1 As filed with the Securities and Exchange Commission on December 11, 1998 Registration No. 333-65787 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 RENTERS CHOICE, INC. RENT-A-CENTER, INC. COLORTYME, INC. (Exact name of co-registrants as specified in its charter)
DELAWARE 7359 48-1024367 DELAWARE 7359 48-0959188 TEXAS 6794 75-2651408 (State or other jurisdiction of (Primary standard industrial (I.R.S. Employer incorporation or organization) classification code number) Identification No.) (Address, including zip code, and telephone number, including area code of each Registrant's principal executive offices)
RENT-A-CENTER, INC. RENTERS CHOICE, INC. COLORTYME, INC. 5700 TENNYSON PARKWAY 5700 TENNYSON PARKWAY 1231 GREENWAY DRIVE, SUITE 900 THIRD FLOOR THIRD FLOOR IRVING, TEXAS 75038 PLANO, TEXAS 75029 PLANO, TEXAS 75029 (972) 751-1711 (972) 801-1100 (972) 801-1100 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration number for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier, effective registration statement for the same offering. [ ] CALCULATION OF REGISTRATION FEE
J. ERNEST TALLEY CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER RENTERS CHOICE, INC. With Copies To: 5700 TENNYSON PARKWAY THOMAS W. HUGHES, ESQ. THIRD FLOOR BRUCE A. CHEATHAM, ESQ. PLANO, TEXAS 75029 WINSTEAD SECHREST & MINICK P.C. (972) 801-1100 5400 RENAISSANCE TOWER (Name, address, including zip code, and telephone 1201 ELM STREET number, DALLAS, TEXAS 75270-2199 including area code, of Agent for service) (214) 745-5400 (1) In accordance with Rule 457(f)(2), the registration fee is calculated based on the book value, which has been computed as of October 13, 1998, of the outstanding 11% Senior Subordinated Notes due 2008 of Renters Choice, Inc. to be canceled in the exchange transaction hereunder. (2) Rent-A-Center, Inc. and ColorTyme, Inc., each a direct, wholly owned subsidiary of the Registrant, have each guaranteed the Notes being registered pursuant hereto. (3) Pursuant to Rule 457(n), no separate fee is payable with respect to the guarantees of the Notes being registered. THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ TITLE OF EACH NOTE OF AMOUNT TO BE PROPOSED OFFERING PROPOSED AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER NOTE(1) OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------ 11% Senior Subordinated Notes due 2008.............................. $175,000,000 100% $175,000,000 $51,625.00 - ------------------------------------------------------------------------------------------------------------------------ Guarantees of Senior Subordinated Notes(2).......................... -- -- -- (3) - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ 2 PRELIMINARY PROSPECTUS $175,000,000 11% SENIOR SUBORDINATED NOTES [LOGO] RENTERS CHOICE, INC. Issuer RENT-A-CENTER, INC. COLORTYME, INC. Guarantors Offer to Exchange 11% Senior Subordinated Notes Due 2008 (the "Exchange Notes") For All Outstanding 11% Senior Subordinated Notes Due 2008 (the "Old Notes") THE EXCHANGE NOTES -- - - Identical in all material respects to the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes - - Fully and unconditionally guaranteed on an unsecured, senior subordinated basis by Rent-A-Center, Inc. and ColorTyme, Inc. (the "Subsidiary Guarantors") THE EXCHANGE OFFER -- - - For all of the old notes - - Expires at 5:00 p.m., New York City time, on [ ], 1998 CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 21 OF THIS PROSPECTUS. You should rely only on the information contained in this prospectus or that we have referred you to. We have not authorized anyone to provide you with information that is different. We are not offering to sell or asking you to buy anything other than the exchange notes. We are not offering to sell or asking you to buy anything in any jurisdiction where doing so would be against the law. As of September 30, 1998, we had $716.9 million of Senior Debt outstanding. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE EXCHANGE NOTES NOR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Subject to completion, dated December 11, 1998 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. 3 PROSPECTUS SUMMARY This summary highlights some information from this prospectus, but does not contain all material features of the exchange offer. Please read the detailed information and consolidated financial statements and the notes thereto appearing elsewhere in this prospectus. Except as otherwise required by the context, references in this prospectus to "we," "us," or "Renters Choice" refer to (i) prior to and including August 5, 1998, the businesses of Renters Choice and ColorTyme, and (ii) after August 5, 1998, the combined business of Renters Choice and its subsidiaries, ColorTyme and Rent-A-Center. The term "Guarantors" refers to ColorTyme and Rent-A-Center, both wholly owned subsidiaries of Renters Choice. The term "old notes" refers to the 11% Senior Subordinated Notes due 2008 that were issued on August 18, 1998. The term "exchange notes" refers to the 11% Senior Subordinated Notes due 2008 offered hereby. The term "notes" refers to the old notes and the exchange notes, collectively. The term "you" refers to prospective investors in the exchange notes. THE EXCHANGE OFFER Exchange Notes............... The forms and terms of the exchange notes are identical in all material respects to the terms of the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. These are described elsewhere in this prospectus under "Description of the Notes and Guarantees" and "Old Notes Exchange and Registration Rights Agreement." The Exchange Offer........... We are offering to exchange up to $175,000,000 of the exchange notes for up to $175,000,000 of the old notes. Old notes may be exchanged only in integral multiples of $1,000. Expiration Date; Withdrawal of Tender.................. Unless we extend the Exchange Offer, it will expire at 5:00 p.m., New York City time, on [ ], 1998. We will not extend this time period to a date later than [ ], 1998. You may withdraw any old notes you tender pursuant to the exchange offer at any time prior to [ ], 1998. We will return, as promptly as practicable after the expiration or termination of the exchange offer, any old notes not accepted for exchange for any reason without expense to you. Certain Conditions to the Exchange Offer............. The exchange offer is subject to the following customary conditions, which may be waived by us. 3 4 These conditions permit us to refuse acceptance of the old notes or to terminate the exchange offer if: - a lawsuit is instituted or threatened in a court or before a government agency which may impair our ability to proceed with the exchange offer; - a law, statute, rule or regulation is proposed or enacted or interpreted by the SEC which may impair our ability to proceed with the exchange offer; or - any governmental approval is not received which we think is necessary to consummate the exchange offer. Procedures for Tendering Old Notes...................... If you wish to accept the exchange offer, you must complete, sign and date the letter of transmittal in accordance with the instructions, and deliver the letter of transmittal, along with the old notes and any other required documentation, to the exchange agent. By executing the letter of transmittal, you will represent to us that, among other things: - any exchange notes you receive will be acquired in the ordinary course of your business, - you have no arrangement with any person to participate in the distribution of the exchange notes, and - you are not an "affiliate," as defined in Rule 405 of the Securities Act of 1933, as amended, of Renters Choice or, if you are an affiliate, you will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. If you hold your old notes through the Depository Trust Corporation ("DTC") and wish to participate in the exchange offer, you may do so through DTC's Automated Tender Offer Program. By participating in the exchange offer, you will agree to be bound by the letter of transmittal as though you had executed such letter of transmittal. Interest on the New Notes.... Interest on the exchange notes: - accrues from the date of issuance at the rate of 11% per annum, and - is payable semi-annually in arrears on each February 15 and August 15, commencing on February 15, 1999. 4 5 On February 15, 1999, holders of the exchange notes will also receive an amount equal to the accrued interest on the old notes. Interest on the old notes accepted for exchange will stop accruing upon the issuance of the exchange notes. Special Procedures for Beneficial Owners.......... If you are a beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and wish to tender such old notes in the exchange offer, please contact the registered holder as soon as possible and instruct them to tender on your behalf and comply with our instructions set forth elsewhere in this prospectus. Guaranteed Delivery Procedure.................. If you wish to tender your old notes, you may, in certain instances, do so according to the guaranteed delivery procedures set forth elsewhere in this prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures." Registration Rights Agreement.................. We sold the old notes and the related Guarantees to the Initial Purchasers in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, on August 18, 1998. At that time, Renters Choice and the Initial Purchasers entered into a Registration Rights Agreement which grants the holders of the old notes certain exchange and registration rights. This exchange offer satisfies those rights, which terminate upon consummation of the exchange offer. You will not be entitled to any exchange or registration rights with respect to the exchange notes. Certain Federal Tax Considerations............. With respect to the exchange of the old notes for the exchange notes: - the exchange should not constitute a taxable exchange for U.S. federal income tax purposes, - you should not recognize gain or loss upon receipt of the exchange notes, - you must include interest in gross income to the same extent as the old notes, and - you should be able to tack the holding period of the exchange notes to the holding period of the old notes. 5 6 Use of Proceeds.............. We will not receive any proceeds from the exchange of notes pursuant to the exchange offer. Exchange Agent............... We have appointed IBJ Schroder Bank & Trust Company as the Exchange Agent for the exchange offer. The address and telephone number of the Exchange Agent are IBJ Schroder Bank & Trust Company, P. O. Box 84, Bowling Green Station, New York, New York 10274-0084, telephone (212) 858-2103. 6 7 TERMS OF THE NOTES AND GUARANTEES The form and terms of the exchange notes are substantially the same as the form and terms of the old notes, except that the exchange notes are registered under the Securities Act. As a result, the exchange notes will not bear legends restricting their transfer and will not contain the registration rights and liquidated damages provisions contained in the old notes. Issuer....................... Renters Choice, Inc. Guarantors................... Rent-A-Center, Inc. and ColorTyme, Inc. Securities Offered........... $175,000,000 aggregate principal amount of 11% Senior Subordinated Notes due 2008. Maturity..................... August 15, 2008 Interest Payment Dates....... February 15 and August 15 of each year, commencing February 15, 1999. Sinking Fund................. None. Optional Redemption.......... Except as described below and under "Change of Control," we may not redeem the notes prior to August 15, 2003. After August 15, 2003, we may redeem any amount of the notes at any time at the respective redemption prices, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to August 15, 2001, we may redeem up to 33.33% of the original aggregate principal amount of the notes with the cash proceeds of one or more Equity Offerings (as defined). Should we do so, we would be required to pay a redemption price equal to 111% of the principal amount of the notes to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption. We would still be required to keep at least 66.67% of the original aggregate principal amount of the notes outstanding after such a redemption. Change of Control............ Upon the occurrence of a change of control (as defined), the holders of the notes have the right to require us to repurchase the notes at a price equal to 101% of the original aggregate principal amount, together with accrued and unpaid interest, if any, to the date of repurchase. In the event of a change of control, Renters Choice may not have sufficient funds available to repurchase the exchange notes. Ranking...................... The notes will be unsecured and will be subordinated to all existing and future senior indebtedness of Renters Choice. The notes will rank without preference with all 7 8 existing and future Senior Subordinated Indebtedness of Renters Choice and will rank senior to all existing and future Subordinated Obligations of Renters Choice. Guarantees................... The Guarantees are general unsecured obligations of the Subsidiary Guarantors and are subordinated in right of payment to all existing and future Guarantor Senior Indebtedness. The Guarantees are joint and several. Restrictive Covenants........ The Indenture under which the exchange notes will be issued and the old notes were issued limits: - the incurrence of additional indebtedness by us and our subsidiaries, - the payment of dividends on, and redemption of, our capital stock and our subsidiaries' capital stock and the redemption of our and our subsidiaries' subordinated obligations, - investments, - sales of assets and subsidiary stock, - transactions with affiliates, - sale and leaseback transactions, and - liens. In addition, the Indenture limits our ability to engage in consolidations, mergers and transfers of substantially all of our assets and also contains certain restrictions on distributions from our subsidiaries. All of these limitations and prohibitions are subject to a number of important qualifications and exceptions. Absence of a Public Market for the Exchange Notes....... In general, you may freely transfer the exchange notes. However, there are exceptions to this general statement. Holders may not freely transfer the exchange notes if: - they acquire the exchange notes outside of their ordinary course of business, - they have an arrangement with any person to participate in the distribution of the exchange notes, or - they are an "affiliate" of Renters Choice. Further, the exchange notes will be new securities for which there will not initially be a market. As a result, the development or liquidity of any market for the exchange notes may not occur. The Initial Purchasers 8 9 have advised us that they currently intend to make a market in the exchange notes. However, you should be aware that the Initial Purchasers are not obligated to do so. In the event such a market may develop, the Initial Purchasers may discontinue it at any time without notice. We do not intend to apply for a listing of the exchange notes on any securities exchange or on any automated dealer quotation system. 9 10 RENTERS CHOICE We are the largest operator in the U.S. rent-to-own industry with approximately 25% of the market share of rent-to-own stores. At November 30, 1998, we operated 2,127 company-owned stores and franchised 321 stores in the United States and Puerto Rico. Our stores offer home electronics, appliances and furniture and accessories under flexible rental purchase agreements that allow our customers to obtain ownership of the merchandise at the conclusion of an agreed upon rental period. Our principal executive office is located at 5700 Tennyson Parkway, Third Floor, Plano, Texas 75029. Our telephone number is (972) 801-1100. BUSINESS STRATEGY - - Integrate Rent-A-Center. We have developed a comprehensive program for the integration of the Rent-A-Center stores, which, as described below, is currently in process and which we expect to complete within 18-24 months. We believe we will realize over $30 million in net annual cash cost savings upon completion of the integration plan, primarily as a result of eliminating: - duplicative general and administrative expenses, and - Rent-A-Center's nationwide distribution network including seven distribution centers. Additional benefits and margin improvements are expected to be realized over time as we undertake initiatives to enhance the operations of the Rent-A-Center stores. - - Continue to Enhance Store Operations. Our management endeavors to improve store performance through strategies intended to produce gains in operating efficiency and profitability. We believe we will achieve gains in revenues and operating margins in our stores by: - using focused advertising to increase store traffic, - expanding the offering of upscale, higher margin products (such as Sony wide screen televisions, La-Z-Boy recliners and JVC stereo systems) to increase the number of product rentals, - employing strict store-level cost control, and - closely monitoring each store's performance through the use of our management information system to ensure each store's adherence to established operating guidelines. - - Pursue Strategic Expansion. Our management team has gained significant experience in the acquisition and integration of other rent-to-own operators and believes the fragmented nature of the rent-to-own industry will result in ongoing growth opportunities for us. Once our Rent-A-Center integration plan is substantially in place, we will again focus on strategic acquisition opportunities and new store development. We typically target underperforming and undercapitalized chains of rent-to-own stores. These acquired stores benefit from our management expertise, administrative network, 10 11 improved product mix, sophisticated management information system and purchasing power of the larger organization while strengthening their local market position. In addition, we have access to an expanding number of franchise locations, which we have the right of first refusal to purchase. We plan to continue opening new stores in our existing and new markets, and will focus our new market penetration in adjacent areas or regions which are underserved by the rent-to-own industry. In evaluating a new market, we review demographic statistics, cost of advertising and the number and nature of competitors. RECENT DEVELOPMENTS Rent-A-Center Acquisition. On August 5, 1998, we acquired Rent-A-Center pursuant to an agreement dated June 16, 1998 with Thorn plc, a company incorporated under the laws of England and Wales, for approximately $900 million in cash (including the repayment of certain debt of Rent-A-Center), subject to adjustment. Prior to this acquisition, Rent-A-Center was the largest rent-to-own competitor with 1,404 company-owned stores and 65 franchised stores in 49 states and the District of Columbia. Rent-A-Center operated stores under three brand names, "Rent-A-Center," "Remco" and "U-Can-Rent." Rent-A-Center operated 1,158 stores under the Rent-A-Center brand, the most widely recognized store name in the rent-to-own industry. We financed the acquisition of Rent-A-Center through certain financing arrangements, consisting of a senior credit facility and a senior subordinated facility. We also issued a total of $260 million in preferred stock to certain affiliates of Apollo Management IV, L.P. ("Apollo") and to an affiliate of Bear, Stearns & Co. Inc. to assist in the funding of the Rent-A-Center acquisition, to repurchase $25 million of our common stock and to repay our prior credit facility. Following the acquisition of Rent-A-Center, we issued the old notes to repay the senior subordinated facility. In connection with the acquisition of Rent-A-Center, we assumed certain of Rent-A-Center's ongoing litigation, including an adverse New Jersey state court judgment currently on appeal. For additional information, please read the sections entitled "Risk Factors -- Legal Proceedings" and "Business -- Legal Proceedings" located elsewhere in this prospectus. We are currently in the process of integrating the stores acquired in the Rent-A-Center acquisition and we believe that we will realize over $30 million in net annual cash cost savings upon completion of our integration plan. During the first two months following the acquisition of Rent-A-Center, we have begun to implement the initiatives of this plan. Specifically, we have reduced the Wichita corporate staff from 560 to approximately 100 people and have planned and organized the physical shutdown of the Wichita facility and moved the Rent-A-Center corporate headquarters to our new facility in Plano, Texas. Additionally, the conversion of Rent-A-Center's store management information systems to our management information system (High Touch) is expected to be completed during the fourth quarter of 1998. We are also in the process of eliminating Rent-A-Center's product distribution network and replacing it with our system of drop shipments to our stores by our vendors. We expect to close the Rent-A-Center warehouses during the fourth quarter of 1998 and to utilize all remaining excess inventory in the normal rental process in our stores during the first two quarters of 1999. We retained the Rent-A-Center product repair network and are utilizing it to provide product repair services to our customers in the Renters Choice stores, as well as the Rent-A-Center stores. In September 1998, we 11 12 purchased 41 Rent-A-Center franchised stores and are currently converting them to Renters Choice owned and operated stores. Finally, we decided to operate all of our stores under the Rent-A-Center trade name and anticipate the completion of the conversion of the Renters Choice, Remco and U-Can-Rent stores to the Rent-A-Center trade name by the first quarter of 1999. With the actions described above well underway, our original assumption of a transition period of up to 12 months for integrating the Rent-A-Center stores is progressing as planned and should be completed on schedule. Central Rents Acquisition. In May 1998, we acquired substantially all of the assets of Central Rents, Inc., for approximately $100 million. Central Rents operated 176 stores located primarily in California, the Southwest, Midwest and South. This acquisition expanded our presence in a region of the country, the Southwest, which we strategically targeted for expansion. We expect to generate an additional $2.6 million in annual general and administrative cost savings as a result of this acquisition. These cost savings will be derived primarily from the elimination of duplicative corporate and administrative functions. In addition to these general and administrative cost reductions, we anticipate that we will gradually bring the store operating performance of Central Rents in line with our own store margins within 24-30 months. During the first 30 days following this acquisition, we converted all of the Central Rents stores to our management information system and began implementing our human resource, purchasing and advertising programs, as well as other processes that are essential in our system. Our immediate focus in these stores is to improve operations and continue to build strength in store management personnel. RISK FACTORS You should consider carefully the information set forth under the caption "Risk Factors" beginning on page 21 and all the other information set forth in this prospectus before deciding whether to participate in the exchange offer. 12 13 SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (DOLLARS IN THOUSANDS) Our Unaudited Pro Forma Combined Financial Information gives effect to both the offering of the old notes and the acquisitions of Central Rents and Rent-A-Center, as if these transactions had occurred on January 1, 1997. The acquisitions of Central Rents and Rent-A-Center were completed on May 28, 1998 and August 5, 1998, respectively, and have been reflected within the Renters Choice historical balance sheet as of September 30, 1998 and the Renters Choice historical statement of operations since their dates of acquisition. The Unaudited Pro Forma Combined Statement of Operations for the year ended December 31, 1997 includes Rent-A-Center historical information for the year ended March 31, 1998, which was its fiscal year end. These transactions and the related adjustments are described in the accompanying notes. In the opinion of management, all adjustments have been made that are necessary to present fairly the pro forma data. Our Unaudited Pro Forma Combined Financial Information is not indicative of Renters Choice's results of operations as of September 30, 1998, nor for any future date, and is not necessarily indicative of what Renters Choice's results of operations would have been had both the offering of the old notes and the acquisitions of Central Rents and Rent-A-Center occurred on January 1, 1997. Further, it does not give effect to (i) any transactions other than the foregoing transactions and those described in the accompanying Notes to Unaudited Pro Forma Combined Financial Information, or (ii) Renters Choice's, Central Rents', or Rent-A-Center's results of operations since September 30, 1998. Although the following Unaudited Pro Forma Combined Financial Information gives effect to expected annual net savings from the elimination of duplicative general and administrative and field expenses as a result of the aforementioned acquisitions, it does not give effect to additional annual net savings expected to be achieved resulting from the acquisition of Rent-A-Center, relating principally to changes made to its product distribution network, and the utilization of its service and repair network. Actual amounts could differ from those presented. The following Unaudited Pro Forma Combined Financial Information is based upon the historical financial statements of Renters Choice, Central Rents, and Rent-A-Center, and should be read in conjunction with such historical financial statements, the related notes, and the Notes to Unaudited Pro Forma Combined Financial Information. Nonrecurring charges represent (i) approximately $4.5 million in both the year ended December 31, 1997 and the nine months ended September 30, 1998 of restructuring charges relating to the closing of certain non-performing stores, and the reorganization of certain administrative support functions and (ii) approximately $2.1 and $1.1 million in the year ended December 31, 1997 and the nine months ended September 30, 1998, respectively, related primarily to Rent-A-Center's writedown of cellular phone inventory. 13 14 SUMMARY UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS 14
COMBINED PRO FORMA ---------------------------- NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1997 1998 ------------ ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenue..................................................... $1,314,712 $1,027,581 Operating expenses Direct store expenses Depreciation of rental merchandise...................... 328,000 247,885 Other................................................... 714,312 568,317 ---------- ---------- 1,042,312 816,202 Franchise cost of merchandise sold........................ 35,841 27,318 General and administrative expenses....................... 52,512 49,925 Nonrecurring charges...................................... 6,600 5,600 Amortization of intangibles............................... 26,813 20,521 ---------- ---------- Total operating expenses............................ 1,164,078 919,566 ---------- ---------- Operating profit.................................... 150,634 108,015 Interest expense............................................ 83,219 67,431 Interest income............................................. (392) (1,932) ---------- ---------- Earnings before income taxes........................ 67,807 42,516 Income tax expense.......................................... 34,690 22,684 ---------- ---------- Net earnings........................................ 33,117 19,832 Preferred dividends......................................... 9,888 7,662 ---------- ---------- Earnings allocable to common stockholders........... $ 23,229 $ 12,170 ========== ========== OTHER FINANCIAL DATA: Basic earnings per share.................................... $ .97 $ .51 ========== ========== Diluted earnings per share.................................. $ .96 $ .50 ========== ========== Ratio of earnings to fixed charges.......................... 1.7x 1.5x ========== ========== OPERATING DATA: Number of stores (end of period)............................ 2,065 2,125 Revenue data: Store Rentals and fees........................................ $1,204,971 $ 938,376 Merchandise sales....................................... 65,289 53,522 Other................................................... 793 2,094 Franchise Merchandise sales....................................... 37,385 28,440 Royalty income and fees................................. 6,274 5,149 ---------- ---------- Total revenue....................................... $1,314,712 $1,027,581 ========== ========== 15 RENTERS CHOICE, INC. SUMMARY HISTORICAL FINANCIAL DATA Our summary historical financial data as of and for each of the five years in the period ended December 31, 1997, have been derived from our consolidated financial statements which have been audited and reported upon by Grant Thornton LLP. Our summary historical financial data as of and for the nine months ended September 30, 1997 and 1998 have been derived from our unaudited consolidated financial statements which were prepared on the same basis as our audited financial statements and include, in the opinion of our management, all adjustments necessary to present fairly the information presented for such interim periods. Please read this information in conjunction with our audited consolidated financial statements and notes thereto included herein, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other financial information included elsewhere in this prospectus. Because of our significant growth from acquisitions, the historical results of operations, the period-to-period comparisons of such results and certain financial data may not be comparable, meaningful or indicative of future results. In each of the periods presented ending prior to January 1, 1995, Renters Choice operated as an S corporation under Subchapter S of the Internal Revenue Code and comparable provisions of certain state tax laws. Accordingly, prior to January 1, 1995, Renters Choice was not subject to federal income taxation; however, Renters Choice was subject to other income taxes, including Puerto Rico income tax and certain state income taxes. Earnings per share are not provided for periods prior to January 1, 1995, because operating results for those periods are not comparable. Depreciation and amortization expense and capital expenditures, as presented within other financial data, excludes depreciation of rental merchandise and purchases of rental merchandise, respectively. Nonrecurring finance charges for the nine months ended September 30, 1998 relate principally to interim financing utilized in the acquisition of Rent-A-Center until permanent financing was obtained. These finance charges include an availability fee of 1.25% and a utilization fee of 1.5% on the $175 million bridge loan which was utilized for approximately two weeks before being repaid. 15 16 RENTERS CHOICE, INC. SUMMARY HISTORICAL DATA -- (CONTINUED) 16
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------------------- --------------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- -------- -------- -------- -------- ---------- (DOLLARS IN THOUSANDS) STATEMENTS OF EARNINGS DATA: Total revenue............... $53,212 $74,385 $133,289 $237,965 $331,541 $239,253 $ 459,433 Direct store expenses Depreciation of rental merchandise............. 11,626 15,614 29,640 42,978 57,223 42,271 91,382 Other store expenses...... 29,576 40,701 74,966 124,934 173,823 127,694 255,177 ------- ------- -------- -------- -------- -------- ---------- 41,202 56,315 104,606 167,912 231,046 169,965 346,559 Franchise operating expense................... -- -- -- 24,010 35,841 22,929 27,318 General and administrative expenses.................. 2,151 2,809 5,766 10,111 13,304 9,597 18,054 Amortization of intangibles............... 5,304 6,022 3,109 4,891 5,412 4,016 7,767 ------- ------- -------- -------- -------- -------- ---------- Total operating expenses.......... 48,657 65,146 113,481 206,924 285,603 206,507 399,698 ------- ------- -------- -------- -------- -------- ---------- Operating profit.... 4,555 9,239 19,808 31,041 45,938 32,746 59,735 Interest expense............ 1,817 2,160 2,202 606 2,194 1,402 18,469 Nonrecurring financing costs..................... -- -- -- -- -- -- 5,017 Interest income............. -- -- (890) (667) (304) (256) (1,932) ------- ------- -------- -------- -------- -------- ---------- Earnings before income taxes...... 2,738 7,079 18,496 31,102 44,048 31,600 38,181 Income tax expense.......... 937 1,600 7,784 13,076 18,170 13,108 17,153 ------- ------- -------- -------- -------- -------- ---------- Net earnings........ 1,801 5,479 10,712 18,026 25,878 18,492 21,028 Preferred dividends......... -- -- -- -- -- -- 1,496 ------- ------- -------- -------- -------- -------- ---------- Net earnings allocable to common stockholders...... $ 1,801 $ 5,479 $ 10,712 $ 18,026 $ 25,878 $ 18,492 $ 19,532 ======= ======= ======== ======== ======== ======== ========== Basic earnings per share.... $ .52 $ .73 $ 1.04 $ .74 $ .79 ======== ======== ======== ======== ========== Diluted earnings per share..................... $ .52 $ .72 $ 1.03 $ .74 $ .78 ======== ======== ======== ======== ========== OTHER FINANCIAL DATA: Depreciation and amortization.............. $ 6,164 $ 7,207 $ 5,239 $ 8,571 $ 11,013 $ 8,002 $ 18,306 Capital expenditures........ 1,489 1,715 3,473 8,187 10,446 7,636 9,732 Ratio of earnings to fixed charges................... 2.1x 3.2x 5.1x 7.9x 6.7x 7.8x 2.7x BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents... $ 1,359 $ 1,441 $ 35,321 $ 5,920 $ 4,744 $ 6,280 $ 90,483 Rental merchandise, net..... 20,672 28,096 64,240 95,110 112,759 109,696 481,981 Total assets................ 34,813 36,959 147,294 174,467 208,868 206,385 1,646,813 Total debt.................. 27,592 23,383 40,850 18,993 27,172 33,652 892,912 Total stockholders' equity.................... 4,168 9,286 96,484 125,503 152,753 144,742 148,879 17 RENTERS CHOICE, INC. SUMMARY HISTORICAL DATA -- (CONTINUED) 17
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------------------- --------------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- -------- -------- -------- -------- ---------- (DOLLARS IN THOUSANDS) OPERATING DATA: Number of stores (end of period)................... 112 114 325 423 504 503 2,125 Average annual revenue per store..................... $ 591 $ 653 $ 626 $ 608 $ 610 $ 611 $ 600 Comparable store revenue growth.................... 11.1% 10.8% 18.1% 3.8% 8.1% 9.0% 8.7% REVENUES: Store revenue Rentals and fees........ $51,162 $70,590 $126,264 $198,486 $275,344 $200,970 $ 400,793 Merchandise sales....... 1,678 3,470 6,383 10,604 14,125 10,774 24,329 Other................... 372 325 642 687 679 525 2,094 Franchise revenue Merchandise sales......... -- -- -- 25,229 37,385 23,971 28,440 Royalty income and fees... -- -- -- 2,959 4,008 3,013 3,777 ------- ------- -------- -------- -------- -------- ---------- Total revenue....... $53,212 $74,385 $133,289 $237,965 $331,541 $239,253 $ 459,433 ======= ======= ======== ======== ======== ======== ========== 18 RENT-A-CENTER SUMMARY HISTORICAL FINANCIAL DATA The summary historical financial data for Rent-A-Center as of and for each of the three years in the period ended March 31, 1998, have been derived from Rent-A-Center's audited consolidated financial statements. The summary historical financial data for Rent-A-Center as of and for the three months ended June 30, 1997 and 1998 have been derived from Rent-A-Center's unaudited consolidated financial statements which were prepared on the same basis as Rent-A-Center's audited financial statements and include, in the opinion of Rent-A-Center's management, all adjustments necessary to present fairly the information presented for such interim periods. As part of the acquisition of Rent-A-Center, we acquired several Non-Rent-to-Own Businesses including used automobile retailing, credit retailing and check cashing businesses which began generating revenues in fiscal 1998. We sold AdvantEDGE Auto, Inc. in August 1998 for $4.0 million and are in the process of discontinuing the remaining Non-Rent-to-Own Businesses. The Rent-to-Own financial and certain operating data presented below represents Rent-A-Center's historical financial results, excluding the operations of these Non-Rent-to-Own Businesses, which were accounted for as separate divisions. Under the caption Rent-to-Own financial data, depreciation and amortization excludes depreciation of rental merchandise, and capital expenditures excludes purchases of rental merchandise. Nonrecurring charges in 1996 relate to the consolidation of corporate and field offices and reductions in the number of employees. In 1998, nonrecurring charges represent (A) approximately $12.3 million in charges related to discontinued Non-Rent-to-Own Businesses, closure of certain nonperforming rent-to-own stores and reorganized administrative support functions, and (B) approximately $2.1 million related primarily to Rent-A-Center's writedown of cellular phone inventory. Please read this information in conjunction with the consolidated financial statements of Rent-A-Center and notes thereto included herein, "Management's Discussion and Analysis of Financial Conditions and Results of Operations of Rent-A-Center," and the other financial information included elsewhere in this prospectus. 18 19 RENT-A-CENTER SUMMARY HISTORICAL FINANCIAL DATA 19
THREE MONTHS ENDED YEARS ENDED MARCH 31, JUNE 30, ------------------------------------ ----------------------- 1996 1997 1998 1997 1998 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Total revenue................... $ 897,927 $ 926,871 $ 904,004 $ 225,641 $ 235,421 Cost of sales................... 43,345 39,793 45,574 8,524 12,503 Depreciation and amortization Rental merchandise............ 257,383 260,433 244,572 62,852 62,886 Other......................... 52,236 59,085 56,869 14,598 14,532 Salaries, wages and fringe benefits...................... 255,768 272,242 279,796 68,488 72,960 Other operating expenses........ 202,577 233,015 207,460 50,654 52,653 Nonrecurring charges............ 12,600 -- 14,392 -- -- ---------- ---------- ---------- ---------- ---------- Total operating expenses............. 823,909 864,568 848,663 205,116 215,534 ---------- ---------- ---------- ---------- ---------- Operating profit....... 74,018 62,303 55,341 20,525 19,887 Interest expense, net........... 80,207 52,651 46,184 10,825 11,191 Other (income) expense.......... 101 (254) (88) (81) 72 ---------- ---------- ---------- ---------- ---------- Earnings (loss) before income taxes......... (6,290) 9,906 9,245 9,781 8,624 Income tax expense.............. 6,771 13,880 7,760 5,950 5,344 ---------- ---------- ---------- ---------- ---------- Net earnings (loss).... $ (13,061) $ (3,974) $ 1,485 $ 3,831 $ 3,280 ========== ========== ========== ========== ========== RENT-TO-OWN FINANCIAL DATA: Depreciation and amortization... $ 52,236 $ 59,085 $ 56,464 $ 14,541 $ 14,387 Capital expenditures............ 44,642 29,906 33,187 6,574 16,887 BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents....... $ 19,225 $ 26,077 $ 23,755 $ 37,399 $ 27,486 Rental merchandise, net......... 304,164 276,012 292,965 268,564 303,682 Total assets........... 1,242,211 1,108,280 1,079,109 1,086,784 1,085,796 Total debt............. 1,042,729 714,235 714,223 714,827 714,663 Total stockholder's equity............... 88,529 239,026 236,483 242,857 239,763 RENT-TO-OWN OPERATING DATA: Number of stores (end of period)....................... 1,306 1,367 1,384 1,392 1,404 Average annual revenue per store......................... $ 744 $ 694 $ 639 $ 648 $ 653 Revenues: Store revenue Rentals and fees............ $ 827,935 $ 864,256 $ 831,025 $ 212,256 $ 217,616 Merchandise sales........... 64,628 60,249 46,337 10,636 9,296 Franchise royalty income...... 5,364 2,366 2,266 582 560 ---------- ---------- ---------- ---------- ---------- Total rent-to-own revenue.............. 897,927 926,871 879,628 223,474 227,472 Non-rent-to-own revenue....... -- -- 24,376 2,167 7,949 ---------- ---------- ---------- ---------- ---------- Total revenue.......... $ 897,927 $ 926,871 $ 904,004 $ 225,641 $ 235,421 ========== ========== ========== ========== ========== 20 WHERE YOU CAN FIND MORE INFORMATION Renters Choice files annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any reports, statements and other information we file at the SEC's public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please call 1-800-SEC-0330 for further information on the public reference rooms. Our filings are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at http://www.sec.gov. We, together with the Subsidiary Guarantors, have filed a Registration Statement on Form S-4 to register with the SEC the exchange notes to be issued in exchange for the old notes. This prospectus is part of that Registration Statement. As allowed by the SEC's rules, this prospectus does not contain all of the information you can find in the Registration Statement or the exhibits to the Registration Statement. FORWARD-LOOKING STATEMENTS The statements, other than statements of historical facts included in this prospectus are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate" or "believe" or the negative thereof or variations thereon or similar terminology. We believe that the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that such expectations will occur. Our actual future performance could differ materially from such statements. Factors that could cause or contribute to such differences include, but are not limited to, - - the uncertainties and or potential delays associated with respect to implementing Renters Choice's business plans in the stores acquired in the Rent-A-Center and Central Rents acquisitions, - - the ability to enhance the performance of the other acquired stores and to integrate the other acquired store into Renters Choice's operations, - - the ability to acquire additional rent-to-own stores on favorable terms, - - uncertainties regarding the ability to open new stores, - - the passage of legislation adversely affecting the rent-to-own industry, - - interest rates, - - Renters Choice's ability to collect on its rental purchase agreements at the current rate, and - - the other risks detailed from time to time in our SEC reports. You should not unduly rely on these forward-looking statements, which speak only as of the date of this prospectus. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this prospectus or to reflect the occurrence of unanticipated events. Important factors that could cause our actual results to differ materially from our expectations (the "Cautionary Statements") are discussed under "Risk Factors" and elsewhere in this prospectus. All subsequent written and oral forward-looking statements attributable to Renters Choice, or persons acting on its behalf, are expressly qualified in their entirety by the Cautionary Statements. 20 21 RISK FACTORS You should carefully consider the information below in addition to everything else we have told you in this prospectus in evaluating whether or not you should participate in the exchange offer. RISKS ASSOCIATED WITH THE ACQUISITION OF RENT-A-CENTER Expected Benefits of Combined Business May Not Be Achieved. We believe the combination of Renters Choice and Rent-A-Center will be of significant benefit to Renters Choice and its stockholders. However, you should be aware that these benefits may not be realized if combining Renters Choice's business and Rent-A-Center's business cannot be accomplished in an efficient and effective manner. This combination will require, among other things, the integration of management philosophies and personnel, arrangements with third party vendors, standardization of training programs, realization of operating efficiencies, and effective coordination of sales and marketing and financial reporting efforts. In addition, we are currently implementing our information systems in the stores we acquired in the Rent-A-Center acquisition and expect this process to be completed by late December 1998. You should be aware that any difficulties or delays that we may experience in implementing our system in the acquired stores could negatively impact our financial and operating results. You should also be aware that acquisitions in general are subject to a number of special risks, including adverse short-term effects on our reported operating results, diversion of management's attention, and unanticipated problems or legal liabilities. Although we have a history of successful acquisitions, we cannot assure you that this acquisition and the integration of Rent-A-Center's operations into Renters Choice's will be successful or accomplished efficiently. You should be aware that if we fail to integrate Rent-A-Center's operations successfully with Renters Choice's, our operations and financial results could be affected, both materially and adversely. Increased Size of Company. Although we have successfully acquired many businesses since our initial public offering, we have never been this large of a company. Our operations more than doubled with the purchase of Rent-A-Center. Our future operations depend largely upon our ability to manage this sizeable and growing business profitably. We believe, with the implementation of our management philosophy, that we can accomplish this task. However, we cannot guarantee to you that we will. If we fail to manage the size and the growth of our business, a material adverse effect could result. SIGNIFICANT LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS Because of the acquisition of Rent-A-Center, we have a significant amount of debt outstanding. As of September 30, 1998, we owed approximately $892.9 million under our various debt agreements (including the old notes). The maximum amount of senior debt that we could have borrowed on that date was $720.0 million. Under our Term Loans, we will be required to make principal payments totalling approximately $2.0 million in 1999, $14.0 million in 2000, $22.0 million in 2001, $26.0 million in 2002 and $30.0 million in 2003. You should be aware that this significant amount of debt could have important consequences to you as a holder of the notes. Below we have identified for you many, but 21 22 not all, of the consequences resulting from this significant amount of debt that we now owe. - - We may be unable to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes. - - A significant portion of our cash flow from operations must be dedicated to the repayment of the indebtedness, thereby reducing the amount of cash we have available for other purposes. - - We may be disadvantaged as compared to our competitors as a result of the significant amount of debt we now owe. - - Our ability to adjust to changing market conditions and our ability to withstand competition may be hampered by the amount of debt we now owe. It may also make us more vulnerable in a downturned market. You should be aware that our ability to repay or refinance our current debt depends on our successful financial and operating performance. Our ability to meet our payment obligations may depend on our ability to successfully implement our business strategy. Unfortunately, we cannot assure you that we will be successful in implementing our strategy or in realizing our anticipated financial results. You should also be aware that our financial and operational performance depends upon a number of factors, many of which are beyond our control. These factors include: - - the current economic and competitive conditions in the rent-to-own industry, - - any operating difficulties, operating costs or pricing pressures we may experience, - - the passage of legislation or other regulatory developments that affects us adversely, and - - any delays in implementing any strategic projects we may have. In the event that we are unable to repay our current debt, we may be forced to reduce or delay expansion, sell some of our assets, obtain additional equity capital or refinance or restructure our debt. We cannot assure you that our cash flow and capital resources will be sufficient to repay any indebtedness we may incur in the future, or that we will be successful in obtaining alternative financing. You should also read the information we have included under the captions "Description of Other Indebtedness," "Description of the Notes and Guarantees," and "Business -- Business Strategy" later in this prospectus. MATERIAL LEGAL PROCEEDINGS AGAINST RENTERS CHOICE, RENT-A-CENTER AND COLORTYME The rent-to-own industry is the subject of class action litigation involving claims that rent-to-own contracts are in fact disguised installment sales contracts or involve undisclosed excessive interest charges. We are involved in such litigation in four states: New Jersey, Wisconsin, New York and Minnesota. We are involved in three class actions in New Jersey, one of which (Robinson v. Thorn Americas, Inc.) was originally filed against Rent-A-Center. In Robinson v. Thorn Americas, Inc., a New Jersey state court entered a judgment against Rent-A-Center and ordered Rent-A-Center to pay the class of plaintiffs an amount in excess of $140 million which will increase until this litigation is resolved. Rent-A-Center posted a $163 million supersedeas bond, which amount was derived from an accounting by the plaintiffs of the 22 23 projected amount of judgment liability as of April 1999. Rent-A-Center is appealing the Robinson decision. The other two class actions in New Jersey are entitled Gallagher v. Crown Leasing Corporation and Handy Boykin v. Renters Choice, Inc. In these cases, the plaintiffs allege we (or, in the Gallagher case, Renters Choice as the successor to Crown) violated the New Jersey Consumer Fraud Act and the New Jersey Retail Installment Sales Act. The claims arising from the Boykin and Gallagher cases are similar to the claims made against our subsidiary Rent-A-Center in Robinson v. Thorn Americas, Inc. Claims have also been made that Rent-A-Center violated rent-to-own statutes in certain other states. We intend to vigorously defend ourselves in all pending or asserted actions against us. A class action entitled Fogie v. Thorn Americas, Inc. has been filed in Minnesota alleging Rent-A-Center's rent-to-own contracts violated Minnesota's Consumer Credit Sales Act and the Minnesota General Usury Statute. Furthermore, a class action entitled Colon v. Thorn Americas, Inc. has been filed in New York State court, alleging that Rent-A-Center has a duty to disclose "effective interest" under New York consumer protection laws and seeks damages for Rent-A-Center's failure to do so. Rent-A-Center was also named in a class action in Wisconsin entitled Burney v. Thorn Americas, Inc. In Burney v. Thorn Americas, Inc., a plaintiff filed a class action in Wisconsin state court alleging Rent-A-Center violated the Wisconsin Consumer Act. This matter was settled in principle for approximately $16.25 million. A claim was also filed against Rent-A-Center alleging discrimination against its African-American employees. This matter was settled in principle for approximately $6.75 million. An adverse ruling on any of these cases could have a material adverse effect on our business operations and our financial performance. You should read the sections entitled "-- Government Regulation," "Business -- Government Regulation" and "Business -- Legal Proceedings" located later in this prospectus for additional information regarding our litigation. PASSAGE OF ADVERSE GOVERNMENT REGULATION IMPACTING THE RENT-TO-OWN INDUSTRY As is the case with most businesses, we are subject to certain governmental regulations, specifically with respect to rent-to-own transactions. There are currently 45 states that have passed laws regulating rental purchase transactions and another state that has a retail installment sales statute that excludes rent-to-own transactions from its coverage if certain criteria are met. These laws generally require certain contractual and advertising disclosures. They also provide varying levels of substantive consumer protection, such as requiring a grace period for late fees and contract reinstatement rights in the event the rental purchase agreement is terminated. The rental purchase laws of nine states limit the total amount of rentals that may be charged over the life of a rental purchase agreement. Certain states also effectively regulate rental purchase transactions under other consumer protection statutes. You should also be aware that we are currently subject to outstanding judgments and other litigation alleging that we, or our subsidiaries, have violated some of these statutory provisions. You should also read the information under the sections "-- Material Legal Proceedings against Renters Choice, Rent-A-Center and ColorTyme" above and "Business -- Legal Proceedings" later in this prospectus for a more complete discussion of these matters. 23 24 Although there is no comprehensive federal legislation regulating rental-purchase transactions, we cannot assure you that such legislation will not be enacted in the future. From time to time, legislation has been introduced in Congress seeking to regulate our business. In the event that legislation having a negative impact on our business is adopted, you should be aware that it could have a material adverse impact on us. In addition, we cannot assure you that the various legislatures in the states where we currently do business will not adopt new legislation or amend existing legislation that negatively affects us. You should also read the section entitled "Business -- Government Regulation" appearing later in this prospectus for additional discussions related to this matter. DEPENDENCE UPON KEY PERSONNEL Renters Choice's continued success is highly dependent upon the personal efforts and abilities of our senior management, including J. Ernest Talley, our Chairman of the Board and Chief Executive Officer, Mark E. Speese, our President and Chief Operating Officer, and L. Dowell Arnette, our Executive Vice President. We do not have employment contracts with any of these officers and the loss of any one of them could impact us in a negative way. Please also read the "Management" section later in this prospectus for additional information. CONTROL BY PRINCIPAL STOCKHOLDERS You should be aware that a total of approximately 48.9% of our voting stock on a fully diluted basis is controlled by Messrs. Talley, Speese and by Apollo. As a result, in the event they act together, they have the ability to exercise practical control over the outcome of actions requiring the approval of our stockholders, including potential acquisitions, elections of our Board of Directors and sales or changes in control of Renters Choice. You should read the section entitled "Security Ownership of Certain Beneficial Owners and Management" later in this prospectus for additional information. RELIANCE ON INFORMATION SYSTEMS As is common with large organizations, we rely extensively on our information systems to manage our operations. As a result, we regularly invest in various upgrades to our systems in order to achieve optimum performance compared to the costs involved. You should be aware that any disruption with respect to our information systems could negatively impact our financial and operating results. Please read the sections entitled "-- Potential Adverse Impact Related to the Year 2000 Issue" next and "Business -- Management Information Systems" later in this prospectus for additional information. POTENTIAL ADVERSE IMPACT RELATED TO THE YEAR 2000 ISSUE Year 2000 issues exist when dates are recorded in computers using two digits (rather than four) and are then used for arithmetic operations, comparisons or sorting. A two-digit recording may recognize a date using "00" as 1900 rather than 2000, which could cause our computer systems to perform inaccurate computations. We have received confirmation from our management information systems vendors that our system is Year 2000 compliant. You should be aware that Year 2000 issues relate not only to our systems, but also to those used by our suppliers. We anticipate that system replacements and modifications will resolve any Year 2000 issues that may exist with our suppliers or their suppliers. However, we cannot guarantee to you that such replacements or modifications 24 25 will be completed successfully or on time and, as a result, any failure to complete such modifications on time could materially affect our financial and operating results in a negative way. Please read the additional discussion regarding the Year 2000 issue and the potential impact on our business in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Renters Choice -- Year 2000" and read the section entitled "Business -- Management Information Systems" later in this prospectus for additional information. RESTRICTIONS IMPOSED ON RENTERS CHOICE BY OUR DEBT AGREEMENTS The indenture and our senior credit facilities (as defined below) impose significant operating and financial restrictions on us and our subsidiaries. These restrictions may significantly limit or prohibit us from engaging in certain transactions, including the following: - borrowing additional money, - paying dividends or other distributions to our stockholders, - making certain investments, - creating certain liens on our assets, - selling certain assets currently held by us, - entering into transactions with any of our affiliates, and - engaging in certain mergers or consolidations involving Renters Choice. The loan documents we signed to borrow money to acquire Rent-A-Center (the "senior credit facilities") impose significant restrictive covenants on Renters Choice and our subsidiaries and require Renters Choice and our subsidiaries to maintain specified financial ratios and satisfy certain financial tests. Our ability to meet these financial ratios and tests may be affected by events beyond our control and, as a result, we cannot guarantee to you that we will be able to meet such tests. In addition, the restrictions contained in the senior credit facilities could limit our ability to obtain future financing, make needed capital expenditures, withstand a future downturn in our business or in the economy or otherwise conduct necessary corporate activities. Our failure to comply with the restrictions in the Indenture and the senior credit facilities could lead to a default under the terms of those documents. In the event of such a default, the applicable lender could declare all amounts borrowed and all amounts due under other instruments that contain certain provisions for cross-acceleration or cross-default due and payable, including all interest that is accrued and unpaid. In addition, the lenders under such agreements could terminate their commitments to lend to us. If that does occur, we cannot assure you that we would be able to make the necessary payments to the lenders and we cannot give you any assurance that we would be able to find additional alternative financing. Even if we could obtain additional alternative financing, we cannot assure you that it would be on terms that are favorable or acceptable to us. You should also be aware that the existing indebtedness under the senior credit facilities is secured by substantially all of our and our subsidiaries' assets. Should a default or acceleration of such indebtedness occur, the holders of such indebtedness could seize these assets securing the indebtedness and sell the assets to satisfy all or a part of what is owed. 25 26 The senior credit facilities also contain provisions prohibiting the modification of the exchange notes, subject to certain exceptions favorable to the lenders under the senior credit facilities. These exceptions include: - - an extension of the maturity of the exchange notes, - - a reduction in the amount of any payment of principal, - - the reduction of the rate of interest on the exchange notes, and - - the extension of the date for payment of interest on the exchange notes. In addition, the senior credit facilities also limit our ability to refinance the exchange notes without the consent of such lenders. Please refer to the sections in this prospectus entitled "Description of the Notes and Guarantees -- Certain Covenants," and "Description of Other Indebtedness" later in this prospectus for additional information. DIFFICULTY OF SATISFYING PAYMENT OBLIGATIONS UPON A CHANGE OF CONTROL If a change of control occurs, we may be required to make an offer to purchase all of the notes then outstanding. We would be required to purchase the notes at 101% of their principal amount, plus accrued interest to the date of repurchase. If a change of control occurs, we cannot be sure that we would have enough funds to pay for all of the notes. If we are required to purchase the notes, we would need to secure third-party financing if we do not have available funds to meet our purchase obligations. However, we cannot be sure that we would be able to secure such financing on favorable terms, if at all. Also, our financing arrangements will restrict our ability to repurchase the notes, including pursuant to a change of control. Furthermore, a change of control will result in an event of default under the senior credit facilities and may lead to an acceleration of any other senior indebtedness we may have at that time. In such event, the subordination provisions of the notes would require us to pay our senior credit facilities and any other senior indebtedness in full before repurchasing notes. In addition, a change of control could require us to repurchase our existing notes and we could be required to offer to redeem our Convertible Preferred Stock. See "Description of the Notes and Guarantees -- Change of Control" and "Description of Capital Stock -- Preferred Stock -- Mandatory Redemption." The inability to repay senior indebtedness, if accelerated, and to purchase all of the tendered notes, would constitute an event of default under the Indenture. COMPETITION IN THE RENT-TO-OWN INDUSTRY We operate in a highly competitive industry. We face competition from sources outside the rent-to-own industry, such as department stores, discount stores and rental stores offering short-term rent-to-rent arrangements. Because barriers to entry in the rent-to-own industry are relatively low, additional competition may arise from new sources. As a result of these competitive conditions, we may not be able to sustain past levels of revenue or continue our recent revenue growth or profitability. Please refer to the section entitled "Business -- Competition" later in this prospectus for additional information. ABSENCE OF PUBLIC MARKET Currently, there is no public market for the exchange notes or the old notes. We do not intend to apply for listing of the notes on any securities exchange or on any automated 26 27 dealer quotation system. Although the Initial Purchasers have informed us that they intend to make a market in the notes, they are not obligated to do so and may discontinue any such market at any time without notice. In addition, such market making activity may be limited during this exchange offer or during an offering under a shelf registration statement should we decide to file one. As a result, we can make no assurances to you as to the development or liquidity of any market for the notes, your ability to sell the notes, or the price at which you may be able to sell the notes. Future trading prices of the notes will depend on many factors, including among other things, prevailing interest rates, our operating results and the market for similar securities. Historically, the market for securities similar to the notes, including non-investment grade debt, has been subject to disruptions that have caused substantial volatility in the prices of such securities. We cannot assure you that, if a market develops, it will not be subject to similar disruptions. EFFECT ON THE MARKET FOR OLD NOTES FOR THE FAILURE TO EXCHANGE THE OLD NOTES Old notes that are not tendered in exchange for exchange notes or are tendered but not accepted will, following consummation of the exchange offer, continue to be subject to the existing transfer restrictions. To the extent that old notes are tendered and accepted in the exchange offer, the trading market for untendered and tendered but unaccepted old notes could be adversely affected due to the limited amount, or "float," of the old notes that are expected to remain outstanding following the exchange offer. Generally, a lower "float" of a security could result in less demand to purchase such security and, as a result, could result in lower prices for such security. For the same reason, to the extent that a large amount of old notes are not tendered or are tendered and not accepted in the exchange offer, the trading market for the exchange notes could be adversely affected. For additional information, please refer to the sections entitled "The Exchange Offer" and "Plan of Distribution" later in this prospectus. USE OF PROCEEDS OF THE EXCHANGE NOTES This exchange offer is intended to satisfy our obligations under the Exchange and Registration Rights Agreement dated as of August 15, 1998 (the "Exchange and Registration Rights Agreement") by and between Renters Choice and Chase Securities Inc., Bear, Stearns & Co. Inc., NationsBanc Montgomery Securities LLC, and Credit Suisse First Boston Corporation, as initial purchasers (each, an "Initial Purchaser," and, collectively, the "Initial Purchasers"). We will not receive any cash proceeds from the issuance of the exchange notes. We will only receive old notes with a total principal amount equal to the total principal amount of the exchange notes issued in the exchange offer. 27 28 CAPITALIZATION The following table sets forth the unaudited capitalization of Renters Choice as of September 30, 1998. The information set forth below should be read in conjunction with the "Summary Historical Financial Data of Renters Choice" and the notes thereto, "Selected Historical Financial Data of Renters Choice," and notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of Renters Choice and the notes thereto included elsewhere in this prospectus. - ------------------------- (1) The Senior Revolving Credit Facility provides for borrowings of up to $120.0 million. (2) The Letter of Credit/Multidraw Facility was initially used to post a letter of credit in the amount of $122.25 million to support a $163 million bond relating to certain New Jersey litigation. See "Business -- Legal Proceedings." Once the Letter of Credit has been terminated, Renters Choice may borrow up to $85 million until 2004. (3) Senior Term Loan A is a 6.0 year facility in an aggregate principal amount of $120 million. (4) Senior Term Loan B is a 7.5 year facility in an aggregate principal amount of $270 million. (5) Senior Term Loan C is a 8.5 year facility in an aggregate principal amount of $330 million. (6) The proceeds from the sale of the old notes and available cash were used to repay $175 million outstanding under the Senior Subordinated Facility. (7) In connection with financing a portion of the acquisition of Rent-A-Center, Apollo purchased $250 million, and an affiliate of Bear, Stearns & Co. Inc. purchased $10 million, of Renters Choice's Convertible Preferred Stock. Dividends on the Convertible Preferred Stock are payable quarterly at an annual rate of 3.75% (subject to reduction based on Renters Choice's stock price performance) in cash or in-kind at Renters Choice's option (subject to restrictions under the senior credit facilities and the Notes). The Convertible Preferred Stock is convertible into approximately 27.1% of Renters Choice's common stock on a fully diluted basis. See "Description of Capital Stock -- Preferred Stock." 28
