<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
AUGUST 5, 1998
----------
RENTERS CHOICE, INC.
(Exact name of registrant as specified in charter)
DELAWARE 0-25370 48-1024367
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
13800 MONTFORT DRIVE
SUITE 300
DALLAS, TEXAS 75240
(Address of Principal Executive Offices) (Zip Code)
(972) 701-0489
(Registrant's telephone
number, including area code)
NO CHANGE
(Former Name or Former Address, if Changed Since Last Report)
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<PAGE> 2
ITEM 2. ACQUISITION OF ASSETS
On August 5, 1998, the Registrant purchased 100% of the capital stock
of Thorn Americas, Inc. ("Thorn Americas") for approximately $900
million (including the repayment of certain debt of Thorn Americas),
subject to adjustment, pursuant to that certain Stock Purchase
Agreement, dated June 16, 1998, by and among the Registrant, Thorn
International BV and Thorn plc (the "Stock Purchase Agreement").
Immediately following the closing, Thorn Americas name was changed to
Rent-A- Center, Inc. Prior to its acquisition by the Registrant, Thorn
Americas was the largest rent-to-own operator with 1,404 company-owned
stores and 65 franchised stores. Thorn Americas operated under three
brand names, "Rent-A-Center," "Remco" and "U-Can Rent." In addition,
Thorn Americas operated certain non-rent-to-own businesses, including
automobile retailing, credit retailing and check cashing that
represented less than 2.3% of Thorn Americas revenues during the
fiscal year ended March 31, 1998.
Pursuant to the Stock Purchase Agreement, the Registrant paid the
purchase price in cash and repaid certain debt of Thorn Americas owed
to a subsidiary of Thorn plc. The total purchase price and structure
of the consideration paid was determined by negotiation between the
Registrant and Thorn plc. The source of the cash consideration was the
proceeds from (i) a newly established $926.25 million senior credit
facility with Chase Manhattan Bank, as Administrative Agent, Comerica
Bank, as Documentation Agent, and NationsBank, N.A., as Syndication
Agent, (ii) a $175 million senior subordinated credit facility with
The Chase Manhattan Bank, as Administrative Agent and Chase Securities
Inc., as Arranger, and (iii) the issuance of $235 million of preferred
stock to Apollo Investment Fund IV, L.P. These proceeds were also used
to retire the Registrants prior revolving credit facility with
Comerica Bank, as Agent. There was no material relationship between
(i) the Registrant, any of its affiliates, any of its officers or
directors, or any associate of such officers and directors, and (ii)
Thorn Americas, Thorn International BV, or Thorn plc, any affiliates
of Thorn Americas, Thorn International BV, or Thorn plc, any of the
officers or directors of Thorn Americas, Thorn International BV, or
Thorn plc or any associate of such officers and directors.
The Registrant intends to continue operating the acquired stores as
rent-to-own stores and discontinue Thorn Americas non-rent-to-own
businesses. Thorn Americas generated approximately $880 million in
rent-to-own revenue during its fiscal year 1998.
The Registrant is the largest rent-to-own operator and franchisor in
the United States. The Registrant operates 2,084 company owned stores
and franchises 343 stores in all 50 states and Puerto Rico and the
District of Columbia.
-2-
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Report of Independent Auditors
Balance Sheets as of March 31, 1997 and 1998
Statements of Operations for the years ended March 31, 1996, 1997
and 1998
Statements of Stockholder's Equity for the years ended March 31,
1996, 1997 and 1998
Statements of Cash Flows for the years ended March 31, 1996, 1997
and 1998
Notes to Financial Statements
-3-
<PAGE> 4
CONSOLIDATED FINANCIAL STATEMENTS
THORN AMERICAS, INC. AND SUBSIDIARIES
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 5
THORN Americas, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended March 31, 1996, 1997 and 1998
With Report of Independent Auditors
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. 1
Consolidated Financial Statements
Balance Sheets.............................................................. 2
Statements of Operations.................................................... 4
Statements of Stockholder's Equity.......................................... 5
Statements of Cash Flows ................................................... 6
Notes to Financial Statements............................................... 8
</TABLE>
<PAGE> 6
Report of Independent Auditors
The Board of Directors
THORN Americas, Inc.
We have audited the accompanying consolidated balance sheets of THORN Americas,
Inc. and subsidiaries as of March 31, 1997 and 1998, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended March 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of THORN
Americas, Inc. and subsidiaries at March 31, 1997 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
April 24, 1998
except for Note 14, as to which
the date is June 25, 1998
Wichita, Kansas
1
<PAGE> 7
THORN Americas, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
JUNE 30
MARCH 31 1998
1997 1998 (UNAUDITED)
---------- ---------- -----------
<S> <C> <C> <C>
Cash $ 26,077 $ 23,755 $ 27,486
Accounts receivable - other 10,339 26,937 22,322
Accounts receivable - affiliated companies, net
62,101 15,024 702
Prepaid expenses 9,169 8,114 8,555
Deferred income taxes 21,209 21,113 21,113
Merchandise and auto inventory 38,231 39,443 43,068
Rental merchandise, at cost 509,183 521,482 539,539
Less accumulated depreciation 233,171 228,517 235,857
---------- ---------- ----------
Net rental merchandise 276,012 292,965 303,682
Property and equipment, at cost
Land and building 19,810 22,855 22,971
Furniture and equipment 84,083 95,594 98,189
Transportation and equipment 86,140 87,494 87,851
Leasehold improvements 59,206 63,593 73,616
---------- ---------- ----------
249,239 269,536 282,627
Less accumulated depreciation and
amortization 130,736 146,016 152,475
---------- ---------- ----------
Net property and equipment 118,503 123,520 130,152
Goodwill, less accumulated amortization
499,471 479,636 479,517
Other assets, less accumulated amortization
47,168 48,602 49,199
---------- ---------- ----------
$1,108,280 $1,079,109 $1,085,796
========== ========== ==========
</TABLE>
See accompanying notes.
2
<PAGE> 8
<TABLE>
<CAPTION>
JUNE 30
MARCH 31 1998
1997 1998 (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
Liabilities and Stockholder's Equity
Accounts payable $ 62,222 $ 31,717 $ 41,334
Accrued expenses:
Salaries, wages and fringe benefits 31,523 32,492 31,305
Other 18,948 9,047 9,495
Other liabilities 40,776 52,986 47,383
Accrued incentives 1,550 2,161 1,853
Long term loans from affiliates 714,235 714,223 714,663
----------- ----------- -----------
Total liabilities 869,254 842,626 846,033
----------- ----------- -----------
Stockholder's equity:
Common stock of $1 par value;
1,000 shares authorized,
issued and outstanding 1 1 1
Additional paid-in capital 334,681 334,681 334,681
Retained deficit (95,656) (98,199) (94,919)
----------- ----------- -----------
Total stockholder's equity 239,026 236,483 239,763
----------- ----------- -----------
----------- ----------- -----------
$ 1,108,280 $ 1,079,109 $ 1,085,796
=========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 9
THORN Americas, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30
YEARS ENDED MARCH 31 1997 1998
1996 1997 1998 (UNAUDITED)
--------- --------- --------- ------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenues and fees $ 819,452 $ 850,773 $ 819,949 $ 208,444 $ 214,514
Sale of merchandise and autos 64,628 60,249 62,712 12,611 15,141
Franchise income 5,364 2,366 2,266 582 560
Other income 8,483 13,483 19,077 4,004 5,206
--------- --------- --------- --------- ---------
Total revenues 897,927 926,871 904,004 225,641 235,421
--------- --------- --------- --------- ---------
Costs and operating expenses:
Cost of sales 43,345 39,793 45,574 8,524 12,503
Depreciation and amortization:
Rental merchandise 257,383 260,433 244,572 62,852 62,886
Goodwill 19,097 23,164 24,044 6,014 5,884
Other 33,139 35,921 32,825 8,584 8,648
Salaries, wages and fringe benefits 255,768 272,242 279,796 68,488 72,960
Advertising 33,895 30,284 30,320 8,059 8,188
Property costs 52,393 59,244 61,643 15,054 14,886
Other operating expenses 116,289 143,487 117,597 27,541 29,579
Restructuring charges 12,600 -- 12,292 -- --
--------- --------- --------- --------- ---------
Total costs and operating expenses
823,909 864,568 848,663 205,116 215,534
--------- --------- --------- --------- ---------
Operating income 74,018 62,303 55,341 20,525 19,887
--------- --------- --------- --------- ---------
Other (income) expense:
Interest:
Related parties, net 79,692 53,078 45,961 10,888 11,271
Other interest, net 515 (427) 223 (63) (80)
Other 101 (254) (88) (81) 72
--------- --------- --------- --------- ---------
80,308 52,397 46,096 10,744 11,263
--------- --------- --------- --------- ---------
Income (loss) before income taxes
(6,290) 9,906 9,245 9,781 8,624
Income taxes 6,771 13,880 7,760 5,950 5,344
--------- --------- --------- --------- ---------
Net income (loss) $ (13,061) $ (3,974) $ 1,485 $ 3,831 $ 3,280
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 10
THORN Americas, Inc. and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars in thousands)
For the years ended March 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at March 31, 1995
As previously reported $ 1 $ 180,210 $ (75,636) $ 104,575
Adjustment for reorganization
/demerger -- -- (2,985) (2,985)
---------- ---------- ---------- ----------
Adjusted balance 1 180,210 (78,621) 101,590
Net loss -- -- (13,061) (13,061)
---------- ---------- ---------- ----------
Balance at March 31, 1996 1 180,210 (91,682) 88,529
Net loss -- -- (3,974) (3,974)
Capital contributed by Parent -- 154,471 -- 154,471
---------- ---------- ---------- ----------
Balance at March 31, 1997 1 334,681 (95,656) 239,026
Net income -- -- 1,485 1,485
Advance to unconsolidated
New Zealand division -- -- (4,028) (4,028)
---------- ---------- ---------- ----------
Balance at March 31, 1998 1 334,681 (98,199) 236,483
Net income (unaudited) -- -- 3,280 3,280
---------- ---------- ---------- ----------
Balance at June 30, 1998
(unaudited) $ 1 $ 334,681 $ (94,919) $ 239,763
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 11
THORN Americas, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30
YEARS ENDED MARCH 31 1997 1998
1996 1997 1998 (UNAUDITED)
--------- --------- --------- ------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (13,061) $ (3,974) $ 1,485 $ 3,831 $ 3,280
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Rental merchandise losses 9,463 11,152 10,126 1,054 2,656
Depreciation and amortization 309,619 319,518 301,441 77,450 77,418
Interest added to principal balance,
loan from affiliates 88,891 34,468 -- -- --
Deferred income taxes (5,341) (10,277) 96 -- --
Restructuring charges 7,814 -- 6,851 -- --
Changes in operating assets and liabilities
net of effects from business combinations:
Accounts receivable - other (407) (3,930) (16,598) 8,297 4,615
Accounts receivable - affiliated companies 21,826 480 (480) -- --
Prepaid expenses (3,697) 1,604 1,055 316 (441)
Merchandise and auto inventory (6,622) (9,443) (1,212) 7,682 (3,625)
Accounts payable 12,748 11,112 (30,505) (22,860) 9,617
Accrued expenses, other liabilities and
accrued incentives 4,968 32,954 (3,100) (3,059) (6,650)
--------- --------- --------- --------- ---------
Net cash provided by operating activities 426,201 383,664 269,159 72,711 86,870
Cash flows from investing activities:
Proceeds from sale of rental merchandise 43,858 50,998 39,474 9,441 8,040
Net funds received from affiliated company 17,427 141,672 47,557 914 14,322
Advance to unconsolidated New Zealand division -- -- (4,028) -- --
Acquisition of rental merchandise (299,704) (289,483) (306,792) (64,506) (83,320)
Acquisition of property and equipment (44,642) (32,306) (38,077) (5,630) (15,454)
Acquisition of rental companies, net of cash
acquired (124,577) (21,073) (7,626) (1,448) (4,040)
Purchase of Minority Interest -- -- -- -- (3,000)
Decrease in undistributed IRB funds 2,250 -- -- -- --
Other (10,330) (10,658) (1,977) (752) (127)
--------- --------- --------- --------- ---------
Net cash used by investing activities $(415,718) $(160,850) $(271,469) (61,981) (83,579)
</TABLE>
Continued on following page.
