UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File Number 0-25370
RENTERS CHOICE, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0431870
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13800 Montfort, Suite 300
Dallas, Texas 75240
(214) 701-0489
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of May 1, 1996:
Class Outstanding
----- -----------
Common stock, $.01 par value per share 24,378,108
<PAGE>
RENTERS CHOICE, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Balance Sheets as of March 31, 1996 and December 31, 1995..... 1
Statements of Earnings for the three months ended
March 31, 1996 and 1995.............................. 2
Statements of Cash Flows for the three months ended
March 31, 1996 and 1995.............................. 3
Notes to Financial Statements................................. 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................ 5
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................ 8
ITEM 6. Exhibits and Reports on Form 8-K................. 11
SIGNATURES.................................................................. 14
Exhibit 11.1.................................................. 18
Exhibit 27.................................................... 19
<PAGE>
RENTERS CHOICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- -------------
Unaudited
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................... $ 6,049,238 $ 35,321,338
Rental merchandise, net
On rent .................................................. 48,711,027 49,700,354
Held for rent ............................................ 19,378,778 14,539,645
Income taxes receivable ..................................... -- 1,440,223
Deferred income taxes ....................................... 6,976,580 6,976,576
Prepaid expenses and other assets ........................... 1,232,046 2,391,220
Intangible assets, net ...................................... 28,526,757 29,549,275
Property assets, net ........................................ 8,853,594 7,375,667
------------- -------------
$ 119,728,020 $ 147,294,298
============= =============
LIABILITIES
Accounts payable - trade .................................... $ 5,155,623 $ 3,288,069
Accrued liabilities ......................................... 3,652,210 4,213,624
Income taxes payable ........................................ 1,350,181 --
Taxes other than income ..................................... 2,952,857 2,458,984
Other debt .................................................. 6,454,911 40,849,605
------------- -------------
19,565,782 50,810,282
COMMITMENTS AND CONTINGENCIES ................................... -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issue ............................................... -- --
Common stock, $.01 par value; 30,000,000 shares authorized;
24,378,108 shares issued ................................. 243,781 243,781
Additional paid-in capital .................................. 87,905,631 87,919,305
Unamortized value of stock award ............................ (822,890) (897,890)
Retained earnings ........................................... 12,835,716 9,218,820
------------- -------------
100,162,238 96,484,016
------------- -------------
$ 119,728,020 $ 147,294,298
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE>
RENTERS CHOICE, INC.
STATEMENTS OF EARNINGS
Three Months Ended March 31,
----------------------------
1996 1995
------------ -----------
Unaudited
REVENUE
Rentals and fees ........................... $45,565,352 $19,885,256
Merchandise sales .......................... 3,254,453 1,075,512
Other ...................................... 181,936 84,657
----------- -----------
TOTAL REVENUE .................... 49,001,741 21,045,425
OPERATING EXPENSES
Direct store expenses
Depreciation of rental merchandise ...... 10,154,647 4,363,804
Cost of merchandise sold ................ 2,401,812 731,199
Salaries and other expenses ............. 26,900,783 10,349,081
----------- -----------
39,457,242 15,444,084
General and administrative expenses ........ 2,058,646 1,057,779
Amortization of intangibles ................ 1,141,755 748,529
----------- -----------
TOTAL OPERATING EXPENSES ......... 42,657,643 17,250,392
----------- -----------
OPERATING PROFIT ................. 6,344,098 3,795,033
INTEREST EXPENSE ............................... 72,642 163,448
----------- -----------
EARNINGS BEFORE INCOME TAXES ..... 6,271,456 3,631,585
INCOME TAX EXPENSE ............................. 2,654,560 1,644,226
----------- -----------
NET EARNINGS ..................... $ 3,616,896 $ 1,987,359
=========== ===========
Weighted average shares outstanding ............ 24,772,182 17,997,660
=========== ===========
EARNINGS PER SHARE ............... $ 0.15 $ 0.11
=========== ===========
The accompanying notes are an integral part of these statements.