AS OF SEPTEMBER 30, 1998 ------------------ (DOLLARS IN MILLIONS) Senior Revolving Credit Facility(1)......................... $ 1.2 Letter of Credit/Multidraw Facility(2)...................... -- Senior Term Loan A(3)....................................... 119.3 Senior Term Loan B(4)....................................... 268.4 Senior Term Loan C(5)....................................... 328.0 Other debt outstanding...................................... 1.0 Senior Subordinated Facility(6)............................. -- Senior Subordinated Notes Due 2008(6)....................... 175.0 -------- Total debt........................................ 892.9 Convertible Preferred Stock(7).............................. 259.5 Stockholders' equity........................................ 148.9 -------- Total capitalization.............................. $1,301.3 ======== 29 THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER At the time we issued the old notes, we agreed to file a registration statement to register the exchange of the old notes for the exchange notes on or prior to 60 days after August 18, 1998 (the "Issue Date") and to use our reasonable best efforts to cause such registration statement to become effective under the Securities Act within 150 days after the Issue Date. In the event that applicable interpretations of the staff of the SEC do not permit Renters Choice to effect the exchange offer, or if certain holders of the old notes notify Renters Choice that they are not eligible to participate in, or would not receive freely tradeable exchange notes in exchange for tendered old notes pursuant to, the exchange offer, Renters Choice will use its reasonable best efforts to cause to become effective a shelf registration statement (the "Shelf Registration Statement") with respect to the resale of the old notes and to keep the Shelf Registration Statement effective until two years after the Issue Date. If the exchange offer registration statement is not effective on January 15, 1999, Renters Choice will be obligated to pay liquidated damages to holders of the old notes. See "Old Notes Exchange and Registration Rights Agreement." Each holder of the old notes that wishes to exchange old notes for exchange notes will be required to represent that (i) any exchange notes received will be acquired in the ordinary course of its business, (ii) it has no arrangement with any person to participate in the distribution of the exchange notes, and (iii) it is not an "affiliate," as defined in Rule 405 of the Securities Act, of Renters Choice or, if it is an affiliate, that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. RESALE OF EXCHANGE NOTES Based on interpretations by the staff of the SEC set forth in no-action letters issued to third-parties, Renters Choice believes that, except as described below, exchange notes issued pursuant to the exchange offer in exchange for old notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than a holder which is an "affiliate" of Renters Choice within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such exchange notes are acquired in the ordinary course of such holder's business and such holder does not intend to participate and has no arrangement or understanding with any person to participate in the distribution of such exchange notes. Any holder who tenders in the exchange offer with the intention or for the purpose of participating in a distribution of the exchange notes cannot rely on such interpretation by the staff of the SEC and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Unless an exemption from registration is otherwise available, any such resale transaction should be covered by an effective registration statement containing the selling security holder's information required by Item 507 of Regulation S-K under the Securities Act. This prospectus may be used for an offer to resell, resale or other retransfer of exchange notes only as specifically set forth herein. Only broker-dealers who acquired the old notes as a result of market-making activities or other trading activities may participate in the exchange offer. Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where such old notes were acquired by such 29 30 broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See "Plan of Distribution." TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, Renters Choice will accept for exchange any and all old notes properly tendered and not withdrawn prior to 5:00 p.m., New York City time, on [ , 1999] ( the "Expiration Date"). Renters Choice will issue $1,000 principal amount of exchange notes in exchange for each $1,000 principal amount of outstanding old notes surrendered pursuant to the exchange offer. Old notes may be tendered only in integral multiples of $1,000. The form and terms of the exchange notes will be the same as the form and terms of the old notes except that the exchange notes will be registered under the Securities Act and will not bear legends restricting their transfer. The exchange notes will evidence the same debt as the old notes. The exchange notes will be issued under and entitled to the benefits of the Indenture, which also authorized the issuance of the old notes, such that both series will be treated as a single class of debt securities under the Indenture. See "Description of the Notes and Guarantees -- General." The exchange offer is not conditioned upon any minimum aggregate principal amount of old notes being tendered for exchange. As of the date of this prospectus, $175.0 million of the old notes are outstanding. This prospectus, together with the letter of transmittal, is being sent to all registered holders of old notes. There will be no fixed record date for determining registered holders of old notes entitled to participate in the exchange offer. Renters Choice intends to conduct the exchange offer in accordance with the provisions of the Exchange and Registration Rights Agreement and the applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the SEC thereunder. Old notes that are not tendered for exchange in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits such holders have under the Indenture and the Exchange and Registration Rights Agreement. Renters Choice will be deemed to have accepted for exchange properly tendered notes when, as and if Renters Choice shall have given oral or written notice of acceptance to the exchange agent and complied with the provisions of Section 1 of the Exchange and Registration Rights Agreement. The exchange agent will act as agent for the tendering holders for the purposes of receiving the exchange notes from Renters Choice. Renters Choice expressly reserves the right to amend or terminate the exchange offer, and not to accept for exchange any old notes not accepted for exchange, upon the occurrence of any of the conditions specified below under "-- Certain Conditions to the Exchange Offer." Holders who tender old notes in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of old notes pursuant to the exchange offer. Renters Choice will pay all charges and expenses, other than certain applicable taxes described below, in connection with the exchange offer. See "-- Fees and Expenses." 30 31 EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" means 5:00 p.m., New York City time on [ , 1999,] unless Renters Choice, in its sole discretion, extends the exchange offer, in which case the term "Expiration Date" will mean the latest date and time to which the exchange offer is extended. In order to extend the exchange offer, Renters Choice will notify the Exchange Agent of any extension by oral or written notice and will mail to the registered holders of old notes an announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the Expiration Date. Renters Choice reserves the right, in its sole discretion, (i) to delay accepting any old notes for exchange, to extend the exchange offer or to terminate the exchange offer if any of the conditions set forth below under "-- Certain Conditions to the Exchange Offer" have not been satisfied, by giving oral or written notice of such delay, extension or termination to the Exchange Agent, or (ii) to amend the terms of the exchange offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered holders of old notes. If the exchange offer is amended in a manner determined by Renters Choice to constitute a material change, Renters Choice will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered holders, and Renters Choice will extend the exchange offer, depending upon the significance of the amendment and the manner of disclosure to the registered holders, if the exchange offer would otherwise expire during such period. Without limiting the manner in which Renters Choice may choose to make a public announcement of any delay, extension, amendment or termination of the exchange offer, Renters Choice has no obligation to publish, advertise or otherwise communicate any such public announcement, other than by making a timely release to an appropriate news agency. If Renters Choice extends the period of time during which the exchange offer is open, or if Renters Choice is delayed in accepting for exchange of, or in issuing and exchanging the exchange notes for, any old notes, or is unable to accept for exchange of, or issue exchange notes for, any old notes pursuant to the exchange offer for any reason, then, without prejudice to Renters Choice's rights under the exchange offer, the exchange agent may, on our behalf, retain all old notes tendered, and such old notes may not be withdrawn except as otherwise provided below in "-- Withdrawal of Tenders." The right to delay acceptance for exchange of, or the issuance and the exchange of the exchange notes for, any old notes is subject to applicable law, including Rule 14e-1(c) under the Exchange Act, which requires that Renters Choice either deliver the exchange notes or return the old notes deposited by or on behalf of the holders thereof promptly after termination or withdrawal of the exchange offer. INTEREST ON THE EXCHANGE NOTES The exchange notes will bear interest at a rate of 11% per annum, payable semi-annually, on February 15 and August 15 of each year, commencing on February 15, 1999. Holders of exchange notes will receive interest on February 15, 1999 from the date of initial issuance of the exchange notes, plus an amount equal to the accrued interest on the old 31 32 notes through such date. Interest on the old notes accepted for exchange will cease to accrue upon issuance of the exchange notes. CERTAIN CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other term of the exchange offer, Renters Choice will not be required to accept for exchange, or exchange any exchange notes for, any old notes, and may terminate the exchange offer before the acceptance of any old notes for exchange, if: - any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer which, in Renters Choice's reasonable judgment, might materially impair the ability of Renters Choice to proceed with the exchange offer; or - any law, statute, rule or regulation is proposed, adopted or enacted, or any existing law, statute, rule or regulation is interpreted by the staff of the SEC, which, in Renters Choice's reasonable judgment, might materially impair the ability of Renters Choice to proceed with the exchange offer; or - any governmental approval has not been obtained, which approval Renters Choice shall, in its reasonable discretion, deem necessary for the consummation of the exchange offer as contemplated hereby. If Renters Choice determines in its sole discretion that any of these foregoing conditions are not satisfied, Renters Choice may - refuse to accept any old notes and return all old notes to the tendering holders, - extend the exchange offer and retain all old notes tendered prior to the expiration of the exchange offer, subject, however, to the rights of holders to withdraw such old notes (see "Withdrawal of Tenders"), or - waive such unsatisfied conditions with respect to the exchange offer and accept all properly tendered old notes which have not been withdrawn. If such waiver constitutes a material change to the exchange offer, Renters Choice will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the registered holders of the old notes and Renters Choice will extend the exchange offer for a period of five to ten business days, depending on the significance of the waiver and the manner of disclosure to the registered holders, if the exchange offer would otherwise expire during such five to ten day business period. The foregoing conditions are for the sole benefit of Renters Choice and may be asserted by Renters Choice regardless of the circumstances giving rise to any such condition or may be waived by Renters Choice in whole or in part at any time and from time to time in its sole discretion. The failure by Renters Choice at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. In addition, Renters Choice will not accept for exchange any old notes tendered, and no exchange notes will be issued in exchange for any such old notes, if at such time any stop order shall be threatened or in effect with respect to the registration statement of which 32 33 this prospectus constitutes a part or the qualification of the Indenture under the Trust Indenture Act of 1939 (the "TIA"). PROCEDURES FOR TENDERING Subject to the terms and conditions hereof and the letter of transmittal, only a holder of old notes may tender such old notes in the exchange offer. To tender in the exchange offer, a holder must complete, sign and date the letter of transmittal, or facsimile thereof, have the signature thereon guaranteed if required by the letter of transmittal, and mail or otherwise deliver such letter of transmittal or such facsimile to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date or, in the alternative, comply with DTC's ATOP procedures described below. In addition, either: - - old notes must be received by the Exchange Agent along with the letter of transmittal, or - - a timely confirmation of book-entry transfer (a "Book-Entry Confirmation") of such old notes, if such procedure is available, into the Exchange Agent's account at DTC (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below or properly transmitted Agent's Message (as defined below) must be received by the Exchange Agent prior to the Expiration Date, or - - the holder must comply with the guaranteed delivery procedures described below. To be tendered effectively, the letter of transmittal and other required documents must be received by the Exchange Agent at the address set forth below under "-- Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. The tender by a holder which is not withdrawn prior to the Expiration Date will constitute an agreement between such holder and Renters Choice in accordance with the terms and subject to the conditions set forth herein and in the letter of transmittal. The method of delivery of old notes, the letter of transmittal and all other required documents to the exchange agent is at the election and risk of the holder. Instead of delivery by mail, it is recommended that holders use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure delivery to the Exchange Agent before the expiration date. No letter of transmittal or old notes should be sent to Renters Choice. Holders may request their respective brokers, dealers, commercial banks, trust companies or other nominees to effect the above transactions for such holders. Any beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered holder of old notes to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the letter of transmittal and delivering such owner's old notes, either make appropriate arrangements to register ownership of the old notes in such owner's name or obtain a properly completed bond power from the registered holder of old notes. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the Expiration Date. Signatures on a letter of transmittal and a notice of withdrawal described below must be guaranteed by an Eligible Institution (as defined below) unless the old notes are tendered 33 34 (A) by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal, or (B) for the account of an Eligible Institution. In the event that signatures on a letter of transmittal or a notice of withdrawal are required to be guaranteed, such guarantor must be a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of the recognized signature guarantee programs identified in the letter of transmittal (an "Eligible Institution"). If the letter of transmittal is signed by a person other than the registered holder of any old notes listed therein, such old notes must be endorsed or accompanied by a properly completed bond power, signed by such registered holder as such registered holder's name appears on such old notes with the signature thereon guaranteed by an Eligible Institution. If the letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by Renters Choice, provide evidence satisfactory to Renters Choice of their authority to so act must be submitted with the letter of transmittal. The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC's system may utilize DTC's Automated Tender Offer Program ("ATOP") to tender. Accordingly, participants in DTC's ATOP may, in lieu of physically completing and signing the letter of transmittal and delivering it to the Exchange Agent, electronically transmit their acceptance of the exchange offer by causing DTC to transfer the old notes to the Exchange Agent in accordance with DTC's ATOP procedures for transfer. DTC will then send an Agent's Message to the exchange agent. The term "Agent's Message" means a message transmitted by DTC received by the Exchange Agent and forming part of the Book-Entry Confirmation, which states that DTC has received an express acknowledgment from a participant in DTC's ATOP that is tendering old notes which are the subject of such book entry confirmation, that such participant has received and agrees to be bound by the terms of the letter of transmittal (or, in the case of an Agent's Message relating to guaranteed delivery, that such participant has received and agrees to be bound by the applicable Notice of Guaranteed Delivery), and that the agreement may be enforced against such participant. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered old notes and withdrawal of tendered old notes will be determined by Renters Choice in its sole discretion, which determination will be final and binding. Renters Choice reserves the absolute right to reject any and all old notes not properly tendered or any old notes Renters Choice's acceptance of which would, in the opinion of counsel for Renters Choice, be unlawful. Renters Choice also reserves the right to waive any defects, irregularities or conditions of tender as to particular old notes. Renters Choice's interpretation of the terms and conditions of the exchange offer (including the instructions in the letter of transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within such time as Renters Choice shall determine. Although Renters Choice intends to notify holders of defects or irregularities with respect to tenders of old notes, neither Renters Choice, the 34 35 exchange agent nor any other person shall incur any liability for failure to give such notification. Tenders of old notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any old notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent to the tendering holder, unless otherwise provided in the letter of transmittal, as soon as practicable following the Expiration Date. In all cases, issuance of exchange notes for old notes that are accepted for exchange pursuant to the exchange offer will be made only after timely receipt by the exchange agent of old notes or a timely Book-Entry Confirmation of such old notes into the exchange agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed letter of transmittal and all other required documents. If any tendered old notes are not accepted for exchange for any reason set forth in the terms and conditions of the exchange offer or if old notes are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or non-exchanged old notes will be returned without expense to the tendering holder thereof (or, in the case of old notes tendered by book-entry transfer into the exchange agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described below, such non-exchanged Notes will be credited to an account maintained with such Book-Entry Transfer Facility) as promptly as practicable after the expiration or termination of the exchange offer. BOOK-ENTRY TRANSFER The exchange agent will make a request to establish an account with respect to the old notes at the Book-Entry Transfer Facility for purposes of the exchange offer within two business days after the date of this prospectus, and any financial institution that is a participant in the Book-Entry Transfer Facility's system may make book-entry delivery of old notes by causing the Book-Entry Transfer Facility to transfer such old notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. However, although delivery of notes may be effected through book-entry transfer at the Book-Entry Transfer Facility, the letter of transmittal or facsimile thereof, with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received by the Exchange Agent at the address set forth below under "-- Exchange Agent" on or prior to the Expiration Date or, if the guaranteed delivery procedures described below are to be complied with, within the time period provided under such procedures. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their old notes and (A) whose old notes are not immediately available, or (B) who cannot deliver their old notes, the letter of transmittal or any other required documents to the exchange agent prior to the Expiration Date, may effect a tender if: - The tender is made through an Eligible Institution; - Prior to the Expiration Date, the exchange agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery 35 36 (by facsimile transmission, mail or hand delivery) setting forth the name and address of the holder, the registered number(s) of such old notes and the principal amount of old notes tendered, stating that the tender is being made thereby and guaranteeing that, within three (3) New York Stock Exchange trading days after the Expiration Date, the letter of transmittal (or facsimile thereof) together with the old notes or a Book-Entry Confirmation, as the case may be, and any other documents required by the letter of transmittal will be deposited by the Eligible Institution with the exchange agent; and - Such properly completed and executed letter of transmittal (or facsimile thereof), or properly transmitted Agent's Message as well as all tendered old notes in proper form for transfer or a Book-Entry Confirmation, as the case may be, and all other documents required by the letter of transmittal, are received by the Exchange Agent within three (3) New York Stock Exchange trading days after the Expiration Date. Upon request to the exchange agent, a Notice of Guaranteed Delivery will be sent to holders who wish to tender their old notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of old notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. For a withdrawal to be effective, (i) a written notice of withdrawal must be received by the exchange agent at one of the addresses set forth below under "-- Exchange Agent," or (ii) holders must comply with the appropriate procedures of DTC's ATOP system. Any such notice of withdrawal must specify the name of the person having tendered the old notes to be withdrawn, identify the old notes to be withdrawn (including the principal amount of such old notes), and (where certificates for old notes have been transmitted) specify the name in which such old notes were registered, if different from that of the withdrawing holder. If certificates for old notes have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of such certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such holder is an Eligible Institution. If old notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn old notes and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by Renters Choice, whose determination shall be final and binding on all parties. Any old notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Any old notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder (or, in the case of old notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such old notes will be credited to an account maintained with such Book-Entry Transfer Facility for the old notes) as soon as practicable after withdrawal, rejection of tender or termination of the 36 37 exchange offer. Properly withdrawn old notes may be retendered by following one of the procedures described under "-- Procedures for Tendering" above at any time on or prior to the Expiration Date. EXCHANGE AGENT IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent for the exchange offer. Questions and requests for assistance, requests for additional copies of this prospectus or the letter of transmittal and requests for Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: By Facsimile: (212) 858-2611 (To confirm facsimile transmissions, call: (212) 858-2103) FEES AND EXPENSES The expenses of soliciting tenders will be borne by Renters Choice. The principal solicitation is being made by mail. However, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of Renters Choice and its affiliates. Renters Choice has not retained any dealer-manager in connection with the exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. Renters Choice, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The cash expenses to be incurred in connection with the exchange offer will be paid by Renters Choice and are estimated in the aggregate to be approximately $300,000. Such expenses include registration fees, fees and expenses of the Exchange Agent and Trustee, accounting and legal fees and printing costs, and related fees and expenses. TRANSFER TAXES Renters Choice will pay all transfer taxes, if any, applicable to the exchange of the old notes for exchange notes pursuant to the exchange offer. If, however, certificates representing old notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of notes tendered, or if tendered notes are registered in the name of any person other than the person signing the letter of transmittal, or if a transfer tax is imposed for any reason other than the exchange of notes pursuant to the exchange offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of 37
By Registered or Certified Mail or by Overnight Courier: By Hand: IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company P. O. Box 84 One State Street Bowling Green Station New York, New York 10004 New York, New York 10274-0084 Attn: Securities Processing Attn: Reorganization Operations Window, Dept Subcellar One, (SC-1) 38 such taxes or exemption therefrom is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of old notes who do not exchange their old notes for exchange notes pursuant to the exchange offer will continue to be subject to the restrictions on transfer of such old notes, as set forth (i) in the legend thereon as a consequence of the issuance of the old notes pursuant to the exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws, and (ii) otherwise set forth in the Offering Memorandum dated August 13, 1998, distributed in connection with the offering of the old notes. In general, the old notes may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Renters Choice does not currently anticipate that it will register the old notes under the Securities Act. 38 39 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS) Our Unaudited Pro Forma Combined Financial Information gives effect to both the offering of the old notes and the acquisitions of Central Rents and Rent-A-Center, as if these transactions had occurred on January 1, 1997. The acquisitions of Central Rents and Rent-A-Center were completed on May 28, 1998 and August 5, 1998, respectively, and have been reflected within the Renters Choice historical balance sheet as of September 30, 1998 and the Renters Choice historical statement of operations since their dates of acquisition. The Unaudited Pro Forma Combined Statement of Operations for the year ended December 31, 1997 includes Central Rents historical information for the year ended December 31, 1997, and Rent-A-Center historical information for the year ended March 31, 1998, which was its fiscal year end. These transactions and the related adjustments are described in the accompanying notes. In the opinion of management, all adjustments have been made that are necessary to present fairly the pro forma data. Our Unaudited Pro Forma Combined Financial Information is not indicative of Renters Choice's results of operations as of September 30, 1998, nor for any future date, and is not necessarily indicative of what Renters Choice's results of operations would have been had both the offering of the old notes and the acquisitions of Central Rents and Rent-A-Center occurred on January 1, 1997. Further, it does not give effect to (i) any transactions other than the foregoing transactions and those described in the accompanying Notes to Unaudited Pro Forma Combined Financial Information, or (ii) Renters Choice's results of operations since September 30, 1998. Although the following Unaudited Pro Forma Combined Financial Information gives effect to expected annual net savings from the elimination of duplicative general and administrative and field expenses as a result of the aforementioned acquisitions, it does not give effect to additional annual net savings expected to be achieved resulting from the acquisition of Rent-A-Center, relating principally to changes made to its product distribution network, and the utilization of its service and repair network. Actual amounts could differ from those presented. The following Unaudited Pro Forma Combined Financial Information is based upon the historical financial statements of Renters Choice, Central Rents, and Rent-A-Center, and should be read in conjunction with such historical financial statements, the related notes, and the Notes to Unaudited Pro Forma Combined Financial Information. 39 40 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 See accompanying notes to Unaudited Pro Forma Combined Statement of Operations 40
RENT-A-CENTER PRO FORMA ADJUSTMENTS RENTERS RENTERS -------------------------- CHOICE AND CHOICE AND ELIMINATION CENTRAL CENTRAL RENTS CENTRAL RENTS RENT-A- NON-RENT- RENTS PRO FORMA PRO FORMA CENTER TO-OWN HISTORICAL(1) ADJUSTMENTS COMBINED HISTORICAL BUSINESSES ACQUISITION ------------- ------------- ------------- ---------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues Store Rentals and fees.......... $373,926 $ -- $373,926 $839,026 $ (3,779)(2) $ (4,202)(3) Merchandise sales......... 18,972 -- 18,972 62,712 (16,395)(2) -- Other..................... 793 -- 793 -- -- -- Franchise Merchandise sales......... 37,385 -- 37,385 -- -- -- Royalty income and fees... 4,008 -- 4,008 2,266 -- -- -------- -------- -------- -------- -------- --------- Total revenues........ 435,084 -- 435,084 904,004 (20,174) (4,202) Operating expenses Direct store expenses Depreciation of rental merchandise............. 87,630 -- 87,630 244,572 -- (4,202)(3) Cost of merchandise sold.................... 14,885 -- 14,885 45,574 (14,853)(2) -- Salaries and other expenses................ 162,458 57,884(4) 220,342 -- -- 448,364(3) Franchise cost of merchandise sold.......... 35,841 -- 35,841 -- -- -- General and administrative expenses.................. 77,559 (60,484)(4) 17,075 513,481 (10,535)(2) (467,509)(3) Indemnified litigation expenses.................. -- -- -- 6,600 -- (6,600)(5) Nonrecurring charges(14).... -- -- -- 14,392 (7,792)(2) -- Amortization of intangibles............... 6,957 939(6) 7,896 24,044 -- (5,127)(6) -------- -------- -------- -------- -------- --------- Total operating expenses............ 385,330 (1,661) 383,669 848,663 (33,180) (35,074) Operating profit...... 49,754 1,661 51,415 55,341 13,006 30,872 Interest expense.............. 10,043 (752)(7) 9,291 46,184 -- 28,263(8) Interest income and other..... (304) -- (304) (88) -- -- -------- -------- -------- -------- -------- --------- Earnings before income taxes............... 40,015 2,413 42,428 9,245 13,006 2,609 Income tax expense............ 17,044 965(10) 18,009 7,760 -- 8,713(11) -------- -------- -------- -------- -------- --------- Net earnings.......... 22,971 1,448 24,419 1,485 13,006 (6,104) Preferred dividends........... -- -- -- -- -- 9,888(13) -------- -------- -------- -------- -------- --------- Net earnings allocable to common stockholders........ $ 22,971 $ 1,448 $ 24,419 $ 1,485 $ 13,006 $ (15,992) ======== ======== ======== ======== ======== ========= Basic earnings per share(15): Earnings per share.......... $ 1.02 ======== Weighted average common shares outstanding........ 23,854 ======== Diluted earnings per share(15): Earnings per share.......... $ 1.01 ======== Weighted average common and common equivalent shares outstanding............... 24,204 ======== Ratio of earnings to fixed charges(16)................. 3.6x ======== ACQUISITIONS OFFERING PRO FORMA PRO FORMA ADJUSTMENTS COMBINED ------------ ----------- ---------- Revenues Store Rentals and fees.......... $1,204,971 $ -- $1,204,971 Merchandise sales......... 65,289 -- 65,289 Other..................... 793 -- 793 Franchise Merchandise sales......... 37,385 -- 37,385 Royalty income and fees... 6,274 -- 6,274 ---------- ----- ---------- Total revenues........ 1,314,712 -- 1,314,712 Operating expenses Direct store expenses Depreciation of rental merchandise............. 328,000 -- 328,000 Cost of merchandise sold.................... 45,606 -- 45,606 Salaries and other expenses................ 668,706 -- 668,706 Franchise cost of merchandise sold.......... 35,841 -- 35,841 General and administrative expenses.................. 52,512 -- 52,512 Indemnified litigation expenses.................. -- -- -- Nonrecurring charges(14).... 6,600 -- 6,600 Amortization of intangibles............... 26,813 -- 26,813 ---------- ----- ---------- Total operating expenses............ 1,164,078 -- 1,164,078 Operating profit...... 150,634 -- 150,634 Interest expense.............. 83,738 (519)(9) 83,219 Interest income and other..... (392) -- (392) ---------- ----- ---------- Earnings before income taxes............... 67,288 519 67,807 Income tax expense............ 34,482 208(12) 34,690 ---------- ----- ---------- Net earnings.......... 32,806 311 33,117 Preferred dividends........... 9,888 -- 9,888 ---------- ----- ---------- Net earnings allocable to common stockholders........ $ 22,918 $ 311 $ 23,229 ========== ===== ========== Basic earnings per share(15): Earnings per share.......... $ 0.96 $ 0.97 ========== ========== Weighted average common shares outstanding........ 23,854 23,854 ========== ========== Diluted earnings per share(15): Earnings per share.......... $ 0.95 $ 0.96 ========== ========== Weighted average common and common equivalent shares outstanding............... 24,204 24,204 ========== ========== Ratio of earnings to fixed charges(16)................. 1.7x 1.7x ========== ========== 41 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) The following historical combined statement of operations of Renters Choice and Central Rents for the year ended December 31, 1997 has been derived from the audited financial statements of the respective entities: (2) Reflects the elimination of Rent-A-Center's Non-Rent-to-Own Businesses, including used automobile retailing, credit retailing and check cashing businesses, which had combined total revenues of $20.2 million. These operations, which are accounted for 41
RENTERS CHOICE AND CENTRAL RENTS RENTERS CENTRAL HISTORICAL CHOICE RENTS COMBINED -------- -------- ------------- Revenues Store Rentals and fees................ $275,344 $ 98,582 $373,926 Merchandise sales............... 14,125 4,847 18,972 Other........................... 679 114 793 Franchise Merchandise sales............... 37,385 -- 37,385 Royalty income and fees......... 4,008 -- 4,008 -------- -------- -------- Total revenues............. 331,541 103,543 435,084 Operating expenses Store expenses Depreciation of rental merchandise................... 57,223 30,407 87,630 Cost of merchandise sold........ 11,365 3,520 14,885 Salaries and other expenses..... 162,458 -- 162,458 Franchise cost of merchandise sold............................ 35,841 -- 35,841 General and administrative expenses........................ 13,304 64,255 77,559 Amortization of intangibles........ 5,412 1,545 6,957 -------- -------- -------- Total operating expenses... 285,603 99,727 385,330 Operating profit........... 45,938 3,816 49,754 Interest expense..................... 2,194 7,849 10,043 Interest income...................... (304) -- (304) -------- -------- -------- Earnings (loss) before income taxes............ 44,048 (4,033) 40,015 Income tax expense (benefit)......... 18,170 (1,126) 17,044 -------- -------- -------- Net earnings (loss)........ $ 25,878 $ (2,907) $ 22,971 ======== ======== ======== Basic earnings per share: Earnings per share................. $ 1.04 ======== Weighted average common shares outstanding..................... 24,844 ======== Diluted earnings per share: Earnings per share................. $ 1.03 ======== Weighted average common shares outstanding..................... 25,194 ======== 42 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) as separate divisions by Rent-A-Center, were exited by Renters Choice shortly after the acquisition. Nonrecurring charges are discussed in Note (14). 42
INCREASE (DECREASE) (3) -------------------------------------------------- STORE RENTALS EXPENSES SALARIES AND DEPRECIATION AND GENERAL AND FEES OF RENTAL OTHER ADMINISTRATIVE REVENUE MERCHANDISE EXPENSES EXPENSES ------- ------------ -------- -------------- Reclassification of Rent-A-Center store expenses to conform with Renters Choice's presentation....... $ -- $ -- $457,807 $(457,807) Reclassification Rent-A-Center volume and cash discounts from purchases to conform with Renters Choice's presentation................ (4,202) (4,202) -- -- Reclassification of Rent-A-Center advertising rebates as a reduction in store expenses to conform with Renters Choice's presentation................ -- -- (5,798) 5,798 Elimination of income related to a rebate of management fees from Thorn plc......... -- -- -- 2,900 Elimination of duplicate corporate overhead and regional management expenses: (a) Corporate overhead Salaries and benefits.... -- -- -- (17,400) Administrative expenses............... -- -- -- (1,000) Regional management expenses................. -- -- (2,500) -- Adjustment to depreciation expense(b).................. -- -- (1,145) -- ------- ------- -------- --------- $(4,202) $(4,202) $448,364 $(467,509) ======= ======= ======== ========= 43 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------- (a) In addition to cost savings of $20.9 million from the acquisition of Rent-A-Center and $2.6 million (see Note (4)) from the acquisition of Central Rents, included in the Unaudited Pro Forma Combined Statements of Operations, Renters Choice is planning to implement certain other initiatives which are expected to generate an additional $9.9 million of annual cost savings. These include making changes to Rent-A-Center's product distribution network, and utilizing Rent-A-Center's service and repair network, which would result in estimated annual savings of $22.3 million and $4.6 million, respectively. In addition, Renters Choice is considering other initiatives to increase Rent-A-Center's store efficiencies and operating profit, resulting in increased costs of approximately $17.0 million. (b) Adjustment to reduce depreciation expense, representing the difference between historical depreciation for property assets acquired in the Rent-A-Center acquisition and depreciation computed based on the allocated purchase price of such assets. The adjustment was calculated for transportation equipment, furniture and equipment and leasehold improvements on a straight-line basis over their useful lives of four to six years.
Pro forma depreciation expense......................... $ 29,004 Less historical depreciation expense................... (30,149) -------- Depreciation expense adjustment........................ $ (1,145) ======== (5) Elimination of litigation expense relating to Minnesota and Pennsylvania class action litigation indemnified by seller as part of the acquisition of Rent-A-Center. (6) Reversal of historical intangible amortization and recording the pro forma intangible amortization required as a result of the Central Rents and Rent-A-Center acquisitions, 43
INCREASE (DECREASE) (4) ----------------------------------- STORE EXPENSES SALARIES GENERAL AND AND ADMINISTRATIVE OTHER EXPENSES TOTAL -------- -------------- ----- Reclassification of Central Rents other store expenses to conform with Renters Choice's presentation.................. $57,684 $(57,684) $ -- Elimination of duplicate corporate overhead and additional field expenses as a result of the Central Rents acquisition............................ 200 (2,800) (2,600) ------- -------- ------- $57,884 $(60,484) $(2,600) ======= ======== ======= 44 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) using estimated useful lives of 5 years for the noncompete agreements, and 30 years for excess costs over fair market value of net assets acquired: (7) Change in interest expense as a result of borrowings on the existing revolving credit agreement used to finance the acquisition of Central Rents:
CENTRAL RENT-A- RENTS CENTER ------- ------------- Reversal of historical intangible amortization... $(1,545) $(24,044) Pro forma intangible amortization................ 2,484 18,917 ------- -------- $ 939 $ (5,127) ======= ======== (8) Net adjustment to interest expense as a result of the issuance of debt to complete the acquisition of Rent-A-Center:
Borrowings of $101.4 million at 7% on the existing revolving credit agreement used to finance the acquisition of Central Rents............................................. $ 7,097 Elimination of historical interest expense for Central Rents..................................................... (7,849) ------- $ (752) ======= 44
Senior credit facilities: $120 million Term Loan A at an annual interest rate of 7.625%................................................. $ 9,150 $270 million Term Loan B at an annual interest rate of 7.875%................................................. 21,263 $330 million Term Loan C at an annual interest rate of 8.125%................................................. 26,813 Annual commitment fee of 0.50% applied to the $120 million unused balance of the Revolving Credit Facility........ 600 Annual 2.50% fee applied to the Letter of Credit Facility............................................... 3,056 $175 million Senior Subordinated Facility at an annual interest rate of 11.625%.................................. 20,344 -------- Cash interest expense....................................... 81,226 Amortization of deferred financing costs(a)................. 2,366 -------- Pro forma interest expense for the acquisitions............. 83,591 Interest expense relating to existing Renters Choice debt not refinanced............................................ 147 -------- Pre-offering pro forma interest expense..................... 83,738 Less: Renters Choice and Central Rents pro forma combined interest expense plus Rent-A-Center historical interest expense................................................... (55,475) -------- Pre-offering net interest expense adjustment................ $ 28,263 ======== 45 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------- (a) Deferred financing costs are amortized over the term of the related debt (ten years for the Senior Subordinated Facility, six years for the Term Loan A, seven and one-half years for Term Loan B, eight and one-half years for Term Loan C, and six years for both the Revolving Credit and Letter of Credit Facilities). A change of 0.125% in the annual interest rates would result in a $1.1 million change in pro forma interest expense for the year. (9) Net adjustments to interest expense as a result of the Offering: (10) Income tax expense adjustment related to the effects of the Central Rents pro forma adjustments at a 40% effective tax rate. (11) Income tax expense adjustment related to the effects of the pro forma adjustments based upon an assumed composite income tax rate of 40% applied to combined pro forma earnings before income taxes, adjusted for nondeductible goodwill amortization of $18.9 million related to the acquisition of Rent-A-Center. (12) Income tax expense adjustment related to the effects of the Offering adjustments, at a 40% effective tax rate. (13) In-kind dividends at 3.75% per annum on the $260 million of redeemable convertible preferred stock issued to finance a portion of the acquisition of Rent-A-Center. For the first five years subsequent to issuance, Renters Choice has the option to pay the quarterly dividends in cash or in-kind with the issuance of additional redeemable convertible preferred stock. Renters Choice's ability to pay the dividends in cash will be subject to restrictions under the Senior Credit Facilities and Senior Subordinated Notes. Dividends reflected herein are assumed to be paid in-kind with the issuance of additional redeemable convertible preferred stock. (14) Nonrecurring charges relate to Rent-A-Center's discontinued Non-Rent-to-Own Businesses, the closing of certain non-performing rent-to-own stores, and reorganization of certain administrative support functions aggregating approximately $12.3 million, and approximately $2.1 million related primarily to Rent-A-Center's writedown of cellular phone inventory. (15) Weighted average common shares outstanding for both basic and diluted earnings per share were decreased by 990,099 to give pro forma effect of the repurchase of $25 million of Renters Choice common stock at $25.25 per share from Renters 45
Issuance of Senior Subordinated Notes due 2008 -- $175 million at 11.0%.......................................... $ 19,250 Amortization of related deferred financing costs............ 575 Repayment of Senior Subordinated Facility -- $175 million at 11.625%................................................... (20,344) -------- $ (519) ======== 46 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Choice's Chief Executive Officer on August 18, 1998. The quoted market price of Renters Choice common stock at the close of business on August 17, 1998 was $25.25. The assumed conversion of the redeemable convertible preferred stock would have had an anti-dilutive effect on diluted earnings per share for the year ended December 31, 1997, and therefore has been excluded from the computation thereof. (16) In calculating the ratio of earnings to fixed charges, earnings consist of earnings before income taxes plus fixed charges (excluding capitalized interest). Fixed charges consist of interest expense (which includes amortization of deferred financing costs) whether expensed or capitalized and one-fourth of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. 46 47 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 See accompanying notes to Unaudited Pro Forma combined Statement of Operations 47
RENTERS CHOICE RENTERS CHOICE AND CENTRAL AND CENTRAL RENTS CENTRAL RENTS RENTS RENT-A-CENTER HISTORICAL PRO FORMA PRO FORMA HISTORICAL COMBINED(1) ADJUSTMENTS COMBINED PRE-ACQUISITION(17) -------------- ------------- -------------- ------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues Store Rentals and fees................... $439,486 $ -- $439,486 $505,246 Merchandise sales.................. 26,583 -- 26,583 42,981 Other.............................. 2,094 -- 2,094 -- Franchise Merchandise sales.................. 28,440 -- 28,440 -- Royalty income and fees............ 3,777 -- 3,777 1,372 -------- -------- -------- -------- Total revenues.................. 500,380 -- 500,380 549,599 Operating expenses Direct store expenses Depreciation of rental merchandise....................... 102,804 -- 102,804 146,712 Cost of merchandise sold........... 18,574 -- 18,574 33,731 Salaries and other expenses........ 238,577 24,598(4) 263,175 -- Franchise cost of merchandise sold.... 27,318 -- 27,318 -- General and administrative expenses... 45,899 (25,681)(4) 20,218 316,845 Indemnified litigation expenses....... -- -- -- 5,600 Nonrecurring charges(14).............. -- -- -- 10,877 Amortization of intangibles........... 7,874 947(6) 8,821 13,780 -------- -------- -------- -------- Total operating expenses........ 441,046 (136) 440,910 527,545 Operating profit................ 59,334 136 59,470 22,054 Interest expense...................... 31,608 (5,221)(7) 26,387 30,349 Interest income....................... (1,932) -- (1,932) -- -------- -------- -------- -------- Earnings before income taxes.... 29,658 5,357 35,015 (8,295) Income tax expense.................... 13,914 2,142(10) 16,056 2,238 -------- -------- -------- -------- Net earnings.................... 15,744 3,215 18,959 (10,533) Preferred dividends................... 1,496 -- 1,496 -- -------- -------- -------- -------- Net earnings allocable to common stockholders.................. $ 14,248 $ 3,215 $ 17,463 $(10,533) ======== ======== ======== ======== Basic earnings per share(15): Earnings per share................... $ 0.73 ======== Weighted average common shares outstanding........................ 23,920 ======== Diluted earnings per share(15): Earnings per share................... $ 0.72 ======== Weighted average common and common equivalent shares outstanding...... 24,152 ======== Ratio of earnings to fixed charges(16).......................... 2.1x ======== RENT-A-CENTER PRO FORMA ADJUSTMENTS -------------------------- ELIMINATION OF NON- RENT-TO-OWN ACQUISITIONS OFFERING COMBINED BUSINESSES ACQUISITION PRO FORMA ADJUSTMENTS PRO FORMA ----------- ----------- ------------ ----------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues Store Rentals and fees................... $ (4,725)(2) $ (1,631)(3) $ 938,376 $ -- $ 938,376 Merchandise sales.................. (16,042)(2) -- 53,522 -- 53,522 Other.............................. -- -- 2,094 -- 2,094 Franchise Merchandise sales.................. -- -- 28,440 -- 28,440 Royalty income and fees............ -- -- 5,149 -- 5,149 -------- --------- ---------- ----- ---------- Total revenues.................. (20,767) (1,631) 1,027,581 -- 1,027,581 Operating expenses Direct store expenses Depreciation of rental merchandise....................... -- (1,631)(3) 247,885 -- 247,885 Cost of merchandise sold........... (15,986)(2) -- 36,319 -- 36,319 Salaries and other expenses........ -- 268,823(3) 531,998 -- 531,998 Franchise cost of merchandise sold.... -- -- 27,318 -- 27,318 General and administrative expenses... (8,165)(2) (278,973)(3) 49,925 -- 49,925 Indemnified litigation expenses....... -- (5,600)(5) -- -- -- Nonrecurring charges(14).............. (5,277)(2) -- 5,600 -- 5,600 Amortization of intangibles........... -- (2,080)(6) 20,521 -- 20,521 -------- --------- ---------- ----- ---------- Total operating expenses........ (29,428) (19,461) 919,566 -- 919,566 Operating profit................ 8,661 17,830 108,015 -- 108,015 Interest expense...................... -- 11,084(8) 67,820 (389)(9) 67,431 Interest income....................... -- -- (1,932) -- (1,932) -------- --------- ---------- ----- ---------- Earnings before income taxes.... 8,661 6,746 42,127 389 42,516 Income tax expense.................... -- 4,234(11) 22,528 156(12) 22,684 -------- --------- ---------- ----- ---------- Net earnings.................... 8,661 2,512 19,599 233 19,832 Preferred dividends................... -- 6,166(13) 7,662 -- 7,662 -------- --------- ---------- ----- ---------- Net earnings allocable to common stockholders.................. $ 8,661 $ (3,654) $ 11,937 $ 233 $ 12,170 ======== ========= ========== ===== ========== Basic earnings per share(15): Earnings per share................... $ 0.50 $ 0.51 ========== ========== Weighted average common shares outstanding........................ 23,920 23,920 ========== ========== Diluted earnings per share(15): Earnings per share................... $ 0.49 $ 0.50 ========== ========== Weighted average common and common equivalent shares outstanding...... 24,152 24,152 ========== ========== Ratio of earnings to fixed charges(16).......................... 1.5x 1.5x ========== ========== 48 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) The following historical combined statement of operations of Renters Choice and Central Rents for the nine months ended September 30, 1998 has been derived from the unaudited financial statements of the respective entities: 48
RENTERS CHOICE AND PLUS CENTRAL CENTRAL RENTS RENTERS RENTS PRE HISTORICAL CHOICE(A) ACQUISITION(B) COMBINED --------- -------------- -------------- Revenues Store Rentals and fees........................................ $400,793 $38,693 $439,486 Merchandise sales....................................... 24,329 2,254 26,583 Other................................................... 2,094 -- 2,094 Franchise Merchandise sales....................................... 28,440 -- 28,440 Royalty income and fees................................. 3,777 -- 3,777 -------- ------- -------- Total revenues...................................... 459,433 40,947 500,380 Operating expenses Direct store expenses Depreciation of rental merchandise...................... 91,382 11,422 102,804 Cost of merchandise sold................................ 16,600 1,974 18,574 Salaries and other expenses............................. 238,577 -- 238,577 Franchise cost of merchandise sold........................ 27,318 -- 27,318 General and administrative expenses....................... 18,054 27,845 45,899 Amortization of intangibles............................... 7,767 107 7,874 -------- ------- -------- Total operating expenses............................ 399,698 41,348 441,046 Operating profit.................................... 59,735 (401) 59,334 Interest expense............................................ 23,486 8,122 31,608 Interest income............................................. (1,932) -- (1,932) -------- ------- -------- Earnings before income taxes........................ 38,181 (8,523) 29,658 Income tax expense (benefit)................................ 17,153 (3,239) 13,914 -------- ------- -------- Net earnings........................................ 21,028 (5,284) 15,744 Preferred dividends......................................... 1,496 -- 1,496 -------- ------- -------- Earnings allocable to common stockholders........... $ 19,532 $(5,284) $ 14,248 ======== ======= ======== Basic earnings per share: Earnings per share........................................ $ 0.79 ======== Weighted average common shares outstanding................ 24,910 ======== Diluted earnings per share: Earnings per share........................................ $ 0.78 ======== Weighted average common shares outstanding................ 27,034 ======== 49 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------- (a) The Renters Choice information above has been taken from its Form 10-Q for the nine months ended September 30, 1998. Included within this information is the operations of Rent-A-Center for the period (August 5, 1998 through September 30, 1998) following the acquisition by Renters Choice. (b) The Central Rents information above reflects their operations for the period (January 1, 1998 through May 28, 1998) prior to the acquisition by Renters Choice. (2) Reflects the elimination of Rent-A-Center's Non-Rent-to-Own Businesses, including used automobiles retailing, credit retailing and check cashing businesses, which had combined total revenues of $20.8 million. These operations, which are accounted for as separate divisions by Rent-A-Center, were exited by Renters Choice shortly after the acquisition. Nonrecurring charges are discussed in Note (14). 49
(3) Increase (decrease) ------------------------------------------------------- STORE EXPENSES RENTALS DEPRECIATION SALARIES GENERAL AND AND FEES OF RENTAL AND OTHER ADMINISTRATIVE REVENUE MERCHANDISE EXPENSES EXPENSES -------- ------------ --------- -------------- Reclassification of Rent-A-Center store expenses to conform with Renters Choice's presentation....... $ -- $ -- $275,991 $(275,991) Reclassification Rent-A-Center volume and cash discounts from purchases to conform with Renters Choice's presentation................ (1,631) (1,631) -- -- Reclassification of Rent-A-Center advertising rebates as a reduction in store expenses to conform with Renters Choice's presentation................ -- -- (4,851) 4,851 Elimination of income related to a rebate of management fees from Thorn plc......... -- -- -- 2,900 Elimination of duplicate corporate overhead and regional management expenses:(a) Corporate overhead Salaries and benefits.... -- -- -- (10,150) Administrative expenses............... -- -- -- (583) Regional management expenses................. -- -- (1,458) -- Adjustment to depreciation expense(b):.............. -- -- (859) -- ------- ------- -------- --------- $(1,631) $(1,631) $268,823 $(278,973) ======= ======= ======== ========= 50 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------- (a) Represents approximately seven months of estimated cost savings relating to the acquisition of Rent-A-Center, which reflects the approximate period that Rent-A-Center historical operations are included within the accompanying Unaudited Pro Forma Combined Statement of Operations. (b) Adjustment to reduce depreciation expense, representing the difference between historical depreciation for property assets acquired in the Rent-A-Center acquisition and depreciation computed based on the allocated purchase price of such assets. The adjustment was calculated for transportation equipment, furniture and equipment, and leasehold improvements on a straight-line basis over their useful lives of four to six years.
