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
of Incorporation) Identification No.)
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, 1994.
-2-
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: October 1, 1996 BY: /s/ DAVID D. REAL
David D. Real,
Senior Vice President-Finance
and Chief Financial Officer
-3-
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
COLORTYME, INC. AND SUBSIDIARIES
DECEMBER 31, 1994
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
ColorTyme, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of ColorTyme, Inc.
and Subsidiaries as of December 31, 1994, and the related consolidated
statements of operations, 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 consolidated financial statements present fairly, in all
material respects, the financial position of ColorTyme, Inc. and Subsidiaries as
of December 31, 1994, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Dallas, Texas
August 7, 1996
COLORTYME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1994
ASSETS
Cash and cash equivalents ...................... $ 824,540
Receivables
Trade ....................................... $ 3,441,134
Notes ....................................... 27,305,302
Income taxes refundable ..................... 1,159,057
Other ....................................... 917,539
------------
32,823,032
Allowance for uncollectible receivables ..... (1,157,603) 31,665,429
------------
Furniture and equipment
Transportation equipment .................... 17,000
Furniture and fixtures ...................... 1,026,709
1,043,709
Less accumulated depreciation ............... (308,973) 734,736
------------
Investments, including restricted
investments of $1,253,000 .................... 1,501,752
Other assets, including restricted
assets of $669,410 ........................... 3,047,727
------------
$ 37,774,184
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Accounts payable - trade .................... $ 4,361,213
Income taxes payable ........................ 326,130
Accrued expenses ............................ 496,766
Claims payable .............................. 131,386
Notes payable ............................... 31,126,334
------------
Total liabilities ............... 36,441,829
Commitments and contingencies .................. --
Class A, non-voting, redeemable, preferred
stock, $1 par value; 4,000,000 shares
authorized and issued ....................... 4,000,000
Stockholders' deficit
Common stock, $10 par value; 10,000 shares
authorized and issued ..................... $ 100,000
Additional paid-in capital .................. 179,436
Accumulated deficit ......................... (1,307,573)
Less
Treasury stock, at cost, 1,900 shares .... (879,508)
Notes receivable collateralized
by common stock ........................ (760,000) (2,667,645)
------------ ------------
$ 37,774,184
============
The accompanying notes are an integral part of this statement.
3
COLORTYME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1994
Revenue
Sales of rental equipment ..................... $ 48,199,607
Royalty income ................................ 4,755,194
Franchise fees ................................ 62,500
Interest income ............................... 6,568,593
------------
59,585,894
Expenses
Cost of goods sold - rental equipment ......... $45,635,253
Interest expense and servicing fees ........... 5,425,056
Selling, general and administrative expenses .. 6,065,335
Loss on foreclosure ........................... 8,675,360
Provision for uncollectible receivables ....... 1,255,418
Other, net .................................... 197,903 67,254,325
----------- ------------
Loss before income taxes .......... (7,668,431)
Income tax benefit ............................... 194,819
------------
NET LOSS .......................... $ (7,473,612)
============
The accompanying notes are an integral part of this statement.
4
COLORTYME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 1994
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED TREASURY NOTES
STOCK CAPITAL DEFICIT) STOCK RECEIVABLE TOTAL
-------- -------- ----------- --------- --------- -----------
Balance at January 1, 1994 ............... $100,000 $179,436 $ 6,166,039 $(879,508) $(820,000) $ 4,745,967
Net loss ................................. -- -- (7,473,612) -- -- (7,473,612)
Collections on notes receivable .......... -- -- -- -- 60,000 60,000
-------- -------- ----------- --------- --------- -----------
Balance at December 31,1994 .............. $100,000 $179,436 $(1,307,573) $(879,508) $(760,000) $(2,667,645)
======== ======== =========== ========= ========= ===========
The accompanying notes are an integral part of this statement.
5
COLORTYME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1994
Cash flows from operating activities
Net loss .................................... $ (7,473,612)
Adjustments to reconcile net loss to net cash
used in operating activities
Loss on foreclosure ................... 8,675,360
Depreciation .......................... 156,878
Provision for doubtful accounts ....... 1,255,418
Gain on sale of furniture and equipment (142,125)
Deferred income tax expense ........... 292,283
Changes in operating assets and
liabilities
Receivables ......................... 155,974
Other assets ........................ (70,811)
Accounts payable .................... (2,525,660)
Accrued expenses and other
liabilities ....................... (1,125,189)
------------
Net cash used in operating
activities .................... (801,484)
Cash flows from investing activities
Proceeds from sale of investments ........... $ 750,000
Purchase of investments ..................... (172,690)
Other ....................................... (180,081)
Net decrease in notes receivable ............ 24,736,042
Proceeds from sale of furniture and equipment 176,950
Purchases of furniture and equipment ........ (295,611) 25,014,610
------------
Cash flows from financing activities
Net decrease in line of credit .............. (24,708,797)
------------
Decrease in cash and cash equivalents .......... (495,671)
Cash and cash equivalents at beginning of year . 1,320,211
------------
Cash and cash equivalents at end of year ....... $ 824,540
============
Supplemental cash flow information
Interest paid ............................... $ 3,514,965
Taxes paid .................................. $ 435,723
============
Noncash investing and financing activities
Conversion of debt to preferred stock ....... $ 4,000,000
Foreclosure of certain franchisees:
Fair value of assets received ............ $ 1,954,476
Receivables forgiven ..................... $ 10,629,836
The accompanying notes are an integral part of this statement.
