UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 Commission File Number 0-25370 RENTERS CHOICE, INC. (Exact name of registrant as specified in its charter) DELAWARE 48-1024367 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13800 Montfort, Suite 300 Dallas, Texas 75240 (972) 701-0489 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of November 7, 1996: CLASS OUTSTANDING Common stock, $.01 par value per share 24,823,835
RENTERS CHOICE, INC. AND SUBSIDIARY TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. ITEM 1. Consolidated Financial Statements Balance Sheets as of September 30, 1996 and December 31, 1995 1 Statements of Earnings for the nine months ended September 30, 1996 and 1995 2 Statements of Earnings for the three months ended September 30, 1996 and 1995 3 Statements of Cash Flows for the nine months ended September 30, 1996 and 1995 4 Notes to Financial Statements 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 12 ITEM 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 17 Exhibit 3.2 21 Exhibit 10.1 23 Exhibit 11.1 29 Exhibit 27 30
RENTERS CHOICE, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> September 30, 1996 December 31, 1995 ------------- ------------- Unaudited <S> <C> <C> ASSETS Cash and cash equivalents ....................................................... $ 9,679,027 $ 35,321,338 Rental merchandise, net On rent ....................................................................... 59,997,718 49,700,354 Held for rent ................................................................. 16,819,203 14,539,645 Accounts receivable, net ........................................................ 2,105,304 -- Income taxes receivable ......................................................... 216,346 1,440,223 Prepaid expenses and other assets ............................................... 1,742,244 2,391,220 Property assets, net ............................................................ 11,175,872 7,375,667 Deferred income taxes ........................................................... 10,626,581 6,976,576 Intangible assets, net .......................................................... 33,088,143 29,549,275 ------------- ------------- $ 145,450,438 $ 147,294,298 LIABILITIES Accounts payable - trade ........................................................ $ 6,546,706 $ 3,288,069 Accrued liabilities ............................................................. 6,027,019 4,213,624 Income taxes payable ............................................................ 3,390,225 -- Taxes other than income ......................................................... 2,296,896 2,458,984 Deferred income taxes ........................................................... 350,000 -- Other debt ...................................................................... 6,273,822 40,849,605 Reserve for loans sold with recourse ............................................ 1,016,605 -- ------------- ------------- 25,901,273 50,810,282 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; 24,819,395 and 24,378,108 shares issued and outstanding in 1996 and 1995, respectively .................................... 248,193 243,781 Additional paid-in capital ...................................................... 98,039,912 87,919,305 Unamortized value of stock award ................................................ (672,890) (897,890) Retained earnings ............................................................... 21,933,950 9,218,820 ------------- ------------- 119,549,165 96,484,016 $ 145,450,438 $ 147,294,298 </TABLE> The accompanying notes are an integral part of these statements. 1
RENTERS CHOICE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1996 1995 ------------- ----------- Unaudited STORE REVENUE Rentals and fees ......................... $ 142,357,856 $82,529,529 Merchandise sales ........................ 8,030,325 3,651,453 Other 533,924 450,459 FRANCHISE REVENUE Franchise merchandise sales .............. 14,027,289 -- Royalty income and fees .................. 1,833,148 -- ------------- ----------- TOTAL REVENUE ...................... 166,782,542 86,631,441 OPERATING EXPENSES Direct store expenses Depreciation of rental merchandise ..... 31,024,771 19,099,556 Cost of merchandise sold ............... 6,266,708 2,572,274 Salaries and other expenses ............ 83,753,192 44,389,993 Franchise operation expenses Cost of franchise merchandise sales .... 13,376,058 -- ----------- ----------- 134,420,729 66,061,823 General and administrative expenses ...... 6,957,136 4,243,874 Amortization of intangibles .............. 3,546,037 2,109,382 ------------- ----------- TOTAL OPERATING EXPENSES ........... 144,923,902 72,415,079 ------------- ----------- OPERATING PROFIT ................... 21,858,640 14,216,362 INTEREST EXPENSE(INCOME), NET ............... (82,717) 944,490 ------------- ----------- EARNINGS BEFORE INCOME TAXES ....... 21,941,357 13,271,872 INCOME TAX EXPENSE .......................... 9,226,227 5,736,268 ------------- ----------- NET EARNINGS ....................... $ 12,715,130 $ 7,535,604 ============= =========== Weighted average shares outstanding ......... 25,048,765 19,907,787 ============= =========== EARNINGS PER SHARE ................. $ 0.51 $ 0.38 ============= =========== The accompanying notes are an integral part of these statements. 2
