SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
|_| 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:
COMMON STOCK, PAR VALUE $.01 PER SHARE
TITLE OF CLASS
----------------
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 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 15,987,466 SHARES OF COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT AT THE CLOSING SALES PRICE ON MARCH 16,
1998 .................................................. $427,664,715.50
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF THE CLOSE OF BUSINESS
ON MARCH 16, 1998:..................................... 24,927,596
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement relating to the 1998 Annual
Meeting of Stockholders of Renters Choice, Inc., are incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
PAGE
----
PART I
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
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................... 12
Item 6. SELECTED FINANCIAL DATA................................................................... 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..... 14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................... 21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...... 21
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................... 22
Item 11. EXECUTIVE COMPENSATION................................................................... 22
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 22
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 22
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................... 22
PART I
ITEM 1. BUSINESS
GENERAL
Renters Choice, Inc., a Delaware corporation (the "Company"), currently
operates 508 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 262 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"). In May 1996, the
Company acquired ColorTyme, a national franchisor of rent-to-own stores (the
"ColorTyme Acquisition"). At the time of the closing of the ColorTyme
Acquisition, ColorTyme was a franchisor of 313 rent-to-own stores in 40 states,
and directly owned seven rent-to-own stores.
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
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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
ACQUISITIONS AND NEW STORE OPENINGS
As the pool of available large acquisition candidates has significantly
decreased in the last two years, 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 76 stores (5 of
which were subsequently consolidated) in 18 separate transactions (the "1997
Acquisitions") during 1997 for an aggregate purchase price of $30.5 million in
cash. The acquired stores are located in 16 states. Management believes that the
majority of the 1997 Acquisition stores are underperforming. Average monthly
revenues (including rentals and fees only) for the 1997 Acquisition stores
(measured immediately prior to their acquisitions) were $37,000. In addition,
the Company opened 10 new stores in 4 states and in Puerto Rico during 1997.
The Company has reorganized its regional manager territories to
accommodate the stores acquired and opened during 1997 and in previous years.
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 1997 Acquisitions, along with the new
stores opened, 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 1997 Acquisition stores and management has implemented
certain operating strategies designed to improve the efficiency and performance
of such stores.
To date during 1998, the Company has acquired 4 additional stores in 2
states for an aggregate purchase price of approximately $0.8 million.
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 7500 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 44.7% 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.
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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 revenue per unit rented by expanding
the Company's offering of higher priced merchandise; (iv) increasing the size
and number of ColorTyme franchise locations; (v) 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 (vi) 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.
RENTERS CHOICE STORE OPERATIONS
The number of stores operated by the Company under its Renters Choice
brand increased during 1997 from 423 in January to 504 at December 31. The
Company currently operates 508 stores in 33 states and in Puerto Rico, as
illustrated by the following table:
NUMBER OF NUMBER OF
LOCATION STORES LOCATION STORES
- -------- ------ -------- ------
Texas........................ 79 Missouri..................... 8
Florida...................... 39 Arizona...................... 8
Ohio......................... 39 Arkansas..................... 6
Georgia...................... 38 Wisconsin.................... 6
Pennsylvania................. 28 Mississippi.................. 6
Tennessee.................... 25 Virginia..................... 5
Alabama...................... 25 Colorado..................... 4
New York..................... 24 South Carolina............... 4
North Carolina............... 24 Delaware..................... 4
Michigan..................... 21 Utah......................... 3
Indiana...................... 19 Iowa......................... 2
New Jersey................... 17 Massachusetts................ 2
Puerto Rico.................. 16 New Hampshire................ 2
Illinois..................... 16 Oklahoma..................... 2
Louisiana.................... 12 Nevada....................... 1
California................... 12 West Virginia................ 1
Kentucky..................... 9 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 1997, home electronic
products accounted for approximately 46% of the Company's store revenue,
appliances for 24% and furniture and accessories for 30%. 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
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rental payments. Many of the stores acquired in 1997 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, Sony, JVC and Technics. The Company rents major appliances
manufactured by Whirlpool, including refrigerators, washing machines, dryers,
microwave ovens, freezers 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, England-Corsair,
La-Z-Boy 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.
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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 2.1% in 1997, as compared to approximately 2.3% in 1996. In an
effort to improve collections at the stores acquired during 1997, 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 84 regional
managers, in turn, report to 16 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 1997
into its management information system.
The Company is aware of the issues associated with the programming code
in existing computer and software systems as the millennium (Year 2000)
approaches. The Year 2000 problem is pervasive and complex, as virtually every
computer operation could be affected in some way by the rollover of the
two-digit year value to "00". The issue is whether
5
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause complete system failures. The Company has received
confirmation from its primary systems' vendors that their systems will properly
handle the rollover to the Year 2000. Based upon these facts, the Company
believes that the Year 2000 problem will not have a material effect on the
financial position, results of operations or cash flows of the Company.
The Company's electronics and appliances vendors are generally large,
multi-national manufacturers of name brand products. These manufacturers have
reviewed their products for possible Year 2000 conflicts in their annual product
lineups for each of the last several years. Based on the nature of its products
and the aforementioned facts, the Company believes there will be no significant
Year 2000 complications with its rental products.
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 Magnavox and Whirlpool,
which accounted for approximately 21.7% and 21.6%, respectively, of merchandise
purchased for the Company's stores in 1997. 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 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, 1997
and 1996, was approximately 4.7% and 5.0% respectively. 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.
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COMPETITION
The rent-to-own industry is highly competitive. According to industry
analysts, the 10 largest industry participants account for only 44.7% of the
approximately 8300 rent-to-own stores in the United States. The Company
currently is the second largest operator of rent-to-own stores with 770 stores
(including the ColorTyme franchised rental centers), while Rent-A-Center, a
division of Thorn EMI PLC, currently is the largest with approximately 1469
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 competitor has significantly greater resources
and name recognition than the Company.
COLORTYME OPERATIONS
ColorTyme is a nationwide franchisor of television, stereo and furniture
rental centers. During the year, 26 new ColorTyme locations were added and 58
sold or closed. Of the 54 stores sold, Renters Choice has acquired 39. As of
December 31, 1997, there were approximately 262 franchised rental centers
operating in 37 states.
All ColorTyme franchised stores use ColorTyme's tradenames, service
marks, trademarks, logos, emblems and indicia 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.
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 31% of
merchandise purchased by ColorTyme in 1997.
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 store 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.
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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 45 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 disclosures to customers regarding the
terms of the rental purchase transaction, 2 regulate rental purchase
transactions as credit sales and 1 state, New Jersey, currently has no
legislation regulating rental purchase transactions. 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 California, 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
California, 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%. No legislation has been
adopted in New Jersey regulating rental purchase transactions as credit sales.
The Company currently operates seventeen 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. See "Item
3. Legal Proceedings" for further discussion of New Jersey regulatory issues.
EMPLOYEES
As of March 16, 1998, the Company had approximately 2540 employees, of
whom 44 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 19 employees, all 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.
