000) -- 574
-------- -------- --------
Net decrease in cash and cash equivalents (7,069) (1,744) (1,201)
Cash and cash equivalents, beginning of year 12,808 14,552 15,753
-------- -------- --------
Cash and cash equivalents, end of year $ 5,739 $ 12,808 $ 14,552
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 160 $ 1,190 $ 1,271
Interest $ 7,784 $ 7,852 $ 7,725
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 24
CENTRAL RENTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. HISTORY AND BUSINESS ACTIVITY:
Central Rents, Inc.(the "Company") was incorporated in the State of
Delaware on March 17, 1994 to acquire RTO Enterprises, Inc. ("RTO") and WBC
Holdings, Inc. ("WBC"). The Company is a wholly-owned subsidiary of Central
Rents Holding, Inc. which is a wholly-owned subsidiary of Banner Holdings, Inc.
("Banner"), its ultimate parent company. All activity of the Company prior to
the acquisition of RTO and WBC ("Acquisition") related to its formation,
including an infusion of $20,000,000 of cash equity in exchange for the issuance
of 534,000 shares of common stock. On April 28, 1995, RTO and WBC were merged
into the Company pursuant to a statutory merger effected in accordance with the
provisions of the Delaware General Corporation Laws.
The Company's predecessors have been engaged in the rental-purchase
industry since 1968. As of December 31, 1997, the Company operated 175
rental-purchase stores in 20 states throughout the United States. The stores
rent a broad range of consumer products, including electronics, major
appliances, jewelry and furniture.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Rental Merchandise, Depreciation and Revenue Recognition
Rental merchandise is rented by customers through rental-purchase
agreements providing for weekly or monthly payments. The agreements
automatically renew with each payment. Rent is collected in advance at the
beginning of each rental period, is nonrefundable and is recognized as revenue
when collected. Ownership of the rental items passes to the customer when the
customer makes the requisite number of rental payments stipulated by the
agreement, generally 12 to 30 monthly payments. In the accompanying statements
of operations, sales of merchandise primarily include cash received for
outright sales of previously rented merchandise and final rental payments
immediately preceding the passage of title to the respective customers. Cost of
merchandise sold represents the undepreciated cost of merchandise on the date of
sale.
Rental merchandise is recorded at cost. The Company has determined that the
estimated useful lives of its rental merchandise averaged approximately 22
months and such period is used for depreciation purposes.
Property and Equipment
Property and equipment, including leasehold improvements, are recorded at
cost. Additions, improvements and renewals which significantly add to the asset
value or extend the life of the asset are capitalized. Expenditures for
maintenance and repairs are expensed as such costs are incurred.
The Company uses the straight-line method for recording depreciation. The
estimated useful lives used in computing depreciation for financial reporting
purposes are as follows:
<TABLE>
<S> <C>
Leasehold improvements Life of lease
Furniture and equipment 3-7 years
Vehicles 3 years
</TABLE>
24
<PAGE> 25
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, 1997 and 1996, accumulated amortization amounted to $980,000 and $817,000,
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, general and administrative expenses were $6,668,000 in 1997, $5,822,000
in 1996 and $5,394,000 in 1995.
Noncompete Agreement
In connection with the Acquisition, one of the sellers entered into a
noncompete agreement with the Company. The noncompete agreement was amortized
over its contractual life of 3 years. Amortization of the noncompete agreement
was 50% in year one, 35% in year two and 15% in year three. As of December 31,
1997 and 1996, accumulated amortization amounted to $20,000,000 and $18,725,000,
respectively. The agreement was fully amortized at June 30, 1997.