RENTERS CHOICE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1996 1995 ------------ ----------- Unaudited STORE REVENUE Rentals and fees ........................ $ 48,929,122 $35,096,938 Merchandise sales ....................... 2,266,387 1,380,293 Other ................................... 172,317 182,067 FRANCHISE REVENUE Franchise merchandise sales ............. 7,528,885 -- Royalty income and fees ................. 1,127,869 -- ------------ ----------- TOTAL REVENUE ..................... 60,024,580 36,659,298 OPERATING EXPENSES Direct store expenses Depreciation of rental merchandise .... 10,462,160 8,100,795 Cost of merchandise sold .............. 1,882,824 1,101,321 Salaries and other expenses ........... 29,057,753 19,648,195 Franchise operation expenses Cost of franchise merchandise sales ... 7,174,113 -- ---------- ---------- 48,576,850 28,850,311 General and administrative expenses ..... 2,232,054 1,594,759 Amortization of intangibles ............. 1,258,937 785,357 ------------ ----------- TOTAL OPERATING EXPENSES .......... 52,067,841 31,230,427 ------------ ----------- OPERATING PROFIT .................. 7,956,739 5,428,871 INTEREST (INCOME) EXPENSE, NET ............. (105,531) 497,069 ------------ ----------- EARNINGS BEFORE INCOME TAXES ...... 8,062,270 4,931,802 INCOME TAX EXPENSE ......................... 3,333,025 2,010,348 ------------ ----------- NET EARNINGS ...................... $ 4,729,245 $ 2,921,454 ============ =========== Weighted average shares outstanding ........ 25,203,721 21,039,187 ============ =========== EARNINGS PER SHARE ................ $ 0.19 $ 0.14 ============ =========== The accompanying notes are an integral part of these statements. 3
RENTERS CHOICE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ 1996 1995 ------------ ------------ Unaudited CASH FLOWS FROM OPERATING ACTIVITIES <S> <C> <C> Net earnings .................................................................... $ 12,715,130 $ 7,535,604 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation of rental merchandise .......................................... 31,024,771 19,099,556 Depreciation of property assets ............................................. 2,548,495 1,178,323 Amortization of intangibles ................................................. 3,546,037 2,109,382 Other ....................................................................... 225,000 (123,052) Changes in operating assets and liabilities Rental merchandise .......................................................... (41,157,165) (22,996,982) Accounts receivable ......................................................... 312,810 Income taxes receivable ..................................................... 2,194,487 -- Prepaid expenses and other assets ........................................... 1,056,243 (422,607) Accounts payable - trade .................................................... 243,539 169,371 Accrued liabilities ......................................................... (1,344,196) 151,777 Income taxes payable ........................................................ 2,465,701 (122,057) Taxes other than income ..................................................... (162,088) 617,781 Reserve for loans held with recourse ........................................ (123,614) -- ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES ................................. 13,545,150 7,197,096 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property assets ..................................................... (5,897,975) (2,466,463) Proceeds from sale of property assets ........................................... 216,058 377,155 Acquisitions of businesses, net of cash acquired of $2,132,930 in 1996 ......................................................... (7,935,643) (21,351,873) ----------- ------------ NET CASH USED IN INVESTING ACTIVITIES ..................................... (13,617,560) (23,441,181) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from public offerings .................................................. -- 23,396,209 Proceeds from exercise of options ............................................... 590,937 10,000 Distributions to stockholders ................................................... -- (1,493,340) Proceeds from debt .............................................................. 531,844 20,259,780 Repayments of debt .............................................................. (48,030,976) (21,024,743) Repayments of note to stockholder ............................................... -- (6,250,000) Repayment of notes receivable ................................................... 21,338,294 -- ------------ ------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ....................... (25,569,901) 14,897,906 ------------ ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS ......................................................... (25,642,311) (1,346,179) Cash and cash equivalents at beginning of period ................................... 35,321,338 1,441,001 ------------ ------------ Cash and cash equivalents at end of period ......................................... $ 9,679,027 $ 94,822 ============ ============ </TABLE> The accompanying notes are an integral part of these statements. 4