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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 2007. 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 19,450 square feet. Store sizes
range from approximately 1,500 to 8,200 square feet, and average approximately
4,290 square feet. Approximately 80% of each store's space is generally 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 9,600 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 sought, among other things, to void as a fraudulent transfer the
conveyance of certain assets purchased in 1993 by a predecessor of the Company
from DEF and certain of its subsidiaries, to obtain an order that such assets be
turned over to the Trustee, and to require the Company to make all future
payments due to the Hardesty's under consulting and noncompetition agreements
entered into at the time of the purchase, to the Trustee for the benefit of the
DEF bankruptcy estate.
On March 8, 1996, the Company and the Hardestys reached an agreement
with the Trustee to settle the claim in bankruptcy (the "Bankruptcy
Settlement"). The terms of the Bankruptcy Settlement provided for the Company to
be released from the fraudulent transfer claim and the future obligation to pay
the $5.3 million outstanding at March 8, 1996, under the consulting and
noncompetition agreements with the Hardestys in exchange for a cash payment of
$4.75 million to the Trustee. The Bankruptcy Settlement was reduced to writing
and received approval by the Bankruptcy Court on June 18, 1997. The parties
consummated the Bankruptcy Settlement on January 13, 1998, at which time the
Company paid the remaining amount due under the Bankruptcy Settlement into the
registry of the Bankruptcy Court and the Trustee dismissed the Complaint against
the Company and the Hardestys with prejudice. As a part of the Bankruptcy
Settlement, the Bankruptcy Court also issued a protective order enjoining the
Hardestys from making any claims against the Company or J. E. Talley and certain
of their affiliates under the noncompetition and consulting agreements.
In connection with the consummation of the Bankruptcy Settlement, the
Miller Lawsuit was also settled. This
9
resulted in a dismissal of all claims which were or could have been asserted in
that case against the Company. The settlement of the Miller Lawsuit also
received court approval and it is now finalized. The Company made no payments in
connection with the settlement of the Miller Lawsuit.
GALLAGHER V. CROWN LEASING CORPORATION
On January 3, 1996, the Company was served with a class action complaint
adding it as a defendant in this action originally filed in April 1994 against
Crown Leasing Corporation ("Crown") and certain of its affiliates in state court
in New Jersey. The class consists of all New Jersey residents who entered into
rent-to-own contracts with Crown between April 25, 1988 and April 20, 1995.
The lawsuit alleges, among other things, that under certain rent-to-own
contracts entered into between the Plaintiff class and Crown, some of which were
purportedly acquired by the Company pursuant to the Company's acquisition in
April 1995 of the rent-to-own assets of Crown (the "Crown Acquisition"), the
defendants failed to make the necessary disclosures and charged the plaintiffs
fees and expenses that violated the New Jersey Consumer Fraud Act and the New
Jersey Retail Installment Sales Act. The plaintiffs seek damages including,
among other things, a refund of all excessive fees and/or interest charged or
collected by the defendants in violation of such acts, state usury laws and
other related statutes and treble damages, as applicable. The amount of such
excessive fees and/or interest is unspecified.
Pursuant to the Asset Purchase Agreement entered into between Crown, its
controlling shareholder and the Company in connection with the Crown
Acquisition, the Company assumed no liabilities pertaining to the Crown's
rent-to-own contracts for the period prior to the Crown Acquisition. The Asset
Purchase Agreement provides that Crown and its controlling shareholder will
indemnify and hold harmless the Company against damages, including reasonable
attorneys' fees, due to any claim pertaining to the operation of Crown's
rent-to-own business prior to the Crown Acquisition, except as set forth below.
This indemnification is applicable regardless of whether the circumstances
giving rise to any such claim continued after the Crown Acquisition. Claims
covered include claims of customers, other than claims relating to rent-to-own
contracts entered into by Crown prior to the Crown Acquisition which remained in
full force and effect on October 20, 1995. The Company has provided Crown and
its controlling shareholder with a notice of indemnification and tender of
defense. Crown then assumed responsibility for defending the Company in this
matter pursuant to the Asset Purchase Agreement.
The plaintiffs have obtained summary judgment against Crown on the
liability issues. Although the plaintiffs were unsuccessful in their attempt to
certify a class against the Company, the plaintiffs have attempted to assert a
theory of successor liability against the Company. Management believes there is
no basis for a claim of successor liability against the Company, and if Crown is
unable to settle the case, the Company will take appropriate steps to defend and
preserve for appeal the successor liability issues at trial. The case was
scheduled for trial on September 15, 1997. Prior to the trial setting, the
plaintiffs filed a motion for summary judgment on damages against Crown. The
motion was to be decided at a hearing on August 22, 1997.
On August 15, 1997, Crown filed a voluntary petition under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the Eastern
District of Texas, Sherman Division (the "Bankruptcy Filing"). Contemporaneously
with the Bankruptcy Filing, Crown removed the state court case in New Jersey to
the New Jersey federal court and filed a Motion to Transfer Venue (the "Venue
Motion") of the case to the United States District Court for the Eastern
District of Texas, Sherman Division, so that it could then be assigned to the
Texas bankruptcy court for further proceedings. Plaintiffs moved to remand the
action to state court for the determination of damages and an entry of final
judgment. The Venue Motion was granted by the New Jersey federal court, and the
Plaintiff's motion for reconsideration of the court's ruling has now been
denied. In the meantime, the Bankruptcy Filing has been transferred to the
Bankruptcy Court in El Paso, where other litigation against Crown and its owner
is pending. Crown filed a motion with the Eastern District requesting the
Gallagher case be transferred to the Western District where its bankruptcy is
now pending, and that motion was recently granted. The Gallagher plaintiffs
recently moved the El Paso Bankruptcy Court to lift the automatic stay and send
the case back to New Jersey state court. That motion was denied on February 9,
1998, without prejudice.
10
Due to the uncertainties associated with any litigation, the ultimate
outcome of this matter cannot presently be determined.
HINTON, SANCHEZ V. COLORTYME, INC.
On May 25, 1994, a class action complaint was filed in Milwaukee County,
Wisconsin against ColorTyme alleging that ColorTyme had entered into contracts
with residents of Wisconsin that were violative of the Wisconsin Consumer Act
(the "Wisconsin Act"). Specifically, the plaintiffs alleged that the ColorTyme
contracts were consumer credit transactions under the Wisconsin Act, and that
ColorTyme failed to provide required disclosures and violated the Wisconsin
Act's collection practice restrictions. The plaintiffs' complaint sought damages
in excess of $2.0 million. Following the Company's purchase of ColorTyme in May
1996, the plaintiffs added the Company as a defendant in the case.
At a mediation on June 20 and 21, 1997, ColorTyme and the Company
settled the claims of the class, including the cost of class counsel's fees and
related settlement expenses, for $2.9 million, subject to final court approval.
The fairness hearing on the settlement occurred on January 26, 1998 at which
time the court entered its final order approving the settlement. The settlement
proceeds will now be distributed to eligible class members, with any residual
funds not distributed to such class members to be donated to charities chosen by
class counsel, ColorTyme and the Company.
MICHELLE NEWHOUSE V. RENTERS CHOICE, INC.
