UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission File Number 0-25370
RENTERS CHOICE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-1024367
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13800 Montfort, Suite 300
Dallas, Texas 75240
(972) 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 August 4, 1997:
CLASS OUTSTANDING
Common stock, $.01 par value per share 24,857,196
<PAGE>
RENTERS CHOICE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Balance Sheets as of June 30, 1997 and December 31, 1996 ........... 3
Statements of Earnings for the six months ended
June 30, 1997 and 1996 .......................................... 4
Statements of Earnings for the three months ended
June 30, 1997 and 1996 .......................................... 5
Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 .......................................... 6
Notes to Financial Statements ...................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings .................................................. 11
ITEM 6. Exhibits and Reports on Form 8-K ................................... 14
SIGNATURES ................................................................. 16
Exhibit 11.1 .................................................... 17
Exhibit 27 ...................................................... 18
2
<PAGE>
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
Unaudited
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................... $ 6,445,858 $ 5,919,894
Rental merchandise, net
On rent ........................................................ 84,367,478 71,619,875
Held for rent .................................................. 25,892,787 23,490,515
Accounts receivable ................................................. 1,695,749 3,020,631
Income taxes receivable ............................................. -- 2,084,244
Prepaid expenses and other assets ................................... 3,763,205 2,285,044
Property assets, net ................................................ 15,315,461 12,715,593
Deferred income taxes ............................................... 6,138,566 6,138,566
Intangible assets, net .............................................. 61,710,719 47,192,380
------------ ------------
$205,329,823 $174,466,742
============ ============
LIABILITIES
Accounts payable - trade ............................................ $ 11,991,109 $ 17,047,592
Accrued liabilities ................................................. 15,290,338 12,923,664
Income taxes payable ................................................ 1,285,974 --
Other debt .......................................................... 3,461,320 4,557,678
Revolving credit agreement .......................................... 35,625,000 14,435,000
------------ ------------
67,653,741 48,963,934
COMMITMENTS AND CONTINGENCIES ............................................ -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued .................................................... -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
24,850,571 and 24,791,085 shares issued and outstanding
in 1997 and 1996, respectively ................................. 248,498 247,911
Additional paid-in capital .......................................... 98,418,929 98,009,773
Retained earnings ................................................... 39,008,655 27,245,124
------------ ------------
137,676,082 125,502,808
$205,329,823 $174,466,742
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Six months ended June 30,
---------------------------
1997 1996
------------ ------------
Unaudited
Store Revenue
Rentals and fees ........................... $130,149,873 $ 93,428,734
Merchandise sales .......................... 7,457,069 5,763,938
Other ...................................... 338,449 361,607
Franchise Revenue
Franchise merchandise sales ................ 15,461,402 6,498,404
Royalty income and fees .................... 1,982,401 705,279
------------ ------------
TOTAL REVENUE ..................... 155,389,194 106,757,962
Operating Expenses
Direct store expenses
Depreciation of rental merchandise ..... 27,510,298 20,562,611
Cost of merchandise sold ............... 5,607,489 4,383,884
Salaries and other expenses ............ 77,143,579 54,695,439
Franchise operation expenses
Cost of franchise merchandise sales .... 14,725,981 6,201,945
------------ ------------
124,987,347 85,843,879
General and administrative expenses ........ 6,772,347 4,725,082
Amortization of intangibles ................ 2,649,173 2,287,100
------------ ------------
TOTAL OPERATING EXPENSES .......... 134,408,867 92,856,061
------------ ------------
OPERATING PROFIT .................. 20,980,327 13,901,901
Interest expense, net ............................ 589,534 22,814
------------ ------------
Earnings before income taxes ...... 20,390,793 13,879,087
Income tax expense ............................... 8,622,095 5,893,202
------------ ------------
NET EARNINGS ...................... $ 11,768,698 $ 7,985,885
============ ============
Weighted average shares .......................... 25,091,511 24,971,287
============ ============
EARNINGS PER SHARE ................ $ 0.47 $ 0.32
============ ============
The accompanying notes are an integral part of these statements.
