UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-25370
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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)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 PER SHARE NASDAQ NATIONAL MARKET SYSTEM
----------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
AGGREGATE MARKET VALUE OF THE 14,889,172
SHARES OF COMMON STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT AT THE CLOSING SALES PRICE
ON MARCH 24, 1997.................................. $204,726,115
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
AS OF THE CLOSE OF BUSINESS ON
MARCH 24, 1997:.................................... 24,792,685
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement relating to the 1997 Annual
Meeting of Stockholders of Renters Choice, Inc., are incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
PART I...................................................................... 1
Item 1. BUSINESS........................................................... 1
Item 2. PROPERTIES......................................................... 9
Item 3. LEGAL PROCEEDINGS.................................................. 9
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS................................................ 11
PART II..................................................................... 12
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS............................. 12
Item 6. SELECTED FINANCIAL DATA............................................ 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................. 20
PART III.................................................................... 21
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT........................................................ 21
Item 11. EXECUTIVE COMPENSATION............................................ 21
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................................. 21
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 21
PART IV..................................................................... 21
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................................... 21
PART I
ITEM 1. BUSINESS
GENERAL
Renters Choice, Inc., a Delaware corporation (the "Company"), currently
operates 450 rent-to-own stores providing high quality durable goods in 33
states and in Puerto Rico. The Company's wholly-owned subsidiary, ColorTyme,
Inc. ("ColorTyme"), is a national franchisor of 251 rent-to-own stores in 37
states, all of which operate under the "ColorTyme" name. The Company's and the
ColorTyme franchisees' stores offer home electronics, appliances, furniture and
accessories under flexible rental purchase arrangements that allow the customer
to obtain ownership of the merchandise at the conclusion of an agreed upon
rental period. The Company's and the ColorTyme franchisees' rental purchase
arrangements are designed to appeal to a wide variety of consumers by allowing
them to obtain merchandise that they might otherwise be unable or unwilling to
obtain due to insufficient cash resources or a lack of access to credit or
because they have a temporary, short-term need or a desire to rent rather than
to purchase the merchandise.
The Company's principal executive offices are located at 13800 Montfort,
Suite 300, Dallas, Texas 75240.
ACQUISITION HISTORY
The Company was incorporated in 1986. In 1989, J. Ernest Talley, the
Company's Chairman of the Board and Chief Executive Officer, acquired a
controlling interest in the Company and certain related entities, which then
owned 22 rent-to-own stores located primarily in New Jersey and Puerto Rico.
These related entities were merged into the Company under the name Vista Rent To
Own, Inc. in 1990. In March 1993, the Company formed Renters Choice, L.P., for
the purpose of acquiring from DEF Investments, Inc. and certain related entities
84 rent-to-own stores located in 12 states (the "1993 Acquisition"). The 1993
Acquisition was consummated in April 1993. The Company changed its name to
Renters Choice, Inc. in December 1993 and in May 1994 the Company acquired all
of the assets and liabilities of Renters Choice, L.P. in connection with the
dissolution of that partnership. Effective as of January 1, 1995, Talley Lease
To Own, Inc. ("Talley LTO"), a rent-to-own company owned primarily by Mr. Talley
and his son Michael C. Talley, was merged into the Company, with the Company
being the surviving corporation. In April 1995, the Company acquired (such
acquisition being herein referred to as the "Crown Acquisition") 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
(collectively, "Crown"), 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").
Unless the context otherwise requires, references to the Company are to
Renters Choice, Inc. and its predecessors, viewed as a single entity.
COMMON STOCK
On February 1, 1995, the Company consummated its initial public offering
of 2,587,500 shares of its common stock, par value $.01 per share (the "Common
Stock"), at a price of $10 per share, for an aggregate offering price of
approximately $25.9 million. The Company effected two splits of its Common Stock
in 1995, including a 3-for-2 split in June and a 2-for-1 split in October. On
November 1, 1995, the Company consummated a second public offering of its Common
Stock pursuant to which the Company sold an additional 3,650,000 shares at a
price of $16.00 per share, for an aggregate offering price of $58.4 million. Net
proceeds of both offerings were used by the Company to repay indebtedness, for
working capital and general corporate purposes and to fund acquisitions.
Unless the context otherwise requires, all information contained in this
Report gives effect to the 3-for-2 and 2-for-1 stock splits described above.
RECENT DEVELOPMENTS
COLORTYME ACQUISITION
In May 1996, the Company, ColorTyme, Inc. ("Old ColorTyme") and CT
Acquisition Corporation, a wholly-owned subsidiary of the Company, entered into
an Agreement and Plan of Reorganization pursuant to which Old ColorTyme was
merged into CT Acquisition Corporation, with CT Acquisition Corporation being
the surviving corporation (the "ColorTyme Acquisition"). Upon effectiveness of
the merger, the name of CT Acquisition Corporation was changed to ColorTyme,
Inc.
The merger consideration paid by the Company consisted of cash in the
amount of approximately $4.7 million, 343,175 restricted shares of the Company's
Common Stock valued at $19.04 per share and 313,000 options issued to
franchisees of ColorTyme, each to purchase one share of the Company's Common
Stock for a price of $26.75 per share. The Company financed the cash portion of
the merger consideration using cash from operations.
Immediately following consummation of the ColorTyme Acquisition,
ColorTyme Financial Services, Inc. ("CTFS"), then a wholly-owned subsidiary of
ColorTyme, sold certain loans owned by CTFS to STI Credit Corporation for an
aggregate purchase price of $21.7 million. Approximately $13.2 million of the
net proceeds of such sale were used to repay certain indebtedness owed by CTFS.
At the time of the closing of the ColorTyme Acquisition, ColorTyme was
the franchisor of 313 rent-to-own stores in 40 states, and directly owned seven
rent-to-own stores. One of the seven stores directly owned by ColorTyme was sold
by ColorTyme to a third party following consummation of the ColorTyme
Acquisition. The remaining six stores, four of which were located in Wisconsin
and two of which were located in California, were purchased by the Company from
ColorTyme for fair market value following consummation of the ColorTyme
Acquisition.
For the fiscal year ended December 31, 1995, Old ColorTyme had revenues
of approximately $47.2 million. At March 31, 1996, Old ColorTyme had total
assets and liabilities of approximately $29.7 million and $19.1 million,
respectively.
Management of the Company believes that the ColorTyme Acquisition
enables the Company to leverage its core competencies in the rent-to-own
industry and provides the Company with certain strategic benefits arising as a
result of the rights of first refusal contained in the franchise agreements of
the ColorTyme franchisees and otherwise.
$90 MILLION CREDIT FACILITY
In November 1996, the Company obtained a $90 million revolving line of
credit from a syndicate of banks led by Comerica Bank, as agent. The credit
facility has an initial term of three years and replaces the Company's prior $40
million line of credit. Advances under the line of credit may be used by the
Company for general business purposes such as working capital, as well as for
the financing of acquisitions. Borrowings under the line of credit will bear
interest at the Company's choice of a bank prime rate or a LIBOR-based rate, and
will be secured by liens on substantially all of the assets of the Company. The
line of credit contains a subfacility for letters of credit in an aggregate
amount of up to $2 million, and a $2 million swing line of credit, both of which
provide the Company with increased flexibility. The amount currently outstanding
under the new line of credit is $19.3 million.
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Management of the Company believes that the new credit facility provides
the Company with even greater capital resources and increased flexibility to
pursue the Company's goals of internal growth and growth by additional store
acquisitions.
OTHER ACQUISITIONS AND NEW STORE OPENINGS
As the pool of available large acquisition candidates has significantly
decreased in the last year, the Company in mid-1996 launched an aggressive
program to purchase smaller chains of rent-to-own stores, as well as individual
stores. The Company hired a Director of Acquisitions to oversee such
acquisitions. As a result of this program, the Company acquired 88 stores
between May 1 and December 31, 1996 (exclusive of the 6 stores purchased from
ColorTyme) in 20 separate transactions, for an aggregate purchase price of $25.3
million, all of which was financed using cash from operations. The acquired
stores are located in 18 states, including five states in which the Company
previously had no operations. Management believes that the majority of the
stores acquired during 1996 are underperforming. Average monthly revenues
(including rentals and fees only) for the stores acquired during 1996 (measured
immediately prior to their acquisitions) were $31,000.
In addition, the Company opened 13 new stores in 3 states and in Puerto
Rico during 1996.
The Company has reorganized its regional manager territories to
accommodate the stores acquired and opened during 1996. The Company has
incorporated all acquired stores into its operating structure, and installed its
computer system in all such stores to enable increased monitoring of store
performance.
Management believes that the 1996 acquisitions and new stores provide
the Company with certain strategic benefits including (i) increased geographic
presence, (ii) greater market share in certain states or regions, (iii) improved
flexibility to realign regional store management responsibilities on a more
favorable geographic basis, and (iv) increased economies of scale in both
purchasing and advertising due to its larger store base. Management believes
that substantial opportunity exists to improve the performance of the stores
acquired during 1996, and management has implemented certain operating
strategies designed to improve the efficiency and performance of such stores.
To date during 1997, the Company has acquired 25 additional stores in
seven states, including one in which the Company previously had no operations,
for an aggregate purchase price of approximately $10.8 million, and has opened
two additional new stores.
INDUSTRY OVERVIEW
The Association of Progressive Rental Organizations ("APRO"), an
industry trade association, estimates that at the end of 1995 the rent-to-own
industry comprised approximately 7,500 stores that provided 5.5 million products
to 2.9 million households. Although, according to industry sources and
management estimates, the 10 largest industry participants account for 42% of
the total stores, management estimates that the majority of the industry
consists of operations with fewer than 20 stores. The rent-to-own industry is
highly fragmented and, due primarily to the decreased availability of
traditional financing sources, has experienced and is expected to continue to
experience increasing consolidation. Management believes that this consolidation
of operations in the industry presents opportunities for the Company, as well as
other well capitalized rent-to-own operators, to continue to acquire additional
stores on favorable terms.
STRATEGY
The Company plans to continue expanding its business activities and
increasing revenue by: (i) increasing the number of stores it owns, both through
strategic acquisitions and new store openings; (ii) increasing the number of
items on rent at each store through effective merchandising and focused
advertising; (iii) increasing the average
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revenue per unit rented by expanding the Company's offering of higher priced
merchandise; (iv) closely monitoring each store's performance, through the use
of its management information system, to ensure each store's adherence to
established operating guidelines; and (v) emphasizing results-oriented
compensation. The Company's business strategy is designed to capitalize on the
fragmentation and potential for growth of the rent-to-own industry, which
management believes should provide opportunities to grow through strategic and
consolidating acquisitions and through the development of new stores.
COMPANY STORE OPERATIONS
The number of stores operated by the Company increased during 1996 from
325 in January to 423 at December 31. The Company currently operates 450 stores
in 33 states and in Puerto Rico, as illustrated by the following table:
LOCATION NUMBER OF STORES LOCATION NUMBER OF STORES
- -------- ---------------- -------- ----------------
Texas........................ 79 Kentucky..................... 6
Florida...................... 39 Wisconsin.................... 6
Ohio......................... 38 Mississippi.................. 5
Georgia...................... 35 Virginia..................... 5
Tennessee.................... 25 California................... 5
North Carolina............... 24 Pennsylvania................. 5
Alabama...................... 22 Colorado..................... 4
Michigan..................... 21 South Carolina............... 4
New York..................... 20 Delaware..................... 4
New Jersey................... 17 Iowa......................... 2
Indiana...................... 15 Massachusetts................ 2
Puerto Rico.................. 15 New Hampshire................ 2
Louisiana.................... 12 Oklahoma..................... 2
Illinois..................... 10 Utah......................... 2
Missouri..................... 8 Nevada....................... 1
Arizona...................... 7 West Virginia................ 1
Arkansas..................... 6 Maryland..................... 1
PRODUCT SELECTION
Each of the Company's stores offers merchandise from three basic product
categories: home electronics, appliances and furniture and accessories. The
Company's policy is to ensure that its stores maintain sufficient inventory to
offer customers a wide variety of models, styles and brands. The Company seeks
to provide a wide variety of high quality merchandise to its customers, and
emphasizes products from brand-name manufacturers. During 1996, home electronic
products accounted for approximately 45.3% of the Company's store revenue,
appliances for 24.1% and furniture and accessories for 30.6%. Customers may
request either new merchandise or previously rented merchandise. Previously
rented merchandise is offered at the same weekly or monthly rental rate as is
offered for new merchandise, but with an opportunity to obtain ownership of the
merchandise after fewer rental payments. Many of the stores acquired in 1996
carried certain merchandise from other product categories and different
manufacturers than those selected by the Company. As part of the integration
process, the Company has standardized the inventory in each of these stores.
