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