RENTERS CHOICE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The interim financial statements of Renters Choice, Inc. and Subsidiary (the "Company") included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly the Company's results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. 2. On May 15, 1996 the Company acquired all the outstanding common stock of ColorTyme, Inc. ("ColorTyme") pursuant to a merger (the "Merger") of a wholly owned subsidiary of the Company with ColorTyme. The total Merger consideration consisted of cash of $4,665,751 paid to shareholders and 343,175 shares of the Company's common stock, valued at $19.04 per share. The acquisition was accounted for as a purchase, and accordingly, the operating results of ColorTyme have been included in the operating results of the Company since May 1, 1996. Goodwill is amortized over twenty years, and identifiable intangible assets are amortized over periods from eighteen months to ten years. The assets purchased, liabilities assumed and equity consideration were recorded by the Company as follows: ASSETS ACQUIRED Rental merchandise $ 748,717 Accounts receivable 23,756,408 Income taxes receivable 970,610 Deferred income taxes 3,650,000 Prepaid expenses and other assets 375,128 Intangible assets 3,654,341 Property assets 446,784 ---------------- $ 33,601,988 ================ LIABILITIES ASSUMED Accounts payable - trade $ 3,015,098 Accrued liabilities 3,157,591 Income taxes payable 924,524 Deferred income taxes 350,000 Other debt 12,688,583 Reserve for loans sold with recourse 1,140,219 ---------------- 21,276,015 EQUITY CONSIDERATION Common stock 3,462 Additional paid-in capital 9,530,620 9,534,082 ------------ $ 30,810,097 ================ 5
RENTERS CHOICE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 2. Continued. CASH PURCHASE PRICE $ 2,791,891 ================ Immediately following the purchase of ColorTyme by the Company, ColorTyme sold its franchise loan portfolio (with certain recourse provisions) to a third party for an aggregate purchase price of approximately $21.7 million . At September 30, 1996, ColorTyme's provision for future possible losses related to the sale of the loan portfolio is $1,016,605. ColorTyme simultaneously paid off related notes payable owed to Chrysler First Commercial Corporation for $13.2 million. No gain or loss was recognized on the sale. The following summary, prepared on a pro forma basis, combines the results of operations as if ColorTyme, Crown Leasing Corporation and certain of its affiliates, and Pro Rental, Inc. had been acquired as of the beginning of each of the nine month and three month periods ending September 30, 1996 and 1995, after including the impact of purchase accounting adjustments and the additional shares issued as consideration. NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ------------------------- 1996 1995 1996 1995 ------------ ------------ ----------- ----------- Revenue .............. $180,976,695 $163,790,900 $60,024,580 $55,571,704 Net earnings ......... $ 13,074,725 $ 6,279,032 $ 4,729,245 $ 2,126,458 Earnings per common share .............. $ 0.52 $ 0.31 $ 0.19 $ 0.10 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. The Company acquired the assets of an additional seventeen stores in eight transactions during the nine months ended September 30, 1996 for approximately $5.1 million. The transactions were accounted for using the purchase method of accounting. The assets acquired were recorded by the Company as follows: ASSETS ACQUIRED Rental merchandise $ 1,695,811 Prepaid expenses and other assets 9,277 Intangible assets 3,453,429 Property assets 220,000 ----------------- 5,378,517 Other Debt 234,765 CASH PURCHASE PRICE $ 5,143,752 ================ 6
RENTERS CHOICE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 3. The Company has a credit agreement with its current lender for $40 million. This agreement consists of a $10 million revolving credit facility and a $30 million term loan facility. Borrowings under the term loan facility bear interest at a rate equal to the National prime rate as published in the WALL STREET JOURNAL (8-1/4% per annum at September 30, 1996) and borrowings under the revolving credit facility bear interest at such designated prime rate, in each case as adjusted monthly. All borrowings are secured by a lien on substantially all of the Company's assets. Borrowings under the revolving credit facility are due on April 30, 1997. Any term loan borrowings will be funded in individual notes amortized over five-year periods payable in equal monthly installments (including interest). The commitment on the term facility expires April 30, 1997, and bears no commitment fee. The credit agreement includes certain cash flow and net worth requirements, as well as covenants which limit the ability of the Company to incur additional indebtedness, grant liens, transfer assets out of the ordinary course of business or engage in merger transactions. At September 30, 1996, there were no outstanding borrowings under either of these facilities. On September 30, 1996, the Company executed a commitment letter with a syndicate of banks led by Comerica Bank to provide financing in the aggregate principal amount of $90 million. The commitment is subject to certain terms and conditions set forth in the letter. The terms and conditions of the financing are being negotiated, and the agreement is expected to be executed before year-end. 7