2
<PAGE>
RENTERS CHOICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
------------ ------------
Unaudited
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ................................................ $ 3,616,896 $ 1,987,359
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation of rental merchandise .................... 10,154,647 4,363,804
Depreciation of property assets ....................... 727,152 191,161
Amortization of intangibles ........................... 1,141,755 748,529
Other ................................................. (44,242) --
Changes in operating assets and liabilities
Rental merchandise .................................... (14,004,453) (6,648,185)
Income taxes receivable ............................... 1,440,223 --
Prepaid expenses and other assets ..................... 1,159,174 (174,805)
Accounts payable - trade .............................. 1,867,554 511,744
Accrued liabilities ................................... (561,414) (252,463)
Income taxes .......................................... 1,844,054 1,344,373
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 7,341,346 2,926,053
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property assets ................................. (2,245,800) (383,114)
Proceeds from sale of property assets ....................... 40,722 10,584
Acquisitions of businesses .................................. -- (309,688)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ............. (2,205,078) (682,218)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (expenses) from public offerings ................... (13,674) 24,059,572
Distributions to stockholders ............................... -- (1,493,340)
Repayments of debt .......................................... (34,394,694) (12,197,182)
Repayments of note to stockholder ........................... -- (6,250,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (34,408,368) 4,119,050
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................. (29,272,100) 6,362,885
Cash and cash equivalents at beginning of period ................ 35,321,338 1,441,001
------------ ------------
Cash and cash equivalents at end of period ...................... $ 6,049,238 $ 7,803,886
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
RENTERS CHOICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. The interim financial statements of Renters Choice, Inc. (the
"Company") included herein have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these financial statements be read in
conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1995. In the opinion of management, the accompanying unaudited interim
financial statements contain all adjustments, consisting only of those
of a normal recurring nature, necessary to present fairly the Company's
results of operations and cash flows for the periods presented. The
results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
2. The Company recently increased its credit agreement with its current
lender from $25 million to $40 million. This agreement consists of a
$10 million revolving credit facility and a $30 million term loan
facility. Borrowings under the term loan facility bear interest at a
rate equal to the National prime rate as published in the WALL STREET
JOURNAL (8-1/4% per annum at March 31, 1996) and borrowings under the
revolving credit facility bear interest at such designated prime rate,
in each case as adjusted monthly. All borrowings are secured by a lien
on substantially all of the Company's assets. Borrowings under the
revolving credit facility are due on April 30, 1997. Any term loan
borrowings will be funded in individual notes amortized over five-year
periods payable in equal monthly installments (including interest). The
commitment on the term facility expires April 30, 1997, and bears no
commitment fee. The credit agreement includes certain cash flow and net
worth requirements, as well as covenants which limit the ability of the
Company to incur additional indebtedness, grant liens, transfer assets
out of the ordinary course of business or engage in merger
transactions. At March 31, 1996, there were no outstanding borrowings
under either of these facilities.
4
RENTERS CHOICE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 AND 1995
In April 1995, the Company acquired 72 stores located in 18 states from
Crown Leasing Corporation and certain of its affiliates (the "Crown
Acquisition"). In August 1995, the Company acquired 135 stores located in 10
states by purchasing the issued and outstanding stock of Pro Rental, Inc., the
parent company of a chain of rent-to-own stores doing business as Magic
Rent-to-Own and Kelway Rent-to-Own (the "Magic Acquisition" and, together with
the Crown Acquisition, the "1995 Acquisitions"). The 1995 Acquisitions were
accounted for as purchases and, accordingly, the operating results of the
acquired stores have been included in the operating results of the Company since
the respective dates of acquisition. Primarily as a result of the impact of the
1995 Acquisitions on the results of operations, comparisons of the operating
results for the three months ended March 31, 1996 and 1995 may not be meaningful
or indicative of future results.
Total revenue increased by $28.0 million, or 133.3%, to $49.0 million
for 1996 from $21.0 million for 1995. The increase in total revenue was
primarily attributable to the inclusion of the 209 stores purchased in 1995.
Total revenue exclusive of the 209 stores increased by $2.7 million, or 12.9% to
$23.7 million for 1996 from $21.0 million in 1995. This improvement was
primarily attributable to an increase in both the number of items on rent and in
revenue earned per item on rent.
Depreciation of rental merchandise increased by $5.8 million, or
131.8%, to 10.2 million for 1996 from $4.4 million for 1995. Depreciation of
rental merchandise expressed as a percent of rental revenue increased from 21.9%
in 1995 to 22.3% in 1996. The increase was primarily attributable to lower
rental rates on rental merchandise acquired in the 1995 Acquisitions.
Salaries and other expenses expressed as a percentage of total revenues
increased to 54.9% for 1996 from 49.2% for 1995 primarily as a result of
increases in salaries for employees of acquired stores immediately following the
acquisitions while store revenues have increased gradually. General and
administrative expenses expressed as a percent of total revenue decreased from
5.0% for 1995 to 4.2% for 1996. The decrease is primarily attributable to
increased economies of scale resulting from the 1995 Acquisitions.
Operating profit increased by $2.5 million, or 65.8%, to $6.3 million
for 1996 from $3.8 million for 1995. This improvement was primarily attributable
to an increase in both the number of items on rent and in revenue earned per
item on rent, both in stores acquired before 1995 and in stores acquired in the
1995 Acquisitions.
Net earnings increased by $1.6 million, or 80.0%, to $3.6 million in
1996 from $2.0 million in 1995. The improvement was a result of the increase in
operating profit described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are the acquisition of
existing stores, the opening of new stores, the purchase of additional rental
merchandise and the replacement of rental merchandise which has been sold or
charged-off or is no longer suitable for rent. During the year ended December
31, 1995, the Company acquired 209 stores for an aggregate purchase price of $59
million, of which $21.7 million was paid in cash. The
5
RENTERS CHOICE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Company purchased $14.6 million and $6.6 million of rental merchandise during
the three months ended March 31, 1996 and 1995, respectively.