On November 26, 1997 a class action complaint was filed against the
Company by Michelle Newhouse in New Jersey state court alleging, among other
things, that under certain rent-to-own contracts entered into between the
plaintiffs and the Company, the Company failed to make the necessary disclosures
and charged the plaintiffs fees and expenses that violated the New Jersey
Consumer Fraud Act and the New Jersey Installment Sales Act. The proposed class
consists of all residents of New Jersey who are or have been parties to
contracts to rent-to-own merchandise from the Company within the past six years.
The Company removed the case to federal court on January 21, 1998, and
was then advised by the plaintiffs' attorney that Michelle Newhouse no longer
wished to serve as class representative, and papers would be filed seeking court
approval for the withdrawal of the complaint. However, management believes that
it is probable that the attorneys representing the plaintiffs will file a
similar complaint on behalf of a new class representative.
Due to the uncertainties associated with any litigation, the ultimate
outcome of this matter cannot presently be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been quoted on the National Market of the Nasdaq
Stock Market, Inc. ("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.
1997 HIGH LOW
------- -------
First Quarter ............................ $17.500 $11.750
Second Quarter ........................... 20.625 13.250
Third Quarter ............................ 24.250 17.000
Fourth Quarter ........................... 24.250 18.000
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
As of March 16, 1998, there were 76 record holders of the Common Stock.
Since the Company's initial public offering in 1995, the Company has not
paid any cash dividends and expects that it will retain all available earnings
generated by its operations for the development and growth of its business. The
Company 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."
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the five years ended
December 31, 1997 have been derived from the consolidated financial statements
of the Company audited by Grant Thornton LLP, 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.
12
YEAR ENDED DECEMBER 31,(1)
----------------------------------------------------
1997 1996(2) 1995(3) 1994(4) 1993(4)
-------- --------- -------- ------- -------
STATEMENT OF EARNINGS DATA
REVENUE (In thousands, except per share data)
Rentals and fees .................. $275,344 $ 198,486 $126,264 $70,590 $51,162
Merchandise sales ................. 14,125 10,604 6,383 3,470 1,678
Other ............................. 679 687 642 325 372
Franchise revenue(6) .............. 41,393 28,188 -- -- --
-------- --------- -------- ------- -------
331,541 237,965 133,289 74,385 53,212
OPERATING EXPENSES
Direct store expenses
Depreciation of rental
merchandise ................... 57,223 42,978 29,640 15,614 11,626
Cost of merchandise sold ........ 11,365 8,357 4,954 2,915 1,756
Salaries and other expenses ..... 162,458 116,577 70,012 37,786 27,820
Franchise operating expenses
Cost of franchise merchandise
sold (6) ........................ 35,841 24,010 -- -- --
-------- --------- -------- ------- -------
266,887 191,922 104,606 56,315 41,202
General and administrative expenses 13,304 10,111 5,766 2,809 2,151
Amortization of intangibles ....... 5,412 4,891 3,109 6,022 5,304
-------- --------- -------- ------- -------
Total operating expenses ........ 285,603 206,924 113,481 65,146 48,657
-------- --------- -------- ------- -------
Operating profit ................ 45,938 31,041 19,808 9,239 4,555
Interest expense (income), net .... 1,890 (61) 1,312 2,160 1,817
-------- --------- -------- ------- -------
Earnings before income taxes .... 44,048 31,102 18,496 7,079 2,738
Income tax expense ................ 18,170 13,076 7,784 1,600 937
-------- --------- -------- ------- -------
Net earnings .................... $ 25,878 $ 18,026 $ 10,712 $ 5,479 $ 1,801
======== ========= ======== ======= =======
Basic earnings per share .......... $ 1.04 $ 0.73 $ 0.52 -- --
======== ========= ======== ======= =======
Diluted earnings per share ........ $ 1.03 $ 0.72 $ 0.52 -- --
======== ========= ======== ======= =======
OPERATING DATA
Stores open at end of period ...... 504 423 325 114 112
Comparable store revenue growth (5) 8.1% 3.8% 18.1% 10.8% 11.1%
BALANCE SHEET DATA
Rental merchandise, net ........... $112,759 $ 95,110 $ 64,240 $28,096 $20,672
Intangible assets, net ............ 61,183 47,192 29,549 3,712 9,741
Total assets ...................... 208,868 174,467 147,294 36,959 34,813
Total debt ........................ 27,172 18,993 40,850 23,383 27,592
Total liabilities ................. 56,115 48,964 50,810 27,673 30,645
Stockholders' equity .............. 152,753 125,503 96,484 9,286 4,168
- ------------------------------------------------
(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) In May 1996, the Company completed the ColorTyme Acquisition, which
affects the comparability between the historical financial and operating
data for the periods presented.
(3) 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.
(4) 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
13
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.
(5) Comparable store revenue for each period presented includes revenues
only of stores open throughout the full period and the comparable prior
period.
(6) 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 years ended December 31, 1996
and 1997 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, (i) uncertainties regarding the
ability to open new stores, (ii) the ability to acquire additional rent-to-own
stores on favorable terms, (iii) the ability to enhance the performance of the
required stores and to integrate the acquired stores into the Company's
operations, (iv) the passage of legislation adversely affecting the rent-to-own
industry, (v) interest rates, and (vi) the ability of the Company to collect on
its rental purchase agreements at the current rate.
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.
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. For periods prior to 1996, the Company used the
income forecasting method to
14
calculate depreciation of its rental merchandise for tax purposes. However, in
1996, the Company began using the MACRS method of depreciation using a five-year
class life for its rental purchase merchandise. In August 1997, the Internal
Revenue Service issued a revenue ruling requiring rental purchase companies to
use MACRS, with a 3 year class life for all purchases after August 5, 1997. The
Company began application of the ruling for all purchases effective August 5,
1997, and thereafter.
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 and Regional Management
salaries, travel and occupancy, 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.
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)
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- -----
REVENUE
Rentals and fees .................. 94.9% 94.7% 94.7% -- -- --
Merchandise Sales ................. 4.9 5.0 4.8 90.3% 89.6% --
Other/Royalties ................... 0.2 0.3 0.5 9.7 10.4 --
----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% --
===== ===== ===== ===== ===== =====
OPERATING EXPENSES
Direct expenses
Depreciation of rental
merchandise ....................... 19.7% 20.5% 22.2% -- -- --
Cost of merchandise sold ..... 3.9 3.9 3.8 86.6% 85.0% --
Salaries and other expenses .. 56.0 55.6 52.5 1/M -- --
----- ----- ----- ----- ----- -----
79.6 80.0 78.5 86.6 85.0 --
General and administrative
expenses .......................... 3.8 3.8 4.3 5.3 7.7 --
Amortization of intangibles ....... 1.7 2.3 2.3 1.0 0.6 --
----- ----- ----- ----- ----- -----
Total operating expenses .......... 85.1 86.1 85.1 92.9 93.3 --
----- ----- ----- ----- ----- -----
Operating profit .................. 14.9 13.9 14.9 7.1 6.7 --
Interest expense / (income) ....... .8 0.1 1.0 (0.6) (1.9) --
----- ----- ----- ----- ----- -----
Earnings before income taxes ...... 14.1% 13.8% 13.9% 7.7% 8.6% --
===== ===== ===== ===== ===== =====
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Between January 1, 1997 and December 31, 1997 the Company acquired 76
stores (5 of which were subsequently consolidated with existing locations). The
1997 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 the 1997 Acquisitions, comparisons of the Company's
operating results for 1997 and 1996 may not be meaningful or indicative of
future results.