RENTERS CHOICE, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements that involve risks and uncertainties. The actual future results of the Company could differ materially from those statements. Factors that could cause or contribute to such differences include, but are not limited to, uncertainties regarding the ability to acquire additional rent-to-own stores on favorable terms, to enhance their performance and to integrate the acquired stores into the Company's operations. In April 1995, the Company acquired 72 stores located in 18 states from Crown Leasing Corporation and certain of its affiliates (the "Crown Acquisition") and two other stores in a separate transaction. In August 1995, the Company acquired 135 stores located in 10 states by purchasing the issued and outstanding stock of Pro Rental, Inc., the parent company of a chain of rent-to-own stores doing business as Magic Rent-to-Own and Kelway Rent-to-Own (the "Magic Acquisition" and, together with the Crown Acquisition, the "1995 Acquisitions"). In May 1996, the Company acquired all the issued and outstanding stock of ColorTyme, Inc. ("ColorTyme"), a franchisor of 313 rent-to-own stores, pursuant to the Merger. Prior to the Merger, ColorTyme operated six company owned stores, all of which were purchased by the Company subsequent to the Merger. The Company acquired an additional seventeen stores in seven separate transactions in the first half of 1996 (together with the ColorTyme Acquisition, the "1996 Acquisitions") and fifty stores in seven separate transactions through November 7, 1996. The 1995 and 1996 Acquisitions were accounted for as purchases and, accordingly, the operating results of the acquired stores and franchisor have been included in the operating results of the Company since the respective dates of acquisition. Primarily as a result of the impact of the 1995 and 1996 Acquisitions on the results of operations, comparisons of the operating results for the three month and nine month periods ended September 30, 1996 and 1995 may not be meaningful or indicative of future results. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 Total revenue increased by $80.2 million, or 92.6%, to $166.8 million for 1996 from $86.6 million for 1995. The increase in total revenue was primarily attributable to the inclusion of the 209 stores purchased in 1995, and the 1996 Acquisitions. Total revenue exclusive of the 1995 and the 1996 Acquisitions increased by $5.2 million, or 7.9% to $71.4 million for 1996 from $66.2 million in 1995. This improvement was primarily attributable to an increase in revenue earned per item on rent. Depreciation of rental merchandise increased by $11.9 million, or 62.3%, to $31.0 million for 1996 from $19.1 million for 1995. Depreciation of rental merchandise expressed as a percent of rental revenue decreased from 23.1% in 1995 to 21.8% in 1996. The decrease was primarily attributable to higher rental rates on rental merchandise. Salaries and other expenses expressed as a percentage of total store revenue increased to 55.5% for 1996 from 51.2% for 1995. This increase is attributable to increase in salaries for employees of acquired stores immediately following the acquisitions while store revenues have increased gradually. Additionally, the Company increased its advertising efforts during the first nine months of 1996 in the markets related to the 1995 and 1996 Acquisitions. Occupancy costs also increased as a percent of total revenue primarily because of the relocation of certain stores acquired in the 1995 acquisitions to stores that are larger in square footage. Revenues from these larger stores increase gradually while the additional occupancy costs are incurred immediately. The average relocated store is approximately 4,000 square feet. General and administrative expenses expressed as a percent of total revenue decreased to 4.2% for 1996 from 4.9% for 1995. The decrease is primarily attributable to increased economies of scale resulting from the 1995 and 1996 Acquisitions. 8
RENTERS CHOICE, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Operating profit increased by $7.7 million, or 54.2%, to $21.9 million for 1996 from $14.2 million for 1995. This improvement was primarily attributable to an increase in revenue earned per item on rent, in stores acquired in the 1995 and 1996 Acquisitions. Net earnings increased by $5.2 million, or 69.3%, to $12.7 million in 1996 from $7.5 million in 1995. The improvement was a result of the increase in operating profit described above. COMPARISON OF THREE MONTHS SEPTEMBER 30, 1996 AND 1995 Total revenue increased by $23.3 million, or 63.5%, to $60.0 million for 1996 from $36.7 million for 1995. The increase in total revenue was primarily attributable to the inclusion of the 209 stores purchased in 1995, and the 1996 Acquisitions. Total revenue exclusive of the Magic Acquisition, and the 1996 Acquisitions increased by $2.3 million or 7.4% to $33.5 million for 1996 from $31.2 million in 1995. Same store revenue for the quarter ended September 30, 1996 increased $1,763,000 or 5.7%, over the comparable quarter. Notwithstanding same store revenue growth for the quarter ended September 30, 1996, the Company's existing operations were adversely affected by inclement weather due to tropical storms in September on both the East Coast and in Puerto Rico. Additionally, during 1996 the Company relocated managers and regional managers from stores acquired prior to 1995 to stores acquired in 1995. As a result, same store revenue during the quarter ended September 30, 1996 for stores acquired prior to 1995 increased 1%, while same store revenue for the April 1995 (72 store) acquisition increased 18%. Depreciation of rental merchandise