For the three months ended March 31, 1996, cash provided by operating
activities increased by $4.4 million from $2.9 million in 1995 to $7.3 million
in 1996, primarily due to increased earnings, timing of the payment of various
operating expenses offset by increased rental merchandise purchases. Cash used
in investing activities increased by $1.5 million from $682,000 in 1995 to $2.2
million in 1996, primarily relating to computers and signs purchased for stores
acquired in the Magic Acquisition. Cash used in financing activities was $34.4
million for the three months ended March 31, 1996, which relates primarily to
repayment of debt to the Magic selling shareholders which was paid in full on
January 2, 1996.
The Company recently increased its credit agreement with its current
lender from $25 million to $40 million. This agreement consists of a $10 million
revolving credit facility and a $30 million term loan facility. Borrowings under
the term loan facility bear interest at a rate equal to the National prime rate
as published in the WALL STREET JOURNAL (8-1/4% per annum at March 31, 1996) and
borrowings under the revolving credit facility bear interest at such designated
prime rate, in each case as adjusted monthly. All borrowings are secured by a
lien on substantially all of the Company's assets. Borrowings under the
revolving credit facility are due on April 30, 1997. Any term loan borrowings
will be funded in individual notes amortized over five-year periods payable in
equal monthly installments (including interest). The commitment on the term
facility expires April 30, 1997, and bears no commitment fee. The credit
agreement includes certain cash flow and net worth requirements, as well as
covenants which limit the ability of the Company to incur additional
indebtedness, grant liens, transfer assets out of the ordinary course of
business or engage in merger transactions. On March 31, 1996, there were no
outstanding borrowings under either of these facilities.
In connection with the stores acquired in 1993, monthly payments of
$33,333 are due under a consulting agreement through April 1, 2001, and monthly
payments of $125,000 are due under a non-competition agreement from February
1996 through January 1998. If the settlement agreement described under the
caption "Part II. Item 1. Legal Proceedings - IN RE: DEF INVESTMENTS, INC." is
executed, the Company will be released from its obligation to make payments
under such consulting and non-competition agreements, in exchange for a cash
payment of $4.75 million (the "Settlement Amount"). Management expects to pay
the Settlement Amount no earlier than June 1996, and believes that its borrowing
capacity under its credit facility and cash flow from operations will be
sufficient to fund the payment.
In connection with the Crown Acquisition, monthly payments of $16,667
are due under a consulting agreement through October 1996, and in connection
with the Magic Acquisition, monthly payments in the aggregate amount of $32,500
each are due under certain noncompetition agreements through August 2000.
The Company currently expects to open ten to twelve new stores during
1996 and a comparable number of stores in each of the next few years. Currently,
the Company estimates that the average investment with respect to new stores is
approximately $350,000 per store, of which rental merchandise comprises
approximately 75% to 80% of the investment. The remaining investment consists of
leasehold improvements, delivery trucks, store signs, computer equipment and
start-up costs. There can be no assurance that the Company will open any new
stores in the future, or as to the number, location or profitability thereof.
6
RENTERS CHOICE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
In addition to its intention to open new stores annually, the Company
intends to increase the number of stores it operates through acquisitions. In
particular, the Company's goal is to increase the number of stores it operates
by approximately 50-60 stores in each of the next few years, primarily through
acquisitions. Management believes that there are currently a number of possible
future acquisition opportunities in the rent-to-own industry, and it is possible
that any acquisition could be material to the Company. There can be no assurance
that the Company will be able to acquire any additional stores, or that any
stores that are acquired will be or will become profitable.
Management believes that cash flow from operations and the previously
described credit facilities will be adequate to fund the operations and
expansion plans of the Company during 1996. In addition, to provide any
additional funds necessary for the continued pursuit of the Company's growth
strategies, the Company may incur, from time to time, additional short- and
long-term bank indebtedness and may issue, in public or private transactions,
its equity and debt securities. The availability and attractiveness of any
outside sources of financing will depend on a number of factors, some of which
will relate to the financial condition and performance of the Company, and some
of which will be beyond the Company's control such as prevailing interest rates
and general economic conditions. There can be no assurance that such additional
financing will be available, or if available, will be on terms acceptable to the
Company.
7
PART II. OTHER INFORMATION
RENTERS CHOICE, INC.
ITEM 1. LEGAL PROCEEDINGS.
From time to time the Company is a party to various legal proceedings
arising in the ordinary course of its business. Except as described below, the
Company is not currently a party to any material litigation.