6
<PAGE> 12
THORN Americas, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30
YEARS ENDED MARCH 31 1997 1998
1996 1997 1998 (UNAUDITED)
--------- --------- --------- -----------------------
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Advances from parent $ -- $ -- $ -- $ 592 $ 440
Repayment of bond obligations (1,740) (7,322) -- -- --
Repayments of loan from parent -- (208,640) (12) -- --
--------- --------- --------- --------- ---------
Net cash used by financing activities (1,740) (215,962) (12) 592 440
--------- --------- --------- --------- ---------
Net increase (decrease) in cash 8,743 6,852 (2,322) 11,322 3,731
Cash at beginning of year 10,482 19,225 26,077 26,077 23,755
--------- --------- --------- --------- ---------
Cash at end of year $ 19,225 $ 26,077 $ 23,755 $ 37,399 $ 27,486
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 4,862 $ 30,431 $ 48,709 $ 11,476 $ 11,502
Income taxes 4,295 17,102 23,991 9,265 252
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
During fiscal 1997, as part of the demerger transaction, the Company received a
capital contribution of $154,471 related to a reduction of affiliated
indebtedness.
DISCLOSURE OF ACCOUNTING POLICIES
For purposes of the statement of cash flows, the Company considers cash and cash
equivalents to include currency on hand, demand deposits and short-term
investments with a maturity of three months or less with banks or other
financial institutions.
7
<PAGE> 13
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
March 31, 1996, 1997 and 1998
(Information as of June 30, 1998 and for the three-month periods
ended June 30, 1997 and 1998 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATED FINANCIAL STATEMENTS
Prior to April 1996, THORN Americas, Inc. (TA) was a wholly-owned subsidiary of
THORN EMI North America Holdings, Inc. (TEMINAH) and TEMINAH was an indirectly
wholly-owned subsidiary of THORN EMI plc., a United Kingdom limited liability
company. Effective August 19, 1996, the demerger and reorganization of the THORN
EMI group was completed and the rental, rental-purchase and related businesses
of THORN EMI group were transferred to THORN plc. (THORN), a newly formed United
Kingdom limited liability company. As a result of this demerger and
reorganization, TA became a wholly owned subsidiary of THORN International BV,
(hereinafter referred to as the "Parent"). The Parent is an indirectly
wholly-owned subsidiary of THORN. The consolidated financial statements include
the accounts of THORN Americas, Inc. and its wholly-owned subsidiaries, except
for the net assets and operations of its New Zealand division, which had net
assets at March 31, 1997 and 1998 of $7,608 and $10,242, respectively,
hereinafter referred to collectively as the Company. All significant
intercompany balances and transactions have been eliminated in consolidation.
THORN Americas, Inc., dba Rent-A-Center (RAC), Remco America, Inc. (Remco),
U-Can Rent, and THORN Services International (TSI) operate approximately 1,400
rent-to-own stores throughout the United States. RAC, Remco and U-Can Rent
principally rent consumer electronics, appliances and furniture on a short or
long term basis. Ownership of the merchandise may be transferred to the consumer
when rented on a long term basis, usually 6 to 30 months. TSI services the
rental merchandise and provides warehouse and merchandise distribution services
to the RAC, Remco and U-Can Rent stores.
During fiscal 1998, the Company began testing a used auto sales business, under
the tradename AdvantEDGE Quality Cars. This proposition offers a retail
transaction on the sale of used autos with installment financing available
through the Company.
Certain reclassifications have been made in the 1996 and 1997 consolidated
financial statements to conform with the 1998 format.
8
<PAGE> 14
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
MERCHANDISE AND AUTO INVENTORY
Merchandise inventory consists primarily of rental merchandise which is
temporarily stored in distribution centers awaiting assignment to a store.
Rental merchandise inventory is stated at average cost. In fiscal 1998,
merchandise and auto inventory also includes inventory associated with the
Company's auto business. Auto inventory is stated at actual cost.
RENTAL MERCHANDISE, RELATED RENTAL REVENUES AND DEPRECIATION
Rental merchandise is rented to customers pursuant to rental agreements which
generally provide for either weekly or monthly rental terms, with rental
payments collected in advance. The rental agreements may be terminated at any
time by the customers, and if terminated, the rental merchandise is returned to
the Company. Rental revenue is recognized as collected.
Merchandise rented to customers or available for rent is classified in the
consolidated balance sheets as rental merchandise and is being depreciated on a
straight-line basis over various periods ranging from 6 to 30 months (a majority
of rental merchandise is depreciated over 18 to 24 month periods).
DEPRECIATION AND AMORTIZATION
Depreciation of furniture and equipment, transportation equipment and buildings
is computed on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized on a straight-line basis over the
term of the related leases.
9
<PAGE> 15
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents the excess of cost over the fair value of the net assets of
businesses acquired and is amortized on the straight-line method over periods
ranging from 2 to 40 years. Accumulated amortization of goodwill was $149,210
and $173,254 at March 31, 1997 and 1998, respectively.
OTHER ASSETS
Other assets consist of territory rights, covenants not to compete, deferred
software costs, and other tangible and intangible amounts. Other assets, which
are amortizable, are amortized using the straight-line method over periods
ranging from 3 to 25 years. Accumulated amortization of these assets was $14,797
and $17,091 at March 31, 1997 and 1998, respectively.
SALE OF MERCHANDISE AND AUTOS
Sale of merchandise and autos consists primarily of sales of used rental
merchandise, including proceeds from early payoffs of rental purchase contracts,
and automobile sales in connection with the Company's auto business which opened
in fiscal 1998.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable. Impairment is recognized when the carrying amounts of such assets
cannot be recovered by the undiscounted future net cash flows likely to be
generated.
ADVERTISING COSTS
Costs incurred for communicating and producing advertising are expensed the
first time the advertising occurs. During fiscal 1996, 1997 and 1998,
advertising expense was $33,895, $30,284 and $30,320, respectively.
10
<PAGE> 16
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company participates in stock option and share rights plans sponsored by
THORN that provide for the granting of stock options (Thorn Share Option Plan)
to exempt level employees and share rights (Share Appreciation Rights Plan) to
certain key executives of the Company. The stock options and share rights, which
are associated with THORN stock, are typically issued annually and vest over a
three year period, subject to certain performance criteria. Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based
Compensation," encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company
applies APB Opinion 25 "Accounting for Stock Issued to Employees" in accounting
for stock options.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that were exposed to concentrations of
credit risk consist primarily of cash. The Company places its funds into high
credit quality financial institutions and, at times, such funds may be in excess
of the Federal Depository insurance limit.
UNAUDITED INTERIM FINANCIAL DATA
The interim financial data at June 30, 1998, and for the three-month periods
ended June 30, 1997 and 1998, included herein, are unaudited and, in the opinion
of management, reflect all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of financial position and the
results of operations and cash flows for such interim periods.