Pro forma depreciation expense......................... $ 17,720 Less historical depreciation expense................... (18,579) -------- Depreciation expense adjustment........................ $ (859) ======== (5) Elimination of litigation expense relating to Minnesota and Pennsylvania class action litigation indemnified by seller as part of the acquisition of Rent-A-Center. (6) Reversal of historical intangible amortization and recording of the pro forma intangible amortization required as a result of the acquisition of Central Rents and the acquisition of Rent-A-Center, using estimated useful lives of 5 years for the 50
INCREASE (DECREASE) (4) -------------------------- STORE EXPENSES GENERAL AND SALARIES ADMINISTRATIVE AND OTHER EXPENSES --------- -------------- Reclassification of Central Rents' other store expenses to conform with Renters Choice's presentation..................................... $24,514 $(24,514) Elimination of duplicate corporate overhead and additional field expenses as a result of the Central Rents acquisition........................ 84 (1,167) ------- -------- $24,598 $(25,681) ======= ======== 51 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) noncompete agreements, and 30 years for excess costs over fair market value of net assets acquired:
CENTRAL RENTS RENT-A-CENTER ------- ------------- Reversal of historical intangible amortization recorded by respective entities.................... $ (107) $(13,780) Reversal of historical intangible amortization relating to the acquisition of Central Rents and Rent-A-Center recorded by Renters Choice from the acquisition date through September 30, 1998........ (809) (2,488) Pro forma intangible amortization for nine months.... 1,863 14,188 ------ -------- $ 947 $ (2,080) ====== ======== (8) Net adjustment to interest expense for nine months as a result of the issuance of debt to complete the acquisition of Rent-A-Center:
(7) Change in interest expense for nine months as a result of borrowings on the existing revolving credit agreement used to finance the acquisition of Central Rents: $ 5,324 Borrowings of $101.4 million at 7%, for nine months, on the existing revolving credit agreement used to finance the acquisition of Central Rents.............................. (8,122) Elimination of historical interest expense for Central Rents prior to the acquisition by Renters Choice................ (2,423) Elimination of historical interest expense recorded by Renters Choice from the acquisition date through September 30, 1998, relating to the acquisition of Central Rents.... ------- $(5,221) ======= 51
Senior credit facilities: $120 million Term Loan A at an annual interest rate of 7.625%................................................. $ 6,863 $270 million Term Loan B at an annual interest rate of 7.875%................................................. 15,947 $330 million Term Loan C at an annual interest rate of 8.125%................................................. 20,109 Annual commitment fee of 0.50% applied to the $120 million unused balance of the Revolving Credit Facility........ 450 Annual 2.50% fee applied to the Letter of Credit Facility............................................... 2,292 $175 million Senior Subordinated Facility at an annual interest rate of 11.625%.................................. 15,258 -------- Cash interest expense....................................... 60,919 52 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------- (a) Deferred financing costs are amortized over the term of the related debt (ten years for the Senior Subordinated Facility, six years for the Term Loan A, seven and one-half years for Term Loan B, eight and one-half years for Term Loan C, and six years for both the Revolving Credit and Letter of Credit Facilities). Includes $5,017 of financing costs expensed in Renters Choice's third quarter relating to interim financing utilized in the acquisition of Rent-A-Center until permanent financing was obtained. A change of 0.125% in annual interest rates would result in a $.8 million change in pro forma interest expense for the nine months ended September 30, 1998. (9) Net adjustments to interest expense for nine months as a result of the Offering:
Amortization of deferred financing costs(a)................. 6,792 -------- Pro forma interest expense for the acquisitions............. 67,711 Interest expense relating to existing Renters Choice debt not refinanced............................................ 109 -------- Pre-Offering pro forma interest expense..................... 67,820 Less: Renters Choice and Central Rents pro forma combined interest expense plus Rent-A-Center historical interest expense................................................... (56,736) -------- Pre-Offering net interest expense adjustment................ $ 11,084 ======== (10) Income tax expense adjustment related to the effects of the Central Rents pro forma adjustments at a 40% effective tax rate. (11) Income tax expense adjustment related to the effects of the pro forma adjustments based upon an assumed composite income tax rate of 40% applied to combined pro forma earnings before income taxes, adjusted for nondeductible goodwill amortization of $14.2 million related to the acquisition of Rent-A-Center. (12) Income tax expense adjustment related to the effects of the Offering adjustments, at a 40% effective tax rate. (13) Nine months of in-kind dividends at 3.75% per annum on the $260 million of redeemable convertible preferred stock issued to finance a portion of the acquisition of Rent-A-Center. For the first five years subsequent to issuance, Renters Choice has the option to pay the quarterly dividends in cash or in-kind with the issuance of additional redeemable convertible preferred stock. Renters Choice's ability to pay the 52
Issuance of Senior Subordinated Notes due 2008 -- $175 million at 11.0%.......................................... $ 14,437 Amortization of related deferred financing costs............ 432 Repayment of Senior Subordinated Facility -- $175 million at 11.625%................................................... (15,258) -------- $ (389) ======== 53 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) dividends in cash will be subject to restrictions under the Senior Credit Facilities and Senior Subordinated Notes. Dividends reflected herein are assumed to be paid in-kind with the issuance of additional redeemable convertible preferred stock. (14) Nonrecurring charges relate to Rent-A-Center's discontinued Non-Rent-to-Own businesses, the closing of certain non-performing Rent-to-Own stores, and reorganization of certain administrative support functions aggregating approximately $9.8 million and approximately $1.1 million related primarily to Rent-A-Center's writedown of cellular phone inventory. (15) Weighted average common shares outstanding for both basic and diluted earnings per share were decreased by 990,099 to give pro forma effect of the repurchase of $25 million of Renters Choice common stock at $25.25 per share from Renters Choice's Chief Executive Officer on August 18, 1998. The quoted market price of Renters Choice common stock at the close of business on August 17, 1998 was $25.25. The assumed conversion of the redeemable convertible preferred stock would have had an anti-dilutive effect on diluted earnings per share for the nine months ended September 30, 1998, on a pro forma basis, and therefore has been excluded from the calculation thereof. (16) In calculating the ratio of earnings to fixed charges, earnings consist of earnings before income taxes plus fixed charges (excluding capitalized interest). Fixed charges consist of interest expense (which includes amortization of deferred financing costs) whether expensed or capitalized and one-fourth of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. (17) The Rent-A-Center pre-acquisition information reflects their operations for the period from January 1, 1998 to August 4, 1998. This information was derived from Rent-A-Center's internal financial statements. In order to prepare a statement of operations for the aforementioned period, the results for the quarter ended March 31, 1998 were combined with the results for the period from April 1, 1998 to August 4, 1998. 53
Pro forma in-kind dividends for nine months ended September 30, 1998.................................................. $ 7,662 Less: historical preferred dividends recorded by Renters Choice post acquisition................................... (1,496) ------- Pro forma preferred dividend adjustment..................... $ 6,166 ======= 54 RENTERS CHOICE, INC. SELECTED HISTORICAL FINANCIAL DATA The selected historical financial data for Renters Choice as of and for each of the five years in the period ended December 31, 1997, have been derived from Renters Choice's consolidated financial statements which have been audited and reported upon by Grant Thornton LLP. The selected historical financial data for Renters Choice as of and for the nine months ended September 30, 1997 and 1998 have been derived from Renters Choice's unaudited consolidated financial statements which were prepared on the same basis as Renters Choice's audited financial statements and include, in the opinion of Renters Choice's management, all adjustments necessary to present fairly the information presented for such interim periods. This information should be read in conjunction with Renters Choice's audited consolidated financial statements and notes thereto included herein, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other financial information included elsewhere in this prospectus. Because of the significant growth of Renters Choice from acquisitions, the historical results of operations, its period-to-period comparisons of such results and certain financial data may not be comparable, meaningful or indicative of future results. 54
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------------------- --------------------- 1993(1) 1994(1) 1995 1996 1997 1997 1998 ------- ------- -------- -------- -------- -------- ---------- (DOLLARS IN THOUSANDS) STATEMENTS OF EARNINGS DATA: Total revenue.................. $53,212 $74,385 $133,289 $237,965 $331,541 $239,253 $ 459,433 Direct store expenses Depreciation of rental merchandise.................. 11,626 15,614 29,640 42,978 57,223 42,271 91,382 Other store expenses......... 29,576 40,701 74,966 124,934 173,823 127,694 255,177 ------- ------- -------- -------- -------- -------- ---------- 41,202 56,315 104,606 167,912 231,046 169,965 346,559 Franchise operating expense(2)................... -- -- -- 24,010 35,841 22,929 27,318 General and administrative expenses..................... 2,151 2,809 5,766 10,111 13,304 9,597 18,054 Amortization of intangibles.... 5,304 6,022 3,109 4,891 5,412 4,016 7,767 ------- ------- -------- -------- -------- -------- ---------- Total operating expenses............. 48,657 65,146 113,481 206,924 285,603 206,507 399,698 ------- ------- -------- -------- -------- -------- ---------- Operating profit....... 4,555 9,239 19,808 31,041 45,938 32,746 59,735 Interest expense............... 1,817 2,160 2,202 606 2,194 1,402 18,469 Nonrecurring financing costs(8)..................... -- -- -- -- -- -- 5,017 Interest income................ -- -- (890) (667) (304) (256) (1,932) ------- ------- -------- -------- -------- -------- ---------- Earnings before income taxes................ 2,738 7,079 18,496 31,102 44,048 31,600 38,181 Income tax expense............. 937 1,600 7,784 13,076 18,170 13,108 17,153 ------- ------- -------- -------- -------- -------- ---------- Net earnings........... 1,801 5,479 10,712 18,026 25,878 18,492 21,028 Preferred dividends............ -- -- -- -- -- -- 1,496 ------- ------- -------- -------- -------- -------- ---------- Net earnings allocable to common stockholders......... $ 1,801 $ 5,479 $ 10,712 $ 18,026 $ 25,878 $ 18,492 $ 19,532 ======== ======== ======== ======== ========== Basic earnings per share....... $ .52 $ .73 $ 1.04 $ .74 $ .79 ======== ======== ======== ======== ========== Diluted earnings per share..... $ .52 $ .72 $ 1.03 $ .74 $ .78 ======== ======== ======== ======== ========== 55 RENTERS CHOICE, INC. SELECTED HISTORICAL FINANCIAL DATA -- (CONTINUED) 55
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------------------- --------------------- 1993(1) 1994(1) 1995 1996 1997 1997 1998 ------- ------- -------- -------- -------- -------- ---------- (DOLLARS IN THOUSANDS) OTHER FINANCIAL DATA: Depreciation and amortization(3).............. $ 6,164 $ 7,207 $ 5,239 $ 8,571 $ 11,013 $ 8,002 $ 18,306 Capital expenditures(4)........ 1,489 1,715 3,473 8,187 10,446 7,636 9,732 Ratio of earnings to fixed charges(5)................... 2.1x 3.2x 5.1x 7.9x 6.7x 7.8x 2.7x BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents...... $ 1,359 $ 1,441 $ 35,321 $ 5,920 $ 4,744 $ 6,280 $ 90,483 Rental merchandise, net........ 20,672 28,096 64,240 95,110 112,759 109,696 481,981 Total assets................... 34,813 36,959 147,294 174,467 208,868 206,385 1,646,813 Total debt..................... 27,592 23,383 40,850 18,993 27,172 33,652 892,912 Total stockholders' equity..... 4,168 9,286 96,484 125,503 152,753 144,742 148,879 OPERATING DATA: Number of stores (end of period)...................... 112 114 325 423 504 503 2,125 Average annual revenue per store(6)..................... $ 591 $ 653 $ 626 $ 608 $ 610 $ 611 $ 600 Comparable store revenue growth(7).................... 11.1% 10.8% 18.1% 3.8% 8.1% 9.0% 8.7% Revenues: Store revenue Rentals and fees........... $51,162 $70,590 $126,264 $198,486 $275,344 $200,970 $ 400,793 Merchandise sales.......... 1,678 3,470 6,383 10,604 14,125 10,774 24,329 Other...................... 372 325 642 687 679 525 2,094 Franchise revenue Merchandise sales.......... -- -- -- 25,229 37,385 23,971 28,440 Royalty income and fees.... -- -- -- 2,959 4,008 3,013 3,777 ------- ------- -------- -------- -------- -------- ---------- Total revenue.......... $53,212 $74,385 $133,289 $237,965 $331,541 $239,253 $ 459,433 ======= ======= ======== ======== ======== ======== ========== 56 NOTES TO SELECTED HISTORICAL FINANCIAL DATA OF RENTERS CHOICE, INC. (1) In each of the periods presented ending prior to January 1, 1995, we operated as an S corporation under Subchapter S of the Internal Revenue Code and comparable provisions of certain state tax laws. Accordingly, prior to January 1, 1995, we were not subject to federal income taxation. Earnings per share are not provided for periods prior to January 1, 1995, because operating results for those periods are not comparable. (2) Prior to our acquisition of ColorTyme in May 1996, we conducted no franchise operations. Therefore, we presented franchise operation financial information for periods beginning with the year ended December 31, 1996. (3) This amount excludes depreciation of rental merchandise. (4) We exclude purchase of rental merchandise. (5) In calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges (excluding capitalized interest). Fixed charges consist of interest expense (which includes amortization of deferred financing costs) whether expensed or capitalized and one-fourth of rental expense, which we deem representative of that portion of rental expense estimated to be attributable to interest. (6) We annualized the revenues for the nine months ended September 30, 1997 and 1998. (7) Comparable store revenue growth for each period presented includes revenues only of stores open throughout the full period and the comparable prior period. (8) Nonrecurring finance charges for the nine months ended September 30, 1998, relate principally to interim financing utilized in the acquisition of Rent-A-Center until permanent financing was obtained. These finance charges include an availability fee of 1.25% and a utilization fee of 1.5% that were levied upon a $175 million bridge loan that was utilized for approximately two weeks before being repaid. 56 57 RENT-A-CENTER SELECTED HISTORICAL FINANCIAL DATA The selected historical financial data for Rent-A-Center as of and for each of the three years in the period ended March 31, 1998, have been derived from Rent-A-Center's audited consolidated financial statements. The selected historical financial data for Rent-A-Center as of and for the three months ended June 30, 1997 and 1998 have been derived from Rent-A-Center's unaudited consolidated financial statements which were prepared on the same basis as Rent-A-Center's audited financial statements and include, in the opinion of Rent-A-Center's management, all adjustments necessary to present fairly the information presented for such interim periods. This information should be read in conjunction with the consolidated financial statements of Rent-A-Center and notes thereto included herein, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the other financial information included elsewhere in this prospectus. 57
THREE MONTHS ENDED YEARS ENDED MARCH 31, JUNE 30, ------------------------------------ ----------------------- 1996 1997 1998 1997 1998 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA:(1) Total revenue.............. $ 897,927 $ 926,871 $ 904,004 $ 225,641 $ 235,421 Cost of sales.............. 43,345 39,793 45,574 8,524 12,503 Depreciation and amortization Rental merchandise....... 257,383 260,433 244,572 62,852 62,886 Other.................... 52,236 59,085 56,869 14,598 14,532 Salaries, wages and fringe benefits................. 255,768 272,242 279,796 68,488 72,960 Other operating expenses... 202,577 233,015 207,460 50,654 52,653 Nonrecurring charges(2).... 12,600 -- 14,392 -- -- ---------- ---------- ---------- ---------- ---------- Total operating expenses........ 823,909 864,568 848,663 205,116 215,534 ---------- ---------- ---------- ---------- ---------- Operating profit.......... 74,018 62,303 55,341 20,525 19,887 Interest expense, net...... 80,207 52,651 46,184 10,825 11,191 Other (income) expense..... 101 (254) (88) (81) 72 ---------- ---------- ---------- ---------- ---------- Earnings (loss) before income taxes........... (6,290) 9,906 9,245 9,781 8,624 Income tax expense......... 6,771 13,880 7,760 5,950 5,344 ---------- ---------- ---------- ---------- ---------- Net earnings (loss)........ $ (13,061) $ (3,974) $ 1,485 $ 3,831 $ 3,280 ========== ========== ========== ========== ========== RENT-TO-OWN FINANCIAL DATA:(3) Depreciation and amortization(4).......... $ 52,236 $ 59,085 $ 56,464 $ 14,541 $ 14,387 Capital expenditures(5).... 44,642 29,906 33,187 6,574 16,887 58 RENT-A-CENTER SELECTED HISTORICAL FINANCIAL DATA -- (CONTINUED) 58
THREE MONTHS ENDED YEARS ENDED MARCH 31, JUNE 30, ------------------------------------ ----------------------- 1996 1997 1998 1997 1998 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents.............. $ 19,225 $ 26,077 $ 23,755 $ 37,399 $ 27,486 Rental merchandise, net.... 304,164 276,012 292,965 268,564 303,682 Total assets............... 1,242,211 1,108,280 1,079,109 1,086,784 1,085,796 Total debt................. 1,042,729 714,235 714,223 714,827 714,663 Total stockholder's equity................... 88,529 239,026 236,483 242,857 239,763 RENT-TO-OWN OPERATING DATA: Number of stores (end of period).................. 1,306 1,367 1,384 1,392 1,404 Average annual revenue per store(6)................. $ 744 $ 694 $ 639 $ 648 $ 653 Revenues: Store revenue Rentals and fees....... $ 827,935 $ 864,256 $ 831,025 $ 212,256 $ 217,616 Merchandise sales...... 64,628 60,249 46,337 10,636 9,296 Franchise royalty income................. 5,364 2,366 2,266 582 560 ---------- ---------- ---------- ---------- ---------- Total rent-to-own revenue......... $ 897,927 $ 926,871 $ 879,628 $ 223,474 $ 227,472 Non-Rent-to-Own revenue................ -- -- 24,376 2,167 7,949 ---------- ---------- ---------- ---------- ---------- Total Revenue..... $ 897,927 $ 926,871 $ 904,004 $ 225,641 $ 235,421 ========== ========== ========== ========== ========== 59 NOTES TO SELECTED HISTORICAL FINANCIAL DATA OF RENT-A-CENTER (1) As part of the acquisition of Rent-A-Center, we acquired several Non-Rent-to-Own Businesses including used automobile retailing, credit retailing and check cashing businesses which began generating revenues in fiscal 1998. We sold AdvantEDGE Auto, Inc. in August 1998 for $4.0 million and are in the process of discontinuing the remaining Non-Rent-to-Own Businesses. (2) Nonrecurring charges in 1996 relate to the consolidation of corporate and field offices and reductions in the number of employees. In 1998, nonrecurring charges represents (i) approximately $12.3 million in charges related to discontinued Non-Rent-to-Own Businesses, closure of certain nonperforming rent-to-own stores and reorganized administrative support functions, and (ii) approximately $2.1 million related primarily to Rent-A-Center's writedown of cellular phone inventory. (3) The rent-to-own financial data and certain operating data represents Rent-A-Center's historical financial results, excluding the operations of the Non-Rent-to-Own Businesses, which are accounted for as separate divisions. (4) We excluded depreciation of rental merchandise. (5) We excluded purchases of rental merchandise. (6) Our revenues for the three months ended June 30, 1997 and 1998 have been annualized. 59 60 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the results of operations of Renters Choice for the period ending September 30, 1998 reflects the consummation of the acquisition of Rent-A-Center by Renters Choice, the issuance by Renters Choice of the Convertible Preferred Stock, the offering of the notes and the repurchase of $25 million of Renters Choice's Stock (together, the "Transactions"), all of which occurred during the third quarter of 1998. However, the discussion and analysis of the periods ending prior to September 30, 1998 do not reflect the significant impact of the Transactions on the operations and financial results of Renters Choice. See "Risk Factors," "Unaudited Pro Forma Combined Financial Information" and "-- Liquidity and Capital Resources of Renters Choice" for further discussion relating to the impact on Renters Choice. The following discussion should be read in conjunction with "Selected Historical Financial Information -- Renters Choice," "Rent-A-Center Selected Historical Financial Information" and the Financial Statements, including the notes thereto, incorporated by reference herein. GENERAL Renters Choice is the largest operator in the United States rent-to-own industry with approximately 25% market share (based on store count). In June 1998, Renters Choice entered into an agreement to acquire Rent-A-Center, Inc. (f/k/a Thorn Americas, Inc.) with Thorn plc, a UK-based company, to purchase Rent-A-Center, an indirect wholly-owned subsidiary of Thorn plc (the "Rent-A-Center Acquisition"). Proceeds from the Senior Credit Facilities, Senior Subordinated Facility and the sale of the Convertible Preferred Stock were used to fund the Rent-A-Center Acquisition, refinance Renters Choice's pre-Acquisition indebtedness and repurchase $25 million of Renters Choice's common stock held by J. Ernest Talley. Renters Choice's stores offer home electronics, appliances, and furniture and accessories under flexible rental purchase agreements that allow its customers to obtain ownership of the merchandise at the conclusion of the agreed upon rental period. Renters Choice has developed a plan to integrate the operations of Rent-A-Center with Renters Choice's business practices. The main initiatives of this integration plan are to (i) eliminate duplicative general and administrative expenses, (ii) eliminate Rent-A-Center's distribution network, (iii) implement Renters Choice's management practices into Rent-A-Center's stores, (iv) increase the number of higher margin products available for rent while eliminating lower margin products, and (v) divest non-core assets. Renters Choice believes its integration plan will be fully implemented within 18-24 months and will yield net annual cost savings of $30 million. In addition to the anticipated net cost savings from its implementation plan, Renters Choice anticipates additional improvement in sales and profitability as a direct result of the investment Renters Choice intends to make in Rent-A-Center's stores. As part of the Rent-A-Center Acquisition, Renters Choice acquired certain of the Non-Rent-to-Own Businesses which began generating revenues in fiscal 1998. Renters Choice is in the process of discontinuing the operations of the Non-Rent-to-Own Businesses. For the fiscal year ended March 31, 1998, the Non-Rent-to-Own Businesses generated revenue of $20.2 million and a net loss before income taxes of $5.2 million. Subsequent to the 60 61 Rent-A-Center Acquisition, Renters Choice sold all of the outstanding stock of AdvantEDGE Auto, Inc., a Non-Rent-to-Own Business, for approximately $4.0 million. Since 1993, Renters Choice's store count has grown from 27 to 2,127 through acquisitions and new store openings. In May 1998, Renters Choice completed the acquisition of Central Rents, Inc. (the "Central Acquisition"), acquiring substantially all of the assets of an underperforming rent-to-own operator which expanded Renters Choice's presence in a region of the country, the Southwest, which Renters Choice had strategically targeted for expansion. Renters Choice expects to generate annual general and administrative cost savings as a result of the Central Acquisition of $2.6 million. These cost savings will be derived primarily from the closing of Central Rents' corporate headquarters and the elimination of duplicative corporate and administrative functions. In addition to these general and administrative cost reductions, Renters Choice anticipates that it will gradually bring the store operating performance of Central Rents in line with its own store margins within 24-30 months. Renters Choice operates on a December 31 fiscal year end. Rent-A-Center's historical results of operations, which were based upon a March 31 fiscal year end, have not been restated to a December 31 year end for the purpose of any pro forma financial presentation of Renters Choice's historical operations. COMPONENTS OF INCOME Revenue. Renters Choice collects nonrefundable rental payments and fees in advance, generally on a weekly or monthly basis. This revenue is recognized when collected. Rental purchase agreements generally include a discounted early purchase option. Amounts received upon sales of merchandise pursuant to such options, and upon the sale of used merchandise, are recognized as revenue when the merchandise is sold. Franchise Revenue. Revenue from the sale of rental equipment is recognized upon shipment of the equipment to the franchisee. Franchise fee revenue is recognized upon completion of substantially all services and satisfaction of all material conditions required under the terms of the franchise agreement. Depreciation of Rental Merchandise. Except for tax purposes, Renters Choice depreciates its rental merchandise using the income forecasting method. The income forecasting method of depreciation does not consider salvage value and does not allow the depreciation of rental merchandise during periods when it is not generating rental revenue. For periods prior to 1996, Renters Choice used the income forecasting method to calculate depreciation of its rental merchandise for tax purposes. However, in 1996, Renters Choice began using the MACRS method of depreciation using a five-year class life for its rental purchase merchandise. In August 1997, the Internal Revenue Service issued a revenue ruling requiring rental purchase companies to use MACRS, with a three year class life for all purchases after August 5, 1997. Renters Choice began application of the ruling for all purchases effective August 5, 1997, and thereafter. Cost of Merchandise Sold. Cost of merchandise sold represents the book value net of accumulated depreciation of rental merchandise at time of sale. Salaries and Other Expenses. Salaries and other expenses include all salaries and wages paid to store level employees and regional management salaries, travel and occupancy, 61 62 including any related benefits and taxes, as well as all store level general and administrative expenses and selling, advertising, occupancy, nonrental depreciation and other operating expenses. General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to Renters Choice's headquarters such as salaries, taxes and benefits, occupancy, administrative and other operating expenses, as well as Regional Vice Presidents' salaries, travel and office expenses. RESULTS OF OPERATIONS -- RENTERS CHOICE The following table sets forth, for the periods indicated, certain historical Statement of Earnings data as a percentage of total revenue from stores and total revenue from franchise operations. 62
NINE MONTHS NINE MONTHS YEARS ENDED ENDED YEARS ENDED ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, --------------------- ------------- -------------------- ------------- 1995 1996 1997 1997 1998 1995 1996 1997 1997 1998 ----- ----- ----- ----- ----- ---- ----- ----- ----- ----- (COMPANY OWNED STORES ONLY) (FRANCHISE OPERATIONS) Revenue Rentals and fees..... 94.7% 94.7% 94.9% 94.7% 94.2% --% --% --% --% --% Merchandise Sales.... 4.8 5.0 4.9 5.1 5.4 -- 89.6 90.3 88.8 88.3 Other/Royalties...... 0.5 0.3 0.2 0.2 0.4 -- 10.4 9.7 11.2 11.7 ----- ----- ----- ----- ----- -- ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% 100.0% --% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== == ===== ===== ===== ===== Operating Expenses Direct store expenses Depreciation of rental merchandise...... 22.2% 20.5% 19.7% 20.0% 21.4% --% --% --% --% --% Cost of merchandise sold............. 3.8 3.9 3.9 3.9 3.9 -- 85.0 86.6 85.0 84.8 Salaries and other expenses......... 52.5 55.6 56.0 56.2 56.1 -- -- -- -- -- ----- ----- ----- ----- ----- -- ----- ----- ----- ----- 78.5 80.0 79.6 80.1 81.4 -- 85.0 86.6 85.0 84.8 General and administrative expenses........... 4.3 3.8 3.8 3.6 5.0 -- 7.7 5.3 6.3 6.0 Amortization of intangibles........ 2.3 2.3 1.7 1.7 1.7 -- 0.6 1.0 1.2 0.8 ----- ----- ----- ----- ----- -- ----- ----- ----- ----- Total operating expenses..... 85.1 86.1 85.1 85.4 88.1 -- 93.3 92.9 92.5 91.6 ----- ----- ----- ----- ----- -- ----- ----- ----- ----- Operating profit....... 14.9 13.9 14.9 14.6 11.9 -- 6.7 7.1 7.5 8.4 Interest expense/ (income)............. 1.0 0.1 0.8 0.9 3.9 -- (1.9) (0.6) (1.7) (0.8) ----- ----- ----- ----- ----- -- ----- ----- ----- ----- Earnings before income taxes................ 13.9% 13.8% 14.1% 13.7% 8.0% --% 8.6% 7.7% 9.2% 9.2% ===== ===== ===== ===== ===== == ===== ===== ===== ===== 63 Renters Choice has increased the number of stores owned from 27 at the beginning of 1993 to 2,127 at November 30, 1998. The following table shows the number of stores opened, acquired and closed during 1993 through 1998. - ------------------------- (1) Through November 30, 1998. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 Total revenue increased by $220.1 million, or 92.0%, to $459.4 million for 1998 from $239.3 million for 1997. The increase in total revenue was primarily attributable to the Rent-A-Center Acquisition and the Central Acquisition. Same store revenues increased by $17.1 million, or 8.7% to $214.0 million for 1998 from $196.9 million in 1997. Same store revenues represent those revenues earned in stores that were operated by Renters Choice for the entire nine-month periods ending September 30, 1998 and 1997. This improvement was primarily attributable to an increase in both the number of items on rent and in revenue earned per item on rent. Depreciation of rental merchandise increased by $49.1 million, or 116.2%, to $91.4 million for 1998 from $42.3 million for 1997. Depreciation of rental merchandise expressed as a percent of total store rental and fee revenue increased from 21.0% in 1997 to 22.8% in 1998. The increase was primarily attributable to the Central Acquisition and the Rent-A-Center Acquisition, as these companies were experiencing depreciation rates of 22.9% and 29.8% respectively. Renters Choice is in the process of implementing its pricing strategy and inventory management practices in the stores acquired pursuant to the Rent-A-Center Acquisition and the Central Acquisition. Salaries and other expenses expressed as a percentage of total store revenue decreased to 55.8% for 1998 from 56.2% for 1997. This decrease is attributable to the increase in store revenues from the Rent-A-Center Acquisition and the Central Acquisition, as well as the same store base, and Renters Choice has experienced some efficiencies in spreading costs over a larger store base, in particular advertising costs and certain service costs. General and administrative expenses expressed as a percent of total revenue decreased from 4.0% in 1997 to 3.9% in 1998. This decrease was the result of increased revenues from the Central Acquisition as well as the Rent-A-Center Acquisition, allowing Renters Choice to leverage its fixed and semi-fixed costs over the larger revenue base. 63
RENTERS CHOICE ----------------------------------------------------------------- BEGINNING FISCAL YEAR ENDED OF PERIOD NEW STORE STORE STORE END OF PERIOD DECEMBER 31, STORE COUNT OPENINGS ACQUISITIONS CLOSINGS STORE COUNT ----------------- ----------- --------- ------------ -------- ------------- 1993.................. 27 1 84 -- 112 1994.................. 112 2 -- -- 114 1995.................. 114 4 209 (2) 325 1996.................. 325 13 94 (9) 423 1997.................. 423 10 76 (5) 504 1998(1)............... 504 1 1,633 (11) 2,127 64 Operating profit, including non-recurring charges of $2.5 million in 1998 to effect a name change of the Renters Choice stores to Rent-A-Center, increased by $27.0 million, or 82.4%, to $59.7 million for 1998 from $32.7 million for 1997. 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 1996 and 1997 Acquisitions offset by the non-recurring charges. Net interest expense increased from $1.1 million of interest expense in 1997 to $16.5 million of interest expense in 1998. The increased interest expense and debt level relates primarily to the financing associated with Central Acquisition in May 1998 and the Rent-A-Center Acquisition in August 1998. Net earnings for the period were also impacted negatively by non-recurring financing cost of $5.0 million associated with the interim financing utilized in the Rent-A-Center Acquisition until permanent financing was obtained. Net earnings increased by $2.5 million, or 13.7%, to $21.0 million in 1998 from $18.5 million in 1997. The improvement was a result of the increase in operating profit described above. COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996 Between January 1, 1997 and December 31, 1997 Renters Choice acquired 76 stores (five of which were subsequently consolidated with existing locations) in 18 separate transactions. The 1997 acquisitions were accounted for as purchases, and accordingly, the operating results of the acquired operations have been included in the results of operations of Renters Choice since the respective dates of acquisition. Primarily as a result of the 1997 Acquisitions, comparisons of Renters Choice's operating results for 1997 and 1996 may not be meaningful or indicative of future results. Revenues. Total revenue increased by $93.5 million, or 39.3%, to $331.5 million for 1997 from $238.0 million for 1996. Store revenues increased $80.3 million, or 38.3% to $290.1 million in 1997 from $209.8 million in 1996. The increase in store revenue was primarily due to the inclusion of 76 stores acquired in 1997 and the full year impact of the 94 stores acquired in 1996. Store revenues also increased as a result of the increase in same store revenue growth of 8.1%. Same store revenues increased due to an increase in both the number of items on rent and in revenue earned per item on rent. Franchise revenues increased $13.2 million, or 46.9% to $41.4 million from $28.2 million in 1996. This increase was primarily due to the inclusion of the franchise operations for an entire year in 1997, compared to only eight months in 1996. Depreciation of rental merchandise. Depreciation of rental merchandise increased $14.2 million, or 33.0%, to $57.2 million for 1997 from $43.0 million for 1996. Depreciation of rental merchandise as a percent of total store revenue decreased to 19.7% for 1997 from 20.5% for 1996. The decrease in depreciation of rental merchandise as a percent of revenue was primarily attributable to higher rental rates on rental merchandise. Salaries and other expenses. Salaries and other expenses as a percentage of store revenue increased to 56.0% for 1997 from 55.6% for 1996. This increase was primarily attributable to the increase in salaries for employees and other expenses of the acquired stores immediately following the acquisitions. Occupancy costs also increased as a percent of total store revenue due to the relocation of certain stores acquired in 1996 and 1997 to locations that are larger in square footage. Generally, revenue from these stores increased gradually while the additional payroll and occupancy costs were incurred immediately. The average 64 65 square footage per store was approximately 4,150 at December 31, 1996 as compared to 4,290 for 1997. General and administrative expenses. General and administrative expenses expressed as a percentage of total revenue decreased to 4.0% for 1997 from 4.2% for 1996. Expressed as a percentage of store revenue only, general and administrative expenses, exclusive of expenses relative to ColorTyme, were 3.8% in both 1997 and 1996. Franchise general and administrative expenses as a percentage of franchise revenue totaled 5.3% in 1997, down significantly from 7.7% in 1996. This decrease was primarily attributable to streamlining efforts as overhead reductions were implemented in 1996 and 1997. Operating profit. Operating profit increased by $14.9 million, or 48.1%, to $45.9 million for 1997 from $31.0 million for 1996. Net earnings. Net earnings increased by $7.9 million, or 43.9%, to $25.9 million in 1997 from $18.0 million in 1996. The improvement was primarily attributable to the increase in operating profit described above. COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995 In May 1996, Renters Choice completed the acquisition of ColorTyme, and between May 1996 and December 1996, Renters Choice acquired a total of 94 additional stores. The 1996 acquisitions were accounted for as purchases, and accordingly, the operating results of the acquired operations have been included in the results of operations of Renters Choice since the respective dates of acquisition. Primarily as a result of the 1996 Acquisitions on Renters Choice's results of operations, comparisons of Renters Choice's operating results for 1996 and 1995 may not be meaningful or indicative of future results. Total revenues. Total revenue increased by $104.7 million, or 78.5%, to $238.0 million for 1996 from $133.3 million for 1995. Store revenues increased $76.5 million, 57.4% to $209.8 million in 1996 from $133.3 million in 1995. The increase in store revenue was primarily due to the inclusion of stores acquired in 1996 and the full year impact of the stores acquired in 1995. Store revenues also increased as a result of the increase in same store revenue growth of 3.8%. Some store revenues increased primarily due to an increase in both the number of items on rent and in revenue per rental. Franchise revenue was $28.2 million in 1996. Depreciation of rental merchandise. Depreciation of rental merchandise increased by $13.4 million, or 45.3%, to $43.0 million for 1996 from $29.6 million for 1995. Depreciation of rental merchandise as a percent of total store revenue decreased to 20.5% for 1996 from 22.2% for 1995. The decrease in depreciation of rental merchandise as a percent of revenue was primarily attributable to higher rental rates on rental merchandise. Salaries and other expenses. Salaries and other expenses as a percentage of store revenue increased to 55.6% for 1996 from 52.5% for 1995. This increase is primarily attributable to the increase in salaries for employees and other expenses of the acquired stores immediately following the acquisitions while store revenue has increased gradually. Additionally, Renters Choice increased its advertising efforts during 1996 in the markets related to the stores acquired in 1996. Occupancy costs also increased as a percent of total 65 66 store revenue due to the relocation of certain stores acquired in 1996 to stores that are larger in square footage. Revenue from these stores increased gradually while the additional occupancy costs are incurred immediately. The average square footage per store was approximately 3,800 at December 31, 1995 compared to 4,150 at December 31, 1996. General and administrative expenses. General and administrative expenses expressed as a percentage of total revenue decreased to 4.2% for 1996 from 4.3% for 1995. This relatively small decrease was primarily attributable to the leveraging of corporate overhead expenses over a larger store and revenue base offset by franchise general and administrative expenses incurred in 1996 for the first year of operations. Franchise general and administrative expenses as a percentage of franchise revenue totaled 7.7% in 1996. This increase was offset by the decrease in corporate overhead for store operations in 1996, which declined to 3.8% of store revenue in 1996 compared to 4.3% in 1995. Operating profit. Operating profit increased by $11.2 million, or 56.6%, to $31.0 million for 1996 from $19.8 million for 1995. Net earnings. Net earnings increased by $7.3 million, or 68.2%, to $18.0 million for 1996 from $10.7 million for 1995. The improvement was primarily attributable to the increase in operating profit described above, as well as a reduction in interest expense from 1995. LIQUIDITY AND CAPITAL RESOURCES Renters Choice's primary liquidity requirements are for debt service under its senior credit facilities (the "Senior Credit Facilities"), the notes, other indebtedness outstanding, working capital and capital expenditures. As of September 30, 1998, Renters Choice's consolidated indebtedness was approximately $892.9 million, consisting primarily of $716.9 million of the Senior Credit Facilities (including the Senior Revolving Credit Facility of $1.2 million, but excluding outstanding letters of credit under the Letter of Credit/Multidraw Facility), $175.0 million of the notes and $1.0 million of other debt. In addition, Renters Choice raised $260 million through the sale of the Convertible Preferred Stock. During the nine months ended September 30, 1998, Renters Choice acquired 1,632 stores for an aggregate purchase price of approximately $1.0 billion. Renters Choice also opened 1 new store during the first three quarters of 1998. Renters Choice purchased $120.1 million and $62.0 million of rental merchandise during the nine months ended September 30, 1998 and 1997, respectively. For the nine months ended September 30, 1998, cash provided (used) by operating activities decreased by $53.5 million, from $21.6 million in 1997 to ($31.9) million in 1998, primarily due to payments on liabilities assumed in the Rent-A-Center Acquisition. Cash used in investing activities increased by $918.1 million from $36.7 million in 1997 to $954.8 million in 1998, principally related to the greater number of stores acquired in 1998 as compared to the number of stores acquired during the same period for 1997. Cash provided by financing activities was $1,072.4 million for the nine months ended September 30, 1998. At September 30, 1998, Renters Choice had in place a $962 million Senior Credit Facility. Borrowings under the Senior Credit Facility bore interest at a rate equal to 0.25% to 1.75% over the designated prime rate (8.5% per annum at September 30, 1998) or 1.25% to 2.75% over LIBOR (5.375% at September 30, 1998) at Renters Choice's option. At 66 67 September 30, 1998, the average rate on outstanding borrowings was 8.2%. For the quarter, the weighted average interest rate under the Senior Credit Facility was 8.4%. During the quarter, Renters Choice entered into certain interest rate protection agreements (the "Interest Rate Agreements") with two banks. Under the terms of the Interest Rate Agreements, the LIBOR rate used to calculate the interest rate charged on $500 million of the outstanding senior term debt has been fixed at an average rate of 5.59%. These Interest Rate Agreements have terms of three and five years. Borrowings were collateralized by a lien on substantially all of the assets of the Company. A commitment fee equal to .25% to .50% of the unused portion of the term loan facility was payable quarterly. The Senior Credit Facility included certain net worth and fixed charge coverage requirements, as well as covenants which restrict additional indebtedness and the disposition of assets not in the ordinary course of business. On September 30, 1998, the outstanding borrowings under the Senior Credit Facility were $716.9 million. Principal and interest payments under the Senior Credit Facilities and the notes will represent significant liquidity requirements for Renters Choice. Under the Term Loans, Renters Choice will be required to make principal payments totaling approximately $2.0 million in 1999, $14.0 million in 2000, $22.0 million in 2001, $26.0 million in 2002, and $30.0 million in 2003. Loans under the Senior Credit Facilities will bear interest at floating rates based upon the interest rate option selected by Renters Choice. Under the terms of the Senior Credit Facilities, Renters Choice is required to purchase and maintain interest rate protection with respect to 50% of the Term Loans for 3 years. During September 1998, Renters Choice entered into a three-year interest rate swap for $250 million and a five-year interest rate swap for $250 million. These swaps fixed the interest rate plus the applicable spread for the applicable periods. The blended interest rate for the swaps is 5.59%. See "Description of Other Indebtedness." During the quarter ended September 30, 1998, Renters Choice issued $175 million of Senior Subordinated Notes in a private placement transaction under Rule 144A (the "Note Issuance"). The proceeds from the Note Issuance were used to retire a $175 million senior subordinated credit facility entered into in conjunction with the Senior Credit Facility. In connection with the integration plan for Rent-A-Center, Renters Choice expects to incur $45.0 million of nonrecurring cash costs within 24 months following the Rent-A-Center Acquisition. Capital expenditures are generally to maintain existing operations and for the acquisition and opening of stores. Renters Choice expects to spend approximately $26.4 million in 1998 and $24.8 million in 1999 on capital expenditures, all of which are to maintain existing operations. Furthermore, Renters Choice purchases new property and equipment in connection with a store acquisition or new store opening. During the next twelve to twenty-four months, Renters Choice's central business strategy is to successfully integrate the Rent-A-Center Acquisition and the Central Acquisition into the Renters Choice system. Once completed, Renters Choice intends to resume its strategy to increase its store base and annual revenues and profits through the opening of new stores, as well as opportunistic acquisitions. Renters Choice anticipates ample opportunities to increase its store base through its continued participation in the industry consolidation and the possibility for increased penetration and expansion of its existing customer base. 67 68 After the assimilation of the Rent-A-Center Acquisition and the Central Acquisition, Renters Choice plans to accomplish its future growth through selective and opportunistic acquisitions, with an increasing emphasis on new store development. Typically, a newly opened rental store is profitable on a monthly basis in the sixth to seventh month after its initial opening. Historically, a typical store has achieved break-even profitability in twelve to fifteen months after its initial opening. Total financing requirements of a typical new store approximates $350,000, with roughly 80% to 85% of that amount relating to the purchase of rental merchandise inventory (both on-rent and idle). A newly opened store historically has achieved results consistent with other Renters Choice mature stores (stores that have been operating within the system for greater than two years) by the end of its third year of operation. There can be no assurance that Renters Choice will be able to acquire any additional stores, or that any stores that are acquired will be or will become profitable, nor is there any assurance that Renters Choice will open any new stores in the future, or as to the number, location or profitability thereof. Renters Choice believes that cash flow from operations together with amounts available under the Senior Credit Facilities (including the Revolving Credit Facility and Letter of Credit/Multidraw Facility therein) will be sufficient to fund its debt service requirements, working capital needs, capital expenditures and litigation exposure during 1998 and 1999. The Revolving Credit Facility provides Renters Choice with revolving loans in an aggregate principal amount not exceeding $120.0 million and the Letter of Credit/ Multidraw Facility will provide Renters Choice with an additional $122.25 million of financing to support certain litigation assumed in connection with the Rent-A-Center acquisition. Based upon its extensive review and analysis of such litigation and its potential exposure thereon, Renters Choice believes it will have sufficient funds available to pay any litigation expenses related to such litigation. In addition, once the letter of credit is terminated, the Letter of Credit/Multidraw Facility will convert to a $85 million term loan. In addition, to provide any additional funds necessary for the continued pursuit of Renters Choice's growth strategies, Renters Choice may incur from time to time additional short or long-term bank indebtedness and may issue, in public or private transactions, 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 Renters Choice, and some of which will be beyond Renters Choice's control, such as prevailing interest rates and general economic conditions. There can be no assurance such additional financing will be available, or if available, will be on terms acceptable to Renters Choice. YEAR 2000 Year 2000 issues exist when dates are recorded on computers using two digits (rather than four) and are then used for arithmetic operations, comparisons or sorting. A two digit recording may recognize a date using "00" as 1900, rather than 2000, which could cause computer systems to perform inaccurate computations or shut down. Many of the world's computer systems currently record years in a two-digit format. Such computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to disruptions in computer operations. 68 69 Renters Choice is currently in the process of evaluating its operations and the potential problems that could occur with respect to the Year 2000. Renters Choice plans to complete the identification and replacement of any vulnerable systems during 1999. Certain areas in its operations have been identified and preparations for the Year 2000 have begun with respect to the following areas: - Management Information System. Renters Choice's primary information technology system controls all of its computer operations in its rent-to-own stores and in the home office. Renters Choice has received written assurance from the software vendor for its system that the system is Year 2000 compliant, which means that it is equipped to interpret dates beyond the year 1999. As part of the integration plan, this same system is currently being integrated into the retail outlets and operations of Rent-A-Center. In addition, Renters Choice has engaged external resources to complete an independent review of its information systems with respect to Year 2000 readiness. Renters Choice anticipates that this review will be completed during the first quarter of 1999. - Major Suppliers. Renters Choice utilizes many suppliers and no single supplier is material to the operations of Renters Choice. As a result, Renters Choice has the ability to obtain merchandise for its stores from many different vendors. In the event any one of its vendors has a Year 2000 problem, sufficient additional sources exist which Renters Choice should be able to utilize. However, with respect to Renters Choice's existing vendors, Renters Choice is currently requesting written assurance from such vendors to determine whether they are Year 2000 compliant. - Other Systems. Renters Choice uses certain on-site non-information technology systems that may be Year 2000 sensitive. Renters Choice is currently in the process of identifying these systems and, once these systems have been fully identified, Renters Choice will determine, with the help of outside vendors, whether these systems are Year 2000 compliant. Potential non-information technology systems include: - alarms, - elevators, - irrigation systems, - thermostats, and - utility meters and switches. Renters Choice will utilize both internal and external resources to test and replace its systems for Year 2000 compliance. Renters Choice anticipates completing this process during 1999. However, there can be no guarantee that the systems of other companies on which Renters Choice may rely will be timely converted and will not have an adverse effect on our operations. 69 70 Contingency Plans. Renters Choice will evaluate the need for a contingency plan in 1999 as it progresses through its Year 2000 conversion. INFLATION During the years ended December 31, 1997, 1996 and 1995, the cost of rental merchandise, lease expense and salaries and wages have increased modestly. The increases have not had a significant effect on Renters Choice's results of operations because Renters Choice has been able to charge proportionally higher rental rates for its merchandise. RESULTS OF OPERATIONS -- RENT-A-CENTER The following table sets forth, for the periods indicated, certain historical Statement of Operations data as a percentage of total revenue. 70
THREE MONTHS YEAR ENDED MARCH 31, ENDED JUNE 30, ----------------------- -------------- 1996 1997 1998 1997 1998 ----- ----- ----- ----- ----- Revenue Rent-to-own revenue................. 100.0% 100.0% 97.3% 99.0% 96.6% Non-rent-to-own revenue............. -- -- 2.7 1.0 3.4 ----- ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== Operating Expenses Depreciation of rental merchandise...................... 28.7% 28.1% 27.0% 27.9% 26.7% Amortization of intangibles......... 2.1 2.5 2.7 2.7 2.5 Cost of merchandise sold............ 4.8 4.3 5.0 3.8 5.3 Salaries, wages and fringe benefits......................... 28.5 29.4 31.0 30.4 31.0 Other............................... 26.3 29.0 26.8 26.1 26.1 Restructuring charges............... 1.4 -- 1.4 -- -- ----- ----- ----- ----- ----- Total operating expenses.... 91.8 93.3 93.9 90.9 91.6 Operating profit...................... 8.2 6.7 6.1 9.1 8.4 Interest expense/(income)............. 8.9 5.6 5.1 4.8 4.7 ----- ----- ----- ----- ----- Earnings (loss) before income taxes... (0.7)% 1.1% 1.0% 4.3% 3.7% ===== ===== ===== ===== ===== 71 Rent-A-Center increased its owned stores from 1,006 at fiscal year end 1993 to 1,384 at fiscal year end 1998. The following table sets forth the number of stores, opened, acquired and closed from 1994 through 1998. - ------------------------- (1) As of March 31, 1998, Rent-A-Center increased its store count by 25 to 1,409, the number of stores acquired by Renters Choice pursuant to the acquisition of Rent-A-Center. COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 Total revenue. Total revenues were $235.4 million for 1998 compared to $225.6 million for 1997, an increase of 4.3% or $9.8 million. The increase in revenues was primarily attributable to an increase in the total rental agreements outstanding, partially offset by a reduction in the average price charged per rental agreement. The increase in the total rental agreements outstanding was primarily the result of increases in the number of store locations, combined with increases in agreements outstanding in existing stores resulting from certain advertising promotions. Rent-A-Center ended the quarter ending June 30, 1998 with 1,404 store locations, up from 1,392 at June 30, 1997. The increase in the number of stores since June 30, 1997 was partially offset by the impact of the closing of 42 stores in the fourth quarter of fiscal 1998. The decrease in the average price charged per rental agreement was principally due to a shift in product mix toward less expensive items such as cellular phones and pagers, as well as promotional pricing programs. Depreciation of rental merchandise. Depreciation of rental merchandise was approximately the same in terms of dollars for both periods, $62.9 million for 1998 and 1997. Depreciation of rental merchandise as a percent of revenues decreased to 26.7% for 1998 and from 27.9% in 1997. This decrease is primarily due to selected price increases in recent months on certain core products and an increasing emphasis on overall gross margin management. Salaries, wages and fringe benefits. Salaries, wages and fringe benefits increased 6.6%, or $4.5 million, to $72.0 million for 1998 from $68.5 million for 1997. This increase was primarily related to the increase in the number of stores and rental agreements for fiscal 1998 as these salaries and wages were largely consistent with the number of rental contracts and stores. 71
RENT-A-CENTER ---------------------------------------------------------------- FISCAL YEAR BEGINNING OF END OF ENDED PERIOD STORE NEW STORE STORE STORE PERIOD MARCH 31, COUNT OPENINGS ACQUISITIONS CLOSINGS STORE COUNT ----------- ------------ --------- ------------ -------- ----------- 1994................... 1,006 54 27 (10) 1,077 1995................... 1,077 32 12 (12) 1,109 1996................... 1,109 12 200 (15) 1,306 1997................... 1,306 19 64 (22) 1,367 1998................... 1,367 34 25 (42) 1,384(1) 72 Other operating expenses. Other operating expenses increased 4.0%, or $2.0 million, to $52.7 million for 1998 from $50.7 million for 1997. The increase was generally consistent with the revenue increase of 4.3% discussed above. Net income. Net income decreased by $.5 million, to $3.3 million for 1998 from $3.8 million in 1997. COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1998 AND FISCAL YEAR ENDED MARCH 31, 1997 Total revenue. Total revenues were $904.0 million for fiscal 1998 compared to $926.9 million for fiscal 1997, a decrease of 2.5% or $22.9 million. Total rent-to-own revenues decreased by 5.1%, or $47.3 million, to $879.6 million for fiscal 1998 from $926.9 million for fiscal 1997. Rent-to-own revenues are comprised of two principal components, rental revenues and other revenues. Rental revenues declined by 4.9%, or $37.8 million, from $764.0 million for fiscal 1997 to $726.2 million for fiscal 1998. The decline in rental revenues is primarily attributable to a reduction in the average price charged per rental agreement offset by an increase in total rental agreements outstanding. The reduction in the average price charged per rental agreement is principally due to a shift in product mix toward less expensive items such as cellular phones and pagers, as well as a promotional pricing program. The increase in the total rental agreements outstanding is primarily the result of promotional activities and an increase in the average number of stores open during the year. During the fiscal year, Rent-A-Center acquired and opened a total of 59 stores, but this was offset by the closing of 42 stores in the fourth quarter of fiscal 1998. Other revenues decreased slightly to $153.4 million for fiscal 1998 versus $162.9 million for fiscal 1997. This decrease was primarily attributable to decreased sales of used merchandise for fiscal 1998 due to stronger business conditions and less build-up of excess idle inventory resulting from a better product mix of the volume of merchandise rented. This decrease was offset by increases in ancillary service fees and revenues associated with the rental of merchandise to commercial business. Ancillary services include the sale of product protection plans, cellular phones and pager airtime. The introduction of the Value Club program by Rent-A-Center for fiscal 1998, in particular, contributed positively to Other Revenues. The Value Club program provides customers loss damage waiver protection, extended service contracts, and other miscellaneous benefits such as dental savings, grocery coupons, discounts on auto service, entertainment discounts and emergency auto assistance. The balance of total revenues in 1998 of $24.4 million is due to Non-Rent-to-Own Businesses ($20.2 million) including used car retailing, credit retailing and check cashing kiosks and conforming adjustments ($4.2 million). Non-Rent-to-Own Businesses had no revenues in 1997. Depreciation of rental merchandise. Depreciation of rental merchandise decreased by $15.8 million, or 6.1%, to $244.6 million for fiscal 1998 from $260.4 million for fiscal 1997. Depreciation of rental merchandise as a percent of rent-to-own revenues decreased to 27.8% for 1998 and from 28.1% for 1997. This decrease was primarily due to results from the change in product mix discussed above and a reduction in the average quantity and cost of idle inventory held as available for rent in the stores. This reduction in idle inventory was largely due to the implementation of a new jewelry strategy in October 1997, which used alloy-based prototypes rather than actual jewelry for display in the stores. 72 73 Salaries, wages and fringe benefits. Salaries, wages and fringe benefits increased 2.8%, or $7.6 million, to $279.8 million for fiscal 1998 from $272.2 million for fiscal 1997. This increase was primarily attributable to the increase in number of rental agreements for fiscal 1998 as these salaries and wages are largely consistent with the number of rental contracts. Other operating expenses. Other operating expenses decreased 18.0%, or $25.9 million, to $117.6 million for fiscal 1998 from $143.5 million for fiscal 1997. The decrease was primarily a result of the impact of the field reorganization that occurred at the end of fiscal 1997. As part of the reorganization, field divisional offices were closed and consolidated into the corporate office. In addition, for fiscal 1998 Rent-A-Center eliminated store managers' meetings resulting in savings of $2.0 million. Restructuring charges. Restructuring charges were $12.3 million for fiscal 1998, while fiscal 1997 had none. The restructuring charges related to the discontinuation of certain new concepts, certain nonperforming rental purchase stores and the reorganization of certain administrative support functions. Operating income. Operating income decreased by $7.0 million, or 11.2%, to $55.3 million for fiscal 1998 from $62.3 million for fiscal 1997. This decrease was primarily attributable to the reasons stated above. Net income. Net income increased by $5.5 million, or 137.5%, to $1.5 million for fiscal 1998 from a net loss of $4.0 million the fiscal 1997. COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1997 AND FISCAL YEAR ENDED MARCH 31, 1996 In August 1995, Rent-A-Center completed the U-Can-Rent acquisition, and in January 1996, Rent-A-Center completed the Advantage, Inc. acquisition. The financial results of these stores are included in Rent-A-Center's fiscal 1996 results from the dates of the respective acquisitions. Total revenue. Total revenues were $926.9 million for fiscal 1997 compared to $897.9 million for fiscal 1996, an increase of $28.9 million, or 3.2%. Non-Rent-to-Own Businesses had no revenues in 1997 and 1996. Rent-to-own revenues are comprised of two principal components, rental revenue and other revenue. Rental revenue increased 2.7%, or $19.9 million, during fiscal 1997 to $764.0 million from $744.1 million for fiscal 1996. The increase was primarily attributable to two acquisitions made during fiscal 1996. The increase in rental revenue experienced in fiscal 1997 as a result of these acquisitions was offset by soft results experienced by, Rent-A-Center overall., Rent-A-Center's net portfolio of agreements outstanding during fiscal 1997 declined by 55,400 primarily due to a disappointing holiday season. Other revenue increased 5.9%, or $9.1 million, during fiscal 1997 to $162.9 million from $153.8 million for fiscal 1996. The increase was primarily attributable to the impact of, Rent-A-Center's acquisitions made during fiscal 1996, as discussed above, as well as the increase in revenues associated with, Rent-A-Center's commercial rental business, which commenced operation in August 1995. In addition, during fiscal 1997, Rent-A-Center experienced a substantial increase in customer participation in its Value Club program which was introduced in fiscal 1996. Restructuring charges. Restructuring charges were $12.6 million for fiscal 1996 while fiscal 1997 had none. The restructuring charges related to the consolidation of offices and 73 74 reductions in the number of employees. These charges were primarily made up of employee separation costs. Depreciation of rental merchandise. Depreciation of rental merchandise increased by $3.1 million, or 1.2%, to $260.4 million for fiscal 1997 from $257.4 million for fiscal 1996. Depreciation of rental merchandise as a percent of rent-to-own revenues decreased to 28.1% for fiscal 1997 from 28.7% for fiscal 1996. This increase was primarily attributable to the result of the 1996 acquisitions and the associated increase in rental merchandise held as available for rent in the stores. Salaries, wages and fringe benefits. Salaries, wages and fringe benefits increased 6.4% or $16.5 million, to $272.2 million for fiscal 1997 from $255.8 million for fiscal 1996. This increase was primarily attributable to the impact of the 1996 acquisitions and a reduction in average revenue per store for fiscal 1997 compared to fiscal 1996. Other operating expenses. Other operating expenses increased $27.2 million, or 23.4%, to $143.5 million for fiscal 1997 from $116.3 million for fiscal 1996. Operating income. Operating income decreased by $11.7 million, or 15.8%, to $62.3 million for fiscal 1997 from $74.0 million for fiscal 1996. This decrease was primarily attributable to the reasons stated above. Net loss. The net loss decreased by $9.1 million, or 69.5% to a loss of $4.0 million for fiscal 1997 from a loss of $13.1 million for fiscal 1996. HISTORICAL LIQUIDITY AND CAPITAL RESOURCES -- RENT-A-CENTER RAC's primary capital requirements were the acquisition of existing stores, the opening of new stores, the purchase of additional rental merchandise and the purchase of replacement rental merchandise. Capital spent on the purchase of new rental merchandise in 1998 was $306.8 million compared to $289.5 million and $299.7 million in 1997 and 1996, respectively. The cost of depreciation of rental merchandise was $244.6 million, $260.4 million and $257.4 million in 1998, 1997 and 1996, respectively. 74 75 The following table sets forth (A) the number of stores acquired, (B) the cash consideration paid for such stores, and (C) capital expenditures for the 1998, 1997 and 1996 fiscal years: QUARTERLY RESULTS -- RENTERS CHOICE The following table contains certain unaudited historical financial information for the quarters indicated.