IN RE: DEF INVESTMENTS, INC.
On September 5, 1995, a complaint (the "Complaint") was filed in the
United States Bankruptcy Court for the District of Minnesota (the "Bankruptcy
Court") against Mr. and Mrs. Robert A. Hardesty (the "Hardestys") and the
Company, among others (collectively, the "Defendants"). The complaint was filed
by the trustee (the "Trustee") for DEF Investments, Inc. ("DEF"), in an
involuntary chapter 7 bankruptcy case against DEF (the "DEF Bankruptcy Case")
commenced on April 20, 1995.
The Complaint seeks (i) to avoid the transfer of certain assets
purchased in 1993 by a predecessor of the Company from DEF and certain of its
subsidiaries pursuant to the 1993 Acquisition and to obtain an order that such
assets be turned over to the Trustee, (ii) to nullify the Hardestys' consulting
and noncompetition agreements, pursuant to the terms of which the Company paid
$2.0 million to the Hardestys on the closing date of the 1993 Acquisition, has
paid them an additional $900,000 since the closing date and is obligated to pay
them approximately $5.3 million in varying amounts through April 1, 2001, (iii)
to require the Company to make all future payments under the consulting and
noncompetition agreements to the Trustee for the benefit of the DEF bankruptcy
estate, and (iv) to set aside all payments already made by the Company to the
Hardestys under the consulting and noncompetition agreements, and to grant
judgment against the Hardestys for the amount of all such payments.
On March 8, 1996, the Company reached an agreement with the Trustee and
the Hardestys to settle the lawsuit. The terms of the settlement provide that
the Company will be released from the fraudulent transfer claim and the future
obligation to pay $5.3 million under the consulting and noncompetition
agreements with the Hardestys in exchange for a cash payment of $4.75 million to
the Trustee. The agreement, which, as of May 1, 1996, has not yet been reduced
to writing and is subject to approval by the Bankruptcy Court after notice and
hearing, contemplates the nonrefundable payment by the Company of $50,000 upon
execution of the written settlement agreement in exchange for the Trustee's
dismissal of the Complaint against the Company without prejudice. As to the
balance of the settlement amount, $300,000 is attributable to the Trustee's
claims against the Company based upon payments already made to the Hardestys,
and $4.4 million is attributable to future obligations under the noncompetition
and consulting agreements.
As part of the overall settlement, the Company will receive a full
release from the fraudulent transfer claim by the Trustee on behalf of DEF, all
of its subsidiaries which have filed Chapter 7 bankruptcy cases and their
respective creditors. The settlement is also conditioned on the Bankruptcy Court
issuing protective orders enjoining the Hardestys from making any claims against
the Company or J. E. Talley and certain of their affiliates under the
noncompetition and consulting agreements.
The pending class action against DEF and other companies including, at
this point, the Company (the "Miller lawsuit") is not the direct subject of this
settlement agreement. Nevertheless, the agreement does address the Miller
lawsuit in that it provides that the plaintiff class, which is represented by
the same attorney that represents the Trustee, has agreed that it must first
pursue collection of any judgment obtained against the Company in the Miller
lawsuit through enforcement of the indemnity agreement between the Company and
Transamerica Commercial Finance Corporation, I ("Transamerica"). The plaintiff
class will further agree that it cannot collect or enforce any judgment obtained
against the Company in the Miller lawsuit until he has exhausted collection
through the indemnity agreement. Finally, the settlement calls for the plaintiff
class to release and covenant not to assert any claims it may have against the
Company except those contained in its current pleading in the Miller lawsuit.
See "Item 1. Legal Proceedings -- BASIC RENTAL V. TRANSAMERICA ET AL AND DELILAH
MILLER ET AL V. RENTERS CHOICE ET AL."
8
Management believes that the implementation of the settlement
agreement, which management expects to be executed and approved by the
Bankruptcy Court by the end of May 1996, will not have a material adverse effect
on the Company's results of operations. There can be no assurance that the
settlement agreement will be entered into. If the settlement agreement is not
executed, the Trustee would be able to proceed against the Company in the
fraudulent transfer claim.
GALLAGHER V. CROWN
On January 3, 1996, the Company was served with a complaint adding it
as a defendant in a putative class action originally filed in April 1994 against
Crown Leasing Corporation ("Crown") and certain of its affiliates.
The lawsuit alleges, among other things, that under certain rent-to-own
contracts entered into between the plaintiffs and Crown, some of which were
purportedly acquired by the Company pursuant to the Company's acquisition in
April 1995 of the rent-to-own assets of Crown (the "Crown Acquisition"), the
defendants charged the plaintiffs fees and expenses that violated the New Jersey
Consumer Fraud Act and the New Jersey Retail Installment Sales Act. The
plaintiffs seek damages including, among other things, a refund of all excessive
fees and/or interest charged or collected by the defendants in violation of such
acts, state usury laws and other related statutes and treble damages, as
applicable. The amount of such excessive fees and/or interest is unspecified.
