UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File Number 0-25370
RENTERS CHOICE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-1024367
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13800 Montfort, Suite 300
Dallas, Texas 75240
(972) 701-0489
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 10, 1997:
CLASS OUTSTANDING
--------------------------------- ----------------
Common stock, $.01 par value per share 24,898,321
RENTERS CHOICE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Balance Sheets as of September 30, 1997 and December 31, 1996 3
Statements of Earnings for the nine months ended
September 30, 1997 and 1996 4
Statements of Earnings for the three months ended
September 30, 1997 and 1996 5
Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 6
Notes to Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 6. Exhibits and Reports on Form 8-K 14
- -------
SIGNATURES 16
Exhibit 11.1 17
Exhibit 27 18
2
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
------------- --------------
Unaudited
ASSETS
Cash and cash equivalents $ 6,280,482 $ 5,919,894
Rental merchandise, net
On rent 83,824,793 71,619,875
Held for rent 25,871,321 23,490,515
Accounts receivable 2,525,429 3,020,631
Income taxes receivable -- 2,084,244
Prepaid expenses and other assets 1,785,289 2,285,044
Property assets, net 16,647,569 12,715,593
Deferred income taxes 6,138,566 6,138,566
Intangible assets, net 63,311,586 47,192,380
------------- --------------
$206,385,035 $174,466,742
============= ==============
LIABILITIES
Accounts payable - trade 11,508,781 17,047,592
Accrued liabilities 15,508,957 12,923,664
Income taxes payable 973,147 --
Other debt 2,911,804 4,557,678
Revolving credit agreement 30,740,000 14,435,000
------------- --------------
61,642,689 48,963,934
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000
shares authorized;
none issued -- --
Common stock, $.01 par value; 50,000,000
shares authorized;
24,887,821 and 24,791,085 shares issued
and outstanding
in 1997 and 1996, respectively 248,878 247,911
Additional paid-in capital 98,761,090 98,009,773
Retained earnings 45,732,378 27,245,124
------------- --------------
144,742,346 125,502,808
------------- --------------
$206,385,035 $174,466,742
============= ==============
The accompanying notes are an integral part of these statements.
3
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Nine months ended September 30,
-------------------------------
1997 1996
--------------- --------------
Unaudited
STORE REVENUE
Rentals and fees $200,970,180 $ 142,357,856
Merchandise sales 10,774,080 8,030,325
Other 524,499 533,924
FRANCHISE REVENUE
Franchise merchandise sales 23,971,218 14,027,289
Royalty income and fees 3,013,483 1,833,148
------------- --------------
TOTAL REVENUE 239,253,460 166,782,542
OPERATING EXPENSES
Direct store expenses
Depreciation of rental merchandise 42,270,950 31,024,771
Cost of merchandise sold 8,354,931 6,266,708
Salaries and other expenses 119,339,415 83,753,192
Franchise operation expenses
Cost of franchise merchandise sales 22,928,905 13,376,058
------------- --------------
192,894,201 134,420,729
General and administrative expenses 9,596,817 6,957,136
Amortization of intangibles 4,016,337 3,546,037
------------- --------------
TOTAL OPERATING EXPENSES 206,507,355 144,923,902
------------- --------------
OPERATING PROFIT 32,746,105 21,858,640
INTEREST EXPENSE (INCOME), NET 1,145,770 (82,717)
------------- --------------
EARNINGS BEFORE INCOME TAXES 31,600,335 21,941,357
INCOME TAX EXPENSE 13,107,914 9,226,227
------------- --------------
NET EARNINGS 18,492,421 $ 12,715,130
============= ==============
WEIGHTED AVERAGE SHARES $ 25,155,525 25,048,765
============= ==============
EARNINGS PER SHARE $ 0.74 $ 0.51
============= ==============
The accompanying notes are an integral part of these statements.