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 price is subject to
change upon the resolution of certain issues with the seller. The Company
periodically reviews the excess of cost over net assets acquired to assess
recoverability. Impairment would be recognized in operating results if a
permanent diminution in value were to occur. At year end, 1995, the Company
specifically reviewed the excess of cost over net assets acquired related to its
California operations. The Company undertook such a review in light of much
lower operating results experienced by these operations, due in a large part to
the new California legislation regulating rental-purchase transactions which
became effective on January 1, 1995 (the "California Legislation"). The
California Legislation limited the Company's ability to collect certain types of
fees. Based upon the then current economic environment and future outlook, the
Company determined that approximately $3.0 million of excess of cost over net
assets acquired related to its California operations had been impaired and
therefore such amount was charged-off as of December 31, 1995. As of December
31, 1997 and 1996, accumulated amortization amounted to $3,960,000 and
$3,712,000, respectively.
Cash and Cash Equivalents
The Company invests excess cash from operations in short-term investment
grade commercial paper and repurchase agreements. The Company considers all
highly liquid debt instruments purchased with an original maturity date of three
months or less to be cash equivalents.
Concentration of Credit Risk
The Company places its temporary cash and cash investments with high
quality financial institutions. Management monitors the financial
creditworthiness of these financial institutions. At times, such investments may
be in excess of insured limits.
25
<PAGE> 26
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, 1997
and 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.
The Company and Banner have entered into a tax sharing agreement which
provides, among other things, for the sharing of federal consolidated and state
combined income tax liabilities and refunds. Under the tax sharing agreement,
payments and refunds will be calculated by the Company on a separate company
basis. The Company will repay Banner $434,000 due to limitations that apply to
loss carryovers on a separate company basis due to a change in the method used
in allocating the tax liabilities in the prior years. The Company recorded an
income tax benefit in 1997, 1996 and 1995 of $1,126,000, $1,040,000 and
$3,750,000, respectively, and income taxes payable to Banner of $434,000 at
December 31, 1997 and income tax receivable from Banner of $1,871,000 at
December 31, 1996.
Earnings Per Share
Earnings per common share is computed using the weighted average number of
shares outstanding and dilutive common stock equivalents (options and warrants).
No common stock equivalents were used in the computation as the impact would be
anti-dilutive.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of Enterprise and Related Information" ("SFAS 131") in fiscal year
1997. The Company adopted SFAS 128 in 1997 and will adopt SFAS 130 and 131 in
1998. The Company does not expect that the adoption of SFAS 130 and SFAS 131
will have a material effect on its financial position or its results of
operations for the year ended December 31, 1998.
As described above, the Company reports earnings per share according to the
provisions of SFAS 128. The following table presents a reconciliation of basic
earnings per share and diluted earnings per share. The denominator of diluted
earnings per share includes the effect of dilutive common stock equivalents.
There were no potentially dilutive securities that were outstanding at December
31, 1997.
26
<PAGE> 27
<TABLE>
<CAPTION>
(Dollars in thousands except share and per share data) Basic Earnings Diluted Earnings
Per Share Per Share
--------- ---------
<S> <C> <C>
For the Year Ended December 31, 1997
Numerator - net loss $ (2,907) $ (2,907)
Denominator - weighted average shares outstanding 606,557 606,557
Loss per share $ (4.79) $ (4.79)
For the Year Ended December 31, 1996
Numerator - net loss $ (1,840) $ (1,840)
Denominator - weighted average shares outstanding 551,045 551,045
Loss per share $ (3.34) $ (3.34)
For the Year Ended December 31, 1995
Numerator - net loss $ (9,155) $ (9,155)
Denominator - weighted average shares outstanding 541,985 541,985
Loss per share $ (16.89) $ (16.89)
</TABLE>
Balance Sheet Presentation
The Company's balance sheet is presented on a non-classified basis
consistent with industry practice.
Use of Estimates
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts, generally not by material amounts. Management
believes that these estimates and assumptions provide a reasonable basis for the
fair presentation of the Company's financial position and results of operations.
Included in the accompanying balance sheet is a deferred tax asset of $10.6
million as of December 31, 1997. Management believes it is more likely than not
that it will realize the net deferred tax assets. The Company expects to realize
this recorded deferred tax asset through the potential disposition of all or a
part of the assets of the Company some time in the future, or through taking the
Company public providing for additional capital for growth and expansion.