4
<PAGE>
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended June 30,
--------------------------
1997 1996
----------- ------------
Unaudited
Store Revenue
Rentals and fees ........................... $68,348,400 $ 47,863,382
Merchandise sales .......................... 3,197,419 2,509,485
Other ...................................... 168,190 179,671
Franchise Revenue
Franchise merchandise sales ................ 8,071,599 6,498,404
Royalty income and fees .................... 1,016,908 705,279
----------- ------------
TOTAL REVENUE ..................... 80,802,516 57,756,221
Operating Expenses
Direct store expenses
Depreciation of rental merchandise ..... 14,400,705 10,407,964
Cost of merchandise sold ............... 2,530,831 1,982,072
Salaries and other expenses ............ 40,021,269 27,794,656
Franchise operation expenses
Cost of franchise merchandise sales .... 7,646,217 6,201,945
----------- ------------
64,599,022 46,386,637
General and administrative expenses ........ 3,643,969 2,666,436
Amortization of intangibles ................ 1,218,162 1,145,345
----------- ------------
TOTAL OPERATING EXPENSES .......... 69,461,153 50,198,418
----------- ------------
OPERATING PROFIT .................. 11,341,363 7,557,803
Interest expense (income), net ................... 295,902 (49,828)
----------- ------------
Earnings before income taxes ...... 11,045,461 7,607,631
Income tax expense ............................... 4,688,821 3,238,642
----------- ------------
NET EARNINGS ...................... $ 6,356,640 $ 4,368,989
=========== ============
Weighted average shares .......................... 25,143,586 25,170,392
=========== ============
EARNINGS PER SHARE ................ $ 0.25 $ 0.17
=========== ============
The accompanying notes are an integral part of these statements.
5
<PAGE>
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
1997 1996
------------ ------------
Unaudited
<S> <C> <C>
Cash flows from operating activities
Net earnings ............................................... $ 11,768,698 $ 7,985,885
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation of rental merchandise ..................... 27,510,298 20,562,611
Depreciation of property assets ........................ 2,508,981 1,415,455
Amortization of intangibles ............................ 2,649,173 2,287,100
Other .................................................. (5,167) 150,000
Changes in operating assets and liabilities,
net of effects of acquisitions
Rental merchandise ..................................... (34,927,439) (30,161,300)
Accounts receivable .................................... 1,324,881 --
Prepaid expenses and other assets ...................... 241,994 1,697,556
Intangible assets ...................................... (754,350) --
Accounts payable - trade ............................... (5,056,483) (2,228,583)
Accrued liabilities .................................... 2,366,674 (927,890)
Income taxes ........................................... 3,370,219 4,807,650
Reserve for loans held with recourse ................... -- (123,615)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ 10,997,479 5,464,869
Cash flows from investing activities
Purchase of property assets ................................ (4,754,923) (4,093,228)
Proceeds from sale of property assets ...................... 129,253 419,920
Acquisitions of businesses ................................. (26,349,231) (4,863,535)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ............. (30,974,901) (8,536,843)
Cash flows from financing activities
Proceeds from exercise of options .......................... 409,743 542,080
Proceeds from debt ......................................... 48,132,231 531,844
Repayments of debt ......................................... (28,038,588) (47,676,443)
Repayment of notes receivable .............................. -- 21,338,295
------------ ------------
Net cash provided by (used in) financing activities 20,503,386 (25,264,224)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ........................... 525,964 (28,336,198)
Cash and cash equivalents at beginning of period ................. 5,919,894 35,321,338
------------ ------------
Cash and cash equivalents at end of period ....................... $ 6,445,858 $ 6,985,140
============ ============
Supplemental cash flow information
Cash paid during the period for
Interest ............................................... $ 1,021,214 $ 257,737
Income taxes ........................................... 5,127,976 1,100,497
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
RENTERS CHOICE, INC. AND SUBSIDIARIES
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, 1996.
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 acquired the assets of 38 rent-to-own stores in seven
transactions during the three months ended June 30, 1997 for $14.9 million.
During the three months ended March 31, 1997, the Company acquired the
assets of 27 rent-to-own stores in nine transactions for $11.4 million. On
May 15, 1996, the Company acquired all the outstanding common stock of
ColorTyme, Inc. for $14.5 million in cash (the "ColorTyme Acquisition"). At
the time of acquisition, ColorTyme, Inc. was a franchisor of 313 rent-to-own
stores and directly owned 7 rent-to-own stores, 6 of which were purchased by
the Company. Subsequent to the ColorTyme Acquisition, the Company acquired
the assets of an additional eighty-eight stores in twenty-three transactions
for approximately $25.6 million cash and $1.8 million in notes. All
acquisitions have been accounted for as purchases and the operating results
of the acquired stores have been included in the financial statements of the
Company since the acquisition. The following pro forma information combines
the results of operations as if the acquisitions had been consummated as of
the beginning of each of the six and three month periods ending June 30,
1997 and 1996, after including the impact of adjustment for amortization of
intangibles and interest expense on acquisition borrowings.
