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 March 31, 1997
Commission File Number 0-25370
RENTERS CHOICE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-1024367
(State of 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 May 9, 1997:
CLASS OUTSTANDING
Common stock, $.01 par value per share 24,795,310
<PAGE>
RENTERS CHOICE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- -------
ITEM 1. Financial Statements
Balance Sheets as of March 31, 1997 and December 31, 1996 3
Statements of Earnings for the three months ended
March 31, 1997 and 1996 4
Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 5
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 6. Exhibits and Reports on Form 8-K 13
- -------
SIGNATURES 15
Exhibit 11.1 18
Exhibit 27 19
2
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RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
Unaudited
--------- ------------
ASSETS
Cash and cash equivalents ..................... $ 5,403,569 $ 5,919,894
Rental merchandise, net
On rent .................................. 79,292,446 71,619,875
Held for rent ............................ 22,822,946 23,490,515
Accounts receivable - trade, net of
allowance of $202,115 and
$255,812 in 1997 and 1996, respectively .. 2,745,460 3,020,631
Income taxes receivable ....................... -- 2,084,244
Prepaid expenses and other assets ............. 3,103,458 2,285,044
Property assets, net .......................... 13,954,481 12,715,593
Deferred income taxes ......................... 6,138,566 6,138,566
Intangible assets, net ........................ 52,592,982 47,192,380
------------ ------------
$186,053,908 $174,466,742
============ ============
LIABILITIES
Accounts payable - trade ...................... $ 12,794,316 $ 17,047,592
Accrued liabilities ........................... 14,914,063 12,923,664
Income taxes payable .......................... 1,862,435 --
Other debt .................................... 4,050,918 4,557,678
Revolving credit agreement .................... 21,505,000 14,435,000
------------ ------------
55,126,732 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; 24,792,685 and 24,791,085
shares issued and outstanding in 1997 and
1996, respectively ............................ 247,927 247,911
Additional paid-in capital .................... 98,027,235 98,009,773
Retained earnings ............................. 32,652,014 27,245,124
------------ ------------
130,927,176 125,502,808
------------ ------------
$186,053,908 $174,466,742
============ ============
The accompanying notes are an integral part of these statements.
3
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RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended March 31,
----------------------------
1997 1996
---- ----
Unaudited
Store Revenue
Rentals and fees .......................... $ 61,801,473 $ 45,565,352
Merchandise sales ......................... 4,259,650 3,254,453
Other ..................................... 170,259 181,936
Franchise Revenue
Franchise merchandise sales ............... 7,389,803 --
Royalty income and fees ................... 965,493 --
---------- ----------
TOTAL REVENUE .................. 74,586,678 49,001,741
Operating Expenses
Direct store expenses
Depreciation of rental merchandise ... 13,109,593 10,154,647
Cost of merchandise sold ............. 3,076,658 2,401,812
Salaries and other expenses .......... 37,122,310 26,900,783
Franchise operation expenses
Cost of franchise merchandise sales .. 7,079,764 --
---------- ----------
60,388,325 39,457,242
General and administrative expenses ....... 3,128,378 2,058,646
Amortization of intangibles ............... 1,431,011 1,141,755
---------- ----------
TOTAL OPERATING EXPENSES ....... 64,947,714 42,657,643
---------- ----------
OPERATING PROFIT ............... 9,638,964 6,344,098
Interest income .................................. (210,571) (93,858)
Interest expense ................................. 504,203 166,500
---------- ----------
Earnings before income taxes ... 9,345,332 6,271,456
Income tax expense ............................... 3,933,274 2,654,560
---------- ----------
NET EARNINGS ................... $ 5,412,058 $ 3,616,896
============ ============
Weighted average shares 25,039,435 24,772,182
============ ============
EARNINGS PER SHARE $0.22 $0.15
============ ============
The accompanying notes are an integral part of these statements.