($MILLIONS) ------------------------ 1996 1997 1998 ------ ----- ----- Number of stores acquired..................... 200 64 25 Cash consideration for acquired stores........ $124.6 $21.1 $ 7.6 Capital expenditures for property and equipment: Transportation equipment.................... $ 19.3 $10.9 $ 8.0 Computer furniture and equipment............ 8.8 3.8 5.5 Leasehold improvements...................... 4.4 12.5 12.1 Store fixtures and equipment................ 4.2 4.9 11.5 Buildings................................... 7.3 -- -- Other....................................... 0.6 0.2 1.0 ------ ----- ----- Total............................... $ 44.6 $32.3 $38.1 ====== ===== ===== - ------------------------- (1) During 1998, 5 stores were purchased during the first quarter; 177 stores were purchased during the second quarter; and 1,450 stores were purchased during the third quarter. In addition, one store was opened in the first quarter of 1998. (2) During 1997, 28 stores were purchased during the first quarter; 39 stores were purchased during the second quarter; and nine stores were purchased during the third quarter. Of the 76 stores acquired, five were subsequently consolidated with existing store locations. In addition, two stores were opened during the first quarter; two stores were opened during the second quarter; four stores were opened during the third quarter; and two stores were opened during the fourth quarter. 75
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Nine months ended September 30, 1998(1) Revenue........................ $90,233 $103,313 $265,886 n/a Operating profit............... 13,721 15,547 30,467 n/a Year ended December 31, 1997(2) Revenue........................ $74,587 $ 80,803 $ 83,864 $92,288 Operating profit............... 9,639 11,341 11,766 13,192 Year ended December 31, 1996(3) Revenue........................ $49,002 $ 57,756 $ 60,025 $71,182 Operating profit............... 6,344 7,558 7,957 9,183 76 (3) During 1996, 11 stores were purchased during the second quarter, 12 stores were purchased during the third quarter, and 71 stores were purchased during the fourth quarter of 1996. In addition, three stores were opened in the second quarter, four stores were opened in the third quarter, and six stores were opened in the fourth quarter of 1996. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 addresses the manner in which certain items included in stockholders equity are displayed in the financial statements, but does not affect reported assets or net earnings. Renters Choice adopted SFAS No. 130 effective January 1, 1998. In 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." See Note A to the consolidated financial statements of Renters Choice, Inc. and Subsidiaries for further discussion. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1998. Renters Choice will account for the derivative transactions required under the terms of the Senior Credit Facilities in accordance with SFAS No. 133. 76 77 BUSINESS RENTERS CHOICE Renters Choice is the largest operator in the rent-to-own industry with approximately 25% market share (based on the number of stores). As of November 30, 1998, Renters Choice operated 2,127 company-owned stores, and franchised 321 stores, in 50 states, Puerto Rico and the District of Columbia. Renters Choice's stores offer home electronics, appliances, and furniture and accessories under flexible rental purchase agreements that allow customers to obtain ownership of the merchandise at the conclusion of an agreed upon rental period. The Company's revenue from rentals and fees related to these flexible rental purchase agreements, expressed as a percentage of total consolidated revenue, was 94.7%, 83.4% and 83.0% for the years ended December 31, 1995, 1996 and 1997, respectively. The rent-to-own industry appeals to a wide variety of consumers by allowing them to obtain merchandise that they might otherwise be (i) unable to purchase due to insufficient cash resources or a lack of access to credit, or (ii) unwilling to purchase due to a temporary, short-term need or desire to rent. Rent-A-Center Acquisition. On August 5, 1998, Renters Choice acquired Rent-A-Center pursuant to an agreement with Thorn plc dated June 16, 1998, for approximately $900 million in cash (including the repayment of certain debt of Rent-A-Center), subject to adjustment. Prior to this acquisition, Rent-A-Center was the largest rent-to-own competitor with 1,404 company-owned stores and 65 franchised stores in 49 states and the District of Columbia. Rent-A-Center operated stores under three brand names, "Rent-A-Center," "Remco" and "U-Can-Rent." Rent-A-Center operated 1,158 stores under the Rent-A-Center brand, the most widely recognized store name in the rent-to-own industry. Renters Choice financed the acquisition of Rent-A-Center through certain financing arrangements, consisting of a senior credit facility and a senior subordinated facility. Renters Choice also issued a total of $260 million in preferred stock to certain affiliates of Apollo and to an affiliate of Bear Stearns to assist in the funding of the Rent-A-Center Acquisition, to repurchase $25 million of our common stock and to repay its prior credit facility. Following the acquisition of Rent-A-Center, Renters Choice issued the old notes to repay the senior subordinated facility. In connection with the acquisition of Rent-A-Center, Renters Choice assumed certain of Rent-A-Center's ongoing litigation, including an adverse New Jersey state court judgment currently on appeal. In addition, Thorn plc has agreed to indemnify and hold harmless Renters Choice and Rent-A-Center from two lawsuits and has deposited $40 million in escrow with respect to such claims and other indemnification claims Renters Choice may have against Thorn plc. For additional information, please read the sections entitled "Risk Factors -- Legal Proceedings" and "-- Legal Proceedings" located elsewhere in this prospectus. Prior to the Rent-A-Center Acquisition, Renters Choice was the second largest competitor in the rent-to-own industry with 680 company-owned stores operating under the "Renters Choice" brand name in 35 states and Puerto Rico. In addition, its ColorTyme subsidiary was the largest rent-to-own franchisor in the U.S. with 278 franchised stores in 37 states. Renters Choice's management team has gained extensive experience in integrating acquisitions and is headed by J. Ernest Talley, the Chairman and Chief Executive Officer of Renters Choice, who is generally credited with founding the rent-to-own industry in the 77 78 early 1960's. Since 1993, Renters Choice's store count grew from 27 to 2,127 through acquisitions and new store openings. RENT-TO-OWN INDUSTRY Overview. According to APRO, an industry trade association, the rent-to-own industry generated approximately $4.1 billion in revenue during 1996 through the rental of roughly 5.8 million products to approximately 3.0 million households. Renters Choice estimates the rent-to-own target market is greater than 20 million households, principally comprised of households with annual income from $15,000 to $50,000. Management estimates that the rent-to-own industry is comprised of approximately 8,300 stores. Although the five largest rent-to-own companies operate approximately 38.5% of the industry's store base, the industry is highly fragmented as the majority of rent-to-own competitors operate fewer than 20 stores. The industry has experienced significant consolidation since 1993, when the five largest rent-to-own companies operated approximately 26.6% of the industry's store base. The rent-to-own industry is experiencing consolidation primarily because larger, multi-unit operators have significant competitive advantages compared to their smaller competitors. Larger operators enjoy greater purchasing power, which enables them to offer more competitively priced merchandise and are able to operate more efficiently than smaller operators in areas such as management information systems, advertising and purchasing. Many smaller competitors lack the managerial resources necessary to operate larger rent-to-own operations efficiently across multiple locations. Management believes that these factors will continue to promote the trend toward consolidation and present an opportunity for well-capitalized operators to acquire additional stores on favorable terms. Rent-to-Own Transaction. The rent-to-own industry provides consumers with: (A) a means of obtaining merchandise without the burden of incurring debt or qualifying for credit, (B) the ability to return merchandise at any time without future obligations, (C) flexible payment terms, (D) delivery, repair and pick-up service typically at no incremental charge, and (E) the potential for merchandise ownership after a predetermined number of payments. The types of products rented by rent-to-own customers include: furniture and accessories, electronics, appliances, and other items including jewelry, pagers and personal computers. Customers enter into weekly or monthly rental purchase agreements, which renew automatically upon receipt of each payment. Rental payments are made each week in advance generally in cash. Rent-to-own companies retain title to rental merchandise during the term of the rental purchase agreement. Ownership of the merchandise typically transfers to the customer if the customer has continuously renewed the rental purchase agreement for a specified period of time or exercises a specified early purchase option. On average, however, ownership requirements are met on less than 25% of items being rented for the first time. Products are typically rented four to six times over a 24 month period with the average time on rent to each customer lasting approximately four months. Virtually all rental items are ultimately rented to ownership in subsequent rental transactions. The rent-to-own transaction bears an important distinction to a traditional retail transaction: rent-to-own companies do not lend to customers or bear the associated credit risk because customers make all payments in advance. As a result, balance sheets of rent-to-own companies have very few accounts receivable. 78 79 BUSINESS STRENGTHS Over the past several years, Renters Choice experienced significant increases in sales and operating income through acquisitions and internal growth. During this period, Renters Choice focused on achieving a position as a market-leading operator of rent-to-own stores. As a result, Renters Choice believes that it benefits from the following competitive advantages. Industry Leader. Renters Choice is the largest competitor in the rent-to-own industry (based on the number of stores) with market share of approximately 25%. The next largest operator has a market share of less than 5.5%. Renters Choice's stores currently operate under various brand names including Renters Choice and Rent-A-Center, the most widely recognized name in the rent-to-own industry. Renters Choice is currently in the process of converting all of its stores to the Rent-A-Center brand name. In 1997, Renters Choice and Rent-A-Center together served over 1 million customers. As the only nationwide rent-to-own competitor, Renters Choice benefits from (A) greater visibility among consumers, (B) geographic diversity, (C) increased opportunities to expand into contiguous markets, (D) certain efficiencies in areas such as advertising, purchasing and human resources, and (E) the ability to leverage its corporate overhead over a larger store base. Consistent Revenue and Strong Cash Flow. In 1997, repeat customers accounted for approximately 50% of Renters Choice's revenues. Historically, Renters Choice has not experienced a significant correlation between economic conditions (as measured by GDP growth) and same store revenue growth. As a result of this loyal customer base, as well as the Company's resilience to economic cycles, the Company has been able to generate stable revenue. Through the successful integration of Rent-A-Center into Renters Choice's operating system, management expects to substantially increase the profit margins and cash flows at the combined company. Consistently stable revenue and strong margins (combined with low levels of maintenance capital expenditures) provide resources that can be used to fund Renters Choice's growth strategy. Superior Customer Service. Management believes that providing superior customer service is a key element for its long-term success. Renters Choice achieves a high level of customer satisfaction by providing: (A) appealing store environments, (B) premium quality, durable merchandise, (C) personal customer service, and (D) experienced, well-trained store personnel. Renters Choice believes its high level of customer satisfaction allows it to maximize the number and length of rental agreements per store, leading to customer referrals and repeat business. Premium Quality Product Offerings. Renters Choice distinguishes itself from its competitors by purchasing, marketing, and renting premium name brand products from manufacturers such as Sony, JVC and Magnavox for home electronics; La-Z-Boy, Sealy and Ashley for home furnishings and accessories; and Whirlpool, General Electric and Kenmore for appliances. In addition to satisfying customer demand, premium products reduce service costs through increased reliability. Furthermore, Renters Choice has developed strong relationships with its key vendors, enabling cost effective direct-to-store distribution from its vendors. Ability to Successfully Integrate Acquisitions. Since 1993, Renters Choice acquired 2,090 stores, giving management extensive experience in the integration of diverse rent-to-own operations. Renters Choice's information systems facilitate acquisition integration by 79 80 providing management with operating and financial information about each store location and region and every rental purchase transaction. As a result of management's ability to implement Renters Choice's business practices, operating performance of the integrated stores has improved significantly. For example, in 1997, store operating margins (before field administration and corporate overhead) for all of Renters Choice's stores was 23.9%, while its 325 mature stores (in Renters Choice's system for at least two years) generated store operating margins of 26.8%. Renters Choice's mature stores primarily consist of acquired stores. The average store operating margin for Rent-A-Center's stores for fiscal 1998 was 20.9%. Experienced and Committed Management Team. Renters Choice has a senior management team with an average of 17 years of rent-to-own experience. J. Ernest Talley, Chairman and Chief Executive Officer of Renters Choice, is generally credited with founding the rent-to-own industry in the early 1960's. Renters Choice's management team has a significant personal economic interest in Renters Choice's performance: (A) the senior management group collectively owns approximately 26.2% of Renters Choice on a fully-diluted basis, and (B) store, regional and senior manager compensation is tied directly to store revenue and/or operating profit and such bonuses account for up to 30% of all compensation. Renters Choice believes that the de-centralized, entrepreneurial spirit of its field management, together with the guidance provided by senior management, will continue to be a key factor in its efforts to maximize revenue, improve margins and expand Renters Choice's store base. BUSINESS STRATEGY Renters Choice is focusing its strategic efforts on (A) the implementation of its integration plan, (B) continued efforts to improve store operations, and (C) the pursuit of strategic expansion once the integration plan is substantially in place. Implement the Integration Plan. Renters Choice management has developed a comprehensive program for the integration of Rent-A-Center, which it expects will be completed within 18-24 months. Renters Choice believes it will experience over $30 million in net annual cash cost savings upon completion of the integration plan, primarily as a result of eliminating (A) duplicative general and administrative expenses, and (B) Rent-A-Center's nationwide distribution network including seven distribution centers. Additional benefit and margin improvement is expected to be realized over time as management undertakes initiatives to enhance operations in Rent-A-Center stores. These cost savings represent less than 2.5% of Renters Choice's latest twelve months revenues. In addition, Renters Choice is continuing the process of integrating Central Rents, from which it expects to realize an additional $2.6 million of annual general and administrative cost savings. Continue to Enhance Store Operations. Management seeks to improve store performance through strategies intended to produce gains in operating efficiency and profitability. Renters Choice believes it will achieve these gains in revenues and operating margins in its stores by: (A) using focused advertising to increase store traffic, (B) expanding the offering of upscale, higher margin products (such as Sony wide screen televisions, La-Z-Boy recliners and JVC stereo systems) to increase the number of product rentals, (C) employing strict store-level cost control, and (D) closely monitoring each store's performance through the use of its management information system to ensure each store's adherence to established operating guidelines. 80 81 Pursue Strategic Expansion. Management has gained significant experience in the acquisition and integration of other rent-to-own operators and believes the fragmented nature of the rent-to-own industry will result in ongoing growth opportunities. Once the integration plan is substantially in place, Renters Choice will again focus on strategic acquisition opportunities and new store development. Renters Choice typically targets underperforming and undercapitalized chains of rent-to-own stores. The acquired stores benefit from the administrative network, improved product mix, sophisticated management information system and purchasing power of the larger organization while strengthening their local market position. In addition, Renters Choice has access to an expanding number of franchise locations, which it has the right of first refusal to purchase. Renters Choice believes the rent-to-own market is significantly under-penetrated and plans to continue opening new stores in current and new markets. Renters Choice will focus its new market penetration in adjacent areas or regions which are underserved by the rent-to-own industry. In evaluating a new market, Renters Choice reviews demographic statistics, cost of advertising and the number and nature of competitors. 81 82 STORES Store sizes range from approximately 1,500 to 8,200 square feet, and average approximately 3,600 square feet. Approximately 80% of each store's space is generally used for showroom space and 20% for offices and storage space. As of November 30, 1998, Renters Choice operated approximately 2,127 Company-owned stores and franchised approximately 321 stores in 50 states, Puerto Rico and the District of Columbia, as illustrated by the following table: 82
NUMBER OF STORES NUMBER OF STORES ------------------- ------------------- COMPANY COMPANY LOCATION OWNED FRANCHISE LOCATION OWNED FRANCHISE -------- ------- --------- -------- ------- --------- Alabama.............. 46 -- Nebraska............. 4 -- Alaska............... 1 -- Nevada............... 16 4 Arizona.............. 54 10 New Hampshire........ 15 2 Arkansas............. 23 2 New Jersey........... 40 9 California........... 119 9 New Mexico........... 10 10 Colorado............. 26 3 New York............. 100 19 Connecticut.......... 17 6 North Carolina....... 95 9 Delaware............. 15 1 North Dakota......... 1 -- District of Columbia........... 4 -- Ohio................. 127 8 Florida.............. 136 8 Oklahoma............. 37 13 Georgia.............. 95 5 Oregon............... 6 4 Hawaii............... 11 1 Pennsylvania......... 76 5 Idaho................ 1 2 Puerto Rico.......... 17 -- Illinois............. 114 -- Rhode Island......... 7 4 Indiana.............. 75 17 South Carolina....... 28 1 Iowa................. 19 -- South Dakota......... 2 -- Kansas............... 28 17 Tennessee............ 78 8 Kentucky............. 42 7 Texas................ 226 60 Louisiana............ 35 4 Utah................. 16 1 Maine................ -- 13 Vermont.............. 6 -- Maryland............. 46 6 Virginia............. 39 1 Massachusetts........ 40 11 Washington........... 27 3 Michigan............. 95 14 West Virginia........ 14 2 Minnesota............ 6 -- Wisconsin............ 29 2 Mississippi.......... 12 10 Wyoming.............. 1 -- ----- --- Missouri............. 49 7 Montana.............. 1 3 Total................ 2,127 321 ===== === 83 Renters Choice has increased its owned stores from 27 at the beginning of 1993 to 2,127 at November 30, 1998 (including the acquisition of 1,409 Rent-A-Center stores). The following table shows the number of stores opened, acquired and closed during 1993 through 1998. - ------------------------- (1) Historically Renters Choice has only closed stores in connection with acquiring stores. (2) Through November 30, 1998. Renters Choice focuses on expansion by making acquisitions and opening new stores. With respect to store acquisitions, Renters Choice typically targets underperforming and undercapitalized chains of rent-to-own stores. The acquired stores benefit from the management expertise, administrative network, improved product mix, sophisticated management information system and purchasing power of the larger organization allowing them to strengthen their local market position. In addition, Renters Choice's information systems facilitate acquisition integration by providing management with access to operating and financial information about any store location or region in which Renters Choice operates and generates management reports on a daily, weekly, month-to-date and year-to- date basis for each store and every rental purchase transaction. Store leases typically range from three to five years and contain one to two renewal options. Before a new site is selected, management reviews demographic information regarding the median income, housing and other factors that affect the buying patterns for potential rental purchase customers primarily within a five mile radius for urban locations and up to 30 miles for rural locations of a potential site. Store locations are selected based upon management's analysis of such demographic information, location of competitors, customer traffic for the site, accessibility and cost. Stores are typically located in or near low to middle income neighborhoods, usually in strip shopping centers which contain a large anchor tenant and other suitable tenants. Renters Choice estimates that the average investment with respect to opening a new store is approximately $350,000 of which rental merchandise comprises approximately 80% of the investment. The remaining investment consists of leasehold improvements, furnishings and fixtures, computer equipment, store signs and start-up costs. Newly opened stores historically have become profitable after approximately six months. Management believes that suitable store space is generally available for lease and that Renters Choice would be able to relocate any of its stores without significant difficulty should it be unable to renew a particular lease. Management also expects that additional space will be readily available at competitive rates in the event Renters Choice desires to open new stores. 83
RENTERS CHOICE - --------------------------------------------------------------------------------------------- END OF FISCAL YEARS BEGINNING OF NEW PERIOD ENDED PERIOD STORE STORE STORE STORE DECEMBER 31, STORE COUNT OPENINGS ACQUISITIONS CLOSINGS(1) COUNT ------------ ------------ -------- ------------ ----------- ------ 1993......................... 27 1 84 -- 112 1994......................... 112 2 -- -- 114 1995......................... 114 4 209 (2) 325 1996......................... 325 13 94 (9) 423 1997......................... 423 10 76 (5) 504 1998(2)...................... 504 1 1,633 (11) 2,127 84 PRODUCT SELECTION Renters Choice's stores offer merchandise from three basic product categories: home electronics, appliances and furniture and accessories. Management's policy is to ensure that its stores maintain sufficient inventory to provide a wide variety of high quality merchandise to its customers and emphasizes products from a core group of brand-name manufacturers. Choices of merchandise reflect management's belief that customers want to rent the same quality of merchandise that is available from more traditional retailers and that customers are willing to pay for value and quality. In addition, by focusing on its manufacturers' premium quality products, Renters Choice seeks to avoid frequent service problems associated with inferior products. During 1997, home electronic products accounted for approximately 46%, appliances for 24% and furniture and accessories for 30% of Renters Choice's store revenue. Management believes the effect of this product mix and its focus on "higher end" products results in its favorable profit margin relative to its competitors. The general product mix in Renters Choice's stores is determined by senior management, based on an analysis of customer rental patterns and the introduction of new products on a test basis. Individual store managers are responsible for determining the particular product selection for their store from the list of products approved by senior management. Customers may request either new merchandise or previously rented merchandise. Previously rented merchandise is offered at the same weekly or monthly rental rate as is offered for new merchandise, but with an opportunity to obtain ownership of the merchandise after fewer rental payments. In order to achieve gross margins consistent with its mature stores, Renters Choice standardizes inventory in each of its acquired stores. On average, Rent-A-Center's stores offer approximately 1,000 stock keeping units ("SKUs"), as compared to approximately 100 SKUs offered by the Renters Choice stores. This greater number of product offerings is achieved in part through the use of an in-store catalog. Merchandise is offered from the same three basic product categories: home electronics (40.7% of total Rent-A-Center sales), appliances (16.6%) and furniture and accessories (27.5%), as well as computers, pagers, cellular phones and jewelry (15.2%). Historically, Renters Choice has elected not to rent certain of these merchandise categories, such as pagers, cellular phones and jewelry. Management believes these products do not produce enough volume to justify their relatively lower margins. Moreover, with pagers and cellular phones, revenue is generated primarily from the sale of air time (which is not a part of Renters Choice's business) rather than from the rental of the hardware. As part of the integration process, Renters Choice is in the process of standardizing the inventory in each of the Rent-A-Center stores. Home Electronics. Home electronic products offered by Renters Choice's stores include televisions, video cassette recorders and stereos. Renters Choice offers home electronics merchandise from top brand manufacturers such as Magnavox, Sony, JVC and Technics, with weekly rental prices in this product category ranging from approximately $9.99 to $45.99 per item. Appliances. Renters Choice rents major appliances manufactured by Whirlpool, General Electric and Kenmore, including refrigerators, washing machines, dryers, microwave ovens, freezers and ranges, with weekly rental prices in this product category ranging from approximately $9.99 to $29.99 per item. 84 85 Furniture and Accessories. Renters Choice offers a variety of furniture products, including dining room, living room and bedroom furniture featuring a number of styles, materials and colors. Showroom displays enable customers to visualize how the product will look in their homes and provide a showcase for accessories. Renters Choice offers furniture made by Ashley, England-Corsair, La-Z-Boy and other top brand manufacturers, with weekly rental prices in this product category ranging from approximately $5.99 to $35.99. Accessories such as pictures, plants, lamps and tables are typically rented as part of a package of items to furnish a complete room. Rental rates for accessories vary widely and are often determined based upon the rental rates of the other items in the package. Computers. Rent-A-Center began the rental of computers in 1993 and Renters Choice is considering adding computers to its product offering. As new generations of computers become available, Rent-A-Center reduced the rental rates and/or rental terms on older models. This makes the computers affordable to a customer base that would otherwise be unwilling or unable to afford the higher rates for the new units. Store associates receive training in marketing personal computers. Major computer brands in this category include Packard Bell and Epson. Weekly rental rates for computers range from $34.99 to $39.99. PURCHASING AND DISTRIBUTION Specific purchasing decisions for Renters Choice's stores are made by store managers, subject to review by headquarters management. Other than the warehouses previously utilized by Rent-A-Center, Renters Choice does not maintain any warehouse space. All merchandise is shipped by vendors directly to each store, typically within two to six days for electronics and appliances and one to two weeks for furniture, where it is held for rental. Renters Choice purchases the majority of its merchandise directly from manufacturers. Renters Choice's largest suppliers include Magnavox and Whirlpool, which accounted for approximately 21.7% and 21.6%, respectively, of merchandise purchased for Renters Choice's stores in 1997. No other supplier accounted for more than 10% of merchandise purchased by Renters Choice during such period. Renters Choice generally does not enter into written contracts with its suppliers. Although Renters Choice currently expects to continue relationships with its existing suppliers, management believes there are numerous sources of products available to Renters Choice, and does not believe that the success of its operations is dependent on any one or more of its present suppliers. In contrast to Renters Choice's strategy of direct-to-store delivery, Rent-A-Center previously maintained a nationwide network of seven distribution centers. These distribution centers consisted of warehouses, all of which were leased, ranging in size from 87,000 to 215,000 square feet (averaging approximately 135,000 square feet) and had the capacity to distribute to an average of approximately 300 stores each. Rent-A-Center utilized a fleet of 171 trucks to distribute its products through its distribution system, delivering merchandise to its stores once a week in the holiday season and once every two weeks in the off-peak season. Expenses incurred to operate this distribution network were $23.5 million for the fiscal year ended March 31, 1998. Renters Choice is in the process of closing down Rent-A-Center's distribution system as part of the integration process. 85 86 THE RENTAL PROCESS Marketing. Renters Choice uses advertising to introduce and reinforce the benefits of its rental-purchase program to existing and potential customers as well as to make such customers aware of new products and special promotions. Renters Choice's advertisements emphasize such features as product and brand name selection, prompt delivery and the absence of any initial deposit, credit investigation or long-term obligation. Renters Choice focuses on direct mail advertising, and to a lesser extent television, radio and secondary print advertising. Direct mail is used extensively because it allows Renters Choice to target specific zip codes near its stores and those areas where potential customers reside. On average, Renters Choice distributes approximately 8 million color flyers per month by direct mail. As a percentage of store revenues, Renters Choice spent 4.7% ($13.7 million) in its most recent fiscal year on advertising. As Renters Choice acquires or opens new stores in its existing market areas, it realizes certain efficiencies by listing all stores in the same market-wide advertisement. Rental-Purchase Agreement. In general, Renters Choice and Rent-A-Center utilized substantially similar rental purchase agreements and screening processes. Renters Choice retains title to the merchandise during the term of the rental purchase agreement. The term required for ownership of new products on initial rental is 12 to 36 months depending on the product category. The contract also provides the customer with an early purchase option. On average, however, ownership requirements are met on less than 25% of items being rented for the first time. During 1997, the average actual term of Renters Choice's rental purchase agreements was approximately 4.3 months. Actual rental periods vary based on the type of merchandise rented: consumer electronics products have an average actual rental period of 3.8 months, while appliances and furniture are generally rented for longer periods with an average actual rental period of 5.2 and 4.6 months, respectively. Renters Choice strives to make the rental-purchase transaction as simple and as accessible as possible for the customer. An agreement is intended to be straightforward and understandable and includes the total amount required to be paid for ownership of the merchandise, as well as all other required disclosures. If a customer elects to continue to rent the merchandise, the customer pays the next period's rental. If a customer elects to terminate an agreement, Renters Choice will pick up the merchandise or the merchandise will be returned by the customer and in either case, will be held by Renters Choice for re-rental. A customer may purchase a rented product at any time for a price based on a predetermined formula. Approval Process. Although Renters Choice does not conduct a formal credit review, its order approval process provides a mechanism for qualifying a customer. This process is designed to verify a customer's financial ability to meet weekly or monthly payments and to ensure store personnel will be able to locate the merchandise should the customer's account become past due. Renters Choice's qualification process consists of obtaining the customer's name, address, landlord or mortgage holder, source of income and personal references. Information is verified over the telephone by store personnel contacting the personal references and other sources. Generally, Renters Choice will verify employment and residence status. Since merchandise is rented rather than purchased, Renters Choice focuses on a customer's credibility, not the customer's credit history. If a customer does not pay promptly, the rent-to-own merchandise is simply returned or picked up. The approval process is designed to be completed within an hour. 86 87 Product Delivery. Renters Choice offers same day or 24-hour delivery and installation of its merchandise at no additional cost to the customer. While providing value to the customers, delivery of the merchandise provides Renters Choice with further confirmation of the information provided in the customer's rental order and better inventory control. As an additional service to the customer, Renters Choice provides free pick-up should the customer wish to terminate the rental agreement. Repair. Through the network of 22 service centers previously utilized by Rent-A-Center and acquired pursuant to the Rent-A-Center Acquisition, Renters Choice also provides any required service or repair of merchandise without additional charge, except for damage in excess of normal wear and tear. If the product cannot be repaired at the customer's residence, Renters Choice provides a temporary replacement while the product is being repaired. The customer is fully liable for damage, loss or destruction of the merchandise, unless the customer purchases an optional loss/damage waiver. Most of the products offered by Renters Choice are covered by a manufacturer's warranty for varying periods, which, subject to the terms of the warranty, is transferred to the customer in the event that the customer obtains ownership. Collections. Management believes that good collections practices are critical to Renters Choice's success in the rent-to-own industry. Management believes its strict and disciplined approach to collections results in increased collected revenue and ultimately enhances its long term relationships with its customers. Once a customer accepts delivery of merchandise, the next priority is to encourage the customer to continue renting the merchandise while making all payments in a timely manner. The goal is to treat each customer with respect and dignity. Store managers use a computerized management information system to track cash collections on a daily basis. Most rental-purchase payments are made on or near the due date, with little or no collection efforts by Renters Choice and are made in cash and in person. Having customers deliver payments in person affords Renters Choice an opportunity to further develop its customer relationships and market additional merchandise. On average, 93.5% of all Renters Choice's accounts are collected within seven days of their respective due dates. In the event a customer fails to make a rental payment when due, store management will attempt to contact the customer to obtain payment and reinstate the contract or will terminate the account and arrange to regain possession of the merchandise. Renters Choice attempts to recover the rental items by the seventh to tenth day following termination or default of a rental purchase agreement. Depending on state regulatory requirements, Renters Choice charges for the reinstatement of terminated accounts or collects a delinquent account fee. It also collects loss/damage waiver fees from customers desiring such product protection in the case of theft and certain natural disasters. Such fees are standard in the industry and may be subject to government-specified limits. See "-- Government Regulation." Renters Choice's policy is to charge-off accounts within 90 days of becoming past due. Renters Choice's charge-offs due to lost or stolen merchandise, expressed as a percentage of store revenues, were approximately 2.1% in 1997, as compared to approximately 2.3% in 1996. Rent-A-Center's charge-offs were approximately 2.3% in 1997, as compared to approximately 2.4% in 1996. These percentages compare to an industry average of 2.9% in 1997 for chains of 20 stores or more. 87 88 STORE OPERATIONS Renters Choice employs a decentralized management organization, delegating significant responsibility to its store and field managers and emphasizing results-oriented compensation directly tied to store profitability and/or growth in store revenue. A typical mature store has a store manager, an assistant manager, and two or three account executives. Each store is responsible for its operations including customer relations, credit management, delivery and pickup of merchandise, inventory management, staffing and certain marketing efforts. Account executives make deliveries, monitor accounts, secure timely rental payments and pick up rental merchandise, as necessary. Renters Choice's philosophy is to treat store managers as "owners" of their stores. At the end of each year, store managers prepare projections for the upcoming year that must be approved by executive officers and senior management. Each month actual results are compared to projected results, and managers must be able to explain significant discrepancies. Because up to 30% of the compensation of the managers of mature stores is based on profitability, store managers are attentive to their store's financial statements and play an active role in the analysis of store performance. The latitude granted to Renters Choice's store managers is a key to manager accountability. Unless inventory units not rented within the last 90 days exceed acceptable levels, no approval by Renters Choice's senior management is required to order merchandise from Renters Choice's approved vendor list. Renters Choice has idle inventory standards that are closely monitored and designed to provide for adequate display merchandise without building up excess inventory. All of these factors help keep store inventory as low as possible while maintaining sufficient quantities for store displays and customer deliveries. As part of the integration process, Renters Choice is currently reallocating its existing resources to add the assistant manager position in the Rent-A-Center stores. Management believes the assistant manager is a critical position in increasing store depth as it adds additional support for the store manager and develops management backup. In addition, starting pay for entry level positions in Renters Choice's stores is greater than in Rent-A-Center stores. In addition, Renters Choice intends to transition the salaries of Rent-A-Center's entry level employees to those of Renters Choice as it believes the higher wages allow it to attract and retain stronger, more efficient employees. REGIONAL MANAGEMENT Each store manager reports to a market manager who typically oversees seven to nine stores. Market managers are primarily responsible for monitoring individual store performance and inventory levels within their respective regions. Renters Choice's approximately 265 market managers, in turn, report to 41 regional directors, who monitor the operations of approximately six regions, and, through the market managers, individual store performance. The regional directors report to Renters Choice's senior management and together, the regional directors and senior management direct and coordinate purchasing, financial planning and controls, employee training, personnel matters and new store site selection. Despite Renters Choice's decentralized structure, senior management closely monitors operations by examining store-level performance on a daily basis through Renters Choice's management information system and frequent on-site reviews. As part of 88 89 the integration process, Renters Choice is in the process of reorganizing Rent-A-Center's field reporting structure and aligning its compensation plans to conform to the structure employed by Renters Choice. Up to 30% of all market manager compensation at Renters Choice is tied directly to store revenue and/or operating profit. RECRUITMENT, RETENTION AND TRAINING Renters Choice places great importance on recruiting and training quality personnel and believes that its managers are among the best in the industry. As part of its recruiting process, each prospective store employee is administered an examination to determine his or her managerial abilities. In order to attract and retain quality personnel, Renters Choice generally pays its entry level employees more than the industry average and provides competitive benefits packages. In order to become a store manager, a candidate must have experience working in Renters Choice system and be selected by regional and senior management and complete the management training program. In order to be promoted to regional manager, a candidate must have previously served as a store manager. Renters Choice conducts an annual managers' meeting at a central location attended by store managers, regional managers, regional vice presidents and executive management. At such sessions, prior performance is critiqued, operating procedures are reviewed and revised, new merchandise is showcased and managers receive classroom training in the areas of financial management, product information, inventory management, customer service, credit management and other areas of store operations. MANAGEMENT INFORMATION SYSTEMS Utilizing Renters Choice's management information system, executive management, regional managers and store managers can closely monitor the productivity of stores under their supervision as compared to prescribed guidelines. This system provides Renters Choice's management with access to operating and financial information about each store location and region, and generates management reports on a daily, weekly, month-to-date and year-to-date basis for each unit of merchandise and every rental purchase transaction. The reports for all stores are reviewed daily by senior management and any irregularities are addressed the following business day. Each store is equipped with a computer system that tracks individual components of revenue, each item in idle and rented inventory, total items on rent, delinquent accounts and other account information. In addition, Renters Choice's computer system maintains all standard agreements, which are printed off the system on an as-needed basis at each store. All documents including standard agreements, sales material and collection material have been pre-formatted. Renters Choice has only five employees in its management information system department as it outsources the maintenance and software development to an outside vendor. COMPETITION The rent-to-own industry is highly competitive. Renters Choice is the largest rent-to-own operator with 2,127 stores as well as the largest franchisor with 307 stores. The five largest industry participants account for only 38.5% of the approximately 8,300 rent-to-own stores in the United States. Renters Choice's stores will compete with other rent-to-own businesses, as well as with rental stores that do not offer their customers a purchase option. 89 90 With respect to customers desiring to purchase merchandise for cash or on credit, Renters Choice will also compete with department stores and discount stores. Competition is based primarily on store location, product selection and availability, customer service and rental rates and terms. FRANCHISE OPERATIONS ColorTyme is the largest nationwide rent-to-own franchisor with 297 stores in 39 states. In addition, Rent-A-Center has 24 franchise stores in 3 states. All ColorTyme franchised stores use ColorTyme's trade names, service marks, trademarks, logos, emblems and indicia of origin and operate under distinctive operating procedures and standards specified by ColorTyme. ColorTyme's primary source of revenue is the sale of rental equipment to its franchisees, who, in turn, offer the equipment to the general public for rent or purchase under a rent-to-own program. As franchisor, ColorTyme receives royalties of 2.3% to 4.0% of the franchisees' rental income and, generally, an initial fee of $7,500 per location for existing franchisees and up to $25,000 per location for new franchisees. ColorTyme has established a national advertising fund (the "Fund") for the franchised stores, whereby ColorTyme has the right to collect up to 3% of the monthly gross rental payments and sales from each franchisee to be contributed to the Fund. Currently, ColorTyme has set the monthly franchisee contribution at $250 per store per month. ColorTyme directs the advertising programs of the Fund, generally consisting of advertising in print, television and radio. Furthermore, the franchisees are required to expend 3% of their monthly gross rental payments and sales on local advertising. Rent-A-Center has 24 franchised locations operating under the Rent-A-Center name. As franchisor, Rent-A-Center receives royalties of up to 3% of gross receipts and a fee of $25,000 per location. Additionally, franchisees can purchase merchandise through Rent-A-Center with no mark-up. Rent-A-Center franchisees pay substantially the same amount for advertising as the ColorTyme stores. EMPLOYEES As of November 30, 1998, Renters Choice had approximately 11,514 employees, of whom approximately 322 were assigned to Renters Choice's headquarters and the remainder of whom were directly involved in the management and operation of Renters Choice's stores. As of the same date, ColorTyme had approximately 18 employees, all of which were employed full-time. None of Renters Choice's employees are covered by a collective bargaining agreement. PROPERTIES Renters Choice. Renters Choice leases space for all of its retail stores, as well as its corporate and regional offices, under operating leases. Most of these leases are for terms of 3 to 5 years and contain renewal options for an additional one or two terms at rental rates adjusted according to agreed upon formulas. In November 1998, Renters Choice moved its headquarters to 5700 Tennyson Parkway, Plano, Texas (the "New Headquarters"). The New Headquarters consist of approximately 82,274 square feet and is the home office for 90 91 all of Renters Choice's operations. The Rent-A-Center operations were moved to the New Headquarters from Rent-A-Center's Wichita, Kansas office in December 1998. Renters Choice intends to dispose of the former headquarters of Rent-A-Center. ColorTyme. ColorTyme's headquarters are located at 1231 Greenway Drive in Irving, Texas, and consist of approximately 9,600 square feet. It is anticipated that ColorTyme will relocate to the New Headquarters in January 1999. GOVERNMENT REGULATION State Regulation There are currently 45 states that have legislation regulating rental purchase transactions. With some variations in individual states, most state legislation requires the lessor to make prescribed disclosures to customers about the rental purchase agreement and transaction, and provides time periods during which customers may reinstate agreements. Some state rental purchase laws prescribe grace periods for nonpayment, prohibit or limit certain types of collection or other practices, and limit certain fees that may be charged. Nine states limit the total rental payments that can be charged. Such limitations, however, do not become applicable in general unless the total rental payments required under agreements exceed 2 times to 2.4 times of the "disclosed cash price" or the retail value. Minnesota and, more recently, New Jersey have had lower court decisions which treat rental purchase transactions as credit sales subject to consumer lending restrictions. In response, Renters Choice has developed and utilizes rent-to-rent agreements, with certain variations, in both Wisconsin and Minnesota. Three other states (Alaska, Montana and North Carolina), Puerto Rico and the District of Columbia have no rental purchase legislation. However, the retail installment sales statute in North Carolina recognizes that rental purchase transactions which provide for more than a nominal purchase price at the end of the agreed rental period are not credit sales under such statute. Renters Choice operates 23 stores in the remaining jurisdictions (excluding North Carolina) which have no rental purchase legislation. There can be no assurance that new or revised rental purchase laws will not be enacted or, if enacted, that such laws would not have a material adverse effect on Renters Choice. See "Risk Factors -- Passage of Adverse Government Regulation Impacting the Rent-to-Own Industry." Federal Legislation No comprehensive federal legislation has been enacted regulating or otherwise impacting the rental-purchase transaction. From time to time, legislation has been introduced in Congress that would regulate the rental-purchase transaction, including legislation that would subject the rental-purchase transaction to interest rate, finance charge and fee limitations, as well as the Federal Truth in Lending Act. Any such federal legislation, if enacted, could have a material adverse effect on Renters Choice. See "Risk Factors -- Passage of Adverse Government Regulation Impacting the Rent-to-Own Industry." 91 92 LEGAL PROCEEDINGS From time to time, Renters Choice, along with its subsidiaries, is party to various legal proceedings arising in the ordinary course of business. The majority of the material proceedings involve claims that may be generally characterized into one of two categories, recharacterization claims and statutory compliance claims. Recharacterization claims generally involve claims (A) in states that do not have rent-to-own legislation, (B) that rent-to-own transactions are disguised installment sales in violation of applicable state installment statutes, and (C) that allege greater damages. Statutory compliance claims generally involve claims (A) in states that have rent-to-own legislation, (B) that the operator failed to comply with applicable state rental purchase statutes (e.g., notices and late fees), and (C) that allege lesser damages. Except as described below, Renters Choice is not currently a party to any material litigation. The following litigation matters were assumed with Rent-A-Center pursuant to the Rent-A-Center Acquisition. In connection with accounting for the Rent-A-Center Acquisition, Renters Choice made appropriate purchase accounting adjustments for contingent liabilities associated with outstanding litigation. Robinson v. Thorn Americas, Inc. The plaintiffs filed this class action on April 19, 1994 in state court in New Jersey. The class consists of all residents of New Jersey who are or have been parties to Rent-A-Center rent-to-own contracts since April 19, 1988. During this period, Rent-A-Center operated approximately 23 stores in New Jersey. The plaintiffs' claims are for alleged violations of the New Jersey Retail Installment Sales Act and the New Jersey Consumer Fraud Act, usury, unlawful contractual penalty and conversion. On January 5, 1998, the court entered a judgment against Rent-A-Center and ordered Rent-A-Center to pay the plaintiffs the amount equal to (A) all reinstatement fees collected by Rent-A-Center since April 29, 1988 and (B) 40% of all rental revenue collected by Rent-A-Center from the plaintiffs from April 29, 1988, trebled. Later, the court added an incentive award to the class representative, the inclusion of attorneys' fees, and granted plaintiff's counsel 25% of the amount to be distributed to the class. The judgment is secured by a supersedeas bond posted by Rent-A-Center in the amount of $163 million, which amount was derived from an accounting by plaintiffs of the projected amount of the judgment liability through April 1999. Rent-A-Center filed its notice of appeal on January 26, 1998 and the appeal is now fully briefed. Renters Choice is vigorously defending this action on behalf of its subsidiary Rent-A-Center. However, there can be no assurance that Renters Choice will be successful on appeal. Burney v. Thorn Americas, Inc. The plaintiffs originally filed a class action in federal court in Wisconsin alleging Rent-A-Center's rent-to-own contracts violated the Wisconsin Consumer Act and federal RICO and truth-in-lending statutes. The court first granted the plaintiffs' motion for summary judgment as to liability. The court then withdrew that decision and dismissed the action for lack of federal subject matter jurisdiction once the plaintiffs withdrew their truth-in-lending claims. The plaintiffs' refiled the action on February 28, 1997 in state court in Wisconsin, and the court granted plaintiffs' motion for class certification on July 7, 1998. The class is comprised of the persons who were party to rent-to-own contracts with Rent-A-Center in Wisconsin after October 19, 1988 and who have paid RAC an amount equal to or greater than the value of the merchandise. During this period, Rent-A-Center operated approximately 23 stores in Wisconsin. (The plaintiffs have asserted that the value of the merchandise for class certification purposes is 60% of 92 93 the amount required to obtain ownership.) This limitation on the members of the class distinguishes Burney from Robinson. Renters Choice has settled this matter on behalf of its subsidiary Rent-A-Center for $16.25 million, subject to final approval by the court. The court has preliminarily approved the settlement and notices to class members are being prepared. Colon v. Thorn Americas, Inc. The plaintiffs filed this class action in November 1997 in New York state court. Rent-A-Center removed the case to the U.S. District Court for the Southern District of New York. Plaintiffs filed a motion to remand, which was granted. The plaintiffs acknowledge that rent-to-own transactions in New York are subject to the provisions of New York's Rental Purchase Statute but contend the Rental Purchase Statute does not provide Rent-A-Center immunity from suit for other statutory violations. Plaintiffs allege Rent-A-Center has a duty to disclose "effective interest" under New York consumer protection laws, and seek damages and injunctive relief for Rent-A-Center's failure to do so. This suit also alleges violations relating to late fees, harassment, undisclosed charges, and the ease of use and accuracy of its payment records. No damages theory was specified in the complaint. The proposed class includes all New York residents who were party to Rent-A-Center rent-to-own contracts from November 26, 1991 through November 26, 1997. Renters Choice is vigorously defending this action on behalf of its subsidiary Rent-A-Center and on September 24, 1998, filed motions to deny class certification and dismiss the complaint. However, there can be no assurance that such motions will be granted or that Rent-A-Center will be found not to have any liability. Anslono v. Thorn Americas, Inc. This is a putative class action filed in Massachusetts state court on January 6, 1998. Plaintiffs acknowledge that rent-to-own contracts constitute "consumer leases" under Massachusetts' rent-to-own statute, but contend that Rent-A-Center failed to comply with certain statutory provisions and Rent-A-Center failed to provide certain disclosures. Plaintiffs seek actual and statutory damages and an injunction to prohibit Rent-A-Center from engaging in the acts complained of. The proposed class includes all Massachusetts residents who were parties to Rent-A-Center rent-to-own contracts in the four-year period prior to the January 6, 1998 filing. Renters Choice is vigorously defending this action on behalf of its subsidiary Rent-A-Center. However, there can be no assurance that Rent-A-Center will be found not to have any liability. Allen v. Thorn Americas, Inc. The plaintiffs filed August 15, 1997 a putative nationwide class action suit in federal court in Missouri, alleging that Rent-A-Center has discriminated against African-Americans in its hiring, compensation, promotional and termination policies. Renters Choice, on behalf of its subsidiary Rent-A-Center, has settled this matter in principle for approximately $6.75 million. Cooks v. Thorn Americas, Inc. The plaintiff filed a putative class action in Texas state court in 1993, alleging violations of Texas' usury statute, Deceptive Trade Practices Act and Insurance Code. This case has been dormant since 1994. Renters Choice intends to vigorously defend its subsidiary in this action should it once again become active. However, there can be no assurance that Rent-A-Center will be found not to have any liability. In connection with the Rent-A-Center Acquisition, Thorn plc agreed to indemnify and hold harmless Renters Choice and Rent-A-Center from the following two lawsuits and 93 94 deposited $40 million in escrow in respect of these two lawsuits and other indemnification claims that Renters Choice may have against Thorn plc. Fogie v. Thorn Americas, Inc. The plaintiffs filed this class action on December 4, 1991 in Minnesota. The class consists of residents of Minnesota who entered rental purchase contracts with Rent-A-Center from August 1, 1990 through November 30, 1996. The plaintiffs alleged that Rent-A-Center's rent-to-own contracts violated Minnesota's Consumer Credit Sales Act and the Minnesota General Usury Statute. On April 15, 1998, the court entered a final judgment against Rent-A-Center and ordered it to pay approximately $30 million to the plaintiffs. Under certain provisions of the judgment, Rent-A-Center may receive certain credits against the judgment. On May 15, 1998, Rent-A-Center filed a notice of appeal from the damages finding only and is vigorously pursuing its appeal. Willis v. Thorn Americas, Inc. The Willis action consolidated three separate but related actions, the first of which was filed in 1994, that cover the period from December 22, 1988 to September 9, 1996. The plaintiffs alleged that prior to Pennsylvania's enactment of rent-to-own legislation, Rent-A-Center's rent-to-own contracts were actual installment sales contracts in violation of Pennsylvania law. Rent-A-Center entered into a settlement agreement with the plaintiffs whereby Rent-A-Center agreed to pay $9,350,000. On July 8, 1998, the court approved the settlement and rebate checks have been sent to eligible members of the class. The following litigation matters are also pending against Renters Choice: Gallagher v. Crown Leasing Corporation. On January 3, 1996, Renters Choice was served with a class action complaint adding it as a defendant in this action originally filed in April 1994 against Crown and certain of its affiliates in state court in New Jersey. The class consists of all New Jersey residents who entered into rent-to-own contracts with Crown between April 25, 1988 and April 20, 1995. During this period, Crown operated approximately 5 stores in New Jersey. The lawsuit alleges, among other things, that under certain rent-to-own contracts entered into between the plaintiff class and Crown, some of which were purportedly acquired by Renters Choice pursuant to the acquisition of Crown and certain of its affiliates (the "Crown Acquisition"), the defendants failed to make the necessary disclosures and charged the plaintiffs fees and expenses that violated the New Jersey Consumer Fraud Act and the New Jersey Retail Installment Sales Act. The plaintiffs seek damages including, among other things, a refund of all excessive fees and/or interest charged or collected by the defendants in violation of such acts, state usury laws and other related statutes and treble damages, as applicable. Pursuant to the Asset Purchase Agreement entered into between Crown, its controlling shareholder and Renters Choice in connection with the Crown Acquisition, Renters Choice did not contractually assume any liabilities pertaining to Crown's rent-to-own contracts for the period prior to the acquisition of Crown. The plaintiffs have obtained class certification and a summary judgment against Crown on the liability issues. Subsequent to these decisions by the New Jersey state court, Crown filed for protection from its creditors under Chapter 11 of the federal bankruptcy laws. The bankruptcy court has allowed the lawsuit to proceed in New Jersey, where the state court granted summary judgment on the plaintiff's damages formula against Crown. The plaintiffs calculated actual damages for purposes of their summary judgment motion at approximately $7.6 million. The court ruled that the plaintiffs are entitled to three times actual damages. However, the state court's ruling 94 95 requires certain minor adjustments pursuant to an accounting. Although the plaintiffs were unsuccessful in their attempt to certify a class against Renters Choice, the plaintiffs have attempted to assert a theory of successor liability against Renters Choice. Management believes there is no basis for a claim of successor liability against Renters Choice. Renters Choice will take appropriate steps to defend the successor liability issues at trial. Due to the uncertainties associated with any litigation, the ultimate outcome of this matter cannot presently be determined. Michelle Newhouse v. Renters Choice, Inc./Handy Boykin v. Renters Choice, Inc. On November 26, 1997 a class action complaint was filed against Renters Choice by Michelle Newhouse in New Jersey state court alleging, among other things, that under certain rent-to-own contracts entered into between the plaintiffs and Renters Choice, Renters Choice failed to make the necessary disclosures and charged the plaintiffs fees and expenses that violated the New Jersey Consumer Fraud Act and the New Jersey Installment Sales Act. The claims arising from this action are similar to the claims made in Robinson v. Thorn Americas, Inc. and Gallagher v. Crown Leasing Corporation. The proposed class consists of all residents of New Jersey who are or have been parties to contracts to rent-to-own merchandise from Renters Choice within the past six years. During this period, Renters Choice operated approximately 17 stores in New Jersey. Renters Choice removed the case to federal court on January 21, 1998, and was then advised by the plaintiffs' attorney that Michelle Newhouse no longer wished to serve as class representative. A motion to voluntarily dismiss the Newhouse case filed by the plaintiffs' attorney was granted shortly thereafter. However, on May 1, 1998, a new class action complaint against Renters Choice made by Handy Boykin was filed by the plaintiffs' attorney in the Newhouse matter in New Jersey state court alleging the same causes of action with the same proposed class as that of the Newhouse matter. This new filing essentially constitutes a replacement of the named plaintiff in the Newhouse matter with a new named plaintiff, Handy Boykin. Management anticipated such a replacement and is defending this matter vigorously. Renters Choice removed the Boykin case to federal court, where Boykin's motion to remand to New Jersey state court is now pending. No motion for class certification has been made; however, due to the uncertainties associated with any litigation, the ultimate outcome of this matter cannot presently be determined. An adverse decision in this case could have a material effect on Renters Choice. 95 96 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the executive officers and directors of Renters Choice: J. Ernest Talley. Mr. Talley has served as Chairman of the Board of Directors of Renters Choice since May 1989 and Chief Executive Officer since November 1994. Mr. Talley operated a rent-to-own business from 1963 to 1974 in Wichita, Kansas, which he sold to Remco (later acquired by Rent-A-Center and acquired as part of the Rent-A-Center Acquisition) in 1974. From 1974 to 1988, he was involved in the commercial real estate business in Dallas, Texas. Mr. Talley co-founded Talley Lease to Own, Inc. with his son, Michael C. Talley, in 1987 and served as a director and Chief Executive Officer of that company from 1988 until its merger with Renters Choice on January 1, 1995. Mr. Talley's term as a director expires at Renters Choice's 2001 annual meeting. 96