2. ACQUISITIONS AND MERGERS
The Company maintains an ongoing program to acquire selected rental operations.
During fiscal 1998, the Company acquired in purchase transactions eight rental
operations for an aggregate $7,626 net of cash acquired, of which $4,209 was
accounted for as goodwill. During fiscal 1997, the Company acquired in purchase
transactions twelve rental operations for an aggregate $21,073 net of cash
acquired, of which $15,292 was accounted for as goodwill. During fiscal 1996,
the Company acquired in purchase
11
<PAGE> 17
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
2. ACQUISITIONS AND MERGERS (CONTINUED)
transactions seven rental operations for an aggregate $124,577 net of cash
acquired, of which $85,363 was accounted for as goodwill. The operations of the
stores are included in the Company's consolidated financial statements beginning
on the date of acquisition. The Company is continuing to consider the
acquisition of additional rental operations.
On August 19, 1996 the demerger of the THORN EMI group was completed and the
rental, rental-purchase and related businesses of the THORN EMI group were
transferred to THORN plc. This resulted in, among other things, the Company
acquiring 100 percent of the common stock of Remco Americas, Inc. in exchange
for the Company's twelve percent investment interest in the common stock of an
affiliated company, Thorn EMI North America, Inc. (TENA). The Company's
investment in TENA was accounted for under the cost method of accounting and had
a net book carrying value of $50,000. The affiliates from which this common
stock and these net assets were purchased were under the common control of the
Company's indirect parent at the time of the transaction and accordingly, the
assets and liabilities were recorded at their historical cost in a manner
similar to that of a pooling of interest. The accompanying financial statements
include the accounts and operations of these affiliates as if they were a part
of the Company at the beginning of fiscal 1996.
3. LOANS FROM AFFILIATES
Prior to the demerger, the Company had entered into a loan agreement with
TEMINAH which required the Company to pay to TEMINAH $2,129,280 on July 2, 2004.
This amount consisted of principal plus interest compounded at ten percent (10%)
per year. As a part of the demerger transaction the Company and an affiliated
company, Thorn Finance, plc. (TFP), refinanced the loan agreement, requiring the
Company to pay TFP $710,818 together with all accrued and unpaid interest on the
unpaid balance on July 2, 2010. In connection with this refinancing the Company
paid $200,000 on the original note. In addition, $50,000 of this note was
forgiven by TEMINAH and recorded as a contribution of capital in the
accompanying statement of stockholders' equity.
During fiscal 1998, interest accrues at a variable rate equal to 120% of the
"Applicable Federal Rate" (AFR), designated as "Compounding Monthly," for debt
instruments with a maturity of less than three years (6.3% at March 31, 1998).
During fiscal 1997, the interest rate was equal to fifty (50) basis points above
the AFR (6.18% at March 31, 1997). The terms of the agreement allow the Company
to prepay the note in part or in
12
<PAGE> 18
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
3. LOANS FROM AFFILIATES (CONTINUED)
full, without premium or penalty. The balance on the note payable to TFP, at
March 31, 1997 and 1998 was $714,235 and $714,223, respectively.
4. ACCOUNTS RECEIVABLE - AFFILIATED COMPANIES
Accounts receivable from affiliated companies includes income taxes payable to
Parent of $480 at March 31, 1997 (see Note 9). These balances are not subject to
interest. The Company has short term loans receivable outstanding from TFP
totaling $65,000 and $15,000 as of March 31, 1997 and 1998, respectively. Other
intercompany receivables/(payables) with affiliated companies totaled $(2,419)
and $24 as of March 31, 1997 and 1998, respectively. The year-end net receivable
balances are not subject to specified settlement terms.
Prior to the demerger transaction, advances to or from affiliated companies were
made as working capital was available or needed. The Company received interest
at 125% of the monthly applicable federal rate on the deposited funds. After the
demerger transaction the Company continues to earn interest on its excess cash
invested with THORN at rates commensurate with short term interest rates
available in major U.S. banking markets.
5. COMMITMENTS
The Company leases its store and distribution facilities. Management expects, in
the normal course of business, that leases which expire will be renewed or
replaced by other leases. At March 31, 1998, the approximate future annual
minimum rental payments required under these noncancelable operating leases were
as follows:
<TABLE>
<S> <C>
1999 $39,886
2000 28,625
2001 14,344
2002 6,114
2003 2,475
Thereafter 2,327
-------
Total minimum payments required $93,771
=======
</TABLE>
13
<PAGE> 19
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
5. COMMITMENTS (CONTINUED)
Rent expense under noncancelable operating leases for fiscal 1996, 1997, and
1998 was approximately $41,197, $45,973 and $47,590, respectively.
6. INCENTIVE PLANS
The Company has long-term incentive plans for key executives. Payments are
contingent upon the Company meeting long-term financial objectives based upon
three-year operating cycles. Expense associated with such plans during fiscal
1996, 1997 and 1998 totaled $440, $797 and $1,072, respectively. The expected
obligations under these plans at March 31, 1997 and 1998 were $1,550 and $2,161,
respectively.
7. SAVINGS PLANS
The Company has a trusteed savings plan for the benefit of eligible employees.
The plan provides for the participants to make voluntary contributions to the
plan ranging from 1% to 20% of their gross compensation which is matched by the
Company at a rate each year as determined by the Company's Board of Directors.
The Company may, at its sole discretion, match 100% of the amount contributed by
the participant up to 4% of the employee's annual gross compensation.
Effective January 1, 1998, the Company offered a nonqualified saving plan (NSP)
for certain designated employees who are within a select group of key management
or highly compensated employees. Employees eligible to participate in the NSP
may elect to defer up to a maximum of 80% of their salary and up to a maximum of
100% of incentive bonuses. The Company will make a matching deferred
contribution of up to 15% of the employee's contribution, not to exceed $15 per
employee per plan year.
During fiscal 1996, 1997, and 1998 the expense related to these plans, net of
forfeitures, amounted to $3,554, $3,359 and $3,295, respectively.
8. STOCK-BASED COMPENSATION PLANS
In fiscal 1997, the Company adopted the disclosure-only provisions of SFAS 123.
SFAS 123 encourages entities to adopt a fair value-based method of accounting
for employee stock compensation plans, but allows companies to continue to
account for those plans using the accounting proscribed by APB 25. The Company
has elected to account for
14
<PAGE> 20
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
8. STOCK-BASED COMPENSATION PLANS (CONTINUED)
stock based compensation using APB 25, while making the required pro forma
disclosures of net earnings as if the fair value-based method had been applied.
Accordingly, no compensation expense has been recorded for the stock option or
share rights plans. Had the compensation cost for stock based compensation plans
been determined using the fair value method of accounting consistent with SFAS
123, there would have been no significant effect on the Company's net income.
The Black-Scholes option-pricing model was used to determine the fair value on
the date of grant for the stock options and share rights. As of March 31, 1998
there were awards for 9,961,904 shares outstanding.
SFAS 123 requires certain disclosures to be made about the pricing model
assumptions used, exercisable options, option activity, weighted average price
per option and option exercise price range for each income statement period.
Since the stock option and share rights activity relates only to THORN's
stockholders' equity, this information is not presented for the Company.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 8,576 $ 17,487 $ 7,050
State 3,536 6,670 614
-------- -------- --------
Total current 12,112 24,157 7,664
-------- -------- --------
Deferred: (4,384) (7,998) (532)
Federal (957) (2,279) 628
-------- -------- --------
State (5,341) (10,277) 96
-------- -------- --------
Total deferred $ 6,771 $ 13,880 $ 7,760
-------- -------- --------
</TABLE>
15
<PAGE> 21
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
9. INCOME TAXES (CONTINUED)
Prior to the demerger, the Company filed a consolidated federal tax return with
TEMINAH and calculated its tax provision in accordance with TEMINAH's tax
allocation policy, which provides for calculations on a stand-alone basis with
any tax liability or benefit recorded as a payable to or receivable from
TEMINAH. Post- demerger, the Company files a consolidated federal tax return
with its U.S. subsidiaries and calculates its tax liability based upon income
for the applicable periods. During fiscal 1997 in connection with the demerger,
TEMINAH forgave $8,721 in tax liability owed to them from the Company. This
reduction in liability was treated as a capital contribution by TEMINAH and
recorded as an increase in paid-in capital by the Company.
The income tax provision differed from the amount computed by applying the U.S.
federal income tax rate of 35% for fiscal 1997 and 1998 to income before income
taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense $ (2,202) $ 3,466 $ 3,236
Increase (reduction) in income taxes
resulting from:
Amortization of non-deductible goodwill 5,336 6,149 6,123
State and local income tax, net of federal income
tax benefit 2,298 4,336 807
Reduction of valuation allowance -- -- (1,400)
Other, net 1,339 (71) (1,006)
-------- -------- --------
$ 6,771 $ 13,880 $ 7,760
======== ======== ========
</TABLE>
16
<PAGE> 22
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
9. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Reserves for contingencies and restructuring $10,836 $19,704
Reserves for self-insurance and accrued
liabilities 9,997 11,378
Alternative minimum tax credit
carryforward -- 6,674
Property and equipment 5,146 10,377
Other 4,324 5,520
------- -------
Total deferred tax assets 30,303 53,653
Deferred tax liabilities:
Rental assets $ 4,875 $26,811
Other 4,219 5,729
------- -------
Total deferred tax liabilities 9,094 32,540
------- -------
Net deferred tax assets $21,209 $21,113
======= =======
</TABLE>
The alternative minimum tax credit carryforward has no expiration date.
