<PAGE> 1
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, 1998
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 Drive, 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 11, 1998:
Class Outstanding
- -------------------------------------- -------------
Common stock, $.01 par value per share 24,969,858
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RENTERS CHOICE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
Item 1. Financial Statements
Balance Sheets as of March 31, 1998 and December 31, 1997 3
Statements of Earnings for the three months ended
March 31, 1998 and 1997 4
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 17
Exhibit 27 21
</TABLE>
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RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31,
1998 1997
-------- --------
(In Thousands Of Dollars) Unaudited
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,896 $ 4,744
Rental merchandise, net
On rent 94,228 89,007
Held for rent 22,909 23,752
Accounts receivable; trade 2,576 2,839
Prepaid expenses and other assets 2,509 3,164
Property assets, net 18,368 17,700
Deferred income taxes 6,479 6,479
Intangible assets, net 60,408 61,183
-------- --------
$213,373 $208,868
======== ========
LIABILITIES
Revolving credit agreement $ 14,020 $ 26,280
Accounts payable - trade 16,182 11,935
Accrued liabilities 21,064 17,008
Other debt 889 892
-------- --------
52,155 56,115
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;
24,957,883 and 24,904,721 shares issued and outstanding
in 1998 and 1997, respectively 250 249
Additional paid-in capital 99,989 99,381
Retained earnings 60,979 53,123
-------- --------
161,218 152,753
-------- --------
$213,373 $208,868
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
-------- --------
(In Thousands Of Dollars, except for per share data) Unaudited
<S> <C> <C>
STORE REVENUE
Rentals and fees $ 75,426 $ 61,801
Merchandise sales 5,962 4,260
Other 118 170
FRANCHISE REVENUE
Franchise merchandise sales 7,621 7,390
Royalty income and fees 1,106 966
-------- --------
TOTAL REVENUE 90,233 74,587
OPERATING EXPENSES
Direct store expenses
Depreciation of rental merchandise 15,505 13,110
Cost of merchandise sold 4,554 3,077
Salaries and other expenses 44,497 37,122
Franchise operation expenses
Cost of franchise merchandise sales 7,343 7,080
-------- --------
71,899 60,389
General and administrative expenses 3,225 3,128
Amortization of intangibles 1,388 1,431
-------- --------
TOTAL OPERATING EXPENSES 76,512 64,948
-------- --------
OPERATING PROFIT 13,721 9,639
INTEREST INCOME (114) (210)
INTEREST EXPENSE 450 504
-------- --------
EARNINGS BEFORE INCOME TAXES 13,385 9,345
INCOME TAX EXPENSE 5,529 3,933
-------- --------
NET EARNINGS $ 7,856 $ 5,412
======== ========
BASIC EARNINGS PER SHARE 0.32 0.22
======== ========
DILUTED EARNINGS PER SHARE $ 0.31 $ 0.22
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In Thousands Of Dollars) Three months ended March 31,
----------------------------
1998 1997
-------- --------
Unaudited
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 7,856 $ 5,412
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation of rental merchandise 15,505 13,110
Depreciation of property assets 1,542 1,180
Amortization of intangibles 1,388 1,431
Other -- (5)
Changes in operating assets and liabilities, net of effects of
acquisitions
Rental merchandise (19,669) (15,812)
Accounts receivable 263 275
Prepaid expenses and other assets 655 (803)
Accounts payable - trade 4,247 (4,253)
Accrued liabilities 4,056 5,937
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,843 6,472
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property assets (2,514) (2,263)
Proceeds from sale of property assets 309 81
Acquisitions of businesses (832) (11,387)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,037) (13,569)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options 608 17
Proceeds from debt 13,135 20,981
Repayments of debt (25,397) (14,417)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (11,654) 6,581
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,152 (516)
Cash and cash equivalents at beginning of period 4,744 5,920
-------- --------
Cash and cash equivalents at end of period $ 5,896 $ 5,404
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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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,
1997. 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 5 rent-to-own stores in 3 separate
transactions during the three months ended March 31, 1998 for approximately
$832,000. During 1997, the Company acquired the assets of 71 stores in
eighteen separate transactions for approximately $30.5 million in cash. 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 acquisitions. 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, 1998 and 1997, after including the impact of adjustment for
amortization of intangibles and interest expense on acquisition borrowings.
