UNITED STATES
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):
MAY 15, 1996
RENTERS CHOICE, INC.
(Exact name of registrant as specified in charter)
DELAWARE 48-1024367
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation)
0-25370
(Commission
File Number)
13800 MONTFORT DRIVE
SUITE 300
DALLAS, TEXAS 75240
(214) 701-0489
(Address of Principal Executive Offices,
including zip code, and telephone
number, including area code)
NO CHANGE
(Former Name or Former Address, if Changed Since Last Report)
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Filed herewith as a part of this report are the audited
financial statements of ColorTyme, Inc., a Texas corporation,
for the fiscal year ending December 31, 1995, and unaudited
financial statements for the 3-month period ending March 31,
1996, as required by Rule 3-05(b) of Regulation S-X.
(B) PRO FORMA FINANCIAL INFORMATION.
Filed herewith as a part of this report, is the pro forma
financial information required by Article 11 of Regulation
S-X.
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.
(Registrant)
DATE: July 26, 1996 BY: /S/ DAVID D. REAL
David D. Real, Senior Vice President-Finance
and Chief Financial Officer
COLORTYME, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995, AND
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
ColorTyme, Inc. and subsidiaries
Irving, Texas
We have audited the accompanying consolidated balance sheet of ColorTyme, Inc.
and subsidiaries as of December 31, 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements present fairly, in
all material respects, the financial position of ColorTyme, Inc. and
subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 1, on
August 1, 1995, Chrysler First Commercial Corporation ("Chrysler") exercised its
option pursuant to the Credit Agreement by giving notice of its intention to
terminate the Company's credit facility. Under the terms of the Company's credit
agreement with Chrysler First Commercial Corporation, all amounts outstanding
under the revolving loan will become due and payable at May 15, 1996, which
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to this matter are described in Note 1.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
-1-
We have not audited any financial statements of the Company for any period
subsequent to December 31, 1995. However, as discussed in Note 13 to the
consolidated financial statements, on May 15, 1996, Renters Choice, Inc.
("Renters Choice") acquired all outstanding shares of the Class A redeemable
preferred and common stock of the Company. In connection with this transaction,
the Company sold approximately $21.5 million of its accounts and notes
receivable portfolio to STI Credit Corporation and with the proceeds repaid
certain short-term debt. In addition, the Company settled the two franchisee
lawsuits pending in the United States District Court for the Northern District
of Texas.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 26, 1996
(June 5, 1996 as to Note 13)
-2-
COLORTYME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
ASSETS
FRANCHISE AND LIFE INSURANCE:
Cash and cash equivalents ................................ $ 1,223,642
Certificates of deposit - unrestricted ................... 235,360
Certificates of deposit - restricted ..................... 100,000
Receivables:
Trade ................................................. 3,740,467
Income taxes .......................................... 1,812,376
Royalty ............................................... 175,552
Interest and other .................................... 124,721
------------
5,853,116
Allowance for doubtful accounts ....................... (286,280)
5,566,836
Furniture and fixtures - net ............................. 599,650
Other assets ............................................. 267,731
------------
Total franchise and life insurance ............... 7,993,219
FINANCIAL SERVICES:
Cash ..................................................... 51,595
Held to maturity investments - restricted ............... 501,328
Notes receivable - net of allowance of $846,000 .......... 20,015,736
Interest receivable ...................................... 194,257
Assets held for sale ..................................... 1,027,202
Other assets ............................................. 10,609
------------
Total financial services ......................... 21,800,727
TOTAL ....................................................... $ 29,793,946
============
See notes to consolidated financial statements.
-3-
COLORTYME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
FRANCHISE AND LIFE INSURANCE:
Accounts payable ........................................... $ 3,859,964
Income taxes payable ....................................... 1,151,581
Accrued expenses ........................................... 353,263
Deferred income tax liability .............................. 134,000
Claim reserve payable ...................................... 47,126
------------
Total franchise and life insurance ................. 5,545,934
FINANCIAL SERVICES:
Note payable - net of reserve account of $662,197 .......... 13,928,716
Other liabilities .......................................... 66,589
------------
Total financial services ........................... 13,995,305
Total liabilities .................................. 19,541,239
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Class A, nonvoting, redeemable, preferred stock, $1 par
value; 4,000,000 shares authorized and issued (Note 7) .. 4,000,000
Common stock, $10 par value; 10,000 shares authorized
and issued .............................................. 100,000
Additional paid-in capital ................................. 179,436
Retained earnings .......................................... 7,612,779
Less, treasury stock at cost, 1,900 shares ................. (879,508)
Less, notes receivable secured by common stock ............. (760,000)
------------
10,252,707
------------
TOTAL ......................................................... $ 29,793,946
============
See notes to consolidated financial statements.