Home electronic products offered by the Company's stores include
televisions, video cassette recorders and stereos from top brand manufacturers
such as Magnavox, RCA, JVC and Technics. The Company rents major appliances
manufactured by Whirlpool, including refrigerators, washing machines, dryers,
microwave ovens, freezers
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and ranges. The Company offers a variety of furniture products, including dining
room, living room and bedroom furniture featuring a number of styles, materials
and colors. Showroom displays enable customers to visualize how the product will
look in their homes and provide a showcase for accessories. The Company offers
furniture made by Ashley, Franklin, Lazyboy and other top brand manufacturers.
Accessories include pictures, plants, lamps and tables and are typically rented
as part of a package of items, such as a complete room of furniture.
RENTAL PURCHASE AGREEMENTS
The Company's customers generally enter into weekly or monthly rental
purchase agreements, which renew automatically upon receipt of each payment. The
Company retains title to the merchandise during the term of the rental purchase
agreement. Ownership of the merchandise generally transfers to the customer if
the customer has continuously renewed the rental purchase agreement for a period
of 18 to 36 months or exercises a specified early purchase option. Although the
Company does not conduct a formal credit investigation of each customer, a
potential customer must provide store management with sufficient personal
information to allow the Company to verify sources of income. References listed
by the customer are contacted to verify the information contained in the
customer's rental purchase order form. Rental payments are made in cash, by
money order and, occasionally, by personal check or debit card. Depending on
state regulatory requirements, the Company charges for the reinstatement of
terminated accounts or collects a delinquent account fee and collects
loss/damage waiver fees from customers desiring such product protection in the
case of theft and certain natural disasters. Such fees are standard in the
industry and may be subject to government-specified limits. See "Item 1.
Business-- Government Regulation."
PRODUCT TURNOVER
In the majority of the Company's stores, a minimum rental term of 18
months generally is required to obtain ownership of new merchandise. Management
believes that fewer than 25% of the Company's customers complete the full term
of the agreement as to a given item of merchandise. Turnover varies
significantly based on the type of merchandise rented, with certain consumer
electronics products, such as camcorders and VCRs, generally rented for shorter
periods, while appliances and furniture are generally rented for longer periods.
In order to cover the relatively high operating expenses generated by greater
product turnover, rental purchase agreements require higher aggregate payments
than are generally charged under installment purchase or credit plans.
CUSTOMER SERVICE
The Company offers same day or 24-hour delivery and installation of its
merchandise at no additional cost to the customer. The Company provides any
required service or repair without charge, except for damage in excess of normal
wear and tear. If the product cannot be repaired at the customer's residence,
the Company provides a temporary replacement while the product is being
repaired. The customer is fully liable for damage, loss or destruction of the
merchandise, unless the customer purchases an optional loss/damage waiver. Most
of the products offered by the Company are covered by a manufacturer's warranty
for varying periods, which, subject to the terms of the warranty, is transferred
to the customer in the event that the customer obtains ownership. Certain of the
services provided by the Company, such as repair services, are provided through
independent contractors or under factory warranties.
COLLECTIONS
Store managers use the Company's computerized management information
system to track cash collections on a daily basis. In the event a customer fails
to make a rental payment when due, store management will attempt to contact the
customer to obtain payment and reinstate the contract or will terminate the
account and arrange to regain possession of the merchandise. The Company
attempts to recover the rental items by the seventh to tenth day following
termination or default of a rental purchase agreement. Charge-offs due to lost
or stolen merchandise, expressed as a percentage of store revenues, were
approximately 2.3% in 1996, as compared to approximately 2.4% in
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1995. In an effort to improve collections at the stores acquired during 1996,
the Company has implemented its collection procedures in such stores, including
its management incentive plans, which provide incentives to reduce the
percentage of delinquent accounts.
MANAGEMENT
The Company's network of stores is organized geographically with
multiple levels of management. At the individual store level, each store manager
is responsible for customer and credit relations, deliveries and pickups,
inventory management, staffing and certain marketing efforts. Each store manager
reports to a regional manager who typically oversees 5 to 7 stores. Regional
managers are primarily responsible for monitoring individual store performance
and inventory levels within their respective regions. The Company's 75 regional
managers, in turn, report to 13 regional vice presidents, who monitor the
operations of regions and, through the regional managers, individual store
performance. The regional vice presidents report to the Company's senior
executives. A significant portion of a regional or store manager's compensation
is dependent upon store revenue and profits.
Executive management at the Company's headquarters directs and
coordinates purchasing, financial planning and controls, employee training,
personnel matters and new store site selection. Headquarters personnel also
evaluate the performance of each store, including on-site reviews. The Company's
business strategy emphasizes strict cost containment and operational controls.
MANAGEMENT INFORMATION SYSTEMS
The Company uses integrated computerized management information and
control systems to track each unit of merchandise in its stores and each rental
purchase agreement. The Company's systems also include extensive management
software and report-generating capabilities. The reports for all stores are
reviewed daily by senior management and any irregularities are addressed the
following business day. Each store is equipped with a computer system that
tracks individual components of revenue, each item in idle and rented inventory,
total items on rent, delinquent accounts and other account information. The
Company electronically gathers each day's activity report through the computer
located at the headquarters office. This system provides the Company's
management with access to operating and financial information about any store
location or region in which the Company operates and generates management
reports on a daily, weekly, month-to-date and year-to-date basis for each store
and every rental purchase transaction. Utilizing the management information
system, executive management, regional managers and store managers can closely
monitor the productivity of stores under their supervision as compared to
Company prescribed guidelines. The integration of the management information
system with the Company's accounting system facilitates the production of
financial statements. The Company has incorporated the stores purchased in 1996
into its management information system.
PURCHASING AND DISTRIBUTION
The general product mix in the Company's stores is determined by senior
management, based on an analysis of customer rental patterns and the
introduction of new products on a test basis. Individual store managers are
responsible for determining the particular product selection for their store
from the list of products approved by senior management. Specific purchasing
decisions for the Company's stores are made by store managers, subject to review
by headquarters management. All merchandise is shipped by vendors directly to
each store, where it is held for rental.
The Company does not maintain any warehouse space.
The Company purchases the majority of its merchandise directly from
manufacturers. The Company's largest suppliers include Whirlpool and Magnavox,
which accounted for approximately 20.5% and 22.7%, respectively, of merchandise
purchased for the Company's stores in 1996. No other supplier accounted for more
than 10% of merchandise purchased by the Company during such period. The Company
generally does not enter into written contracts with its suppliers. Although the
Company currently expects to continue relationships with its existing
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suppliers, management believes there are numerous sources of products available
to the Company, and does not believe that the success of the Company's
operations is dependent on any one or more of its present suppliers.
MARKETING
The Company promotes the products and services in its stores primarily
through direct mail advertising and, to a lesser extent, television, radio and
secondary print media advertisement. Company advertisements emphasize such
features as product and brand name selection, prompt delivery and the absence of
any initial deposit, credit investigation or long-term obligation. Advertising
expense as a percentage of store revenue for the year ended December 31, 1996,
was approximately 5%. As the Company obtains new stores in its existing market
areas, the advertising expenses of each store in the area can be reduced by
listing all stores in the same market-wide advertisement.
TRADEMARKS
The Company owns the registered trademarks "Renters Choice" and "Your
Home Furnishing Outlets." The products held for rent by the Company also bear
trademarks and service marks held by their manufacturers.
COMPETITION
The rent-to-own industry is highly competitive. The 10 largest industry
participants account for only 42% of the approximately 7,500 rent-to-own stores
in the United States. The Company currently is the second largest operator of
rent-to-own stores with 450 stores, while Rent-A-Center, a division of Thorn EMI
PLC, currently is the largest with approximately 1,400 stores. The Company's
stores compete with other national and regional rent-to-own businesses, as well
as with rental stores that do not offer their customers a purchase option. With
respect to customers desiring to purchase merchandise for cash or on credit, the
Company also competes with department stores and discount stores. Competition is
based primarily on store location, product selection and availability, customer
service and rental rates and terms. The Company's largest national competitors
have significantly greater resources and name recognition than the Company.
COLORTYME OPERATIONS
ColorTyme is a nationwide franchisor of television, stereo and furniture
rental centers. As of March 24, 1997, there were approximately 251 franchised
rental centers operating in 37 states.
All ColorTyme franchised stores use ColorTyme's tradenames, service
marks, trademarks, logos, emblems and indica of origin and operate under
distinctive operating procedures and standards specified by ColorTyme.
ColorTyme's primary source of revenue is the sale of rental equipment to its
franchisees, who, in turn, offer the equipment to the general public for rent or
purchase under a rent-to-own program. As franchisor, ColorTyme receives
royalties of 2.3% to 4% of the franchisees' rental income and, generally, an
initial fee of $7,500 per location for existing franchisees and up to $25,000
per location for new franchisees.
ColorTyme has an arrangement with STI Credit Corporation ("STI") whereby
STI may provide inventory financing to qualified new franchisees.
The ColorTyme franchise agreement (the "Franchise Agreement") generally
requires the franchised stores to utilize certain computer hardware and software
for the purpose of recording rentals, sales and other record keeping and central
functions. ColorTyme retains the right to upload and download data,
troubleshoot, and retrieve that data and information from the franchised stores'
computer systems.
-7-
The Franchise Agreement also requires the franchised stores to
exclusively offer for rent or sale only those brands, types, and models of
products that ColorTyme has approved. The franchised stores are required to
maintain an adequate mix and inventory of approved products for rent as dictated
by ColorTyme policy manuals, and must maintain on display at the franchised
stores, such products as specified by ColorTyme. ColorTyme negotiates purchase
arrangements with various suppliers it has approved. ColorTyme's largest
suppliers are Whirlpool and Magnavox, which accounted for approximately 35% of
merchandise purchased by ColorTyme in 1996.
ColorTyme has established a national advertising fund (the "Fund") for
the franchised stores, whereby ColorTyme has the right to collect up to 3% of
the monthly gross rental payments and sales from each franchisee to be
contributed to the Fund. Currently, ColorTyme has set the monthly franchisee
contribution at $250 per month. ColorTyme directs the advertising programs of
the Fund, generally consisting of advertising in print, television and radio.
Furthermore, the franchisees are required to expend 3% of their monthly gross
rental payments and sales on local advertising.
ColorTyme licenses the use of its trademarks to the franchisees under
the Franchise Agreement. ColorTyme owns the registered trademarks "ColorTyme,"
"ColorTyme-What's Right for You" and "FlexTyme" along with certain design and
service marks.
GOVERNMENT REGULATION
There currently are 44 states that have legislation regulating rental
purchase transactions. Of the 33 states in which the Company operates stores, 30
require the Company to provide certain disclosure to customers regarding the
terms of the rental purchase transaction and 3 regulate rental purchase
transactions as credit sales. No federal legislation has been enacted regulating
rental purchase transactions.
With some variations in individual states, most state legislation
requires the lessor to make prescribed disclosures to a customer about the
rental purchase agreement and transaction. Such legislation also prescribes
grace periods for nonpayment and time periods during which a customer may
reinstate a rental purchase agreement, prohibits or limits certain types of
collection or other practices and, in some instances, limits certain fees that
may be charged. Some states, including Iowa, Michigan, Ohio and West Virginia,
limit the total rental payments that can be charged. Such limitations, however,
do not become applicable unless the total rental payments required under the
rental purchase agreement exceed 200% of the "disclosed cash price" in Iowa and
Ohio and 240% of the "retail" value in West Virginia. Michigan limits the amount
that may be charged to 2.22 times the price that would have been charged had the
product been purchased rather than leased.
In Wisconsin, where the Company operates six stores, legislation has
been adopted which treats certain rental purchase transactions as consumer
credit sales if the rental purchase agreement permits the lessee to acquire the
rental property for no other or nominal consideration upon full compliance with
the agreement. The Company has responded to the Wisconsin legislation by
developing and using a rent-to-rent agreement similar to agreements used by
traditional rent-to-rent companies. In order for the customer to obtain
ownership of a rental product, a completely separate transaction is required.
While the Wisconsin legislation has caused the Company to adopt this two-step
approach, it has not precluded the Company from continuing to conduct business
in Wisconsin nor has it materially impacted the Company's operations.
A New Jersey trial court has held that rental purchase transactions in
New Jersey are credit sales subject to certain consumer protection laws which,
among other things, limit maximum interest rates to 30%. However, no legislation
has been adopted in New Jersey regulating rental purchase transactions as credit
sales. The Company operates 17 stores in New Jersey. Management believes that
the Company's operations will not be materially affected by a binding decision
or legislation requiring rental purchase transactions to be treated as credit
sales because the Company anticipates that it would be able to develop and use a
contractual arrangement permissible under New Jersey law similar to the
rent-to-rent agreement the Company uses in Wisconsin.