Six months ended June 30, Three months ended June 30,
-------------------------- ------------------------
1997 1996 1997 1996
------------ ------------ ----------- -----------
Revenue ............... $161,929,000 $131,311,000 $82,863,000 $71,216,000
Net Earnings .......... $ 11,833,000 $ 8,174,000 $ 6,345,000 $ 4,600,000
Earnings per common
share................ $ 0.47 $ 0.32 $ 0.25 $ 0.18
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of operating results that would have
occurred had the acquisitions been consummated as of the above dates, nor
are they necessarily indicative of future operating results.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE, which is effective for
financial statements issued after December 15, 1997. Early adoption of the
new standard is not permitted. The new standard eliminates primary and fully
diluted earnings per share and requires presentation of basic and diluted
earnings per share together with disclosure of how the per share amounts
were computed. The adoption of this new standard is not expected to have a
material impact on the disclosure of earnings per share in the financial
statements.
7
<PAGE>
RENTERS CHOICE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
This report contains forward-looking statements that involve risks and
uncertainties. The actual future results of the Company could differ materially
from those statements. Factors that could cause or contribute to such
differences include, but are not limited to, uncertainties regarding the
Company's ability to acquire additional rent-to-own stores on favorable terms,
to enhance the performance of acquired stores and to integrate acquired stores
into the Company's operations.
In April 1995, the Company acquired 72 stores located in 18 states,
including nine states in which the Company previously had no operations, from
Crown Leasing Corporation and certain of its affiliates (the "Crown
Acquisition"), and in September 1995, the Company completed the acquisition of
an additional 135 stores located in 10 states, including one state in which the
Company previously had no operations, from the shareholders of 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"). In May 1996, the Company acquired all the
issued and outstanding stock of ColorTyme, Inc. ("ColorTyme"), a franchisor of,
at the time of closing, 313 rent-to-own stores in 40 states and 7 directly owned
rent-to-own stores (the "ColorTyme Acquisition"), one of which was sold after
the ColorTyme Acquisition to a third party and the remainder of which were
purchased by the Company. The Company acquired 88 stores between May 1 and
December 31, 1996 (exclusive of the 6 stores purchased from ColorTyme) in 23
separate transactions (together with the ColorTyme Acquisition, the "1996
Acquisitions"). The Company has acquired 65 stores during the six months ended
June 30, 1997 (the "1997 Acquisitions"). All of the aforementioned acquisitions
were accounted for as purchases and, accordingly, the operating results of the
acquired stores and ColorTyme franchisor operations have been included in the
operating results of the Company since their respective dates of acquisition.
Because of the significant growth of the Company since its formation, the
Company's historical results of operations, its period-to-period comparisons of
such results and certain financial data may not be comparable, meaningful or
indicative of future results.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Total revenue increased by $48.6 million, or 45.5%, to $155.3 million
for 1997 from $106.8 million for 1996. The increase in total revenue was
primarily attributable to the inclusion of the 65 stores purchased in 1997, the
1996 Acquisitions, the ColorTyme Acquisition and growth in stores which were in
the system for the entirety of the two six month periods. Same store revenues
increased by 8.9%, from $98 million to $107 million. Same store revenues
represents revenues earned in stores that were operated by the Company for the
entire six-month periods ending June 30, 1996 and 1997. This improvement was
primarily attributable to an increase in both the number of items on rent and in
revenue earned per item on rent.
Depreciation of rental merchandise increased by $6.9 million, or 33.8%,
to $27.5 million for 1997 from $20.6 million for 1996. Depreciation of rental
merchandise expressed as a percent of rental and fee revenue decreased from 22%
in 1996 to 21.1% in 1997. The decrease was primarily attributable to higher
rental rates on rental merchandise purchased after the 1995 Acquisitions.