-4-
COLORTYME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
REVENUE:
Sales of rental equipment ................................ $ 38,114,775
Sales of dealer support merchandise ...................... 1,237,583
Royalty income ........................................... 4,530,968
Franchise fees ........................................... 57,500
Interest income - finance company ........................ 3,244,060
------------
47,184,886
COST OF GOODS SOLD - Rental equipment and dealer
support merchandise ...................................... 37,001,652
INTEREST EXPENSE AND SERVICING FEES ......................... --
Financial services ....................................... 2,220,636
------------
7,962,598
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................................. 5,493,563
PROVISION FOR DOUBTFUL ACCOUNTS ............................. 508,408
INTEREST INCOME AND FINANCE CHARGES ......................... (488,954)
INTEREST EXPENSE ............................................ 946,429
LOSS ON ASSETS HELD FOR SALE ................................ 671,082
OTHER, NET .................................................. 172,987
------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ........... 659,083
INCOME TAX BENEFIT .......................................... 211,000
------------
INCOME BEFORE EXTRAORDINARY ITEM ............................ 870,083
EXTRAORDINARY GAIN ON LIFE INSURANCE PROCEEDS ............... 8,050,269
------------
NET INCOME .................................................. $ 8,920,352
============
See notes to consolidated financial statements.
-5-
COLORTYME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
CLASS A
REDEEMABLE ADDITIONAL RETAINED
PREFERRED COMMON PAID-IN EARNINGS TREASURY NOTES
STOCK STOCK CAPITAL (DEFICIT) STOCK RECEIVABLE TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 1, 1995 ...... $ 4,000,000 $ 100,000 $ 179,436 $(1,307,573) $ (879,508) $ (760,000) $ 1,332,355
Net income ................. 8,920,352 8,920,352
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 .... $ 4,000,000 $ 100,000 $ 179,436 $ 7,612,779 $ (879,508) $ (760,000) $10,252,707
=========== =========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
-6-
COLORTYME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 8,920,352
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ........................................... 895,083
Provision for doubtful accounts ........................ 508,408
Gain on sale of stores ................................. (142,236)
Loss on sale of property and equipment ................. 4,817
Deferred income taxes .................................. 252,876
Changes in assets and liabilities:
Receivables ......................................... (862,768)
Other assets ........................................ 695,651
Accounts payable .................................... (500,865)
Accrued expenses and other liabilities .............. 657,890
------------
Net cash provided by operating activities ......... 10,429,208
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of restricted certificates
of deposit .............................................. 153,000
Proceeds from maturity of unrestricted certificates
of deposit .............................................. 13,392
Proceeds from maturities of restricted held to
maturity investments .................................... 498,672
Proceeds from sale of assets held for sale ................ 537,500
Investment in assets held for sale ........................ (208,878)
Advances on financial services notes receivable .......... (20,387,965)
Collections of financial services notes receivable ........ 26,630,925
Purchase of equipment ..................................... (23,926)
------------
Net cash provided by investing activities ......... 7,212,720
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable ................................ (329,352)
Borrowings under financial services notes payable ......... 20,387,584
Repayments of financial services notes payable ............ (37,249,463)
------------
Net cash used in financing activities ............. (17,191,231)
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................... 450,697
------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 824,540
------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 1,275,237
============
SUPPLEMENTAL INFORMATION:
Interest paid ............................................. $ 2,910,666
============
Income taxes refunded ..................................... $ 462,281
============
See notes to consolidated financial statements.
-7-
COLORTYME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
1. BUSINESS AND GOING CONCERN CONSIDERATIONS
ColorTyme, Inc. (the "Company') is a nationwide franchisor of television,
stereo and furniture rental centers. The Company's primary source of
revenue is the sale of rental equipment to its franchisees, who, in turn,
offer the equipment to the general public for rent or purchase under a
rent-to-own program. As franchisor, the Company receives royalties of 2.3%
to 3% of franchisee rental income and, generally, an initial fee of $7,500
per location for existing franchisees and up to $25,000 per location for
new franchisees. At December 31, 1995, there were approximately 321
franchised rental centers operating in 40 states.
At December 31, 1995, the Company had 35 franchise stores operating under
expired franchise agreements. Currently 10 franchise stores are operating
under expired franchise agreements. The Company has 37 franchise
agreements scheduled to expire prior to December 31, 1996. Management
expects that the majority of the franchise agreements that have expired or
are scheduled to expire during 1996 will be signed or renewed. However,
there can be no assurance that the Company will be successful in its
efforts to re-sign or renew expired or expiring franchise agreements.
The Company may also provide financing exclusively to existing
franchisees, subject to approval by the Company's lender, for the purchase
of rental equipment through its wholly-owned subsidiary, ColorTyme
Financial Services, Inc. ("ColorTyme Financial"). Another wholly-owned
subsidiary, ColorTyme Life Insurance Company, Inc. ("ColorTyme Life"),
provides credit life insurance for all rental customers. The credit life
policies are issued and administered by an independent life insurance
company which transfers the claims risk to ColorTyme Life through a
reinsurance agreement. The Company ceased issuing credit life policies
effective June 30, 1995.