Total revenue increased by $93.5 million, or 39.3%, to $331.5 million
for 1997 from $238.0 million for 1996. The increase in total revenue was
primarily attributable to the inclusion of 71 stores purchased in 1997 (net of
consolidation) and the inclusion of the operating results from the franchise
operations for an entire fiscal year in 1997, compared to only eight months in
1996. Total revenue exclusive of the 71 (net of consolidation) new stores and
franchise operations increased by $52.6 million, or 25.1% to $262.4 million for
1997 from $209.8 million in 1996.
Depreciation of rental merchandise increased by $14.2 million, or 33%,
to $57.2 million for 1997 from $43.0 million for 1996. Depreciation of rental
merchandise as a percent of total store revenue decreased to 19.7%
16
for 1997 from 20.5% for 1996. 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 56.0% for 1997 from 55.6% for 1996. This increase is attributable to the
increase in salaries for employees and other expenses of the acquired stores
immediately following the acquisitions. Occupancy costs also increased as a
percent of total store revenue due to the relocation of certain stores acquired
in 1996 and 1997 to locations that are larger in square footage. Generally,
revenue from these stores increased gradually while the additional payroll and
occupancy costs were incurred immediately. The average square footage per store
was approximately 4,150 at December 31, 1996 as compared to 4,290 for 1997.
General and administrative expenses expressed as a percentage of total
revenue decreased from 4.2% in 1996 to 4.0% in 1997. Expressed as a percentage
of store revenue only, general and administrative expenses, exclusive of
expenses relative to ColorTyme, were 3.8% in both 1997 and 1996. Franchise
general and administrative expenses as a percentage of franchise revenue totaled
5.3% in 1997, down significantly from 7.7% in 1996. This decrease was primarily
attributable to our streamlining efforts as overhead reductions were implemented
in 1996 and 1997.
Operating profit increased by $14.9 million, or 48.1%, to $45.9 million
for 1997 from $31.0 million for 1996. 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 in 1997 and 1996. The revenue increase exceeded
increases in direct store expenses, as many of the stores acquired by the
Company are beginning to flourish in the Company systems and processes.
Net earnings increased by $7.9 million, or 43.9%, to $25.9 million in
1997 from $18.0 million in 1996. The improvement was the result of the increase
in operating profit described above.
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 $67.9 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% 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.
17
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 increased 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 decreased to 4.2% in 1996 from 4.3% in 1995. This relatively small
decrease was due to the leveraging of corporate overhead expenses over a larger
store and revenue base offset by franchise general and administrative expenses
incurred in 1996 for the first year of operations. Franchise general and
administrative expenses as a percentage of franchise revenue totaled 7.7% in
1996. This increase was offset by the aforementioned 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are the acquisition of
existing stores, the opening of new stores, the purchase of additional rental
merchandise and the replacement of rental merchandise which has been sold,
charged-off or is no longer suitable for rent. During the year ended December
31, 1997, the Company acquired 71 stores (net of consolidation) for an aggregate
purchase price of $30.5 million, all of which was paid in cash. During the year
ended December 31, 1997, the Company purchased rental merchandise in the amount
of $85.9 million. The Company purchased $75.2 million and $44.5 million of
rental merchandise during the years ended December 31, 1996 and 1995,
respectively.
For 1997, cash provided by operating activities increased by $9.4
million from $19.4 million in 1996 to $28.8 million in 1997, primarily due to
the $7.9 million increase in net earnings. Cash used in investing activities
increased by $4.3 million from $36.3 million in 1996 to $40.6 million in 1997,
primarily due to additional cash paid pursuant to the 1997 Acquisitions.
Additionally, the Company paid $2.3 million more in 1997 than 1996 for the
purchase of property assets. The increase is attributable primarily to
relocating and improving acquired stores. During 1997, cash provided by
financing activities was $10.6 million, primarily from the Company's credit
facility. 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.
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 6, 1998 is $15 million.
The facility bears a commitment fee ranging from 0.3% to 0.5% of the average
unused portions.
18
In connection with the 1993 Acquisition, monthly payments of $33,333
were due under a consulting agreement through April 1, 2001, and monthly
payments of $125,000 were due under a non-competition agreement from February
1996 through January 1998. The settlement agreement described under the caption
"Item 3. Legal Proceedings -- IN RE: DEF INVESTMENTS, INC." was completed in
January 1998, at which time the Company was released from its obligation to make
payments under such consulting and non-competition agreements, in exchange for a
final cash payment of $950,000.
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 non-competition agreements through August
2000.
The Company currently expects to open approximately twelve new stores
during 1998 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% 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 75-100 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 1998. In addition, to provide any additional funds
necessary for the continued pursuit of the Company's growth strategies, the
Company may incur, from time to time, additional short 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, 1997, 1996 and 1995, 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, 1997(1)
Revenue ...................... $74,587 $80,803 $83,864 $92,288
Operating profit ............. 9,639 11,341 11,766 12,970
Net earnings ................. 5,412 6,357 6,724 7,385
Basic Earnings per share ..... 0.22 0.25 0.27 0.30
Diluted Earnings per share ... $ 0.22 $ 0.25 $ 0.27 $ 0.29
Year ended December 31, 1996(2)
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
Basic Earnings per share ..... 0.15 0.18 0.19 0.21
Diluted Earnings per share ... $ 0.15 $ 0.17 $ 0.19 $ 0.21
- -------------------------
(1) During 1997, 28 stores were purchased during the first quarter; 39
stores were purchased during the second quarter; and 9 stores were
purchased during the third quarter. Of the 76 stores acquired, 5 were
subsequently consolidated with existing store locations. In addition,
two stores were opened during the first quarter; two stores were opened
during the second quarter; four stores were opened during the third
quarter; and two stores were opened during the fourth quarter.
(2) During 1996, 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.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
The provision of SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The new rules require that all items that are
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company will adopt SFAS No. 130 in 1998 and does
not expect that such adoption will have a material impact on results of
operations, financial position or cash flows.
20
In 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. The provisions of SFAS No. 131 require
public companies to use a management approach to determining their operating
segments. This management approach model defines operating segments as
revenue-producing components of the enterprise for which separate financial
information is produced internally and are subject to evaluation by the chief
operating decision maker in deciding how to allocate resources to segments. SFAS
No. 131 also expands the financial and descriptive information disclosures
relative to the identified operating segments. The Company will adopt SFAS No.
131 in 1998 and anticipates that it will have two reportable segments, rental
store operations and franchise operations.
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.