Salaries and other expenses expressed as a percentage of total store
revenue increased to 55.9% for 1997 from 54.9% for 1996. This increase is
attributable to an increase in salaries for employees of acquired stores
immediately following the acquisitions while store revenues have increased
gradually. Occupancy costs also increased as a percent of total revenue
primarily because of the relocation of certain stores acquired in the 1995 and
1996 acquisitions to stores that are larger in square footage. Revenues from
these larger stores increase gradually while the additional occupancy costs are
incurred immediately. General and administrative expenses expressed as a percent
of total revenue remained constant at 4.4% for 1997 and 1996.
8
<PAGE>
Operating profit increased by $7.1 million, or 51.0%, to $21.0 million
for 1997 from $13.9 million for 1996. This improvement was primarily
attributable to an increase in both the number of items on rent and in revenue
earned per item on rent, both in stores acquired before 1995 and in stores
acquired in the 1996 and 1997 Acquisitions. Net earnings increased by $3.8
million, or 47.4%, to $11.8 million in 1997 from $8.0 million in 1996. The
improvement was a result of the increase in operating profit described above.
Net interest expense increased from $23 thousand in 1996 to $590
thousand in 1997. The increased debt level relates primarily to the acquisition
of stores in 1996 and 1997.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Total revenue increased by $23.0 million, or 39.9%, to $80.8 million for
1997 from $57.8 million for 1996. The increase in total revenue was primarily
attributable to the inclusion of the 209 stores acquired in 1995 and the 1997
and 1996 Acquisitions, as well as the 21 new store locations opened by the
Company in its new store opening program since 1995. Same store revenues
increased by 8.3%, from $49.7 million to $53.8 million. Same store revenues
represents revenues earned in stores that were operated by the Company for the
entire three-month periods ending June 30, 1996 and 1997. This improvement was
primarily attributable to an increase in both the number of items on rent and in
revenue earned per item on rent.
Depreciation of rental merchandise increased by $4.0 million, or 38.4%,
to $14.4 million for 1997 from $10.4 million for 1996. Depreciation of rental
merchandise expressed as a percent of rental and fee revenue decreased from
21.7% in 1996 to 21.1% in 1997. The decrease was primarily attributable to
higher rental rates on rental merchandise and operational emphasis on increasing
the rental life of inventory items.
Salaries and other expenses expressed as a percentage of total store
revenue increased to 55.8% for 1997 from 55.0% for 1996 primarily as a result of
increases in salaries for employees of the 1996 Acquisition and 1997 Acquisition
stores immediately following the acquisitions while store revenues have
increased gradually. General and administrative expenses expressed as a percent
of total revenue decreased from 4.6% in 1996 to 4.5% in 1997.
Amortization expenses decreased from 2.0% in 1996 to 1.5% in 1997,
reflecting the combination of increasing revenue and the completion of
amortization of customer contracts acquired in the Magic transaction during the
1997 period.
Operating profit increased by $3.8 million, or 50.0% to $11.3 million
for 1997 from $7.6 million for 1996. This improvement was attributable to an
increase in both the number of items on rent and in revenue earned per item. The
1996 and 1997 Acquisitions plus the operating profit contribution from ColorTyme
also contributed to this increase.
Net earnings increased by $2.0 million, or 45.5%, to $6.4 million in
1997 from $4.4 million in 1996. 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 six months ended June
30, 1997, the Company acquired 65 stores for an aggregate purchase price of
$26.3 million, principally all of which was paid in cash. The Company also
opened an additional 4 stores during the first two quarters of 1997.
The Company purchased $47.9 million and $36.9 million of rental
merchandise during the six months ended June 30, 1997 and 1996, respectively.
For the six months ended June 30, 1997, cash provided by operating
activities increased by $5.5 million, from $5.5 million in 1996 to $11.0 million
in 1997, primarily due to increased cash earnings, offset by increased rental
merchandise purchases. Cash used in investing activities increased by $22.5
million from $8.5 million in 1996 to $31.0 million in 1997, principally related
to the 65 stores acquired in 1997. Cash provided by financing
9
<PAGE>
activities was $20.5 million for the six months ended June 30, 1997.
The Company has a $90 million credit facility with a group of banks.