10. CONTINGENCIES
The Company is a defendant in a number of class or alleged class action cases
relating to Rent-A-Center's rental-purchase or rent-to-rent agreements as
detailed below. Each claim is being adjudicated in the context of the relevant
state law which is different in each state. The first five cases referred to
below, which seek to recharacterize the transaction from a lease to a credit
sale, were filed prior to 1995. Of the remaining four cases, two, filed in late
1997 and early 1998, seek to challenge compliance with the relevant
rental-purchase statutes. The remaining two cases, filed in early 1998, seek to
challenge the reinstatement fee and in addition, one of the cases alleges that
the Liability Damage Waiver (LDW) charge is excessive.
17
<PAGE> 23
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
10. CONTINGENCIES (CONTINUED)
The Company is a defendant in a class action alleging that Rent-A-Center's
rental-purchase agreements are credit sales and do not comply with the
requirements of the Minnesota Consumer Protection Statutes and Usury Law.
Summary judgment was entered as to liability and was affirmed by the U.S. Eighth
Circuit Court of Appeals. The District Court found that the remedy available to
the class members would be full recovery of all amounts paid for customers who
returned their property and recovery of only the alleged interest for those
customers who did not return their property.
Final Judgment as to damages was issued April 15, 1998, in the amount of $29,898
plus interest, although the court is considering the plaintiffs' request for an
additional $1,630. The Company will appeal such award of damages and will be
required to post a bond in connection therewith. The Company no longer offers
its rental-purchase transaction in this state.
The Company and five of its present or former officers are defendants in a
Pennsylvania alleged class action resulting from the consolidation of two
existing proposed class actions. A third class action lawsuit in Pennsylvania
has been stayed pending the outcome of the consolidated action and is
incorporated into the settlement relating to that consolidated action. The
consolidated action alleges that Rent-A-Center's rental agreements violate the
Pennsylvania Goods and Services Installment Sales Act and the federal Racketeer
Influenced and Corrupt Organization Act (RICO). A motion for a nationwide class
certification has been denied by the court with the provision that plaintiffs
may attempt to amend their complaint. A settlement in the amount of $9,350 has
been reached with the plaintiffs. A final hearing to obtain the Court's approval
was held June 17, 1998, and the Court approved the settlement July 8, 1998.
The class action filed in 1994 in Federal Court in Wisconsin was dismissed for
lack of jurisdiction on October 20, 1997. The plaintiffs have re-filed the case
in a Wisconsin state court. The new complaint alleges that Rent-A-Center's
rental purchase agreements should be deemed consumer credit sales under the
Wisconsin Consumer Act, violated Wisconsin's Usury law and violated the
Wisconsin Deceptive Practices Act. The Court entered an order July 7, 1998
granting the plaintiff's motion for class certification and denying the
Company's motion for partial summary judgment. A pre-trial conference is
scheduled August 26, 1998.
18
<PAGE> 24
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
10. CONTINGENCIES (CONTINUED)
The Company is a defendant in a class action alleging that Rent-A-Center's
rental-purchase agreements are credit sales and do not comply with the
requirements of the New Jersey Retail Installment Sales Act and violate the New
Jersey Consumer Fraud Act and Usury law. In January 1997, summary judgment was
granted in favor of the plaintiffs in this case as to violation of the Retail
Installment Sales Act and the Consumer Fraud Act; the Court denied the
plaintiff's motion on the usury count. However, in September 1997, the Court
granted the plaintiff's motion for summary judgment on damages for breach of the
Retail Installment Sales Act and the Consumer Fraud Act, adopting the
plaintiff's formula of 40% of all rental payments, being the time differential
interest equivalent, plus reinstatement fees. This amount was trebled pursuant
to the Consumer Fraud Act. Judgment has now been entered for an amount of
$100,000 subject to further accounting. Initially, a bond was posted for this
amount, and pursuant to further accounting was increased by $63,000 to cover
potential damages through April, 1999. The injunction to prevent Rent-A-Center
from continuing to trade has been stayed pending the appeal. The Company is
appealing this decision to the New Jersey Court of Appeals and intends to pursue
all further legal proceedings as appropriate.
The Company is a defendant in a class action alleging that Rent-A-Center
violated the Texas Usury Law, the Texas Insurance Law and the Texas Deceptive
and Unfair Trade Practices Act. Texas law presently provides that rental
purchase agreements are not credit sales. There have been no developments in
this case since 1994 and damages are unspecified.
The following information relates to those claims not seeking
recharacterization:
The Company is a defendant in an alleged class action in New York. The case has
been removed to Federal Court. The complaint alleges that Rent-A-Center engaged
in deceptive or unfair acts in contravention of the New York Personal Property
Law (the Rent-to-Own Program Law), as well as provisions of the General Business
Law relating to consumer protection for deceptive acts and practices and false
advertising. The plaintiffs seek both compensatory and punitive damages.
The Company is a defendant in an alleged class action filed in Massachusetts.
This claim alleges that Rent-A-Center's transactions and advertising failed to
comply with the Massachusetts rental purchase statute and are deceptive under
the Massachusetts Consumer Protection Act. The plaintiffs seek both compensatory
and punitive damages.
19
<PAGE> 25
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
10. CONTINGENCIES (CONTINUED)
The Company is a defendant in two alleged class actions filed in the State of
Alabama which were filed in January and March, 1998. These claims allege that
Rent-A-Center's reinstatement fee constitutes an illegal penalty and that
charging such fee constitutes breach of contract. A second claim was added to
the second class action alleging the LDW charge is excessive. The plaintiffs
seek compensatory damages only.
The claims described above, where not concluded, are being vigorously defended.
However, management believes that a loss will be incurred in some of the cases
and although a specific amount cannot be estimated due to an inability to
reasonably estimate potential losses and potential appellate decisions reversing
in whole or in part outstanding lower court judgments, the Company has accrued
$34,500 in the accompanying financial statements. If the courts in these actions
were to hold that the Company's rental or rental-purchase transactions
constitute credit sales, the Company would seek to adapt its agreements, where
this has not already occurred, so that they would not be so treated under
relevant state laws. Management believes that a final unfavorable outcome in any
one of these actions, except for that in Texas, would not have a material
adverse effect on the Company's ongoing business. There can be no assurance,
however, that final unfavorable outcomes in any of these actions would not have
a material effect on the Company's financial condition or results of operations
in the year of final adjudication.
The Company is a defendant in an action filed in the Federal District Court in
Missouri alleging a policy of racial discrimination against a nationwide class
of African-Americans who applied for employment, are currently employed or were
formerly employed. The Company denies the allegations and will vigorously oppose
certification of a nationwide class. Attempts to certify a nationwide class in a
racial discrimination case filed in the Federal District Court in Kansas were
dismissed last year.
The Company's management is not aware of any additional legal or arbitration
proceedings pending or threatened against the Company which may have any
liability significantly in excess of provisions in the accounts.
20
<PAGE> 26
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at March 31, 1998 are as
follows:
Loans from affiliated company: It was not practicable to estimate the fair value
of the Company's loans from its affiliates because no quoted market prices exist
for these unique instruments and there is no intent by management to retire the
debts.
12. OFF-BALANCE SHEET RISK
Letters of credit are issued by the Company during the ordinary course of
business through banks as required by certain vendor contracts. As of March 31,
1997 and 1998, the Company had outstanding irrevocable stand-by letters of
credit for $27,336 and $66,842, respectively.
Subsequent to March 31, 1998, the Company secured a bond in the amount of
$32,786 and canceled its previously outstanding stand-by letter of credit in the
amount of $4,000, in connection with a class action lawsuit in Minnesota (see
Note 10). The Company and THORN are both guarantors of the bond.
The Company has secured a bond in the amount of $100,000 in connection with a
class action lawsuit in New Jersey (See Note 10). The Company and THORN are both
guarantors of the bond.
The Company has a $20,000 unused line of credit with a financial institution.
13. RESTRUCTURING CHARGES
During fiscal 1998, the Company discontinued its new concept tests related to
its credit retail and check-cashing businesses, closed certain nonperforming
rental purchase stores and reorganized certain administrative support functions
resulting in a charge to operating income of $12,292. Such restructuring charges
include asset valuation reductions of approximately $3,750, future rent
obligations of approximately $2,250, employee severance costs of approximately
$5,250 and other costs of approximately $1,042. As of March 31, 1998, $6,851 of
total restructuring charges remained in accrued liabilities.
During 1996, the Company recorded restructuring charges of $12,600 related to
consolidation of offices and reductions in the number of employees. These
charges were
21
<PAGE> 27
THORN AMERICAS, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
13. RESTRUCTURING CHARGES (CONTINUED)
primarily made up of the expected costs of employee separations. There was no
remaining liability at March 31, 1998.
14. SUBSEQUENT EVENT
On June 17, 1998 THORN announced that it has entered into an agreement to sell
the Company to Renter's Choice, Inc, a publicly held rent-to-own company for
approximately $900,000 subject to shareholder and Federal Trade Commission
approval. A closing date for the transaction has not yet been determined.
In August, 1998, subsequent to its change of control, the Company reached a
tentative settlement with the plaintiffs in Wisconsin, in the amount of $16.25
million. Such amount is not accrued in the June 30, 1998 financial statements.
22
<PAGE> 28
(b) PRO FORMA FINANCIAL INFORMATION OF RENTERS CHOICE, INC. AND
THORN AMERICAS, INC.