21
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 1998 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
None
22
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
23
10.9(19) - Noncompetition Agreement dated as of August 27, 1995 between
Renters Choice, Inc. and Rance D. Richter
10.10(20) - Option Agreement dated August 27, 1995 between the Company and
Terry N. Worrell
10.11(21) - Option Agreement dated August 27, 1995 among the Company,
Worrell Investors, Inc., The Christy Ann Worrell Trust and The
Michael Neal Worrell Trust
10.15(22) - Portfolio Acquisition Agreement dated May 15, 1996, by and among
Renters Choice, Inc., ColorTyme Financial Services, Inc., and
STI Credit Corporation
10.16(23)* - Employment Agreement, dated March 28, 1997, by and between
Renters Choice, Inc. and Danny Z. Wilbanks
10.17(24)* - Stock Option Agreement, dated April 1, 1997, by and between
Renters Choice, Inc. and Danny Z. Wilbanks
23 - Notice of Annual Meeting of Stockholders and Proxy Statement of
the Company for the 1998 Annual Meeting of the Company (to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A)
23.1 - Consent of Independent Certified Public Accountants
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
24
(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 2.2 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(21) Incorporated herein by reference to Exhibit 2.3 to the registrant's
Current Report on Form 8-K dated August 27, 1995
(22) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
(23) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(24) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
25
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 16, 1998
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 16, 1998
J. Ernest Talley Chief Executive Officer
(Principal Executive Officer)
/s/ MARK E. SPEESE
Mark E. Speese President, Chief Operating Officer March 16, 1998
and Director
/s/ DANNY Z. WILBANKS Senior Vice President - Finance and Chief March 16, 1998
Danny Z. Wilbanks Financial Officer (Principal Financial
and Accounting Officer)
/s/ J. V. LENTELL Director March 16, 1998
J.V. Lentell
/s/ JOSEPH V. MARINER Director March 16, 1998
Joseph V. Mariner
/S/ REX W. THOMPSON Director March 16, 1998
Rex W. Thompson
26
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
2.1(1) - Asset Purchase Agreement dated April 20, 1995 among Renters
Choice, Inc., Crown Leasing Corporation, Robert White,
individually and Robert White Company, a sole proprietorship
owned by Robert White
2.2(2) - Stock Purchase Agreement dated as of August 27, 1995 among
Renters Choice, Inc., Starla J. Flake, Rance D. Richter,
Bruce S. Johnson and Pro Rental, Inc.
2.3(3) - Stock Purchase Agreement dated September 29, 1995 between the
Company and Terry N. Worrell
2.4(4) - Partnership Interest Purchase Agreement dated September 29, 1995
among the Company, Worrell Investors, Inc., The Christy Ann
Worrell Trust and The Michael Neal Worrell Trust
2.5(5) - Agreement and Plan of Merger by and among Renters Choice, Inc.,
Pro Rental, Inc., MRTO Holdings, Inc. and Pro Rental II, Inc.
2.6(6) - Agreement and Plan of Reorganization dated May 15, 1996, among
Renters Choice, Inc., ColorTyme, Inc., and CT Acquisition
Corporation
3.1(7) - Amended and Restated Certificate of Incorporation
of the Company
3.2(8) - Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of the Company
3.3(9) - Amended and Restated Bylaws of the Company
4.1(10) - Form of Certificate evidencing Common Stock
10.1(11)* - Amended and Restated 1994 Renters Choice, Inc. Long-Term
Incentive Plan
10.2(12) - Revolving Credit Agreement dated as of November 27, 1996 between
Comerica Bank, as agent, Renters Choice, Inc. and certain other
lenders
10.3(13) - Consulting Agreement dated April 1, 1993, by and between Bob A.
Hardesty and Brenda K. Hardesty and Renters Choice, L.P.
10.4(14) - Non-Competition Agreement dated April 1, 1993, by and between
Bob A. Hardesty and Brenda K. Hardesty and Renters Choice, L.P.
10.5(15) - Noncompetition Agreement dated as of April 20, 1995, between
Renters Choice, Inc. and Patrick S. White
10.6(16) - Consulting Agreement dated as of April 20, 1995 between Renters
Choice, Inc. and Jeffrey W. Smith
10.7(17) - Noncompetition Agreement dated as of August 27, 1995 between
Renters Choice, Inc. and Starla J. Flake
10.8(18) - Noncompetition Agreement dated as of August 27, 1995 between
Renters Choice, Inc. and Bruce S. Johnson
27
10.9(19) - Noncompetition Agreement dated as of August 27, 1995 between
Renters Choice, Inc. and Rance D. Richter
10.10(20) - Option Agreement dated August 27, 1995 between the Company and
Terry N. Worrell
10.11(21) - Option Agreement dated August 27, 1995 among the Company,
Worrell Investors, Inc., The Christy Ann Worrell Trust and The
Michael Neal Worrell Trust
10.15(22) - Portfolio Acquisition Agreement dated May 15, 1996, by and among
Renters Choice, Inc., ColorTyme Financial Services, Inc., and
STI Credit Corporation
10.16(23)* - Employment Agreement, dated March 28, 1997, by and between
Renters Choice, Inc. and Danny Z. Wilbanks
10.17(24)* - Stock Option Agreement, dated April 1, 1997, by and between
Renters Choice, Inc. and Danny Z. Wilbanks
23 - Notice of Annual Meeting of Stockholders and Proxy Statement of
the Company for the 1998 Annual Meeting of the Company (to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A)
23.1 - Consent of Independent Certified Public Accountants
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
28
(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)
(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
(22) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
(23) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(24) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
29
F-1
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, 1997 and 1996, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
February 12, 1998
F-2
Renters Choice, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
(IN THOUSANDS OF DOLLARS) 1997 1996
----------- ---------
ASSETS
Cash and cash equivalents ....................................... $ 4,744 $ 5,920
Rental merchandise, net
On rent ...................................................... 89,007 71,620
Held for rent ................................................ 23,752 23,490
Accounts receivable - trade ..................................... 2,839 3,021
Prepaid expenses and other assets ............................... 3,164 4,369
Property assets, net ............................................ 17,700 12,716
Deferred income taxes ........................................... 6,479 6,138
Intangible assets, net .......................................... 61,183 47,193
-------- --------
$208,868 $174,467
======== ========
LIABILITIES
Revolving credit agreement ...................................... $ 26,280 $ 14,435
Accounts payable - trade ........................................ 11,935 17,047
Accrued liabilities ............................................. 17,008 12,924
Other debt ...................................................... 892 4,558
-------- --------
56,115 48,964
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;
24,904,721 and 24,791,085 shares issued and outstanding
in 1997 and 1996, respectively ............................... 249 248
Additional paid-in capital ...................................... 99,381 98,010
Retained earnings ............................................... 53,123 27,245
-------- --------
152,753 125,503
-------- --------
$ 208,868 $ 174,467
======== ========
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,
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1997 1996 1995