NAME AGE POSITION ---- --- -------- J. Ernest Talley................ 63 Chairman of the Board of Directors and Chief Executive Officer Mark E. Speese.................. 41 President, Chief Operating Officer and Director Danny Z. Wilbanks............... 42 Senior Vice President -- Finance and Chief Financial Officer L. Dowell Arnette............... 51 Executive Vice President Bradley W. Denison.............. 38 Senior Vice President -- General Counsel Anthony M. Doll................. 30 Senior Vice President C. Edward Ford, III............. 31 Senior Vice President Dana F. Goble................... 33 Senior Vice President John H. Whitehead............... 48 Senior Vice President David A. Kraemer................ 37 Senior Vice President William C. Nutt................. 42 Senior Vice President Thomas J. Lopez................. 39 Senior Vice President Robert D. Davis................. 27 Vice President -- Finance and Treasurer David M. Glasgow................ 30 Secretary Mitchell E. Fadel............... 41 President and Chief Executive Officer of ColorTyme, Inc. Joseph V. Mariner, Jr........... 78 Director J.V. Lentell.................... 60 Director Rex W. Thompson................. 48 Director Laurence M. Berg................ 32 Director Peter P. Copses................. 40 Director 97 Mark E. Speese. Mr. Speese has served as President and a director of Renters Choice since 1990, and as Chief Operating Officer since November 1994. From Renters Choice's inception in 1986 until 1990, Mr. Speese served as a Vice President responsible for Renters Choice's New Jersey operations. Prior to joining Renters Choice, Mr. Speese was a regional manager for Rent-A-Center from 1979 to 1986. Mr. Speese's term as a director expires at Renters Choice's 1999 annual meeting. Danny Z. Wilbanks. Mr. Wilbanks was appointed Senior Vice President -- Finance and Chief Financial Officer of Renters Choice in April 1997. From January 1995 to April 1997, Mr. Wilbanks served as President and Chief Executive Officer of Trans Texas Capital, L.L.C., a rental purchase company, the assets of which were acquired by Renters Choice in February 1997. Between August 1993 and January 1995, Mr. Wilbanks was a self-employed consultant in the rent-to-own industry. From January 1986 to August 1993, Mr. Wilbanks, who is a certified public accountant, served as Chief Financial Officer of Remco. L. Dowell Arnette. Mr. Arnette has served as an Executive Vice President of Renters Choice since September 1996. From May 1995 to September 1996, Mr. Arnette served as Senior Vice President of Renters Choice. From November 1994 to May 1995, he served as Regional Vice President of Renters Choice. From 1993 to November 1994, he served as a regional manager of Renters Choice responsible for the southeastern region. From 1975 until 1993, Mr. Arnette was an Executive Vice President of DEF Investments, Inc. ("DEF"), an operator of rent-to-own stores. Renters Choice acquired substantially all of the assets of DEF and its subsidiaries in April 1993. Mr. Arnette is the brother of Joe T. Arnette, Vice President -- Training & Personnel of Renters Choice. Bradley W. Denison. Mr. Denison was appointed Senior Vice President -- General Counsel of Renters Choice in September 1998. Between September 1996 and September 1998, Mr. Denison was Vice President and Assistant General Counsel for Rent-A-Center, Inc. From August 1996 to September 1996, Mr. Denison served as Associate General Counsel for Rent-A-Center, Inc. and from June 1994 until August 1996, served as Director and Chief Counsel for Rent-A-Center, Inc. Prior to that time, Mr. Denison served as a Staff Attorney for Rent-A-Center, Inc. Anthony M. Doll. Mr. Doll was appointed Senior Vice President of Renters Choice in September 1998. From September 1996 until September 1998, Mr. Doll served as Regional Vice President of Renters Choice. Between May 1995 and September 1996, Mr. Doll served as Renters Choice's regional manager for the Detroit, Michigan area. From April 1993 to May 1995, Mr. Doll served as the manager of Renters Choice's stores in Michigan. C. Edward Ford, III. Mr. Ford was appointed Senior Vice President of Renters Choice in September 1998. From January 1997 until September 1998, Mr. Ford served as a Regional Vice President of Renters Choice. Between November 1994 until January 1997, Mr. Ford served as a regional manager for Renters Choice for the Tennessee region. From July 1993 until November 1994, Mr. Ford served as a store manager for Renters Choice. Dana F. Goble. Mr. Goble was appointed Senior Vice President of Renters Choice in December 1996 and served as a Regional Vice President of Renters Choice from May 1995 until December 1996. From April 1993 to May 1995, Mr. Goble served as regional manager for the Detroit, Michigan area. 97 98 John H. Whitehead. Mr. Whitehead was appointed Senior Vice President of Renters Choice in September 1997. Between May 1995 and September 1997, Mr. Whitehead served as a Regional Vice President for Renters Choice. From July 1993 to May 1995, Mr. Whitehead served as Renters Choice's regional manager for the Atlanta, Georgia area. David A. Kraemer. Mr. Kraemer was appointed Senior Vice President of Renters Choice in September 1998. From December 1995 until September 1998, Mr. Kraemer served as a Regional Vice President for Renters Choice. Prior to that time, Mr. Kraemer served as a Divisional Vice President for MRTO Holdings from November 1990 until Renters Choice acquired MRTO Holdings in September 1995. William C. Nutt. Mr. Nutt was appointed Senior Vice President of Renters Choice in May 1998. Between December 1995 until May 1998, Mr. Nutt served as a Regional Vice President for Renters Choice. From December 1992 through December 1995, Mr. Nutt served as Renters Choice's regional manager for the Northeast Ohio area. Thomas J. Lopez. Mr. Lopez was appointed Senior Vice President in September 1998. Between December 1995 and September 1998, Mr. Lopez served as a Regional Vice President for Renters Choice. From April 1991 until Renters Choice acquired MRTO Holdings in September 1995, Mr. Lopez served as a Divisional Vice President for MRTO Holdings. Robert D. Davis. Mr. Davis was appointed Vice President -- Finance and Treasurer of Renters Choice in September 1998. Between June 1997 and September 1998, Mr. Davis served as Treasurer of Renters Choice. From January 1997 until June 1997, Mr. Davis served as Renters Choice's Assistant Secretary and Treasurer. Between June 1995 and January 1997, Mr. Davis served as the Payroll Supervisor for Renters Choice and from June 1993 to June 1995 served as an accountant for Renters Choice. David M. Glasgow. Mr. Glasgow has served as Secretary for Renters Choice since June 1995. Between June 1995 to June 1997, Mr. Glasgow served as Secretary and Treasurer for Renters Choice. From March 1995 to June 1995, Mr. Glasgow served as accounting operations supervisor and from June 1993 to March 1995, served as an accountant for Renters Choice. Mitchell E. Fadel. Mr. Fadel has been President and Chief Executive Officer of ColorTyme since November 1992. ColorTyme was acquired by Renters Choice in May 1996. Joseph V. Mariner, Jr. Mr. Mariner has served as a director of Renters Choice since February 1995. Until his retirement in 1978, Mr. Mariner served as Chairman of the Board of Directors and Chief Executive Officer of Hydrometals, Inc., a large conglomerate with subsidiaries engaged in the manufacture of retail plumbing supplies, nonpowered hand tools and electronic components. Mr. Mariner currently serves as a director of Temtex Industries, Inc., a manufacturer of energy efficient fireplaces and gas logs, Peerless Mfg. Co., a manufacturer of heavy oil and gas filtration equipment and Dyson Kissner Moran Corp., a New York based private investment company engaged in acquiring and operating a multitude of manufacturing companies with additional holdings in real estate. Mr. Mariner's term as a director expires at Renters Choice's 2000 annual meeting. 98 99 J.V. Lentell. Mr. Lentell has served as a director of Renters Choice since February 1995. Mr. Lentell was employed by Kansas State Bank & Trust Co., Wichita, Kansas, from 1966 through July 1993, serving as Chairman of the Board from 1981 through July 1993. Since July 1993, he has served as a director and Vice Chairman of the Board of Directors of Intrust Bank, N.A., successor by merger to Kansas State Bank & Trust Co. Mr. Lentell's term as a director expires at Renters Choice's 2000 annual meeting. Rex W. Thompson. Mr. Thompson has served as a director of Renters Choice since February 1995. Since 1988, Mr. Thompson has served as a Professor of Finance at the Edwin L. Cox School of Business, Southern Methodist University, Dallas, Texas, where he is the Collins Professor of Finance. Mr. Thompson previously served as department chair, and as an associate professor at the University of British Columbia and the Wharton School of Business. Mr. Thompson's term as a director expires at Renters Choice's 1999 annual meeting. Laurence M. Berg. Mr. Berg was appointed a director of Renters Choice on August 5, 1998. Mr. Berg has been associated since 1992 and a principal since 1995 with Apollo Advisors, L.P., which together with its affiliates, acts as managing general partner of Apollo Investment Fund, L.P., AIF II, L.P., Apollo Investment Fund III, L.P., and Apollo Investment Fund IV, L.P. Mr. Berg is also a director of Paragon Health Network, Inc., Continental Graphics Holdings, Inc., CWT Specialty Stores, Inc. and Communications Corp. of America. Mr. Berg serves as one of Apollo's designees on Renters Choice's Board. Mr. Berg's term as a director expires at Renters Choice's 1999 annual meeting. Peter P. Copses. Mr. Copses was appointed a director of Renters Choice on August 5, 1998. Mr. Copses has been a principal since 1990 of Apollo Advisors, L.P., which, together with its affiliates, acts as managing general partner of Apollo Investment Fund, L.P., AIF II, L.P., Apollo Investment Fund III, L.P. and Apollo Investment Fund IV, L.P. Mr. Copses is also a director of Paragon Health Network, Inc., Dominick Supermarkets, Inc., and Zale Corporation. Mr. Copses serves as one of Apollo's designees on Renters Choice's Board. Mr. Copses' term as a director expires at Renters Choice's 2001 annual meeting. TERM AND COMPENSATION OF DIRECTORS Renters Choice's Board of Directors is divided into three separate classes (Class I, Class II and Class III), with one class of directors elected at each annual meeting to serve a three year term. Each director elected serves in such capacity until the next annual meeting of the stockholders of Renters Choice where that class is re-elected or until their successors are duly elected and qualified. Directors that are not employees of Renters Choice (the "Outside Directors") each receive $3,000 for each meeting of the Board of Directors that they attend and $1,000 for attending a meeting of a committee of the Board of Directors. Automatic annual awards of fully-vested options to purchase 3,000 shares of Renters Choice's par value $.01 per share common stock (the "Common Stock") at the market price on the date of grant are made to each Outside Director on the first business day of each year. Each of Renters Choice's directors is reimbursed for any expenses incurred by such director in connection with such director's attendance at a meeting of the Board of Directors, or committee thereof. Directors receive no other compensation from Renters Choice for serving on the Board of Directors. 99 100 TERM OF EXECUTIVE OFFICERS The Board of Directors names the officers of Renters Choice at the first board meeting following Renters Choice's annual meeting of stockholders. Each officer serves at the behest of the Board of Directors and until their successors are elected and appointed or until the earlier of their death, resignation or removal. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has appointed (A) a Compensation Committee which consists of Messrs. Thompson, Lentell, Mariner and Copses, (B) an Audit Committee comprising Messrs. Mariner, Lentell, Thompson and Berg, and (C) a Finance Committee comprising Messrs. Talley, Lentell and Copses. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION J.V. Lentell, a director of Renters Choice, serves as Vice Chairman of the Board of Directors of Intrust Bank, N.A., one of Renters Choice's lenders. Intrust Bank, N.A. was an $18,000,000 participant in Renters Choice's prior credit facility and is a $20,000,000 participant in the Senior Credit Facilities. The prior credit facility was replaced by the Senior Credit Facilities. In addition, Intrust Bank, N.A. serves as trustee of Company's 401(k) plan. No executive officer of Renters Choice served as a member of the compensation or similar committee or Board of Directors of any other entity of which an executive officer served on the Compensation Committee or Board of Directors of Renters Choice. LIMITATION OF LIABILITY AND INDEMNIFICATION As permitted by the Delaware General Corporation Law, Renters Choice has adopted provisions in its Certificate of Incorporation and Bylaws which provide for the indemnification of its directors and officers to the fullest extent permitted by applicable law. These provisions, among other things, indemnify each of Renters Choice's directors for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by such director in any action or proceeding, including any action by or in the right of Renters Choice, on account of such director's service as a director of Renters Choice. In addition, Renters Choice maintains a customary directors' and officers' liability insurance policy covering its directors and officers. Renters Choice believes that these indemnification provisions are necessary to attract and retain qualified persons as directors. 100 101 EXECUTIVE COMPENSATION The following table summarizes the compensation for fiscal 1997, 1996 and 1995 for Renters Choice's Chief Executive Officer and each of its four other most highly compensated executive officers in fiscal 1997 (the Chief Executive Officer and such other officers, collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE - ------------------------- (1) The Named Executive Officers did not receive any annual compensation not properly categorized as salary or bonus, except for certain perquisites or other benefits the aggregate cost of which did not exceed the lesser of $50,000 or 10% of the total of annual salary and bonus for each such officer. (2) Mr. Fadel is President of ColorTyme, which was acquired by Renters Choice in May 1996. The amount presented for 1996 reflects the entire portion of his $210,000 annual salary received in 1996, although only $105,000 of such salary was paid to Mr. Fadel by Renters Choice. (3) These amounts represent options to purchase Renters Choice's Common Stock that were granted to Mr. Fadel in July 1996 and were outstanding as of December 31, 1996 (the "1996 Options"). Effective January 2, 1997, the 1996 Options were canceled and Mr. Fadel was granted 10,000 new options (the "New Options") to replace the 1996 Options. The New Options vest at 25% per year, beginning January 2, 1998. (4) In May 1995, Mr. Arnette was granted 15,000 options to purchase Renters Choice's Common Stock on a one-for-one basis, pursuant to Renters Choice's Long-Term Incentive Plan. The options vest over four years and expire 10 years from the date of the grant. 101
ANNUAL LONG-TERM COMPENSATION(1) COMPENSATION --------------------- ------------ SECURITIES ALL OTHER UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) ($) - --------------------------- --------- -------- ------------ ------------ J. Ernest Talley........... 1997 $250,000 $ -- -- -- Chairman of the Board and 1996 240,000 -- -- -- Chief Executive Officer 1995 240,000 -- -- -- Mark E. Speese............. 1997 $170,000 $21,000 -- -- President and Chief 1996 160,000 16,000 -- -- Operating Officer 1995 150,000 10,000 -- -- Mitchell E. Fadel(2)....... 1997 $210,000 $96,000 10,000(3) -- President -- ColorTyme, Inc. 1996 210,000(2) 96,000 -- -- 1995 -- -- -- -- L. Dowell Arnette.......... 1997 $160,000 $25,000 -- -- Executive Vice President 1996 150,000 16,000 -- -- 1995 132,000 23,000 15,000(4) -- Dana F. Goble.............. 1997 $120,000 $14,000 5,000(5) -- Senior Vice President 1996 82,000 22,000 -- -- 1995 60,000 12,000 15,000(6) -- 102 (5) In January 1997, Mr. Goble was granted 5,000 options to purchase Renters Choice's Common Stock on a one-for-one basis, pursuant to Renters Choice's Long-Term Incentive Plan. The options vest over four years and expire 10 years from the date of the grant. (6) In May 1995, Mr. Goble was granted 15,000 options to purchase Renters Choice's Common Stock on a one-for-one basis, pursuant to Renters Choice's Long-Term Incentive Plan. The options vest over four years and expire 10 years from the date of the grant. 102 103 OPTIONS GRANTED IN LAST FISCAL YEAR The following table sets forth information concerning options granted during fiscal 1997 to each of the Named Executive Officers. To date, no such options have been exercised. - ------------------------- (1) These amounts represent certain assumed rates of appreciation only. Actual gains, if any, on stock option exercises are dependent on the future performance of Renters Choice's Common Stock and overall market conditions. There can be no assurance that the amounts reflected in this table will be achieved. (2) Options are exercisable at 25% per year, beginning one year from the date of grant. (3) The exercise price was fixed at the date of the grant and represented the fair market value per share of common stock on such date. (4) These amounts represent the 1996 Options that were granted to Mr. Fadel in July 1996 and were outstanding as of December 31, 1996. Effective January 2, 1997, the 1996 Options were canceled and Mr. Fadel was granted 10,000 new options to replace the 1996 Options. The New Options vest at 25% per year, beginning January 2, 1998, have an exercise price of $14.38 per share and expire on January 2, 2007. EMPLOYMENT AGREEMENTS Renters Choice entered into an employment agreement with Danny Z. Wilbanks dated March 28, 1997, pursuant to which Mr. Wilbanks became the Senior Vice President -- Finance and Chief Financial Officer of Renters Choice effective April 1, 1997. The employment agreement provides for Mr. Wilbanks' employment by Renters Choice for a two-year period commencing April 1, 1997, subject to earlier termination by Renters Choice or Mr. Wilbanks at any time for any reason, and for an annual salary of $140,000 for the first year, with annual increases thereafter as authorized by Renters Choice's Board of Directors. Renters Choice and Mr. Wilbanks also entered into a stock option agreement pursuant to which Mr. Wilbanks received an option to purchase 60,000 shares of Renters Choice's Common Stock under Renters Choice's Long-Term Incentive Plan, at an exercise price of $14.00 per share. Of the 60,000 options granted, 20,000 are currently exercisable, with the remaining options vesting over the remaining four-year period through the year 2002 on each anniversary date of the agreement. Renters Choice does not have employment agreements with any other executive officers. 103
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF % OF ANNUAL STOCK PRICE SECURITIES TOTAL APPRECIATION FOR UNDERLYING GRANTED OPTION TERM(1) OPTIONS IN FISCAL EXERCISE EXPIRATION -------------------- NAME GRANTED(2) 1997 PRICE(3) DATE 5% 10% ---- ---------- --------- -------- ---------- -------- --------- J. Ernest Talley..... 0 0 N/A N/A N/A N/A Mark E. Speese....... 0 0 N/A N/A N/A N/A Mitchell E. Fadel.... 10,000(4) 1.16% $14.38 1/2/07 90,450 229,217 L. Dowell Arnette.... 0 0 N/A N/A N/A N/A Dana F. Goble........ 5,000 0.58% $14.38 1/2/07 45,225 114,609 104 LONG-TERM INCENTIVE AND OTHER PLANS FOR EMPLOYEES Long-Term Incentive Plan. Under Renters Choice's Amended and Restated 1994 Renters Choice, Inc. Long-Term Incentive Plan (the "Long-Term Incentive Plan") designated officers, employees and directors are eligible to receive awards in the form of stock options, stock appreciation rights, restricted stock grants and cash awards. An aggregate of 4,500,000 shares of Common Stock is currently reserved for issuance under the Long-Term Incentive Plan, subject to adjustment in the event of a stock split, stock dividend or other change in the Common Stock or the capital structure of Renters Choice. 401(k) Savings Plan. Renters Choice maintains a defined contribution plan (the "401(k) Plan") whereby after one year of service substantially all employees may defer a portion of their current salary, on a pre-tax basis, to the 401(k) Plan. Renters Choice may make discretionary matching contributions to the 401(k) Plan in an amount equal to a certain percentage of each participant's salary reduction contribution for the plan year. Renters Choice may also make a discretionary profit sharing contribution to the 401(k) Plan that is allocated to the participants based on a formula defined by the 401(k) Plan. Matching contributions made by Renters Choice for the plan year ended December 31, 1997 were twenty-five cents (25c) for every one dollar ($1.00) contributed through the first four percent (4%) of employee compensation. Discretionary contributions made by Renters Choice for the plan year ended December 31, 1997 were $61,824. The trustee of the 401(k) Plan is Intrust Bank, N.A. 104 105 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the voting securities of Renters Choice as of November 9, 1998, by (i) each person who is known to Renters Choice to be the beneficial owner of more than 5% or more of the outstanding voting securities of Renters Choice, (ii) each director of Renters Choice, (iii) each Named Executive Officer, and (iv) all executive officers and directors of the company as a group. Unless otherwise indicated, the persons named below have the sole power to vote and dispose of the shares of voting securities beneficially owned by them, subject to community property laws, where applicable. - ------------------------- * Less than 1%. (1) The address of J. Ernest Talley and Mark E. Speese is 13800 Montfort Drive, Suite 300, Dallas, Texas 75240. (2) Does not include an aggregate of 326,184 shares owned by two of Mr. Talley's children, as to which Mr. Talley disclaims beneficial ownership. (3) The address of Montgomery Asset Management, LLC is 101 California Street, San Francisco, California 94111. (4) As of December 3, 1998. (5) Includes 11,250 shares issuable pursuant to options granted under the Long-Term Incentive Plan, all of which are currently exercisable. (6) Includes 5,000 shares issuable pursuant to options granted under the Long-Term Incentive Plan, all of which are currently exercisable. (7) Includes 13,750 shares issuable pursuant to options granted under the Long-Term Incentive Plan, all of which are currently exercisable. (8) These shares are issuable pursuant to options granted under the Long-Term Incentive Plan, all of which are currently exercisable. (9) Messrs. Berg and Copses are each principals and officers of certain affiliates of Apollo. Accordingly, each of Messrs. Berg and Copses may be deemed to beneficially own shares owned by Apollo. Messrs. Berg and Copses disclaim beneficial ownership with respect to any such shares owned by Apollo. (10) The address of Apollo is 1999 Avenue of the Stars, Suite 1900, Los Angeles, California 90067. The 8,949,347 shares of Common Stock represent the shares of Common Stock into which the Series A Preferred Stock is convertible. Apollo owns 250,000 shares of the Series A Preferred Stock, which represents in excess of 96% of the outstanding shares of the Series A Preferred Stock. Apollo also has the right to vote RCAC's 10,000 shares of Series A Preferred Stock. Apollo disclaims any beneficial ownership in these 10,000 shares other than its right to vote these shares. 105
SHARES OF SERIES A SHARES OF COMMON STOCK PREFERRED STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED ---------------------- ------------------ NAME AND ADDRESS OF PERCENT PERCENT BENEFICIAL OWNER NUMBER OF CLASS NUMBER OF CLASS ------------------- --------- -------- ------- -------- J. Ernest Talley(1).................... 4,903,166(2) 20.37% -- -- Mark E. Speese(1)...................... 2,288,432 9.51% -- -- Montgomery Asset Management, LLC(3).... 1,818,600(4) 7.55% -- -- L. Dowell Arnette...................... 416,164(5) 1.77% -- -- Mitchell E. Fadel...................... 89,523(6) * -- -- Dana F. Goble.......................... 22,813(7) * -- -- J.V. Lentell........................... 13,000(8) * -- -- Rex W. Thompson........................ 12,000(8) * -- -- Joseph V. Mariner, Jr.................. 5,842 * -- -- Lawrence M. Berg(9).................... 0 * -- -- Peter P. Copses(9)..................... 0 * -- -- Apollo(10)............................. 8,949,347 27.10% 260,000 100.0% All officers and directors as a group (19 total)........................... 7,829,623 32.38% -- -- 106 CERTAIN TRANSACTIONS OF RENTERS CHOICE CERTAIN BUSINESS RELATIONSHIPS J.V. Lentell, a director of Renters Choice, serves as Vice Chairman of the Board of Directors of Intrust Bank, N.A., one of Renters Choice's lenders. Intrust Bank, N.A. was an $18.0 million participant in Renters Choice's prior credit facility and is a $20.0 million participant in the Senior Credit Facilities. The prior credit facility was replaced by the Senior Credit Facilities. In addition, Intrust Bank, N.A. serves as trustee of Renters Choice's 401(k) plan. Mitchell E. Fadel, President of ColorTyme, owns approximately 13.5% of each of Portland II RAC, Inc. ("Portland") and Wilson Enterprises of Maine, Inc. ("Wilson"), both of which are franchisees of Rent-A-Center. As of October 13, 1998, Portland and Wilson collectively were indebted to Rent-A-Center for approximately $31,000. On August 5, 1998, Apollo purchased $250 million of Renters Choice's Preferred Stock. Pursuant to the Stock Purchase Agreement Renters Choice entered into with Apollo, Apollo is entitled to designate two individuals on Renters Choice's Board. Messrs. Berg and Copses currently serve as Apollo's designees on Renters Choice's Board. ACQUISITION OF TRANS TEXAS CAPITAL, L.L.C. In February 1997, Renters Choice acquired fourteen stores in Texas from Trans Texas Capital, L.L.C. ("Trans Texas") for approximately $7.3 million in cash (the "Trans Texas Acquisition"). Danny Z. Wilbanks, Senior Vice President -- Finance and Chief Financial Officer of Renters Choice was the managing member of Trans Texas. At the time of the Trans Texas Acquisition, Mr. Wilbanks was not an executive officer of Renters Choice. REPURCHASE OF $25 MILLION OF RENTERS CHOICE'S COMMON STOCK On August 18, 1998, Renters Choice repurchased 990,099 shares of its common stock for $25 million from J. Ernest Talley, its Chairman of the Board and Chief Executive Officer. The repurchase of Mr. Talley's stock was approved by the Board of Directors of Renters Choice on August 5, 1998. The price was determined by a pricing committee made up of Joseph V. Mariner, Jr., J. V. Lentell and Rex W. Thompson (and approved by the Board of Directors of Renters Choice, with Mr. Talley abstaining). The pricing committee met on August 17, 1998, after the close of the markets, and Mr. Talley's shares were repurchased at the price of $25.25 per share, the closing price of Renters Choice's common stock on August 17, 1998. 106 107 DESCRIPTION OF CAPITAL STOCK The following description of the capital stock of Renters Choice and certain provisions of Renters Choice's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and Renters Choice's Amended and Restated By-Laws (the "By-Laws") is a summary and is qualified in its entirety by the provisions of the Certificate of Incorporation and By-Laws, copies of which have been filed as exhibits to Renters Choice's filings, from time to time, with the SEC. As of November 9, 1998, the authorized capital stock of Renters Choice consisted of (i) 50,000,000 shares of Common Stock, par value $.01 per share, of which 24,074,734 shares were outstanding, and (ii) 5,000,000 shares of Preferred Stock, par value $.01 per share, of which 260,000 shares were outstanding. COMMON STOCK As of November 9, 1998, there were 24,074,734 shares of Common Stock outstanding held by approximately 75 record holders. The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of the stockholders. Cumulative voting of shares of Common Stock is prohibited. The holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of assets legally available therefor, subject to the payment of any preferential dividends and the setting aside of sinking funds or redemption accounts, if any, with respect to any Preferred Stock that from time to time may be outstanding. In the event of liquidation, dissolution or winding up of Renters Choice, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of the holders of any outstanding Preferred Stock. The holders of Common Stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. All of the outstanding shares of Common Stock are fully paid and nonassessable, and all of the shares of Common Stock offered hereby, when issued, will be fully paid and nonassessable. PREFERRED STOCK The Board of Directors of Renters Choice, without further action by the stockholders, is authorized to issue up to 5,000,000 shares of Preferred Stock (the "Preferred Stock") in one or more series and to fix and determine as to any series any and all of the relative rights and preferences of shares in such series, including, without limitation, preferences, limitations or relative rights with respect to redemption rights, conversion rights, voting rights, dividend rights and preferences on liquidation. Convertible Preferred Stock To finance a portion of the cost of the Rent-A-Center Acquisition, Renters Choice issued to Apollo 250,000 shares of Convertible Preferred Stock at $1,000 per share, resulting in aggregate proceeds to Renters Choice of $250 million. In addition, Renters Choice issued to an affiliate of Bear, Stearns & Co. Inc. ("Bear Stearns") 10,000 shares of Convertible Preferred Stock at $1,000 per share contemporaneously with the Offering, resulting in 107 108 aggregate proceeds to Renters Choice of $10 million. The terms of the Convertible Preferred Stock are summarized below. Series A and Series B Preferred Stock. Renters Choice issued to Apollo 134,414 shares of Series A Preferred Stock ("Series A Preferred Stock") and 115,586 shares of Series B Preferred Stock ("Series B Preferred Stock" and, together with the Series A Preferred Stock, the "Convertible Preferred Stock"). Renters Choice issued to Bear Stearns 5,377 shares of Series A Preferred Stock and 4,623 of Series B Preferred Stock. At a special meeting of the stockholders of Renters Choice held on October 20, 1998, the stockholders approved the conversion of the Series B Preferred Stock into Series A Preferred Stock. As a result, all of the issued and outstanding Series B Preferred Stock automatically converted to Series A Preferred Stock. Therefore, a total of 250,000 shares of Series A Preferred Stock is now held by Apollo and a total of 10,000 shares of Series A Preferred Stock is held by Bear Stearns. Liquidation Preference. The Series A Preferred Stock has a liquidation preference of $1,000 per share, plus all accrued and unpaid dividends. No distributions may be made to holders of Common Stock until the holders of the Convertible Preferred Stock have received the liquidation preference. Dividends. Holders of Series A Preferred Stock are entitled to receive quarterly dividends at the rate of $37.50 per annum per share of Series A Preferred Stock. For the first five years, dividends on the Convertible Preferred Stock may be paid, at the option of Renters Choice, in cash or in additional Convertible Preferred Stock. For the four quarters beginning the ninth quarter following August 5, 1998, no dividend shall be paid or accrued on any share of Series A Preferred Stock for any quarter in which the average stock price for the fifteen consecutive trading days immediately preceding the payment date is equal to or greater than two times the Conversion Price (as defined below). For each quarter beginning the thirteenth quarter following August 5, 1998, no dividend shall be paid or accrued on any share of Series A Preferred Stock in any quarter in which the average stock price for the fifteen consecutive trading days immediately preceding the payment date is equal to or greater than the Conversion Price accumulated forward to the payment date at a compound annual growth rate of 25% per annum, compounded quarterly. Conversion Price. Holders of Series A Preferred Stock may convert their shares of Series A Preferred Stock at any time into shares of Renters Choice's Common Stock at a price equal to $27.935 per share (the "Conversion Price"). Optional Redemption. The Series A Preferred Stock is not redeemable for four years; thereafter, Renters Choice may redeem all but one share of the Series A Preferred Stock at any time at 105% of the liquidation preference plus accrued and unpaid dividends. Apollo may reserve from redemption one share of Series A Preferred Stock until such time as it and its Permitted Transferees (as defined in the Certificate of Designations, Preferences and Relative Rights and Limitations of Series A Preferred Stock of Renters Choice, Inc.) shall own less than 33 1/3% of the Shares (as defined immediately below) initially issued to Apollo. "Shares" is defined as shares of the common stock (voting and non-voting) and the Series A Preferred Stock, and the preceding percentage shall be calculated as if each of the Shares had been exchanged or converted into shares of common stock immediately prior to the calculation regardless of the existence of any restrictions on such exchange or conversion. 108 109 Mandatory Redemption. Holders of Convertible Preferred Stock have the right to require Renters Choice to redeem the Convertible Preferred Stock on the earliest of a change of control, the date upon which Renters Choice's common stock is not listed for trading on a United States national securities exchange or the Nasdaq National Market System or the eleventh anniversary of the issuance of the Convertible Preferred Stock at a price equal to the liquidation preference of the Convertible Preferred Stock. Board Representation. Holders of Series A Preferred Stock are entitled to two seats on Renters Choice's Board of Directors. Voting Rights. Holders of Series A Preferred Stock are entitled to vote on all matters presented to the holders of Renters Choice's common stock. The number of votes per share of Series A Preferred Stock shall be equal to the number of votes associated with the underlying voting common stock into which such Series A Preferred Stock is convertible. CERTAIN ANTI-TAKEOVER MATTERS Renters Choice's Amended and Restated By-Laws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors to be brought before meetings of stockholders of Renters Choice. These procedures provide that notice of such stockholder proposals must be timely given in writing to the Secretary of Renters Choice prior to the meeting at which action is to be taken. Generally, to be timely, notice must be received at the principal executive offices of Renters Choice not less than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders. Such notice must also contain certain information specified in Renters Choice's Amended and Restated By-Laws. There are currently 5,000,000 authorized shares of Preferred Stock, of which 260,000 shares were outstanding as of November 9, 1998. The existence of authorized but unissued Preferred Stock may enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of Renters Choice by means of a merger, tender offer, proxy consent or otherwise. For example, if in the due exercise of its fiduciary obligations, the Board of Directors were to determine that a takeover proposal is not in Renters Choice's best interests, the Board of Directors could cause shares of Preferred Stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group or create a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent Board of Directors. In this regard, the Amended and Restated Certificate of Incorporation grants the Board of Directors broad power to establish the rights and preferences of authorized and unissued Preferred Stock. The issuance of shares of Preferred Stock pursuant to the Board of Directors' authority described above could decrease the amount of earnings and assets available for distribution to holders of Common Stock and adversely affect the rights and powers, including voting rights, of such holders and may have the effect of delaying, deterring or preventing a change in control of Renters Choice. The Board of Directors does not currently intend to seek stockholder approval prior to any issuance of Preferred Stock, unless otherwise required by law. 109 110 Renters Choice is a Delaware corporation and is subject to Section 203 of the Delaware General Corporation Law (the "DGCL"). In general, subject to certain exceptions, Section 203 prohibits a Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date that such stockholder became an interested stockholder, unless - - prior to such date the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, or - - upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding for purposes of determining the number of shares outstanding those shares owned by (A) persons who are directors and also officers and (B) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer), or - - on or subsequent to such date the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Section 203 defines a "business combination" to include certain mergers, consolidations, asset sales and stock issuances and certain other transactions resulting in a financial benefit to an "interested stockholder." In addition, Section 203 defines an "interested stockholder" to include any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with such an entity or person. LIMITATION OF LIABILITY The DGCL allows a Delaware corporation to limit a director's personal liability for monetary damages for breaches of certain fiduciary duties owed to the corporation and its stockholders. The Amended and Restated Certificate of Incorporation contains a provision that limits the liability of its directors for monetary damages for any breach of fiduciary duty as a director to the maximum extent permitted by the DGCL. This provision, however, does not eliminate a director's liability - - for any breach of the director's duty of loyalty to Renters Choice or its stockholders, - - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, - - for a transaction from which the director derived an improper personal benefit, or - - in respect of certain unlawful dividend payments or stock purchases or redemptions. The inclusion of this provision in the Amended and Restated Certificate of Incorporation may reduce the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breaches of their fiduciary duties, even though such an action, if successful, might otherwise have benefited Renters Choice and its stockholders. This provision does not prevent Renters Choice or its stockholders from seeking injunctive relief or other equitable remedies 110 111 against its directors under applicable state law, although there can be no assurance that such remedies, if sought, would be obtained. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock and the Preferred Stock is ChaseMellon Shareholder Services, L.L.C. 111 112 DESCRIPTION OF OTHER INDEBTEDNESS The description set forth below does not purport to be complete and is subject to, and qualified in its entirety by reference to, all of the provisions (including all of the definitions therein of terms not defined in this prospectus) of certain agreements setting forth the principal terms and conditions of Renters Choice's Senior Credit Facility which is available upon request from Renters Choice. SENIOR SECURED CREDIT FACILITY To assist in financing the Rent-A-Center Acquisition, Renters Choice obtained $962.3 million in senior secured credit facilities, for which The Chase Manhattan Bank serves as Administrative Agent. Chase Securities Inc. acted as Arranger. Comerica Bank serves as Documentation Agent. NationsBank, N.A. serves as Syndication Agent. The senior credit facilities consist of the following: - ------------------------- (1) Pricing subject to a leverage-based pricing grid. (2) The Letter of Credit/Multidraw Facility are included in funded debt for purposes of calculating covenants and the pricing grid. The $120.0 million 6.0 year Revolving Credit Facility will be made available to Renters Choice for working capital and general corporate purposes, including acquisitions. The $122.3 million 6.0 year Letter of Credit/Multidraw Facility has been initially used to post a letter of credit to support a $163 million bond relating to certain New Jersey litigation. Once the Letter of Credit has been terminated, Renters Choice will be permitted to borrow up to $85 million under the multidraw term loan facility. The $720.0 million in Term Loan Facilities, comprised of a $120.0 million 6.0 year Series A facility, a $270.0 million 7.5 year Series B facility, and a $330.0 million 8.5 year Series C facility, was drawn at the closing of the Rent-A-Center Acquisition to fund Renters Choice's purchase of Rent-A-Center's stock, refinance existing debt held by Renters Choice and to pay certain other costs associated with the Rent-A-Center Acquisition. The senior credit facilities are secured by a perfected first priority security interest in substantially all of Renters Choice's tangible and intangible assets including, without limitation, intellectual property, real property, and the capital stock of Renters Choice's direct and indirect subsidiaries. The senior credit facilities are unconditionally guaranteed by each of Renters Choice's direct and indirect domestic subsidiaries. In addition, the senior credit facilities will be subject to several financial covenants, including (A) a maximum leverage ratio, (B) a minimum interest coverage ratio, and (C) a minimum fixed charge coverage ratio. 112
LIBOR SENIOR FACILITIES AMOUNT TENOR SPREAD(1) - ----------------- ------ --------- --------- (DOLLARS IN MILLIONS) Senior Revolving Credit Facility............ $120.0 6.0 years 225 bps Letter of Credit/Multidraw Facility(2)...... 122.3 6.0 years 225 bps Senior Term Loan A Facility................. 120.0 6.0 years 225 bps Senior Term Loan B Facility................. 270.0 7.5 years 250 bps Senior Term Loan C Facility................. 330.0 8.5 years 275 bps ------ Total Facilities.................. $962.3 113 DESCRIPTION OF THE NOTES AND GUARANTEES GENERAL The exchange notes will be issued, and the old notes were issued, under the Indenture among Renters Choice, the Subsidiary Guarantors and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"), a copy of which has been filed as an exhibit to the Registration Statement of which this prospectus is a part. The following summary of certain provisions of the Indenture and the notes does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part thereof by the TIA. We do, however, believe that we have disclosed to you in this prospectus the material elements of the Indenture and the notes. Capitalized terms defined in "-- Certain Definitions" below are used in this "Description of the Notes and Guarantees" as so defined. For purposes of this Section, any reference to a "Holder" means a Holder of the notes. The notes are unsecured obligations of Renters Choice ranking subordinate in right of payment to all senior indebtedness of Renters Choice. The notes are fully and unconditionally guaranteed on an unsecured senior subordinated basis by Renters Choice's existing and future Restricted Subsidiaries. MATURITY, INTEREST AND PRINCIPAL The notes are limited to $175 million and mature on August 15, 2008. Each note bears interest at 11% per annum from the date of issuance, or from the most recent date to which interest has been paid or provided. Interest is payable semiannually in cash and in arrears to Holders of record at the close of business on the February 1 or August 1 immediately preceding the interest payment date on February 15 and August 15 of each year, beginning February 15, 1999. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. Principal of, premium, if any, and interest on the notes is payable at the office or agency of Renters Choice in the Borough of Manhattan, The City of New York (which initially shall be the principal corporate trust office of the Trustee, at One State Street, New York, New York). The notes may be exchanged at the same office or agency. However, at the option of Renters Choice, payment of interest may be made by check mailed to the addresses of the Holders of the notes as such addresses appear in the Note Register. Any old notes that remain outstanding after the completion of the exchange offer, together with the exchange notes issued in connection with the exchange offer, will be treated as a single class of securities under the Indenture. See "The Exchange Offer" and "Old Notes Exchange and Registration Rights Agreement." The notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and integral multiples thereof. No service charge will be made for any registration of transfer or exchange of notes, but Renters Choice may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. 113 114 OPTIONAL REDEMPTION The notes are redeemable, at Renters Choice's option, in whole or in part, at any time and from time to time on and after August 15, 2003 and prior to maturity. Renters Choice must provide notice of redemption not less than 30 nor more than 90 days' prior to such redemption by first-class mail to each Holder's registered address. The notes may be redeemed at the following redemption prices (expressed as a percentage of principal amount), plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on August 15 of the years set forth below: In addition, at any time and from time to time prior to August 15, 2001, Renters Choice may redeem up to 33.33% of the original aggregate principal amount of the notes with the proceeds of one or more Equity Offerings by Renters Choice at a redemption price (expressed as a percentage of principal amount thereof) of 111% plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date). However, at least 66.67% of the original amount of the notes must remain outstanding after each such redemption. Any redemption under this provision must occur within 90 days following the closing of any such Equity Offering. SELECTION AND NOTICE OF REDEMPTION In the event that less than all of the notes are redeemed pursuant to an optional redemption, selection of the notes for redemption will be made by the Trustee on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate. No notes of a principal amount or principal amount at maturity, of $1,000 or less may be redeemed in part. Notice of redemption must be mailed by first-class mail at least 30 but not more than 90 days before the redemption date to each Holder of notes to be redeemed at the Holder's registered address. If any note is to be redeemed in part only, the notice of redemption that relates to such note must state the portion of the principal amount or principal amount at maturity, as the case may be, to be redeemed. A new note in a principal amount equal to the unredeemed portion must be issued in the name of the Holder upon cancellation of the original note. On and after the redemption date, interest will cease to accrue on notes or portions thereof called for redemption as long as Renters Choice has deposited with the paying agent for the notes funds in satisfaction of the applicable redemption price pursuant to the Indenture. 114