4
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended
September 30,
-----------------------------
1997 1996
------------- --------------
Unaudited
STORE REVENUE
Rentals and fees $70,820,307 $ 48,929,122
Merchandise sales 3,317,011 2,266,387
Other 186,050 172,317
FRANCHISE REVENUE
Franchise merchandise sales 8,509,816 7,528,885
Royalty income and fees 1,031,082 1,127,869
------------- --------------
TOTAL REVENUE 83,864,266 60,024,580
OPERATING EXPENSES
Direct store expenses
Depreciation of rental merchandise 14,760,652 10,462,160
Cost of merchandise sold 2,747,442 1,882,824
Salaries and other expenses 42,195,836 29,057,753
Franchise operation expenses
Cost of franchise merchandise sales 8,202,924 7,174,113
------------- --------------
67,906,854 48,576,850
General and administrative expenses 2,824,470 2,232,054
Amortization of intangibles 1,367,164 1,258,937
------------- --------------
TOTAL OPERATING EXPENSES 72,098,488 52,067,841
------------- --------------
OPERATING PROFIT 11,765,778 7,956,739
INTEREST EXPENSE (INCOME), NET 556,236 (105,531)
------------- --------------
EARNINGS BEFORE INCOME TAXES 11,209,542 8,062,270
INCOME TAX EXPENSE 4,485,819 3,333,025
------------- --------------
NET EARNINGS $ 6,723,723 $ 4,729,245
============= ==============
WEIGHTED AVERAGE SHARES 25,283,553 25,203,721
============= ==============
EARNINGS PER SHARE $ 0.27 $ 0.19
============= ==============
The accompanying notes are an integral part of these statements.
5
RENTERS CHOICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
-----------------------------
1997 1996
------------- --------------
Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $18,492,421 $ 12,715,130
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation of rental merchandise 42,270,950 31,024,771
Depreciation of property assets 3,985,204 2,548,495
Amortization of intangibles 4,016,337 3,546,037
Other (5,167) 225,000
Changes in operating assets and liabilities,
net of effects of
acquisitions
Rental merchandise (47,093,251) (41,157,165)
Accounts receivable 495,202 312,810
Prepaid expenses and other assets 544,071 1,056,243
Intangible assets (1,168,940) --
Accounts payable - trade (5,538,811) 243,539
Accrued liabilities 2,585,293 (1,506,284)
Income taxes payable 3,057,391 4,660,188
Reserve for loans held with recourse -- (123,614)
------------- --------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 21,640,700 13,545,150
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property assets (7,636,703) (5,897,975)
Proceeds from sale of property assets 219,202 216,058
Acquisitions of businesses, net of cash
acquired of $2,132,930 in 1996 (29,274,021) (7,935,643)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (36,691,522) (13,617,560)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options 752,284 590,937
Proceeds from debt 71,290,213 531,844
Repayments of debt (56,631,087) (48,030,976)
Repayment of notes receivable -- 21,338,294
------------- --------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 15,411,410 (25,569,901)
------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 360,588 (25,642,311)
Cash and cash equivalents at beginning of period 5,919,894 35,321,338
------------- --------------
Cash and cash equivalents at end of period $ 6,280,482 $ 9,679,027
============= ==============
The accompanying notes are an integral part of these statements.
6
RENTERS CHOICE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. The interim financial statements of Renters Choice, Inc. (the "Company")
included herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information presented
not misleading. It is suggested that these financial statements be read in
conjunction with the financial statements and notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996. In the
opinion of management, the accompanying unaudited interim financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary to present fairly the Company's results of
operations and cash flows for the periods presented. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year.
2. The Company acquired the assets of 8 rent-to-own stores in two transactions
during the three months ended September 30, 1997 for $3.0 million. During the
six months ended June 30, 1997, the Company acquired the assets of 64
rent-to-own stores in 16 transactions for $26.3 million. On May 15, 1996, the
Company acquired all of the outstanding common stock of ColorTyme, Inc. for
$14.5 million in cash (the "ColorTyme Acquisition"). At the time of
acquisition, ColorTyme, Inc. was a franchisor of 313 rent-to-own stores and
directly owned 7 rent-to-own stores, 6 of which were subsequently purchased
by the Company. Following the ColorTyme Acquisition, and prior to December
31, 1996, the Company acquired the assets of an additional eighty-eight
stores in twenty-three transactions for approximately $25.6 million cash and
$1.8 million in notes. All acquisitions have been accounted for as purchases
and the operating results of the acquired stores have been included in the
financial statements of the Company since the acquisition. The following pro
forma information combines the results of operations as if the acquisitions
had been consummated as of the beginning of each of the nine and three month
periods ending September 30, 1997 and 1996, after including the impact of
adjustment for amortization of intangibles and interest expense on
acquisition borrowings.
Nine months ended Three months ended
September 30, September 30,
----------------------------- ---------------------------
1997 1996 1997 1996
-------------- ------------- ------------ ------------
Revenue $ 247,520,618 $212,769,845 $84,306,987 $70,497,173
Net Earnings $ 18,480,271 $ 13,378,153 $ 6,713,447 $ 4,933,702
Earnings per
common share $ 0.74 $ 0.53 $ 0.27 $ 0.20
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of operating results that would have
occurred had the acquisitions been consummated as of the above dates, nor are
they necessarily indicative of future operating results.