increased by $2.4 million, or 29.6%, to $10.5 million for 1996 from $8.1 million for 1995. Depreciation of rental merchandise expressed as a percent of rental revenue decreased to 21.4% in 1996 from 23.1% in 1995. The decrease was primarily attributable to higher rental rates on rental merchandise. Salaries and other expenses expressed as a percentage of total store revenue increased to 56.6% for 1996 from 53.6% for the comparative 1995 quarter. This increase is attributable to increase in salaries for employees of acquired stores immediately following the acquisitions while store revenues have increased gradually. Additionally, the Company increased its advertising efforts during the quarter ended September 30, 1996 in the markets related to the 1995 and 1996 Acquisitions. Occupancy costs also increased as a percent of total revenue primarily because of the relocation of certain stores acquired in the 1995 acquisitions to stores that are larger in square footage. Revenues from these larger stores increase gradually while the additional costs are incurred immediately. The average relocated store is approximately 4,000 square feet. General and administrative expenses expressed as a percent of total revenue decreased to 3.7% for 1996 from 4.4% for 1995. The decrease is primarily attributable to increased economies of scale resulting from the 1995 and 1996 Acquisitions. Operating profit increased by $2.6 million, or 48.1%, to $8.0 million for 1996 from $5.4 million for 1995. This improvement was primarily attributable to an increase in both the number of items on rent and in revenue earned per item on rent, both in stores acquired before 1995 and in stores acquired in the 1995 Acquisitions. Net earnings increased by $1.8 million, or 62.0%, to $4.7 million in 1996 from $2.9 million in 1995. The improvement was a result of the increase in operating profit described above. LIQUIDITY AND CAPITAL RESOURCES The Company's primary requirements for capital are the acquisition of existing stores, the opening of new stores, the purchase of additional rental merchandise and the replacement of rental merchandise which has been sold or charged-off or is no longer suitable for rent. During the year ended December 31, 1995, the Company 9
RENTERS CHOICE, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued acquired 209 stores for an aggregate purchase price of $59 million, of which $21.7 million was paid in cash. During the nine months ended September 30, 1996, the Company acquired an additional seventeen stores and ColorTyme for a net cash purchase price of $7.9 million. The Company purchased $50.2 million and $24.7 million of rental merchandise during the nine month periods ended September 30, 1996 and 1995, respectively. For the nine months ended September 30, 1996, cash provided by operating activities increased by $6.3 million to $13.5 million in 1996 from $7.2 million in 1995, primarily due to increased earnings, timing of the payment of various operating expenses offset by increased rental merchandise purchases. Cash used in investing activities decreased by $9.8 million to $13.6 million in 1996 from $23.4 in 1995, primarily relating to the 1995 Acquisitions. Cash used in financing activities was $25.6 million for the nine months ended September 30, 1996, 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 franchise loan portfolio. Cash provided by financing activities was $14.9 million for the nine months ended September 30, 1995, which relates primarily to the proceeds from the initial public offering in January 1995 offset by repayment of the note to a stockholder. The Company increased its credit agreement with its current lender from $25 million to $40 million in the first quarter of 1996. This agreement consists of a $10 million revolving credit facility and a $30 million term loan facility. Borrowings under the term loan facility bear interest at a rate equal to the National prime rate as published in the WALL STREET JOURNAL (8 1/4% per annum at September 30, 1996) and borrowings under the revolving credit facility bear interest at such designated prime rate, in each case as adjusted monthly. All borrowings are secured by a lien on substantially all of the Company's assets. Borrowings under the revolving credit facility are due on April 30, 1997. Any term loan borrowings will be funded in individual notes amortized over five-year periods payable in equal monthly installments (including interest). The commitment on the term facility expires April 30, 1997, and bears no commitment fee. The credit agreement includes certain cash flow and net worth requirements, as well as covenants which limit the ability of the Company to incur additional indebtedness, grant liens, transfer assets out of the ordinary course of business or engage in merger transactions. On September 30, 1996, there were no outstanding borrowings under either of these facilities. In connection with the stores acquired in 1993, monthly payments of $33,333 are due under a consulting agreement through April 1, 2001, and monthly payments of $125,000 are due under a non-competition agreement from February 1996 through January 1998. If the settlement agreement described under the caption "Part II. Item 1. Legal Proceedings - IN RE: DEF INVESTMENTS, INC." is executed, the Company will be released from its obligation to make payments under such consulting and non-competition agreements, in exchange for a cash payment of $4.75 