Pursuant to the Asset Purchase Agreement entered into between Crown and
its controlling shareholder and the Company in connection with the Crown
Acquisition, the Company assumed no liabilities pertaining to Crown's
rent-to-own contracts for the period prior to the Crown Acquisition in April
1995. The Asset Purchase Agreement provides that Crown and its controlling
shareholder will indemnify and hold harmless the Company against damages,
including reasonable attorneys' fees, due to any claim pertaining to the
operation of Crown's rent-to-own business prior to the Crown Acquisition, except
as set forth below. This indemnification is applicable regardless of whether the
circumstances giving rise to any such claim continued after the Crown
Acquisition. Claims covered include claims of customers, other than claims
relating to rent-to-own contracts entered into by Crown prior to the Crown
Acquisition which remained in full force and effect on October 20, 1995. The
Company has provided Crown and its controlling shareholder with a notice of
indemnification and tender of defense. Crown has assumed responsibility for
defending the Company in this matter pursuant to the Asset Purchase Agreement.
The court recently certified a class against Crown, consisting of all
New Jersey residents who entered into rent-to-own contracts with Crown between
April 25, 1988 and April 20, 1995. The court denied the plaintiff's motion for
class certification against the Company, ruling that the named plaintiff and
proposed class representative, Paul Gallagher, was not an adequate
representative of a class against the Company since his contracts were not
acquired by the Company and he never executed a Company contract. The individual
plaintiff is therefore, left to pursue his claims, if any, against the Company
on an individual basis.
Management does not believe this suit will have a material adverse
effect upon the Company.
BASIC RENTAL, INC. V. TRANSAMERICA COMMERCIAL ET AL. AND DELILAH MILLER ET AL.
V. RENTERS CHOICE, ET AL.
The Company is a defendant in two lawsuits arising from the past
lending activities of MRTO Holdings, Inc. ("MRTO"), acquired by the Company in
September 1995.
Prior to the fall of 1994, MRTO was engaged in the business of making
loans to companies in the business of selling or renting consumer appliances and
other goods to the general public. MRTO no longer is engaged in, and the Company
never has engaged in, such lending activities. One of these lawsuits, brought by
Basic Rental, Inc. ("Basic"), is pending in federal district court in Monroe,
Louisiana. This suit alleges that, while an affiliate of Transamerica, MRTO
(formerly known as Transamerica Rental Finance Corporation) and others engaged
in intentional misrepresentation, negligent misrepresentation, breach of
fiduciary duty, breach of good faith and fair dealing, usury and violation of
federal antitrust laws, among other things, in connection with a loan made by
MRTO to Basic. The maximum amount loaned to Basic by MRTO during the relevant
periods involved was approximately $1.8 million. The suit seeks recovery of an
unspecified amount of actual and punitive damages from MRTO and the other
defendants.
9
On March 27, 1996, the court granted the defendants' motion for summary
judgment on certain claims. The summary judgment constitutes a final judgment in
favor of all of the major claims, including detrimental reliance, intentional
misrepresentation, negligent misrepresentation, breach of fiduciary duty, breach
of duty of good faith and fair dealing, usury, antitrust and exemplary damages.
The only remaining claims are two claims which involve less than $8.0 million in
the aggregate. These claims are based on a breach of duty of good faith and fair
dealing theory and involve the alleged overcharging of interest and the alleged
failure of MRTO to promptly release its security interest at the time Basic paid
its indebtedness in full. The Plaintiff has indicated that it intends to appeal
the summary judgment ruling.
The other suit (the "Miller lawsuit") is a class action suit brought by
certain named plaintiffs on behalf of themselves and all others similarly
situated, pending in the district court in Hennepin County, Minnesota. This suit
alleges that Transamerica and certain of its affiliates and MRTO, as primary
lenders to various co-defendants in the suit, including DEF, exerted influence
and control over such co-defendants and therefore engaged in deceptive and
unlawful trade practices and violated various statutes, including the Minnesota
Consumer Protection Statutes, the Federal Truth-In-Lending Act and the
Racketeering Influenced and Corrupt Organizations Act resulting from the
rent-to-own activities conducted by the co-defendants in Minnesota. The
plaintiffs have requested, among other things, that the court enjoin the
defendants from engaging in such alleged illegal activities in the future,
rescind the rent-to-own contracts entered into with plaintiffs and award an
unspecified amount of damages, including restitution of all monies paid under
the rent-to-own contracts, plus interest thereon and statutory damages available
under the various statutes allegedly violated.