Reclassifications
Certain reclassifications have been made to previously reported amounts to
conform to the current year presentation.
3. LONG-TERM NOTES:
The Company funded the purchase price for the stock and notes of RTO and
WBC from the proceeds of an offering of Units (the "Offering"), consisting of
$60,000,000 principal amount of Senior Notes and Warrants to purchase 60,000
shares of common stock of the Company. The long-term notes were issued at a
price equal to 96.3% of the aggregate principal amount. Of the total proceeds,
$57,389,000 was allocated to Notes and $2,200,000 was allocated to the issuance
of Warrants. On or before February 28, 1997, all Warrant holders exercised their
option to convert the Warrants into the Company's common stock.
27
<PAGE> 28
On September 28, 1994, the Company's Registration Statement under the
Securities Act relating to the issuance by the Company of $60,000,000 principal
amount of 12 7/8% Series B Senior Notes due 2003 (the "New Notes") in exchange
for the outstanding Notes (the "Exchange Offer") was declared effective by the
Securities and Exchange Commission. Upon its effectiveness, the Company
commenced the Exchange Offer, pursuant to which all of the outstanding Notes
were tendered and exchanged on or prior to October 28, 1994. The terms of the
New Notes and the Notes are identical in all material respects, except for
certain transfer restrictions and registration rights relating to the Notes.
The New Notes bear interest at the rate of 12 7/8% per annum payable
semi-annually on December 15 and June 15, commencing December 15, 1994. On or
after June 15, 1999, the New Notes will be redeemable at the option of the
Company, in whole or in part, at the redemption prices as defined plus accrued
and unpaid interest to the date of redemption.
In connection with the issuance of the Notes, the Company executed an
indenture dated June 3, 1994 (the "Indenture"). The Indenture contains certain
covenants that, among other things, limit the ability of the Company and its
subsidiaries to incur additional Indebtedness (as defined), pay dividends in
excess of $2.0 million or make certain other Restricted Payments (as defined),
enter into certain transactions with affiliates, sell assets or enter into
certain mergers and consolidations. In addition, under certain circumstances,
the Company is required to offer to purchase the long-term notes at a price
equal to 100% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of purchase, with proceeds from certain asset sales (as
defined). Interest expense on the New Notes amounted to $7,725,000 in 1997, 1996
and 1995.
On May 10, 1997, the Company canceled a revolving line of credit agreement
with Wells Fargo Bank (the "Line of Credit") which was entered into on May 9,
1995. The Line of Credit was subject to an annual commitment fee payable to the
bank on a quarterly basis of 0.5% of the unused borrowings.
4. COMMITMENTS AND CONTINGENCIES:
Leases
The Company has various operating leases, which generally have an initial
lease term of 18 to 60 months. The operating leases are for office facilities,
store locations, rental of vehicles, office equipment and various other assets.
Generally leases for store locations contain renewal options for periods up to
six years. Rental expenses related to these leases during 1997, 1996 and 1995
amounted to $7,545,000, $6,755,000 and $7,667,000, 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, Vehicles Real Estate Total
-------- ----------- -----
<S> <C> <C> <C>
1998 $ 2,236,000 $ 5,911,000 $ 8,147,000
1999 1,604,000 3,969,000 5,573,000
2000 1,208,000 3,047,000 4,255,000
2001 313,000 1,595,000 1,908,000
2002 1,000 1,046,000 1,047,000
Thereafter -- 360,000 360,000
----------- ----------- -----------
$ 5,362,000 $15,928,000 $21,290,000
=========== =========== ===========
</TABLE>
28
<PAGE> 29
Litigation
The Company is a party to legal proceedings arising in the normal course of
business. Based on consultation with legal counsel and on the facts currently
available, it is management's opinion that the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
Letters of Credit
The Company utilizes standby letters of credit to satisfy property and
vehicle insurance security deposit requirements. These letters of credit are
irrevocable and have one-year renewable terms. Outstanding standby letters of
credit as of December 31, 1997 and 1996 were $862,000 and $200,000,
respectively.