million (the "Settlement Amount"). Although management cannot at this time estimate when it will be required to pay the Settlement Amount, if ever, management believes that the Company's borrowing capacity under its credit facility and cash flow from operations will be sufficient to fund the payment. In connection with the Crown Acquisition, monthly payments of $16,667 were due under a consulting agreement through October 1996, and in connection with the Magic Acquisition, monthly payments in the aggregate amount of $32,500 are due under certain noncompetition agreements through August 2000. The Company intends to increase the number of stores it operates through acquisitions and new store openings. In particular, the Company's goal is to increase the number of stores it operates by approximately 50-60 stores in each of the next few years. The Company currently expects to open six to ten new stores during the last quarter of 1996. The Company estimates that the average investment with respect to new stores is approximately $350,000 per store, of which rental merchandise comprises approximately 75% to 80% of the investment. The 10 RENTERS CHOICE, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued 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. Additionally, 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 facilities will be adequate to fund the operations and expansion plans of the Company during 1996. 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-term 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. 11
PART II. OTHER INFORMATION RENTERS CHOICE, INC. AND SUBSIDIARY ITEM 1. LEGAL PROCEEDINGS. From time to time the Company is a party to various legal proceedings arising in the ordinary course of its business. Except as described below, the Company is not currently a party to any material 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, at this point, the Company (the "Miller lawsuit"). The Complaint seeks (i) to avoid the transfer of certain assets purchased in 1993 by a predecessor of the Company from DEF and certain of its subsidiaries and to obtain an order that such assets be turned over to the Trustee, (ii) to nullify the Hardestys' consulting and noncompetition agreements, pursuant to the terms of which the Company paid $2.0 million to the Hardestys on the closing date of the 1993 acquisition, has paid them an additional $900,000 since the closing date and is obligated to pay them approximately $5.3 million in varying amounts through April 1, 2001, (iii) to require the Company to make all future payments under the consulting and noncompetition agreements to the Trustee for the benefit of the DEF bankruptcy estate, and (iv) to set aside all payments already made by the Company to the Hardestys under the consulting and noncompetition agreements, and to grant judgment against the Hardestys for the amount of all such payments. On March 8, 1996, the Company reached an agreement with the Trustee and the Hardestys to settle the bankruptcy lawsuit (the "Bankruptcy Settlement"). The terms of the Bankruptcy Settlement provide that the Company will be released from the fraudulent transfer claim and the future obligation to pay $5.3 million under the consulting and noncompetition agreements with the Hardestys in exchange for a cash payment of $4.75 million to the Trustee. The Bankruptcy Settlement, which, as of November 7, 1996, has not yet been reduced to writing and is subject to approval by the Bankruptcy Court after notice and hearing, contemplates the nonrefundable payment by the Company of $50,000 upon execution of the written settlement agreement in exchange for the Trustee's dismissal of the Complaint against the Company without prejudice. As to the balance of the settlement amount, $300,000 is attributable to the Trustee's claims against the Company based upon payments already made to the Hardestys, and $4.4 million is attributable to future obligations under the noncompetition and consulting agreements. As a part of the overall Bankruptcy Settlement, the Company will receive a full release from the fraudulent transfer claim by the Trustee on behalf of DEF, all of its subsidiaries which have filed Chapter 7 bankruptcy cases and their respective creditors. The Bankruptcy Settlement is also conditioned on the Bankruptcy Court issuing protective orders enjoining the Hardestys from making any claims against the Company or J. E. Talley and certain of their affiliates under the noncompetition and consulting agreements. The Miller lawsuit will not be dismissed entirely under the Bankruptcy Settlement. While the claims against the Hardestys will be dismissed, the claims against the Company will not be. Nevertheless, the plaintiffs agreed to first pursue collection of any judgment obtained against the Company through enforcement of the indemnity agreement between the Company and Transamerica Commercial Finance Corporation, Inc. ("Transamerica"). The plaintiff class further agreed that it cannot collect or enforce any judgment obtained against the Company in the Miller lawsuit until it has exhausted collection through the indemnity agreement. In September 1996, Transamerica and the plaintiff class reached an agreement to settle all claims against the Company in the Miller lawsuit. The terms of the settlement between the plaintiff and Transamerica are subject to approval of the Bankruptcy Court and the state court after notice and hearing. 12