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EMPLOYEES
As of March 11, 1997, the Company had approximately 2,250 employees, of
whom 42 are assigned to the Company's headquarters and the remainder of whom are
directly involved in the management and operation of the Company's stores. As of
the same date, ColorTyme had approximately 22 employees, 21 of which were
employed full-time. None of the Company's nor ColorTyme's employees are covered
by a collective bargaining agreement. Management believes that the Company's and
ColorTyme's relationships with their respective employees are generally good.
ITEM 2. PROPERTIES
The Company leases space for all of its retail stores, as well as its
corporate and regional offices, under operating leases expiring at various times
through 2005. Most of these leases contain renewal options for additional
periods ranging from three to five years at rental rates adjusted according to
agreed upon formulas. The Company's headquarters are located at 13800 Montfort,
Dallas, Texas, and consist of approximately 18,000 square feet. Store sizes
range from approximately 1,300 to 12,200 square feet, and average approximately
4,150 square feet. Approximately 80% of each store's space generally is used for
showroom space and 20% for offices and storage space. Management believes that
suitable store space generally is available for lease and that the Company would
be able to relocate any of its stores without significant difficulty should it
be unable to renew a particular lease. Management also expects that additional
space will be readily available at competitive rates in the event the Company
desires to open new stores.
ColorTyme's headquarters are located at 1231 Greenway Drive in Irving,
Texas, and consist of approximately 8,400 square feet.
ITEM 3. 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 seeks (i) to avoid the transfer of certain assets
purchased in 1993 by a predecessor of the Company from DEF and certain of its
subsidiaries pursuant to the 1993 Acquisition and to obtain an order that such
assets be turned over to the Trustee, (ii) to nullify the Hardestys' consulting
and noncompetition agreements, pursuant to the terms of which the Company paid
$2.0 million to the Hardestys on the closing date of the 1993 Acquisition, has
paid them an additional $900,000 since the closing date and is obligated to pay
them approximately $5.3 million in varying amounts through April 1, 2001, (iii)
to require the Company to make all future payments under the consulting and
noncompetition agreements to the Trustee for the benefit of the DEF bankruptcy
estate, and (iv) to
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set aside all payments already made by the Company to the Hardestys under the
consulting and noncompetition agreements, and to grant judgment against the
Hardestys and the Company for the amount of all such payments.
On March 8, 1996, the Company reached an agreement with the Trustee and
the Hardestys to settle the bankruptcy (the "Bankruptcy Settlement"). The terms
of the Bankruptcy Settlement provide that the Company will be released from the
fraudulent transfer claim and the future obligation to pay $5.3 million under
the consulting and noncompetition agreements with the Hardestys in exchange for
a cash payment of $4.75 million to the Trustee. The Bankruptcy Settlement,
which, as of March 24, 1997, has not yet been reduced to writing and is subject
to approval by the Bankruptcy Court after notice and hearing, contemplates the
nonrefundable payment by the Company of $50,000 upon execution of the written
settlement agreement in exchange for the Trustee's dismissal of the Complaint
against the Company with prejudice. On November 18, 1996, the Company interplead
approximately $1.53 million into the registry of the Bankruptcy Court, leaving a
balance outstanding under the consulting and noncompetition agreements of
approximately $3.8 million, and reducing the cash payment due under the proposed
settlement agreement to approximately $3.25 million. On December 1, 1996, the
Company began monthly payments of approximately $160,000 to the registry of the
Bankruptcy Court, due on the first day of each month until the consulting and
noncompetition agreements are fully satisfied, or the Bankruptcy Settlement is
finalized, at which time the balance of the settlement amount shall be payable
in full. Each such monthly payment will reduce on a dollar-for-dollar basis the
balance due under the consulting and noncompetition agreements and the
Bankruptcy Settlement.
As part of the overall Bankruptcy Settlement, the Company will receive a
full release from the fraudulent transfer claim by the Trustee on behalf of DEF,
any of its subsidiaries which may file Chapter 7 bankruptcy cases and their
respective creditors. The Bankruptcy Settlement is also conditioned on the
Bankruptcy Court issuing protective orders enjoining the Hardestys from making
any claims against the Company or J. E. Talley and certain of their affiliates
under the noncompetition and consulting agreements.
The Miller lawsuit has recently been settled. This should result in a
dismissal of all claims which were or could have been asserted in that case
against the Company. The Company is insisting and TransAmerica has agreed that
any potential obligations it or others may have under certain DEF-related loan
documents to TransAmerica for indemnity be released as part of the settlement,
including any claims TransAmerica might have for any indemnity claims asserted
against it in the Miller lawsuit. Execution of a global settlement agreement
should be simplified in light of the settlement of the Miller lawsuit.
Management believes that the implementation of the settlement agreement,
which management expects to be executed and approved by the Bankruptcy Court
sometime during 1997, will not have a material adverse effect on the Company's
results of operations. There can be no assurance that the settlement agreement
will be entered into. If the settlement agreement is not executed, the Trustee
would be able to proceed against the Company in the fraudulent transfer claim.
GALLAGHER V. CROWN
On January 3, 1996, the Company was served with a class action complaint
adding it as a defendant in this action originally filed in April 1994 against
Crown Leasing Corporation ("Crown") and certain of its affiliates. The class
consists of all New Jersey residents who entered into rent-to-own contracts with
Crown between April 25, 1988 and April 20, 1995.
The lawsuit alleges, among other things, that under certain rent-to-own
contracts entered into between the plaintiffs and Crown, some of which were
purportedly acquired by the Company pursuant to the Company's acquisition in
April 1995 of the rent-to-own assets of Crown (the "Acquisition"), the
defendants charged the plaintiffs fees and expenses that violated the New Jersey
Consumer Fraud Act and the New Jersey Retail Installment Sales Act. The
plaintiffs seek damages including, among other things, a refund of all excessive
fees and/or interest charged
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or collected by the defendants in violation of such acts, state usury laws and
other related statutes and treble damages, as applicable. The amount of such
excessive fees and/or interest is unspecified.
Pursuant to the Asset Purchase Agreement entered into between Crown and
its controlling shareholder and the Company in connection with the Acquisition,
the Company assumed no liabilities pertaining to Crown's rent-to-own contracts
for the period prior to the Acquisition in April 1995. The Asset Purchase
Agreement provides that Crown and its controlling shareholder will indemnify and
hold harmless the Company against damages, including reasonable attorneys' fees,
due to any claim pertaining to the operation of Crown's rent-to-own business
prior to the Crown Acquisition, except as set forth below. This indemnification
is applicable regardless of whether the circumstances giving rise to any such
claim continued after the Acquisition. Claims covered include claims of
customers, other than claims relating to rent-to-own contracts entered into by
Crown prior to the Acquisition which remained in full force and effect on
October 20, 1995. The Company has provided Crown and its controlling shareholder
with a notice of indemnification and tender of defense. Crown has assumed
responsibility for defending the Company in this matter pursuant to the Asset
Purchase Agreement.
The plaintiffs have obtained summary judgment against Crown on the
liability issues, reserving damages for trial. Although the plaintiffs were
unsuccessful in their attempt to certify a class against the Company, the
plaintiffs have attempted to assert a theory of successor liability against the
Company. Management believes there is no basis for a claim of successor
liability against the Company, and if Crown is unable to settle the case, the
Company will take appropriate steps to defend and preserve for appeal the
successor liability issues at trial.
HINTON, SANCHEZ V. COLORTYME
On May 25, 1994, a class action complaint was filed in Milwaukee County,
Wisconsin against ColorTyme, Inc., a wholly-owned subsidiary of the Company
("ColorTyme") alleging that ColorTyme had entered into contracts with residents
of Wisconsin that were violative of the Wisconsin Consumer Act (the "Wisconsin
Act"). Specifically, the plaintiffs allege that the ColorTyme contracts were
consumer credit transactions under the Wisconsin Act, and that ColorTyme failed
to provide required disclosures and violated the Wisconsin Act's collection
practice restrictions. The plaintiffs' complaint seeks damages in an unspecified
amount.
In light of the merger of a subsidiary of the Company with ColorTyme and
the Company's later purchase of the assets of four Milwaukee ColorTyme stores,
the plaintiffs have included the Company as a defendant to the extent that the
Company assumed the obligations of certain existing ColorTyme contracts through
the asset purchase of the Milwaukee stores. Furthermore, the court has defined
the class to include, in general, all contracts entered into with ColorTyme in
the State of Wisconsin after July 1988 and those in which payments were made
after July 1988.
At this time discovery continues and no trial date has been set. Due to
the uncertainties associated with any litigation, the ultimate outcome cannot
presently be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been quoted on the NASDAQ National Market System
("NASDAQ") under the symbol "RCII" since January 25, 1995, the date the Company
commenced its initial public offering. The following table sets forth, for the
periods indicated, the high and low sales price per share of the Common Stock as
reported on NASDAQ.
1996 HIGH LOW
----- -----
First Quarter......................... $18.500 $12.750
Second Quarter........................ 28.750 17.000
Third Quarter......................... 26.000 16.250
Fourth Quarter........................ 22.750 14.125
1995 HIGH LOW
----- -----
First Quarter (from January 25)....... $ 5.584 $ 3.334
Second Quarter........................ 10.000 5.000
Third Quarter......................... 17.000 9.875
Fourth Quarter........................ 18.250 11.625
As of March 24, 1997, there were 98 record holders of the Common Stock.
The Company expects that it will retain all available earnings generated
by its operations for the development and growth of its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. Any change in the Company's dividend policy will be made at the
discretion of the Board of Directors of the Company and will depend on a number
of factors, including the future earnings, capital requirements, contractual
restrictions, financial condition and future prospects of the Company and such
other factors as the Board of Directors may deem relevant. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the four years ended
December 31, 1996 have been derived from the financial statements of the Company
audited by Grant Thornton LLP, independent certified public accountants. The
selected data presented below for the year ended December 31, 1992 has been
derived from the financial statements of the Company audited by Kirkpatrick,
Sprecker & Company, independent certified public accountants. The historical
financial data are qualified in their entirety by, and should be read in
conjunction with, the financial statements and the notes thereto included
elsewhere herein.
YEAR ENDED DECEMBER 31,(1)
1996 1995(2) 1994(3) 1993(3) 1992(3)
--------- --------- --------- --------- ---------
(In thousands, except per share data)
STATEMENT OF EARNINGS DATA
REVENUE
Rentals and fees ............................................ $ 198,486 $ 126,264 $ 70,590 $ 51,162 $ 19,231
Merchandise sales ........................................... 10,604 6,383 3,470 1,678 734
Other ....................................................... 687 642 325 372 298
Franchise revenue(5) ........................................ 28,188 -- -- -- --
--------- --------- --------- --------- ---------
$ 237,965 $ 133,289 $ 74,385 $ 53,212 $ 20,263
OPERATING EXPENSES
Direct store expenses
Deprecation of rental merchandise ....................... $ 42,978 $ 29,640 $ 15,614 $ 11,626 $ 4,126
Cost of merchandise sold ................................ 8,357 4,954 2,915 1,756 525
Salaries and other expenses ............................. 116,577 70,012 37,786 27,820 9,581
Franchise operating expenses
Cost of franchise merchandise sold(5) ................... 24,010 -- -- -- --
--------- --------- --------- --------- ---------
191,922 104,606 56,315 41,202 14,232
General and administrative expenses ......................... 10,111 5,766 2,809 2,151 574
Amortization of intangibles ................................. 4,891 3,109 6,022 5,304 120
--------- --------- --------- --------- ---------
Total operating expenses ................................ 206,924 113,481 65,146 48,657 14,926
--------- --------- --------- --------- ---------
Operating profit ........................................ 31,041 19,808 9,239 4,555 5,337
Interest expense (income), net .............................. (61) 1,312 2,160 1,817 600
--------- --------- --------- --------- ---------
Earnings before income taxes ............................ 31,102 18,496 7,079 2,738 4,737
Income tax expense .......................................... 13,076 7,784 1,600 937 684
--------- --------- --------- --------- ---------
Net earnings ............................................ $ 18,026 $ 10,712 $ 5,479 1,801 $ 4,053
========= ========= ========= ========= =========
Earnings per share .......................................... $ 0.72 $ 0.52 -- -- --
========= ========= ========= ========= =========
Weighted average shares outstanding ......................... 25,065 20,794 12,967 -- --
OPERATING DATA
Stores open at end of period ................................ 423 325 114 112 27
Comparable store revenue growth (4) ......................... 3.8% 18.1% 10.8% 11.1% 22.9%
BALANCE SHEET DATA
Rental merchandise, net ..................................... $ 95,110 $ 64,240 $ 28,096 $ 20,672 $ 6,893
Intangible assets, net ...................................... 47,192 29,549 3,712 9,741 1,878
Deferred income taxes ....................................... 6,139 6,977 -- -- --
Total assets ................................................ 174,467 147,294 36,959 34,813 10,813
Total debt .................................................. 18,993 40,850 23,383 27,592 6,565
Total liabilities ........................................... 48,964 50,810 27,673 30,645 8,145
Stockholders' equity (deficit) .............................. 125,503 96,484 9,286 4,168 2,668
-13-
- -----------------------------
(1) The Company has pursued an aggressive growth strategy since it was
acquired in 1989 by J.E. Talley. 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.