3. The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE, which is effective for
financial statements issued after December 15, 1997. Early adoption of the
new standard is not permitted. The new standard eliminates primary and fully
diluted earnings per share and requires presentation of basic and diluted
earnings per share together with disclosure of how the per share amounts were
computed. The adoption of this new standard will not have a material impact
on the disclosure of earnings per share in the Company's financial
statements.
7
RENTERS CHOICE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
This report contains certain forward-looking statements that involve risks
and uncertainties. The actual future results of the Company could differ
materially from those statements. Factors that could cause or contribute to such
differences include, but are not limited to, uncertainties regarding the
Company's ability to acquire additional rent-to-own stores on favorable terms,
to enhance the performance of acquired stores and to integrate acquired stores
into the Company's operations.
In April 1995, the Company acquired 72 stores located in 18 states,
including nine states in which the Company previously had no operations, from
Crown Leasing Corporation and certain of its affiliates (the "Crown
Acquisition"), and in September 1995, the Company completed the acquisition of
an additional 135 stores located in 10 states, including one state in which the
Company previously had no operations, from the shareholders of the parent
company of a chain of rent-to-own stores doing business as Magic Rent-to-Own and
Kelway Rent-to-Own (the "Magic Acquisition", and together with the Crown
Acquisition, the "1995 Acquisitions"). In May 1996, the Company acquired all of
the issued and outstanding stock of ColorTyme, Inc. ("ColorTyme"), a franchisor
of, at the time of closing, 313 rent-to-own stores in 40 states and 7 directly
owned rent-to-own stores (the "ColorTyme Acquisition"), one of which was sold
after the ColorTyme Acquisition to a third party and the remainder of which were
subsequently purchased by the Company. The Company acquired 88 stores between
May 1 and December 31, 1996 (exclusive of the 6 stores purchased from ColorTyme)
in 23 separate transactions (together with the ColorTyme Acquisition, the "1996
Acquisitions"). The Company has acquired 72 stores during the nine months ended
September 30, 1997 (the "1997 Acquisitions"). All of the aforementioned
acquisitions were accounted for as purchases and, accordingly, the operating
results of the acquired stores and ColorTyme franchisor operations have been
included in the operating results of the Company since their respective dates of
acquisition. Because of the significant growth of the Company since its
formation, the Company's historical results of operations, its period-to-period
comparisons of such results and certain financial data may not be comparable,
meaningful or indicative of future results.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Total revenue increased by $72.5 million, or 43%, to $239.3 million for
1997 from $166.8 million for 1996. The increase in total revenue was primarily
attributable to the inclusion of the 1997 Acquisitions, the 1996 Acquisitions,
the ColorTyme Acquisition and growth in stores which were in the system for the
entirety of the two nine month periods. Same store revenues increased by 9%,
from $147 million to $160 million. Same store revenues represents revenues
earned in stores that were operated by the Company for the entire nine-month
periods ending September 30, 1996 and 1997. This improvement was primarily
attributable to an increase in both the number of items on rent and revenue
earned per item on rent.
Depreciation of rental merchandise increased by $11.2 million, or 36%, to
$42.3 million for 1997 from $31.0 million for 1996. Depreciation of rental
merchandise expressed as a percent of rental and fee revenue decreased from
21.8% in 1996 to 21.0% in 1997. The decrease was primarily attributable to
higher rental rates earned on rental merchandise purchased in the 1995, 1996 and
1997 Acquisition stores.
Salaries and other expenses expressed as a percentage of total store
revenue increased to 56.2% for 1997 from 55.5% for 1996. This increase is
attributable to an increase in salaries for employees of acquired stores
immediately following the acquisitions while store revenues have increased
gradually. Occupancy costs also increased as a percent of total revenue
primarily because of the relocation of certain stores acquired in the 1996 and
1997 Acquisitions to stores that are larger in square footage. Revenues from
these larger stores increase gradually while the additional occupancy costs are
incurred immediately. General and administrative expenses expressed as a
8
percent of total revenue decreased from 4.2% to 4.0% in 1997. The improvement
primarily reflects the leveraging of fixed and semi-fixed costs over the 1997
higher revenue volume.