--------- ---------- --------
Revenue
Store
Rentals and fees ........................ $ 275,344 $ 198,486 $ 126,264
Merchandise sales ....................... 14,125 10,604 6,383
Other ................................... 679 687 642
Franchise
Merchandise sales ....................... 37,385 25,229 --
Royalty income and fees ................. 4,008 2,959 --
--------- --------- ---------
331,541 237,965 133,289
Operating expenses
Direct store expenses
Depreciation of rental merchandise .... 57,223 42,978 29,640
Cost of merchandise sold .............. 11,365 8,357 4,954
Salaries and other expenses ........... 162,458 116,577 70,012
Franchise operating expense
Cost of merchandise sales ............. 35,841 24,010 --
--------- --------- ---------
266,887 191,922 104,606
General and administrative expenses ..... 13,304 10,111 5,766
Amortization of intangibles ............. 5,412 4,891 3,109
--------- --------- ---------
Total operating expenses ........... 285,603 206,924 113,481
--------- --------- ---------
Operating profit ................... 45,938 31,041 19,808
Interest expense ........................... 2,194 606 2,202
Interest income ............................ (304) (667) (890)
--------- --------- ---------
Earnings before income taxes ....... 44,048 31,102 18,496
Income tax expense ......................... 18,170 13,076 7,784
--------- --------- ---------
NET EARNINGS ....................... $ 25,878 $ 18,026 $ 10,712
========= ========= =========
Basic earnings per share ................... $ 1.04 $ 0.73 $ 0.52
========= ========= =========
Diluted earnings per share ................. $ 1.03 $ 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
UNAMORTIZED
RENTERS CHOICE, INC. ADDITIONAL VALUE
COMMON STOCK PAID-IN RETAINED OF STOCK
SHARES AMOUNT CAPITAL EARNINGS AWARD TOTAL
------ ------ ------- -------- ----- -----
(IN THOUSANDS OF DOLLARS)
Balance at January 1, 1995 ....... 4,300 $ 43 $ 116 $ 9,126 $ -- $ 9,285
Net earnings .................. -- -- -- 10,712 -- 10,712
Dividends paid ................ -- -- -- (1,493) -- (1,493)
Contribution of undistributed
S corporation earnings ..... -- -- 9,126 (9,126) -- --
Initial public offering of
common stock ............... 2,587 26 23,370 -- -- 23,396
Issuance of common stock
under stock option plan .... 1 -- 10 -- -- 10
Three-for-two common
stock split effected in
the form of a dividend ..... 3,444 34 (34) -- -- --
Two-for-one common stock
split effected in the form
of a dividend .............. 10,333 103 (103) -- -- --
Stock award ................... 63 1 960 -- (961) --
Amortization of stock award ... -- -- -- -- 63 63
Public offering of common stock 3,650 37 54,474 -- -- 54,511
------ ------ ------- ------- ------- ---------
Balance at December 31, 1995 ..... 24,378 244 87,919 9,219 (898) 96,484
Net earnings .................. -- -- -- 18,026 -- 18,026
Amortization of stock award ... -- -- 322 322
Termination of stock award .... (37) -- (576) -- 576 --
Exercise of stock options ..... 107 1 695 -- -- 696
Tax benefits related to
exercise of stock options .. -- -- 460 -- -- 460
Acquisition of ColorTyme, Inc. 343 3 9,512 -- 9,515
------ ------ ------- ------- ------- ---------
Balance at December 31, 1996 ..... 24,791 248 98,010 27,245 -- 125,503
Net earnings .................. -- -- -- 25,878 -- 25,878
Exercise of stock options ..... 114 1 950 -- -- 951
Tax benefits related to
exercise of stock options .. -- -- 421 -- -- 421
------ ------ ------- ------- ------- ---------
Balance at December 31, 1997 ..... 24,905 $249 $ 99,381 $53,123 $ -- $152,753
====== ====== ========= ======== ======= =========
The accompanying notes are an integral part of these statements.
F-5
Renters Choice, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(IN THOUSANDS OF DOLLARS) 1997 1996 1995
---------- ---------- ---------
Cash flows from operating activities
Net earnings .............................................. $ 25,878 $ 18,026 $ 10,712
Adjustments to reconcile net earnings
to net cash provided by operating activities
Depreciation of rental merchandise .................. 57,223 42,978 29,640
Depreciation of property assets ..................... 5,601 3,680 2,130
Amortization of intangibles ........................ 5,412 4,891 3,109
Deferred income taxes ............................... (341) 4,961 1,406
Other ............................................... -- 24 (91)
Changes in operating assets and liabilities, net of
effects of acquisitions
Rental merchandise .................................. (64,346) (64,927) (39,220)
Accounts receivable - trade ......................... 182 (602) --
Prepaid expenses and other assets ................... 1,252 524 (2,636)
Accounts payable - trade ............................ (5,112) 10,745 (28)
Accrued liabilities ................................. 3,033 (939) 183
-------- -------- --------
Net cash provided by operating activities ......... 28,782 19,361 5,205
Cash flows from investing activities
Purchase of property assets ............................... (10,446) (8,187) (3,473)
Proceeds from sale of property assets ..................... 376 303 414
Acquisitions of businesses ................................ (30,491) (28,367) (21,680)
-------- -------- --------
Net cash used in investing activities ............. (40,561) (36,251) (24,739)
Cash flows from financing activities
Proceeds from public stock offerings ...................... -- -- 77,907
Exercise of stock options ................................. 951 696 10
Distributions to stockholders ............................. -- -- (1,493)
Proceeds from debt ........................................ 80,656 37,733 33,083
Repayments of debt ........................................ (71,004) (72,278) (49,843)
Repayments of note payable to stockholder ................. -- -- (6,250)
Sale of notes receivable .................................. -- 21,338 --
-------- -------- --------
Net cash provided by (used in) financing activities 10,603 (12,511) 53,414
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................ (1,176) (29,401) 33,880
Cash and cash equivalents at beginning of year ............... 5,920 35,321 1,441
-------- -------- --------
Cash and cash equivalents at end of year ..................... $ 4,744 $ 5,920 $ 35,321
======== ======== ========
The accompanying notes are an integral part of these statements.
F-6
Renters Choice, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
(IN THOUSANDS OF DOLLARS) 1997 1996 1995
- ------------------------- ------- ------- -------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest .............................................................. $ 1,962 $ 929 $ 1,711
Income taxes .......................................................... $ 13,983 $ 8,426 $ 7,764
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
In conjunction with the businesses acquired, liabilities were assumed as
follows:
1997 1996 1995
-------- -------- --------
Fair value of assets acquired ......................................... $ 30,491 $ 57,223 $ 68,285
Stock and options issued .............................................. -- (9,515) --
Cash paid ............................................................. (30,491) (28,367) (21,680)
-------- -------- --------
Liabilities assumed ......................................................... $ -- $ 19,341 $ 46,605
======== ======== ========
The accompanying notes are an integral part of these statements.
F-7
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 AND NATURE OF OPERATIONS
The accompanying financial statements include the accounts of Renters Choice,
Inc. (Renters Choice) and its franchise subsidiaries ColorTyme, Inc.