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
(In Thousands of Dollars, except per share data) 1998 1997
---------- ----------
<S> <C> <C>
Revenue $ 90,233 $ 79,687
Net Earnings $ 7,856 $ 5,412
Basic earnings per common share $ 0.32 $ 0.22
Diluted earnings per common share $ 0.31 $ 0.22
</TABLE>
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.
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3. EARNINGS PER SHARE
Basic and diluted earnings per common share is computed based on the
following information:
<TABLE>
<CAPTION>
(In Thousands Of Dollars, except for per share data) Three Months Ended
March 31, 1998
------------------------------------
Net earnings Shares Per share
------------ ------ ---------
<S> <C> <C> <C>
Basic earnings per common share $7,856 24,921 $ 0.32
Effect of dilutive stock options 250
------ ------ --------
Diluted earnings per share $7,856 25,171 $ 0.31
====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997
------------------------------------
Net earnings Shares Per share
------------ ------ ---------
<S> <C> <C> <C>
Basic earnings per common share $5,412 24,792 $ 0.22
Effect of dilutive stock options 249
------ ------ --------
Diluted earnings per share $5,412 25,041 $ 0.22
====== ====== ========
</TABLE>
7
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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 (i) the
Company's ability to open new stores, (ii) the ability to acquire additional
rent-to-own stores on favorable terms, (iii) the ability to enhance the
performance of acquired stores and to integrate acquired stores into the
Company's operations, (iv) the passage of legislation adversely affecting the
rent-to-own industry, (v) interest rates, and (vi) the ability of the Company to
collect on its rental purchase agreements at the current rate.
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 acquired 71 stores in 18 separate transactions
during the twelve months ended December 31, 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 THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Total revenue increased by $15.6 million, or 21.0%, to $90.2 million
for 1998 from $74.6 million for 1997. The increase in total revenue was
primarily attributable to the inclusion of the 158 stores either acquired or
opened since October 1, 1996. Same store revenues increased by 10.0%, from $64.4
million to $70.9 million. Same store revenues represents those revenues earned
in stores that were operated by the Company for the entire three-month periods
ending March 31, 1997 and 1998. 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 $2.4 million, or 18.3%,
to $15.5 million for 1998 from $13.1 million for 1997. Depreciation of rental
merchandise expressed as a percent of total store revenue decreased from 19.8%
in 1997 to 19.0% in 1998. 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 decreased to 54.6% for 1998 from 56.0% for 1997 primarily as a result of
increased revenues in our 1996 Acquisitions and 1997 Acquisitions, as
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well as the leveraging of our fixed and semi-fixed costs in these stores.
General and administrative expenses expressed as a percent of total revenue
decreased from 4.2% in 1997 to 3.6% in 1998.
Operating profit increased by $4.1 million, or 42.4% to $13.7 million
for 1998 from $9.6 million for 1997. This improvement was attributable to the
efficiencies discussed above and the profit contribution from ColorTyme.
Net earnings increased by $2.5 million, or 45.2%, to $7.9 million in
1998 from $5.4 million in 1997. 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,
charged-off or is no longer suitable for rent. During the three months ended
March 31, 1998, the Company acquired 5 stores for an aggregate purchase price of
$832,000, all of which was paid in cash.
The Company purchased $26.5 million and $24.1 million of rental
merchandise during the three months ended March 31, 1998 and 1997, respectively.