(2) On April 20, 1995, the Company completed the Crown Acquisition, and in
September 1995, the Company completed the Magic Acquisition, both of
which affect the comparability between the historical financial and
operating data for the periods presented.
(3) In each of the periods presented ending prior to January 1, 1995, the
Company operated as an S corporation under Subchapter S of the Internal
Revenue Code and comparable provisions of certain state tax laws.
Accordingly, prior to January 1, 1995, the Company was not subject to
federal income taxation. Earnings per share are not provided for periods
prior to January 1, 1995, because operating results for these periods
are not comparable.
(4) Comparable store revenue for each period presented includes revenues
only of stores open throughout the full period and the comparable prior
period.
(5) Prior to the Company's acquisition of ColorTyme in May 1996, the Company
conducted no franchise operations. Therefore, franchise operations
financial information is presented for the year ended December 31, 1996
only.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements that involve risks and
uncertainties. The actual future results of the Company could differ materially
from those statements. Factors that could cause or contribute to such
differences include, but are not limited to, uncertainties regarding the ability
to open new stores, the ability to acquire additional rent-to-own stores on
favorable terms, the ability to enhance the performance of the required stores
and to integrate the acquired stores into the Company's operations.
The following discussion and analysis should be read in conjunction with
the information set forth under the caption "Selected Financial Data" and the
financial statements of the Company and the accompanying notes thereto included
elsewhere in this Report.
GENERAL
The Company has pursued an aggressive growth strategy since it was
acquired in 1989 by J.E. Talley. In general, the Company has sought to acquire
underperforming stores to which it could apply its operating strategies. See
"Business--Strategy." As a result, the acquired stores generally have
experienced more significant revenue growth during the initial periods following
their acquisition than in subsequent periods. Because of the significant growth
of the Company since its formation, the Company's historical results of
operations and period-to-period comparisons of such results and certain
financial data may not be meaningful or indicative of future results.
The Company expects to grow through both the acquisition of existing
stores and the opening of new stores. If the Company opens new stores or
acquires underperforming or unprofitable stores, start-up costs associated with
new stores and excess salaries, other overhead costs and operating results
associated with acquired stores could negatively impact the Company's earnings
until these stores are fully integrated into the Company's operations and become
profitable.
COMPONENTS OF INCOME
REVENUE. The Company collects non-refundable rental payments and fees in
advance, generally on a weekly or monthly basis. This revenue is recognized when
collected. Rental purchase agreements generally include a discounted early
purchase option. Amounts received upon sales of merchandise pursuant to such
options, and upon the sale of used merchandise, are recognized as revenue when
the merchandise is sold.
FRANCHISE REVENUE. Revenue from the sale of rental equipment is
recognized upon shipment of the equipment to the franchisee. Franchise fee
revenue is recognized upon completion of substantially all services and
satisfaction of all material conditions required under the terms of the
franchise agreement.
-14-
DEPRECIATION OF RENTAL MERCHANDISE. Except for tax purposes, the Company
depreciates its rental merchandise using the income forecasting method. The
income forecasting method of depreciation does not consider salvage value and
does not allow the depreciation of rental merchandise during periods when it is
not generating rental revenue. As a result of a revenue ruling published in 1995
by the Internal Revenue Service stating that the MACRS method of depreciation
over a five-year period is the appropriate method of depreciation for rental
purchase merchandise, the Company began using the MACRS method of depreciation
for tax purposes in 1996.
COST OF MERCHANDISE SOLD. Cost of merchandise sold represents the book
value net of accumulated depreciation of rental merchandise at time of sale.
SALARIES AND OTHER EXPENSES. Salaries and other expenses include all
salaries and wages paid to store level employees, including any related benefits
and taxes, as well as all store level general and administrative expenses and
selling, advertising, occupancy, non-rental depreciation and other operating
expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include all corporate overhead expenses related to the Company's headquarters
such as salaries, taxes and benefits, occupancy, administrative and other
operating expenses, as well as Regional Vice President's salaries, travel and
office expenses.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles consists
primarily of the amortization of the excess of purchase price over the fair
market value of acquired assets.
INCOME TAX EXPENSE. Prior to January 1, 1995, the Company operated under
Subchapter S of the Internal Revenue Code and, therefore, was not subject to
federal income tax. As of January 1, 1995, the Company became subject to federal
income tax. Income tax expense prior to January 1, 1995 represents primarily
Puerto Rican income tax. Under current federal tax laws, income taxes paid in
Puerto Rico may be used to offset the Company's federal income tax liability,
subject to certain limitations.
-15-
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
historical Statement of Earnings data as a percentage of total revenue.
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
(Company owned stores only) (Franchise operations)
1996 1995 1994 1996 1995 1994
----- ----- ----- ----- ---- ----
REVENUE
Rentals and fees ................... 94.7% 94.7% 94.9% -- % -- --
Merchandise Sales .................. 5.0 4.8 4.7 89.6 -- --
Other/Royalties .................... 0.3 0.5 0.4 10.4 -- --
----- ----- ----- ----- ---- ----
100.0% 100.0% 100.0% 100.0% -- --
OPERATING EXPENSES
Direct expenses
Depreciation of rental merchandise 20.5% 22.2% 21.0% -- % -- --
Cost of merchandise sold ......... 4.0 3.8 3.9 85.0 -- --
Salaries and other expenses ...... 55.6 52.5 50.8 -- -- --
----- ----- ----- ----- ---- ----
80.1 78.5 75.7 85.0 -- --
General and administrative expenses 3.8 4.3 3.8 7.7 -- --
Amortization of intangibles ........ 2.3 2.3 8.1 0.6 -- --
----- ----- ----- ----- ---- ----
Total operating expenses ........... 86.2 85.1 87.6 93.3 -- --
----- ----- ----- ----- ---- ----
Operating profit ................... 13.9 14.9 12.4 6.7 -- --
Interest expense / (income) ........ 0.1 1.0 2.9 (1.9) -- --
----- ----- ----- ----- ---- ----
Earnings before income taxes ....... 13.8% 13.9% 9.5% 8.6% -- --
===== ===== ===== ===== ==== ====
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
In May 1996, the Company completed the ColorTyme Acquisition, and
between May 1996 and December 1996, the Company acquired a total of 94
additional stores. The 1996 acquisitions were accounted for as purchases, and
accordingly, the operating results of the acquired operations have been included
in the results of operations of the Company since the respective dates of
acquisition. Primarily as a result of all of the 1996 acquisitions on the
Company's results of operations, comparisons of the Company's operating results
for 1996 and 1995 may not be meaningful or indicative of future results.
Total revenue increased by $104.6 million, or 78.5%, to $237.9 million
for 1996 from $133.3 million for 1995. The increase in total revenue was
primarily attributable to the inclusion of 94 stores purchased in 1996 and the
operating results from the franchise operations. Total revenue exclusive of the
94 new stores and franchise operations increased by $67.8 million, or 50.9% to
$201.1 million for 1996 from $133.3 million in 1995.
Depreciation of rental merchandise increased by $13.4 million, or 45.3%,
to $43.0 million for 1996 from $29.6 million for 1995. Depreciation of rental
merchandise as a percent of total store revenue decreased to 20.5%
-16-
for 1996 from 22.2% for 1995. The decrease in depreciation of rental merchandise
as a percent of revenue was primarily attributable to higher rental rates on
rental merchandise.
Salaries and other expenses as a percentage of store revenue increased
to 55.6% for 1996 from 52.5% for 1995. This increase is attributable to the
increase in salaries for employees and other expenses of the acquired stores
immediately following the acquisitions while store revenue has increased
gradually. Additionally, the Company increased its advertising efforts during
1996 in the markets related to the stores acquired in 1996. Occupancy costs also
increased as a percent of total store revenue due to the relocation of certain
stores acquired in 1996 to stores that are larger in square footage. Revenue
from these stores increase gradually while the additional occupancy costs are
incurred immediately. The average square footage per store was approximately
3,800 at December 31, 1995 compared to 4,150 at December 31, 1996.
General and administrative expenses expressed as a percentage of total
revenue increased to 4.8% in 1996 from 4.3% in 1995. The increase was due to the
higher overhead in the franchise operations relative to franchise revenue.
Franchise general and administrative expenses as a percentage of franchise
revenue totaled 7.7% in 1996. This increase was offset by a decrease in
corporate overhead for store operations in 1996, which declined to 3.8% of store
revenue in 1996 compared to 4.3% in 1995. The decrease is primarily due to
increased economies of scale as a result of the increased number of stores.
Operating profit increased by $11.2 million, or 56.6%, to $31.0 million
for 1996 from $19.8 million for 1995. This improvement was primarily due to an
increase in both the number of items on rent and in revenue earned per item on
rent in the stores acquired prior to 1996. The revenue increase exceeded
increases in direct store expenses.
Net earnings increased by $7.3 million, or 68.3%, to $18.0 million in
1996 from $10.7 million in 1995. The improvement was the result of the increase
in operating profit described above, as well as a reduction in interest expense
from 1995.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
On April 20, 1995, the Company completed the Crown Acquisition
consisting of 72 rent-to-own stores. In September 1995, the Company completed
the Magic Acquisition consisting of an additional 135 rent-to-own stores. The
1995 Acquisitions were accounted for as purchases and, accordingly, the
operating results of the acquired stores have been included in the operating
results of the Company since the respective dates of acquisition. Primarily as a
result of the impact of the 1995 Acquisitions on the Company's results of
operations, comparisons of the Company's operating results for 1995 and 1994 may
not be meaningful or indicative of future results.
Total revenue increased by $58.9 million, or 79.2%, to $133.3 million
for 1995 from $74.4 million for 1994. The increase in total revenue was
primarily attributable to the inclusion of the 209 stores purchased in 1995.
Total revenue exclusive of the 209 new stores increased by $14.9 million, or
20.0% to $89.2 million for 1995 from $74.3 million in 1994.
Depreciation of rental merchandise increased by $14.0 million, or 89.8%,
to $29.6 million for 1995 from $15.6 million for 1994. Depreciation of rental
merchandise as a percent of revenue increased to 22.2% for 1995 from 21.0% for
1994. The increase in depreciation of rental merchandise as a percent of revenue
was primarily attributable to lower rental rates on rental merchandise acquired
in the 1995 Acquisitions.
Salaries and other expenses increased by $32.2 million, or 85.3%, to
$70.0 million for 1995 from $37.8 million for 1994, primarily because of an
increase in total Company personnel attributable to the 1995 Acquisitions.
Salaries and other expenses as a percentage of revenue increased to 52.5% in
1995 from 50.8% in 1994, primarily as a result of increases in salaries for
employees of acquired stores immediately following the acquisitions while store
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revenues have increased gradually. Similarly, general and administrative
expenses increased as a percentage of total revenue to 4.3% in 1995 from 3.8% in
1994 primarily due to an increase in the number of home office personnel,
increased communication costs, and a national store manager meeting in 1995.
Operating profit increased by $10.6 million, or 114.4%, to $19.8 million
for 1995 from $9.2 million for 1994. This improvement was primarily due to an
increase in both the number of items on rent and in revenue earned per item on
rent in the stores acquired before 1995. The revenue increase exceeded increases
in direct store expenses.
Net earnings increased by $5.2 million, or 95.5%, to $10.7 million in
1995 from $5.5 million in 1994. The improvement was the result of the increase
in operating profit described above, as well as a reduction in net interest
expense of $800,000 as a result of the application of proceeds from the
Company's initial and secondary offerings to reduce outstanding borrowings
offset by an increase in income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are the acquisition of
existing stores, the opening of new stores, the purchase of additional rental
merchandise and the replacement of rental merchandise which has been sold or
charged-off or is no longer suitable for rent. During the year ended December
31, 1996, the Company acquired 88 stores (exclusive of the six stores purchased
from ColorTyme) and ColorTyme for an aggregate purchase price of $57.2 million,
of which $28.4 million was paid in cash. Additionally, the Company purchased
rental merchandise in the amount of $75.2 million. The Company purchased $44.5
million and $27.5 million of rental merchandise during the years ended December
31, 1995 and 1994, respectively.