Borrowings under the facility bear interest at a rate equal to the designated
prime rate (8-1/2% per annum at June 30, 1997) or 1.10% to 1.65% over LIBOR
(5.6879% at June 30, 1997) at the Company's option. At June 30, 1997, the
average rate on outstanding borrowings was 7.0%, and for the quarter the
weighted average interest rate under this facility was 6.9%. Borrowings are
collateralized by a lien on substantially all of the assets of the Company. A
commitment fee equal to .30% to .50% of the unused portion of the term loan
facility is payable quarterly. The credit facility includes certain net worth
and fixed charge coverage requirements, as well as covenants which restrict
additional indebtedness and the disposition of assets not in the ordinary course
of business. On June 30, 1997, the outstanding borrowings under this revolving
credit agreement were $35.6 million. The credit facility expires in December,
1999.
In connection with certain stores acquired by the Company 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 through January 1998. If the settlement agreement described under the
caption "Part II. Item 1. Legal Proceedings - 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 final
cash payment of approximately $3.25 million (the "Settlement Amount") which
approximates the carrying amount of the obligation at June 30, 1997. Management
expects to pay the Settlement Amount during 1997, and believes that its
borrowing capacity under its credit facility and cash flow from operations will
be sufficient to fund the payment.
The Company currently expects to open a total of 12 new stores during
1997 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 the Company will open any new stores
in the future, or as to the number, location or profitability thereof.
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 15-20% of the beginning store base during each of the next few
years, primarily through acquisitions. Management believes there are 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 its credit
facility will be adequate to fund the operations and expansion plans of the
Company during 1997. 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- or 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 such additional financing will be available, or if
available, will be on terms acceptable to the Company.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and ColorTyme are party to various legal
proceedings arising in the ordinary course of business. Except as described
below, neither the Company nor ColorTyme is currently a party to any material
litigation. Although the ultimate outcome of any litigation matter can never be
predicted with certainty, management of the Company believes that the Company
has established sufficient reserves to cover its reasonable exposure with
respect to its outstanding litigation.
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 connection
with an involuntary chapter 7 bankruptcy case against DEF (the "DEF Bankruptcy
Case") commenced on April 20, 1995 by the plaintiffs in a pending class action
suit against DEF and other companies including the Company (the "Miller
lawsuit").
The Complaint sought (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, had paid them an additional $900,000 through the date the Complaint
was filed and was obligated to pay them an additional approximately $5.3 million
in varying amounts between the date the Complaint was filed and April 1, 2001,
(iii) to require the Company to make all payments due after the date the
Complaint was filed under the consulting and noncompetition agreements to the
Trustee for the benefit of the DEF bankruptcy estate, and (iv) to set aside all
payments made by the Company prior to the filing of the Complaint to the
Hardestys under the consulting and noncompetition agreements, and to grant
judgment against the Hardestys and the Company 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 bankruptcy (the "Bankruptcy Settlement"). The terms
of the Bankruptcy Settlement provide that the Company will be released from the
fraudulent transfer claim and the obligation to pay $5.3 million under the
consulting and noncompetition agreements in exchange for a cash payment of $4.75
million to the Trustee. The Bankruptcy Settlement has been reduced to writing
and received approval by the Bankruptcy Court on May 28, 1997. The settlement
required and the Company made a nonrefundable payment of $50,000 to the Trustee
upon execution of the written settlement agreement. On November 18, 1996, the
Company interplead approximately $1.53 million into the registry of the
Bankruptcy Court, leaving a balance outstanding under the consulting and
noncompetition agreements of approximately $3.8 million, and reducing the cash
payment due under the proposed settlement agreement to approximately $3.25
million. On December 1, 1996, the Company began monthly payments of
approximately $160,000 to the registry of the Bankruptcy Court, due on the first
day of each month until the consulting and noncompetition agreements are fully
satisfied, or the Bankruptcy Settlement is finalized, at which time the balance
of the settlement amount will be payable in full. Each such monthly payment
reduces on a dollar-for-dollar basis the balance due under the consulting and
noncompetition agreements and the Bankruptcy Settlement.
As part of the overall Bankruptcy Settlement, the Company will receive a
full release from the fraudulent transfer claim by the Trustee on behalf of (i)
DEF, (ii) its subsidiaries, all of which have filed Chapter 7 bankruptcy cases,
and (iii) their respective creditors. The Bankruptcy Settlement will also result
in the Bankruptcy Court issuing protective orders enjoining the Hardestys from
making any claims against the Company or J. E. Talley (Chief Executive Officer,
Chairman of the Board and a principal shareholder of the Company) and certain of
their affiliates under the noncompetition and consulting agreements.