For the three months ended March 31, 1998, cash provided by operating
activities increased by $9.3 million, from $6.5 million in 1997 to $15.8 million
in 1998, primarily due to increased net earnings and the timing of the payment
of various operating expenses. Cash used in investing activities decreased by
$10.5 million from $13.5 million in 1997 to $3.0 million in 1998, principally
related to the fewer number of stores acquired in 1998 as compared to the number
of stores acquired during the same period for 1997. Cash used in financing
activities was $11.7 million for the three months ended March 31, 1998.
The Company has a $90 million credit facility (the "Credit Facility")
with a group of banks. Borrowings under the Credit Facility bear interest at a
rate equal to the designated prime rate (8-1/2% per annum at March 31, 1998) or
1.10% to 1.65% over LIBOR (5.6875% at March 31, 1998) at the Company's option.
At March 31, 1998, the average rate on outstanding borrowings was 6.96%, and for
the quarter the weighted average interest rate under the Credit Facility was
7.03%. 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, 1998, the outstanding
borrowings under this revolving credit agreement were $14.0 million. The Credit
Facility expires in December 1999.
On May 1, 1998, the Company agreed to acquire substantially all of the
assets of Central Rents, Inc. for an aggregate purchase price of approximately
$103 million in cash. In connection with such acquisition, the Company obtained
commitments from a group of banks increasing the borrowings available under the
Credit Facility to $140 million and intends to increase the amount of funds
available under the Credit Facility to $175 million. The Company believes that
this increase, along with its cash flows from operations, will adequately fund
the Company's operations and expansion plans during 1998.
The Company currently expects to open a total of 12 new stores during
1998 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-
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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 (to the extent it is able to increase the borrowings under the Credit
Facility to $175 million) will be adequate to fund the operations and expansion
plans of the Company during 1998. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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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.
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 sought, among other things, to void as a fraudulent transfer the
conveyance of certain assets purchased in 1993 by a predecessor of the Company
from DEF and certain of its subsidiaries, to obtain an order that such assets be
turned over to the Trustee, and to require the Company to make all future
payments due to the Hardesty's under consulting and noncompetition agreements
entered into at the time of the purchase, to the Trustee for the benefit of the
DEF bankruptcy estate.
On March 8, 1996, the Company and the Hardestys reached an agreement
with the Trustee to settle the claim in bankruptcy (the "Bankruptcy
Settlement"). The terms of the Bankruptcy Settlement provided for the Company to
be released from the fraudulent transfer claim and the future obligation to pay
the $5.3 million outstanding at March 8, 1996, 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 was reduced to writing
and received approval by the Bankruptcy Court on June 18, 1997. The parties
consummated the Bankruptcy Settlement on January 13, 1998, at which time the
Company paid the remaining amount due under the Bankruptcy Settlement into the
registry of the Bankruptcy Court and the Trustee dismissed the Complaint against
the Company and the Hardestys with prejudice. As a part of the Bankruptcy
Settlement, the Bankruptcy Court also issued a protective order 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.
In connection with the consummation of the Bankruptcy Settlement, the
Miller Lawsuit was also settled. This resulted in a dismissal of all claims
which were or could have been asserted in that case against the Company. The
settlement of the Miller Lawsuit also received court approval and it is now
finalized. The Company made no payments in connection with the settlement of the
Miller Lawsuit.
GALLAGHER V. CROWN LEASING CORPORATION
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 in
state court in New Jersey. 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 failed to make the necessary disclosures and 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.
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Pursuant to the Asset Purchase Agreement entered into between Crown,
its controlling shareholder and the Company in connection with the Crown
Acquisition, the Company assumed no liabilities pertaining to the Crown's
rent-to-own contracts for the period prior to the Crown Acquisition. The Asset
Purchase Agreement provides that Crown and Robert White, 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 then 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. 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 was
scheduled for trial on September 15, 1997. Prior to the trial setting, the
plaintiffs filed a motion for summary judgment on damages against Crown. The
motion was to be decided at a hearing on August 22, 1997.