PART II. OTHER INFORMATION RENTERS CHOICE, INC. AND SUBSIDIARY - Continued Finally, the Bankruptcy Settlement calls for the plaintiff class to release and covenant not to assert any claims it may have against the Company except those contained in its current pleading in the Miller lawsuit. Management believes that the execution of the Bankruptcy Settlement, in the form in which it is currently proposed, will not have a material adverse effect on the Company's results of operations. Management cannot predict when the Bankruptcy Settlement will be executed and approved by the Bankruptcy Court, and there can be no assurance that the Bankruptcy Settlement will be entered into at all. If the Bankruptcy Settlement is not executed, the Trustee would be able to proceed against the Company in the fraudulent transfer claim. HINTON ET AL. V. COLORTYME, INC. In May 1994, certain Wisconsin residents filed suit against ColorTyme alleging that ColorTyme had entered into contracts with them which were violative of the Wisconsin Consumer Act (the "Wisconsin Act"). Specifically, the plaintiffs allege that the ColorTyme contracts were consumer credit transactions under the Wisconsin Act, and that ColorTyme failed to provide required disclosures and violated the Wisconsin Act's collection practice restrictions. Plaintiffs are seeking damages in excess of $2.0 million. In light of the Merger and the Company's later purchase of the assets of four Milwaukee ColorTyme stores, the plaintiffs were granted leave to add the Company as a defendant along with additional related substantive claims. Currently, the parties have filed cross motions in an attempt to define the class. In those motions, it has become clear that the plaintiffs have included the Company as a defendant in this lawsuit to the extent that the Company assumed the obligations of certain existing ColorTyme contracts through the asset purchase regarding the Milwaukee stores. Nevertheless, there is still a possibility that the plaintiffs may attempt to pursue the Company solely due to its parent subsidiary relationship with ColorTyme. The Company and ColorTyme have recently moved to dismiss the non-Wisconsin Act claims in the lawsuit. Discovery continues and no trial date has been set. Although management cannot predict the outcome of the case, management does not expect the ultimate resolution of the case to have a material adverse effect on the Company's consolidated results of operations. 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. CURRENT REPORTS ON FORM 8-K Current Report on Form 8-K dated May 15, 1996, filed May 30, 1996. Current Report on Form 8-K/A dated May 15, 1996, filed July 26, 1996. Current Report on Form 8-K/A dated May 15, 1996, filed October 2, 1996. 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 - Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company 3.3(8) - Amended and Restated Bylaws of the Company 4.1(9) - Form of Certificate evidencing Common Stock 10.1* - Amended and Restated 1994 Renters Choice, Inc. Long-Term Incentive Plan 10.2(10) - Amended and Restated Loan Agreement dated as of April 13, 1995 between INTRUST Bank, N.A. and Renters Choice, Inc. 10.3(11) - Consulting Agreement dated April 1, 1993, by and between Bob A. Hardesty and Brenda K. Hardesty and Renters Choice, L.P. 10.4(12) - Non-Competition Agreement dated April 1, 1993, by and between Bob A. Hardesty and Brenda K. Hardesty and Renters Choice, L.P. 10.5(13) - Noncompetition Agreement dated as of April 20, 1995 between Renters Choice, Inc. and Patrick S. White 10.6(14) - Consulting Agreement dated as of April 20, 1995 between Renters Choice, Inc. and Jeffrey W. Smith 10.7(15) - Noncompetition Agreement dated as of August 27, 1995 between Renters Choice, 14
Inc. and Starla J. Flake 10.8(16) - Noncompetition Agreement dated as of August 27, 1995 between Renters Choice, Inc. and Bruce S. Johnson 10.9(17) - Noncompetition Agreement dated as of August 27, 1995 between Renters Choice, Inc. and Rance D. Richter 10.10(18) - Option Agreement dated August 27, 1995 between the Company and Terry N. Worrell 10.11(19) - Option Agreement dated August 27, 1995 among the Company, Worrell Investors, Inc., The Christy Ann Worrell Trust and The Michael Neal Worrell Trust 10.12(20) - First Amendment to Amended and Restated Loan Agreement dated October 1995 by and between Intrust Bank, N.A. and Renters Choice, Inc. 10.13(21) - Second Amendment to Amended and Restated Loan Agreement dated April 30, 1996 by and between Intrust, N.A. and Renters Choice, Inc. 10.14(22)* - Employment Agreement dated September 11, 1995 by and between Renters Choice, Inc. and David D. Real 10.15(23) - Portfolio Acquisition Agreement dated May 15, 1996, by and among Renters Choice, Inc., ColorTyme Financial Services, Inc., and STI Credit Corporation. 11.1 - Computation of Earnings per share 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 10K 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 3.4 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1994. (9) Incorporated herein by reference to Exhibit 4.1 to the registrant's Registration Statement on Form S-1 (File No. 33-86504) (10) Incorporated herein by reference to Exhibit 10.2 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (11) Incorporated herein by reference to Exhibit 10.5 to the registrant's Registration Statement on Form S-1 (File No. 33-86504) (12) Incorporated herein by reference to Exhibit 10.6 to the registrant's Registration Statement on Form S-1 (File No. 33-86504) (13) Incorporated herein by reference to Exhibit 10.7 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) 15