5. INCOME TAXES:
The benefit for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ -- $(1,061,000) $ 36,000
State and local 160,000 47,000 164,000
----------- ----------- -----------
160,000 (1,014,000) 200,000
----------- ----------- -----------
Deferred:
Federal (660,000) (20,000) (3,150,000)
State and local (626,000) (6,000) (800,000)
----------- ----------- -----------
(1,286,000) (26,000) (3,950,000)
----------- ----------- -----------
Total tax benefit $(1,126,000) $(1,040,000) $(3,750,000)
=========== =========== ===========
</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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected provision (benefit) for federal income taxes (35.0)% (35.0)% (35.0)%
State taxes - net of federal deduction (7.8) (5.2) (.1)
Nondeductible and other items 14.9 4.1 6.1
------ ------ ------
(27.9)% (36.1)% (29.0)%
====== ====== ======
</TABLE>
The primary components of temporary differences which give rise to deferred
taxes at December 31, 1997 and 1996 are:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred Tax Assets:
Depreciation of fixed assets $ 1,082,000 $ 1,331,000
Reserves and other accrued expenses 1,542,000 1,585,000
Noncompete agreement amortization 6,411,000 6,200,000
Operating loss carry forward 3,901,000 --
Other 573,000 304,000
------------ ------------
Total deferred tax assets 13,509,000 9,420,000
Deferred Tax Liabilities:
Rental merchandise (648,000) (601,000)
State income tax (755,000) (474,000)
Other (1,511,000) (189,000)
------------ ------------
Net deferred tax assets $ 10,595,000 $ 8,156,000
============ ============
</TABLE>
29
<PAGE> 30
The Internal Revenue Service ("IRS") has examined certain of the Company's
former subsidiaries. In connection with the Acquisition, the sellers entered
into an agreement to indemnify the Company for income tax liabilities of RTO and
WBC attributable to pre-acquisition tax periods. The results of these audits did
not have a material adverse effect on the financial position of the Company.
The IRS published a revenue ruling in July 1995 providing that the Modified
Accelerated Cost Recovery System ("MACRS") is the appropriate depreciation
method for rental purchase merchandise. The Company has used the income forecast
method of depreciation for tax accounting, and management believes that this
method has been widely used throughout the rental-purchase industry prior to the
publication of this revenue ruling. The Company received permission from the IRS
and converted to the MACRS method of depreciation for tax accounting purposes
only, effective January 1, 1996. This change in tax accounting method will
require the Company to increase taxable income in future years in order to
recapture depreciation deductions previously claimed on the Company's tax
returns taken under the income forecast method of depreciation in advance of the
time at which such deductions may have been allowable under the MACRS
depreciation method. Management believes that the adoption of MACRS will not
significantly impact the Company's financial position and results of operations.
The Company provides taxes on a separate company basis pursuant to its tax
sharing agreement. Management believes it is more likely than not that it will
realize the net deferred tax assets and accordingly no valuation allowance has
been provided. This conclusion is based on the expectation of future taxable
income relating to the potential disposition of all or a part of the assets of
the Company or through taking the Company public providing for additional
capital for growth and expansion. If the Company is unable to generate
sufficient taxable income through operating results or dispositions and
alternative strategies are not viable, then the establishment of a valuation
allowance may be necessary.
The Company has federal net operating loss carryforwards of approximately
$10,400,000 of which $1,288,000 expires in 2010, $2,295,000 expires in 2011 and
$6,817,000 expires in 2012. At December 31, 1997, the Company has state net
operating loss carryforwards of approximately $4,070,000 which expire at various
times and various amounts through the year 2012.