During 1995, the Company took steps to reduce its general and
administrative expenses, instituted controls to streamline its operations,
sold six of 15 owned stores for proceeds aggregating $537,500 and is
continuing in its efforts to sell the remaining stores foreclosed on
during 1994 (see Note 4). These actions have been taken to improve cash
flows and return the Company to profitability; however, on August 1, 1995,
pursuant to the December 14, 1994 Restated and Amended Credit Agreement
(the "Credit Agreement"), between Chrysler First Commercial Corporation
("Chrysler") and the Company, Chrysler exercised its option under the
terms of the Credit Agreement, not to extend the termination date beyond
November 15, 1995. In accordance with the Credit Agreement, the
termination date was automatically extended to May 15, 1996. At such time,
all amounts outstanding under the revolving loan will become due. As of
March 26, 1996, $13,386,927 was outstanding under the loan agreement. The
Company is currently negotiating the sale of the Company to a publicly
held Company, and is evaluating other options with respect to satisfying
this obligation. However, there can be no assurance that the Company will
be successful in its efforts to refinance or repay this obligation. The
Company would then have to consider certain other options necessary to
protect the stockholders' interests.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Chrysler's
decision not to extend the termination date of the Credit
-8-
Agreement raises substantial doubt about the Company's ability to continue
as a going concern. The accompanying consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
The estimates susceptible to significant change are those used in
determining deferred income tax assets, assets held for sale, the
valuation allowances for notes and other receivables and the claim reserve
payable. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate.
PRINCIPLES OF CONSOLIDATION -The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, ColorTyme
Financial and ColorTyme Life. All significant intercompany balances and
transactions are eliminated in consolidation.
CONCENTRATION OF CREDIT RISK - The Company provides credit in the form of
trade receivables and notes receivable to retailers in the rent-to-own
industry. With respect to trade, royalty and notes receivable, five
franchisees accounted for approximately $12.3 million as of December 31,
1995. In addition, the Company continually monitors the credit worthiness
of its franchisees and requires collateral consisting primarily of the
franchisees' rental contracts and merchandise inventory to secure notes
receivable.
CASH EQUIVALENTS - The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.
REVENUE RECOGNITION - Revenue from the sale of rental equipment is
recognized upon shipment of the equipment to the franchisee. Initial
franchise fee revenue is recognized when the Company has performed
substantially all services and obligations required under terms of
franchise agreements. Interest income from financing agreements with
franchisees is reported as earned over the terms of the related notes
receivable (generally 12 to 24 months). The notes bear interest at the
prime rate (not less than 7%) plus a variable percentage. Credit life
premiums are reported as earned over the contract period (approximately 24
months).
FURNITURE AND FIXTURES - Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Total
accumulated depreciation was $450,985 as of December 31, 1995. Total
depreciation expense was $154,195 during 1995.
INCOME TAXES - Income tax expense is based on the liability method. Under
this method, deferred tax assets and liabilities are recognized based on
differences between the financial statement and tax bases of assets and
liabilities using presently enacted tax rates.
CLAIM RESERVE - COLORTYME LIFE - The liability for unpaid life insurance
losses includes amounts determined on a case-by-case basis and estimates
of unreported losses based on a standard experience rating.
-9-
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - In accordance with the
provisions of Statement of Financial Accounting Standards No. 114 (SFAS
No. 114), "Accounting by Creditors for Impairment of a Loan," as amended
by SFAS No. 118, "Accounting by Creditors for the Impairment of a Loan
Income Recognition and Disclosure," the Company has identified those loans
that are impaired. The Company believes that it is probable that it will
be unable to collect all amounts due according to the contractual terms of
the loan agreements for these impaired loans. The allowance for possible
losses on notes receivable is management's best estimate of losses which
may be sustained on outstanding loans, considering the financial condition
of the borrowers, fair market value of the collateral and general economic
conditions in the industry. The excess, if any, of the note balance over
the estimated realizable fair market value of the collateral obtained
through foreclosure is charged to the allowance for possible losses.
Subsequent declines in value of such collateral or changes in value upon
disposition of the collateral are recorded in operations.
Total impaired loans and the allowance for all credit losses were
approximately $2,139,000 and $846,000, respectively, at December 31, 1995.
The Company's primary policy is to utilize the accrual basis of accounting
for the recognition of interest income on impaired loans. The average
recorded investment in impaired loans during 1995 was approximately
$1,934,000 and the related interest income recognized during the period
related to impaired loans was approximately $247,000 on the accrual basis
of accounting.
Activity in the allowance for doubtful notes receivable was as follows:
Balance, January 1, 1995 ............................ $ 721,251
Provision for doubtful accounts charged to operations 325,000
-----------
1,046,251
Chargeoffs .......................................... (200,531)
Recoveries .......................................... 280
-----------
Balance, December 31, 1995 .......................... $ 846,000
===========
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - In accordance with
the provisions of Statement of Financial Accounting Standards No. 107
(SFAS No. 107), "Disclosures About Fair Value of Financial Investments,"
the Company has estimated the fair value of financial instruments as of
December 31, 1995. The estimated fair value amounts are determined by
using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts
the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
The Company's financial instruments under SFAS No. 107 include: cash,
certificates of deposit, held to maturity investments, trade, royalty and
notes receivable, accounts payable and the note payable to Chrysler. The
Company has estimated that the carrying amount of cash, certificates of
deposit, receivables, net of the allowance for doubtful accounts, and
accounts payable approximates fair value due to the short-term maturities
of these instruments. The fair value of the notes receivable
-10-
approximates the carrying value, net of the allowance, as of December 31,
1995 and was determined utilizing discounted cash flows based on interest
rates currently being offered for loans to borrowers with similar credit
ratings and maturities. The fair value of the Company's investments in
U.S. Treasury securities held to maturity was $545,705 as of December 31,
1995, which exceeded the carrying value by $44,377. Because the Company's
note payable bears interest at rates which float with market rates, the
Company has estimated that the carrying amount of its note payable also
approximates its fair value.