Unaudited Pro Forma Combined Balance Sheet as of June 30, 1998
Notes to Unaudited Pro Forma Combined Balance Sheet as of June 30,
1998
Unaudited Pro Forma Combined Statement of Operations for the year
ended December 31, 1997
Notes to Unaudited Pro Forma Combined Statement of Operation for
the year ended December 31, 1997
Unaudited Pro Forma Combined Statement of Operations for the six
months ended June 30, 1998
Notes to Unaudited Pro Forma Combined Statement of Operation for
the six months ended June 30, 1998
<PAGE> 29
UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
The following unaudited pro forma combined financial information of
Renters Choice, Inc. (RCI or the Company) gives effect to the Thorn Americas,
Inc. (Thorn) acquisition (the Acquisition) and the offering of $175 million of
11% Senior Subordinated Notes due 2008 (the Offering) as if such transactions
were consummated on June 30, 1998, in the case of the Unaudited Pro Forma
Combined Balance Sheet, and as if such transactions and the Central Rents, Inc.
(Central Rents) acquisition (the Central Acquisition) were consummated on
January 1, 1997, in the case of Unaudited Pro Forma Combined Statements of
Operations for the year ended December 31, 1997 and the six months ended June
30, 1998. The Unaudited Pro Forma Combined Statement of Operations for the year
ended December 31, 1997 includes Thorn historical information for the year ended
March 31, 1998, its fiscal year end. The acquisition of Thorn was completed on
August 5, 1998 and the acquisition of Central Rents was completed on May 28,
1998. The aforementioned transactions and the related adjustments are described
in the accompanying notes. In the opinion of management, all adjustments have
been made that are necessary to present fairly the pro forma data.
The following unaudited pro forma combined financial information is
presented for illustrative purposes only, does not purport to be indicative of
the RCI's financial position or results of operations as of the date hereof, or
as of or for any other future date, and is not necessarily indicative of what
RCI's actual financial position or results of operations would have been had the
foregoing transactions been consummated on such dates, nor does it give effect
to (i) any transactions other than the foregoing transactions and those
described in the accompanying Notes to Unaudited Pro Forma Combined Financial
Information or (ii) RCI's, Thorn's, or Central Rents' results of operations
since June 30, 1998. Although the following unaudited pro forma combined
financial information gives effect to expected annual net savings from the
elimination of duplicate general and administrative and field expenses as a
result of the aforementioned acquisitions, it does not give effect to additional
annual net savings expected to be achieved following consummation of the
Acquisition and the Central Acquisition (described in Note (3) to the Unaudited
Pro Forma Combined Statement of Operations for the year ended December 31,
1997). Actual amounts could differ from those presented.
The following unaudited pro forma combined financial information is
based upon the historical financial statements of RCI, Thorn, and Central Rents,
and should be read in conjunction with such historical financial statements, the
related notes, and the Notes to Unaudited Pro Forma Combined Financial
Information. In the preparation of the unaudited pro forma combined financial
information, it has been generally assumed that the historical value of Thorn's
assets and liabilities approximates the fair value thereof, except as described
in the Notes to Unaudited Pro forma Combined Financial Information, since an
independent valuation has not been completed. RCI will be required to determine
the fair value of Thorn's assets and liabilities as of the closing date of the
Acquisition. Although such determination of fair value is not presently expected
to result in values that are materially greater or less than the values assumed
in the preparation of the following unaudited pro forma combined financial
information, there can be no assurance with respect thereof.
<PAGE> 30
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
Thorn
RCI Thorn Pro Forma Acquisition Offering Pro Forma
Historical Historical Adjustments Pro forma Adjustments Combined
---------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 23,347 $ 27,486 $ 5,835 (1) $ 56,668 $ (5,750)(5) $ 50,918
Accounts receivable 1,799 23,024 (702)(2) 24,121 -- 24,121
Rental merchandise, net 148,432 303,682 -- 452,114 -- 452,114
Merchandise and auto inventory -- 43,068 -- 43,068 -- 43,068
Prepaids and other assets 2,440 8,555 19,465 (3) 30,460 5,750 (5) 36,210
Property assets, net 21,479 130,152 -- 151,631 -- 151,631
Deferred income taxes 6,479 21,113 26,376 (2) 53,968 -- 53,968
Intangible assets, net 131,862 528,716 (39,253)(2) 621,325 -- 621,325
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 335,838 $1,085,796 $ 11,721 $1,433,355 $ -- $1,433,355
========== ========== ========== ========== ========== ==========
LIABILITIES AND EQUITY
Accounts payable $ 14,193 $ 41,334 $ -- $ 55,527 $ -- $ 55,527
Accrued liabilities 23,067 90,036 (36,353)(2) 76,750 -- 76,750
Debt 128,235 -- 767,500 (1) 895,735 -- 895,735
Loans from Thorn plc -- 714,663 (714,663)(2) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities 165,495 846,033 16,484 1,028,012 -- 1,028,012
Redeemable convertible preferred stock -- -- 260,000 (1) 260,000 -- 260,000
Stockholders' equity 170,343 239,763 (264,763)(4) 145,343 -- 145,343
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity $ 335,838 $1,085,796 $ 11,721 $1,433,355 $ -- $1,433,355
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Balance Sheet
<PAGE> 31
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(1) Adjustment to record the debt and equity required to finance the
Acquisition and the repurchase of common stock and use of related proceeds:
<TABLE>
<S> <C>
Sources:
Senior Term Loan A $ 120,000
Senior Term Loan B 270,000
Senior Term Loan C 330,000
Senior Subordinated Credit Facility 175,000
Redeemable convertible preferred stock 260,000
----------
Total sources $1,155,000
==========
Uses:
Purchase price of the Acquisition $ 900,000 (a)
Estimated purchase price adjustment per agreement 17,600 (a)
Retirement of existing RCI Debt 127,500
Repurchase of RCI common stock 25,000 (b)
Transition and integration costs related to the Acquisition 45,000 (a)
Fees and expenses 34,065 (a)
Cash and cash equivalents 5,835
----------
Total uses $1,155,000
==========
</TABLE>
(a) Pro Forma adjustment reflected in Note (2) below. Fees and expenses are
also reflected in Note (3)
(b) Pro Forma adjustment reflected in Note (4) below.
(2) The aggregate purchase price assumed to be paid by RCI and the related
purchase accounting for the Acquisition is as follows:
<TABLE>
<S> <C> <C>
Aggregate purchase price
Purchase price per agreement $ 900,000
Estimated purchase price adjustment per agreement 17,600
Estimated legal, accounting and other advisory fees 14,600
Restructuring charge related to the Acquisition 45,000 (a)
----------
$ 977,200
==========
Allocation of purchase price
Aggregate purchase price $ 977,200
Less net book value of assets acquired 239,763
----------
737,437
Less adjustments to record assets and liabilities acquired at fair market value
Existing goodwill $(479,517)
Other intangible assets (48,067)(b)
Existing loans from Thorn plc forgiven 714,663
Existing Accounts receivable - affiliated companies forgiven (702)
Accrued liabilities 36,353 (c)
Deferred income taxes 26,376 (d) 249,106
--------- ----------
Excess cost over fair market value of tangible net assets acquired $ 488,331 (e)
==========
</TABLE>
<PAGE> 32
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET - CONTINUED
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(a) Reflects estimated transition and integration costs to be incurred in
connection with the Acquisition in accordance with EITF 95-3
"Recognition of Liabilities in Connection with a Purchase Business
Combination"
<TABLE>
<S> <C>
Severance payments and other compensation to employees $ 24,500
Lease termination and store conversion costs 20,500
---------
$ $45,000
=========
</TABLE>
(b) Elimination of other assets such as territory rights and deferred
software costs as a result of the Acquisition.
(c) Elimination of the $34,500 legal reserve for pending class action
litigation indemnified by seller and the elimination of $1,853 of
accrued incentive payments to employees which are being assumed by
seller.
(d) Deferred tax asset related to the temporary differences between
financial statement carrying amounts and tax basis of assets and
liabilities acquired, as adjusted, at an assumed income tax rate of
40% for the years in which those differences are expected to be
recovered or settled.
(e) Thorn has not accrued a liability for the Robinson v. Thorn Americas,
Inc. litigation in which a New Jersey state court has entered a
judgment against Thorn and has ordered Thorn to pay the class of
plaintiffs an amount in excess of $100 million. Thorn has posted a
$163 million supersedeas bond, which amount was derived from an
accounting by the plaintiffs of the projected amount of judgment
liability as of April 1999. RCI intends to vigorously defend any
actions still pending at the time of the consummation of the
Acquisition and, accordingly, in its preliminary purchase accounting,
RCI has also not recorded an estimated liability related to this
case. This will be treated as a preacquisition contingency by RCI. In
the event that RCI is unsuccessful under the appeal, excess cost over
fair market value of tangible net assets will be increased by any
damages required to be paid.
(3) Represents debt issuance costs associated with the Acquisition.
(4) Reflects the following:
<TABLE>
<S> <C>
Elimination of equity $(239,763)
Repurchase of RCI common stock (25,000)
---------
$(264,763)
=========
</TABLE>
(5) Adjustment to reflect the costs of the Offering.