For 1996, cash provided by operating activities increased by $14.2
million from $5.2 million in 1995 to $19.4 million in 1996, primarily due to the
$7.3 million increase in net earnings and the $10.7 million increase in trade
accounts payable relating to the timing of payments to vendors. Cash used in
investing activities increased by $11.6 million from $24.7 million in 1995 to
$36.3 million in 1996, primarily due to additional cash paid for the
acquisitions of businesses. Additionally, the Company paid $4.7 million more in
1996 than 1995 for the purchase of property assets. The increase is attributable
primarily to relocating and improving acquired stores. During 1996, cash used in
financing activities was $12.5 million which relates primarily to repayment of
debt to the Magic selling shareholders which was paid in full on January 2,
1996, offset by the net proceeds of the sale of the ColorTyme franchisee loan
portfolio. During 1995, cash provided by financing activities was $53.4 million,
generated primarily by proceeds from the initial and secondary public Common
Stock offerings offset by repayments of debt and notes to a stockholder.
On November 27, 1996, the Company consummated a $90 million revolving
line of credit with a group of banks led by Comerica Bank as agent. The credit
facility has a stated term of three years and replaces the Company's prior $40
million credit facility. Advances under the line of credit may be used by the
Company for general business purposes such as working capital and for the
financing of acquisitions. Borrowings under the line of credit will bear
interest at the Company's choice of a bank prime rate or a LIBOR-based rate, and
are secured by liens on substantially all of the assets of the Company. The
amount outstanding under the line of credit as of March 24, 1997 is $19.3
million. The facility bears a commitment fee ranging from 0.3% to 0.5% of the
average unused portions.
In connection with the 1993 Acquisition, monthly payments of $33,333 are
due under a consulting agreement through April 1, 2001, and monthly payments of
$125,000 are due under a non-competition agreement from February 1996 through
January 1998. If the settlement agreement described under the caption "Item 3.
Legal Proceedings -- IN RE: DEF INVESTMENTS, INC." is executed, the Company will
be released from its obligation to make payments under such consulting and
non-competition agreements, in exchange for a cash payment of $4.75 million (the
"Settlement
-18-
Amount"). Management expects that its borrowing capacity under its credit
facility and cash flow from operations will be sufficient to fund the payment.
In connection with the Crown Acquisition, monthly payments of $16,667
were made under a consulting agreement that ended in October 1996, and in
connection with the Magic Acquisition, monthly payments in the aggregate amount
of $32,500 each are due under certain noncompetition agreements through August
2000.
The Company currently expects to open approximately fifteen to twenty
new stores during 1997 and to open 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 80% to 85% of the investment. The remaining
investment consists of leasehold improvements, delivery trucks, store signs,
computer equipment and start-up costs. There can be no assurance that the
Company will open any new stores in the future, or as to the number, location or
profitability thereof.
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 60-70 stores in each of the next few years, primarily through
acquisitions. Management believes that there are currently a number of possible
future acquisition opportunities in the rent-to-own industry, and it is possible
that any acquisition could be material to the Company. There can be no assurance
that the Company will be able to acquire any additional stores, or that any
stores that are acquired will be or will become profitable.
Management believes that cash flow from operations and the previously
described credit facility will be adequate to fund the operations and expansion
plans of the Company during 1997. In addition, to provide any additional funds
necessary for the continued pursuit of the Company's growth strategies, the
Company may incur, from time to time, additional short-and long-term bank
indebtedness and may issue, in public or private transactions, its equity and
debt securities. The availability and attractiveness of any outside sources of
financing will depend on a number of factors, some of which will relate to the
financial condition and performance of the Company, and some of which will be
beyond the Company's control such as prevailing interest rates and general
economic conditions. There can be no assurance that such additional financing
will be available or, if available, will be on terms acceptable to the Company.
INFLATION
During the years ended December 31, 1996, 1995 and 1994, the cost of
rental merchandise, lease expense and salaries and wages have increased
modestly. The increases have not had a significant effect on the Company's
results of operations because the Company has been able to charge commensurately
higher rental rates for its merchandise.
-19-
QUARTERLY RESULTS
The following table contains certain unaudited historical financial
information for the quarters indicated.
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS)
Year ended December 31, 1996(1)
Revenue.............................. $49,002 $57,756 $60,025 $71,182
Operating profit..................... 6,344 7,558 7,957 9,183
Net earnings......................... 3,617 4,369 4,729 5,311
Earnings per share................... $0.15 $0.17 $0.19 $0.21
Year ended December 31, 1995(2)
Revenue.............................. $21,045 $28,927 $36,659 $46,658
Operating profit..................... 3,795 4,992 5,429 5,592
Net earnings......................... 1,987 2,627 2,921 3,177
Earnings per share................... $0.11 $0.13 $0.14 $0.14
- ---------------
(1) Pursuant to the 1996 acquisitions, 11 stores were purchased during the
second quarter, 12 stores were purchased during the third quarter, and
71 stores were purchased during the fourth quarter of 1996. In addition,
three stores were opened in the second quarter, four stores were opened
in the third quarter, and six stores were opened in the fourth quarter
of 1996.
(2) Pursuant to the 1995 acquisitions, 72 stores were purchased during the
second quarter of 1995 and 135 stores were purchased during the third
quarter of 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company required to be included in this
Item 8 are set forth in Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-20-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(*)
ITEM 11. EXECUTIVE COMPENSATION(*)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(*)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(*)
- -----------------------
* The information required by Items 10, 11, 12 and 13 is or will be set
forth in the definitive proxy statement relating to the 1997 Annual
Meeting of Stockholders of Renters Choice, Inc., which is to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended. Such definitive
proxy statement relates to a meeting of stockholders involving the
election of directors and the portions therefrom required to be set
forth in this Form 10-K by Items 10, 11, 12 and 13 are incorporated
herein by reference pursuant to General Instruction G(3) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
Report Of Independent Certified Public Accountants.......... F-2
Consolidated Financial Statements
Balance Sheets....................................... F-3
Statements Of Earnings............................... F-4
Statement Of Stockholders' Equity.................... F-5
Statements Of Cash Flows............................. F-6
Notes to Consolidated Financial Statements........... F-8
SCHEDULES SUPPORTING FINANCIAL STATEMENTS
Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
either not required under the related instructions or inapplicable.
CURRENT REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K/A on October 2,
1996, relating to the acquisition of ColorTyme, Inc. Included in the
8-K/A filed on October 2, 1996, were the financial statements of
ColorTyme, Inc. as of December 31, 1994.
-21-
LISTING OF EXHIBITS
Exhibits followed by an (*) constitute management contracts or
compensatory plans or arrangements.
EXHIBIT NUMBER DESCRIPTION
2.1(1) - Asset Purchase Agreement dated April 20, 1995
among Renters Choice, Inc., Crown Leasing
Corporation, Robert White, individually and
Robert White Company, a sole proprietorship
owned by Robert White
2.2(2) - Stock Purchase Agreement dated as of August 27,
1995 among Renters Choice, Inc., Starla J.
Flake, Rance D. Richter, Bruce S. Johnson and
Pro Rental, Inc.
2.3(3) - Stock Purchase Agreement dated September 29,
1995 between the Company and Terry N. Worrell
2.4(4) - Partnership Interest Purchase Agreement dated
September 29, 1995 among the Company, Worrell
Investors, Inc., The Christy Ann Worrell Trust
and The Michael Neal Worrell Trust
2.5(5) - Agreement and Plan of Merger by and among
Renters Choice, Inc., Pro Rental, Inc., MRTO
Holdings, Inc. and Pro Rental II, Inc.
2.6(6) - Agreement and Plan of Reorganization dated May
15, 1996, among Renters Choice, Inc.,
ColorTyme, Inc., and CT Acquisition Corporation
3.1(7) - Amended and Restated Certificate of
Incorporation of the Company
3.2(8) - Certificate of Amendment to the Amended and
Restated Certificate of Incorporation of the
Company
3.3(9) - Amended and Restated Bylaws of the Company
4.1(10) - Form of Certificate evidencing Common Stock
10.1(11)* - Amended and Restated 1994 Renters Choice, Inc.
Long-Term Incentive Plan
10.2 - Revolving Credit Agreement dated as of November
27, 1996 between Comerica Bank, as agent,
Renters Choice, Inc. and certain other lenders
10.3(12) - Consulting Agreement dated April 1, 1993, by
and between Bob A. Hardesty and Brenda K.
Hardesty and Renters Choice, L.P.
10.4(13) - Non-Competition Agreement dated April 1, 1993,
by and between Bob A. Hardesty and Brenda K.
Hardesty and Renters Choice, L.P.
10.5(14) - Noncompetition Agreement dated as of April 20,
1995, between Renters Choice, Inc. and Patrick
S. White
10.6(15) - Consulting Agreement dated as of April 20, 1995
between Renters Choice, Inc. and Jeffrey W.
Smith
10.7(16) - Noncompetition Agreement dated as of August 27,
1995 between Renters Choice, Inc. and Starla J.
Flake
10.8(17) - Noncompetition Agreement dated as of August 27,
1995 between Renters Choice, Inc. and Bruce S.
Johnson
-22-
10.9(18) - Noncompetition Agreement dated as of August 27,
1995 between Renters Choice, Inc. and Rance D.
Richter
10.10(19) - Option Agreement dated August 27, 1995 between
the Company and Terry N. Worrell
10.11(20) - Option Agreement dated August 27, 1995 among
the Company, Worrell Investors, Inc., The
Christy Ann Worrell Trust and The Michael Neal
Worrell Trust
10.15(21) - Portfolio Acquisition Agreement dated May 15,
1996, by and among Renters Choice, Inc.,
ColorTyme Financial Services, Inc., and STI
Credit Corporation
11.1 - Computation of Earnings per share
23 - Notice of Annual Meeting of Stockholders and
Proxy Statement of the Company for the 1997
Annual Meeting of the Company (to be filed with
the Securities and Exchange Commission pursuant
to Regulation 14A) (Preliminary Materials)
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 10.5 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(13) Incorporated herein by reference to Exhibit 10.6 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
-23-
(14) Incorporated herein by reference to Exhibit 10.7 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(15) Incorporated herein by reference to Exhibit 10.8 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(16) Incorporated herein by reference to Exhibit 10.10 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(17) Incorporated herein by reference to Exhibit 10.11 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(18) Incorporated herein by reference to Exhibit 10.12 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(19) Incorporated herein by reference to Exhibit 2.2 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(20) Incorporated herein by reference to Exhibit 2.3 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(21) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
-24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ J. ERNEST TALLEY
------------------------
J. Ernest Talley
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Date: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
date indicated.
SIGNATURE TITLE DATE
/s/ J. ERNEST TALLEY Chairman of the Board and March 24, 1997
- --------------------------------- Chief Executive Officer
J. Ernest Talley (Principal Executive Officer)
/s/ MARK E. SPEESE President, Chief Operating Officer March 24, 1997
- --------------------------------- and Director
Mark E. Speese
/s/ RANDALL S. SIMPSON Vice President - Finance and Chief March 24, 1997
- --------------------------------- Financial Officer (Principal Financial
Randall S. Simpson and Accounting Officer)
/s/ J. V. LENTELL Director March 24, 1997
- ---------------------------------
J.V. Lentell
/s/ JOSEPH V. MARINER Director March 24, 1997
- ---------------------------------
Joseph V. Mariner
/s/ REX W. THOMPSON Director March 24, 1997
- ---------------------------------
Rex W. Thompson
S-1
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
2.1(1) - Asset Purchase Agreement dated April 20, 1995
among Renters Choice, Inc., Crown Leasing
Corporation, Robert White, individually and
Robert White Company, a sole proprietorship
owned by Robert White
2.2(2) - Stock Purchase Agreement dated as of August 27,
1995 among Renters Choice, Inc., Starla J.
Flake, Rance D. Richter, Bruce S. Johnson and
Pro Rental, Inc.
2.3(3) - Stock Purchase Agreement dated September 29,
1995 between the Company and Terry N. Worrell
2.4(4) - Partnership Interest Purchase Agreement dated
September 29, 1995 among the Company, Worrell
Investors, Inc., The Christy Ann Worrell Trust
and The Michael Neal Worrell Trust
2.5(5) - Agreement and Plan of Merger by and among
Renters Choice, Inc., Pro Rental, Inc., MRTO
Holdings, Inc. and Pro Rental II, Inc.