Operating profit increased by $10.9 million, or 50%, to $32.7 million for
1997 from $21.9 million for 1996. This improvement was primarily attributable to
an increase in both the number of items on rent and in revenue earned per item
on rent, both in stores acquired before 1995 and in stores acquired in the 1995,
1996 and 1997 Acquisitions. Net earnings increased by $5.8 million, or 45%, to
$18.5 million in 1997 from $12.7 million in 1996. The improvement was a result
of the increase in operating profit described above.
Net interest expense in 1997 was $1.1 million compared to 1996 in which
the Company incurred no interest expense. The interest expense in 1997 is a
result of increased debt levels incurred in connection with the 1996 and 1997
Acquisitions.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Total revenue increased by $23.8 million, or 40%, to $83.9 million for
1997 from $60.0 million for 1996. The increase in total revenue was primarily
attributable to the inclusion of the 160 stores acquired in the 1997 and 1996
Acquisitions, as well as the 25 new store locations opened by the Company in its
new store opening program since 1995. Same store revenues increased by 10%, from
$50.6 million to $55.6 million. Same store revenues represents revenues earned
in stores that were operated by the Company for the entire three-month periods
ending September 30, 1996 and 1997. This improvement was primarily attributable
to an increase in both the number of items on rent and in revenue earned per
item on rent.
Depreciation of rental merchandise increased by $4.3 million, or 41%, to
$14.8 million for 1997 from $10.5 million for 1996. Depreciation of rental
merchandise expressed as a percent of rental and fee revenue decreased from
21.4% in 1996 to 20.8% in 1997. The decrease was primarily attributable to
higher rental rates on rental merchandise and operational emphasis on increasing
the rental life of inventory items.
Salaries and other expenses expressed as a percentage of total store
revenue increased to 56.8% for 1997 from 56.6% for 1996 primarily as a result of
increases in salaries for employees of the 1996 Acquisition and 1997 Acquisition
stores immediately following the acquisitions while store revenues have
increased gradually. General and administrative expenses expressed as a percent
of total revenue decreased from 3.7% in 1996 to 3.4% in 1997.
Amortization expenses expressed as a percentage of total revenue decreased
from 2.1% in 1996 to 1.6% in 1997, reflecting the combination of increasing
revenue and the completion of amortization of customer contracts acquired in the
Magic Acquisition during the 1997 period.
Operating profit increased by $3.8 million, or 48% to $11.8 million for
1997 from $8.0 million for 1996. This improvement was attributable to an
increase in both the number of items on rent and in revenue earned per item. The
1996 and 1997 Acquisitions plus the operating profit contribution from ColorTyme
also contributed to this increase.
Net earnings increased by $2.0 million, or 42%, to $6.7 million in 1997
from $4.7 million in 1996. The improvement was a result of the increase in
operating profit described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are the acquisition of
existing stores, the opening of new stores, the purchase of additional rental
merchandise and the replacement of rental merchandise which has been sold or
charged-off or is no longer suitable for rent. During the nine months ended
September 30, 1997, the Company acquired 72 stores for an aggregate purchase
price of $29.3 million, principally all of which was paid in cash. The Company
also opened an additional 8 stores during the first three quarters of 1997.
The Company purchased $62.0 million and $50.2 million of rental
merchandise during the nine months ended September 30, 1997 and 1996,
respectively.
9
For the nine months ended September 30, 1997, cash provided by operating
activities increased by $8.0 million, from $13.6 million in 1996 to $21.6
million in 1997, primarily due to increased earnings, offset by increased rental
merchandise purchases and working capital used in 1997 to reduce the outstanding
accounts payable-trade balance. Cash used in investing activities increased by
$23.1 million from $13.6 million in 1996 to $36.7 million in 1997, principally
related to the 72 stores acquired in 1997. Cash provided by financing activities
was $15.4 million for the nine months ended September 30, 1997.
The Company has a $90 million credit facility with a group of banks.
Borrowings under the facility bear interest at a rate equal to the designated
prime rate (8-1/2% per annum at September 30, 1997) or 1.10% to 1.65% over LIBOR
(5.6875 % at September 30, 1997) at the Company's option. At September 30, 1997,
the average rate on outstanding borrowings was 6.9%, and for the quarter the
weighted average interest rate under this facility was 7.1%. Borrowings are
collateralized by a lien on substantially all of the assets of the Company. A
commitment fee equal to .30% to .50% of the unused portion of the term loan
facility is payable quarterly. The credit facility includes certain net worth
and fixed charge coverage requirements, as well as covenants which restrict
additional indebtedness and the disposition of assets not in the ordinary course
of business. On September 30, 1997, the outstanding borrowings under this
revolving credit agreement were $30.7 million. The credit facility expires in
December, 1999.