<PAGE> 33
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Thorn
Pro Forma Adjustments
RCI and -------------------------
RCI and Central Rents Central Rents Elimination
Central Rents Pro Forma Pro Forma Thorn Non-RTO
Historical (1) Adjustments Combined Historical Businesses Acquisition
-------------- ------------- ------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Store
Rentals and fees $ 373,926 $ -- $ 373,926 $ 839,026 $ (3,779)(2) $ (4,202)(3)
Merchandise sales 18,972 -- 18,972 62,712 (16,395)(2) --
Other 793 -- 793 -- -- --
Franchise
Merchandise sales 37,385 -- 37,385 -- -- --
Royalty income and fees 4,008 -- 4,008 2,266 -- --
--------- -------- --------- --------- -------- ---------
Total revenues 435,084 -- 435,084 904,004 (20,174) (4,202)
Operating expenses
Direct store expenses
Depreciation of rental
merchandise 87,630 -- 87,630 244,572 -- (4,202)(3)
Cost of merchandise sold 14,885 -- 14,885 45,574 (14,853)(2) --
Salaries and other expenses 162,458 57,884 (4) 220,342 -- -- 449,509 (3)
Franchise cost of merchandise
sold 35,841 -- 35,841 -- -- --
General and administrative
expenses 77,559 (60,484)(4) 17,075 513,481 (10,535)(2) (467,509)(3)
Indemnified litigation expenses -- -- -- 6,600 -- (6,600)(5)
Nonrecurring charges (14) -- -- -- 14,392 (7,792)(2) --
Amortization of intangibles 6,957 939 (6) 7,896 24,044 -- (7,766)(6)
--------- -------- --------- --------- -------- ---------
Total operating
expenses 385,330 (1,661) 383,669 848,663 (33,180) (36,568)
Operating profit 49,754 1,661 51,415 55,341 13,006 32,366
Interest expense 10,043 (752)(7) 9,291 46,184 -- 30,865(8)
Interest income and other (304) -- (304) (88) -- --
--------- -------- --------- --------- -------- ---------
Earnings before
income taxes 40,015 2,413 42,428 9,245 13,006 1,501
Income tax expense 17,044 965 (10) 18,009 7,760 -- 7,214 (11)
--------- -------- --------- --------- -------- ---------
Net earnings 22,971 1,448 24,419 1,485 13,006 (5,713)
Preferred dividends -- -- -- -- -- 9,888 (13)
--------- -------- --------- --------- -------- ---------
Earnings allocable to
common
stockholders $ 22,971 $ 1,448 $ 24,419 $ 1,485 $ 13,006 $ (15,601)
========= ======== ========= ========= ======== =========
Basic earnings per share (15):
Earnings per share $ 1.02
=========
Weighted average common
shares outstanding 23,854
=========
Diluted earnings per share (15):
Earnings per share $ 1.01
=========
Weighted average common
and common equivalent
shares outstanding 24,204
=========
<CAPTION>
Acquisitions Offering Pro Forma
Pro Forma Adjustments Combined
------------ ----------- ----------
<S> <C> <C> <C>
Revenues
Store
Rentals and fees $ 1,204,971 $ -- $ 1,204,971
Merchandise sales 65,289 -- 65,289
Other 793 -- 793
Franchise
Merchandise sales 37,385 -- 37,385
Royalty income and fees 6,274 -- 6,274
----------- -------- -----------
Total revenues 1,314,712 -- 1,314,712
Operating expenses
Direct store expenses
Depreciation of rental
merchandise 328,000 -- 328,000
Cost of merchandise sold 45,606 -- 45,606
Salaries and other expense 669,851 -- 669,851
Franchise cost of merchandise
sold 35,841 -- 35,841
General and administrative
expenses 52,512 -- 52,512
Indemnified litigation expenses -- -- --
Nonrecurring charges (14) 6,600 -- 6,600
Amortization of intangibles 24,174 -- 24,174
----------- -------- -----------
Total operating
expenses 1,162,584 -- 1,162,584
Operating profit 152,128 -- 152,128
Interest expense 86,340 (519)(9) 85,821
Interest income and other (392) -- (392)
----------- -------- -----------
Earnings before
income taxes 66,180 519 66,699
Income tax expense 32,983 208 (12) 33,191
----------- -------- -----------
Net earnings 33,197 311 33,508
Preferred dividends 9,888 -- 9,888
----------- -------- -----------
Earnings allocable to
common
stockholders $ 23,309 $ 311 $ 23,620
=========== ======== ===========
Basic earnings per share (15):
Earnings per share $ .98 $ .99
=========== ===========
Weighted average common
shares outstanding 23,854 23,854
=========== ===========
Diluted earnings per share (15):
Earnings per share $ .96 $ .98
=========== ===========
Weighted average common
and common equivalent
shares outstanding 24,204 24,204
=========== ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statement of Operations
<PAGE> 34
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) The following historical combined statement of operations of RCI and
Central Rents for the year ended December 31, 1997 has been derived from
the audited financial statements of the respective entities:
<TABLE>
<CAPTION>
RCI and
Central Rents
Central Historical
RCI Rents Combined
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Store
Rentals and fees $ 275,344 $ 98,582 $ 373,926
Merchandise sales 14,125 4,847 18,972
Other 679 114 793
Franchise
Merchandise sales 37,385 -- 37,385
Royalty income and fees 4,008 -- 4,008
--------- --------- ---------
Total revenues 331,541 103,543 435,084
Operating expenses
Store expenses
Depreciation of rental merchandise 57,223 30,407 87,630
Cost of merchandise sold 11,365 3,520 14,885
Salaries and other expenses 162,458 -- 162,458
Franchise cost of merchandise sold 35,841 -- 35,841
General and administrative expenses 13,304 64,255 77,559
Amortization of intangibles 5,412 1,545 6,957
--------- --------- ---------
Total operating expenses 285,603 99,727 385,330
Operating profit 45,938 3,816 49,754
Interest expense 2,194 7,849 10,043
Interest income (304) -- (304)
--------- --------- ---------
Earnings (loss) before income taxes 44,048 (4,033) 40,015
Income tax expense (benefit) 18,170 (1,126) 17,044
--------- --------- ---------
Net earnings (loss) $ 25,878 $ (2,907) $ 22,971
========= ========= =========
Basic earnings per share:
Earnings per share $ 1.04
========
Weighted average common
shares outstanding 24,844
========
Diluted earnings per share:
Earnings per share $ 1.03
========
Weighted average common
shares outstanding 25,194
========
</TABLE>
(2) Reflects the elimination of Thorn's Non-RTO Businesses (including
nonrecurring charges of $7,792 as discussed in Note (14)), including used
automobiles retailing, credit retailing and check cashing businesses,
which had combined revenue of $20.2 million.
<PAGE> 35
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS - CONTINUED
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Increase (decrease)
---------------------------------------------------
Store
Expenses
Rentals Depreciation Salaries General and
and Fees of Rental and Administrative
Revenue Merchandise Other Expenses
---------- ------------ --------- --------------
<S> <C> <C> <C> <C>
(3) Reclassification of Thorn store expenses to conform with
RCI's presentation $ -- $ -- $ 457,807 $(457,807)
Reclassification Thorn volume and cash discounts from
purchases to conform with RCI's presentation (4,202) (4,202) -- --
Reclassification of Thorn advertising rebates as a reduction
in store expenses to conform with RCI's presentation -- -- (5,798) 5,798
Elimination of income related to a rebate of management fees
from Thorn plc -- -- -- 2,900
--------- --------- --------- ---------
Total (4,202) (4,202) 452,009 (449,109)
Elimination of duplicate corporate overhead and regional
management expenses: (a)
Corporate overhead
Salaries and benefits -- -- -- (17,400)
Administrative expenses -- -- -- (1,000)
Regional management expenses -- -- (2,500) --
--------- --------- --------- ---------
Total -- -- (2,500) (18,400)
--------- --------- --------- ---------
$ (4,202) $ (4,202) $ 449,509 $(467,509)
========= ========= ========= =========
</TABLE>
(a) In addition to cost savings of $20.9 million from the Acquisition and
$2.6 million from the Central Acquisition, after the Acquisition is
completed the Company is planning to implement certain other
initiatives which are expected to generate an additional $9.9 million
of annual cost savings. These include making changes to Thorn's
product distribution and product service and repair network which
would result in estimated annual savings of $22.3 million and $4.6
million, respectively. In addition, the Company is considering other
initiatives to increase Thorn's store efficiencies and operating
profit. These changes would result in estimated annual additional
expenditures of approximately $17.0 million. Therefore, management
believes it will achieve $30.8 million of total cost savings from the
Acquisition, of which $20.9 million is included in pro forma
operating income and $9.9 million of which reflects the net effect of
these other initiatives.
<TABLE>
<CAPTION>
(4)
Increase (decrease)
--------------------------
Store
Expenses
Salaries General and
and Administrative
Other Expenses
-------- --------------
<S> <C> <C>
Reclassification of Central Rents other store expenses to conform with RCI's presentation $ 57,684 $(57,684)
Elimination of duplicate corporate overhead and additional field expenses as a result of the
Central Rents acquisition 200 (2,800)
-------- --------
$ 57,884 $(60,484)
======== ========
</TABLE>
(5) Elimination of litigation expense relating to Minnesota and Pennsylvania
class action litigation indemnified by seller as part of the Acquisition.