The Miller lawsuit has also been settled (the "Miller Settlement") and
has received preliminary state court approval. A final approval hearing is
scheduled for September 15, 1997. Assuming final approval is received, the
Miller Settlement will result in a dismissal of all claims which were or could
have been asserted in that case against the Company. Any potential obligations
the Company or others may have under certain DEF-related loan documents to
TransAmerica for indemnity will be released as part of the Miller Settlement.
11
<PAGE>
The Bankruptcy Settlement and the Miller Settlement (together, the
"Settlements") are each conditioned on the Miller Settlement receiving final
state court approval. If such approval is received, both Settlements will close
simultaneously.
Management believes that implementation of the Settlements, which
management expects to close in December 1997, will not have a material adverse
effect on the Company's results of operations. If the Miller Settlement does not
receive final state court approval, 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 class action complaint
adding it as a defendant in this action originally filed in April 1994 against
Crown Leasing Corporation ("Crown") and certain of its affiliates. The class
consists of all New Jersey residents who entered into rent-to-own contracts with
Crown between April 25, 1988 and April 20, 1995.
The lawsuit alleges, among other things, that under certain rent-to-own
contracts entered into between the plaintiff class and Crown, some of which were
purportedly acquired by 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. 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 plaintiffs have obtained summary judgment against Crown on the
liability issues, reserving damages for trial. Although the plaintiffs were
unsuccessful in their attempt to certify a class against the Company, the
plaintiffs have attempted to assert a theory of successor liability against the
Company. Management believes there is no basis for a claim of successor
liability against the Company, and if Crown is unable to settle the case, the
Company will take appropriate steps to defend and preserve for appeal the
successor liability issues at trial. The case is currently scheduled for trial
on September 15, 1997.
HINTON, SANCHEZ V. COLORTYME
On May 25, 1994, a class action complaint was filed in Milwaukee County,
Wisconsin against ColorTyme, Inc., a wholly-owned subsidiary of the Company
("ColorTyme") alleging that ColorTyme had entered into contracts with residents
of Wisconsin that were violative of the Wisconsin Consumer Act (the "Wisconsin
Act"). Specifically, the plaintiffs allege that the ColorTyme contracts were
consumer credit transactions under the Wisconsin Act, and that ColorTyme failed
to provide required disclosures and violated the Wisconsin Act's collection
practice restrictions. The plaintiffs' complaint seeks damages in an unspecified
amount.
In light of the ColorTyme Acquisition and the Company's later purchase
of the assets of four Milwaukee ColorTyme stores, the plaintiffs have included
the Company as a defendant to the extent that the Company assumed the
obligations of certain existing ColorTyme contracts through the asset purchase
of the Milwaukee stores. Furthermore, the court has defined the class to
include, in general, all contracts entered into with ColorTyme in the State of
Wisconsin after July 1988 and those in which payments were made after July 1988.
12
<PAGE>
At this time no trial date has been set and due to the uncertainties
associated with any litigation, the ultimate outcome cannot presently be
determined.
13
<PAGE>
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.
2.6(6) - Agreement and Plan of Reorganization dated May 15, 1996,
among Renters Choice, Inc., ColorTyme, Inc., and CT
Acquisition Corporation
3.1(7) - Amended and Restated Certificate of Incorporation of the
Company
3.2(8) - Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Company
3.3(9) - Amended and Restated Bylaws of the Company
4.1(10) - Form of Certificate evidencing Common Stock
10.1(11)* - Amended and Restated 1994 Renters Choice, Inc. Long-Term
Incentive Plan
10.2(12) - Revolving Credit Agreement dated as of November 27, 1996
between Comerica Bank, as agent, Renters Choice, Inc.
and certain other lenders
10.3(13) - Consulting Agreement dated April 1, 1993, by and between
Bob A. Hardesty and Brenda K. Hardesty and Renters
Choice, L.P.
10.4(14) - Non-Competition Agreement dated April 1, 1993, by and
between Bob A. Hardesty and Brenda K. Hardesty and
Renters Choice, L.P.