SALES OF DEALER SUPPORT MERCHANDISE - During 1995, the Company changed its
method of reporting dealer support merchandise sales and cost of goods
sold to a gross basis as opposed to reporting these activities on a net
basis as was the case in prior years.
STATEMENT OF CASH FLOWS - During 1995, $1,006,445 of notes receivable were
issued to finance the trade receivables of certain franchisees.
3. RESTRICTED ASSETS
As a condition of the credit life insurance policies in the state of
Arizona, the Company is required to maintain $100,000 on deposit with the
state treasurer.
In connection with the foreclosure of an affiliate's operations as
discussed in Note 4, the Company maintains approximately $500,000 of
one-year treasury notes. These notes are held in escrow at a bank and may
be used to satisfy claims of the entity which purchased the majority of
the affiliate's stores prior to foreclosure. The escrow agreement provides
for a declining balance to be maintained over the life of the escrow
agreement. The agreement is scheduled to terminate in October 1996. There
have been no claims made to date against these escrow funds and management
has no knowledge of any outstanding claims that could be made against the
funds. The escrowed funds have been pledged against the Company's debt to
Chrysler. The escrow funds are presented as restricted, held-to-maturity
investments in the accompanying December 31, 1995 balance sheet.
4. ASSETS HELD FOR SALE
During 1994, a company affiliated through common management, ColorTyme
Stores Inc. (and affiliates) (ColorTyme Stores) deeded fifteen stores to
ColorTyme Financial Services in lieu of its debt of approximately
$10,300,000 to the Company and ceased doing business. The fifteen stores
were recorded at their estimated fair value of approximately $1,625,000
and a loss of approximately $8,675,000 was recorded in 1994. The Company
has operated the stores since foreclosure; however, the revenues and
expenses of operating the stores are not reported in revenues, cost of
goods sold and/or selling, general and administrative expenses because the
Company is holding the assets for sale. The loss from operations of
approximately $813,000 during 1995 is included in loss on assets held for
sale.
The assets received represent franchised store locations consisting of
rental contracts in place, rental inventory, leasehold improvements and
other store equipment. During 1995, the Company sold 6 stores for proceeds
totaling $537,500. A net gain of approximately $142,000 was recorded on
the sales.
Subsequent to year-end, the Company sold one store for approximately
$100,000. Of the proceeds of this sale, $45,000 were used to satisfy store
operating liabilities and the remaining $55,000 were used to further
reduce the debt to Chrysler. The sale resulted in a loss of approximately
$93,000. The Company is currently attempting to sell the remaining stores.
The carrying amount of the remaining
-11-
stores is stated at their approximate net realizable value. Any proceeds
received from the sale of these stores are required, pursuant to the
Credit Agreement, to be used to reduce the Company's indebtedness to
Chrysler.
5. FINANCIAL SERVICES AND NOTE PAYABLE
ColorTyme Financial provides financing services to certain franchisees
approved by Chrysler under a revolving line of credit with Chrysler. In
addition, ColorTyme Financial provides direct financial assistance to
certain franchisees. All notes receivable are secured by the franchisees'
rental contracts and merchandise inventory. Franchisees must repay
advances in no more than 24 equal monthly principal payments for each unit
of product financed unless otherwise agreed to by Chrysler.
All franchisee loans are serviced by Chrysler or the Company. Cash
received from franchisees is applied to the outstanding notes receivable
balances recorded by the Company and, as applicable, to the note payable
to Chrysler. During 1995, Chrysler required the Company to repurchase
certain franchisee loans from Chrysler aggregating approximately
$2,455,000. The Company has notes receivable from franchisees totaling
approximately $3,300,000 at December 31, 1995 that were repurchased from
Chrysler and are presented in the accompanying consolidated balance sheet
within the financial services notes receivable. The general terms of
repayment from the franchisees include amortization of the debt balance
over a 24 to 60 month period with interest ranging from 0% (in the case of
one note with a balance of approximately $45,000 maturing in 16 months) to
18%.
As of December 31, 1995, the note payable consisted of a revolving loan
which is governed by the December 14, 1994 Restated and Amended Credit
Agreement between Chrysler and the Company. Borrowings under the revolving
line of credit bear interest at the greater of 9.72% or prime plus 2.72%
(11.22% at December 31, 1995) which is payable monthly. The revolving
loan's terms of repayment coincide with the franchisees' repayment terms,
except that Chrysler has an option to give termination notice annually 90
days prior to November 15th, as discussed above. Under the terms of the
Credit Agreement, the Company is liable for any existing collateral
deficiency upon default by a franchisee.