(6) Reversal of historical intangible amortization and recording the pro forma
intangible amortization required as a result of the Central Rents and
Thorn acquisitions, using estimated useful lives of 5 years for the
noncompete agreement (Central Rents), and 30 years for excess costs over
fair market value of net assets acquired:
<TABLE>
<CAPTION>
Central
Rents Thorn
-------- --------
<S> <C> <C>
Reversal of historical intangible amortization $ (1,545) $(24,044)
Pro forma intangible amortization 2,484 16,278
-------- --------
$ 939 $ (7,766)
======== ========
</TABLE>
<PAGE> 36
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS - CONTINUED
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(7) Change in interest expense as a result of borrowings on the existing
revolving credit agreement used to finance the Central Rents acquisition:
<TABLE>
<S> <C>
Borrowings of $101.4 million at 7% on the existing
revolving credit agreement used to finance the
Central Rents acquisition $ 7,097
Elimination of historical interest expense for Central Rents (7,849)
--------
$ (752)
========
</TABLE>
(8) Net adjustment to interest expense as a result of the issuance of debt to
complete the Thorn acquisition:
<TABLE>
<S> <C>
Senior Credit Facilities:
$120 million Term Loan A at an annual interest rate of 7.95% $ 9,540
$270 million Term Loan B at an annual interest rate of 8.20% 22,140
$330 million Term Loan C at an annual interest rate of 8.45% 27,885
Annual commitment fee of 0.50% applied to the $120 million unused balance of the Revolving Credit Facility 600
Annual 2.50% fee applied to the Letter of Credit Facility 3,056
$175 million Senior Subordinated Facility at an annual interest rate of 11.625% 20,344
--------
Cash interest expense 83,565
Amortization of deferred financing costs (a) 2,628
--------
Pro forma interest expense for the acquisitions 86,193
Interest expense relating to existing RCI debt not refinanced 147
--------
Pre-Offering pro forma interest expense 86,340
Less: RCI and Central Rents pro forma combined interest expense plus Thorn historical interest expense (55,475)
--------
Pre-Offering net interest expense adjustment $ 30,865
========
</TABLE>
(a) Deferred financing costs are amortized over the term of the related
debt (ten years for the Senior Subordinated Facility, six years for
the Term Loan A, seven and one-half years for Term Loan B, eight and
one-half years for Term Loan C, and six years for both the Revolving
Credit and Letter of Credit Facilities).
A change of 0.125% in the assumed interest rates would result in a
$1.1 million change in pro forma interest expense for the year.
(9) Net adjustments to interest expense as a result of the Offering:
<TABLE>
<S> <C>
Issuance of Senior Subordinated Notes due 2008 - $175,000 at 11.0% $ 19,250
Amortization of related deferred financing costs 575
Repayment of Senior Subordinated Facility - $175,000 at 11.625% (20,344)
--------
$ (519)
========
</TABLE>
(10) Income tax expense adjustment related to the effects of the Central Rents
pro forma adjustments at a 40% effective tax rate.
(11) Income tax expense adjustment related to the effects of the pro forma
adjustments based upon an assumed composite income tax rate of 40% applied
to combined pro forma earnings before income taxes, adjusted for
nondeductible goodwill amortization of $16.3 million related to the
acquisition of Thorn.
(12) Income tax expense adjustment related to the effects of the Offering
adjustments, at a 40% effective tax rate.
(13) In-kind dividends at 3.75% per annum on the $260 million of redeemable
convertible preferred stock issued to finance a portion of the Acquisition.
For the first five years subsequent to issuance, RCI has the option to pay
the quarterly dividends in cash or in-kind with the issuance of additional
redeemable convertible preferred stock. RCI's ability to pay the dividends
in cash will be subject to restrictions under the Senior Credit Facilities
and Senior Subordinated Notes. Dividends reflected herein are assumed to be
paid in-kind with the issuance of additional redeemable convertible
preferred stock.
(14) Nonrecurring charges relate to Thorn's discontinued non-RTO businesses, the
closing of certain non-performing RTO stores, and reorganization of certain
administrative support functions aggregating approximately $12.3 million
and approximately $2.1 million related primarily to Thorn's writedown of
cellular phone inventory.
(15) Weighted average common shares outstanding for both basic and diluted
earnings per share were decreased by 990,099 to give pro forma effect of
the repurchase of $25 million of RCI common stock at $25.25 per share from
RCI's Chief Executive Officer. The assumed conversion of the redeemable
convertible preferred stock would have had an anti-dilutive effect on
diluted earnings per share for the year ended December 31, 1997, and
therefore has been excluded from the computation thereof.
See accompanying notes to Unaudited Pro Forma Combined Statement of Operations
<PAGE> 37
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Thorn
Pro Forma Adjustments
RCI and -------------------------
RCI and Central Rents Central Rents Elimination
Central Rents Pro Forma Pro Forma Thorn Non-RTO
Historical (1) Adjustments Combined Historical Businesses Acquisition
-------------- ------------- ------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Store
Rentals and fees $ 202,136 $ -- $ 202,136 $ 431,879 $ (3,847)(2) $ (1,398)(3)
Merchandise sales 12,767 -- 12,767 37,035 (13,297)(2) --
Other 281 -- 281 -- -- --
Franchise
Merchandise sales 17,061 -- 17,061 -- -- --
Royalty income and fees 2,248 -- 2,248 1,157 -- --
--------- -------- --------- --------- -------- ---------
Total revenues 234,493 -- 234,493 470,071 (17,144) (1,398)
Operating expenses
Direct store expenses
Depreciation of rental
merchandise 45,261 -- 45,261 125,048 -- (1,398)(3)
Cost of merchandise sold 10,275 -- 10,275 28,636 (13,043)(2) --
Salaries and other expenses 95,287 24,598 (4) 119,885 -- -- 226,699 (3)
Franchise cost of merchandise
sold 16,386 -- 16,386 -- -- --
General and administrative
expenses 35,039 (25,681)(4) 9,358 261,906 (6,614)(2) (234,249)(3)
Indemnified litigation expenses -- -- -- 5,600 -- (5,600)(5)
Nonrecurring charges (14) -- -- -- 10,877 (5,277)(2) --
Amortization of intangibles 3,378 928 (6) 4,306 11,823 -- (3,684)(6)
--------- -------- --------- --------- -------- ---------
Total operating
expenses 205,626 (155) 205,471 443,890 (24,934) (18,232)
Operating profit 28,867 155 29,022 26,181 7,790 16,834
Interest expense 9,677 (5,216)(7) 4,461 26,485 -- 12,189(8)
Interest income and other (238) -- (238) -- -- --
--------- -------- --------- --------- -------- ---------
Earnings before
income taxes 19,428 5,371 24,799 (304) 7,790 4,645
Income tax expense 8,327 2,148 (10) 10,475 664 -- 6,889 (11)
--------- -------- --------- --------- -------- ---------
Net earnings (loss) 11,101 3,223 14,324 (968) 7,790 (2,244)
Preferred dividends -- -- -- -- -- 4,898 (13)
--------- -------- --------- --------- -------- ---------
Earnings (loss)
allocable to common
stockholders $ 11,101 $ 3,223 $ 14,324 $ (968) $ 7,790 $ (7,142)
========= ======== ========= ========= ======== =========
Basic earnings per share (15):
Earnings per share $ .60
=========
Weighted average common
shares outstanding 23,964
=========
Diluted earnings per share (15):
Earnings per share $ .59
=========
Weighted average common
and common equivalent
shares outstanding 24,212
=========
<CAPTION>
Acquisitions Offering Pro Forma
Pro Forma Adjustments Combined
------------ ----------- ----------
<S> <C> <C> <C>
Revenues
Store
Rentals and fees 628,770 $ -- $ 628,770
Merchandise sales 36,505 -- 36,505
Other 281 -- 281
Franchise
Merchandise sales 17,061 -- 17,061
Royalty income and fees 3,405 -- 3,405
-------- -------- -----------
Total revenues 686,022 -- 686,022
Operating expenses
Direct store expenses
Depreciation of rental
merchandise 168,911 -- 168,911
Cost of merchandise sold 25,868 -- 25,868
Salaries and other expenses 346,584 -- 346,584
Franchise cost of merchandise
sold 16,386 -- 16,386
General and administrative
expenses 30,401 -- 30,401
Indemnified litigation expenses -- -- --
Nonrecurring charges (14) 5,600 -- 5,600
Amortization of intangibles 12,445 -- 12,445
-------- -------- -----------
Total operating
expenses 606,195 -- 606,195
Operating profit 79,827 -- 79,827
Interest expense 43,135 (259)(9) 42,876
Interest income and other (238) -- (238)
-------- -------- -----------
Earnings before
income taxes 36,930 259 37,189
Income tax expense 18,028 104 (12) 18,132
-------- -------- -----------
Net earnings (loss) 18,902 155 19,057
Preferred dividends 4,898 -- 4,898
-------- -------- -----------
Earnings (loss)
allocable to common
stockholders $ 14,004 $ 155 $ 14,159
======== ======== ===========
Basic earnings per share (15):
Earnings per share $ .58 $ .59
======== ===========
Weighted average common
shares outstanding 23,964 23,964
======== ===========
Diluted earnings per share (15):
Earnings per share $ .56 $ .57
======== ===========
Weighted average common
and common equivalent
shares outstanding 33,563 33,563
======== ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statement of Operations
<PAGE> 38
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) The following historical combined statement of operations of RCI and
Central Rents for the six months ended June 30, 1998 has been derived from
the unaudited financial statements of the respective entities:
<TABLE>
<CAPTION>
RCI and
Central Rents
Central Historical
RCI Rents (a) Combined
--------- ---------- -------------
<S> <C> <C> <C>
Revenues
Store
Rentals and fees $ 163,443 $ 38,693 $ 202,136
Merchandise sales 10,513 2,254 12,767
Other 281 -- 281
Franchise
Merchandise sales 17,061 -- 17,061
Royalty income and fees 2,248 -- 2,248
--------- --------- ---------
Total revenues 193,546 40,947 234,493
Operating expenses
Store expenses
Depreciation of rental merchandise 33,839 11,422 45,261
Cost of merchandise sold 8,301 1,974 10,275
Salaries and other expenses 95,287 -- 95,287
Franchise cost of merchandise sold 16,386 -- 16,386
General and administrative expenses 7,194 27,845 35,039
Amortization of intangibles 3,271 107 3,378
--------- --------- ---------
Total operating expenses 164,278 41,348 205,626
Operating profit (loss) 29,268 (401) 28,867
Interest expense 1,555 8,122 9,677
Interest income (238) -- (238)
--------- --------- ---------
Earnings (loss) before income taxes 27,951 (8,523) 19,428
Income tax expense (benefit) 11,566 (3,239) 8,327
--------- --------- ---------
Net earnings (loss) $ 16,385 $ (5,284) $ 11,101
========= ========= =========
Basic earnings per share:
Earnings per share $ .66
========
Weighted average common
shares outstanding 24,954
========
Diluted earnings per share:
Earnings per share $ .65
========
Weighted average common
shares outstanding 25,202
========
</TABLE>
(a) The Central Rents information above reflects their operations for the
period (January 1, 1998 through May 28, 1998) prior to acquisition by
RCI.