6. RELATED PARTY TRANSACTIONS:
The Company has entered into an Administrative Services Agreement (the
"Administrative Services Agreement") with Banner pursuant to which Banner or one
of the other Banner subsidiaries, other than the Company, provides purchasing,
advertising, accounting, insurance, health and other benefits, real estate,
management information systems, and other services to the Company. The Company
is required to reimburse Banner for its allocable share of direct and overhead
costs determined on the basis of the Company's percentage utilization of the
applicable services contemplated by the Administrative Services Agreement. The
Administrative Services Agreement had an initial term of two years beginning
June 3, 1994 and will be automatically extended for up to eight successive
one-year terms after the end of the initial term unless the Company gives at
least 30 days prior notice at the end of the then current term that the
Administrative Services Agreement will terminate. As long as Banner or any other
Banner subsidiary beneficially owns more than 50% of the voting stock of the
Company, the Administrative Services Agreement shall not be terminable by Banner
or any other Banner subsidiary as a result of any breach of the Administrative
Services Agreement by the Company. During 1997, 1996 and 1995, the Company
purchased $883,000, $640,000 and $1,927,000, respectively, of merchandise from
Banner's Central Electric, a wholly owned subsidiary of Banner. The Company has
not incurred any material common costs or
30
<PAGE> 31
expenses to be allocated during 1997, 1996 and 1995 in connection with the
Administrative Services Agreement.
The receivable from (payable to) related parties as of December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Banner Holdings $ (434,000) $ 2,371,000
Banner Central Electric 178,000 (656,000)
G. M. Cypres & Co. (63,000) (61,000)
Banner Central Electric Properties -- (20,000)
----------- -----------
$ (319,000) $ 1,634,000
=========== ===========
</TABLE>
The Company and G. M. Cypres & Co., a related party through common
ownership, entered into an agreement (the "Consulting Agreement") pursuant to
which G. M. Cypres & Co. or its designee provides consulting, investment banking
or similar services to the Company in consideration for the payment of certain
fees and expenses, including an annual management fee (the "Management Fee").
Under the terms of the Indenture, the fees and expenses payable under the
Consulting Agreement must be reasonable and customary, and the Management Fee
shall not exceed $375,000 per year. Management Fees charged under the terms of
the Consulting Agreement totaled $375,000 for the years ended December 31, 1997,
1996 and 1995.
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, 1997, 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.
7. RETIREMENT SAVINGS PLAN:
The Company established a new 401(k) defined contribution plan in October
1997. The Company did not match employee contributions and had no other expenses
related to the plan.
As of December 31, 1995 the Company terminated a 401(k) defined
contribution plan covering substantially all employees of one of the Company's
subsidiaries. The Company matched the first 6% of eligible compensation
contributed by the participants at a rate of 25%. During 1995, the Company
contributed $49,000 to the plan.
8. STORE SALES AND CLOSINGS:
During 1997, the Company opened 13 new stores, sold the assets of one
store, closed two stores and transferred their agreements into other operating
stores in the area.
During 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
31
<PAGE> 32
and sold six stores that were not located within the Company's targeted
geographic markets.
9. STOCK TRANSACTIONS:
Issuance of Common Stock
On July 14, 1995 an outside institutional investor purchased 17,045 shares
of common stock of the Company at a price of $44.00 per share for an aggregate
purchase price of $750,000. The shares were issued pursuant to the terms of a
letter agreement which places certain restrictions on the purchaser's ability to
transfer the issued shares of stock.
As of February 28, 1997 all Warrant holders exercised their option to
convert the Warrants into the Company's common stock. 66,000 shares of stock
were issued for the Warrants at an exercise price of $.01 per share; 60,000
relating to the initial offering and an additional 6,000 issued to the Initial
Purchaser of the Notes.
Stock Options
In 1994 the Board of Directors adopted a Stock Option Plan (the "1994
Plan"), to grant to certain key employees of the Company options to purchase
shares of the common stock of the Company at fair market value. A percentage of
the options vest on each year provided that the Company meets or exceeds certain
financial performance standards during such year. If those standards are not
attained in such year, that portion of the option that would have vested may
vest in the year the Company does meet those standards. Management believes that
those standards will be attained in future years, before the options expire in
the year 2004, and therefore there is a potential that the options will be
exercisable. The stock options granted pursuant to the 1994 Plan cannot exceed
15% of the fully diluted shares of common stock of the Company. As of December
31, 1997 and 1996 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, 1995 24,000 $37.45
Granted 17,000 37.45
Expired or canceled (11,000) 37.45
Exercised --
------
Outstanding at December 31, 1996 30,000 37.45
Granted -- 37.45
Expired or canceled (18,000) 37.45
Exercised --
------
Outstanding at December 31, 1997 12,000 37.45
======
Options exercisable at December 31, 1997 --
======
</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
32
<PAGE> 33
disclosures of earnings and earnings per share as if the change in accounting
provision of SFAS 123 has been adopted.