6
COLORTYME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
NATURE OF OPERATIONS
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 2.4% 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, 1994, there were approximately 350 franchised
rental centers operating in 40 states.
At any point in time, the Company may have franchisees operating under
expired franchise agreements. Management believes that the majority of the
expired franchise agreements 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"), offers credit life insurance to
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.
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.
7
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 receipt of the
equipment by the franchisee. Franchise fee revenue is recognized when the
Company has performed substantially all services and obligations required
under terms of franchise agreements.
PROPERTY AND EQUIPMENT
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets. When depreciable assets are sold or retired, the
related cost and accumulated depreciation are removed from the accounts and
any gains or losses are included as other income (expense). Repairs and
maintenance are expensed as incurred.
OTHER ASSETS
Other assets consist primarily of the cash surrender value of an officer's
life insurance policies.
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 financial statement and tax bases of assets and liabilities using
presently enacted tax rates.
CLAIMS PAYABLE
Claims payable represents the liability for unpaid life insurance losses and
loss adjustment expenses. Amounts are determined on a case-by-case basis and
include estimates of unreported losses and expenses based on a standard
experience rating.
INVESTMENTS
Investments consist of held-to-maturity securities and therefore are carried
at amortized cost.
8
NOTE B - NOTES RECEIVABLE
The Company provides financing services to franchisees subject to a credit
agreement with the franchisee. All notes receivable are collateralized by the
franchisees' rental contracts and merchandise inventory. Franchisees must
repay advances in no more than 24 equal monthly principal installments for
each unit of product financed. The notes bear interest at the prime rate (not
less than 7%) plus a variable percentage.
NOTE C - DEBT AND REDEEMABLE PREFERRED STOCK
Notes payable consist of the following:
Credit agreement ................................... $30,790,594
Others ............................................. 335,740
-----------
$31,126,334
===========
On December 14, 1994, the Company restructured its debt. This restructuring
resulted in the issuance of 4,000,000 shares of the Company's $1 par value
redeemable preferred stock in exchange for the cancellation of $4,000,000 of
debt. The remaining debt was converted to a revolving loan and a term loan
which are governed by the December 14, 1994 Restated and Amended Credit
Agreement (Credit Agreement). Outstanding balances under these loan
agreements were as follows at December 31, 1994:
Revolving loan commitment ......................... $24,457,478
Term loan ......................................... 6,333,117
-----------
$30,790,595
===========
All amounts outstanding under the Credit Agreement are collateralized by
substantially all of the Company's assets, including any interest the Company
may have in any franchisee's 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 Credit
Agreement expired on November 15, 1995; however, the termination date was
automatically extended to May 15, 1996 at which time the amounts were repaid
(see Note I).
The term loan bears interest at a fixed rate of 10.72%, matures in October
2000 and requires the following approximate monthly payments of principal and
interest:
November 1994 through February 1995 ...................... $ 25,000
March 1995 through October 1995 .......................... 75,000
November 1995 through October 2000 ....................... 135,000
9
The preferred stock pays quarterly dividends commencing in December of 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, its principal stockholder, and the holder of the
preferred stock, in the event the principal stockholder sells his ownership
interest in the Company, the principal stockholder will purchase all of the
outstanding preferred stock and contribute it to the Company.
NOTE D - INCOME TAXES
Income tax expense (benefit) consists of the following:
Federal
Current ....................................... $(487,102)
Deferred ...................................... 292,283
---------
Total tax benefit ....................... $(194,819)
=========
The income tax benefit differs from the expected tax benefit computed by
applying the U.S. Federal corporate income tax rate to the loss before income
taxes as follows:
Expected tax benefit ................................... $(2,607,267)
Increase (reduction) in income taxes resulting from:
Life insurance premiums ............................. 85,000
Small life insurance company deduction .............. (229,914)
Tax benefit not recognized .......................... 2,262,558
Other, net .......................................... 294,804
-----------
$ (194,819)
===========
10
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1994 are as follows:
Deferred tax assets
Bad debt reserve ..................................... $ 143,560
Accrued expenses ..................................... 100,520
Loss carryforward .................................... 3,302,845
Alternative minimum tax credit carryforward .......... 285,166
-----------
3,832,091
Less valuation allowance ............................. (3,671,169)
-----------
160,922
Deferred tax liabilities
Furniture and equipment .............................. (41,662)
-----------
Net deferred tax assets ................................. $ 119,260
===========
At December 31, 1994, the Company had net operating loss carryforwards of
approximately $9.7 million expiring in 2009. As a result of a settlement of
previous tax assessments with the Internal Revenue Service, these net
operating loss carryforwards were reduced to $6.8 million during 1995.