Management believes that the Company is entitled to indemnification or
other recovery for any damages incurred as a result of the suit brought by the
Basic and Miller lawsuits pursuant to (i) contractual arrangements between
Transamerica and Pro Rental, Inc. ("Pro Rental") the former shareholder of MRTO
entered into at the time MRTO was acquired by Pro Rental and (ii) contractual
arrangements between the Company and certain of the former stockholders of Pro
Rental entered into in connection with the Company's acquisition of Pro Rental.
The defense of the Basic and Miller lawsuits on behalf of the Company and the
Transamerica affiliates which are also defendants in the suits has been
undertaken by a Transamerica affiliate. There can be no assurance that the
Company will prevail in the pending suits or, if the Company is found liable,
that the Transamerica affiliate or the former stockholders of Pro Rental will be
able to satisfy their indemnification obligations.
10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
CURRENT REPORTS ON FORM 8-K
None
LISTING OF EXHIBITS
Exhibits followed by an (*) constitute management contracts or
compensatory plans or arrangements.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1(1) Asset Purchase Agreement dated April 20, 1995 among Renters Choice,
Inc., Crown Leasing Corporation, Robert White, individually and
Robert White Company, a sole proprietorship owned by Robert White
2.2(2) Stock Purchase Agreement dated as of August 27, 1995 among Renters
Choice, Inc., Starla J. Flake, Rance D. Richter, Bruce S. Johnson
and Pro Rental, Inc.
2.3(3) Stock Purchase Agreement dated September 29, 1995 between the
Company and Terry N. Worrell
2.4(4) Partnership Interest Purchase Agreement dated September 29, 1995
among the Company, Worrell Investors, Inc., The Christy Ann Worrell
Trust and The Michael Neal Worrell Trust
2.5(5) Agreement and Plan of Merger by and among Renters Choice, Inc., Pro
Rental, Inc., MRTO Holdings, Inc. and Pro Rental II, Inc.
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2 Amended and Restated Bylaws of the Company
4.1(6) Form of Certificate evidencing Common Stock
10.1(7)* 1994 Renters Choice, Inc. Long-Term Incentive Plan
10.2(8) Amended and Restated Loan Agreement dated as of April 13, 1995
between INTRUST Bank, N.A. and Renters Choice, Inc.
10.3(9) Consulting Agreement dated April 1, 1993, by and between Bob A.
Hardesty and Brenda K. Hardesty and Renters Choice, L.P.
10.4(10) Non-Competition Agreement dated April 1, 1993, by and between Bob A.
Hardesty and Brenda K. Hardesty and Renters Choice, L.P.
10.5(11) Noncompetition Agreement dated as of April 20, 1995 between Renters
Choice, Inc. and Patrick S. White
10.6(12) Consulting Agreement dated as of April 20, 1995 between Renters
Choice, Inc. and Jeffrey W. Smith
10.7(13) Noncompetition Agreement dated as of August 27, 1995 between Renters
Choice, Inc. and Starla J. Flake
10.8(14) Noncompetition Agreement dated as of August 27, 1995 between Renters
Choice, Inc. and Bruce S. Johnson
10.9(15) Noncompetition Agreement dated as of August 27, 1995 between Renters
Choice, Inc. and Rance D. Richter
11
10.10(16) Promissory Note dated August 27, 1995 executed by the Company and
payable to the order of Starla J. Flake
10.11(17) Promissory Note dated August 27, 1995 executed by the Company and
payable to the order of Bruce S. Johnson
10.12(18) Promissory Note dated August 27, 1995 executed by the Company and
payable to the order of Rance D. Richter
10.13(19) Option Agreement dated August 27, 1995 between the Company and Terry
N. Worrell
10.14(20) Option Agreement dated August 27, 1995 among the Company, Worrell
Investors, Inc., The Christy Ann Worrell Trust and The Michael Neal
Worrell Trust
10.15(21) Promissory Note dated September 29, 1995 executed by the Company and
payable to Terry N. Worrell
10.16(22) Promissory Note dated September 29, 1995 executed by the Company and
payable to Worrell Investors, Inc.
10.17(23) Promissory Note dated September 29, 1995 executed by the Company and
payable to The Christy Ann Worrell Trust
10.18(24) Promissory Note dated September 29, 1995 executed by the Company and
payable to The Michael Neal Worrell Trust
10.19(25) First Amendment to Amended and Restated Loan Agreement dated October
1995 by and between Intrust Bank, N.A. and Renters Choice, Inc.
10.20(26)* Employment Agreement dated September 11, 1995 by and between Renters
Choice, Inc. and David D. Real
11.1 Computation of Earnings per share
27 Financial Data Schedule
- ---------------
(1) Incorporated herein by reference to Exhibit 2.1 to the registrant's
Current Report on Form 8-K dated May 4, 1995
(2) Incorporated herein by reference to Exhibit 2.1 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(3) Incorporated herein by reference to Exhibit 10.19 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(4) Incorporated herein by reference to Exhibit 10.20 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(5) Incorporated herein by reference to Exhibit 2.7 to the registrant's
Annual Report on Form 10K for the year ended December 31, 1995.