In connection with certain stores acquired by the Company in 1993, monthly
payments of $33,333 are due under a consulting agreement through April 1, 2001,
and monthly payments of $125,000 are due under a non-competition agreement
through January 1998. If the settlement described under the caption "Part II.
Item 1. Legal Proceedings - In re: DEF INVESTMENTS, INC." is finalized, the
Company will be released from its obligation to make payments under such
consulting and non-competition agreements, in exchange for a final cash payment
of approximately $3.25 million (the "Settlement Amount"). Management expects to
pay the Settlement Amount (reduced dollar for dollar by all amounts paid monthly
subsequent to the establishment of the Settlement Amount) during 1997, and
believes that its borrowing capacity under its credit facility and cash flow
from operations will be sufficient to fund the payment.
The Company currently expects to open a total of 11-12 new stores during
1997 and a comparable number of stores in each of the next few years. Currently,
the Company estimates that the average investment with respect to new stores is
approximately $350,000 per store, of which rental merchandise comprises
approximately 75% to 80% of the investment. The remaining investment consists of
leasehold improvements, delivery trucks, store signs, computer equipment and
start-up costs. There can be no assurance the Company will open any new stores
in the future, or as to the number, location or profitability thereof.
In addition to its intention to open new stores annually, the Company
intends to increase the number of stores it operates through acquisitions. In
particular, the Company's goal is to increase the number of stores it operates
by approximately 15-20% of the beginning store base during each of the next few
years, primarily through acquisitions. Management believes there are a number of
possible future acquisition opportunities in the rent-to-own industry, and it is
possible that any acquisition could be material to the Company. There can be no
assurance that the Company will be able to acquire any additional stores, or
that any stores that are acquired will be or will become profitable.
Management believes that cash flow from operations and its credit facility
will be adequate to fund the operations and expansion plans of the Company
during 1997. In addition, to provide any additional funds necessary for the
continued pursuit of the Company's growth strategies, the Company may incur from
time to time additional short- or long-term bank indebtedness and may issue, in
public or private transactions, its equity and debt securities. The availability
and attractiveness of any outside sources of financing will depend on a number
of factors, some of which will relate to the financial condition and performance
of the Company, and some of which will be beyond the Company's control such as
prevailing interest rates and general economic conditions. There can be no
assurance such additional financing will be available, or if available, will be
on terms acceptable to the Company.
10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and ColorTyme are party to various legal
proceedings arising in the ordinary course of business. Except as described
below, neither the Company nor ColorTyme is currently a party to any material
litigation. Although the ultimate outcome of any litigation matter can never be
predicted with certainty, management of the Company believes that the Company
has established sufficient reserves to cover its reasonable exposure with
respect to its outstanding litigation.
IN RE: DEF INVESTMENTS, INC.
On September 5, 1995, a complaint (the "Complaint") was filed in the
United States Bankruptcy Court for the District of Minnesota (the "Bankruptcy
Court") against Mr. and Mrs. Robert A. Hardesty (the "Hardestys") and the
Company, among others (collectively, the "Defendants"). The Complaint was filed
by the trustee (the "Trustee") for DEF Investments, Inc. ("DEF"), in connection
with an involuntary Chapter 7 bankruptcy case against DEF (the "DEF Bankruptcy
Case") commenced on April 20, 1995 by the plaintiffs in a pending class action
suit against DEF and other companies including the Company (the "Miller
lawsuit").
The Complaint sought (i) to avoid the transfer of certain assets purchased
in 1993 by a predecessor of the Company from DEF and certain of its subsidiaries
(the "1993 Acquisition") and to obtain an order that such assets be turned over
to the Trustee, (ii) to nullify the Hardestys' consulting and noncompetition
agreements, pursuant to the terms of which the Company paid $2.0 million to the
Hardestys on the closing date of the 1993 Acquisition, had paid them an
additional $900,000 through the date the Complaint was filed and was obligated
to pay them an additional approximately $5.3 million in varying amounts between
the date the Complaint was filed and April 1, 2001, (iii) to require the Company
to make all payments due after the date the Complaint was filed under the
consulting and noncompetition agreements to the Trustee for the benefit of the
DEF bankruptcy estate, (iv) to set aside all payments made by the Company prior
to the filing of the Complaint to the Hardestys under the consulting and
noncompetition agreements, and (v) to grant judgment against the Hardestys and
the Company for the amount of all such payments.