(ColorTyme) (collectively, the Company). All significant intercompany
accounts and transactions have been eliminated. Renters Choice leases
household durable goods to customers on a rent-to-own basis. At December 31,
1997, the Company operated 504 stores which were located throughout the
United States and the Commonwealth of Puerto Rico (sixteen 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, 1997, there were
approximately 262 franchised rental centers operating in 37 states.
SEGMENT DISCLOSURES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company will be required to adopt SFAS 131 in 1998. The
Company anticipates that only its rent-to-own and franchise operations will
be required to be separately disclosed under the reporting guidelines of SFAS
131.
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 accumulated 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
Effective January 1, 1995, the Company terminated its S corporation status
and became a C corporation and, therefore, is 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 AND STOCK SPLITS
Effective for the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS 128), which
requires the computation of basic and diluted earnings per share. The
provisions of SFAS 128 have been applied retroactively to all periods
presented herein. Basic earnings per share are based upon the weighted
average number of common shares outstanding during each period presented.
Diluted earnings per share are based upon the weighted average number of
common shares outstanding during the period, plus the assumed exercise of
stock options at the beginning of the year.
F-9
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS - Continued
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.
ADVERTISING COSTS
Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expense was $13.7 million, $10.6 million and $6.4
million in 1997, 1996 and 1995, respectively.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to conform to the 1997 presentation.
NOTE B - ACQUISITIONS
During 1997, the Company acquired the assets of 76 stores in eighteen
separate transactions for approximately $30.5 million in cash.
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:
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) .... 1997 1996
----------- -----------
Revenue ............................................. $ 339,809 $ 291,555
Net earnings ........................................ $ 25,866 $ 18,833
Basic earnings per common share ..................... $ 1.04 $ 0.76
Diluted earnings per common share ................... $ 1.03 $ 0.75
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
(IN THOUSANDS OF DOLLARS) 1997 1996
-------- --------
ON RENT
Cost ........................................ $142,408 $109,663
Less accumulated depreciation ............... 53,401 38,043
-------- --------
$ 89,007 $ 71,620
======== ========
HELD FOR RENT
Cost ........................................ $ 29,975 $ 27,805
Less accumulated depreciation ............... 6,223 4,315
-------- --------
$ 23,752 $ 23,490
======== ========
F-11
NOTE D - PROPERTY ASSETS
(IN THOUSANDS OF DOLLARS) 1997 1996
-------- --------
Furniture and equipment .................... $ 13,115 $ 9,259
Delivery vehicles .......................... 2,608 2,711
Leasehold improvements ..................... 14,499 8,542
Construction in progress ................... 547 236
-------- --------
30,769 20,748
Accumulated depreciation ................... (13,069) (8,032)
-------- --------
$ 17,700 $ 12,716
======== ========
NOTE E - INTANGIBLE ASSETS
AMORTIZATION
(IN THOUSANDS OF DOLLARS) PERIOD 1997 1996
------------------ --------- --------
Customer rental agreements ............. 18 months $ 1,773 $ 2,537
Noncompete agreements .................. 2 - 5 years 3,652 2,892
Consulting agreement ................... 4 years -- 2,918
Franchise network ...................... 10 years 3,000 3,000
Goodwill ............................... 20 years 61,228 43,933
------- -------
69,653 55,280
Less accumulated amortization .......... 8,470 8,087
------- -------
$61,183 $47,193
======= =======
Customer rental agreements represent the projected cash flows less servicing
costs 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 (8.50% at
December 31, 1997) or 1.10% to 1.65% over LIBOR (5.75% at December 31, 1997)
at the Company's option. 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 7.0% and 6.7% for
the years ended December 31, 1997 and 1996, respectively. 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. At December 31, 1997, the
Company has $64.5 million available under the agreement.
F-12
NOTE G - ACCRUED LIABILITIES
(IN THOUSANDS OF DOLLARS) 1997 1996
------------------------- ---- ----
Taxes other than income .............................................. $ 3,700 $ 2,872
Income taxes payable ................................................. 1,762 --
Accrued litigation costs ............................................. 4,038 4,114
Accrued insurance costs .............................................. 3,033 1,859
Accrued compensation and other ....................................... 4,475 4,079
------- -------
$17,008 $12,924
======= =======
NOTE H - OTHER DEBT
(IN THOUSANDS OF DOLLARS) ............................................ 1997 1996
Obligation payable under noncompete agreement, due in 24 monthly
installments of $125 commencing April 1, 1996, with interest
imputed at 5.32% ................................................... $ -- $ 1,826
Obligation payable under consulting agreement, in 96 monthly
installments of $33.3 commencing May 1, 1993, with interest
imputed at 5.32% - 1,545............................................ 1/M 1,545
Obligations under noncompete agreements, due in 60 monthly installments
of $32.5 commencing September 1, 1995 with interest imputed at 8.75% 892 1,187
------- -------
$ 892 $ 4,558
======= =======
The following are scheduled maturities of debt at December 31, 1997
YEAR ENDING
DECEMBER 31,
-------------
1998 $ 289
1999 351
2000 252
-------
$ 892
=======
F-13
NOTE I - INCOME TAXES
The components of the income tax provision are as follows:
(IN THOUSANDS OF DOLLARS) YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- ------- ------
Current
Federal ....................... $ 15,028 $ 5,262 $3,837
State ......................... 1,911 1,297 1,227
Foreign ....................... 1,572 1,556 1,314
-------- ------- ------
Total current ............... 18,511 8,115 6,378
Deferred
Federal ....................... (351) 3,866 1,238
State ......................... 10 1,095 168
-------- ------- ------
Total deferred .............. (341) 4,961 1,406
-------- ------- ------
Total ....................... $ 18,170 $13,076 $7,784
======== ======= ======
The income tax provision reconciled to the tax computed at the statutory
Federal rate is:
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
Tax at statutory rate ............................ 35.0% 34.0% 34.0%
State income taxes, net of federal benefit ....... 4.6 5.1 4.9
Effect of foreign operations, net of foreign
tax credits ...................................... 0.4 0.5 1.0
Goodwill amortization ............................ 1.1 1.8 .7
Other, net ....................................... .2 0.6 1.5
------ ------ ------
Total ....................................... 41.3% 42.0% 42.1%
====== ====== ======
Deferred tax assets and liabilities consist of the following:
DECEMBER 31,
--------------------
1997 1996
-------- -------
Deferred tax assets
Net operating loss carryforwards
Federal ......................................... $ 4,202 $ 4,595
State ........................................... 2,614 3,103
Accrued expenses .................................. 4,267 1,957
Intangible assets ................................. 1,079 835
Property assets ................................... 783 166
Alternative minimum tax carryforward .............. 463 463
Other ............................................. 124 676
------- -------
13,532 11,795
Less valuation allowance .......................... 2,930 3,418
------- -------
10,602 8,377
Deferred tax liability
Rental merchandise ................................ 4,123 2,239
------- -------
Net deferred tax asset .......................... $ 6,479 $ 6,138
======= =======
F-14
NOTE I - INCOME TAXES - Continued
The Company has Federal net operating loss carryforwards of approximately
$10.8 million at December 31, 1997 which were acquired in connection with
purchased companies. 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.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company leases its office and store facilities and certain delivery
vehicles. Rental expense was $22.0 million, $15.7 million and $9.4 million
for 1997, 1996 and 1995, respectively. Future minimum rental payments under
operating leases with remaining noncancellable lease terms in excess of one
year at December 31, 1997 are as follows:
YEAR ENDING
DECEMBER 31, (IN THOUSANDS OF DOLLARS)
------------ -------------------------
1998 $ 15,026
1999 12,592
2000 9,699
2001 6,797
2002 2,833
Thereafter 1,235
----------
$ 48,182
==========
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.