On August 15, 1997, Crown filed a voluntary petition under Chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern
District of Texas, Sherman Division (the "Bankruptcy Filing"). Contemporaneously
with the Bankruptcy Filing, Crown removed the state court case in New Jersey to
the New Jersey federal court and filed a Motion to Transfer Venue (the "Venue
Motion") of the case to the United States District Court for the Eastern
District of Texas, Sherman Division, so that it could then be assigned to the
Texas bankruptcy court for further proceedings. Plaintiffs moved to remand the
action to New Jersey state court for the determination of damages and an entry
of final judgment. The Venue Motion was granted by the New Jersey federal court,
and the Plaintiff's motion for reconsideration of the court's ruling has now
been denied. In the meantime, the Bankruptcy Filing has been transferred to the
Bankruptcy Court in El Paso, where other litigation against Crown and its owner
is pending. Crown filed a motion with the Eastern District requesting the
Gallagher case be transferred to the Western District where its bankruptcy is
now pending. That motion was granted. The Gallagher plaintiffs moved the El Paso
Bankruptcy Court to lift the automatic stay and send the case back to New Jersey
state court. That motion was denied on February 9, 1998, without prejudice.
The Gallagher plaintiffs have filed a motion to dismiss the Bankruptcy
Filing and a motion to remand the Gallagher case to New Jersey state court. In
addition, the Gallagher plaintiffs filed a $22 million proof of claim. Crown has
filed an objection to the Gallagher plaintiffs' $22 million proof of claim. The
Company and Crown have agreed to the purchase by the Company of one of Crown's
remaining assets, a limited partnership interest, for the sum of $300,000,
subject to Bankruptcy Court approval. The Company has agreed not to pursue any
indemnification claims against Mr. White in exchange for Mr. White's agreement
to provide consulting services to the Company and to assist in the defense of
the Gallagher plaintiffs' claims. No trial setting or scheduling order has been
issued in the Gallagher case now pending before the El Paso Bankruptcy Court.
Hearings on the pending motions in the Bankruptcy Filing are expected to occur
within thirty to sixty days.
Due to the uncertainties associated with any litigation, the ultimate
outcome of this matter cannot presently be determined.
HINTON, SANCHEZ V. COLORTYME, INC.
On May 25, 1994, a class action complaint was filed in Milwaukee
County, Wisconsin against 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 alleged 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
sought damages in excess of $2.0 million. Following the Company's purchase of
ColorTyme in May 1996, the plaintiffs added the Company as a defendant in the
case.
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At a mediation on June 20 and 21, 1997, ColorTyme and the Company
settled the claims of the class, including the cost of class counsel's fees and
related settlement expenses, for $2.9 million, subject to final court approval.
The fairness hearing on the settlement occurred on January 26, 1998 at which
time the court entered its final order approving the settlement. The settlement
proceeds will now be distributed to eligible class members, with any residual
funds not distributed to such class members to be donated to charities chosen by
class counsel, ColorTyme and the Company.
MICHELLE NEWHOUSE V. RENTERS CHOICE, INC./HANDY BOYKIN V. RENTERS CHOICE, INC.
On November 26, 1997 a class action complaint was filed against the
Company by Michelle Newhouse in New Jersey state court alleging, among other
things, that under certain rent-to-own contracts entered into between the
plaintiffs and the Company, the Company failed to make the necessary disclosures
and charged the plaintiffs fees and expenses that violated the New Jersey
Consumer Fraud Act and the New Jersey Installment Sales Act. The proposed class
consists of all residents of New Jersey who are or have been parties to
contracts to rent-to-own merchandise from the Company within the past six years.
The Company removed the case to federal court on January 21, 1998, and
was then advised by the plaintiffs' attorney that Michelle Newhouse no longer
wished to serve as class representative. A motion to voluntarily dismiss the
Newhouse case was filed by the plaintiffs' attorney and is now pending.