As more fully discussed in Note 1, on August 1, 1995, Chrysler exercised
its option pursuant to the Credit Agreement by giving notice to the
Company of its intention to terminate both the revolving and term loans
which means all amounts will be due and payable on May 15, 1996.
Currently, the Company has no other financing in place. All amounts
outstanding under the Credit Agreement are secured by substantially all of
the Company's assets, including any interest the Company may have in any
franchisees rental contracts, inventory or capital stock. The Credit
Agreement contains several covenants which require the Company to maintain
certain financial ratios and limit specific payments and equity
distribution, including employee compensation, loans to dealers, capital
expenditures and capital stock issuance, among other items. The Company
was not in compliance with certain debt covenants under the Credit
Agreement as of December 31, 1995; however; the Company subsequently
obtained a waiver from Chrysler for these covenants.
-12-
6. INCOME TAXES
Income tax expense (benefit) consisted of the following:
Federal:
Current ................................. $(479,000)
Deferred ................................ 253,000
State ...................................... 15,000
---------
$(211,000)
=========
Income tax expense (benefit) differs from the expected tax expense
(benefit) computed by applying the U.S. federal corporate income tax rate
to earnings before income taxes as follows:
Expected tax expense .................................. $ 256,000
Increase (reduction) in income taxes resulting from:
State income tax ................................... (16,000)
Life insurance premiums ............................ 86,000
Small life insurance company deduction ............. (86,000)
Tax benefit not recognized subject to future
realization ...................................... 132,000
Settlement with Internal Revenue Service ........... (698,000)
Other, net ......................................... 115,000
---------
$(211,000)
=========
Deferred income tax assets and liabilities were comprised of the
following:
Deferred income tax assets:
Allowance for doubtful accounts .............. $ 430,000
Other assets ................................. 86,000
Accrued expenses ............................. 102,000
Loss carryforward ............................ 2,358,000
AMT credit carryforward ...................... 417,000
Other ........................................ 34,000
-----------
3,427,000
Valuation allowance ............................. (3,427,000)
$ -
===========
Deferred income tax liabilities:
Assets held for sale ......................... $ 74,000
Furniture and fixtures ....................... 60,000
-----------
$ 134,000
===========
-13-
The Company has recorded a valuation allowance with respect to the future
tax benefits and the net operating loss reflected as a deferred tax asset
due to the uncertainty of their ultimate realization. As a result, the
valuation allowance increased by approximately $1,484,000 from 1994.
As of December 31, 1995, the Company had tax net operating loss
carryforwards of approximately $6.2 million. These net operating loss
carryforwards will expire in 2009. In addition, the Company has
alternative minimum tax credit carryforwards of approximately $417,000
which have no expiration.
7. PREFERRED STOCK
In December 1994, the Company issued 4,000,000 shares of class A,
nonvoting, redeemable preferred stock. The preferred stock pays quarterly
dividends commencing in December 1996. Beginning in October 1996, the
dividends are cumulative and are payable at an annual rate of $0.10 per
share. The dividend rate increases by $0.01 per share per year each year
through 2003. The preferred shares grant the holder the option to convert
to common stock in the event of an initial public offering of the Company.
On the tenth anniversary of the issuance of the preferred shares, the
holders have the option to require the Company to redeem the preferred
stock at $1.00 per share plus accumulated dividends. At the holder's
option, the redemption will either be in cash or common stock of the
Company. Through an agreement between the Company, the estate of its
principal stockholder, and the holder of the preferred stock, in the event
the estate of the principal stockholder sells its ownership interest in
the Company, the estate of the principal stockholder will purchase all of
the outstanding preferred stock and contribute it to the Company.
8. RELATED PARTY TRANSACTIONS
Certain stockholders and directors control companies which transact
business with the Company in the ordinary course of business. Amounts due
from and transactions between the Company and these companies were as
follows as of and for the year ended December 31, 1995:
At December 31, 1995:
Accounts receivable ............................ $ 431,511
Royalty receivable ............................. 21,114
Notes and interest receivable -
ColorTyme Financial Services ................ 3,442,893
For the year ended December 31, 1995:
Net sales ...................................... 5,610,188
Royalty income ................................. 477,694
Interest income ................................ 451,781
9. NATIONAL ADVERTISING FUND
The National Advertising Fund (the Fund) was formed to provide advertising
at a national level for the benefit of all ColorTyme franchise stores. The
Fund's revenue results from monthly advertising fees charged to each
franchise store. The Company collects the advertising fees from the
franchisees and directly deposits them to the Fund. The Company funds the
payroll expenses of the Fund and then is reimbursed by the Fund. Amounts
due to or from the Fund were not material as of December 31, 1995.
-14-
10. TRANSACTIONS WITH MAJOR FRANCHISEE
Transactions with one major franchisee accounted for approximately 11% of
net revenues for the year ended December 31, 1995.
11. EMPLOYEE BENEFIT PLAN
Effective December 1, 1995, the company installed a plan for its full-time
employees under Section 401(k) of the Internal Revenue Code. This plan
enables employees to contribute a percentage of their salary to the plan
and the Company will match 50% of the first 6% contributed by the
employee. Total expense recognized by the Company relating to this plan
was approximately $4,000 for 1995.