4
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RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1996
---- ----
Unaudited
Cash flows from operating activities
<S> <C> <C>
Net earnings .............................................. $ 5,412,058 $ 3,616,896
Adjustments to reconcile net earnings
to net cash provided by
operating activities
Depreciation of rental merchandise ................... 13,109,593 10,154,647
Depreciation of property assets ...................... 1,179,705 727,152
Amortization of intangibles .......................... 1,431,011 1,141,755
Other ................................................ (5,167) (44,242)
Changes in operating assets and liabilities
Rental merchandise ................................... (15,811,600) (14,004,453)
Accounts receivable .................................. 275,171 --
Prepaid expenses and other assets .................... (802,320) 1,159,174
Accounts payable - trade ............................. (4,253,276) 1,867,554
Accrued liabilities .................................. 1,990,399 (561,414)
Income taxes ......................................... 3,946,679 3,284,277
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ 6,472,253 7,341,346
Cash flows from investing activities
Purchase of property assets ............................... (2,263,093) (2,245,800)
Proceeds from sale of property assets ..................... 80,800 40,722
Acquisitions of businesses ................................ (11,387,003) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ............. (13,569,296) (2,205,078)
Cash flows from financing activities
Proceeds (expenses) from public offerings ................. -- (13,674)
Proceeds from exercise of options ......................... 17,478 --
Proceeds from debt ........................................ 20,980,739 --
Repayments of debt ........................................ (14,417,499) (34,394,694)
------------ ------------
Net cash provided by (used in) financing activities 6,580,718 (34,408,368)
------------ ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS ........................ (516,325) (29,272,100)
Cash and cash equivalents at beginning of period ................. 5,919,894 35,321,338
------------ ------------
Cash and cash equivalents at end of period ....................... $ 5,403,569 $ 6,049,238
============ ============
Supplemental cash flow information
Cash paid during the quarter for
Interest ............................................. $ 504,203 $ 59,000
Income taxes ......................................... $ 166,000 $ 63,000
</TABLE>
The accompanying notes are an integral part of these statements.
5
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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 27 rent-to-own stores in eleven
transactions during the three months ended March 31, 1997 for
approximately $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 three month periods ending March 31, 1997 and
1996, after including the impact of adjustment for amortization of
intangibles and interest expense on acquisition borrowings.
Three months ended March 31,
----------------------------
1997 1996
---- ----
Revenue ............................. $75,518,000 $66,010,000
Net earnings ........................ $ 5,502,000 $ 4,097,000
Earnings per common share ........... $ 0.22 $ 0.16
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.
3. 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. The effect of adopting this new standard has not
been determined.
6
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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"). 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 THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Total revenue increased by $25.6 million, or 52.2%, to $74.6 million
for 1997 from $49.0 million for 1996. The increase in total revenue was
primarily attributable to the inclusion of the 209 stores acquired prior to
March 31, 1996 and the ColorTyme acquisition. Same store revenues increased by
9.6%, from $48.4 million to $53.1 million. Same store revenues represents
revenues earned in stores that were operated by the Company for the entire
three-month periods ending March 31, 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 $3.0 million, or 29.7%,
to $13.1 million for 1997 from $10.1 million for 1996. Depreciation of rental
merchandise expressed as a percent of rental and fee revenue decreased from
22.3% in 1996 to 21.2% in 1997. The decrease was primarily attributable to
higher rental rates on rental merchandise.
Salaries and other expenses expressed as a percentage of total
revenues, net of franchising related revenues, increased to 56% for 1997 from
54.9% for 1996 primarily as a result of increases in salaries for employees of
the 1996 Acquisition stores immediately following the acquisitions while store
revenues have increased gradually. General and administrative expenses expressed
as a percent of total revenue remained constant for both periods at 4.2%.
7
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RENTERS CHOICE, INC. AND SUBSIDIARIES
Operating profit increased by $3.3 million, or 51.9% to $9.6 million
for 1997 from $6.3 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 the increase.
Net earnings increased by $1.8 million, or 49.6%, to $5.4 million in
1997 from $3.6 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 quarter ended March
31, 1997, the Company acquired 27 stores for an aggregate purchase price of
$11.4 million, all of which was paid in cash. The Company also opened an
additional 2 stores during the first quarter of 1997.
The Company purchased $24.1 million and $15.3 million of rental
merchandise during the three months ended March 31, 1997 and 1996, respectively.
For the three months ended March 31, 1997, cash provided by operating
activities decreased by $870,000, from $7.3 million in 1996 to $6.5 million in
1997, primarily due to the timing of the payment of various operating expenses
offset by increased rental merchandise purchases. Cash used in investing
activities increased by $11.4 million from $2.2 million in 1996 to $13.6 million
in 1997. Cash provided by financing activities was $6.6 million for the three
months ended March 31, 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 April 1, 1997) or 1.10% to 1.65% over LIBOR
(5.6879% at April 1, 1997) at the Company's option. At March 31, 1997, the
average rate on outstanding borrowings was 7.01%, and for the quarter the
weighted average interest rate under this facility was 6.7%. 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 March 31, 1997, the outstanding borrowings under this revolving
credit agreement were $21.5 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 - 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 final
cash payment of approximately $3.25 million (the "Settlement Amount").