Management anticipates the ultimate dismissal of the Newhouse complaint.
However, on May 1, 1998, subsequent to the plaintiffs' attorney filing
the motion to voluntarily dismiss the Newhouse complaint, a new class action
complaint against the Company made by Handy Boykin was filed by the plaintiffs'
attorney in the Newhouse matter in New Jersey state court alleging the same
causes of action with the same proposed class as that of the Newhouse matter.
This new filing essentially constitutes a replacement of the named plaintiff in
the Newhouse matter (Michelle Newhouse) with a new named plaintiff, Handy
Boykin. Management anticipated such a replacement and intends to defend this
matter vigorously. However, due to the uncertainties associated with any
litigation, the ultimate outcome of this matter cannot presently be determined.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Current Reports on Form 8-K
None.
LISTING OF EXHIBITS
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> 15
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.9 (19) - Noncompetition Agreement dated as of August 27, 1995
between Renters Choice, Inc. and Rance D. Richter
10.10(20) - Option Agreement dated August 27, 1995 between the Company
and Terry N. Worrell
10.11(21) - Option Agreement dated August 27, 1995 among the Company,
Worrell Investors, Inc., The Christy Ann Worrell Trust and
The Michael Neal Worrell Trust
10.15(22) - Portfolio Acquisition Agreement dated May 15, 1996, by and
among Renters Choice, Inc., ColorTyme Financial Services,
Inc., and STI Credit Corporation
10.16(23) - Employment Agreement, dated March 28, 1997, by and between
Renters Choice, Inc. and Danny Z. Wilbanks
10.17(24) - Stock Option Agreement, dated April 1, 1997, by and between
Renters Choice, Inc. and Danny Z. Wilbanks
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
<PAGE> 16
(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)
(20) Incorporated herein by reference to Exhibit 2.2 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(21) Incorporated herein by reference to Exhibit 2.3 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(22) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
(23) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(24) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
16
<PAGE> 17
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 11, 1998
Renters Choice, Inc.
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C> <C>
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
10.10(20) - Option Agreement dated August 27, 1995 between the Company
and Terry N. Worrell
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C> <C>
10.11(21) - Option Agreement dated August 27, 1995 among the Company,
Worrell Investors, Inc., The Christy Ann Worrell Trust and
The Michael Neal Worrell Trust
10.15(22) - Portfolio Acquisition Agreement dated May 15, 1996, by and
among Renters Choice, Inc., ColorTyme Financial Services,
Inc., and STI Credit Corporation
10.16(23) - Employment Agreement, dated March 28, 1997, by and between
Renters Choice, Inc. and Danny Z. Wilbanks
10.17(24) - Stock Option Agreement, dated April 1, 1997, by and between
Renters Choice, Inc. and Danny Z. Wilbanks
27 - Financial Data Schedule
</TABLE>
(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)
<PAGE> 20
(19) Incorporated herein by reference to Exhibit 10.12 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(20) Incorporated herein by reference to Exhibit 2.2 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(21) Incorporated herein by reference to Exhibit 2.3 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(22) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
(23) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(24) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
<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, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,896
<SECURITIES> 0
<RECEIVABLES> 2,705
<ALLOWANCES> 129
<INVENTORY> 22,909<F1>
<CURRENT-ASSETS> 0<F2>
<PP&E> 32,736
<DEPRECIATION> 15,505
<TOTAL-ASSETS> 213,373
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 0
0
0
<COMMON> 250
<OTHER-SE> 160,968<F3>
<TOTAL-LIABILITY-AND-EQUITY> 213,373
<SALES> 13,583<F4>
<TOTAL-REVENUES> 90,233
<CGS> 11,897<F5>
<TOTAL-COSTS> 71,899
<OTHER-EXPENSES> 4,613<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 336
<INCOME-PRETAX> 13,385
<INCOME-TAX> 5,529
<INCOME-CONTINUING> 7,856
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,856
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
<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>