10.5(15) - Noncompetition Agreement dated as of April 20, 1995,
between Renters Choice, Inc. and Patrick S. White
10.6(16) - Consulting Agreement dated as of April 20, 1995 between
Renters Choice, Inc. and Jeffrey W. Smith
10.7(17) - Noncompetition Agreement dated as of August 27, 1995
between Renters Choice, Inc. and Starla J. Flake
10.8(18) - Noncompetition Agreement dated as of August 27, 1995
between Renters Choice, Inc. and Bruce S. Johnson
14
<PAGE>
10.9(19) - Noncompetition Agreement dated as of August 27, 1995
between Renters Choice, Inc. and Rance D. Richter
10.16* - Employment Agreement, dated March 28, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
10.17* - Stock Option Agreement, dated April 1, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
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 10-K for the year ended December 31, 1995
(6) Incorporated herein by reference to Exhibit 2.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
(7) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
(8) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
(9) Incorporated herein by reference to Exhibit 3.4 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
(10) Incorporated herein by reference to Exhibit 4.1 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(11) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
(12) Incorporated herein by reference to Exhibit 10.2 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 1996
(13) Incorporated herein by reference to Exhibit 10.5 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(14) Incorporated herein by reference to Exhibit 10.6 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(15) Incorporated herein by reference to Exhibit 10.7 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(16) Incorporated herein by reference to Exhibit 10.8 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(17) Incorporated herein by reference to Exhibit 10.10 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(18) Incorporated herein by reference to Exhibit 10.11 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(19) Incorporated herein by reference to Exhibit 10.12 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
15
<PAGE>
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: DANNY Z. WILBANKS
Danny Z. Wilbanks
SENIOR VICE PRESIDENT-
FINANCE AND CHIEF
FINANCIAL OFFICER
Date: August 11, 1997
Renters Choice, Inc.
16
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the period ending June 30, 1997
-----------------------------------
Three months Six months
----------- -----------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
Net earnings ................................................... $ 6,356,640 $11,768,698
=========== ===========
Weighted average number of common shares outstanding ........... 24,817,346 24,804,747
Net effect of dilutive stock options based on the treasury stock
method of using average market price .................. 326,240 386,763
Weighted average number of common and common equivalent
shares outstanding .................................... 25,143,586 25,091,511
=========== ===========
PRIMARY EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE ...................................... $ 0.25 $ 0.47
=========== ===========
FULLY DILUTED EARNINGS PER SHARE
Net earnings ................................................... $ 6,356,640 $11,768,698
=========== ===========
Weighted average number of common shares outstanding ........... 24,817,346 24,804,747
Net effect of dilutive stock options based on the
treasury stock method using the greater of the average
or ending market price ....................................... 437,809 343,159
Weighted average number of common and common equivalents
shares outstanding .................................... 25,255,155 25,147,906
=========== ===========
EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE ASSUMING FULL DILUTION .......................... $ 0.25 $ 0.47
=========== ===========
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS
FOUND ON PAGES 1 AND 2 OF THE COMPANY'S FORM 10-Q FOR THE SIX MONTHS ENDED JUNE
30, 1997.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,446
<SECURITIES> 0
<RECEIVABLES> 1,825
<ALLOWANCES> 129
<INVENTORY> 25,893<F1>
<CURRENT-ASSETS> 0<F2>
<PP&E> 25,797
<DEPRECIATION> 10,482
<TOTAL-ASSETS> 205,330
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 0
0
0
<COMMON> 248
<OTHER-SE> 137,428<F3>
<TOTAL-LIABILITY-AND-EQUITY> 205,330
<SALES> 22,918<F4>
<TOTAL-REVENUES> 155,389
<CGS> 20,333<F5>
<TOTAL-COSTS> 124,988
<OTHER-EXPENSES> 9,421<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 590
<INCOME-PRETAX> 20,391
<INCOME-TAX> 8,622
<INCOME-CONTINUING> 11,769
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,769
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
<FN>
<F1> RENTAL MERCHANDISE, HELD FOR RENT.
<F2> BALANCE SHEET IS UNCLASSIFIED.
<F3> ADDITIONAL PAID IN CAPITAL AND RETAINED EARNINGS.
<F4> STORE AND FRANCHISE MERCHANDISE SALES.
<F5> STORE AND FRANCHISE COST OF MERCHANDISE SOLD.
<F6> GENERAL AND ADMINISTRATIVE EXPENSE AND AMORTIZATION OF INTANGIBLES.
</FN>
</TABLE>