(14) Incorporated herein by reference to Exhibit 10.8 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (15) Incorporated herein by reference to Exhibit 10.10 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (16) Incorporated herein by reference to Exhibit 10.11 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (17) Incorporated herein by reference to Exhibit 10.12 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (18) Incorporated herein by reference to Exhibit 2.2 to the registrant's Current Report on Form 8-K dated August 27, 1995 (19) Incorporated herein by reference to Exhibit 2.3 to the registrant's Current Report on Form 8-K dated August 27, 1995 (20) Incorporated herein by reference to Exhibit 10.25 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (21) Incorporated herein by reference to Exhibit 10.20 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (22) Incorporated herein by reference to Exhibit 10.26 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (23) Incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated May 15, 1996. 16
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned duly authorized. RENTERS CHOICE, INC. AND SUBSIDIARY By: /s/ DAVID D. REAL ------------- David D. Real SENIOR VICE PRESIDENT-FINANCE AND CHIEF FINANCIAL OFFICER Date: November 8, 1996 17
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 - Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company 3.3(8) - Amended and Restated Bylaws of the Company 4.1(9) - Form of Certificate evidencing Common Stock 10.1* - Amended and Restated 1994 Renters Choice, Inc. Long-Term Incentive Plan 10.2(10) - Amended and Restated Loan Agreement dated as of April 13, 1995 between INTRUST Bank, N.A. and Renters Choice, Inc. 10.3(11) - Consulting Agreement dated April 1, 1993, by and between Bob A. Hardesty and Brenda K. Hardesty and Renters Choice, L.P. 10.4(12) - Non-Competition Agreement dated April 1, 1993, by and between Bob A. Hardesty and Brenda K. Hardesty and Renters Choice, L.P. 10.5(13) - Noncompetition Agreement dated as of April 20, 1995 between Renters Choice, Inc. and Patrick S. White 10.6(14) - Consulting Agreement dated as of April 20, 1995 between Renters Choice, Inc. and Jeffrey W. Smith 10.7(15) - Noncompetition Agreement dated as of August 27, 1995 between Renters Choice, Inc. and Starla J. Flake 10.8(16) - Noncompetition Agreement dated as of August 27, 1995 between Renters Choice, Inc. and Bruce S. Johnson 10.9(17) - Noncompetition Agreement dated as of August 27, 1995 between Renters Choice, Inc. and Rance D. Richter 10.10(18) - Option Agreement dated August 27, 1995 between the Company and Terry N. Worrell 10.11(19) - Option Agreement dated August 27, 1995 among the Company, Worrell Investors, 18
Inc., The Christy Ann Worrell Trust and The Michael Neal Worrell Trust 10.12(20) - First Amendment to Amended and Restated Loan Agreement dated October 1995 by and between Intrust Bank, N.A. and Renters Choice, Inc. 10.13(21) - Second Amendment to amended and Restated Loan Agreement dated April 30, 1996 by and between Intrust, N.A. and Renters Choice, Inc. 10.14(22)* - Employment Agreement dated September 11, 1995 by and between Renters Choice, Inc. and David D. Real 10.15(23) - Portfolio Acquisition Agreement dated May 15, 1996, by and among Renters Choice, Inc., ColorTyme Financial Services, Inc., and STI Credit Corporation 11.1 - Computation of Earnings per share 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 10K 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 3.4 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1994. (9) Incorporated herein by reference to Exhibit 4.1 to the registrant's Registration Statement on Form S-1 (File No. 33-86504) (10) Incorporated herein by reference to Exhibit 10.2 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (11) Incorporated herein by reference to Exhibit 10.5 to the registrant's Registration Statement on Form S-1 (File No. 33-86504) (12) Incorporated herein by reference to Exhibit 10.6 to the registrant's Registration Statement on Form S-1 (File No. 33-86504) (13) Incorporated herein by reference to Exhibit 10.7 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (14) Incorporated herein by reference to Exhibit 10.8 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (15) Incorporated herein by reference to Exhibit 10.10 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (16) Incorporated herein by reference to Exhibit 10.11 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (17) Incorporated herein by reference to Exhibit 10.12 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (18) Incorporated herein by reference to Exhibit 2.2 to the registrant's Current Report on Form 8-K dated August 27, 1995 (19) Incorporated herein by reference to Exhibit 2.3 to the registrant's Current Report on Form 8-K dated August 27, 1995 19
(20) Incorporated herein by reference to Exhibit 10.25 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (21) Incorporated herein by reference to Exhibit 10.20 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (22) Incorporated herein by reference to Exhibit 10.26 to the registrant's Registration Statement on Form S-1 (File No. 33-97012) (23) Incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated May 15, 1996. 20