2.6(6) - Agreement and Plan of Reorganization dated May
15, 1996, among Renters Choice, Inc.,
ColorTyme, Inc., and CT Acquisition Corporation
3.1(7) - Amended and Restated Certificate of
Incorporation of the Company
3.2(8) - Certificate of Amendment to the Amended and
Restated Certificate of Incorporation of the
Company
3.3(9) - Amended and Restated Bylaws of the Company
4.1(10) - Form of Certificate evidencing Common Stock
10.1(11)* - Amended and Restated 1994 Renters Choice, Inc.
Long-Term Incentive Plan
10.2 - Revolving Credit Agreement dated as of November
27, 1996 between Comerica Bank, as agent,
Renters Choice, Inc. and certain other lenders
10.3(12) - Consulting Agreement dated April 1, 1993, by
and between Bob A. Hardesty and Brenda K.
Hardesty and Renters Choice, L.P.
10.4(13) - Non-Competition Agreement dated April 1, 1993,
by and between Bob A. Hardesty and Brenda K.
Hardesty and Renters Choice, L.P.
10.5(14) - Noncompetition Agreement dated as of April 20,
1995, between Renters Choice, Inc. and Patrick
S. White
10.6(15) - Consulting Agreement dated as of April 20, 1995
between Renters Choice, Inc. and Jeffrey W.
Smith
10.7(16) - Noncompetition Agreement dated as of August 27,
1995 between Renters Choice, Inc. and Starla J.
Flake
10.8(17) - Noncompetition Agreement dated as of August 27,
1995 between Renters Choice, Inc. and Bruce S.
Johnson
EXHIBIT INDEX - Page 1
10.9(18) - Noncompetition Agreement dated as of August 27,
1995 between Renters Choice, Inc. and Rance D.
Richter
10.10(19) - Option Agreement dated August 27, 1995 between
the Company and Terry N. Worrell
10.11(20) - Option Agreement dated August 27, 1995 among
the Company, Worrell Investors, Inc., The
Christy Ann Worrell Trust and The Michael Neal
Worrell Trust
10.15(21) - Portfolio Acquisition Agreement dated May 15,
1996, by and among Renters Choice, Inc.,
ColorTyme Financial Services, Inc., and STI
Credit Corporation
11.1 - Computation of Earnings per share
23 - Notice of Annual Meeting of Stockholders and
Proxy Statement of the Company for the 1997
Annual Meeting of the Company (to be filed with
the Securities and Exchange Commission pursuant
to Regulation 14A) (Preliminary Materials)
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 10.5 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(13) Incorporated herein by reference to Exhibit 10.6 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
EXHIBIT INDEX - Page 2
(14) Incorporated herein by reference to Exhibit 10.7 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(15) Incorporated herein by reference to Exhibit 10.8 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(16) Incorporated herein by reference to Exhibit 10.10 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(17) Incorporated herein by reference to Exhibit 10.11 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(18) Incorporated herein by reference to Exhibit 10.12 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(19) Incorporated herein by reference to Exhibit 2.2 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(20) Incorporated herein by reference to Exhibit 2.3 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(21) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
EXHIBIT INDEX - Page 3
INDEX TO FINANCIAL STATEMENTS
PAGE
----
RENTERS CHOICE, INC. AND SUBSIDIARIES
Report Of Independent Certified Public Accountants ................ F-2
Consolidated Financial Statements
Balance Sheets ......................................... F-3
Statements of Earnings ................................. F-4
Statement of Stockholders' Equity ...................... F-5
Statements of Cash Flows ............................... F-6
Notes To Consolidated Financial Statements ............. F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Renters Choice, Inc.
We have audited the accompanying consolidated balance sheets of Renters Choice,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Renters Choice,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
February 19, 1997
F-2
Renters Choice, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
------------ -------------
ASSETS
Cash and cash equivalents ........................................................ $ 5,919,894 $ 35,321,338
Rental merchandise, net
On rent ...................................................................... 71,619,875 49,700,354
Held for rent ................................................................ 23,490,515 14,539,645
Accounts receivable - trade, net of allowance of $255,812 ........................ 3,020,631 --
Prepaid expenses and other assets ................................................ 2,285,044 2,391,220
Property assets, net ............................................................. 12,715,593 7,375,667
Refundable income taxes .......................................................... 2,084,244 1,440,223
Deferred income taxes ............................................................ 6,138,566 6,976,576
Intangible assets, net ........................................................... 47,192,380 29,549,275
------------ -------------
$174,466,742 $ 147,294,298
============ =============
LIABILITIES
Revolving credit agreement ....................................................... $ 14,435,000 $ --
Accounts payable - trade ......................................................... 17,047,592 3,288,069
Accrued liabilities .............................................................. 12,923,664 6,672,608
Other debt ....................................................................... 4,557,678 40,849,605
------------ -------------
48,963,934 50,810,282
COMMITMENTS AND CONTINGENCIES ........................................................ -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issue ................................................................... -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
24,791,085 and 24,378,108 shares issued and outstanding
in 1996 and 1995, respectively ............................................... 247,911 243,781
Additional paid-in capital ....................................................... 98,009,773 87,919,305
Unamortized value of stock award ................................................. -- (897,890)
Retained earnings ................................................................ 27,245,124 9,218,820
------------ -------------
125,502,808 96,484,016
------------ -------------
$174,466,742 $ 147,294,298
============ =============
The accompanying notes are an integral part of these statements.
F-3
Renters Choice, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
1996 1995 1994
------------- ------------- -----------
Revenue
Store
Rentals and fees ...................................... $ 198,485,710 $ 126,263,843 $70,589,571
Merchandise sales ..................................... 10,604,158 6,382,879 3,469,842
Other ................................................. 686,540 642,471 325,277
Franchise
Franchise merchandise sales ........................... 25,228,995 -- --
Royalty income and fees ............................... 2,959,302 -- --
------------- ------------- -----------
237,964,705 133,289,193 74,384,690
Operating expenses
Direct store expenses
Depreciation of rental merchandise .................... 42,977,703 29,639,965 15,614,320
Cost of merchandise sold .............................. 8,356,714 4,953,675 2,914,453
Salaries and other expenses ........................... 116,577,020 70,012,036 37,786,033
Franchise operating expense
Cost of franchise merchandise sales ................... 24,010,304 -- --
------------- ------------- -----------
191,921,741 104,605,676 56,314,806
General and administrative expenses ....................... 10,110,868 5,766,115 2,809,222
Amortization of intangibles ............................... 4,890,928 3,109,067 6,022,136
------------- ------------- -----------
Total operating expenses ...................... 206,923,537 113,480,858 65,146,164
------------- ------------- -----------
Operating profit .............................. 31,041,168 19,808,335 9,238,526
Interest expense .............................................. 606,178 2,202,427 2,159,445
Interest income ............................................... (666,957) (890,457) --
------------- ------------- -----------
Earnings before income taxes .................. 31,101,947 18,496,365 7,079,081
Income tax expense ............................................ 13,075,643 7,784,205 1,600,290
------------- ------------- -----------
NET EARNINGS .................................. $ 18,026,304 $ 10,712,160 $ 5,478,791
============= ============= ===========
Earnings per share ............................................ $0.72 $0.52
===== =====
The accompanying notes are an integral part of these statements.
F-4
Renters Choice, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
TALLEY LEASE RENTERS CHOICE, INC.
TO OWN, INC. ----------------------------------------------------
---------------------- COMMON STOCK TREASURY STOCK
COMMON TREASURY -------------------------- --------------------
STOCK STOCK SHARES AMOUNT SHARES AMOUNT
--------- ------- ----------- --------- ------ --------
Balance at January 1, 1994 ................... $ 248,533 $ -- 989,125 $ 52,825 8,000 $ (4,495)
Net earnings ............................. -- -- -- -- -- --
Purchase of treasury stock ............... -- (2,007) -- -- 8,500 (12,875)
Exercise of stock options ................ 26,275 -- 9,875 87,256 (7,000) 3,568
Retirement of treasury stock ............. -- -- (9,500) (13,802) (9,500) 13,802
Distributions ............................ -- -- -- -- -- --
--------- ------- ----------- --------- ------ --------
Balance at December 31, 1994 ................. 274,808 (2,007) 989,500 126,279 -- --
Net earnings ............................. -- -- -- -- -- --
Dividends paid ........................... -- -- -- -- -- --
Restructuring and merger of
companies ............................ (274,808) 2,007 3,310,036 (83,284) -- --
Contribution of undistributed
S corporation earnings ............... -- -- -- -- -- --
Initial public offering of
common stock ......................... -- -- 2,587,500 25,875 -- --
Issuance of common stock
under stock option plan .............. -- -- 1,500 15 -- --
Three-for-two common
stock split effected in
the form of a dividend ............... -- -- 3,444,268 34,443 -- --
Two-for-one common stock
split effected in the form
of a dividend ........................ -- -- 10,332,804 103,328 -- --
Stock award .............................. -- -- 62,500 625 -- --
Amortization of stock award .............. -- -- -- -- -- --
Public offering of common stock .......... -- -- 3,650,000 36,500 -- --
--------- ------- ----------- --------- ------ --------
Balance at December 31, 1995 ................. -- -- 24,378,108 243,781 -- --
Net earnings ............................. -- -- -- -- -- --
Amortization of stock award .............. -- -- -- -- -- --
Termination of stock award ............... -- -- (37,500) (375) -- --
Exercise of stock options ................ -- -- 107,302 1,073 -- --
Tax benefits related to
exercise of stock options ............ -- -- -- -- -- --
Acquisition of ColorTyme, Inc. ........... -- -- 343,175 3,432 -- --
--------- ------- ----------- --------- ------ --------
Balance at December 31, 1996 ................. $ -- $ -- 24,791,085 $ 247,911 -- $ --
========= ======= =========== ========= ====== ========
UNAMORTIZED
ADDITIONAL VALUE
PAID-IN RETAINED OF STOCK
CAPITAL EARNINGS AWARD TOTAL
------------ ------------ --------- -------------
Balance at January 1, 1994 ....................... $ -- $ 3,870,951 $ -- $ 4,167,814
Net earnings ................................. -- 5,478,791 -- 5,478,791
Purchase of treasury stock ................... -- -- -- (14,882)
Exercise of stock options .................... -- -- -- 117,099
Retirement of treasury stock ................. -- -- -- --
Distributions ................................ -- (463,195) -- (463,195)
------------ ------------ --------- -------------
Balance at December 31, 1994 ..................... -- 8,886,547 -- 9,285,627
Net earnings ................................. -- 10,712,160 -- 10,712,160
Dividends paid ............................... -- (1,493,340) -- (1,493,340)
Restructuring and merger of
companies ................................ 116,379 239,706 -- --
Contribution of undistributed
S corporation earnings ................... 9,126,253 (9,126,253) -- --
Initial public offering of
common stock ............................. 23,370,382 -- -- 23,396,257
Issuance of common stock
under stock option plan .................. 9,985 -- -- 10,000
Three-for-two common
stock split effected in
the form of a dividend ................... (34,443) -- -- --
Two-for-one common stock
split effected in the form
of a dividend ............................ (103,328) -- -- --
Stock award .................................. 960,313 -- (960,938) --
Amortization of stock award .................. -- -- 63,048 63,048
Public offering of common stock .............. 54,473,764 -- -- 54,510,264
------------ ------------ --------- -------------
Balance at December 31, 1995 ..................... 87,919,305 9,218,820 (897,890) 96,484,016
Net earnings ................................. -- 18,026,304 -- 18,026,304
Amortization of stock award .................. -- -- 321,327 321,327
Termination of stock award ................... (576,188) -- 576,563 --
Exercise of stock options .................... 694,848 -- -- 695,921
Tax benefits related to
exercise of stock options ................ 460,182 -- -- 460,182
Acquisition of ColorTyme, Inc. ............... 9,511,626 -- -- 9,515,058
------------ ------------ --------- -------------
Balance at December 31, 1996 ..................... $ 98,009,773 $ 27,245,124 $ -- $ 125,502,808
============ ============ ========= =============
The accompanying notes are an integral part of this statement.