(2) Reflects the elimination of Thorn's Non-RTO Businesses (including
nonrecurring charges of $5,277 as discussed in Note (14)), including used
automobiles retailing, credit retailing and check cashing businesses, which
had combined revenue of $17.1 million.
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS - CONTINUED
SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Increase (decrease)
--------------------------------------------------
Store
Expenses
Rentals Depreciation Salaries General and
and Fees of Rental and Administrative
Revenue Merchandise Other Expenses
--------- ------------ --------- ---------
<S> <C> <C> <C> <C>
(3) Reclassification of Thorn store expenses to conform with
RCI's presentation $ -- $ -- $ 232,107 $(232,107)
Reclassification Thorn volume and cash discounts from
purchases to conform with RCI's presentation (1,398) (1,398) -- --
Reclassification of Thorn advertising rebates as a reduction
in store expenses to conform with RCI's presentation -- -- (4,158) 4,158
Elimination of income related to a rebate of management fees
from Thorn plc -- -- -- 2,900
--------- --------- --------- ---------
Total (1,398) (1,398) 227,949 (225,049)
Elimination of duplicate corporate overhead and regional
management expenses: (a)
Corporate overhead
Salaries and benefits -- -- -- (8,700)
Administrative expenses -- -- -- (500)
Regional management expenses -- -- (1,250) --
--------- --------- --------- ---------
Total -- -- (1,250) (9,200)
--------- --------- --------- ---------
$ (1,398) $ (1,398) $ 226,699 $(234,249)
========= ========= ========= =========
</TABLE>
(b) Represents six months of the annual cost savings described in Note
(3)(a) to the Unaudited Pro Forma Combined Statement of Operations
for the year ended December 31, 1997.
<TABLE>
<CAPTION>
(4) Increase (decrease)
--------------------------
Store
Expenses
Salaries General and
and Administrative
Other Expenses
--------- --------------
<S> <C> <C>
Reclassification of Central Rents other store expenses to conform with RCI's presentation $ 24,514 $ (24,514)
Elimination of duplicate corporate overhead and additional field expenses as a result of the
Central Rents acquisition 84 (1,167)
-------- ---------
$ 24,598 $ (25,681)
======== =========
</TABLE>
(5) Elimination of litigation expense relating to Minnesota and Pennsylvania
class action litigation indemnified by seller as part of the Acquisition.
(6) Reversal of historical intangible amortization and recording of the pro
forma intangible amortization required as a result of the Central Rents and
Thorn acquisitions, using estimated useful lives of 5 years for the
noncompete agreement (Central Rents), and 30 years for excess costs over
fair market value of net assets acquired:
<TABLE>
<CAPTION>
Central
Rents Thorn
------- --------
<S> <C> <C>
Reversal of historical intangible amortization recorded by respective entities $ (107) $(11,823)
Reversal of historical intangible amortization relating to the Central acquisition
recorded by RCI from the acquisition date through June 30, 1998 (207) --
Pro forma intangible amortization for six months 1,242 8,139
------- --------
$ 928 $ (3,684)
======= ========
</TABLE>
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS - CONTINUED
SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
(7) Change in interest expense for six months as a result of borrowings on the
existing revolving credit agreement used to finance the Central Rents
acquisition:
Borrowings of $101.4 million at 7%, for six months, on the existing
revolving credit agreement used to finance the Central Rents acquisition $ 3,548
Elimination of historical interest expense for Central Rents (8,122)
Elimination of historical interest expense recorded by RCI from the acquisition date
through June 30, 1998, relating to the financing of Central Rents acquisition (642)
--------
$ (5,216)
========
</TABLE>
(8) Net adjustment to interest expense for six months as a result of the
issuance of debt to complete the Thorn acquisition:
<TABLE>
<S> <C>
Senior Credit Facilities:
$120 million Term Loan A at an annual interest rate of 7.95% $ 4,770
$270 million Term Loan B at an annual interest rate of 8.20% 11,070
$330 million Term Loan C at an annual interest rate of 8.45% 13,943
Annual commitment fee of 0.50% applied to the $120 million unused balance of the Revolving Credit Facility 300
Annual 2.50% fee applied to the Letter of Credit Facility 1,528
$175 million Senior Subordinated Facility at an annual interest rate of 11.625% 10,172
--------
Cash interest expense 41,783
Amortization of deferred financing costs (a) 1,314
--------
Pro forma interest expense for the acquisitions 43,097
Interest expense relating to existing RCI debt not refinanced 38
--------
Pre-Offering pro forma interest expense 43,135
Less: RCI and Central Rents pro forma combined interest expense plus Thorn historical interest expense (30,946)
--------
Pre-Offering net interest expense adjustment $ 12,189
========
</TABLE>
(b) Deferred financing costs are amortized over the term of the related
debt (ten years for the Senior Subordinated Facility, six years for
the Term Loan A, seven and one-half years for Term Loan B, eight and
one-half years for Term Loan C, and six years for both the Revolving
Credit and Letter of Credit Facilities).
A change of 0.125% in the assumed interest rates would result in a $.6
million change in pro forma interest expense for the six months ended June 30,
1998.
(9) Net adjustments to interest expense for six months as a result of the
Offering:
<TABLE>
<S> <C>
Issuance of Senior Subordinated Notes due 2008 - $175,000 at 11.0% $ 9,625
Amortization of related deferred financing costs 288
Repayment of Senior Subordinated Facility - $175,000 at 11.625% (10,172)
--------
$ (259)
</TABLE>
(10) Income tax expense adjustment related to the effects of the Central Rents
pro forma adjustments at a 40% effective tax rate.
(11) Income tax expense adjustment related to the effects of the pro forma
adjustments based upon an assumed composite income tax rate of 40% applied
to combined pro forma earnings before income taxes, adjusted for
nondeductible goodwill amortization of $8.1 million related to the
acquisition of Thorn.
(12) Income tax expense adjustment related to the effects of the Offering
adjustments, at a 40% effective tax rate.
(13) Six months of in-kind dividends at 3.75% per annum on the $260 million of
redeemable convertible preferred stock issued to finance a portion of the
Acquisition. For the first five years subsequent to issuance, RCI has the
option to pay the quarterly dividends in cash or in-kind with the issuance
of additional redeemable convertible preferred stock. RCI's ability to pay
the dividends in cash will be subject to restrictions under the Senior
Credit Facilities and Senior Subordinated Notes. Dividends reflected herein
are assumed to be paid in-kind with the issuance of additional redeemable
convertible preferred stock.
(14) Nonrecurring charges relate to Thorn's discontinued non-RTO businesses, the
closing of certain non-performing RTO stores, and reorganization of certain
administrative support functions aggregating approximately $9.8 million and
approximately $1.1 million related primarily to Thorn's writedown of
cellular phone inventory.
(15) Weighted average common shares outstanding for both basic and diluted
earnings per share were decreased by 990,099 to give pro forma effect of
the repurchase of $25 million of RCI common stock at $25.25 per share from
RCI's Chief Executive Officer. Weighted average common shares outstanding
for diluted earnings per share were increased by 9,350,957 to reflect the
conversion of the redeemable convertible preferred stock to RCI common
stock at a conversion price of $27.935 per share. For the six months ended
June 30, 1998, the conversion of the redeemable convertible preferred stock
is dilutive; therefore, preferred dividends of $4,898 were added to
earnings allocable to common stockholders when computing diluted earnings
per share.
<PAGE> 41
(c) EXHIBITS
2.1 Stock Purchase Agreement, dated June 16, 1998, by and among
the Registrant, Thorn International B.V., and Thorn plc.(1)
23.1 Consent of Ernst & Young LLP.
- ----------
(1) Incorporated herein by reference to Exhibit 2.9 of the Registrants'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and filed
on August 14, 1998.
<PAGE> 42
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 hereunto duly authorized.
RENTERS CHOICE, INC.
DATE: August 25, 1998 BY: /s/ J. ERNEST TALLEY
-------------------------------------
J. Ernest Talley
Chief Executive Officer
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Stock Purchase Agreement, dated June 16, 1998, by and among
the Registrant, Thorn International B.V., and Thorn plc.(1)
23.1 Consent of Ernst & Young LLP.
</TABLE>
- ----------
(1) Incorporated herein by reference to Exhibit 2.9 of the Registrants'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and filed
on August 14, 1998.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in each of the Registration
Statements pertaining to the 1994 Renters Choice, Inc. Long-Term Incentive Plan
and the Amended and Restated 1994 Renters Choice, Inc. Long-Term Incentive Plan,
(Forms S-8 No. 33-98800 and No. 333-53471, respectively) of our report dated
April 24, 1998 (except Note 14, as to which the date is June 25, 1998), with
respect to the consolidated financial statements of Thorn Americas, Inc.
included in Renters Choice, Inc.'s Current Report (Form 8-K/A) dated August 25,
1998.
ERNST & YOUNG LLP
August 24, 1998
Wichita, Kansas