12. COMMITMENTS AND CONTINGENCIES
LEASES - The Company is lessee under noncancelable operating leases for
equipment and office space that expire at various times over the next four
years and provide for renewal options. Total rent expense for operating
leases for the year ended December 31, 1995 was $264,588.
Future payments under noncancelable operating leases as of December 31,
1995 are as follows:
Year ending December 31:
1996 $235,122
1997 229,969
1998 221,439
1999 77,316
--------
$763,846
========
FEDERAL INCOME TAX EXAMINATION - The Company's federal income tax returns
for 1988 through 1991 were examined by the Internal Revenue Service
("IRS"). The IRS concluded its examinations and issued notices of
assessment for $5,468,105 in penalties and interest. The Company
vigorously contested the position taken by the IRS and entered into an
agreement during 1995 whereby the assessment was reduced to approximately
$967,000, including interest of approximately $365,000. Conversely, the
Company was successful in its efforts to recover approximately $1,816,000
in refunds, including interest of approximately $217,000, through the
settlement with the IRS and the carryback of net operating losses
generated in 1994.
LITIGATION - In May 1994, two customers of a rental store formerly owned
and operated by an affiliated company, ColorTyme Stores, Inc., commenced
an action against the Company. The plaintiffs, who seek a class action on
behalf of all similarly situated consumers, allege that the store's rental
contracts violate the Wisconsin Consumer Act in a number of ways.
Plaintiffs seek an injunction against further alleged violations and
attorney's fees and costs, and may have the right under Wisconsin law to
amend the complaint to seek damages, penalties and other remedies. Soon
after the suit was filed, plaintiffs and the Company held settlement
discussions which ended unsuccessfully with the plaintiffs demanding a
$3,000,000 settlement. The Company does not believe that the claim has
merit and will continue to vigorously contest the suit. In the opinion of
management, the ultimate resolution of this action will not have a
material adverse effect on the Company's financial position.
During 1995, the Company became involved in two similar actions pending in
the United States District Court for the Northern District of Texas. The
suits, which were initiated by certain franchisees, allege
-15-
that the Company, and certain officers and directors, committed civil
RICO, anti-trust and deceptive trade practices violations, as well as,
common law fraud and other matters. The plaintiffs are seeking damages
ranging from $100,000 to $5,000,000 per claim as well as attorney fees and
interest. The Company has denied all liability and is vigorously
contesting the allegations and has countersued to recover amounts owed by
the plaintiffs to the Company. In the opinion of management, the ultimate
resolution of these actions will not have a material adverse effect on the
Company's financial position.
The Company is also involved in various other litigation and
administrative proceedings in the normal course of business. The Company
does not believe any of these claims have merit and has been and will
continue to contest them vigorously. In the opinion of management, any
liabilities that may result from these claims will not, individually or in
the aggregate, have a material adverse effect on the Company's financial
position.
FINANCIAL GUARANTEES - To accommodate the refinancing of one of the
Company's franchisees, the Company entered into a one-year guarantee
arrangement with a bank in 1994. Although the guarantee has no stated
maturity and terminates upon the repayment of the associated loan, the
arrangement was approved by Chrysler under the terms of the Credit
Agreement to be extended through May 15, 1996. At December 31, 1995, the
guarantee amount was $2,400,000. The Company received a 1.5% fee from the
franchisee for its guarantee. In addition, during 1995 the Company entered
into a three year guarantee arrangement with a bank to accommodate the
buyer of one of the Company's stores. At December 31, 1995, the guarantee
amount was $147,390. To date, the franchisees have met all debt service
requirements pursuant to these loan agreements and, as a result, the
Company has not accrued any amounts in the accompanying balance sheet
pursuant to these contingencies.
13. SUBSEQUENT EVENTS
On May 15, 1996, the shareholders of the Company entered into an agreement
to sell the outstanding shares of the Class A redeemable preferred and
common stock of the Company to Renters Choice, Inc. ("Renters Choice") for
approximately $11.2 million. In connection with the acquisition, the
Company sold approximately $21.5 million of its accounts and notes
receivable portfolio (the "portfolio") to STI Credit Corporation
("SunTrust") for approximately $21.7 million, subject to certain
adjustments as defined by the purchase agreement and the financial
guarantee of the Company and Renters Choice for the portfolio until the
loans are repaid. As a result of the sale of the portfolio to SunTrust,
the Company repaid $13,215,427, which represents all outstanding
borrowings under the Credit Agreement (see Notes 1 and 5) at May 15, 1996.
In addition, the Company settled the two lawsuits pending in the United
States District Court for the Northern District of Texas (see Note 12).
Under the terms of the settlement, the parties dismissed their respective
claims and the plaintiffs agreed to pay the Company for amounts owed and
the Company agreed to pay the plaintiffs' attorneys' fees.