On March 8, 1996, the Company reached an agreement with the Trustee and
the Hardestys to settle the bankruptcy (the "Bankruptcy Settlement"). The terms
of the Bankruptcy Settlement provide that the Company will be released from the
fraudulent transfer claim and the obligation to pay $5.3 million under the
consulting and noncompetition agreements in exchange for a cash payment of $4.75
million to the Trustee. The Bankruptcy Settlement was reduced to writing and
received approval by the Bankruptcy Court on May 28, 1997. The settlement
required and the Company made a nonrefundable payment of $50,000 to the Trustee
upon execution of the written settlement agreement. On November 18, 1996, the
Company interplead approximately $1.53 million into the registry of the
Bankruptcy Court, leaving a balance outstanding under the consulting and
noncompetition agreements of approximately $3.8 million, and reducing the cash
payment due under the proposed settlement agreement to approximately $3.25
million. On December 1, 1996, the Company began monthly payments of
approximately $160,000 to the registry of the Bankruptcy Court, due on the first
day of each month until the consulting and noncompetition agreements are fully
satisfied, or the Bankruptcy Settlement is closed, at which time the balance of
the settlement amount will be payable in full. Each such monthly payment reduces
on a dollar-for-dollar basis the balance due under the consulting and
noncompetition agreements and the Bankruptcy Settlement.
As part of the overall Bankruptcy Settlement, the Company will receive a
full release from the fraudulent transfer claim by the Trustee on behalf of (i)
DEF, (ii) its subsidiaries, all of which have filed Chapter 7 bankruptcy cases,
and (iii) their respective creditors. The Bankruptcy Settlement will also result
in the Bankruptcy Court issuing protective orders enjoining the Hardestys from
making any claims against the Company or J. E. Talley (Chief Executive Officer,
Chairman of the Board and a principal shareholder of the Company) and certain of
their affiliates under the noncompetition and consulting agreements.
The Miller lawsuit has also been settled (the "Miller Settlement") and
received final state court approval on September 15, 1997. The Miller Settlement
will result in a dismissal of all claims which were or could have been asserted
in that case against the Company. Any potential obligations the Company or
others may have under certain DEF-related loan documents for indemnity will be
released as part of the Miller Settlement. The Bankruptcy Settlement and the
Miller Settlement (together, the "Settlements") are expected to close in
December 1997.
11
Management believes that implementation of the Settlements will not have a
material adverse effect on the Company's results of operations.
GALLAGHER V. CROWN
On January 3, 1996, the Company was served with a class action complaint
adding it as a defendant in this action originally filed in April 1994 against
Crown Leasing Corporation ("Crown") and certain of its affiliates. The class
consists of all New Jersey residents who entered into rent-to-own contracts with
Crown between April 25, 1988 and April 20, 1995.
The lawsuit alleges, among other things, that under certain rent-to-own
contracts entered into between the plaintiff class and Crown, some of which were
purportedly acquired by the Company pursuant to the Company's acquisition in
April 1995 of the rent-to-own assets of Crown (the "Crown Acquisition"), the
defendants charged the plaintiffs fees and expenses that violated the New Jersey
Consumer Fraud Act and the New Jersey Retail Installment Sales Act. The
plaintiffs seek damages including, among other things, a refund of all excessive
fees and/or interest charged or collected by the defendants in violation of such
acts, state usury laws and other related statutes and treble damages, as
applicable. The amount of such excessive fees and/or interest is unspecified.
Pursuant to the Asset Purchase Agreement entered into between Crown, its
controlling shareholder and the Company in connection with the Crown
Acquisition, the Company assumed no liabilities pertaining to Crown's
rent-to-own contracts for the period prior to the Crown Acquisition. The Asset
Purchase Agreement provides that Crown and its controlling shareholder will
indemnify and hold harmless the Company against damages, including reasonable
attorneys' fees, due to any claim pertaining to the operation of Crown's
rent-to-own business prior to the Crown Acquisition, except as set forth below.
This indemnification is applicable regardless of whether the circumstances
giving rise to any such claim continued after the Crown Acquisition. Claims
covered include claims of customers, other than claims relating to rent-to-own
contracts entered into by Crown prior to the Crown Acquisition which remained in
full force and effect on October 20, 1995. The Company has provided Crown and
its controlling shareholder with a notice of indemnification and tender of
defense. Crown has assumed responsibility for defending the Company in this
matter pursuant to the Asset Purchase Agreement.