Crown and its controlling shareholders have agreed to indemnify the Company
against any losses it may incur relating to the litigation under the terms of
the Asset Purchase Agreement between Crown and the Company. Although the
Company believes it has taken appropriate steps to defend itself, the
ultimate outcome of this lawsuit cannot presently be determined.
At December 31, 1997, the Company was a defendant in another class action
lawsuit in New Jersey alleging violations of the New Jersey Consumer Fraud
Act, Retail Installment Sales Act and usury laws, among other things. The
litigation sought treble the amount of damages, if any, incurred by the
plaintiff class, punitive damages, interest, attorneys fees and certain
injunctive relief. The Company removed the case to federal court on January
21, 1998, and was then advised by the plaintiffs' attorney that the plaintiff
no longer wished to serve as class representative. Papers were filed seeking
in January 1998 seeking court approval for the withdrawal of the complaint.
Management believes that it is probable that plaintiffs' attorney will file a
similar complaint on behalf of a new class representative. The ultimate
outcome of this lawsuit cannot presently be determined.
F-15
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - COMMITMENTS AND CONTINGENCIES - Continued
The Company is also involved in various other legal proceedings, claims and
litigation arising in the ordinary course of business. Although occasional
adverse decisions (or settlements) may occur, the Company believes that the
final disposition of such matters will not have a material adverse effect on
the financial position or results of operations of the Company.
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. In 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. At the date of grant, the
fair value of such shares was $960,938. Compensation charged to earnings was
$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, 1997, there
were 443,125 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 1997, 1996 and 1995 net earnings and earnings per share would be
reduced to the pro forma amounts indicated as follows:
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1997 1996 1995
---------- ---------- ----------
Net earnings
As reported ................................. $ 25,878 $ 18,026 $ 10,712
Pro forma ................................... $ 23,967 $ 16,469 $ 10,494
Basic earnings per common share
As reported ................................. $ 1.04 $ 0.73 $ 0.52
Pro forma ................................... $ 0.96 $ 0.67 $ 0.51
Diluted earnings per common share
As reported ................................. $ 1.03 $ 0.72 $ 0.52
Pro forma ................................... $ 0.95 $ 0.66 $ 0.51
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
ranging from 5.75 to 6.92 percent; no dividend yield; and expected lives of
seven years.
Additional information with respect to options outstanding under the Plan at
December 31, 1997, and changes for each of the three years in the period then
ended was as follows:
1997 1996 1995
------------------- ------------------ ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding at beginning of year ......... 1,142,050 $15.74 906,000 $ 7.10 -- $ --
Granted .................................. 859,000 16.54 695,000 22.22 1,204,500 8.75
Exercised ................................ (113,925) 8.39 (109,700) 7.45 (3,000) 3.34
Forfeited ................................ (562,875) 17.13 (349,250) 13.81 (295,500) 8.00
---------- --------- ----------
Outstanding at end of year ............... 1,324,250 $16.39 1,142,050 $15.74 906,000 $ 9.02
========== =========== ==========
Options exercisable at end of year........ 282,375 $14.53 127,800 $ 9.64 24,000 $ 3.34
Weighted average fair value per
share of options granted during
1997, 1996 and 1995, all of which
were granted at market ................ -- $ 9.93 -- $13.35 -- $ 5.25
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, 1997 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 .............. 293,625 7.35 years $ 6.47
$6.68 to $18.50 ............. 523,125 8.76 years $ 14.70
$18.51 to $26.75 ............ 507,500 9.05 years $ 23.88
-------------
1,324,250
=========
OPTIONS EXERCISABLE
--------------------------------
NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
----------- ----------------
$3.34 to $6.67 ......................... 94,125 $ 6.03
$6.68 to $18.50 ........................ 126,000 $ 14.83
$18.51 to $26.75 ....................... 62,250 $ 26.75
-----------
282,375
===========
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents and
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. The carrying amount of cash and
cash equivalents and debt approximates fair value at December 31, 1996 and
1997.
F-18
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - EARNINGS PER SHARE
Summarized basic and diluted earnings per common share were calculated as
follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997
-----------------------------
PER
NET SHARE
EARNINGS SHARES AMOUNT
-------- ------ ------
Basic earnings per common share ............... $25,878 24,844 $1.04
Effect of dilutive stock options .............. -- 350
------- ------
Diluted earnings per common share ............. $25,878 25,194 $1.03
======= ======
1996
-----------------------------
PER
NET SHARE
EARNINGS SHARES AMOUNT
-------- ------ ------
Basic earnings per common share ............... $18,026 24,656 $0.73
Effect of dilutive stock options .............. -- 409
------- ------
Diluted earnings per common share ............. $18,026 25,065 $0.72
======= ======
1995
-----------------------------
PER
NET SHARE
EARNINGS SHARES AMOUNT
-------- ------ ------
Basic earnings per common share ............... $10,712 20,583 $0.52
Effect of dilutive stock options .............. -- 211
------- ------
Diluted earnings per common share ............. $10,712 20,794 $0.52
======= ======
F-19
Renters Choice, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - UNAUDITED QUARTERLY DATA
Summarized quarterly financial data for 1997 and 1996 is as follows:
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
Year ended December 31, 1997
Revenue ............................ $74,587 $80,803 $83,864 $92,288
Operating profit ................... 9,639 11,341 11,766 13,192
Net earnings ....................... 5,412 6,357 6,724 7,385
Basic earnings per share ........... 0.22 0.25 0.27 0.30
Diluted earnings per share ......... $ 0.22 $ 0.25 $ 0.27 $ 0.29
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
Basic earnings per share ........... 0.15 0.18 0.19 0.21
Diluted earnings per share ......... $ 0.15 $ 0.17 $ 0.19 $ 0.21
F-20
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 12, 1998, accompanying the consolidated
financial statements included in the Annual Report of Renters Choice, Inc. onf
Form 10-K for the year ended December 31, 1997. We hereby consent to the
incorporation by reference of said report in the registration statement of
Renters Choice, Inc. on Form S-8 (File No. 33-98800, effective October 31,
1995).
GRANT THORNTON, L.L.P
Dallas, Texas
March 18, 1998
F-21
5
1,000
12-MOS
DEC-31-1997
DEC-31-1997
4,744
0
2,952
113
23,752
0
30,769
13,069
208,868
0
0
0
0
249
152,504
208,868
51,510
331,541
47,206
266,887
18,716
0
1,890
44,048
18,170
25,878
0
0
0
25,878
1.04
1.03
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.