REDEMPTION PERIOD PRICE ------ ---------- 2003........................................ 105.500% 2004........................................ 103.667% 2005........................................ 101.833% 2006 and thereafter......................... 100.000% 115 RANKING The indebtedness evidenced by the notes: - - is unsecured Senior Subordinated Indebtedness of Renters Choice - - is subordinated in right of payment, as set forth in the Indenture, to the payment when due of all existing and future Senior Indebtedness of Renters Choice, including Renters Choice's Obligations under the Senior Credit Facility - - ranks without preference in right of payment with all existing and future Senior Subordinated Indebtedness of Renters Choice, and - - is senior in right of payment to all existing and future Subordinated Obligations of Renters Choice. The notes are also effectively subordinated to any Secured Indebtedness of Renters Choice and its Subsidiaries to the extent of the value of the assets securing such Indebtedness. However, payment from the money or the proceeds of U.S. Government Obligations held in any defeasance trust described under "-- Defeasance" below is not subordinated to any Senior Indebtedness or subject to the restrictions described herein. At September 30, 1998, the outstanding Senior Indebtedness of Renters Choice was $716.9 million (including the Senior Revolving Credit Facility and excluding outstanding letters of credit under the Letter of Credit/Multidraw Facility). Although the Indenture contains limitations on the amount of additional Indebtedness which Renters Choice may Incur, under certain circumstances the amount of such Indebtedness could be substantial and, in any case, such Indebtedness may be Senior Indebtedness. See "-- Certain Covenants -- Limitation on Indebtedness" below. Only Indebtedness of Renters Choice that is Senior Indebtedness will rank senior to the notes in accordance with the provisions of the Indenture. The notes will rank without preference with all other Senior Subordinated Indebtedness of Renters Choice. Renters Choice has agreed in the Indenture that it will not Incur, directly or indirectly, any Indebtedness that is subordinate or junior in ranking in any respect to Senior Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated in right of payment to Senior Subordinated Indebtedness. Unsecured Indebtedness is not deemed to be subordinate or junior to Secured Indebtedness merely because it is unsecured. Renters Choice may not pay principal of, premium (if any) or interest on, the notes or make any deposit pursuant to the provisions described under "Defeasance" below and may not otherwise purchase, redeem or otherwise retire any notes (collectively, "pay the notes") if - - any Senior Indebtedness is not paid when due in cash or Cash Equivalents, or - - any other default on Senior Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated in accordance with its terms unless, in either case, (A) the default has been cured or waived and any such acceleration has been rescinded in writing, or (B) such Senior Indebtedness has been paid in full in cash or Cash Equivalents. However, Renters Choice may pay the notes without regard to the foregoing if Renters Choice and the Trustee receive written notice approving such 115 116 payment from the Representative of the Designated Senior Indebtedness with respect to which either of the events set forth in bullet points above of the immediately preceding sentence has occurred and is continuing. If any Designated Senior Indebtedness is in default and such default would allow the acceleration of the Designated Senior Indebtedness without notice, Renters Choice will not be permitted to pay the notes for a period (the "Payment Blockage Period") beginning upon the receipt by the Trustee of written notice (a "Blockage Notice") of such default from the Designated Senior Indebtedness representative specifying an election to effect a Payment Blockage Period. This Payment Blockage Period will end on the earlier of - - written notice to the Trustee to terminate the period by the person who gave the Blockage Notice; - - the discharge or repayment in full of the Designated Senior Indebtedness; - - the default giving rise to the Blockage Notice is no longer continuing; or - - 179 days have passed following the delivery of the Blockage Notice. Unless the maturity of the Designated Senior Indebtedness has been accelerated, Renters Choice will be permitted to resume payments on the notes after the end of the Payment Blockage Period. Only one Blockage Notice may be given in a 360-day period, regardless of the number of defaults on the Designated Senior Indebtedness during that period. However, if a Blockage Notice is given by a holder of Designated Senior Indebtedness other than Bank Indebtedness during the 360-day period, a representative of Bank Indebtedness may give another Blockage Notice during the 360-day period. In no event, however, may the total number of days during which any Payment Blockage Period or Periods is in effect exceed 179 days during any 360 consecutive day period. The holders of Senior Indebtedness are entitled to receive payment in full before the noteholders are entitled to receive any payment upon: - - any payment or distribution of the assets of Renters Choice upon a total or partial liquidation, dissolution or reorganization of (or a similar proceeding) relating to Renters Choice; or - - in a bankruptcy, insolvency, receivership or similar proceeding relating to Renters Choice. The holders of Senior Indebtedness will be entitled to receive payment in full before the noteholders are entitled to receive any payment. Until the Senior Indebtedness is paid in full, any payment or distribution to which the noteholders would be entitled (but for the subordination provisions of the Indenture) will be made to the holders of the Senior Indebtedness as their interests may appear. If a distribution is made to the noteholders that should have not been made to them as a result of these subordination provisions, the noteholders are required to hold such a distribution in trust for the holders of the Senior Indebtedness and pay it over to them as their interests may appear. If payment of the notes is accelerated because of an Event of Default, Renters Choice or the Trustee is required to promptly notify the holders of the Designated Senior Indebtedness or the representative of such holders of the acceleration. Renters Choice is not permitted to pay the notes until five Business Days after such holders or the 116 117 Representative of the Designated Senior Indebtedness receive notice of such acceleration. At that time, the Company may pay the notes only if the subordination provisions of the Indenture otherwise permit payment at that time. As a result of the subordination provisions in the Indenture, creditors of Renters Choice who are holders of Senior Indebtedness may recover more, ratably, than the noteholders in the event of insolvency. GUARANTEES Each Subsidiary Guarantor will unconditionally guarantee, jointly and severally, on an unsecured, senior subordinated basis, the full and prompt payment of principal of, premium, if any, and interest on the notes, and of all other obligations under the Indenture. Ranking. The indebtedness evidenced by each Subsidiary Guarantee (including the payment of principal of, premium, if any, and interest on the notes and other obligations with respect to the notes) will be subordinated to all Guarantor Senior Indebtedness of such Subsidiary Guarantor on the same basis as the notes are subordinated to Senior Indebtedness of Renters Choice. Each Subsidiary Guarantee will in all respects rank without preference with all other Senior Subordinated Indebtedness of such Subsidiary Guarantor. In addition, a Subsidiary Guarantor may not incur any Indebtedness if such Indebtedness is subordinate or junior in ranking in any respect to any Guarantor Senior Indebtedness of such Subsidiary Guarantor unless such Indebtedness is Guarantor Senior Subordinated Indebtedness of such Subsidiary Guarantor or is expressly subordinated in right of payment to Guarantor Senior Subordinated Indebtedness of such Subsidiary Guarantor. As of September 30, 1998, there was no Guarantor Senior Indebtedness of Subsidiary Guarantors other than the Guarantees of the senior credit facility. See "Description of Other Indebtedness." Although the Indenture contains limitations on the amount of additional Indebtedness that Renters Choice's Restricted Subsidiaries may incur, under certain circumstances the amount of such Indebtedness could be substantial and, in any case, such Indebtedness may be Guarantor Senior Indebtedness. See "-- Certain Covenants -- Limitation on Indebtedness" and "-- Ranking." Limitation on Subsidiary Guarantee. The obligation of each Subsidiary Guarantor under its Subsidiary Guarantee is limited to the maximum amount as will not constitute a fraudulent conveyance or fraudulent transfer under federal or state law, after giving effect to: - - all other contingent and fixed liabilities of the Subsidiary Guarantor (including any Guarantees under the Senior Credit Facility); and - - any collections from or payments made by or on behalf of any other Subsidiary Guarantor with respect to other Subsidiary Guarantor's obligations under its Subsidiary Guarantee pursuant to its contribution obligations under the Indenture. Consolidation and Merger. Each Subsidiary Guarantor is permitted to consolidate or merge into or sell its assets to Renters Choice or another Wholly-Owned Subsidiary Guarantor without limitation. Each Subsidiary Guarantor is permitted to consolidate with or merge into or sell all or substantially all of its assets to a corporation, partnership, trust, 117 118 limited partnership, limited liability company or other similar entity other than Renters Choice or another Wholly-Owned Subsidiary Guarantor if: - - the provisions under the Indenture (including the covenant described under "-- Certain Covenants -- Limitations on Sales of Assets") are complied with; and - - such Subsidiary Guarantor is released from all of its obligations under the Indenture and its Subsidiary Guarantee (which will terminate). However, any such termination will only occur to the extent that the Subsidiary Guarantor's obligations under the Senior Credit Facility and all of its Guarantees of any other Indebtedness of Renters Choice also terminate. CHANGE OF CONTROL Upon the occurrence of a change of control (as defined below), each Holder will have the right to require Renters Choice to repurchase all or any part of such Holder's notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date). Renters Choice will not be obligated to purchase the notes, however, if it has exercised its right to redeem all of the notes as described under "-- Optional Redemption." A "change of control" is defined as - - any "Person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, who is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire within one year), directly or indirectly, of more than 50% of the Voting Stock of Renters Choice or a Successor Company (as defined below) (including, without limitation, through a merger or consolidation or purchase of Voting Stock of Renters Choice); provided that the Permitted Holders do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors; - - during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of Renters Choice was approved by a vote of a majority of the directors of Renters Choice then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office; - - the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of Renters Choice and its Restricted Subsidiaries taken as a whole to any Person or group of related Persons (a "Group") (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than a Permitted Holder; or - - the adoption of a plan relating to the liquidation or dissolution of Renters Choice. 118 119 Unless Renters Choice has exercised its right to redeem all the Notes as described under "-- Optional Redemption," Renters Choice is required, within 30 days following any change of control (or at Renters Choice's option, prior to such change of control but after the public announcement thereof), to mail a notice to each Holder with a copy to the Trustee stating: - - that a change of control has occurred or will occur and that such Holder has (or upon such occurrence will have) the right to require Renters Choice to purchase such Holder's notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of Holders of record on a record date to receive interest on the relevant interest payment date); - - the circumstances and relevant facts and financial information regarding such change of control; - - the date of purchase (which shall be no earlier than 30 days nor later than 90 days from the date such notice is mailed); - - the instructions determined by Renters Choice, consistent with this covenant, that a Holder must follow in order to have its notes purchased; and - - that, if such offer is made prior to such change of control, payment is conditioned on the occurrence of such change of control. Renters Choice will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, Renters Choice will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this paragraph by virtue thereof. The change of control purchase feature is a result of negotiations between Renters Choice and the Initial Purchasers. Renters Choice has no present plans to engage in a transaction involving a change of control, although it is possible that Renters Choice would decide to do so in the future. Subject to the limitations discussed below, Renters Choice could, in the future, enter into certain transactions, including acquisitions, refinancings or recapitalizations, that would not constitute a change of control under the Indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect Renters Choice's capital structure or credit ratings. The occurrence of a change of control would constitute a default under the Senior Credit Agreement. Future Senior Indebtedness of Renters Choice may contain prohibitions of certain events which would constitute a change of control or require such Senior Indebtedness to be repurchased upon a change of control. Moreover, the exercise by the Holders of their right to require Renters Choice to repurchase the notes could cause a default under such Senior Indebtedness, even if the change of control itself does not, due to the financial effect of such repurchase on Renters Choice. Finally, Renters Choice's ability to pay cash to the Holders upon a repurchase may be limited by Renters Choice's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. 119 120 The change of control provisions described above may deter certain mergers, tender offers and other takeover attempts involving Renters Choice by increasing the capital required to effectuate such transactions. The definition of "change of control" includes a disposition of all or substantially all of the property and assets of Renters Choice and its Subsidiaries. With respect to the disposition of property or assets, the phrase "all or substantially all" as used in the Indentures varies according to the facts and circumstances of the subject transaction, has no clearly established meaning under New York law and is subject to judicial interpretation. Accordingly, in certain circumstances there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of "all or substantially all" of the property or assets of a Person, and therefore it may be unclear as to whether a change of control has occurred and whether Renters Choice is required to make an offer to repurchase the notes as described above. CERTAIN COVENANTS The Indenture contains covenants, including, among others, the following: Limitation on Indebtedness. (A) Neither Renters Choice nor any Restricted Subsidiary may Incur any Indebtedness. However, Renters Choice and any Restricted Subsidiary which is a Subsidiary Guarantor may Incur Indebtedness and related Refinancing Indebtedness if, on the date of the Incurrence of such Indebtedness, the Consolidated Coverage Ratio would be greater than: - - 2.25 to 1.00 if such Indebtedness is Incurred on or before the second anniversary of the Issue Date, and - - 2.50 to 1.00 if such Indebtedness is Incurred after the second anniversary of the Issue Date. (B) Renters Choice and its Restricted Subsidiaries may Incur the following types of Indebtedness: - - Indebtedness Incurred pursuant to the Senior Credit Facility, or any refinancing thereof, in a principal amount not to exceed $962.25 million, - - the Subsidiary Guarantees and Guarantees of Indebtedness Incurred pursuant to paragraph (A) above, or, Incurred pursuant to the Senior Credit Facility, or any refinancing thereof, in a principal amount not to exceed $962.25 million, - - Indebtedness of Renters Choice to any Restricted Subsidiary, - - Indebtedness of any Wholly Owned Subsidiary to Renters Choice or any Restricted Subsidiary. However, any subsequent issuance or transfer of any Capital Stock, or any other event resulting in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any other subsequent transfer of such Indebtedness, except to Renters Choice or a Wholly Owned Subsidiary, will be deemed an Incurrence of Indebtedness by Renters Choice or such Restricted Subsidiary, in the amount remaining outstanding after such issuance or transfer of such securities, - - Indebtedness represented by the Notes, 120 121 - - Any Indebtedness and related Refinancing Indebtedness, other than the Indebtedness described in any of the situations above, outstanding on the date of the Indenture, and any Incurred in connection with any of the Indebtedness described, - - Indebtedness of Renters Choice or any Restricted Subsidiary in the form of Capitalized Lease Obligations, Purchase Money Obligations or Attributable Debt, and any related Refinancing Indebtedness, in an aggregate amount note to exceed 2.5% of Consolidated Tangible Assets outstanding at any one time, - - Indebtedness under Hedging Obligations, as long as such Hedging Obligations are entered into for bona fide hedging purposes of Renters Choice or any Restricted Subsidiary and are either in the ordinary course of business or are required by the Senior Credit Facility, - - Indebtedness evidenced by letters of credit assumed in the Transactions or issued in the ordinary course of business of Renters Choice to secure workers' compensation and other insurance coverage, - - Guarantees of Renters Choice for Indebtedness of franchisees not to exceed $50 million outstanding at any one time, and - - Indebtedness, which may include Bank Indebtedness, in an aggregate principal amount not to exceed $25 million outstanding at any one time. (C) Neither Renters Choice nor any Restricted Subsidiary may Incur any Indebtedness pursuant to paragraph (B) above that permits Refinancing Indebtedness related to Indebtedness that constitutes Subordinated Obligations, if the proceeds of such Refinancing Indebtedness are used to Refinance such Subordinated Obligations. However, such Indebtedness is permitted if the Refinancing Indebtedness will be subordinated to the notes at least to the same extent as such Subordinated Obligations. In addition, no Subsidiary Guarantor may Incur any Indebtedness pursuant to paragraph (B) above that permits Refinancing Indebtedness with respect to Indebtedness constituting Guarantor Subordinated Obligations, if the proceeds of such Refinancing Indebtedness are used to Refinance such Guarantor Subordinated Obligations of such Subsidiary Guarantor. However, such Indebtedness is permitted if the Refinancing Indebtedness will be subordinated to the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee to at least the same extent as such Guarantor Subordinated Obligations. (D) If Indebtedness meets the criteria of more than one of the types of Indebtedness described in paragraph (B) above, then for purposes of determining compliance with this covenant, including the outstanding principal amount of any particular Indebtedness relating to this covenant: - - Renters Choice shall have sole discretion to classify such item of Indebtedness. Renters Choice is required only to include the amount and type of such Indebtedness in one of such clauses, and - - the amount of Indebtedness issued at a price that is less than the principal amount of such Indebtedness shall be equal to the amount of the liability attributable to such Indebtedness determined in accordance with GAAP. 121 122 (E) Renters Choice will not permit any Unrestricted Subsidiary to incur any Indebtedness other than Non-Recourse Debt. However, if any such Indebtedness ceases to be Non-Recourse Debt, then such event shall constitute an Incurrence of Indebtedness by Renters Choice or a Restricted Subsidiary. Limitation on Layering. Renters Choice shall not incur any Indebtedness that is expressly subordinate in right of payment to any Senior Indebtedness, unless such Indebtedness is Senior Subordinated Indebtedness or is subordinated in right of payment to Senior Subordinated Indebtedness by contract. In addition, no Subsidiary Guarantor will incur any Indebtedness that is expressly subordinate in right of payment to any Guarantor Senior Indebtedness, unless such Indebtedness is Guarantor Senior Subordinated Indebtedness of such Subsidiary Guarantor, or is subordinated in right of payment to Guarantor Senior Subordinated Indebtedness by contract. Unsecured indebtedness is not considered subordinate to Secured Indebtedness merely because it is unsecured, and Indebtedness that is not guaranteed by a particular person is not deemed to be subordinate to Indebtedness that is so guaranteed, merely because it is not guaranteed. Limitation on Restricted Payments. (A) Renters Choice and its Restricted Subsidiaries are not permitted to take the following actions: - - Declare or pay any dividend or make any distribution on or with respect to its Capital Stock, including payments in connection with any merger or consolidation involving Renters Choice. However, dividends or distributions are permitted if they are either payable solely in Capital Stock (other than Disqualified Stock), or payable to Renters Choice or any Restricted Subsidiary. If such Restricted Subsidiary is not a Wholly Owned Subsidiary, then the distributions or dividends may be payable to its other shareholders only if on a pro rata basis, measured by value. - - Purchase, redeem, retire or otherwise acquire for value any Capital Stock of Renters Choice or any Restricted Subsidiary held by Persons other than Renters Choice or another Restricted Subsidiary. - - Purchase, repurchase, redeem, defease or otherwise acquire or retire for value any Subordinated Obligation before scheduled maturity, scheduled repayment or scheduled sinking fund payment. However, this restriction does not apply to a purchase, repurchase, redemption or other acquisition made in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition. - - Make certain Restricted Payments. Restricted Payments are defined as any dividend, distribution, purchase, redemption, repurchase, defeasance, other acquisition, retirement or Investment. Renters Choice and its Restricted Subsidiaries shall not make any Investment, other than a Permitted Investment, in any Person if at the time Renters Choice or its Restricted Subsidiary makes a Restricted Payment, if: - a Default occurs and continues to occur or would result therefrom, 122 123 - if Renters Choice would not incur at least $1.00 of additional Indebtedness under paragraph (A) of the covenant described in "Limitation of Indebtedness"), or - if the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made after the date of the Indenture would exceed the sum of: - 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from the end of the most recent fiscal quarter ending before the Issue Date to the end of the most recent fiscal quarter ending before the date of such Restricted Payment for which consolidated financial statements of Renters Choice are available (or, if such Consolidated Net Income is a deficit, then minus 100% of such deficit); - the aggregate Net Cash Proceeds received by Renters Choice from issuing or selling its Capital Stock (other than Disqualified Stock) after the Issue Date. This does not apply to an issuance or sale to a Restricted Subsidiary, as long as such issuance or sale is to an employee stock ownership plan or other trust established by Renters Choice or any of its Subsidiaries for the benefit of their employees, to the extent that the purchase by such plan or trust is financed by Indebtedness of such plan or trust and for which Renters Choice is liable as a guarantor or otherwise, such aggregate amount of Net Cash Proceeds shall be limited to the aggregate amount of principal payments made by such plan or trust with respect to such Indebtedness, and - in the case of the disposition or repayment of any Investment constituting a Restricted payment, without duplication of any amount deducted in calculating the amount of Investments at any time outstanding included in the amount of Restricted Payments, an amount equal to the lesser of the return of capital of similar repayment with respect to such Investment, or the initial amount of such Investment, in either case, less the cost of the disposition of such Investment. (B) The provisions of paragraph (A) above will not prohibit the following actions: - - any purchase, redemption, repurchase, defeasance, retirement or other acquisition of Capital Stock of Renters Choice or Subordinated Obligations made by exchange (including any such exchange pursuant to the exercise of a conversion right or privilege in connection with which cash is paid in lieu of the issuance of fractional shares) for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of Renters Choice (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary or an employee stock ownership plan or other trust established by Renters Choice or any of its Subsidiaries), provided that: - such purchase, redemption, repurchase, defeasance, retirement or other acquisition shall be excluded in subsequent calculations of the amount of Restricted Payments, and 123 124 - the Net Cash Proceeds or reduction of Indebtedness from such sale shall be excluded in calculations under paragraph (A) above. - - any purchase, redemption, repurchase, defeasance, retirement or other acquisition of Subordinated Obligations made by exchange for, or out of the proceeds of the substantially concurrent sale of, Subordinated Obligations of Renters Choice that is permitted to be Incurred by the covenant described under "Limitation on Indebtedness." However, such purchase, redemption, repurchase, defeasance, retirement or other acquisition shall be excluded in subsequent calculations of the amount of Restricted Payments. - - any purchase, redemption, repurchase, defeasance, retirement or other acquisition of Subordinated Obligations from Net Available Cash to the extent permitted by the covenant described under "Limitation on Sales of Assets." However, such purchase, redemption, repurchase, defeasance, retirement or other acquisition shall be excluded in subsequent calculations of the amount of Restricted Payments. - - Payment of dividends within 60 days after the date of declaration of such dividends, if at the date of declaration such dividend would have complied with paragraph (A) above. However, such dividend shall be included in subsequent calculations of the amount of Restricted Payments. - - any purchase or redemption of any share of Capital Stock of Renters Choice from employees of Renters Choice and its Subsidiaries pursuant to the repurchase provisions under employee stock option or stock purchase agreements or other agreements to compensate management in am aggregate amount after the date of the Indenture not in excess of $2.5 million in any fiscal year, plus any unused amounts under this clause from prior fiscal years. However, such purchases or redemptions shall be excluded in subsequent calculations of the amount of Restricted Payments. - - The repurchase of Renters Choice common stock in an aggregate amount not to exceed the amount by which the proceeds from the issuance of the Convertible Preferred Stock exceeds $235 million. However, the aggregate amount of repurchases made pursuant to his clause shall not exceed $25 million. Designation of Unrestricted Subsidiaries. The Board of Directors of Renters Choice may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a default. For purposes or making such determination, all outstanding Investments by Renters Choice and its Restricted Subsidiaries (except to the extent repaid in cash) in the subsidiary so designated will be deemed Restricted Payments at the time of such designation, and will reduce the amount available for Restricted Payments under clause three of paragraph (A) of the covenant described in "Limitation on Restricted Payments." All such outstanding Investments will be deemed to constitute Investments in an amount equal to the greater of the fair market value or the book value of such Subsidiary at the time of such designation. Such Designation will be permitted only if such Restricted Payment would be permitted at such time, and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. 124 125 Limitation on Restrictions on Distributions from Restricted Subsidiaries. Neither Renters Choice nor any Restricted Subsidiary shall create or otherwise cause or permit to exist any consensual restriction on the ability of any Restricted Subsidiary to take the following actions: - - pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness or other obligations owed to Renters Choice, - - make any loans or advances to Renters Choice, or - - transfer any of its property or assets to Renters Choice. However, this prohibition does not apply to: - - any restriction pursuant to an agreement in effect or entered into on the date of the Indenture (including, without limitation, the Senior Credit Facility), - - any restriction with respect to a Restricted Subsidiary that is either: - pursuant to an agreement relating to any Indebtedness Incurred by a Restricted Subsidiary before the date on which such Restricted Subsidiary was acquired by Renters Choice, or of another Person that is assumed by Renters Choice or a Restricted Subsidiary in connection with the acquisition of assets from, or merger or consolidation with, such Person and is outstanding on the date of such acquisition, merger or consolidation. However, this does not include Indebtedness Incurred either as consideration in, or for the provision of any portion of the funds or credit support used to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by Renters Choice, or such acquisition of assets, merger or consolidation, or - pursuant to any agreement (not relating to any Indebtedness) existing when a Person becomes a Subsidiary of Renters Choice or when such agreement is acquired by Renters Choice or any Subsidiary thereof, that is not created in contemplation of such Person becoming such a Subsidiary or such acquisition. For purposes of this clause, if another Person is the Successor Company, any Subsidiary or agreement thereof shall be deemed acquired or assumed by Renters Choice when such Person becomes the Successor Company. - - any restriction with respect to a Restricted Subsidiary pursuant to an agreement (a "Refinancing Agreement") effecting a refinancing of Indebtedness Incurred pursuant to, or that otherwise extends, renews, refinances or replaces, an agreement referred to in this covenant (an "Initial Agreement") or contained in any amendment to an Initial Agreement. However, the restrictions contained in any such Refinancing Agreement or amendment cannot be less favorable to the Holders of the notes taken as a whole than restrictions contained in the Initial Agreement or Agreements to which such Refinancing Agreement or amendment relates. - - any restriction that is a customary restriction on subletting, assignment or transfer of any property or asset that is subject to a lease, license or similar contract, or the assignment or transfer of any lease, license or other contract. 125 126 - - any restriction by virtue of a transfer, agreement to transfer, option, right, or Lien with respect to any property or assets of Renters Choice or any Restricted Subsidiary not otherwise prohibited by the Indenture. - - any restriction contained in mortgages, pledges or other agreements securing Indebtedness of a Restricted Subsidiary to the extent such encumbrance or restrictions restrict the transfer of the property subject to such mortgages, pledges or other security agreements. - - any restriction pursuant to customary restrictions on dispositions of real property interests set forth in any reciprocal easement agreements of Renters Choice or any Restricted Subsidiary. - - any restriction with respect to a Restricted Subsidiary (or any of its property or assets) imposed pursuant to an agreement for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary (or the property or assets that are subject to such restriction) pending the closing of such sale or disposition. - - any restriction on the transfer of property or assets required by any regulatory authority having jurisdiction over Renters Choice or any Restricted Subsidiary or any of their businesses. Limitation on Sales of Assets. Neither Renters Choice nor any Restricted Subsidiary shall make any Asset Disposition unless: - - Renters Choice or such Restricted Subsidiary receives consideration (including relief from, or the assumption of another Person for, any liabilities, contingent or otherwise) at the time of such Asset Disposition at least equal to the fair market value of the shares and assets subject to such Asset Disposition. The Board of Directors shall determine the fair market value, and their determination shall be conclusive, including as to the value of all non-cash consideration. - - At least 75% of the consideration for any Asset Disposition received by Renters Choice or such Restricted Subsidiary is in the form of cash. However, in the case of an Asset Disposition of assets, consideration is excluded if it is by way of relief from, or by any other person assuming responsibility for, any liabilities, contingent or otherwise, which are not Indebtedness. - - Renters Choice or such Restricted Subsidiary applies an amount equal to 100% of the Net Available Cash from such Asset Disposition in the following manner: - First, to the extent Renters Choice elects (or is required by the terms of any Senior Indebtedness or Indebtedness, other than Preferred Stock, of a Restricted Subsidiary) to prepay, repay or purchase senior indebtedness or such Indebtedness of a Restricted Subsidiary (in each case other than the Indebtedness owed to Renters Choice or a Restricted Subsidiary) within 365 days after the date of such Asset Disposition. - Second, to the extent of the balance of Net Available Cash, to the extent Renters Choice or such Restricted Subsidiary elects, to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by Renters Choice or another 126 127 Restricted Subsidiary) within 365 days from the date of such Asset Disposition or, if such reinvestment in Additional Assets is a project authorized by the Board of Directors that will take longer than 365 days to complete, the period of time necessary to complete such project. - Third, to the extent of the balance of such Net Available Cash remaining (the "Excess Proceeds"), to make an offer to purchase notes at a price in cash equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the purchase date, and, to the extent required by the terms thereof, any other Senior Subordinated Indebtedness subject to the agreements governing such other Indebtedness at a purchase price of 100% of the principal amount thereof plus accrued and unpaid interest to the purchase date, and - Fourth, to the extent of the balance of such Excess Proceeds, to fund any general corporate purpose, including the repayment of Subordinated Obligations. However, in connection with any prepayments, repayment or purchase of Indebtedness pursuant to the first and third clauses above, Renters Choice or such Restricted Subsidiary will retire such Indebtedness and will cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. The provisions of this covenant do not require Renters Choice and the Restricted Subsidiaries to apply any Net Available Cash in accordance with this covenant, except to the extent that the aggregate Net Available Cash from all Asset Dispositions that is not applied in accordance with this covenant exceeds $10.0 million. To the extent that the aggregate principal amount of the notes and other Senior Subordinated Indebtedness tendered pursuant to an offer to purchase made in accordance with the third clause above exceeds the amount of Excess Proceeds, the Trustee shall select the notes and Senior Subordinated Indebtedness to be purchased on a pro rata basis, based on the aggregate principal amount thereof surrendered in such offer to purchase. When such offer to purchase is complete, the amount of Excess Proceeds shall be reset to zero. For the purposes of this covenant, the following are deemed to be cash: - - Cash Equivalents, - - the assumption of Indebtedness of Renters Choice (other than Disqualified Stock of Renters Choice) or any Restricted Subsidiary and the release of Renters Choice or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition, - - Indebtedness of any Restricted Subsidiary that is no longer a Restricted Subsidiary as a result of such Asset Disposition, to the extent that Renters Choice and each other Restricted Subsidiary is released from any Guarantee of such Indebtedness in connection with such Asset Disposition, - - securities received by Renters Choice or any Restricted Subsidiary from the transferee that are promptly converted by Renters Choice or such Restricted Subsidiary into cash, and 127 128 - - consideration consisting of Indebtedness of Renters Choice or any Restricted Subsidiary. Renters Choice will comply with any applicable requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, Renters Choice will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this covenant as a result of such compliance. Limitation on Transactions with Affiliates. Neither Renters Choice nor any of its Restricted Subsidiaries shall engage in any transaction or series of transactions, including the purchase, sale, lease or exchange of any property or the rendering of any service with any Affiliate of Renters Choice (an "Affiliate Transaction") on terms that: - - taken as a whole are less favorable to Renters Choice or such Restricted Subsidiary than the terms that could be obtained at the time of such transaction in arm's-length dealings with a non-affiliate, and, - - in the event such Affiliate Transaction involves an aggregate amount in excess of $10.0 million, is not in writing and has not been approved by a majority of the members of the Board of Directors having no material personal financial interest in such Affiliate Transaction. If there are no such Board members, then Renters Choice must obtain a Fairness Opinion. A Fairness Opinion means an opinion from an independent investment banking firm or appraiser of national prominence which indicates that the terms of such transaction are fair to Renters Choice or such Restricted Subsidiary from a financial point of view. In addition, any transaction involving aggregate payments or other transfers by Renters Choice and its Restricted Subsidiaries in excess of $20.0 million will also require a Fairness Opinion. The provisions of the paragraph above shall not prohibit the following actions: - - any Restricted Payment permitted by the covenant described under "Limitation on Restricted Payments" or any Permitted Investment, - - the performance of the obligations of Renters Choice or a Restricted Subsidiary under any employment contract, collective bargaining agreement, service agreement, employee benefit plan, related trust agreement or any other similar arrangement entered into in the ordinary course of business, - - payment of compensation, performance of indemnification or contribution obligations, - - any issuance, grant or award of stock, options or other securities, to employees, officers or directors in the ordinary course of business, - - any transaction between Renters Choice and a Restricted Subsidiary or between Restricted Subsidiaries, - - the Transactions and payments of all fees and expenses payable in connection therewith as described or contemplated by the prospectus, - - any other transaction arising out of agreements existing on the Issue Date, 128 129 - - transactions with suppliers or other purchasers or sellers of goods or services, in each case in the ordinary course of business and on terms no less favorable to Renters Choice or the Restricted Subsidiary than those that could be obtained at such time in arm's-length dealings with a non-affiliate. Limitation on the Sale or Issuance of Preferred Stock of Restricted Subsidiaries. Renters Choice shall not sell any shares of Preferred Stock of a Restricted Subsidiary, and shall not permit any Restricted Subsidiary to issue or sell any shares of its Preferred Stock to any Person, other than to Renters Choice or a Restricted Subsidiary. Limitation on Liens. Neither Renters Choice nor any Restricted Subsidiary shall create or permit to exist any Lien (other than Permitted Liens) on any of its property or assets (including Capital Stock), whether owned on the date of the Indenture or thereafter acquired, securing any Indebtedness that is not Senior Indebtedness (the "Initial Lien"), unless at the same time effective provision is made to secure the obligations due under the Indenture and the notes or, with respect to Liens on any Restricted Subsidiary's property or assets, equally and ratably with such obligation for so long as such obligation is secured by such Initial Lien. Any such Lien created in favor of the notes will be automatically and unconditionally released and discharged upon: - - the release and discharge of the Initial Lien to which it relates, or - - any sale, exchange or transfer to a non-affiliate of Renters Choice of the property or assets secured by such Initial Lien, or of all of the Capital Stock held by Renters Choice or any Restricted Subsidiary, or all or substantially all of the assets of any Restricted Subsidiary creating such Lien. Reporting Requirements. As long as any of the notes are outstanding, Renters Choice will file with the SEC (unless the SEC will not accept such a filing) the annual reports, quarterly reports and other documents required to be filed with the SEC pursuant to Sections 13 and 15 of the Exchange Act, whether or not Renters Choice is then obligated to file reports pursuant to such sections. Renters Choice will be required to file with the Trustee and provide to each holder of notes copies of such reports and documents within 15 days after filing with the SEC (or if any such filing is not permitted under the Exchange Act, 15 days after Renters Choice would have been required to make such filing). Future Subsidiary Guarantors. After the Issue Date, Renters Choice will cause each Restricted Subsidiary created or acquired by Renters Choice to execute and deliver to the Trustee a Subsidiary Guarantee. Pursuant to such Guarantee, such Restricted Subsidiary will unconditionally Guarantee, on a joint and several basis, the full and prompt payment of the principal, premium (if any) and interest on the notes on a senior unsecured basis. Limitation on Sale/Leaseback Transactions. Neither Renters Choice nor any Restricted Subsidiary shall enter into any Sale/Leaseback Transaction for any property unless: - - Renters Choice or such Restricted Subsidiary would be entitled to Incur Indebtedness in an amount equal to the Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to the covenant described under "Limitation on Indebtedness;" 129 130 - - the net proceeds received by Renters Choice or any Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at least equal to the fair value (as determined by the Board of Directors) of such property; and - - the transfer of such property is permitted by the covenant described under "Limitation on Sales of Assets," and Renters Choice or such Restricted Subsidiary applies the proceeds of such transaction in compliance with the covenant described under "Limitation on Sales of Assets." MERGER AND CONSOLIDATION Renters Choice will not, in a single transaction or a series of related transactions, consolidate with or merge with or into, or convey, transfer or lease all or substantially all its assets to, any Person, unless: - - the resulting, surviving or transferee Person (the "Successor Company") will be a Person organized and existing under the laws of the United States of America, any State thereof or the District of Columbia; - - the Successor Company (if not Renters Choice) will expressly assume, by an indenture supplemental to the Indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of Renters Choice under the notes and the Indenture; - - immediately before and after giving effect to such transaction or series of transactions no Default or Event of Default exists; - - Renters Choice or the Successor Company (if Renters Choice is not the continuing obligor under the Indenture) will, at the time of such transaction or series of transactions and after giving proforma effect thereto as if such transaction or series of transactions had occurred at the beginning of the applicable four-quarter period, be permitted to Incur at least an additional $1.00 of Indebtedness pursuant to paragraph (A) of "-- Limitation on Indebtedness;" and - - Renters Choice will have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each to the effect that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture, provided that: - in giving such opinion such counsel may rely on such Officer's Certificate as to any matters of fact, including without limitation as to compliance with the foregoing clauses, and - no Opinion of Counsel will be required for a consolidation, merger or transfer described in the previous paragraph of this covenant. The Successor Company will be substituted for, and may exercise every right and power of, Renters Choice under the Indenture. Thereafter the Renters Choice shall be relieved of all obligations and covenants under the Indenture, except that, in the case of a conveyance, transfer or lease of all or substantially all its assets, the Renters Choice will not be released from the obligation to pay the principal of and interest on the notes. 130 131 The provisions of this covenant do not prohibit any Restricted Subsidiary from consolidating with, merging into or transferring all or part of its properties and assets to Renters Choice. Additionally, Renters Choice may merge with an Affiliate incorporated or organized for the purpose of reincorporating or reorganizing Renters Choice in another jurisdiction to realize tax or other benefits. DEFAULTS An Event of Default under the Indenture is defined as: - - a default in any payment of interest on any note when due (whether or not such payment is prohibited by the provisions described under "-- Ranking" above), continued for 30 days, - - a default in the payment of principal of any note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment is prohibited by the provisions described under "-- Ranking" above, - - the failure by Renters Choice to comply with its obligations under the covenant described under "-- Merger and Consolidation" above, - - the failure by Renters Choice to comply for 30 days after written notice with any of its obligations under the covenants described under "-- Change of Control" or "-- Certain Covenants" above (in each case, other than a failure to purchase notes), - - the failure by Renters Choice to comply for 60 days after notice with its other agreements contained in the notes or the Indenture, - - the failure by Renters Choice or any Significant Subsidiary to pay any Indebtedness within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $25 million (the "Cross Acceleration Provision"), - - events of bankruptcy, insolvency or reorganization of Renters Choice or a Significant Subsidiary (the "Bankruptcy Provisions"), - - the rendering of any judgment or decree for the payment of money in an amount (net of any insurance or indemnity payments actually received in respect thereof prior to or within 90 days from the entry thereof, or to be received in respect thereof in the event any appeal thereof shall be unsuccessful) in excess of $25 million against Renters Choice or a Significant Subsidiary that is not discharged, bonded or insured by a third Person if either an enforcement proceeding thereon is commenced, or such judgment or decree remains outstanding for a period of 90 days and is not discharged, waived or stayed (the "Judgment Default Provision") or - - the failure of any Guarantee of the notes by a Subsidiary Guarantor to be in full force (except as contemplated by the terms thereof or of the Indenture) or the denial in writing by any such Subsidiary Guarantor of its obligations under the Indenture or any such Guarantee if such Default continues for 10 days. 131 132 The events listed above will constitute Events of Default regardless of their reasons, whether voluntary or involuntary or whether effected by operation of law or pursuant to any judgment, decree order, rule or regulation of any administrative or governmental body. However, a Default by Renters Choice under the covenants described under "Change of Control" or "Certain Covenants," or a failure by Renters Choice to comply with agreements in the notes or the Indenture will not constitute an Event of Default until the applicable Trustee or the Holders of at least 25% of the aggregate principal amount of the outstanding applicable notes notify Renters Choice of the Default and Renters Choice does not cure such Default within the time specified after receipt of such notice. If an Event of Default (other than a Default relating to certain events of bankruptcy, insolvency or reorganization of Renters Choice) occurs and is continuing, either the Trustee, by notice to Renters Choice, or the Holders of at least a majority in principal amount of the outstanding notes, by notice to Renters Choice and the Trustee, may declare the principal of and accrued but unpaid interest on all of such notes to be due and payable. Upon such a declaration, such principal and interest will be due and payable immediately. If an Event of Default relating to events of bankruptcy, insolvency or reorganization of Renters Choice occurs and is continuing, the principal of and interest on all the notes will become immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. Under certain circumstances, the Holders of a majority in principal amount of the outstanding notes may rescind any such acceleration with respect to the notes and its consequences. Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the Holders, unless such Holders have offered to the Trustee reasonable indemnity or security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder may pursue any remedy with respect to the Indenture or the notes unless: - - such Holder has previously given the Trustee notice that an Event of Default is continuing, - - Holders of at least 25% in principal amount of the outstanding notes have requested the Trustee to pursue the remedy, - - such Holders have offered the Trustee reasonable security or indemnity against any loss, liability or expense, - - the Trustee has not complied with such request within 60 days after the receipt of the request and the offer of security or indemnity, and - - the Holders of a majority in principal amount of the applicable notes have not given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the Holders of a majority in principal amount of the notes outstanding are given the right to direct the time, method and place of conducting any 132 133 proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that: - - conflicts with law or the Indenture, - - the Trustee determines is unduly prejudicial to the rights of any other Holder, or - - would involve the Trustee in personal liability. Before taking any action under the Indenture, the Trustee will be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. The Indenture provides that if a Default occurs and is continuing and is known to the Trustee, the Trustee must mail to each Holder notice of the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of, premium (if any) or interest on any note, the Trustee may withhold notice if and so long as a committee of its Trust Officers in good faith determines that withholding notice is in the interests of the Noteholders. In addition, Renters Choice is required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. Renters Choice also is required to deliver to the Trustee, within 30 days after the occurrence thereof, written notice of any event which would constitute certain Defaults, their status and what action Renters Choice is taking or proposes to take in respect thereof. AMENDMENTS AND WAIVERS Subject to certain exceptions, the Indenture may be amended with the consent of the Holders of a majority in principal amount of the notes then outstanding. Additionally, any past default on any provisions may be waived with the consent of the Holders of a majority in principal amount of the notes then outstanding. However, without the consent of each Holder, no amendment may, among other things: - - reduce the principal amount of notes whose Holders must consent to an amendment, - - reduce the rate of or extend the time for payment of interest on any note, - - reduce the principal amount of or extend the Stated Maturity of any note, - - reduce the premium payable upon the redemption of any note or change the time at which any note may be redeemed as described under "-- Optional Redemption" above, - - make any note payable in money other than that stated in the note, - - make any change to the subordination provisions of the Indenture that adversely affects the rights of any Holder, - - impair the right of any Holder to receive payment of principal of and interest on such Holder's notes on or after the due dates therefor or to sue for the enforcement of any payment on or with respect to such Holder's notes, or - - make any change in the amendment provisions which require each Holder's consent or in the waiver provisions. 133 134 Without the consent of any Holder, Renters Choice, the Subsidiary Guarantors and the Trustee may amend the Indenture in the following manner: - - to cure any ambiguity, omission, defect or inconsistency, - - to provide for the assumption by a successor corporation of the obligations of Renters Choice under the Indenture, - - to provide for uncertificated notes in addition to or in place of certificated notes (provided, however, that the uncertificated notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated notes are described in Section 163(f)(2)(B) of the Code), - - to add Guarantees with respect to the notes, to secure the notes, to add to the covenants of Renters Choice for the benefit of the Noteholders or to surrender any right or power conferred upon Renters Choice, and - - to make any change that does not adversely affect the rights of any Holder, or to comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA. However, no amendment may be made to the subordination provisions of the Indenture that adversely affects the rights of any holder of senior indebtedness then outstanding unless the holders of such senior indebtedness (or any group or representative thereof authorized to give a consent) consent to such change. The consent of the Noteholders is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment under the Indenture becomes effective, Renters Choice is required to mail to the applicable Noteholders a notice briefly describing such amendment. However, the failure to give such notice to all such Noteholders, or any defect in such notice, will not impair or affect the validity of the amendment. DEFEASANCE Renters Choice at any time may terminate all its obligations under the Notes and the Indenture ("legal defeasance"), except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the notes, to replace mutilated, destroyed, lost or stolen notes and to maintain a registrar and paying agent in respect of the notes. Renters Choice at any time may terminate its obligations under the covenants described under "-- Certain Covenants," the operation of the Cross Acceleration Provision, the Bankruptcy Provisions with respect to Subsidiaries and the Judgment Default Provision described under "-- Defaults" above and the limitations contained in the third and fourth clauses under "-- Merger and Consolidation" above ("covenant defeasance"). Renters Choice may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If Renters Choice exercises its legal defeasance option, payment of the notes may not be accelerated because of an Event of Default. If Renters Choice exercises its covenant defeasance option, payment of the notes may not be accelerated because of an Event of Default specified in clauses four, six, seven, (but only 134 135 with respect to certain bankruptcy events of a Significant Subsidiary), eight or nine under "-- Defaults" above or because of the failure of Renters Choice to comply with clause three or four under "-- Merger and Consolidation" above. Either defeasance option may be exercised before any redemption date or the maturity date for the notes. In order to exercise either defeasance option, Renters Choice must irrevocably deposit in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations, or a combination thereof, for the payment of principal of, and premium (if any) and interest on, the applicable notes to redemption or maturity, as the case may be. Additionally, Renters Choice must comply with other conditions, including delivery to the Trustee of an Opinion of Counsel to the effect that Holders of the notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance and will be subject to federal income tax in the same amount and in the same manner and times as would have been the case if such deposit and defeasance had not occurred. In the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or other change in applicable federal income tax law since the date of the Indenture. CONCERNING THE TRUSTEE IBJ Schroder Bank & Trust Company serves as the Trustee for the notes. The Trustee has been appointed by Renters Choice as Registrar and Paying Agent with regard to the notes. GOVERNING LAW Both the Indenture and the notes will be governed by, and construed in accordance with, the laws of the State of New York. Principles of conflicts of law will not apply to the extent that such principles would require the application of the law of another jurisdiction. CERTAIN DEFINITIONS "Additional Assets" means (i) any property or assets (other than Indebtedness and Capital Stock) to be used by the Company or a Restricted Subsidiary in a Related Business; (ii) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary; (iii) Capital Stock of any Person that at such time is a Restricted Subsidiary, acquired from a third party; provided, however, that, in the case of clauses (ii) and (iii), such Restricted Subsidiary is primarily engaged in a Related Business; or (iv) Capital Stock of any Person which is primarily engaged in a Related Business; provided, however, for purposes of the covenant described under "-- Certain Covenants -- Limitation on Sales of Assets," the aggregate amount of Net Available Cash permitted to be invested pursuant to this clause (iv) shall not exceed at any one time outstanding 5% of Consolidated Tangible Assets. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. 135 136 The Chase Manhattan Bank and its Affiliates shall not be deemed an Affiliate of the Company. "Apollo" means Apollo Management IV, L.P. and its Affiliates or any entity controlled thereby or any of the partners thereof. "Asset Disposition" means any sale, lease, transfer or other disposition of shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares), property or other assets (each referred to for the purposes of this definition as a "disposition") by the Company or any of its Restricted Subsidiaries (including any disposition by means of a merger, consolidation or similar transaction) other than (i) a disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Restricted Subsidiary, (ii) a disposition of inventory, equipment, obsolete assets or surplus personal property in the ordinary course of business, (iii) the sale of Temporary Cash Investments or Cash Equivalents in the ordinary course of business, (iv) a transaction or a series of related transactions in which either (x) the fair market value of the assets disposed of, in the aggregate, does not exceed 2.5% of the Consolidated Tangible Assets of the Company or (y) the EBITDA related to such assets does not, in the aggregate, exceed 2.5% of the Company's EBITDA, (v) the sale or discount (with or without recourse, and on commercially reasonable terms) of accounts receivable or notes receivable arising in the ordinary course of business, or the conversion or exchange of accounts receivable for notes receivable, (vi) the licensing of intellectual property in the ordinary course of business, (vii) an RTO Facility Swap, (viii) for purposes of the covenant described under "-- Certain Covenants -- Limitation on Sales of Assets" only, a disposition subject to the covenant described under "-- Certain Covenants -- Limitation on Restricted Payments," or (ix) a disposition of property or assets that is governed by the provisions described under "-- Merger and Consolidation." "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate assumed in making calculations in accordance with FAS 13) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended). "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or redemption or similar payment with respect to such Indebtedness or Preferred Stock multiplied by the amount of such payment by (ii) the sum of all such payments. "Bank Indebtedness" means any and all amounts, whether outstanding on the Issue Date or thereafter incurred, payable under or in respect of the Senior Credit Facility, including, without limitation, principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company or any Restricted Subsidiary whether or not a claim for postfiling interest is allowed in such proceedings), fees, charges, expenses, reimbursement obligations, guarantees, other monetary obligations of any nature and all other amounts payable thereunder or in respect thereof. 136 137 "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banking institutions are authorized or required by law to close in New York City. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Capitalized Lease Obligations" means an obligation that is required to be classified and accounted for as a capitalized lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease. "Cash Equivalents" means any of the following: (a) securities issued or fully guaranteed or insured by the United States Government or any agency or instrumentality thereof, (b) time deposits, certificates of deposit or bankers' acceptances of (i) any lender under the Senior Credit Agreement or (ii) any commercial bank having capital and surplus in excess of $500,000,000 and the commercial paper of the holding company of which is rated at least "A-2" or the equivalent thereof by S&P or at least "P-2" or the equivalent thereof by Moody's (or if at such time neither is issuing ratings, then a comparable rating of another nationally recognized rating agency), (c) commercial paper rated at least "A1" or the equivalent thereof by S&P or at least "P-1" or the equivalent thereof by Moody's (or if at such time neither is issuing ratings, then a comparable rating of another nationally recognized rating agency), (d) investments in money market funds complying with the risk limiting conditions of Rule 2a-7 or any successor rule of the SEC under the Investment Company Act, (e) repurchase obligations of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days, with respect to securities issued or fully guaranteed or insured by the United States government, (f) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least "A" by S&P or "A" by Moody's and (g) securities with maturities of six months or less from the date of acquisition backed by standby letters of credit issued by any commercial bank satisfying the requirements of clause (b) of this definition. "Central Acquisition" means the Company's acquisition of substantially all of the assets of Central Rents, Inc. "Chase" means The Chase Manhattan Bank. "Code" means the Internal Revenue Code of 1986, as amended. 137 138 "Company" means the Renters Choice, Inc. after giving effect to the Rent-A-Center Acquisition. "Consolidated Coverage Ratio" as of any date of determination means the ratio of (i) the aggregate amount of EBITDA of the Company and its Restricted Subsidiaries for the period of the most recent four consecutive fiscal quarters ending prior to the date of such determination for which consolidated financial statements of the Company are available to (ii) Consolidated Interest Expense for such four fiscal quarters (in each of clauses (i) and (ii), determined, for each fiscal quarter (or portion thereof) of the four fiscal quarters ending prior to the Issue Date, on a pro forma basis to give effect to the Central Acquisition and the Transactions (including the anticipated disposition of any non-rent-to-own businesses under contract for sale or held for sale following the Issue Date) as if they had occurred at the beginning of such four-quarter period); provided, however, that: (1) if the Company or any Restricted Subsidiary (x) has Incurred any Indebtedness since the beginning of such period that remains outstanding on such date of determination or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period (except that in making such computation, the amount of Indebtedness under any revolving credit facility outstanding on the date of such calculation shall be computed based on (A) the average daily balance of such Indebtedness during such four fiscal quarters or such shorter period for which such facility was outstanding or (B) if such facility was created after the end of such four fiscal quarters, the average daily balance of such Indebtedness during the period from the date of creation of such facility to the date of such calculation) and the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period, or (y) has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of the period that is no longer outstanding on such date of determination, or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio involves a discharge of Indebtedness (in each case other than Indebtedness Incurred under any revolving credit facility unless such Indebtedness has been permanently repaid), EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such discharge of such Indebtedness, including with the proceeds of such new Indebtedness, as if such discharge had occurred on the first day of such period; (2) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Disposition of any company or any business or any group of assets, the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets that are the subject of such Asset Disposition for such period or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (and, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such 138 139 Indebtedness after such sale); (3) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Person that thereby becomes a Restricted Subsidiary, or otherwise acquired any company or any business or any group of assets, including any such acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness and including the pro forma expenses and cost reductions calculated on a basis consistent with Regulation S-X of the Securities Act) as if such Investment or acquisition occurred on the first day of such period; and (4) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition or any Investment or acquisition of assets that would have required an adjustment pursuant to clause (2) or (3) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition of assets occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an Asset Disposition, Investment or acquisition of assets, or any transaction governed by the provisions described under "-- Merger and Consolidation," or the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred or repaid, repurchased, defeased or otherwise discharged in connection therewith, the pro forma calculations in respect thereof shall be as determined in good faith by a responsible financial or accounting officer of the Company, based on reasonable assumptions. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be calculated at a fixed rate as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term as at the date of determination in excess of 12 months). If any Indebtedness bears, at the option of the Company or a Restricted Subsidiary, a fixed or floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be computed by applying, at the option of the Company or such Restricted Subsidiary, either a fixed or floating rate. If any Indebtedness which is being given pro forma effect was Incurred under a revolving credit facility, the interest expense on such Indebtedness shall be computed based upon the average daily balance of such Indebtedness during the applicable period. "Consolidated Interest Expense" means, as to any Person, for any period, the total consolidated interest expense of such Person and its Subsidiaries determined in accordance with GAAP, minus, to the extent included in such interest expense, amortization or write-off of financing costs plus, to the extent incurred by such Person and its Subsidiaries in such period but not included in such interest expense, without duplication, (i) interest expense attributable to Capitalized Lease Obligations and the interest component of rent expense associated with Attributable Debt in respect of the relevant lease giving rise thereto, determined as if such lease were a capitalized lease, in accordance with GAAP, (ii) amortization of debt discount, (iii) interest in respect of Indebtedness of any other Person that has been Guaranteed by such Person or any Subsidiary, but only to the extent that such interest is actually paid by such Person or any Restricted Subsidiary, 139 140 (iv) non-cash interest expense, (v) net costs associated with Hedging Obligations, (vi) the product of (A) mandatory Preferred Stock cash dividends in respect of all Preferred Stock of Subsidiaries of such Person and Disqualified Stock of such Person held by Persons other than such Person or a Subsidiary multiplied by (B) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, determined on a consolidated basis in accordance with GAAP; and (vii) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest to any Person (other than the referent Person or any Subsidiary thereof) in connection with Indebtedness Incurred by such plan or trust; provided, however, that as to the Company, there shall be excluded therefrom any such interest expense of any Unrestricted Subsidiary to the extent the related Indebtedness is not Guaranteed or paid by the Company or any Restricted Subsidiary. For purposes of the foregoing, gross interest expense shall be determined after giving effect to any net payments made or received by such Person and its Subsidiaries with respect to Interest Rate Agreements. "Consolidated Net Income" means, as to any Person, for any period, the consolidated net income (loss) of such Person and its Subsidiaries before preferred stock dividends, determined in accordance with GAAP; provided, however, that there shall not be included in such Consolidated Net Income: (i) any net income (loss) of any Person if such Person is not (as to the Company) a Restricted Subsidiary and (as to any other Person) an unconsolidated Person, except that (A) subject to the limitations contained in clause (iv) below, the referent Person's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the referent Person or a Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to a Subsidiary, to the limitations contained in clause (iii) below) and (B) the net loss of such Person shall be included to the extent of the aggregate Investment of the referent Person or any of its Subsidiaries in such Person; (ii) any net income (loss) of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any net income (loss) of any Restricted Subsidiary (as to the Company) or of any Subsidiary (as to any other Person) if such Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Subsidiary, directly or indirectly, to the Company, except that (A) subject to the limitations contained in (iv) below, such Person's equity in the net income of any such Subsidiary for such period shall be included in Consolidated Net Income up to the aggregate amount of cash that could have been distributed by such Subsidiary during such period to such Person or another Subsidiary as a dividend (subject, in the case of a dividend that could have been made to another Restricted Subsidiary, to the limitation contained in this clause) and (B) the net loss of such Subsidiary shall be included in determining Consolidated Net Income; (iv) any charges for costs and expenses associated with the Transactions; (v) any extraordinary gain or loss; and (vi) the cumulative effect of a change in accounting principles. "Consolidated Tangible Assets" means, as of any date of determination, the total assets, less goodwill and other intangibles (other than patents, trademarks, copyrights, licenses and other intellectual property), shown on the balance sheet of the Company and its Restricted Subsidiaries as of the most recent date for which such a balance sheet is available, 140 141 determined on a consolidated basis in accordance with GAAP less all write-ups (other than write-ups in connection with acquisitions) subsequent to the date of the Indenture in the book value of any asset (except any such intangible assets) owned by the Company or any of its Restricted Subsidiaries. "Consolidation" means the consolidation of the accounts of each of the Restricted Subsidiaries with those of the Company in accordance with GAAP; provided, however, that "Consolidation" will not include consolidation of the accounts of any Unrestricted Subsidiary, but the interest of the Company in any Unrestricted Subsidiary will be accounted for as an investment. The term "Consolidated" has a correlative meaning. "Convertible Preferred Stock" means (i) the convertible preferred stock of the Company issued to Apollo, resulting in gross proceeds to the Company of $250 million, and (ii) the convertible preferred stock of the Company which will be issued to an Affiliate of Bear, Stearns & Co. concurrently with the issuance of the Old Notes, resulting in gross proceeds to the Company of $10 million. "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement or arrangement (including derivative agreements or arrangements) as to which such Person is a party or a beneficiary. "Default" means any event or condition that is, or after notice or passage of time or both would be, an Event of Default. "Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii) any other Senior Indebtedness which, at the date of determination, has an aggregate principal amount of, or under which, at the date of determination, the holders thereof are committed to lend up to, at least $25.0 million and is specifically designated by the Company in the instrument evidencing or governing such Senior Indebtedness as "Designated Senior Indebtedness" for purposes of the Indenture. "Disqualified Stock" means, with respect to any Person, any Capital Stock (excluding the Convertible Preferred Stock) that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable) or upon the happening of any event (i) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or (iii) is redeemable at the option of the holder thereof, in whole or in part, in the case of clauses (i), (ii) and (iii), on or prior to the 91st day after the Stated Maturity of the Notes. "EBITDA" means, as to any Person, for any period, the Consolidated Net Income for such period, plus the following to the extent included in calculating such Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest Expense, (iii) depreciation expense (other than depreciation expense relating to rental merchandise), (iv) amortization expense and (v) other non-cash charges or non-cash losses, and minus any gain (but not loss) realized upon the sale or other disposition of any asset of the Company or its Restricted Subsidiaries (including pursuant to any Sale/Leaseback Transaction) that is not sold or otherwise disposed of in the ordinary course of business. "Equity Offering" means a primary public or private offering or sale of common stock of the Company, the proceeds of which shall be at least $25.0 million. 141 142 "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAAP" means generally accepted accounting principles in the United States of America as in effect on the Issue Date (for purposes of the definitions of the terms "Consolidated Coverage Ratio," "Consolidated Interest Expense," "Consolidated Net Income" and "EBITDA," all defined terms in the Indenture to the extent used in or relating to any of the foregoing definitions, and all ratios and computations based on any of the foregoing definitions) and as in effect from time to time (for all other purposes of the Indenture), including those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations based on GAAP contained in the Indenture shall be computed in conformity with GAAP. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other nonfinancial obligation of any other Person, including any such obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or such other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a correlative meaning. "Guarantor Senior Indebtedness" means, with respect to a Subsidiary Guarantor, the following obligations, whether outstanding on the date of the Indenture or thereafter issued, without duplication: (i) any Guarantee of the Senior Credit Facility by such Subsidiary Guarantor and all other Guarantees by such Subsidiary Guarantor of Senior Indebtedness of the Company or Guarantor Indebtedness for any other Subsidiary Guarantor; and (ii) all obligations consisting of the principal of and premium, if any, and accrued and unpaid interest (including interest accruing on or after the filling of any petition in bankruptcy or for reorganization relating to the Subsidiary Guarantor regardless of whether post filing interest is allowed in such proceeding) on, and fees and other amounts owing in respect of, all other Indebtedness of the Subsidiary Guarantor, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is expressly provided that the obligations in respect of such Indebtedness are not senior in right of payment to the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee; provided, however, that Guarantor Senior Indebtedness will not include (1) any obligations of such Subsidiary Guarantor to another Subsidiary Guarantor or any other Affiliate of the Subsidiary Guarantor or any such Affiliate's Subsidiaries, (2) any liability for Federal, state, local, foreign or other taxes owed or owing by such Subsidiary Guarantor, (3) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including Guarantees thereof or instruments evidencing such liabilities) or other current liabilities (other than current liabilities which constitute 142 143 Bank Indebtedness or the current portion of any long-term Indebtedness which would constitute Senior Indebtedness but for the operation of this clause (3), (4) any Indebtedness, Guarantee or obligation of such Subsidiary Guarantor that is expressly subordinate or junior to any other Indebtedness, Guarantee or obligation of such Subsidiary Guarantor, including any Guarantor Senior Subordinated Indebtedness and Guarantor Subordinated Obligations of such Subsidiary Guarantor (5) Indebtedness which is represented by redeemable Capital Stock or (6) that portion of any Indebtedness that is incurred in violation of the Indenture. If any Designated Senior Indebtedness is disallowed, avoided or subordinated pursuant to the provisions of Section 548 of Title 11 of the United States Code or any applicable state fraudulent conveyance law, such Designated Senior Indebtedness nevertheless will constitute Senior Indebtedness. "Guarantor Senior Subordinated Indebtedness" means with respect to a Subsidiary Guarantor, the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee and any other Indebtedness of such Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter incurred) that specifically provides that such Indebtedness is to rank pari passu in right of payment with the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee and is not expressly subordinated by its terms in right of payment to any Indebtedness of such Subsidiary Guarantor which is not Guarantor Senior Indebtedness of such Subsidiary Guarantor. "Guarantor Subordinated Obligation" means, with respect to a Subsidiary Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter incurred) which is expressly subordinate in right of payment to the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee pursuant to a written agreement. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement. "Holder" or "Noteholder" means the Person in whose name a Note is registered in the Register. "Incur" means issue, assume, enter into any Guarantee of, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. Any Indebtedness issued at a discount (including Indebtedness on which interest is payable through the issuance of additional Indebtedness) shall be deemed incurred at the time of original issuance of the Indebtedness at the initial accreted amount thereof. "Indebtedness" means, with respect to any Person on any date of determination (without duplication): (i) the principal of Indebtedness of such Person for borrowed money, (ii) the principal of obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all reimbursement obligations of such Person, including reimbursement obligations in respect of letters of credit or other similar instruments (the amount of such obligations being equal at any time to the aggregate then undrawn and unexpired amount of such letters of credit or other instruments plus the aggregate amount of drawings thereunder that have not then been reimbursed), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services (except Trade 143 144 Payables), which purchase price is due more than one year after the date of placing such property in final service or taking final delivery and title thereto or the completion of such services, (v) all Capitalized Lease Obligations and Attributable Debt of such Person, (vi) the redemption, repayment or other repurchase amount of such Person with respect to any Disqualified Stock or (if such Person is a Subsidiary of the Company) any Preferred Stock of such Subsidiary, but excluding, in each case, any accrued dividends (the amount of such obligation to be equal at any time to the maximum fixed involuntary redemption, repayment or repurchase price for such Capital Stock, or if such Capital Stock has no fixed price, to the involuntary redemption, repayment or repurchase price therefor calculated in accordance with the terms thereof as if then redeemed, repaid or repurchased, and if such price is based upon or measured by the fair market value of such Capital Stock, such fair market value shall be as determined in good faith by the Board of Directors or the board of directors of the issuer of such Capital Stock), (vii) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided, however, that the amount of Indebtedness of such Person shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness of such other Persons, (viii) all Indebtedness of other Persons to the extent Guaranteed by such Person, and (ix) to the extent not otherwise included in this definition, net Hedging Obligations of such Person (such obligations to be equal at any time to the termination value of such agreement or arrangement giving rise to such Hedging Obligation that would be payable by such Person at such time). The amount of Indebtedness of any Person at any date shall be determined as set forth above or otherwise provided in the Indenture, or otherwise in accordance with GAAP. "Interest Rate Agreement" means with respect to any Person any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement (including derivative agreements or arrangements) as to which such Person is party or a beneficiary; provided, however, any such agreements entered into in connection with the Notes shall not be included. "Investment" in any Person by any other Person means any direct or indirect advance, loan or other extension of credit (other than to customers, directors, officers or employees of any Person in the ordinary course of business) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by, such Person. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Capital Stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such entity is no longer a Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Capital Stock of such Subsidiary not sold or disposed of. "Issue Date" means the date on which the Old Notes were originally issued (August 18, 1998). 144 145 "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "Moody's" means Moody's Investors Service, Inc., and its successors. "Net Available Cash" from an Asset Disposition means cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring person of Indebtedness or other obligations relating to the properties or assets that are the subject of such Asset Disposition or received in any other noncash form) therefrom, in each case net of (i) all legal, title and recording tax expenses, commissions and other fees and expenses incurred (including, without limitation, fees and expenses of legal counsel, accountants and financial advisors), and all Federal, state, provincial, foreign and local taxes required to be paid or accrued as a liability under GAAP, as a consequence of such Asset Disposition, (ii) all payments made on any Indebtedness that is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon such assets, or that must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law be repaid out of the proceeds from such Asset Disposition, (iii) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition or to any other Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the assets disposed of in such Asset Disposition and (iv) appropriate amounts to be provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the assets disposed of in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds" means, with respect to any issuance or sale of any securities of the Company or any Subsidiary by the Company or any Subsidiary, or any capital contribution, the cash proceeds of such issuance, sale or contribution net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance, sale or contribution and net of taxes paid or payable as a result thereof. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any Restricted Subsidiary (a) provides any Guarantee or credit support of any kind (including any undertaking, Guarantee, indemnity, agreement or instrument that would constitute Indebtedness) or (b) is directly or indirectly liable (as a guarantor or otherwise) and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default under such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity. "Officer" means the Chief Executive Officer, President, Chief Financial Officer, any Vice President, Controller, Secretary or Treasurer of the Company. "Officer's Certificate" means a certificate signed by one Officer. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. 145 146 "Permitted Holders" means Apollo, J. Ernest Talley and Mark E. Speese, their respective Affiliates and successors or assigns and any Person acting in the capacity of an underwriter in connection with a public or private offering of the Company's Capital Stock. "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in any of the following: (i) a Restricted Subsidiary, the Company or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; (ii) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; (iii) Temporary Cash Investments or Cash Equivalents; (iv) receivables owing to the Company or any Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; (v) securities or other Investments received as consideration in connection with RTO Facility Swaps or in sales or other dispositions of property or assets made in compliance with the covenant described under "Certain Covenants -- Limitation on Sales of Assets;" (vi) securities or other Investments received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary, or as a result of foreclosure, perfection or enforcement of any Lien, or in satisfaction of judgments, including in connection with any bankruptcy proceeding or other reorganization of another Person; (vii) Investments in existence or made pursuant to legally binding written commitments in existence on the Issue Date; (viii) Currency Agreements, Interest Rate Agreements and related Hedging Obligations, which obligations are Incurred in compliance with the covenant described under "-- Certain Covenants -- Limitations on Indebtedness;" (ix) pledges or deposits (A) with respect to leases or utilities provided to third parties in the ordinary course of business or (B) otherwise described in the definition of "Permitted Liens;" (x) Investments in a Related Business in an amount not to exceed $10 million in the aggregate; and (xi) other Investments in an aggregate amount not to exceed the sum of $10 million and the aggregate non-cash net proceeds received by the Company from the issue or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Issue Date (other than non-cash proceeds from an issuance or sale of such Capital Stock to a Subsidiary of the Company or an employee stock ownership plan or similar trust); provided, however, that the value of such non-cash net proceeds shall be as conclusively determined by the Board of Directors in good faith, except that in the event the value of any non-cash net proceeds shall be $25 million or more, the value shall be as determined in writing by an independent investment banking firm of nationally recognized standing. "Permitted Liens" means: (i) Liens for taxes, assessments or other governmental charges not yet delinquent or the nonpayment of which in the aggregate would not be reasonably expected to have a material adverse effect on the Company and its Restricted Subsidiaries, or that are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company or such Subsidiary, as the case may be, in accordance with GAAP; (ii) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other like Liens arising in the ordinary course of business in respect of obligations that are not overdue for a period of more than 60 days or that are bonded or that are being contested in good faith and by appropriate proceedings; (iii) pledges, deposits or liens in connection with workers' 146 147 compensation, unemployment insurance and other social security legislation and/or similar legislation or other insurance-related obligations (including, without limitation, pledges or deposits securing liability to insurance carriers under insurance or self-insurance arrangements); (iv) pledges, deposits or Liens to secure the performance of bids, tenders, trade, government or other contracts (other than for borrowed money), obligations for or under or in respect of utilities, leases, licenses, statutory obligations, surety, judgment and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (v) easements (including reciprocal easement agreements), rights-of-way, building, zoning and similar restrictions, utility agreements, covenants, reservations, restrictions, encroachments, changes, and other similar encumbrances or title defects incurred, or leases or subleases granted to others, in the ordinary course of business, which do not in the aggregate materially interfere with the ordinary conduct of the business of the Company and its Subsidiaries, taken as a whole; (vi) Liens existing on, or provided for under written arrangements existing on, the Issue Date, or (in the case of any such Liens securing Indebtedness of the Company or any of its Subsidiaries existing or arising under written arrangements existing on the Issue Date) securing any Refinancing Indebtedness in respect of such Indebtedness so long as the Lien securing such Refinancing Indebtedness is limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or under such written arrangements could secure) the original Indebtedness; (vii) Liens securing Hedging Obligations incurred in compliance with the covenant described under "-- Certain Covenants -- Limitation on Indebtedness;" (viii) Liens arising out of judgments, decrees, orders or awards in respect of which the Company shall in good faith be prosecuting an appeal or proceedings for review which appeal or proceedings shall not have been finally terminated, or the period within which such appeal or proceedings may be initiated shall not have expired; (ix) Liens securing (A) Indebtedness incurred in compliance with clause (b)(i), (b)(ii) or (b)(v) of the covenant described under "-- Certain Covenants -- Limitation on Indebtedness," or clause (b)(iv) thereof (other than Refinancing Indebtedness Incurred in respect of Indebtedness described in paragraph (a) thereof) or (B) Bank Indebtedness; (x) Liens on properties or assets of the Company securing Senior Indebtedness; (xi) Liens existing on property or assets of a Person at the time such Person becomes a Subsidiary of the Company (or at the time the Company or a Restricted Subsidiary acquires such property or assets); provided, however, that such Liens are not created in connection with, or in contemplation of, such other Person becoming such a Subsidiary (or such acquisition of such property or assets), and that such Liens are limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or, under the written arrangements under which such Liens arose, could secure) the obligations to which such Liens relate; (xii) Liens on Capital Stock of an Unrestricted Subsidiary that secure Indebtedness or other obligations of such Unrestricted Subsidiary; (xiii) Liens securing the Notes; and (xiv) Liens securing Refinancing Indebtedness Incurred in respect of any Indebtedness secured by, or securing any refinancing, refunding, extension, renewal or replacement (in whole or in part) of any other obligation secured by, any other Permitted Liens, provided that any such new Lien is limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or, under the written arrangements under which the original Lien arose, could secure) the obligations to which such Liens relate. 147 148 "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" as applied to the Capital Stock of any corporation means Capital Stock of any class or classes (however designated) that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Purchase Money Obligations" means any Indebtedness of the Company or any Restricted Subsidiary incurred to finance the acquisition, construction or capital improvement of any property or business (including Indebtedness incurred within 90 days following such acquisition or construction), including Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed by the Company or a Restricted Subsidiary in connection with the acquisition of assets from such Person; provided, however, that any Lien on such Indebtedness shall not extend to any property other than the property so acquired or constructed. "Refinancing Indebtedness" means Indebtedness that is Incurred to refund, refinance, replace, renew, repay or extend (including pursuant to any defeasance or discharge mechanism) (collectively, "refinances," and "refinanced" shall have a correlative meaning) any Indebtedness existing on the date of the Indenture or Incurred in compliance with the Indenture (including Indebtedness of the Company that refinances Indebtedness of any Restricted Subsidiary (to the extent permitted in the Indenture) and Indebtedness of any Restricted Subsidiary that refinances Indebtedness of another Restricted Subsidiary) including Indebtedness that refinances Refinancing Indebtedness; provided, however, that (i) the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being refinanced and (iii) such Refinancing Indebtedness is Incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being refinanced, plus fees, underwriting discounts, premiums and other costs and expenses incurred in connection with such Refinancing Indebtedness; provided further, however, that Refinancing Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary that refinances Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary. "Related Business" means those businesses, other than the car rental business, in which the Company or any of its Subsidiaries is engaged on the date of the Indenture or that are reasonably related or incidental thereto. "Rent-A-Center Acquisition" means the acquisition of Rent-A-Center by the Company. "Representative" means the trustee, agent or representative (if any) for an issue of Senior Indebtedness. "Restricted Subsidiary" means Rent-A-Center, Inc. and ColorTyme, Inc. 148 149 "Revolving Credit Facility" means the revolving credit facility under the Senior Credit Facility (which may include any swing line or letter of credit facility or subfacility thereunder). "RTO Facility" means any facility through which the Company or any of its Restricted Subsidiaries conducts the business of renting merchandise to its customers and any facility through which a franchise of the Company or any of its Subsidiaries conducts the business of renting merchandise to customers. "RTO Facility Swap" means an exchange of assets (including Capital Stock of a Subsidiary or the Company) of substantially equivalent fair market value, as conclusively determined in good faith by the Board of Directors, by the Company or a Restricted Subsidiary for one or more RTO Facilities or for cash, Capital Stock, Indebtedness or other securities of any Person owning or operating one or more RTO Facilities and primarily engaged in a Related Business; provided, however, that any Net Cash Proceeds received by the Company or any Restricted Subsidiary in connection with any such transaction must be applied in accordance with the covenant described under "-- Certain Covenants -- Limitation on Sale of Assets." "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired by the Company or a Restricted Subsidiary whereby the Company or such Restricted Subsidiary transfers such property to a Person and the Company or such Restricted Subsidiary leases it from such Person, other than leases (x) between the Company and a Restricted Subsidiary or (y) required to be classified and accounted for as capitalized leases for financial reporting purposes in accordance with GAAP. "SEC" means the Securities and Exchange Commission. "Secured Indebtedness" means any Indebtedness of the Company secured by a Lien. "Senior Credit Agreement" means the credit agreement dated as of August 5, 1998, among the Company, the banks and other financial institutions party thereto from time to time, Comerica, N.A. as the documentation agent, NationsBank, N.A. as syndication agent and Chase, as administrative agent, as such agreement may be assumed by any successor in interest, and as such agreement may be amended, supplemented, waived or otherwise modified from time to time, or refunded, refinanced, restructured, replaced, renewed, repaid, increased or extended from time to time (whether in whole or in part, whether with the original agent and lenders or other agents and lenders or otherwise, and whether provided under the original Senior Credit Agreement or otherwise). "Senior Credit Facility" means the collective reference to the Senior Credit Agreement, any Loan Documents (as defined therein), any notes and letters of credit issued pursuant thereto and any guarantee and collateral agreement, patent and trademark security agreement, mortgages, letter of credit applications and other security agreements and collateral documents, and other instruments and documents, executed and delivered pursuant to or in connection with any of the foregoing, in each case as the same may be amended, supplemented, waived or otherwise modified from time to time, or refunded, refinanced, restructured, replaced, renewed, repaid, increased or extended from time to time (whether in whole or in part, whether with the original agent and lenders or other agents and lenders or otherwise, and whether provided under the original Senior Credit Agreement or otherwise). Without limiting the generality of the foregoing, the term 149 150 "Senior Credit Facility" shall include any agreement (i) changing the maturity of any Indebtedness incurred thereunder or contemplated thereby, (ii) adding Subsidiaries of the Company as additional borrowers or guarantors thereunder, (iii) increasing the amount of Indebtedness incurred thereunder or available to be borrowed thereunder or (iv) otherwise altering the terms and conditions thereof. "Senior Indebtedness" means the following obligations, whether outstanding on the date of the Indenture or thereafter issued, without duplication: (i) all obligations consisting of Bank Indebtedness; and (ii) all obligations consisting of the principal of and premium, if any, and accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company regardless of whether postfiling interest is allowed in such proceeding) on, and fees and other amounts owing in respect of, all other Indebtedness of the Company, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that the obligations in respect of such Indebtedness are not superior in right of payment to the Notes; provided, however, that Senior Indebtedness shall not include (1) any obligation of the Company to any Subsidiary or any other Affiliate of the Company, or any such Affiliate's Subsidiaries, (2) any liability for Federal, state, foreign, local or other taxes owed or owing by the Company, (3) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including Guarantees thereof or instruments evidencing such liabilities) or other current liabilities (other than current liabilities which constitute Bank Indebtedness or the current portion of any long-term Indebtedness which would constitute Senior Indebtedness but for the operation of this clause (3)), (4) any Indebtedness, Guarantee or obligations of the Company that is expressly subordinate or junior to any other Indebtedness, Guarantee or obligation of the Company, (5) Indebtedness which is represented by redeemable Capital Stock or (6) that portion of any Indebtedness that is incurred in violation of the Indentures. If any Designated Senior Indebtedness is disallowed, avoided or subordinated pursuant to the provisions of Section 548 of Title 11 of the United States Code or any applicable state fraudulent conveyance law, such Designated Senior Indebtedness nevertheless will constitute Senior Indebtedness. "Senior Subordinated Indebtedness" means the Notes and any other Indebtedness of the Company that (i) specifically provides that such Indebtedness is to rank pari passu with the Notes or is otherwise entitled Senior Subordinated Indebtedness and (ii) is not subordinated by its terms to any Indebtedness or other obligation of the Company that is not Senior Indebtedness. "Significant Subsidiary" means (i) each Subsidiary that for the most recent fiscal year of such Subsidiary had consolidated revenues greater than $10.0 million or as at the end of such fiscal year had assets or liabilities greater than $10.0 million and (ii) any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary. "S&P" means Standard & Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc., and its successors. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the 150 151 happening of any contingency beyond the control of the issuer unless such contingency has occurred). "Subordinated Obligation" means any Indebtedness of the Company (whether outstanding on the date of the Indenture or thereafter Incurred) which is subordinate or junior in right of payment to the Notes pursuant to a written agreement. "Subsidiary" of any Person means any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person or (ii) one or more Subsidiaries of such Person. "Subsidiary Guarantee" means, individually, any Guarantee of payment of the Notes by a Subsidiary Guarantor pursuant to the terms of the Indenture, and, collectively, all such Guarantees. Each such Subsidiary Guarantee will be in the form prescribed in the Indenture. "Subsidiary Guarantor" means (i) Rent-A-Center, Inc. and ColorTyme, Inc. and (ii) any Restricted Subsidiary created or acquired by the Company after the Issue Date. "Successor Company" shall have the meaning assigned thereto in clause (i) under "-- Merger and Consolidation." "Temporary Cash Investments" means any of the following: (i) any investment in direct obligations (x) of the United States of America or any agency thereof or obligations Guaranteed by the United States of America or any agency thereof or (y) of any foreign country recognized by the United States of America rated at least "A" by S&P or "A1" by Moody's, (ii) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company that is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America having capital and surplus aggregating in excess of $250 million (or the foreign currency equivalent thereof) and whose long-term debt is rated "A" by S&P or "A-1" by Moody's, (iii) repurchase obligations with a term of not more than 180 days for underlying securities of the types described in clause (i) or (ii) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) Investments in commercial paper, maturing not more than 180 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any Investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, (v) Investments in securities with maturities of six months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's, (vi) any money market deposit accounts issued or offered by a domestic commercial bank or a commercial bank organized and located in a country recognized by the United States of America, in each case, having capital and surplus in excess of $250 million (or the foreign currency equivalent thereof), or investments in money market funds complying with the risk limiting conditions of 151 152 Rule 2a-7 (or any short-term successor rule) of the SEC, under the Investment Company Act of 1940, as amended, and (vii) similar short-term investments approved by the Board of Directors in the ordinary course of business. "Term Loan Facility" means the term loan facilities provided under the Senior Credit Facility. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. sec.sec.77aaa-77bbbb) as in effect on the date of the Indenture. "Trade Payables" means, with respect to any Person, any accounts payable or any indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person arising in the ordinary course of business in connection with the acquisition of goods or services. "Transactions," means collectively the Rent-A-Center Acquisition, the offering of the Notes, the initial borrowings under the Senior Credit Facility, and all other transactions relating to the Rent-A-Center Acquisition or the financing thereof. "Trustee" means the party named as such in the Indenture until a successor replaces it and, thereafter, means the successor. "Trust Officer" means the Chairman of the Board, the President or any other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has total consolidated assets of $10,000 or less or (B) if such Subsidiary has consolidated assets greater than $10,000, then such designation would be permitted under "-- Certain Covenants -- Limitation on Restricted Payments." The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation (x) the Company could incur at least $1.00 of additional Indebtedness under paragraph (a) in the covenant described under "-- Certain Covenants -- Limitation on Indebtedness" and (y) no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Company's Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Voting Stock" of an entity means all classes of Capital Stock of such entity then outstanding and normally entitled to vote in the election of directors or all interests in such entity with the ability to control the management or actions of such entity. 152 153 "Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all the Capital Stock of which (other than directors' qualifying shares) is owned by the Company or another Wholly Owned Subsidiary. CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES Except as set forth below, the exchange notes will be represented by one permanent global registered note in global form, without interest coupons (the "Global Note"). The Global Note will be deposited with, or on behalf of, The Depository Trust Company ("DTC") and registered in the name of Cede & Co., as nominee of DTC, or will remain in the custody of the Trustee pursuant to the FAST Balance Certificate Agreement between DTC and the Trustee. The descriptions of the operations and procedures of DTC, Euroclear and Cedel set forth below are provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to change by them from time to time. Neither Renters Choice nor the Initial Purchasers takes any responsibility for these operations or procedures, and investors are urged to contact the relevant system or its participants directly to discuss these matters. DTC has advised Renters Choice that it is (i) a limited purpose trust company organized under the laws of the State of New York, (ii) a "banking organization" within the meaning of the New York Banking Law, (iii) a member of the Federal Reserve System, (iv) a "clearing corporation" within the meaning of the Uniform Commercial Code, as amended, and (v) a "clearing agency" registered pursuant to Section 17A of the Exchange Act. DTC was created to hold securities for its participants (collectively, the "Participants") and facilitates the clearance and settlement of securities transactions between Participants through electronic book-entry changes to the accounts of its Participants, thereby eliminating the need for physical transfer and delivery of certificates. DTC's Participants include securities brokers and dealers (including the Initial Purchasers), banks and trust companies, clearing corporations and certain other organizations. Indirect access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the "Indirect Participants") that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. Investors who are not Participants may beneficially own securities held by or on behalf of DTC only through Participants or Indirect Participants. Renters Choice expects that pursuant to procedures established by DTC (i) upon deposit of each Global Note, DTC will credit the accounts of Participants designated by the Initial Purchasers with an interest in the Global Note and (ii) ownership of the Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the interests of Participants) and the records of Participants and the Indirect Participants (with respect to the interests of persons other than Participants). The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Accordingly, the ability to transfer interests in the Notes represented by a Global Note to such persons may be limited. In addition, because DTC can act only on behalf of its Participants, who in turn act on behalf of persons who hold interests through Participants, the ability of a person having an 153 154 interest in notes represented by a Global Note to pledge or transfer such interest to persons or entities that do not participate in DTC's system, or to otherwise take actions in respect of such interest, may be affected by the lack of a physical definitive security in respect of such interest. So long as DTC or its nominee is the registered owner of a Global Note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the notes represented by the Global Note for all purposes under the Indenture. Except as provided below, owners of beneficial interests in a Global Note will not be entitled to have notes represented by such Global Note registered in their names, will not receive or be entitled to receive physical delivery of Certificated Notes, and will not be considered the owners or holders thereof under the Indenture for any purpose, including with respect to the giving of any direction, instruction or approval to the Trustee thereunder. Accordingly, each holder owning a beneficial interest in a Global Note must rely on the procedures of DTC and, if such holder is not a Participant or an Indirect Participant, on the procedures of the Participant through which such holder owns its interest, to exercise any rights of a holder of notes under the Indenture or such Global Note. Renters Choice understands that under existing industry practice, in the event that Renters Choice requests any action of holders of notes, or a holder that is an owner of a beneficial interest in a Global Note desires to take any action that DTC, as the holder of such Global Note, is entitled to take, DTC would authorize the Participants to take such action and the Participants would authorize holders owning through such Participants to take such action or would otherwise act upon the instruction of such holders. Neither Renters Choice nor the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of notes by DTC, or for maintaining, supervising or reviewing any records of DTC relating to such notes. Payments with respect to the principal of, and premium, if any, Liquidated Damages, if any, and interest on, any notes represented by a Global Note registered in the name of DTC or its nominee on the applicable record date will be payable by the Trustee to or at the direction of DTC or its nominee in its capacity as the registered holder of the Global Note representing such notes under the Indenture. Under the terms of the Indenture, Renters Choice and the Trustee may treat the persons in whose names the notes, including the Global Notes, are registered as the owners thereof for the purpose of receiving payment thereon and for any and all other purposes whatsoever. Accordingly, neither Renters Choice nor the Trustee has or will have any responsibility or liability for the payment of such amounts to owners of beneficial interests in a Global Note (including principal, premium, if any, Liquidated Damages, if any, and interest). Payments by the Participants and the Indirect Participants to the owners of beneficial interests in a Global Note will be governed by standing instructions and customary industry practice and will be the responsibility of the Participants or the Indirect Participants and DTC. Transfers between Participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds. Transfers between participants in Euroclear or Cedel will be effected in the ordinary way in accordance with their respective rules and operating procedures. Subject to compliance with the transfer restrictions applicable to the notes, cross-market transfers between the Participants in DTC, on the one hand, and Euroclear or Cedel participants, on the other hand, will be effected through DTC in accordance with DTC's 154 155 rules on behalf of Euroclear or Cedel, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or Cedel, as the case may be, by the counter party in such system in accordance with the rules and procedures and within the established deadlines (Brussels time) of such system. Euroclear or Cedel, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the relevant Global Notes in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Cedel participants may not deliver instructions directly to the depositaries for Euroclear or Cedel. Because of time zone differences, the securities account of a Euroclear or Cedel participant purchasing an interest in a Global Note from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or Cedel participant, during the securities settlement processing day (which must be a business day for Euroclear and Cedel) immediately following the settlement date of DTC. Cash received in Euroclear or Cedel as a result of sales of interest in a Global Security by or through a Euroclear or Cedel participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or Cedel cash account only as of the business day for Euroclear or Cedel following DTC's settlement date. Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to facilitate transfers of interests in the Global Notes among participants in DTC, Euroclear and Cedel, they are under no obligation to perform or to continue to perform such procedures, and such procedures may be discontinued at any time. Neither Renters Choice nor the Trustee will have any responsibility for the performance by DTC, Euroclear or Cedel or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. CERTIFICATED NOTES If (i) Renters Choice notifies the Trustee in writing that DTC is no longer willing or able to act as a depositary or DTC ceases to be registered as a clearing agency under the Exchange Act and a successor depositary is not appointed within 90 days of such notice or cessation, (ii) Renters Choice, at its option, notifies the Trustee in writing that it elects to cause the issuance of Notes in definitive form under the Indenture, or (iii) upon the occurrence of certain other events as provided in the Indenture, then, upon surrender by DTC of the Global Notes, Certificated Notes will be issued to each person that DTC identifies as the beneficial owner of the Notes represented by the Global Notes. Upon any such issuance, the Trustee is required to register such Certificated Notes in the name of such person or persons (or the nominee of any thereof) and cause the same to be delivered thereto. Neither Renters Choice nor the Trustee shall be liable for any delay by DTC or any Participant or Indirect Participant in identifying the beneficial owners of the related notes and each such person may conclusively rely on, and shall be protected in relying on, instructions from DTC for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of the notes to be issued). 