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.
8
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RENTERS CHOICE, INC. AND SUBSIDIARIES
In connection with the Crown Acquisition, monthly payments of $16,667
were paid 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 a total of 12-24 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 50-60 stores during 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 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.
9
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and its wholly-owned subsidiary,
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.
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 by the plaintiffs in a pending class action suit
against DEF and other companies including the Company (the "Miller lawsuit").
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 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 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 Bankruptcy Settlement,
which, as of March 24, 1997, 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 with prejudice. 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 shall be payable
in full. Each such monthly payment will reduce 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
DEF, any of its subsidiaries which may file Chapter 7 bankruptcy cases and their
respective creditors. The Bankruptcy 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 Miller lawsuit has been settled. This should result in a dismissal
of all claims which were or could have been asserted in that case against the
Company. The Company is insisting and TransAmerica has agreed that any
10
<PAGE>
potential obligations it or others may have under certain DEF-related loan
documents to TransAmerica for indemnity be released as part of the settlement,
including any claims TransAmerica might have for any indemnity claims asserted
against it in the Miller lawsuit. Execution of a global settlement agreement
should be simplified in light of the settlement of the Miller lawsuit.
Management believes that the implementation of the settlement
agreement, which management expects to be executed and approved by the
Bankruptcy Court sometime during 1997, 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 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 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 "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 Acquisition,
the Company assumed no liabilities pertaining to Crown's rent-to-own contracts
for the period prior to the 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 Acquisition. Claims covered include claims of
customers, other than claims relating to rent-to-own contracts entered into by
Crown prior to the 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.
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,
11
<PAGE>
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.
At this time discovery continues and no trial date has been set. Due to
the uncertainties associated with any litigation, the ultimate outcome cannot
presently be determined.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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
13
<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)
14
<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: /s/ DANNY Z. WILBANKS
Danny Z. Wilbanks
SENIOR VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
Date: May 14, 1997
Renters Choice, Inc.
15
<PAGE>
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.
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
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
16
<PAGE>
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)
17
Exhibit 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
Three months ended
March 31, 1997
PRIMARY EARNINGS PER SHARE
Net earnings .................................................... $ 5,412,058
===========
Weighted average number of common shares outstanding ............ 24,792,148
Net effect of dilutive stock options based on the
treasury stock method of using average
market price ........................................... 247,287
Weighted average number of common and common
equivalent shares outstanding .......................... 25,039,435
PRIMARY EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE ....................................... $ 0.22
===========
FULLY DILUTED EARNINGS PER SHARE
Net earnings .................................................... $ 5,412,058
===========
Weighted average number of common shares outstanding ............ 24,792,148
Net effect of dilutive stock options based on the
Treasury Stock
Method using the greater of the average
or ending market price ................................. 247,287
Weighted average number of common and common equivalents
shares outstanding ..................................... 25,039,435
===========
EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE ASSUMING FULL DILUTION
$ 0.22
===========
18
<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 THREE MONTHS ENDED
MARCH 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,403
<SECURITIES> 0
<RECEIVABLES> 2,947
<ALLOWANCES> 202
<INVENTORY> 22,822<F1>
<CURRENT-ASSETS> 0<F2>
<PP&E> 23,310
<DEPRECIATION> 9,356
<TOTAL-ASSETS> 186,054
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 248
<OTHER-SE> 130,679<F3>
<TOTAL-LIABILITY-AND-EQUITY> 186,054
<SALES> 11,649<F4>
<TOTAL-REVENUES> 74,587
<CGS> 10,156<F5>
<TOTAL-COSTS> 60,388
<OTHER-EXPENSES> 4,559<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 294
<INCOME-PRETAX> 9,345
<INCOME-TAX> 3,933
<INCOME-CONTINUING> 5,412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,412
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
<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> STORE AND FRANCHISE MERCHANDISE SALES.
<F5> STORE AND FRANCHISE COST OF MERCHANDISE SOLD.
<F6> GENERAL AND ADMINISTRATIVE EXPENSE AND AMORTIZATION OF INTANGIBLES.
</FN>
</TABLE>