******
RENTERS CHOICE, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma condensed financial statements (the "Pro Forma
Financial Statements") are presented for illustrative purposes only and are not
necessarily indicative of the operating results that would have occurred if the
transactions given pro forma effect herein had been consummated as of the time
reflected herein, nor are they necessarily indicative of the future operating
results or financial position of Renters Choice, Inc. (the "Company"). The pro
forma adjustments are based upon available information and certain assumptions
that the Company believes are reasonable. ColorTyme, Inc. and Subsidiaries (the
ColorTyme Acquisition) was acquired on May 15, 1996 and will be accounted for
using the purchase method of accounting effective May 1, 1996. The Allocation of
purchase price of the ColorTyme Acquisition has been determined based upon
preliminary estimates of fair value and is subject to change. Differences
between the amounts included herein and the final allocation are not expected to
have a material effect on the Pro Forma Financial Statements. These Pro Forma
Financial Statements should be read in conjunction with the historical financial
statements and related notes of the Company and ColorTyme, Inc. and
Subsidiaries.
The following unaudited pro forma condensed balance sheet as of March
31, 1996 gives effect to the ColorTyme Acquisition as though it had occurred at
that date. The unaudited pro forma condensed statements of earnings for the year
ended December 31, 1995 and the three months ended March 31, 1996 give effect to
the ColorTyme Acquisition as though it had occurred at the beginning of each
period.
RENTERS CHOICE, INC.
PRO FORMA CONDENSED BALANCE SHEETS
MARCH 31, 1996
(UNAUDITED)
PRO FORMA
COMPANY COLORTYME ADJUSTMENTS PRO FORMA
------------ ------------ ------------- ------------
ASSETS
Cash and cash equivalents ........................ $ 6,049,238 $ 2,770,772 $ 7,924,662 (2) $ 16,744,672
Rental merchandise, net .......................... 68,089,805 -- -- 68,089,805
Accounts receivable .............................. -- 2,773,658 (234,835)(1) 2,538,823
Income taxes receivable .......................... -- 970,610 -- 970,610
Prepaid expenses and other assets ................ 1,232,046 1,463,115 (80,091)(1) 2,615,070
Intangible assets, net ........................... 28,526,757 -- 448,812 (1) 28,975,569
Property assets, net ............................. 8,853,594 570,547 (131,662)(1) 9,292,479
Deferred income taxes ............................ 6,976,580 -- 3,650,000 (1) 10,626,580
Notes receivable ................................. -- 21,103,243 (20,607,117)(2) 496,126
------------ ------------ ------------- ------------
$119,728,020 $ 29,651,945 $ (9,030,231) $140,349,734
============ ============ ============= ============
LIABILITIES
Accounts payable - trade ......................... $ 5,155,623 $ 3,903,345 $ -- $ 9,058,968
Accrued liabilities .............................. 3,652,210 246,414 2,543,332 6,441,956
Income taxes payable ............................. 1,350,181 979,502 -- 2,329,683
Taxes other than income .......................... 2,952,857 -- -- 2,952,857
Deferred income taxes ............................ -- 133,616 216,384 350,000
Other debt ....................................... 6,454,911 12,907,754 (12,907,754) 6,454,911
Reserve for loans sold with recourse ............. -- 925,756 214,463 1,140,219
------------ ------------ ------------- ------------
19,565,782 19,096,387 (9,933,575) 28,728,594
STOCKHOLDERS' EQUITY ............................. 100,162,238 10,555,558 903,344 111,621,140
------------ ------------ ------------- ------------
$119,728,020 $ 29,651,945 $ (9,030,231) $140,349,734
============ ============ ============= ============
NOTES TO PRO FORMA CONDENSED BALANCE SHEETS
(1) Represents the allocation of purchase price of the ColorTyme Acquisition by
the Company to assets and liabilities based upon the fair values at the
acquisition date. The total consideration of $11,458,902 consists of
$4,925,000 in cash and the issuance of 343,175 shares of common stock.
(2) Financing receivables of $21,514,000 and related notes of $13,220,000
(balances at May 15, 1996) were simultaneously sold with recourse to an
unrelated party at closing. The net proceeds from this sale were
$8,294,000. No gain or loss was recognized.
RENTERS CHOICE, INC.