NOTE E - COMMITMENTS AND CONTINGENCIES
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 resulted in 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 or results
of operations.
11
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 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 or results of
operations.
FINANCIAL GUARANTEES
To accommodate the refinancing of two of the Company's franchisees, the
Company entered into two one-year guarantee arrangements with a bank in 1994.
The guarantees have no stated maturity and terminate upon the repayment of
the associated loans. At December 31, 1994, the guarantee amounts aggregate
$3,400,000. The Company received a 1.5% fee from the franchisees for its
guarantee. To date, the franchisees have met all debt service requirements
pursuant to these loan agreements and therefore, the Company has not accrued
any amounts in the accompanying balance sheet pursuant to these
contingencies.
LEASES
The Company is lessee under noncancellable operating leases for equipment and
office space that expire at various times over the next five years and
provide for renewal options.
Future payments under long-term noncancellable operating leases as of
December 31, 1994 are as follows:
YEAR ENDING
DECEMBER 31,
------------
1995 .................................................... $ 241,050
1996 .................................................... 223,179
1997 .................................................... 219,855
1998 .................................................... 219,855
1999 .................................................... 128,980
----------
$1,032,919
==========
Total rent expense for operating leases for the year ended December 31, 1994
was $178,120.
12
NOTE F - FORECLOSURE OF COLORTYME STORES
During 1994, an affiliated franchisee, ColorTyme Stores Inc. and its
affiliates (ColorTyme Stores), sold 45 of its 60 franchised rental centers.
The proceeds of this transaction aggregated approximately $8 million. Of this
amount, approximately $7,445,000 was paid to the Company as partial
satisfaction of the outstanding debt due the Company. On December 12, 1994,
ColorTyme Stores deeded its remaining assets to the Company in lieu of its
remaining debt of approximately $10,600,000 to the Company and ceased doing
business.
The Company's foreclosure of ColorTyme Stores resulted in a loss of
$8,675,360, which represents the difference between the remaining debt
forgiven and the estimated fair value of the assets received. The assets
received represent franchised store locations, rental contracts in place,
rental inventory, leasehold improvements and other store equipment. During
1994, the Company recognized a loss of $255,000 from operating the stores
after foreclosure. The loss was primarily attributable to nonrecurring costs
of integrating the store operations into the Company.
The remaining foreclosed stores are held for sale and are included in the
accompanying balance sheet in other assets in the amount of $1,954,476.
NOTE G - RELATED PARTY TRANSACTIONS
Prior to the foreclosure discussed in Note F, stockholders, directors and
officers of the Company owned controlling interests in franchised rental
stores. Royalty fees for many of these stores had been waived due to reduced
services provided to these stores by the Company. Royalty fees waived during
1994 approximated $318,000.
13
A summary of the related party transactions follows:
OTHER
OFFICERS/ STOCKHOLDERS/
DIRECTORS DIRECTORS TOTALS
---------- ---------- -----------
At December 31, 1994
Accounts receivable ................. $ -- $ 256,468 $ 256,468
Royalty receivable .................. -- 22,656 22,656
Notes and interest receivable ....... -- 3,237,312 3,237,312
For the year ended December 31, 1994
Net sales ........................... 5,667,055 4,397,476 10,064,531
Royalty income ...................... -- 434,446 434,446
Interest income ..................... 1,669,690 375,783 2,045,473
Collections relating to
national advertising program ...... 109,210 65,500 174,710
Loss on foreclosure ................. 8,675,360 -- 8,675,360
NOTE H - NATIONAL ADVERTISING FUND
The National Advertising Fund (the Fund) was developed 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 had a receivable from the Fund in the amount of
$146,209 at December 31, 1994, for advances to cover the excess of
advertising expenditures over payments made by franchisee stores.
NOTE I - SUBSEQUENT EVENT
On May 15, 1996, the shareholders of the Company entered into an agreement to
sell the outstanding capital stock of the Company to Renters Choice, Inc.
(Renters Choice) for approximately $11.2 million. In a separate transaction,
the Company sold approximately $21.5 million of its accounts and notes
receivable portfolio (the portfolio) for approximately $21.7 million to
another party, subject to certain adjustments as defined by the agreement.
The Company and Renters Choice guarantee this portfolio until the loans are
repaid. The Company used these proceeds to repay all outstanding borrowings
under the Credit Agreement of approximately $13.2 million.
14
In addition, the Company settled the two lawsuits pending in the United
States District Court for the Northern District of Texas. Under the terms of
the settlement, the parties dismissed their respective claims and the
plaintiffs agreed to pay the Company for amounts owed the Company and the
Company agreed to pay the plaintiffs' attorneys fees.
NOTE J - SEGMENTS
The Company operates in two principal segments: the sale and operation of
franchises and financial services primarily to franchisees.
FINANCIAL
FRANCHISING SERVICES TOTAL
------- -------- --------
Revenues ............................ $53,017 $ 6,474 $ 59,491
Net income (loss) ................... 1,204 (8,677) (7,473)
Identifiable assets ................. 8,352 29,422 37,774
Depreciation and amortization ....... 157 -- 157
Capital expenditures ................ 296 -- 296
15