(6) Incorporated herein by reference to Exhibit 4.1 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(7) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Registration Statement on Form S-8 (File No. 33-98800)
(8) Incorporated herein by reference to Exhibit 10.2 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(9) Incorporated herein by reference to Exhibit 10.5 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
12
(10) Incorporated herein by reference to Exhibit 10.6 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(11) Incorporated herein by reference to Exhibit 10.7 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(12) Incorporated herein by reference to Exhibit 10.8 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(13) Incorporated herein by reference to Exhibit 10.10 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(14) Incorporated herein by reference to Exhibit 10.11 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(15) Incorporated herein by reference to Exhibit 10.12 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(16) Incorporated herein by reference to Exhibit 10.14 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(17) Incorporated herein by reference to Exhibit 10.15 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(18) Incorporated herein by reference to Exhibit 10.16 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(19) Incorporated herein by reference to Exhibit 2.2 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(20) Incorporated herein by reference to Exhibit 2.3 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(21) Incorporated herein by reference to Exhibit 10.21 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(22) Incorporated herein by reference to Exhibit 10.22 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(23) Incorporated herein by reference to Exhibit 10.23 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(24) Incorporated herein by reference to Exhibit 10.24 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(25) Incorporated herein by reference to Exhibit 10.25 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(26) Incorporated herein by reference to Exhibit 10.26 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned duly authorized.
RENTERS CHOICE, INC.
By: /s/ DAVID D. REAL
David D. Real
SENIOR VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
Date: May 13, 1996
14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1(1) Asset Purchase Agreement dated April 20, 1995 among Renters Choice,
Inc., Crown Leasing Corporation, Robert White, individually and
Robert White Company, a sole proprietorship owned by Robert White
2.2(2) Stock Purchase Agreement dated as of August 27, 1995 among Renters
Choice, Inc., Starla J. Flake, Rance D. Richter, Bruce S. Johnson
and Pro Rental, Inc.
2.3(3) Stock Purchase Agreement dated September 29, 1995 between the
Company and Terry N. Worrell
2.4(4) Partnership Interest Purchase Agreement dated September 29, 1995
among the Company, Worrell Investors, Inc., The Christy Ann Worrell
Trust and The Michael Neal Worrell Trust
2.5(5) Agreement and Plan of Merger by and among Renters Choice, Inc., Pro
Rental, Inc., MRTO Holdings, Inc. and Pro Rental II, Inc.
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2 Amended and Restated Bylaws of the Company
4.1(6) Form of Certificate evidencing Common Stock
10.1(7)* 1994 Renters Choice, Inc. Long-Term Incentive Plan
10.2(8) Amended and Restated Loan Agreement dated as of April 13, 1995
between INTRUST Bank, N.A. and Renters Choice, Inc.
10.3(9) Consulting Agreement dated April 1, 1993, by and between Bob A.
Hardesty and Brenda K. Hardesty and Renters Choice, L.P.
10.4(10) Non-Competition Agreement dated April 1, 1993, by and between Bob A.
Hardesty and Brenda K. Hardesty and Renters Choice, L.P.
10.5(11) Noncompetition Agreement dated as of April 20, 1995 between Renters
Choice, Inc. and Patrick S. White
10.6(12) Consulting Agreement dated as of April 20, 1995 between Renters
Choice, Inc. and Jeffrey W. Smith
10.7(13) Noncompetition Agreement dated as of August 27, 1995 between Renters
Choice, Inc. and Starla J. Flake
10.8(14) Noncompetition Agreement dated as of August 27, 1995 between Renters
Choice, Inc. and Bruce S. Johnson
10.9(15) Noncompetition Agreement dated as of August 27, 1995 between Renters
Choice, Inc. and Rance D. Richter
10.10(16) Promissory Note dated August 27, 1995 executed by the Company and
payable to the order of Starla J. Flake
10.11(17) Promissory Note dated August 27, 1995 executed by the Company and
payable to the order of Bruce S. Johnson
10.12(18) Promissory Note dated August 27, 1995 executed by the Company and
payable to the order of Rance D. Richter
15
10.13(19) Option Agreement dated August 27, 1995 between the Company and Terry
N. Worrell
10.14(20) Option Agreement dated August 27, 1995 among the Company, Worrell
Investors, Inc., The Christy Ann Worrell Trust and The Michael Neal
Worrell Trust
10.15(21) Promissory Note dated September 29, 1995 executed by the Company and
payable to Terry N. Worrell
10.16(22) Promissory Note dated September 29, 1995 executed by the Company and
payable to Worrell Investors, Inc.