PRO FORMA CONDENSED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
PRO FORMA
COMPANY COLORTYME ADJUSTMENTS PRO FORMA
----------- ------------ ------------ -----------
STORE REVENUE
Rentals and fees ................................. $45,565,352 $ -- $ 466,039(1) $46,031,391
Merchandise sales ................................ 3,254,453 -- -- 3,254,453
Other ............................................ 181,936 -- -- 181,936
FRANCHISE REVENUE
Franchise merchandise sales ...................... -- 8,763,483 -- 8,763,483
Royalty income and fees .......................... -- 1,161,485 -- 1,161,485
Finance interest income .......................... -- 715,507 (715,507)(2) --
----------- ------------ ------------ -----------
49,001,741 10,640,475 (249,468) 59,392,748
OPERATING EXPENSES
DIRECT STORE EXPENSES
Depreciation of Rental Merchandise ............... 10,154,647 -- 129,024 (1) 10,283,671
Cost of Merchandise sold ......................... 2,401,812 -- -- 2,401,812
Salaries and Other Expenses ...................... 26,900,783 -- 283,907 (1) 27,184,690
FRANCHISE OPERATION EXPENSES
Cost of franchise merchandise sales .............. -- 8,486,518 -- 8,486,518
Finance interest expense ......................... -- 417,007 (417,007)(2) --
Provision for doubtful accounts .................. -- 120,000 -- 120,000
Loss on assets held for sale ..................... -- 332,883 (332,883)(3) --
----------- ------------ ------------ -----------
39,457,242 9,356,408 (336,959) 48,476,691
General Administrative Expense ...................... 2,058,646 1,009,599 (6,300)(4) 3,061,945
Amortization of Intangibles ......................... 1,141,755 -- 8,300 (5) 1,150,055
----------- ------------ ------------ -----------
TOTAL OPERATING EXPENSES ....................... 42,657,643 10,366,007 (334,959) 52,688,691
----------- ------------ ------------ -----------
OPERATION PROFIT ............................... 6,344,098 274,468 85,491 6,704,057
Interest (Income) Expense, net ...................... 72,642 (24,288) 37,500 (6) 85,854
----------- ------------ ------------ -----------
EARNINGS BEFORE INCOME TAXES................... 6,271,456 298,756 (47,991) 6,618,203
Income Tax Expense (Benefit) ........................ 2,654,560 (4,097) 135,500 (7) 2,785,963
----------- ------------ ------------ -----------
NET EARNINGS ................................... $ 3,616,896 $ 302,853 $ (87,509) $ 3,832,240
=========== ============ ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ................. 24,772,182 343,175 (8) 25,115,357
=========== ============ ===========
EARNINGS PER SHARE .................................. $ 0.15 $ 0.15
=========== ===========
See notes to unaudited pro forma condensed statements of earnings.
RENTERS CHOICE, INC.
PRO FORMA CONDENSED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
PRO FORMA
COMPANY COLORTYME ADJUSTMENTS PRO FORMA
------------ ------------ ------------- ------------
STORE REVENUE
Rentals and fees .............................. $126,263,843 $ -- $ 1,699,197(1) $127,963,040
Merchandise sales ............................. 6,382,879 -- -- 6,382,879
Other ......................................... 642,471 -- -- 642,471
FRANCHISE REVENUE
Franchise merchandise sales ................... -- 39,352,358 -- 39,352,358
Royalty income and fees ....................... -- 4,588,468 -- 4,588,468
Finance interest income ....................... -- 3,244,060 (3,244,060)(2) --
------------ ------------ ------------- ------------
133,289,193 47,184,886 (1,544,863) 178,929,216
OPERATING EXPENSES
DIRECT STORE EXPENSES
Depreciation of Rental Merchandise ............ 29,639,965 -- 471,079(1) 30,111,044
Cost of Merchandise sold ...................... 4,953,675 -- -- 4,953,675
Salaries and Other Expenses ................... 70,012,036 -- 1,216,723(1) 71,228,759
FRANCHISE OPERATION EXPENSES
Cost of franchise merchandise sales ........... -- 37,001,652 -- 37,001,652
Finance interest expense ...................... -- 2,220,636 (2,220,636)(2) --
Provision for doubtful accounts ............... -- 508,408 -- 508,408
Loss on assets held for sale .................. -- 671,082 (671,082)(3) --
------------ ------------ ------------- ------------
104,605,676 40,401,778 (1,203,916) 143,803,538
General Administrative Expense ................... 5,766,115 5,666,550 (25,100)(4) 11,407,565
Amortization of Intangibles ...................... 3,109,067 -- 33,400(5) 3,142,467
------------ ------------ ------------- ------------
TOTAL OPERATING EXPENSES .................... 113,480,858 46,068,328 (1,195,616) 158,353,570
------------ ------------ ------------- ------------
OPERATION PROFIT ............................ 19,808,335 1,116,558 (349,247) 20,575,646
------------ ------------ ------------- ------------
Interest (Income) Expense, net ................... 1,311,970 457,475 (150,200)(6) 1,619,245
------------ ------------ ------------- ------------
EARNINGS BEFORE INCOME TAXES ............... 18,496,365 659,083 (199,047) 18,956,401
Income Tax Expense (Benefit) ..................... 7,784,205 (211,000) 393,600(7) 7,966,805
------------ ------------ ------------- ------------
NET EARNINGS ................................ $ 10,712,160 $ 870,083 $ (592,647) $ 10,989,596
============ ============ ============= ============
WEIGHTED AVERAGE SHARES OUTSTANDING .............. 20,794,065 343,175(8) 21,137,240
============ ============= ============
EARNINGS PER SHARE ............................... $ 0.52 $ 0.52
============ ============
See notes to unaudited pro forma condensed statements of earnings.
RENTERS CHOICE, INC.
NOTES TO PRO FORMA CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(1) Operating results of stores acquired.
(2) Disposition of the finance notes receivable and notes payable.
(3) Reversal of losses on assets held for sale to reflect purchase accounting
adjustments as of January 1, 1995.
(4) Reduction of depreciation expense for property assets resulting from
purchase accounting adjustments.
(5) Increase in amortization of amounts allocated to goodwill over 20 years.
(6) Amortization of commission received for sale of servicing rights on finance
notes receivable.
(7) Tax effect of pro forma adjustments.
(8) Adjustment to weighted average shares outstanding in connection with the
ColorTyme Acquisition.