F-5
Renters Choice, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities
Net earnings .......................................................... $ 18,026,304 $ 10,712,160 $ 5,478,791
Adjustments to reconcile net earnings
to net cash provided by operating activities
Depreciation of rental merchandise ............................ 42,977,703 29,639,965 15,614,320
Depreciation of property assets ............................... 3,680,167 2,130,135 1,184,690
Amortization of intangibles .................................. 4,890,928 3,109,067 6,022,136
Deferred income taxes ......................................... 4,961,226 1,406,130 --
Other ......................................................... 24,135 (91,232) 18,206
Changes in operating assets and liabilities
Rental merchandise ............................................ (64,926,691) (39,220,113) (23,038,794)
Accounts receivable - trade ................................... (602,517) -- --
Prepaid expenses and other assets ............................. 547,059 (937,130) (305,754)
Accounts payable - trade ...................................... 10,744,425 (27,781) 802,721
Accrued liabilities ........................................... (939,119) 183,308 325,142
Income taxes .................................................. (23,062) (1,698,909) 108,763
------------ ------------ ------------
Net cash provided by operating activities ................. 19,360,558 5,205,600 6,210,221
Cash flows from investing activities
Purchase of property assets ........................................... (8,186,607) (3,472,963) (1,714,879)
Proceeds from sale of property assets ................................. 302,515 414,127 156,870
Acquisitions of businesses ............................................ (28,366,616) (21,679,967) --
------------ ------------ ------------
Net cash used in investing activities ..................... (36,250,708) (24,738,803) (1,558,009)
Cash flows from financing activities
Proceeds from public stock offerings .................................. -- 77,906,521 --
Purchase of treasury stock ............................................ -- -- (14,882)
Exercise of stock options ............................................. 695,921 10,000 117,099
Distributions to stockholders ......................................... -- (1,493,340) (463,195)
Proceeds from debt .................................................... 37,732,462 33,083,502 38,313,082
Repayments of debt .................................................... (72,277,971) (49,843,143) (42,522,026)
Repayments of note payable to stockholder ............................. -- (6,250,000) --
Sale of notes receivable .............................................. 21,338,294 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities ....... (12,511,294) 53,413,540 (4,569,922)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................... (29,401,444) 33,880,337 82,290
Cash and cash equivalents at beginning of year ............................ 35,321,338 1,441,001 1,358,711
------------ ------------ ------------
Cash and cash equivalents at end of year .................................. $ 5,919,894 $ 35,321,338 $ 1,441,001
============ ============ ============
F-6
Renters Choice, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
1996 1995 1994
---------- ---------- ----------
Supplemental cash flow information
Cash paid during the year
Interest ........................ $ 929,000 $1,711,000 $2,030,000
Income taxes .................... $8,426,000 $7,764,000 $1,245,000
Supplemental schedule of noncash investing activities
In conjunction with the businesses acquired, liabilities were assumed as
follows:
1996 1995
------------ ------------
Fair value of assets acquired .......... $ 57,222,608 $ 68,284,691
Stock and options issued ............... (9,515,058) --
Cash paid .............................. (28,366,616) (21,679,967)
------------ ------------
Liabilities assumed ................ $ 19,340,934 $ 46,604,724
============ ============
The accompanying notes are an integral part of these statements.
F-7
NOTE A - SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
PRINCIPLES OF CONSOLIDATION
The accompanying 1996 financial statements include the accounts of Renters
Choice, Inc. (Renters Choice) and its subsidiary ColorTyme, Inc. (ColorTyme)
(collectively, the Company). The accompanying 1995 financial statements
include the accounts of Renters Choice and its subsidiary, Pro Rental, Inc.
(Pro Rental). On January 1, 1996, Pro Rental merged into Renters Choice. The
accompanying 1994 financial statements include the accounts of Renters
Choice and its affiliate, Talley Lease To Own, Inc. (Talley LTO). Both
companies were under common control. Effective January 1, 1995, Talley LTO
merged into Renters Choice.
All significant intercompany accounts and transactions have been eliminated.
NATURE OF OPERATIONS
The Company leases household durable goods to customers on a rent-to-own
basis. At December 31, 1996, the Company operated 423 stores which were
located throughout the United States and the Commonwealth of Puerto Rico
(eleven stores).
ColorTyme is a nationwide franchisor of television, stereo and furniture
rental centers. ColorTyme's primary source of revenues is the sale of rental
equipment to its franchisees, who, in turn, offer the equipment to the
general public for rent or purchase under a rent-to-own program. The balance
of ColorTyme's revenues are generated primarily from royalties based on the
franchisee's monthly gross revenues. At December 31, 1996, there were
approximately 294 franchised rental centers operating in 40 states.
RENTAL MERCHANDISE
Rental merchandise is carried at the lower of cost or net realizable value.
Depreciation is provided using the income forecasting method which is
intended to match as closely as practicable the recognition of depreciation
expense with the consumption of the rental merchandise. The consumption of
rental merchandise occurs during periods of rental and directly coincides
with the receipt of rental revenue over the rental-purchase agreement
period, generally 18 to 24 months. Under the income forecasting method,
merchandise held for rent is not depreciated, and merchandise on rent is
depreciated in the proportion of rents received to total rents provided in
the rental contract, which is an activity based method similar to the units
of production method.
CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include all highly
liquid investments with an original maturity of three months or less.
F-8
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS - Continued
RENTAL REVENUE AND FEES
Merchandise is rented to customers pursuant to rental-purchase agreements
which provide for weekly or monthly rental terms with nonrefundable rental
payments. Generally, the customer has the right to acquire title either
through a purchase option or through payment of all required rentals. Rental
revenue and fees are recognized over the rental term. No revenue is accrued
because the customer can cancel the rental contract at any time and the
Company cannot enforce collection for nonpayment of rents. A provision is
made for estimated losses of rental merchandise damaged or not returned by
customers.
ColorTyme's revenue from the sale of rental equipment is recognized upon
shipment of the equipment to the franchisee.
PROPERTY ASSETS AND RELATED DEPRECIATION
Furniture, equipment and vehicles are stated at cost. Depreciation is
provided over the estimated useful lives of the respective assets (generally
five years) by the straight-line method. Leasehold improvements are
amortized over the term of the applicable leases by the straight-line
method.
INTANGIBLE ASSETS AND AMORTIZATION
Intangible assets are stated at cost less amortization calculated by the
straight-line method.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates long-lived assets used 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 net cash flows they will
generate.
INCOME TAXES
Prior to 1995, Renters Choice and Talley LTO were S corporations. As a
result, there is no provision for Federal income taxes for 1994 in the
accompanying financial statements, as such taxes are the responsibility of
the individual stockholders. However, the Company has provided for state and
foreign income taxes for which it is responsible.
Effective January 1, 1995, the Company terminated its S corporation status
and became a C corporation and, therefore, is now subject to Federal income
taxes. The Company provides deferred taxes for temporary differences between
the tax and financial reporting bases of assets and liabilities at the rate
expected to be in effect when taxes become payable.
EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of common
shares and common share equivalents outstanding during each period
presented. Common share equivalents included in the computation represent
shares issuable upon assumed exercise of stock options. Weighted average
shares entering into the computation are 25,064,930 and 20,794,065 for the
years ended December 31, 1996 and 1995, respectively. Such shares have been
restated to reflect the stock splits and the merger effective January 1,
1995. Earnings per share are not presented for 1994 because the Company was
an S corporation and net earnings for 1994 is not comparable to 1996 and
1995.
F-9
NOTE A - SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS - Continued
ADVERTISING COSTS
Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expense was $10.6 million, $6.4 million and $3.5
million in 1996, 1995 and 1994, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial statements include estimated fair value information of
financial instruments. Such information does not purport to represent the
aggregate net fair value of the Company. Further, the fair value estimates
are based on various assumptions, methodologies and subjective
considerations which vary widely among different companies and which are
subject to change. The following methods and assumptions were used by the
Company in estimating financial instrument fair values:
CASH AND CASH EQUIVALENTS: The balance sheet carrying amounts approximate
the estimated fair values of such assets.
DEBT: For variable rate debt that reprices frequently and entails no
significant change in credit risk, fair values are based on the carrying
values. The fair values of other debt is estimated based on discounted cash
flow analysis using interest rates currently offered for loans with similar
terms to borrowers of similar credit quality.
STOCK-BASED COMPENSATION
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 has chosen to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to
acquire that stock.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues during the reporting period. Actual
results could differ from those estimates.
NOTE B - ACQUISITIONS
On May 15, 1996 the Company acquired all the outstanding common stock of
ColorTyme for $14.5 million, including acquisition costs, comprised of cash
of $4.7 million and 343,175 shares of the Company's common stock and 314,000
options for the Company's common stock valued at $3.0 million.
F-10
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITIONS - Continued
Immediately following the purchase of ColorTyme by the Company, ColorTyme
sold its loan portfolio (with certain recourse provisions) to a third party
for approximately $21.7 million. No gain or loss was recognized on the sale.
ColorTyme simultaneously paid off notes payable owed to a finance company of
approximately $13.2 million.
The Company acquired the assets of an additional eighty-eight stores in
twenty-three transactions during 1996, for approximately $25.6 million in
cash and $1.8 million in notes.
In April 1995, the Company acquired 72 stores from Crown Leasing Corporation
and certain of its affiliates (Crown) for a cash purchase price of
approximately $20.6 million.
In September 1995, the Company completed the acquisition of 135 rent-to-own
stores through the purchase of the common stock of Pro Rental, doing
business as Magic Rent-to-Own and Kelway Rent-to-Own. The total purchase
price was approximately $38.4 million, which was paid in cash and notes.
All acquisitions have been accounted for as purchases and the operating
results of the acquired stores have been included in the financial
statements of the Company since their acquisition.
The following unaudited pro forma information combines the results of
operations as if the acquisitions had been consummated as of the beginning
of each of the years presented, after including the impact of adjustments
for amortization of intangibles and interest expense on acquisition
borrowings:
1996 1995
------------ ------------
Revenue ................................ $268,404,000 $217,629,000
Net earnings ........................... $ 18,246,000 $ 9,759,000
Earnings per common share .............. $ .72 $ .46
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 acquisition been consummated as of the above dates, nor are
they necessarily indicative of future operating results.
NOTE C - RENTAL MERCHANDISE
1996 1995
------------ -----------
ON RENT
Cost ................................... $109,662,481 $77,279,439
Less accumulated depreciation .......... 38,042,606 27,579,085
------------ -----------
$ 71,619,875 $49,700,354
============ ===========
HELD FOR RENT
Cost ................................... $ 27,804,654 $17,096,493
Less accumulated depreciation .......... 4,314,139 2,556,848
------------ -----------
$ 23,490,515 $14,539,645
============ ===========
F-11
NOTE D - PROPERTY ASSETS
1996 1995
------------ ------------
Furniture and equipment .............. $ 9,258,658 $ 7,088,184
Delivery vehicles .................... 2,711,359 2,096,807
Leasehold improvements ............... 8,542,487 2,428,103
Construction in progress ............. 235,834 655,041
------------ ------------
20,748,338 12,268,135
Accumulated depreciation ............. (8,032,745) (4,892,468)
------------ ------------
$ 12,715,593 $ 7,375,667
============ ============
NOTE E - INTANGIBLE ASSETS
AMORTIZATION
PERIOD 1996 1995
--------- ----------- -----------
Customer rental agreements ...... 18 months $ 2,536,728 $ 2,751,500
Noncompete agreements ........... 2 years 2,891,824 2,724,824
Consulting agreement ............ 4 years 2,918,201 2,918,201
Franchise network ............... 10 years 3,000,000 --
Goodwill ........................ 20 years 43,933,389 25,370,022
----------- -----------
55,280,142 33,764,547
Less accumulated amortization ... 8,087,762 4,215,272
----------- -----------
$47,192,380 $29,549,275
=========== ===========
Customer rental agreements represent the projected discounted cash flows
from open customer contracts of acquired stores at acquisition date and are
amortized over the average stated term of the customer contract, 18 months.
Noncompete agreements and the consulting agreement are amortized over
the life of the respective agreements.
NOTE F - REVOLVING CREDIT AGREEMENT
On November 27, 1996, the Company entered into a $90 million three-year
revolving credit agreement with a group of banks. Borrowings under the
facility bear interest at a rate equal to a designated prime rate (8.25% at
December 31, 1996) or 1.10% to 1.65% over LIBOR (5.6% at December 31, 1996)
at the Company's option. At December 31, 1996, the average rate on
outstanding borrowings was 6.9%. Borrowings are collateralized by a lien on
substantially all of the Company's assets. A commitment fee equal to .30% to
.50% of the unused portion of the term loan facility is payable quarterly.
The weighted average interest rate under this facility was 6.7% during 1996.
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.
Outstanding borrowings as of December 31, 1996 on the revolving credit
agreement was $14,435,000.