The plaintiffs have obtained summary judgment against Crown on the
liability issues, reserving damages for trial. Although the plaintiffs were
unsuccessful in their attempt to certify a class against the Company, the
plaintiffs have attempted to assert a theory of successor liability against the
Company. Management believes there is no basis for a claim of successor
liability against the Company, and if Crown is unable to settle the case, the
Company will take appropriate steps to defend and preserve for appeal the
successor liability issues at trial. The case was scheduled for trial on
September 15, 1997. Prior to the trial setting, the plaintiffs filed a motion
for summary judgment on damages against Crown. The motion was to be decided at a
hearing on August 22, 1997.
On August 15, 1997, Crown filed a voluntary petition under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the Eastern
District of Texas, Sherman Division (the "Bankruptcy Filing"). Contemporaneously
with the Bankruptcy Filing, Crown removed the state court case in New Jersey to
the New Jersey federal court and filed a Motion to Transfer Venue (the "Venue
Motion") of the case to the United States District Court for the Eastern
District of Texas, Sherman Division, so that it could then be assigned to the
Texas bankruptcy court for further proceedings. Plaintiffs moved to remand the
action to state court for the determination of damages and an entry of final
judgment. The Venue Motion was granted by the New Jersey federal court, though
the plaintiffs have moved for reconsideration of the court's ruling. In the
meantime, the Bankruptcy Filing has been transferred to the Bankruptcy Court in
El Paso, where other litigation against Crown and its owner is pending.
HINTON, SANCHEZ V. COLORTYME
On May 25, 1994, a class action complaint was filed in Milwaukee County,
Wisconsin against ColorTyme alleging that ColorTyme had entered into contracts
with residents of Wisconsin that were violative of the Wisconsin Consumer Act
(the "Wisconsin Act"). Specifically, the plaintiffs 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 Company's purchase of ColorTyme in May 1996 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
12
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 a mediation on June 20 and 21, 1997, ColorTyme and the Company settled
the claims of the class for $2.9 million. Class counsel's fees and all expenses
associated with the settlement will be paid from the $2.9 million. The
settlement is subject to final court approval. ColorTyme and the Company
received preliminary court approval November 10, 1997 and will deposit the $2.9
million settlement proceeds into the registry of the court prior to November 15,
1997. Class members will have an opportunity to opt out of the settlement,
thereby retaining their individual claims, if any, against ColorTyme and the
Company, but if three percent of the class opts out, ColorTyme and the Company
have an absolute, automatic right to void the settlement. Final court approval
should occur some time in early 1998. Following final court approval, the
settlement proceeds will be distributed to eligible class members. Any residual
funds not distributed to eligible class members will be donated to charities
chosen by class counsel, ColorTyme and the Company. Definitive settlement
documents are now being prepared.
13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
CURRENT REPORTS ON FORM 8-K
None
LISTING OF EXHIBITS
Exhibits followed by an (*) constitute management contracts or
compensatory plans or arrangements.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
2.1(1) - Asset Purchase Agreement dated April 20, 1995 among
Renters Choice, Inc., Crown Leasing Corporation,
Robert White, individually and Robert White Company,
a sole proprietorship owned by Robert White
2.2(2) - Stock Purchase Agreement dated as of August 27, 1995
among Renters Choice, Inc., Starla J. Flake, Rance D.
Richter, Bruce S. Johnson and Pro Rental, Inc.
2.3(3) - Stock Purchase Agreement dated September 29, 1995
between the Company and Terry N. Worrell
2.4(4) - Partnership Interest Purchase Agreement dated
September 29, 1995 among the Company, Worrell
Investors, Inc., The Christy Ann Worrell Trust and
The Michael Neal Worrell Trust
2.5(5) - Agreement and Plan of Merger by and among Renters
Choice, Inc., Pro Rental, Inc., MRTO Holdings, Inc.
and Pro Rental II, Inc.
2.6(6) - Agreement and Plan of Reorganization dated May 15, 1996,
among Renters Choice, Inc., ColorTyme, Inc.,
and CT Acquisition Corporation
3.1(7) - Amended and Restated Certificate of Incorporation of
the Company
3.2(8) - Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Company
3.3(9) - Amended and Restated Bylaws of the Company
4.1(10) - Form of Certificate evidencing Common Stock
10.1(11)* - Amended and Restated 1994 Renters Choice, Inc.
Long-Term Incentive Plan
10.2(12) - Revolving Credit Agreement dated as of November 27, 1996
between Comerica Bank, as agent, Renters Choice,
Inc. and certain other lenders
10.3(13) - Consulting Agreement dated April 1, 1993, by and
between Bob A. Hardesty and Brenda K. Hardesty and
Renters Choice, L.P.