The Company has elected to continue to utilize the accounting method
prescribed by APB 25, under which no compensation cost has been recognized, and
adopt the disclosure requirements of SFAS 123. As a result, SFAS 123 has no
effect on the financial condition or results of operations of the Company at
December 31, 1997 and 1996.
Had compensation cost for this plan been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced to
the following pro-forma amounts.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net loss ......... As Reported $(2,907,000) $(1,840,000) $(9,155,000)
Pro Forma $(2,929,000) $(1,889,000) $(9,198,000)
Basic EPS ........ As Reported $(4.79) $(3.34) $(16.89)
Pro Forma $(4.83) $(3.43) $(16.97)
Diluted EPS ...... As Reported $(4.79) $(3.34) $(16.89)
Pro Forma $(4.83) $(3.43) $(16.97)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
an option pricing model with the following weighted-average assumptions used for
grants: dividend yield of 0.0%, volatility of 0.0%, risk-free interest rate of
6.5% and expected lives of 5 years.
On January 7, 1997 the Company declared a cash dividend on its common stock
to be paid to the holders of record of the Company's common stock as of February
28, 1997 payable on March 5, 1997.
Dividends
On March 5, 1997, the Company paid a total cash dividend of $2.0 million to
the holders of its common stock at $3.24 per share.
10. QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
Income Basic Diluted
Total From Net Net Loss Net Loss
Revenues Operations Loss Per Share Per Share
-------- ---------- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1997 $25,029 $ 1,113 $ (826) $ (1.36) $ (1.36)
September 30, 1997 25,409 170 (1,191) (1.93) (1.93)
June 30, 1997 26,394 1,422 (376) (.61) (.61)
March 31, 1997 26,736 1,111 (514) (.89) (.89)
December 31, 1996 26,142 924 (533) (.97) (.97)
September 30, 1996 26,468 1,418 (320) (.58) (.58)
June 30, 1996 27,767 1,331 (369) (.67) (.67)
March 31, 1996 28,400 1,002 (618) (1.12) (1.12)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
<PAGE> 34
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 54 Chairman of the Board and Chief
Executive Officer
A. Keith Wall 45 Vice President, Chief Financial
Officer
Stephen E. Pearson 36 Vice President of Operations
Jonathan D. Martin 28 Corporate Secretary, Administrative
Director of Legal Affairs
</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.
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.
STEPHEN E. PEARSON became Vice President of Operations for Central Rents,
Inc. in September 1997. Prior to his promotion, Mr. Pearson had been Director of
Operations for the Company. He held various positions since first joining one of
the predecessor companies in July 1986.
JONATHAN D. MARTIN is Corporate Secretary, Administrative Director of Legal
Affairs, and a Director of Central Rents, Inc. Mr. Martin holds the same
position at Banner Holdings, Inc., and is Corporate Secretary and Administrative
Director of Legal Affairs for each of its direct and indirect subsidiaries,
including Central Rents
34
<PAGE> 35
Holding, Inc., of which Mr. Martin is also a Director. Mr. Martin is the chief
legal officer of the Company and of Banner Holdings, Inc. and each of its direct
and indirect subsidiaries. Mr. Martin joined the Banner group of companies on
August 26, 1996. Prior to joining the Company, Mr. Martin was an attorney with
the metropolitan New York staff counsel office of Allstate Insurance Company.
Mr. Martin obtained his law degree from Hofstra University School of Law and
obtained his B.A. degree from Amherst College.