F-12
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - ACCRUED LIABILITIES
1996 1995
----------- ----------
Taxes other than income ..................... $ 2,871,794 $2,458,984
Accrued litigation costs .................... 4,114,472 63,048
Accrued insurance costs ..................... 1,858,651 653,690
Accrued compensation and other .............. 4,078,747 3,496,886
----------- ----------
$12,923,664 $6,672,608
=========== ==========
NOTE H - OTHER DEBT
1996 1995
----------- -----------
Notes payable to former stockholders of Pro Rental, with principal
and interest at 5.6% due at maturity in January 1996 ................ $ -- $34,335,000
Obligation payable under noncompete agreement, due in 24 monthly
installments of $125,000 commencing April 1, 1996, with interest
imputed at 5.32% ..................................................... 1,825,669 2,831,697
Obligation payable under consulting agreement, in 96 monthly installments
of $33,333 commencing May 1, 1993, with interest imputed at 5.32% .... 1,544,987 2,020,483
Obligations under noncompete agreements, due in 60 monthly installments
of $32,500 commencing September 1, 1995 with interest imputed at 8.75% 1,187,022 1,489,832
Other .................................................................... -- 172,593
----------- -----------
$ 4,557,678 $40,849,605
=========== ===========
Interest expense on loans made to the Company by the Chief Executive Officer
amounted to $55,000 in 1995 and $578,875 in 1994. The loans were repaid in
1995.
The following are scheduled maturities of debt at December 31, 1996:
YEAR ENDING
DECEMBER 31,
------------
1997 .............................................. $2,289,323
1998 .............................................. 789,670
1999 .............................................. 713,261
2000 .............................................. 633,557
2001 .............................................. 131,867
----------
$4,557,678
==========
F-13
NOTE I - INCOME TAXES
The income tax provision was comprised of the following components:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ---------- ----------
Current
Federal ................... $ 5,261,991 $3,837,097 $ --
State ..................... 1,296,506 1,226,967 255,930
Foreign ................... 1,555,920 1,314,011 1,344,360
----------- ---------- ----------
Total current ........... 8,114,417 6,378,075 1,600,290
Deferred
Federal ................... 3,865,918 1,238,129 --
State ..................... 1,095,308 168,001 --
----------- ---------- ----------
Total deferred .......... 4,961,226 1,406,130 --
----------- ---------- ----------
Total ................... $13,075,643 $7,784,205 $1,600,290
=========== ========== ==========
The income tax provision reconciled to the tax computed at the statutory
Federal rate was:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
Tax at statutory rate ........................... 34.0% 34.0% 34.0%
Taxes allocated to shareholders pursuant
to subchapter S election ..................... -- -- (34.0)
State income taxes, net of federal benefit ...... 5.1 4.9 3.6
Effect of foreign operations, net of
foreign tax credits ........................... .5 1.0 19.0
Goodwill amortization ........................... 1.8 .7 --
Other, net ...................................... .6 1.5 --
------ ------ ------
Total ....................................... 42.0% 42.1% 22.6%
====== ====== ======
Deferred tax assets and liabilities consist of the following:
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
Deferred tax assets
Net operating loss carryforwards
Federal .................................. $ 4,594,983 $ 4,332,151
State, net of federal benefit ............ 3,102,591 3,129,095
Accrued expenses ........................... 1,956,637 573,830
Intangible assets .......................... 835,407 63,071
Property assets ............................ 166,422 1,143,692
Alternative minimum tax carryforward ....... 463,000 --
Other ...................................... 676,596 863,832
----------- -----------
11,795,636 10,105,671
Less valuation allowance ................... 3,417,591 3,129,095
----------- -----------
8,378,045 6,976,576
Deferred tax liability
Rental merchandise ......................... 2,239,479 --
----------- -----------
Net deferred tax asset ......................... $ 6,138,566 $ 6,976,576
=========== ===========
F-14
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - INCOME TAXES - Continued
The Company has Federal net operating loss carryforwards of $12.2 million at
December 31, 1996 which were acquired in connection with the ColorTyme and
Pro Rental acquisitions. The use of Federal carryforwards which expire
between 2005 and 2010 are limited to approximately $3.5 million per year.
Because of uncertainties with respect to allocation of future taxable income
to the various states, a valuation allowance has been provided against these
carryforwards. If utilized, the tax benefit will reduce goodwill.
Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the carryforwards. Although
realization is not assured, management believes it is more likely than not
that all of the net deferred tax asset will be realized.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company leases its office and store facilities and certain delivery
vehicles. Rental expense was $15.7 million, $9.4 million and $4.4 million
for 1996, 1995 and 1994, respectively. Future minimum rental payments under
operating leases with remaining noncancellable lease terms in excess of
one year at December 31, 1996 are as follows:
YEAR ENDING
DECEMBER 31,
------------
1996 ............................................... $11,425,814
1997 ............................................... 8,801,460
1998 ............................................... 6,283,672
1999 ............................................... 4,006,090
2000 ............................................... 2,280,726
Thereafter ......................................... 1,223,758
-----------
$34,021,520
===========
The Company has agreed to indemnify its original stockholders against any
additional income tax liabilities incurred by them attributable to the
Company's operations during taxable periods in which the Company was an S
Corporation.
The Company is one of the defendants in a class action lawsuit which alleges
that certain rent-to-own contracts entered into between Crown and the
plaintiffs included fees and expenses that violated the New Jersey Consumer
Fraud Act and the New Jersey Retail Installment Sales Act. The plaintiffs
have obtained summary judgment against Crown, reserving damages for trial.
Although the Company believes it has taken appropriate steps to defend
itself, the ultimate outcome of this lawsuit cannot presently be determined.
ColorTyme and the Company are defendants in a class action lawsuit which
alleges that contracts for rent-to-own transactions violated the Wisconsin
Consumer Act. The plaintiffs allege the contracts were consumer credit
transactions for which ColorTyme failed to provide required disclosures and
violated collection practice restrictions. The plaintiffs' complaint seeks
damages in an unspecified amount. Discovery in the case is ongoing and no
trial date has been scheduled. The ultimate outcome of this lawsuit cannot
presently be determined.
F-15
NOTE J - COMMITMENTS AND CONTINGENCIES - Continued
The Company is also involved in various other litigation and administrative
proceedings in the normal course of business.
Management believes that any losses that may result from these matters are
reasonably provided for in its accrued litigation costs at December 31,
1996.
NOTE K - STOCK BASED COMPENSATION
In November 1994, the Company established a long term incentive plan (the
Plan) for the benefit of certain key employees and directors. Under the
plan, up to 2,000,000 shares of the Company's shares are reserved for
issuance under stock options, stock appreciation rights or restricted stock
grants. Options granted to employees under the plan become exercisable over
a period of one to five years from the date of grant and may be exercised up
to a maximum of 10 years from date of grant. Options granted to directors
are exercisable immediately. Effective September 11, 1995, the Company
granted a stock award to an employee for 62,500 shares of common stock
subject to forfeiture on termination of employment in certain circumstances.
The amount of shares subject to forfeiture is reduced by 20% for each year
of employment served. At the date of grant, the fair value of such shares
was $960,938. Compensation is charged to earnings over the five years and
amounted to approximately $320,000 and $63,000 in 1996 and 1995,
respectively. Upon termination of employment in 1996, 37,500 shares were
forfeitured in a negotiated settlement with the Company. There have been no
grants of stock appreciation rights and all options had been granted with
fixed prices. At December 31, 1996, there were 875,950 shares reserved for
issuance under the Plan.
The Company has adopted only the disclosure provisions of SFAS 123 for
employee stock options and continues to apply APB 25 for stock options
granted under the Plan. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire
the stock. Compensation costs for all other stock-based compensation is
accounted for under SFAS 123. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for options
under the Plan consistent with the methodology prescribed by SFAS 123, the
Company's 1996 and 1995 net earnings and earnings per share would be reduced
to the pro forma amounts indicated as follows:
1996 1995
-------------- --------------
Net earnings
As reported ..................... $ 18,026,000 $ 10,712,000
Pro forma ....................... $ 16,469,000 $ 10,494,000
Earnings per common share
As reported ..................... $.72 $.52
Pro forma ....................... $.66 $.50
F-16
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - STOCK BASED COMPENSATION - Continued
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 50 percent; risk-free interest rates of
5.75 percent; no dividend yield; and expected lives of seven years.
Additional information with respect to options outstanding under the Plan at
December 31, 1996, and changes for the two years then ended was as follows:
1996
------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
Outstanding at beginning of year .................... 906,000 $ 7.10
Granted ............................................. 695,000 22.22
Exercised ........................................... (109,700) 7.45
Forfeited ........................................... (349,250) 13.81
--------
Outstanding at end of year .......................... 1,142,050 15.74
=========
Options exercisable at December 31, 1996 ............ 127,800 $ 9.64
Weighted average fair value per share of options
granted during 1996 ............................... $13.35
1995
---------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
Outstanding at beginning of year ................. -- $ --
Granted .......................................... 1,204,500 8.75
Exercised ........................................ (3,000) 3.34
Forfeited ........................................ (295,500) 8.00
---------
Outstanding at end of year ....................... 906,000 9.02
=========
Options exercisable at December 31, 1995 ......... 24,000 $ 3.34
F-17
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - STOCK BASED COMPENSATION - Continued
Information about stock options outstanding at December 31, 1996 is
summarized as follows:
OPTIONS OUTSTANDING
--------------------------------
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- ------------------------ ----------- ---------------- --------------
$3.34 to 6.67 443,050 8.35 years $ 6.49
$6.68 to 18.50 331,500 9.11 years 16.38
$18.51 to $26.75 367,500 9.45 years 26.32
--------
1,142,050
=========
OPTIONS EXERCISABLE
---------------------------------
NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- --------------
$3.34 to 6.67 75,175 $ 5.61
$6.68 to 18.50 52,625 15.39
$18.51 to $26.75 -
--------
127,800
========
Prior to December 1994, Renters Choice, Inc. and Talley LTO had book value
stock option plans. In December 1994, the Company terminated the plans.
Under the plans, options were granted to key employees for the purchase of
common stock at book value, as defined by the plans, at the date of grant.
Options granted generally became exercisable either immediately or over a
three-year period. Stock acquired under the plans was subject to a Stock
Restriction Agreement which restricted sale of stock to the Company only, at
a price equal to current book value, as defined. At December 31, 1994, all
options previously granted had been exercised or canceled.
Activity under these plans in 1994 was as follows:
RENTERS CHOICE, INC. OPTIONS PRICE
- -------------------- ------- -------------
Outstanding at January 1, 1994 .............. 14,875 $0 - $0.73
Granted ................................. 5,000 $ 1.93
Exercised ............................... (16,875) $0 - $1.93
Canceled ................................ (3,000) $0.74 - $1.93
-------
Outstanding at December 31, 1994 ............ --
=======
TALLEY LEASE TO OWN, INC.
- -------------------------
Outstanding at January 1, 1994 .............. --
Granted ................................. 9,200 $0.86
Exercised ............................... (7,700) $0.86
Canceled ................................ (1,500) $0.86
------
Outstanding at December 31, 1994 ............ --
======
Compensation expense was $97,920 for the year ended December 31, 1994.
F-18
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - MERGER OF TALLEY LEASE TO OWN, INC. INTO RENTERS CHOICE, INC. AND
STOCK SPLITS
On January 1, 1995, the Company effected an approximately 3.624-for-1 split
of its common stock through the distribution of approximately 2.624
additional shares of common stock as a dividend with respect to each then
outstanding share of common stock. Immediately thereafter, Talley LTO merged
with and into Renters Choice, Inc. and each Talley LTO stockholder received
approximately .354 post-split shares of the Company. The merger was
accounted for at historical cost in a manner similar to a pooling of
interests.
In June 1995, the Company effected a 3 for 2 split of its common stock
through the distribution of one-half additional share of common stock as a
dividend with respect to each outstanding share of common stock.
On September 11, 1995, the Board of Directors approved a 2 for 1 stock
split, to be effected as a 100% stock dividend for shareholders of record as
of September 29, 1995.
All share and per share data has been retroactively restated to reflect
these transactions.
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents and
debt. The carrying amount and fair value of debt was $18,992,678 and
$18,871,000, respectively, at December 31, 1996. The carrying amount of cash
and cash equivalent approximates fair value at December 31, 1996.
NOTE N - UNAUDITED QUARTERLY DATA
Summarized quarterly financial data for 1996 and 1995 is as follows:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Year ended December 31, 1996
Revenue ................... $49,002 $57,756 $60,025 $71,182
Operating profit .......... 6,344 7,558 7,957 9,183
Net earnings .............. 3,617 4,369 4,729 5,311
Earnings per share ........ $ 0.15 $ 0.17 $ 0.19 $ 0.21
Year ended December 31, 1995
Revenue ................... $21,045 $28,927 $36,659 $46,658
Operating profit .......... 3,795 4,992 5,429 5,592
Net earnings .............. 1,987 2,627 2,921 3,177
Earnings per share ........ $ 0.11 $ 0.13 $ 0.14 $ 0.14
F-19