10.4(14) - Non-Competition Agreement dated April 1, 1993, by and
between Bob A. Hardesty and Brenda K. Hardesty and
Renters Choice, L.P.
10.5(15) - Noncompetition Agreement dated as of April 20, 1995,
between Renters Choice, Inc. and Patrick S. White
10.6(16) - Consulting Agreement dated as of April 20, 1995
between Renters Choice, Inc. and Jeffrey W. Smith
10.7(17) - Noncompetition Agreement dated as of August 27, 1995
between Renters Choice, Inc. and Starla J. Flake
10.8(18) - Noncompetition Agreement dated as of August 27, 1995
between Renters Choice, Inc. and Bruce S. Johnson
10.9(19) - Noncompetition Agreement dated as of August 27, 1995
between Renters Choice, Inc. and Rance D. Richter
14
10.16(20)* - Employment Agreement, dated March 28, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
10.17(21)* - Stock Option Agreement, dated April 1, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
11.1 - Computation of Earnings per share
27 - Financial Data Schedule
- ----------------------
(1) Incorporated herein by reference to Exhibit 2.1 to the registrant's
Current Report on Form 8-K dated May 4, 1995
(2) Incorporated herein by reference to Exhibit 2.1 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(3) Incorporated herein by reference to Exhibit 10.19 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(4) Incorporated herein by reference to Exhibit 10.20 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(5) Incorporated herein by reference to Exhibit 2.7 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1995
(6) Incorporated herein by reference to Exhibit 2.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
(7) Incorporated herein by reference to Exhibit 3.2 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1994
(8) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
(9) Incorporated herein by reference to Exhibit 3.4 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1994
(10) Incorporated herein by reference to Exhibit 4.1 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(11) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
(12) Incorporated herein by reference to Exhibit 10.2 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 1996
(13) Incorporated herein by reference to Exhibit 10.5 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(14) Incorporated herein by reference to Exhibit 10.6 to the registrant's
Registration Statement on Form S-1 (File No. 33-86504)
(15) Incorporated herein by reference to Exhibit 10.7 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(16) Incorporated herein by reference to Exhibit 10.8 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(17) Incorporated herein by reference to Exhibit 10.10 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(18) Incorporated herein by reference to Exhibit 10.11 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(19) Incorporated herein by reference to Exhibit 10.12 to the registrant's
Registration Statement on Form S-1 (File No. 33-97012)
(20) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
(21) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned duly authorized.
RENTERS CHOICE, INC.
By: DANNY Z. WILBANKS
SENIOR VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
Date of November 11, 1997
Renters Choice, Inc.
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
For the period ending
September 30, 1997
-------------------------------
Three months Nine months
--------------- --------------
PRIMARY EARNINGS PER SHARE
Net earnings $ 6,723,723 $18,492,421
=============== ==============
Weighted average number of common shares
outstanding 24,867,476 24,825,657
--------------- --------------
Net effect of dilutive stock options based on
the treasury stock method of using average
market price 416,077 329,868
--------------- --------------
Weighted average number of common and common
equivalent shares outstanding 25,283,553 25,155,525
=============== ==============
PRIMARY EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.27 $ 0.74
=============== ==============
FULLY DILUTED EARNINGS PER SHARE
Net earnings $ 6,723,723 $18,492,421
=============== ==============
Weighted average number of common shares
outstanding 24,867,476 24,825,657
--------------- --------------
Net effect of dilutive stock options based on
the treasury stock method using the greater
of the average or ending market price 474,068 386,796
--------------- --------------
Weighted average number of common and common
equivalents shares outstanding 25,341,544 25,212,452
=============== ==============
EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE ASSUMING FULL DILUTION $ 0.27 $ 0.73
=============== ==============
5
1,000
9-MOS
DEC-31-1997
SEP-30-1997
6,280
0
2,713
188
25,871
0
28,425
11,778
206,385
0
0
0
0
248
144,724
206,385
34,745
239,253
31,284
192,894
13,613
0
1,145
31,600
13,108
18,492
0
0
0
18,492
.74
.73
RENTAL MERCHANDISE, HELD FOR RENT.
BALANCE SHEET IS UNCLASSIFIED.
ADDITIONAL PAID IN CAPITAL AND RETAINED EARNINGS.
STORE AND FRANCHISE MERCHANDISE SALES.
STORE AND FRANCHISE COST OF MERCHANDISE SOLD.
GENERAL AND ADMINISTRATIVE EXPENSE AND AMORTIZATION OF INTANGIBLES.