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 1997 (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) 1997 N/A N/A N/A -
1996 N/A N/A N/A -
1995 N/A N/A N/A -
A. Keith Wall 1997 $136,673 N/A N/A $15,856
1996 71,875 N/A 6,000 40,250
1995 N/A N/A N/A N/A
Stephen E. Pearson 1997 $114,262 N/A N/A $52,543
1996 108,290 N/A N/A N/A
1995 97,000 70,011 N/A 11,821
</TABLE>
(1) Principal position see Item 10 of this Form 10-K.
(2) Bonuses are based on Company performance.
(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 1997, 1996 and 1995, Management Fees
payable to G. M. Cypres & Co. were $375,000 per annum.
(4) Such options were granted to certain key employees 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.
35
<PAGE> 36
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, 1997 the Company
had options outstanding to purchase a total of 12,000 shares of its Common Stock
under the 1994 Plan.
There were no grants of stock options during 1997.
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules:
(1) Financial Statements: PAGES
Central Rents, Inc.
Report of Independent Public Accountants 19
Balance Sheets as of December 31, 1997 and 1996 20
Statements of Operations For The Years Ended 21
December 31, 1997, 1996 and 1995
Statements of Stockholders' Equity (Deficit)
For The Years Ended December 31, 1997, 1996 and 1995 22
Statements of Cash Flows For The Years Ended December 23
31, 1997, 1996 and 1995
Notes to Financial Statements 24
36
<PAGE> 37
(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, 1997.
(3) Exhibits
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------
<S> <C> <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. ****
12.1 Computation of Ratio of Earnings to Fixed Charges
</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.
37
<PAGE> 38
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.
By /s/ Gary M. Cypres Chairman of the Board, March 30, 1998
------------------- Chief Executive Officer
Gary M. Cypres
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:
/s/ A. Keith Wall Vice President, March 30, 1998
----------------- Chief Financial Officer
A. Keith Wall
38
<PAGE> 1
EXHIBIT 12.1
CENTRAL RENTS, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE PERIOD JUNE 4, 1994 THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
(unaudited)
For the
Period
June 4
through
December 31,
1997 1996 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fixed Charges:
Interest expense $ 7,725 $ 7,725 $ 7,725 $ 4,442
Amortization of deferred financing 163 330 316 156
Amortization of debt discount 274 274 274 157
Rental expense (1) 2,515 2,252 2,556 1,844
------- ------- ------- -------
Total fixed charges $10,677 $10,581 $10,871 $ 6,599
======= ======= ======= =======
Income before fixed charges $ 7,876 $12,119 $16,716 $ 9,884
======= ======= ======= =======
Ratio of earnings to fixed charges * 1.1x 1.5x 1.5x
======= ======= =======
</TABLE>
* Earnings were inadequate to cover fixed charges for the year ended December
31, 1997. The additional earnings needed to cover fixed charges for this year
were $2,801.
(1) Rental expense imputed interest is calculated at one-third of total
operating lease costs in accordance with industry practices.
39
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,739
<SECURITIES> 0
<RECEIVABLES> 2,396
<ALLOWANCES> 0
<INVENTORY> 36,744
<CURRENT-ASSETS> 0
<PP&E> 7,959
<DEPRECIATION> (4,127)
<TOTAL-ASSETS> 67,760
<CURRENT-LIABILITIES> 0
<BONDS> 58,368
0
0
<COMMON> 7
<OTHER-SE> (2,117)
<TOTAL-LIABILITY-AND-EQUITY> 67,760
<SALES> 0
<TOTAL-REVENUES> 103,543
<CGS> 3,520
<TOTAL-COSTS> 98,182
<OTHER-EXPENSES> 1,545
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,849
<INCOME-PRETAX> (4,033)
<INCOME-TAX> (1,126)
<INCOME-CONTINUING> (2,907)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,907)
<EPS-PRIMARY> (4.79)
<EPS-DILUTED> (4.79)
</TABLE>