10.17(23) Promissory Note dated September 29, 1995 executed by the Company and
payable to The Christy Ann Worrell Trust
10.18(24) Promissory Note dated September 29, 1995 executed by the Company and
payable to The Michael Neal Worrell Trust
10.19(25) First Amendment to Amended and Restated Loan Agreement dated October
1995 by and between Intrust Bank, N.A. and Renters Choice, Inc.
10.20(26)* Employment Agreement dated September 11, 1995 by and between Renters
Choice, Inc. and David D. Real
11.1 Computation of Earnings per share
27 Financial Data Schedule
- ---------------
(1) Incorporated herein by reference to Exhibit 2.1 to the registrant's
Current Report on Form 8-K dated May 4, 1995
(2) Incorporated herein by reference to Exhibit 2.1 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(3) Incorporated herein by reference to Exhibit 10.19 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(4) Incorporated herein by reference to Exhibit 10.20 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(5) Incorporated herein by reference to Exhibit 2.7 to the registrant's
Annual Report on Form 10K for the year ended December 31, 1995.
(6) Incorporated herein by reference to Exhibit 4.1 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(7) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Registration Statement on Form S-8 (File No. 33-98800)
(8) Incorporated herein by reference to Exhibit 10.2 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(9) Incorporated herein by reference to Exhibit 10.5 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(10) Incorporated herein by reference to Exhibit 10.6 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(11) Incorporated herein by reference to Exhibit 10.7 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(12) Incorporated herein by reference to Exhibit 10.8 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(13) Incorporated herein by reference to Exhibit 10.10 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(14) Incorporated herein by reference to Exhibit 10.11 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
16
(15) Incorporated herein by reference to Exhibit 10.12 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(16) Incorporated herein by reference to Exhibit 10.14 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(17) Incorporated herein by reference to Exhibit 10.15 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(18) Incorporated herein by reference to Exhibit 10.16 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(19) Incorporated herein by reference to Exhibit 2.2 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(20) Incorporated herein by reference to Exhibit 2.3 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(21) Incorporated herein by reference to Exhibit 10.21 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(22) Incorporated herein by reference to Exhibit 10.22 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(23) Incorporated herein by reference to Exhibit 10.23 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(24) Incorporated herein by reference to Exhibit 10.24 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(25) Incorporated herein by reference to Exhibit 10.25 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
(26) Incorporated herein by reference to Exhibit 10.26 to the
registrant's Registration Statement on Form S-1 (File No. 33-97012)
17
EXHIBIT 11.1
RENTERS CHOICE, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended
March 31, 1996
-----------------
<S> <C>
PRIMARY EARNINGS PER SHARE
Net earnings ........................................................ $ 3,616,896
===========
Weighted average number of common shares outstanding ................ 24,378,108
Net effect of dilutive stock options based on the treasury stock
method using average market price ............................ 394,074
-----------
Weighted average number of common and common equivalent
shares outstanding ........................................... 24,772,182
===========
PRIMARY EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE ........................................................ $ 0.15
===========
FULLY DILUTED EARNINGS PER SHARE
Net earnings ........................................................ $ 3,616,896
===========
Weighted average number of common shares outstanding ................ 24,378,108
Net effect of dilutive stock options based on the Treasury Stock
Method using the greater of the average or ending market price 442,520
-----------
Weighted average number of common and common equivalents shares
outstanding .................................................. 24,820,628
===========
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
ASSUMING FULL DILUTION ....................................... $ 0.15
===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOUND ON PAGES 1 AND 2 OF THE COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED
MARCH 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,049
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,379 <F1>
<CURRENT-ASSETS> 0 <F2>
<PP&E> 14,450
<DEPRECIATION> 5,596
<TOTAL-ASSETS> 119,728
<CURRENT-LIABILITIES> 0 <F2>
<BONDS> 0
0
0
<COMMON> 243
<OTHER-SE> 99,918 <F3>
<TOTAL-LIABILITY-AND-EQUITY> 119,728
<SALES> 3,254 <F4>
<TOTAL-REVENUES> 49,002
<CGS> 2,402 <F5>
<TOTAL-COSTS> 39,457
<OTHER-EXPENSES> 3,200 <F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> 6,271
<INCOME-TAX> 2,655
<INCOME-CONTINUING> 3,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,617
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
<FN>
<F1> RENTAL MERCHANDISE, HELD FOR RENT.
<F2> BALANCE SHEET IS UNCLASSIFIED.
<F3> ADDITIONAL PAID IN CAPITAL, UNAMORTIZED VALUE OF STOCK AWARD, AND RETAINED
EARNINGS.
<F4> MERCHANDISE SALES.
<F5> COST OF MERCHANDISE SOLD.
<F6> GENERAL AND ADMINISTRATIVE EXPENSE AND AMORTIZATION OF INTANGIBLES.
</TABLE>