155 156 OLD NOTES EXCHANGE AND REGISTRATION RIGHTS AGREEMENT Renters Choice and the Initial Purchasers entered into the Exchange and Registration Rights Agreement on August 18, 1998. Pursuant to the Exchange and Registration Rights Agreement, Renters Choice agreed to (i) file with the SEC on or prior to 60 days after the Issue Date a registration statement (the "Exchange Offer Registration Statement"), relating to the exchange offer for the old notes under the Securities Act and (ii) use its reasonable efforts to cause the exchange offer Registration Statement to be declared effective under the Securities Act within 150 days after the Issue Date. As soon as practicable after the effectiveness of the Exchange Offer Registration Statement, Renters Choice will offer to the holders of Transfer Restricted Securities (as defined below), who are not prohibited by any law or policy of the SEC from participating in the exchange offer, the opportunity to exchange their Transfer Restricted Securities for an issue of the exchange notes which are identical in all material respects to the old notes (except that the exchange notes will not contain terms with respect to transfer restrictions) and that would be registered under the Securities Act. Renters Choice will keep the exchange offer open for not less than 30 days (or longer, if required by applicable law) after the date on which notice of the exchange offer is mailed to the holders of the notes. If (i) because of any change in law or applicable interpretations thereof by the staff of the SEC, Renters Choice is not permitted to effect the exchange offer as contemplated hereby; (ii) any old notes validly tendered pursuant to the exchange offer are not exchanged for exchange notes within 180 days after the Issue Date; (iii) any Initial Purchaser so requests with respect to old notes not eligible to be exchanged for exchange notes in the exchange offer; (iv) any applicable law or interpretations do not permit any Holder of old notes to participate in the exchange offer; (v) any Holder of old notes that participates in the exchange offer does not receive freely transferable exchange notes in exchange for tendered old notes; or (vi) Renters Choice so elects, then Renters Choice will file with the SEC the Shelf Registration Statement to cover resales of Transfer Restricted Securities by such Holders who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. For purposes of the foregoing, "Transfer Restricted Securities" means each old note until (i) the date on which such old note has been exchanged for a freely transferable exchange note in the exchange offer; (ii) the date on which such old note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement, or (iii) the date on which such old note is distributed to the public pursuant to Rule 144 under the Securities Act or is salable pursuant to Rule 144(k) under the Securities Act. Renters Choice will use its reasonable efforts to have the Exchange Offer Registration Statement or, if applicable, the Shelf Registration Statement declared effective by the SEC as promptly as practicable after the filing thereof. Unless the exchange offer would not be permitted by a policy of the SEC, Renters Choice will commence the exchange offer and use its reasonable efforts to consummate the exchange offer as promptly as practicable, but in any event prior to 180 days after the Issue Date. If necessary, Renters Choice will use its commercially reasonable efforts to keep the Shelf Registration Statement effective for a period of two years after the Issue Date. If (i) the applicable Exchange Offer Registration Statement or, if applicable, the Shelf Registration Statement, is not filed with the SEC on or prior to 60 days after the Issue Date; (ii) the applicable Exchange Offer Registration Statement or, if applicable, the 156 157 Shelf Registration Statement, is not declared effective within 150 days after the Issue Date; (iii) the exchange offer is not consummated on or prior to 180 days after the Issue Date; or (iv) the Shelf Registration Statement is filed and declared effective within 150 days after the Issue Date but shall thereafter cease to be effective (at any time that Renters Choice is obligated to maintain the effectiveness thereof) without being succeeded within 45 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (i) through (iv), a "Registration Default"), Renters Choice will be obligated to pay liquidated damages to each Holder of Transfer Restricted Securities, during the period of one or more such Registration Defaults, in an amount equal to $0.192 per week per $1,000 principal amount of the notes constituting Transfer Restricted Securities held by such Holder until the applicable Registration Statement is filed, the Exchange Offer Registration Statement is declared effective and the exchange offer is consummated or the Shelf Registration Statement is declared effective or again becomes effective, as the case may be. All accrued liquidated damages shall be paid to Holders in the same manner as interest payments on the notes on semi-annual payment dates which correspond to interest payment dates for the notes. The accrual of liquidated damages will cease on the day on which all Registration Defaults are cured. The Exchange and Registration Rights Agreement also provides that Renters Choice shall (i) make available for a period of 180 days after the consummation of the exchange offer a prospectus meeting the requirements of the Securities Act to any broker-dealer for use in connection with any resale of any such exchange notes, and (ii) pay all expenses incident to the exchange offer (including the expense of one counsel to the Holders of the notes) and will indemnify certain Holders of the notes (including any broker-dealer) against certain liabilities, including liabilities under the Securities Act. A broker-dealer that delivers such a prospectus to purchasers in connection with such resales will be subject to certain of the civil liability provisions under the Securities Act and will be bound by the provisions of the Exchange and Registration Rights Agreement (including certain indemnification rights and obligations). Each Holder of old notes who wishes to exchange such old notes for exchange notes in the exchange offer will be required to make certain representations, including representations that (i) any exchange notes to be received by it will be acquired in the ordinary course of its business; (ii) it has no arrangement or understanding with any person to participate in the distribution of the exchange notes; and (iii) it is not an "affiliate" (as defined in Rule 405 under the Securities Act) of Renters Choice, or if it is an affiliate, that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. If the Holder is not a broker-dealer, it will be required to represent that it is not engaged in, and does not intend to engage in, the distribution of the exchange notes. If the Holder is a broker-dealer that will receive exchange notes for its own account in exchange for notes that were acquired as a result of market-making activities or other trading activities (an "Exchanging Dealer"), it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. Holders of the old notes will be required to make certain representations to Renters Choice (as described above) in order to participate in the exchange offer and will be required to deliver information to be used in connection with the Shelf Registration Statement and benefit from the provisions regarding liquidated damages set forth in the 157 158 preceding paragraphs. A Holder who sells old notes pursuant to the Shelf Registration Statement generally will be required to be named as a selling securityholder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Exchange and Registration Rights Agreement which are applicable to such a Holder (including certain indemnification obligations). For so long as the old notes are outstanding, Renters Choice will continue to provide to Holders of the old notes and to prospective purchasers of the old notes the information required by Rule 144A(d)(4) under the Securities Act. The foregoing description of the Exchange and Registration Rights Agreement is a summary only, does not purport to be complete and is qualified in its entirety by reference to all provisions of the Exchange and Registration Rights Agreement which is filed as an exhibit to the Registration Statement of which this prospectus is a part. However, Renters Choice believes that this prospectus disclosure presents the material terms of the Exchange and Registration Rights Agreement. 158 159 CERTAIN U. S. FEDERAL INCOME TAX CONSEQUENCES GENERAL The following is a summary of certain U. S. federal income tax consequences associated with the exchange of old notes for exchange notes pursuant to the exchange offer, and does not purport to be a complete analysis of all potential tax effects. This summary is based upon the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations thereunder, published rulings and court decisions, all as in effect and existing on the date hereof and all of which are subject to change at any time, which change may be retroactive. This summary is not binding on the Internal Revenue Service or on the courts, and no ruling will be requested from the Internal Revenue Service on any issues described below. There can be no assurance that the Internal Revenue Service will not take a different position concerning the matters discussed below. This summary applies only to those persons who are the initial holders of old notes, who acquired old notes for cash and who hold old notes as capital assets, and assumes that the old notes were not issued with "original issue discount," as defined in the Code. It does not address the tax consequences to taxpayers who are subject to special rules (such as financial institutions, tax-exempt organizations, insurance companies and persons who are not "U.S. Holders"), or the effect of any applicable U.S. federal estate and gift tax laws or state, local or foreign tax laws. For purposes of this summary, a "U.S. Holder" means a beneficial owner of a note who purchased the notes pursuant to the Offering that is for U.S. federal income tax purposes (i) a citizen or resident of the United States; (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust if (A) a court within the United States is able to exercise primary supervision over the administration of the trust and (B) one or more U.S. fiduciaries have the authority to control all substantial decisions of the trust. EXCHANGE OFFER The exchange of old notes for exchange notes pursuant to the exchange offer should not constitute a taxable exchange for U.S. federal income tax purposes. Accordingly, a U.S. Holder should not recognize gain or loss upon the receipt of exchange notes pursuant to the exchange offer, and a U.S. Holder should be required to include interest on the exchange notes in gross income in the manner and to the extent interest income was includible under the old notes. A U.S. Holder's holding period for the exchange notes should include the holding period of the old notes exchanged therefor, and such holder's adjusted basis in the exchange notes should be the same as the basis of the old notes exchanged therefor immediately before the exchange. The foregoing discussion is included herein for general information only. Accordingly, each holder should consult with its own tax advisors concerning the tax consequences of the exchange offer with respect to its particular situation, including the application and effect of state, local and foreign income and other tax laws. 159 160 PLAN OF DISTRIBUTION Based on interpretations by the SEC set forth in no-action letters issued to third parties, Renters Choice believes that exchange notes issued pursuant to the exchange offer in exchange for the old notes may be offered for resale, resold and otherwise transferred by holders thereof (other than any holder which is (i) an "affiliate" of Renters Choice within the meaning of Rule 405 under the Securities Act, (ii) a broker-dealer who acquired notes directly from Renters Choice or (iii) broker-dealers who acquired notes as a result of market-making or other trading activities) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such exchange notes are acquired in the ordinary course of such holders' business, and such holders are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such exchange notes; provided that broker-dealers ("Participating Broker-Dealers") receiving exchange notes in the exchange offer will be subject to a prospectus delivery requirement with respect to resales of such exchange notes. To date, the SEC has taken the position that Participating Broker-Dealers may fulfill their prospectus delivery requirements with respect to transactions involving an exchange of securities such as the exchange pursuant to the exchange offer (other than a resale of an unsold allotment from the sale of the old notes to the Initial Purchasers) with the prospectus contained in the Exchange Offer Registration Statement. Pursuant to the Exchange and Registration Rights Agreement, Renters Choice has agreed to permit Participating Broker-Dealers to use this prospectus in connection with the resale of such exchange notes. Renters Choice has agreed that, for a period of 180 days after the Expiration Date, it will make this prospectus, and any amendment or supplement to this prospectus, available to any broker-dealer that requests such documents in the letter of transmittal. Each holder of the old notes who wishes to exchange its old notes for exchange notes in the exchange offer will be required to make certain representations to Renters Choice as set forth in "The Exchange Offer -- Purpose and Effect of the Exchange Offer." Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for old notes where such old notes were acquired as a result of market-making activities or other trading activities. Renters Choice has agreed that, for a period of 180 days after the consummation of the exchange offer, it will use its commercially reasonable efforts to make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until [ , 1999,] all dealers effecting transactions in the exchange notes may be required to deliver a prospectus. Renters Choice will not receive any proceeds from any sale of exchange notes by broker-dealers. Exchange notes received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the exchange notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who 160 161 may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such exchange notes. Any broker-dealer that resells exchange notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such exchange notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of exchange notes and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 90 days after the consummation of the exchange offer, Renters Choice will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the letter of transmittal. Renters Choice has agreed to pay all expenses incident to the exchange offer (including the expenses of one counsel for the Holders of the notes) other than commissions or concessions of any broker-dealers and will indemnify the Holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. EXPERTS The audited financial statements of Renters Choice included in this prospectus for the years ended December 31, 1995, 1996 and 1997 have been audited by Grant Thornton LLP, independent certified public accountants, as stated in their reports included herein. The consolidated financial statements of THORN Americas, Inc. and subsidiaries at March 31, 1998 and 1997, and for each of the three years in the period ended March 31, 1998, appearing in this prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The audited financial statements of Central Rents, Inc. included in this prospectus for the years ended December 31, 1995, 1996 and 1997 have been audited by Arthur Andersen LLP, independent public accountants, as stated in their reports included herein. LEGAL MATTERS The validity of the exchange notes offered hereby will be passed upon for Renters Choice by Winstead Sechrest & Minick P.C., Dallas, Texas. 161 162 INDEX TO FINANCIAL STATEMENTS F-1
PAGE ---- FINANCIAL STATEMENTS OF RENTERS CHOICE, INC. AND SUBSIDIARIES Report of Independent Certified Public Accountants........ F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998 (unaudited)................ F-3 Consolidated Statements of Earnings for the years ended December 31, 1995, 1996 and 1997 and the nine month periods ended September 30, 1997 and 1998 (unaudited)............................................ F-4 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997 and the nine month period ended September 30, 1998 (unaudited)............................................ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and the nine month periods ended September 30, 1997 and 1998 (unaudited)............................................ F-6 Notes to Consolidated Financial Statements................ F-8 FINANCIAL STATEMENTS OF THORN AMERICAS, INC. AND SUBSIDIARIES Report of Independent Auditors............................ F-26 Consolidated Balance Sheets as of March 31, 1997 and 1998 and June 30, 1998 (unaudited).......................... F-27 Consolidated Statements of Operations for the years ended March 31, 1996, 1997 and 1998 and the three month periods ended June 30, 1997 and 1998 (unaudited)....... F-29 Consolidated Statements of Stockholder's Equity for the years ended March 31, 1996, 1997 and 1998 and the three month period ended June 30, 1998 (unaudited)........... F-30 Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1997 and 1998 and the three month periods ended June 30, 1997 and 1998 (unaudited)....... F-31 Notes to Consolidated Financial Statements................ F-33 FINANCIAL STATEMENTS OF CENTRAL RENTS, INC. Report of Independent Public Accountants.................. F-45 Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited)................................... F-46 Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and the three month periods ended March 31, 1997 and 1998 (unaudited).................... F-47 Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997 and the three month period ended March 31, 1998 (unaudited).......... F-48 Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and the three month periods ended March 31, 1997 and 1998 (unaudited).................... F-49 Notes to Financial Statements............................. F-50 163 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders Renters Choice, Inc. We have audited the accompanying consolidated balance sheets of Renters Choice, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Renters Choice, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Dallas, Texas February 12, 1998 F-2 164 RENTERS CHOICE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS The accompanying notes are an integral part of these statements. F-3
DECEMBER 31, ------------------- SEPTEMBER 30, 1996 1997 1998 -------- -------- ------------- (UNAUDITED) (IN THOUSANDS OF DOLLARS) ASSETS Cash and cash equivalents........................... $ 5,920 $ 4,744 $ 90,483 Rental merchandise, net On rent........................................... 71,620 89,007 371,018 Held for rent..................................... 23,490 23,752 110,963 Accounts receivable -- trade........................ 3,021 2,839 2,676 Prepaid expenses and other assets................... 4,369 3,164 89,646 Property assets, net................................ 12,716 17,700 89,001 Deferred income taxes............................... 6,138 6,479 163,109 Intangible assets, net.............................. 47,193 61,183 695,266 Due from seller of acquired business................ -- -- 34,651 -------- -------- ---------- $174,467 $208,868 $1,646,813 ======== ======== ========== LIABILITIES Senior term debt.................................. $ 14,435 $ 26,280 $ 716,880 Subordinated notes payable........................ -- -- 175,000 Accounts payable -- trade......................... 17,047 11,935 93,173 Accrued liabilities............................... 12,924 17,008 250,877 Other debt........................................ 4,558 892 1,032 Preferred dividends payable....................... -- -- 1,496 -------- -------- ---------- 48,964 56,115 1,238,458 COMMITMENTS AND CONTINGENCIES....................... -- -- -- PREFERRED STOCK Redeemable preferred stock, net of placement costs, $0.01 par value, 5,000,000 shares authorized; 260,000 shares issued and outstanding..................................... -- -- 259,476 STOCKHOLDERS' EQUITY Common stock, $.01 par value; 50,000,000 shares authorized; 24,791,085 and 24,904,721 shares issued in 1996 and 1997, respectively, and 25,053,233 shares at September 30, 1998......... 248 249 251 Additional paid-in capital........................ 98,010 99,381 100,973 Retained earnings................................. 27,245 53,123 72,655 -------- -------- ---------- 125,503 152,753 173,879 Treasury stock, 990,099 shares at cost............ -- -- (25,000) -------- -------- ---------- 125,503 152,753 148,879 -------- -------- ---------- $174,467 $208,868 $1,646,813 ======== ======== ========== 165 RENTERS CHOICE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS The accompanying notes are an integral part of these statements. F-4
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ------------------- 1995 1996 1997 1997 1998 -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Revenue Store Rentals and fees........................ $126,264 $198,486 $275,344 $200,970 $400,793 Merchandise sales....................... 6,383 10,604 14,125 10,774 24,329 Other................................... 642 687 679 525 2,094 Franchise Merchandise sales....................... -- 25,229 37,385 23,971 28,440 Royalty income and fees................. -- 2,959 4,008 3,013 3,777 -------- -------- -------- -------- -------- 133,289 237,965 331,541 239,253 459,433 Operating expenses Direct store expenses Depreciation of rental merchandise...... 29,640 42,978 57,223 42,271 91,382 Cost of merchandise sold................ 4,954 8,357 11,365 8,355 16,600 Salaries and other expenses............. 70,012 116,577 162,458 119,339 238,577 Franchise operating expense Cost of merchandise sales............... -- 24,010 35,841 22,929 27,318 -------- -------- -------- -------- -------- 104,606 191,922 266,887 192,894 373,877 General and administrative expenses........ 5,766 10,111 13,304 9,597 18,054 Amortization of intangibles................ 3,109 4,891 5,412 4,016 7,767 -------- -------- -------- -------- -------- Total operating expenses........... 113,481 206,924 285,603 206,507 399,698 -------- -------- -------- -------- -------- Operating profit................... 19,808 31,041 45,938 32,746 59,735 Interest expense............................. 2,202 606 2,194 1,402 18,469 Nonrecurring financing costs................. -- -- -- -- 5,017 Interest income.............................. (890) (667) (304) (256) (1,932) -------- -------- -------- -------- -------- Earnings before income taxes....... 18,496 31,102 44,048 31,600 38,181 Income tax expense........................... 7,784 13,076 18,170 13,108 17,153 -------- -------- -------- -------- -------- NET EARNINGS....................... 10,712 18,026 25,878 18,492 21,028 Preferred dividends.......................... -- -- -- -- 1,496 -------- -------- -------- -------- -------- NET EARNINGS ALLOCABLE TO COMMON STOCKHOLDERS.................... $ 10,712 $ 18,026 $ 25,878 $ 18,492 $ 19,532 ======== ======== ======== ======== ======== Basic earnings per share..................... $ 0.52 $ 0.73 $ 1.04 $ 0.74 $ 0.79 ======== ======== ======== ======== ======== Diluted earnings per share................... $ 0.52 $ 0.72 $ 1.03 $ 0.74 $ 0.78 ======== ======== ======== ======== ======== 166 RENTERS CHOICE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY The accompanying notes are an integral part of these statements. F-5
UNAMORTIZED COMMON STOCK ADDITIONAL VALUE ---------------- PAID-IN RETAINED OF STOCK TREASURY SHARES AMOUNT CAPITAL EARNINGS AWARD STOCK TOTAL ------ ------ ---------- -------- ----------- -------- -------- (IN THOUSANDS OF DOLLARS) Balance at January 1, 1995............. 4,300... $ 43 $ 116 $ 9,126 $ -- $ -- $ 9,285 Net earnings......................... -- -- -- 10,712 -- -- 10,712 Dividends paid....................... -- -- -- (1,493) -- -- (1,493) Contribution of undistributed S corporation earnings............... -- -- 9,126 (9,126) -- -- -- Initial public offering of common stock.............................. 2,587 26 23,370 -- -- -- 23,396 Issuance of common stock under stock option plan........................ 1 -- 10 -- -- -- 10 Three-for-two common stock split effected in the form of a dividend........................... 3,444 34 (34) -- -- -- -- Two-for-one common stock split effected in the form of a dividend........................... 10,333 103 (103) -- -- -- -- Stock award.......................... 63 1 960 -- (961) -- -- Amortization of stock award.......... -- -- -- -- 63 -- 63 Public offering of common stock...... 3,650 37 54,474 -- -- -- 54,511 ------ ---- -------- ------- ----- -------- -------- Balance at December 31, 1995........... 24,378 244 87,919 9,219 (898) -- 96,484 Net earnings......................... -- -- -- 18,026 -- -- 18,026 Amortization of stock award.......... -- -- -- -- 322 -- 322 Termination of stock award........... (37) -- (576) -- 576 -- -- Exercise of stock options............ 107 1 695 -- -- -- 696 Tax benefits related to exercise of stock options...................... -- -- 460 -- -- -- 460 Acquisition of ColorTyme, Inc........ 343 3 9,512 -- -- -- 9,515 ------ ---- -------- ------- ----- -------- -------- Balance at December 31, 1996........... 24,791 248 98,010 27,245 -- -- 125,503 Net earnings......................... -- -- -- 25,878 -- -- 25,878 Exercise of stock options............ 114 1 950 -- -- -- 951 Tax benefits related to exercise of stock options...................... -- -- 421 -- -- -- 421 ------ ---- -------- ------- ----- -------- -------- Balance at December 31, 1997........... 24,905 249 99,381 53,123 -- -- 152,753 Net earnings (Unaudited)............. -- -- -- 21,028 -- -- 21,028 Preferred dividends (Unaudited)...... -- -- -- (1,496) -- -- (1,496) Purchase of treasury stock (Unaudited)........................ -- -- -- -- -- (25,000) (25,000) Exercise of stock options (Unaudited)........................ 148 2 1,592 -- -- -- 1,594 ------ ---- -------- ------- ----- -------- -------- Balance at September 30, 1998 (Unaudited).......................... 25,053 $251 $100,973 $72,655 $ -- $(25,000) $148,879 ====== ==== ======== ======= ===== ======== ======== 167 RENTERS CHOICE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS The accompanying notes are an integral part of these statements. F-6
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ -------------------- 1995 1996 1997 1997 1998 -------- -------- -------- -------- --------- (UNAUDITED) (IN THOUSANDS OF DOLLARS) Cash flows from operating activities Net earnings.............................. $ 10,712 $ 18,026 $ 25,878 $ 18,492 $ 19,532 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation of rental merchandise...... 29,640 42,978 57,223 42,271 91,382 Depreciation of property assets......... 2,130 3,680 5,601 3,985 10,539 Amortization of intangibles............. 3,109 4,891 5,412 4,017 7,767 Nonrecurring charges -- financing costs................................. -- -- -- -- 5,017 Nonrecurring charges -- assets related to name change........................ -- -- -- -- 2,451 Amortization of financing fees.......... -- -- -- -- 546 Deferred income taxes................... 1,406 4,961 (341) -- 1,826 Other................................... (91) 24 -- (5) -- Changes in operating assets and liabilities, net of effects of acquisitions Rental merchandise...................... (39,220) (64,927) (64,346) (48,262) (98,839) Accounts receivable -- trade............ -- (602) 182 495 464 Prepaid expenses and other assets....... (2,636) 524 1,252 544 (19,036) Accounts payable -- trade............... (28) 10,745 (5,112) (5,539) 20,812 Accrued liabilities..................... 183 (939) 3,033 5,643 (74,320) -------- -------- -------- -------- --------- Net cash provided by (used in) operating activities............. 5,205 19,361 28,782 21,641 (31,859) Cash flows from investing activities Purchase of property assets............... (3,473) (8,187) (10,446) (7,636) (9,732) Proceeds from sale of property assets..... 414 303 376 219 1,029 Acquisitions of businesses, net of cash acquired of $56,028 in 1998............. (21,680) (28,367) (30,491) (29,274) (946,117) -------- -------- -------- -------- --------- Net cash used in investing activities....................... (24,739) (36,251) (40,561) (36,691) (954,820) Cash flows from financing activities Purchase of treasury stock................ -- -- -- -- (25,000) Financing fees paid....................... -- -- -- -- (29,035) Proceeds from issuance of preferred stock................................... -- -- -- -- 259,476 Proceeds from public stock offerings...... 77,907 -- -- -- -- Exercise of stock options................. 10 696 951 752 1,594 Distributions to stockholders............. (1,493) -- -- -- -- Proceeds from debt........................ 33,083 37,733 80,656 71,290 1,250,863 Repayments of debt........................ (49,843) (72,278) (71,004) (56,631) (385,480) Repayments of note payable to stockholder............................. (6,250) -- -- -- -- Sale of notes receivable.................. -- 21,338 -- -- -- -------- -------- -------- -------- --------- Net cash provided by (used in) financing activities............. 53,414 (12,511) 10,603 15,411 1,072,418 -------- -------- -------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. 33,880 (29,401) (1,176) 361 85,739 Cash and cash equivalents at beginning of year...................................... 1,441 35,321 5,920 5,920 4,744 -------- -------- -------- -------- --------- Cash and cash equivalents at end of year.... $ 35,321 $ 5,920 $ 4,744 $ 6,281 $ 90,483 ======== ======== ======== ======== ========= 168 RENTERS CHOICE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES In conjunction with the businesses acquired, liabilities were assumed as follows:
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- ----------------- 1995 1996 1997 1997 1998 ------ ------ ------- ------- ------- (UNAUDITED) (IN THOUSANDS OF DOLLARS) SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest........................ $1,711 $ 929 $ 1,962 $ 1,417 $11,102 Income taxes.................... $7,764 $8,426 $13,983 $10,316 $10,297 The accompanying notes are an integral part of these statements. F-7
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ---------------------- 1995 1996 1997 1997 1998 -------- -------- -------- -------- ----------- (UNAUDITED) (IN THOUSANDS OF DOLLARS) Fair value of assets acquired................... $ 68,285 $ 57,223 $ 30,491 $ 29,274 $ 1,348,831 Stock and options issued..... -- (9,515) -- -- -- Cash paid.................... (21,680) (28,367) (30,491) (29,274) (1,002,145) -------- -------- -------- -------- ----------- Liabilities assumed......... $ 46,605 $ 19,341 $ -- $ -- $ 346,686 ======== ======== ======== ======== =========== 169 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. Principles of Consolidation and Nature of Operations The accompanying financial statements include the accounts of Renters Choice, Inc. (Renters Choice) and its franchise subsidiaries ColorTyme, Inc. (ColorTyme) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated. Renters Choice leases household durable goods to customers on a rent-to-own basis. At December 31, 1997, the Company operated 504 stores which were located throughout the United States and the Commonwealth of Puerto Rico (sixteen stores). ColorTyme is a nationwide franchisor of television, stereo and furniture rental centers. ColorTyme's primary source of revenues is the sale of rental equipment to its franchisees, who, in turn, offer the equipment to the general public for rent or purchase under a rent-to-own program. The balance of ColorTyme's revenues are generated primarily from royalties based on the franchisee's monthly gross revenues. At December 31, 1997, there were approximately 262 franchised rental centers operating in 37 states. Segment Disclosures In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company adopted SFAS 131 in 1998. The Company's only segments which require separate disclosure under the reporting guidelines of SFAS 131 are its rent-to-own and franchise operations. Rental Merchandise Rental merchandise is carried at the lower of depreciated cost or net realizable value. Depreciation is provided using the income forecasting method which is intended to match as closely as practicable the recognition of depreciation expense with the consumption of the rental merchandise, and assumes no salvage value. The consumption of rental merchandise occurs during periods of rental and directly coincides with the receipt of rental revenue over the rental-purchase agreement period, generally 18 to 24 months. Under the income forecasting method, merchandise held for rent is not depreciated, and merchandise on rent is depreciated in the proportion of rents received to total rents provided in the rental contract, which is an activity based method similar to the units of production method. F-8 170 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS -- (CONTINUED) Cash Equivalents For purposes of reporting cash flows, cash equivalents include all highly liquid investments with an original maturity of three months or less. Rental Revenue and Fees Merchandise is rented to customers pursuant to rental-purchase agreements which provide for weekly or monthly rental terms with nonrefundable rental payments. Generally, the customer has the right to acquire title either through a purchase option or through payment of all required rentals. Rental revenue and fees are recognized over the rental term. No revenue is accrued because the customer can cancel the rental contract at any time and the Company cannot enforce collection for nonpayment of rents. A provision is made for estimated losses of rental merchandise damaged or not returned by customers. ColorTyme's revenue from the sale of rental equipment is recognized upon shipment of the equipment to the franchisee. Property Assets and Related Depreciation Furniture, equipment and vehicles are stated at cost. Depreciation is provided over the estimated useful lives of the respective assets (generally five years) by the straight-line method. Leasehold improvements are amortized over the term of the applicable leases by the straight-line method. Intangible Assets and Amortization Intangible assets are stated at cost less accumulated amortization calculated by the straight-line method. Accounting for Impairment of Long-Lived Assets The Company evaluates all long-lived assets, including all intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment is recognized when the carrying amounts of such assets cannot be recovered by the undiscounted net cash flows they will generate. Impairment is measured as the amount by which the carrying value of the asset exceeds the fair value. Fair value is based on management's knowledge of current market conditions or the present value of estimated expected future cash flows. Income Taxes Effective January 1, 1995, the Company terminated its S corporation status and became a C corporation and, therefore, is subject to Federal income taxes. The Company provides F-9 171 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS -- (CONTINUED) deferred taxes for temporary differences between the tax and financial reporting bases of assets and liabilities at the rate expected to be in effect when taxes become payable. Earnings Per Share and Stock Splits Effective for the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS 128), which requires the computation of basic and diluted earnings per share. The provisions of SFAS 128 have been applied retroactively to all periods presented herein. Basic earnings per share are based upon the weighted average number of common shares outstanding during each period presented. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period, plus the assumed exercise of stock options at the beginning of the year. In June 1995, the Company effected a 3-for-2 split of its common stock through the distribution of one-half additional share of common stock as a dividend with respect to each outstanding share of common stock. On September 11, 1995, the Board of Directors approved a 2-for-1 stock split, to be effected as a 100% stock dividend for shareholders of record as of September 29, 1995. All share and per share data has been retroactively restated to reflect these transactions. Advertising Costs Costs incurred for producing and communicating advertising are expensed when incurred. Advertising expense was $6.4 million, $10.6 million and $13.7 million in 1995, 1996 and 1997, respectively; and $10.0 million (unaudited) and $13.0 million (unaudited) for the nine months ended September 30, 1997 and 1998, respectively. Stock-Based Compensation Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire that stock. F-10 172 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS -- (CONTINUED) Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues during the reporting period. Actual results could differ from those estimates. Interim Financial Statements In the opinion of management, the unaudited interim financial statements as of September 30, 1998 and for the nine months ended September 30, 1997 and 1998 include all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly the Company's financial position as of September 30, 1998 and the results of its operations and cash flows for the nine months periods ended September 30, 1997 and 1998. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of the results to be expected for the full year. Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income". This Statement establishes standards for reporting and display of comprehensive income and its components. The only component of comprehensive income for the three years in the period ended December 31, 1997 and the nine month periods ended September 30, 1997 and 1998, was net earnings as reported in the Consolidated Statements of Earnings. Reclassifications Certain reclassifications have been made to conform to the 1997 presentation. NOTE B -- ACQUISITIONS On May 28, 1998, the Company completed its acquisition of the assets of 176 Central Rents, Inc. stores for approximately $100 million (Unaudited). On August 5, 1998, the Company acquired all of the outstanding common stock of THORN Americas, Inc. (1,404 company-owned stores) for approximately $900 million in cash. The acquisition was financed via $720 million in variable rate senior debt maturing in 6 to 8 1/2 years, $175 million of 11% senior subordinated debt maturing in 11 years, and $260 million of redeemable, convertible preferred stock. As a result of the transaction, the Company recorded goodwill of approximately $565 million, to be amortized over its estimated useful life of 30 years. The purchase agreement provided for a purchase price F-11 173 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B -- ACQUISITIONS -- (CONTINUED) adjustment based on the change in closing adjusted net worth at the acquisition date, as defined in the agreement. The adjustment is not expected to be material. (Unaudited). During 1997, the Company acquired the assets of 76 stores in eighteen separate transactions for approximately $30.5 million in cash. On May 15, 1996 the Company acquired all the outstanding common stock of ColorTyme for $14.5 million, including acquisition costs, comprised of cash of $4.7 million and 343,175 shares of the Company's common stock and 314,000 options for the Company's common stock valued at $3.0 million. Immediately following the purchase of ColorTyme by the Company, ColorTyme sold its loan portfolio (with certain recourse provisions) to a third party for approximately $21.7 million. No gain or loss was recognized on the sale. ColorTyme simultaneously paid off notes payable owed to a finance company of approximately $13.2 million. The Company acquired the assets of an additional ninety-four stores in twenty-three transactions during 1996, for approximately $25.6 million in cash and $1.8 million in notes. In April 1995, the Company acquired 72 stores from Crown Leasing Corporation and certain of its affiliates (Crown) for a cash purchase price of approximately $20.6 million. In September 1995, the Company completed the acquisition of 135 rent-to-own stores through the purchase of the common stock of Pro Rental, doing business as Magic Rent-to-Own and Kelway Rent-to-Own. The total purchase price was approximately $38.4 million, which was paid in cash and notes. All acquisitions have been accounted for as purchases and the operating results of the acquired stores have been included in the financial statements of the Company since their acquisition. The following unaudited pro forma information combines the results of operations as if the acquisitions had been consummated as of the beginning of the period in which the acquisition occurred, and as of the beginning of the immediately preceding period, after F-12 174 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B -- ACQUISITIONS -- (CONTINUED) including the impact of adjustments for amortization of intangibles and interest expense on acquisition borrowings: The pro forma financial information is presented for informational purposes only and is not necessarily indicative of operating results that would have occurred had the acquisition been consummated as of the above dates, nor are they necessarily indicative of future operating results. NOTE C -- RENTAL MERCHANDISE
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------- ------------------------- 1996 1997 1997 1998 ---------- ---------- ---------- ------------ (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Revenue..................... $291,555 $339,809 $977,513 $1,027,581 Net earnings allocable to common stockholders....... $ 18,833 $ 25,866 $ 16,995 $ 17,547 Basic earnings per common share..................... $ 0.76 $ 1.04 $ .68 $ .71 Diluted earnings per common share..................... $ 0.75 $ 1.03 $ .68 $ .70 F-13
DECEMBER 31, ------------------- SEPTEMBER 30, 1996 1997 1998 -------- -------- ------------- (UNAUDITED) (IN THOUSANDS OF DOLLARS) On rent Cost............................... $109,663 $142,408 $441,467 Less accumulated depreciation...... 38,043 53,401 70,449 -------- -------- -------- $ 71,620 $ 89,007 $371,018 ======== ======== ======== Held for rent Cost............................... $ 27,805 $ 29,975 $116,975 Less accumulated depreciation...... 4,315 6,223 6,012 -------- -------- -------- $ 23,490 $ 23,752 $110,963 ======== ======== ======== 175 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE D -- PROPERTY ASSETS NOTE E -- INTANGIBLE ASSETS
DECEMBER 31, ------------------ SEPTEMBER 30, 1996 1997 1998 ------- -------- ------------- (UNAUDITED) (IN THOUSANDS OF DOLLARS) Furniture and equipment............... $ 9,259 $ 13,115 $ 21,780 Delivery vehicles..................... 2,711 2,608 41,603 Building and leasehold improvements... 8,542 14,499 30,345 Construction in progress.............. 236 547 11,482 ------- -------- -------- 20,748 30,769 105,210 Accumulated depreciation.............. (8,032) (13,069) (16,209) ------- -------- -------- $12,716 $ 17,700 $ 89,001 ======= ======== ======== Customer rental agreements represent the projected cash flows less servicing costs from open customer contracts of acquired stores at acquisition date and are amortized over the average stated term of the customer contract, 18 months. Noncompete agreements and the consulting agreement are amortized over the life of the respective agreements. NOTE F -- REVOLVING CREDIT AGREEMENT On November 27, 1996, the Company entered into a $90 million three-year revolving credit agreement with a group of banks. Borrowings under the facility bear interest at a rate equal to a designated prime rate (8.50% at December 31, 1997) or 1.10% to 1.65% over LIBOR (5.75% at December 31, 1997) at the Company's option. Borrowings are F-14
DECEMBER 31, AMORTIZATION ----------------- SEPTEMBER 30, PERIOD 1996 1997 1998 ------------ ------- ------- ------------- (UNAUDITED) (IN THOUSANDS OF DOLLARS) Customer rental agreements.............. 18 months $ 2,537 $ 1,773 $ 1,117 Noncompete agreements..... 2-5 years 2,892 3,652 4,902 Consulting agreement...... 4 years 2,918 -- -- Franchise network......... 10 years 3,000 3,000 3,000 Goodwill.................. 20-30 years 43,933 61,228 701,765 ------- ------- -------- 55,280 69,653 710,784 Less accumulated amortization............ 8,087 8,470 15,518 ------- ------- -------- $47,193 $61,183 $695,266 ======= ======= ======== 176 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE F -- REVOLVING CREDIT AGREEMENT -- (CONTINUED) collateralized by a lien on substantially all of the Company's assets. A commitment fee equal to .30% to .50% of the unused portion of the term loan facility is payable quarterly. The weighted average interest rate under this facility was 6.7% and 7.0% for the years ended December 31, 1996 and 1997, respectively. The credit facility includes certain net worth and fixed charge coverage requirements, as well as covenants which restrict additional indebtedness and the disposition of assets not in the ordinary course of business. At December 31, 1997, the Company has $64.5 million available under the agreement. NOTE G -- ACCRUED LIABILITIES NOTE H -- OTHER DEBT
DECEMBER 31, ----------------- SEPTEMBER 30, 1996 1997 1998 ------- ------- ------------- (UNAUDITED) (IN THOUSANDS OF DOLLARS) Taxes other than income................ $ 2,872 $ 3,700 $ 11,018 Income taxes payable................... -- 1,762 5,541 Accrued litigation costs............... 4,114 4,038 129,067 Accrued insurance costs................ 1,859 3,033 18,978 Accrued compensation and other......... 4,079 4,475 86,273 ------- ------- -------- $12,924 $17,008 $250,877 ======= ======= ======== F-15
DECEMBER 31, ------------- SEPTEMBER 30, 1996 1997 1998 ------ ---- ------------- (UNAUDITED) (IN THOUSANDS OF DOLLARS) Obligation payable under noncompete agreement, due in 24 monthly installments of $125 commencing April 1, 1996, with interest imputed at 5.32%.... $1,826 $ -- $ -- Obligation payable under consulting agreement, in 96 monthly installments of $33.3 commencing May 1, 1993, with interest imputed at 5.32%............... 1,545 -- -- Obligations under noncompete agreements, due in 60 monthly installments of $32.5 commencing September 1, 1995 with interest imputed at 8.75%............... 1,187 892 653 Other..................................... -- -- 379 ------ ---- ------ $4,558 $892 $1,032 ====== ==== ====== 177 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE H -- OTHER DEBT -- (CONTINUED) The following are scheduled maturities of debt at December 31, 1997 NOTE I -- INCOME TAXES The components of the income tax provision are as follows:
YEAR ENDING DECEMBER 31, - ------------ 1998....................................................... $289 1999....................................................... 351 2000....................................................... 252 ---- $892 ==== F-16
YEAR ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------- ------- (IN THOUSANDS OF DOLLARS) Current Federal................................... $3,837 $ 5,262 $15,028 State..................................... 1,227 1,297 1,911 Foreign................................... 1,314 1,556 1,572 ------ ------- ------- Total current..................... 6,378 8,115 18,511 ------ ------- ------- Deferred Federal................................... 1,238 3,866 (351) State..................................... 168 1,095 10 ------ ------- ------- Total deferred.................... 1,406 4,961 (341) ------ ------- ------- Total............................. $7,784 $13,076 $18,170 ====== ======= ======= 178 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE I -- INCOME TAXES -- (CONTINUED) The income tax provision reconciled to the tax computed at the statutory Federal rate is: Deferred tax assets and liabilities consist of the following:
YEAR ENDED DECEMBER 31, ------------------ 1995 1996 1997 ---- ---- ---- Tax at statutory rate............................... 34.0% 34.0% 35.0% State income taxes, net of federal benefit.......... 4.9 5.1 4.6 Effect of foreign operations, net of foreign tax credits........................................... 1.0 0.5 0.4 Goodwill amortization............................... 0.7 1.8 1.1 Other, net.......................................... 1.5 0.6 0.2 ---- ---- ---- Total..................................... 42.1% 42.0% 41.3% ==== ==== ==== The Company has Federal net operating loss carryforwards of approximately $10.8 million at December 31, 1997 which were acquired in connection with purchased companies. The use of Federal carryforwards which expire between 2005 and 2010 are limited to approximately $3.5 million per year. Because of uncertainties with respect to allocation of F-17
DECEMBER 31, ----------------- 1996 1997 ------- ------- Deferred tax assets Net operating loss carryforwards Federal........................................ $ 4,595 $ 4,202 State.......................................... 3,103 2,614 Accrued expenses.................................. 1,957 4,267 Intangible assets................................. 835 1,079 Property assets................................... 166 783 Alternative minimum tax carryforward.............. 463 463 Other............................................. 676 124 ------- ------- 11,795 13,532 Less valuation allowance.......................... 3,418 2,930 ------- ------- 8,377 10,602 Deferred tax liability Rental merchandise................................ 2,239 4,123 ------- ------- Net deferred tax asset.................... $ 6,138 $ 6,479 ======= ======= 179 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE I -- INCOME TAXES -- (CONTINUED) future taxable income to the various states, a valuation allowance has been provided against these carryforwards. If utilized, the tax benefit will reduce goodwill. NOTE J -- COMMITMENTS AND CONTINGENCIES The Company leases its office and store facilities and certain delivery vehicles. Rental expense was $9.4 million, $15.7 million and $22.0 million for 1995, 1996 and 1997, respectively; and $13.1 million (unaudited) and $17.6 million (unaudited) for the nine months ended September 30, 1997 and 1998, respectively. Future minimum rental payments under operating leases with remaining noncancellable lease terms in excess of one year at December 31, 1997 are as follows: The Company has agreed to indemnify its original stockholders against any additional income tax liabilities incurred by them attributable to the Company's operations during taxable periods in which the Company was an S Corporation. The Company is one of the defendants in a class action lawsuit which alleges that certain rent-to-own contracts entered into between Crown and the plaintiffs included fees and expenses that violated the New Jersey Consumer Fraud Act and the New Jersey Retail Installment Sales Act. The plaintiffs have obtained summary judgment against Crown, reserving damages for trial. Crown and its controlling shareholders have agreed to indemnify the Company against any losses it may incur relating to the litigation under the terms of the Asset Purchase Agreement between Crown and the Company. Although the Company believes it has taken appropriate steps to defend itself, the ultimate outcome of this lawsuit cannot presently be determined. At December 31, 1997, the Company was a defendant in another class action lawsuit in New Jersey alleging violations of the New Jersey Consumer Fraud Act, Retail Installment Sales Act and usury laws, among other things. The litigation sought treble the amount of damages, if any, incurred by the plaintiff class, punitive damages, interest, attorneys fees and certain injunctive relief. The Company removed the case to federal court on January 21, 1998, and was then advised by the plaintiffs' attorney that the plaintiff no F-18
YEAR ENDING DECEMBER 31, (IN THOUSANDS ------------ OF DOLLARS) 1998................................................... $15,026 1999................................................... 12,592 2000................................................... 9,699 2001................................................... 6,797 2002................................................... 2,833 Thereafter............................................. 1,235 ------- $48,182 ======= 180 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE J -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) longer wished to serve as class representative. Papers were filed seeking in January 1998 seeking court approval for the withdrawal of the complaint. Management believes that it is probable that plaintiffs' attorney will file a similar complaint on behalf of a new class representative. The ultimate outcome of this lawsuit cannot presently be determined. The Company is also involved in various other legal proceedings, claims and litigation arising in the ordinary course of business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position or results of operations of the Company. NOTE K -- STOCK BASED COMPENSATION In November 1994, the Company established a long-term incentive plan (the Plan) for the benefit of certain key employees and directors. Under the plan, up to 2,000,000 shares of the Company's shares are reserved for issuance under stock options, stock appreciation rights or restricted stock grants. Options granted to employees under the plan become exercisable over a period of one to five years from the date of grant and may be exercised up to a maximum of 10 years from date of grant. Options granted to directors are exercisable immediately. In 1995, the Company granted a stock award to an employee for 62,500 shares of common stock subject to forfeiture on termination of employment in certain circumstances. At the date of grant, the fair value of such shares was $960,938. Compensation charged to earnings was $63,000 and $320,000 in 1995 and 1996, respectively. Upon termination of employment in 1996, 37,500 shares were forfeitured in a negotiated settlement with the Company. There have been no grants of stock appreciation rights and all options had been granted with fixed prices. At December 31, 1997, there were 443,125 shares reserved for issuance under the Plan. The Company has adopted only the disclosure provisions of SFAS 123 for employee stock options and continues to apply APB 25 for stock options granted under the Plan. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation costs for all other stock-based compensation is accounted for under SFAS 123. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for options under the Plan consistent with the methodology prescribed by SFAS 123, the Company's 1997, 1996 and 1995 net earnings and earnings per share would be reduced to the pro forma amounts indicated as follows: F-19 181 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE K -- STOCK BASED COMPENSATION -- (CONTINUED) The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected volatility of 50 percent; risk-free interest rates ranging from 5.75 to 6.92 percent; no dividend yield; and expected lives of seven years. F-20
1995 1996 1997 ------- ------- ------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Net earnings As reported.................................. $10,712 $18,026 $25,878 Pro forma.................................... $10,494 $16,469 $23,967 Basic earnings per common share As reported.................................. $ 0.52 $ 0.73 $ 1.04 Pro forma.................................... $ 0.51 $ 0.67 $ 0.96 Diluted earnings per common share As reported.................................. $ 0.52 $ 0.72 $ 1.03 Pro forma.................................... $ 0.51 $ 0.66 $ 0.95 182 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE K -- STOCK BASED COMPENSATION -- (CONTINUED) Additional information with respect to options outstanding under the Plan at December 31, 1997, and changes for each of the three years in the period then ended was as follows: Information about stock options outstanding at December 31, 1997 is summarized as follows:
1995 1996 1997 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- --------- -------- Outstanding at beginning of year............... -- $ -- 906,000 $ 7.10 1,142,050 $15.74 Granted................. 1,204,500 8.75 695,000 22.22 859,000 16.54 Exercised............... (3,000) 3.34 (109,700) 7.45 (113,925) 8.39 Forfeited............... (295,500) 8.00 (349,250) 13.81 (562,875) 17.13 --------- --------- --------- Outstanding at end of year.................. 906,000 $9.02 1,142,050 $15.74 1,324,250 $16.39 ========= ========= ========= Options exercisable at end of year........... 24,000 $3.34 127,800 $ 9.64 282,375 $14.53 Weighted average fair value per share of options granted during 1995, 1996 and 1997, all of which were granted at market..... $5.25 $13.35 $ 9.93 F-21
OPTIONS OUTSTANDING ------------------------------------------------- WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE ------------------------ ----------- ---------------- ---------------- $3.34 to $6.67..................... 293,625 7.35 years $ 6.47 $6.68 to $18.50.................... 523,125 8.76 years $14.70 $18.51 to $26.75................... 507,500 9.05 years $23.88 --------- 1,324,250 ========= 183 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE K -- STOCK BASED COMPENSATION -- (CONTINUED) NOTE L -- FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash and cash equivalents and debt. For variable rate debt that reprices frequently and entails no significant change in credit risk, fair values are based on the carrying values. The fair values of other debt is estimated based on discounted cash flow analysis using interest rates currently offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of cash and cash equivalents and debt approximates fair value at December 31, 1996 and 1997, and September 30, 1998 (unaudited). NOTE M -- EARNINGS PER SHARE Summarized basic and diluted earnings per common share were calculated as follows:
OPTIONS EXERCISABLE ------------------------------ NUMBER WEIGHTED AVERAGE RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE ------------------------ ----------- ---------------- $3.34 to $6.67..................................... 94,125 $ 6.03 $6.68 to $18.50.................................... 126,000 $14.83 $18.51 to $26.75................................... 62,250 $26.75 ------- 282,375 =======
YEAR ENDED DECEMBER 31, 1995 ----------------------------- NET PER SHARE EARNINGS SHARES AMOUNT -------- ------ --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Basic earnings per common share............ $10,712 20,583 $0.52 Effect of dilutive stock options........... -- 211 ------- ------ Diluted earnings per common share.......... $10,712 20,794 $0.52 ======= ====== F-22
YEAR ENDED DECEMBER 31, 1996 ----------------------------- NET PER SHARE EARNINGS SHARES AMOUNT -------- ------ --------- Basic earnings per common share............ $18,026 24,656 $0.73 Effect of dilutive stock options........... -- 409 ------- ------ Diluted earnings per common share.......... $18,026 25,065 $0.72 ======= ====== 184 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE M -- EARNINGS PER SHARE -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 ----------------------------- NET PER SHARE EARNINGS SHARES AMOUNT -------- ------ --------- Basic earnings per common share............ $25,878 24,844 $1.04 Effect of dilutive stock options........... -- 350 ------- ------ Diluted earnings per common share.......... $25,878 25,194 $1.03 ======= ======
NINE MONTHS ENDED SEPTEMBER 30, 1997 ----------------------------- (UNAUDITED) NET EARNINGS SHARES PER SHARE -------- ------ --------- Basic earnings per common share............ $18,492 24,825 $0.74 Effect of dilutive stock options........... -- 387 ------- ------ Diluted earnings per share................. $18,492 25,212 $0.74 ======= ====== F-23
NINE MONTHS ENDED SEPTEMBER 30, 1998 ----------------------------- (UNAUDITED) EARNINGS SHARES PER SHARE -------- ------ --------- Basic earnings per share: Net earnings............................. $21,028 Less: Preferred dividends................ (1,496) ------- Net earnings allocable to common stockholders.......................... 19,532 24,910 $0.79 ===== Diluted earnings per share: Add: Preferred dividends................. 1,496 Add: Effect of dilutive stock options.... 232 Add: Weighted average convertible preferred shares...................... 1,892 ------- ------ $21,028 27,034 $0.78 ======= ====== ===== 185 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE N -- UNAUDITED QUARTERLY DATA Summarized quarterly financial data for 1996 and 1997 is as follows:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Year ended December 31, 1996 Revenue.......................... $49,002 $57,756 $60,025 $71,182 Operating profit................. 6,344 7,558 7,957 9,183 Net earnings..................... 3,617 4,369 4,729 5,311 Basic earnings per share......... 0.15 0.18 0.19 0.21 Diluted earnings per share....... $ 0.15 $ 0.17 $ 0.19 $ 0.21 NOTE O -- SUBSIDIARY GUARANTORS (UNAUDITED) Pursuant to the terms of the indenture relating to the 11% Senior Subordinated Notes, dated August 18, 1998, due 2008, the direct and wholly owned subsidiaries of Renters Choice, Inc., consisting of ColorTyme, Inc. (which was acquired in May, 1996), and Thorn Americas, Inc. (which was acquired in August, 1998) (collectively, the Guarantors), have fully, jointly and severally, and unconditionally guaranteed the obligations of Renters Choice, Inc. with respect to these notes. The only direct or indirect subsidiaries of the Company that are not Guarantors are inconsequential subsidiaries. There are no restrictions on the ability of any of the Guarantors to transfer funds to Renters Choice, Inc. in the form of loans, advances or dividends, except as provided by applicable law. Accordingly, set forth below is certain summarized combined financial information (within the meaning of Rule 1-02(bb) of Regulation S-X) for the Guarantors, as of and for the year ended December 31, 1996 and 1997, and as of and for the nine months ended September 30, 1997 and 1998. Separate financial statements and other disclosures concerning the Guarantors have not been included because management believes that they are not material to investors. F-24
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Year ended December 31, 1997 Revenue.......................... $74,587 $80,803 $83,864 $92,288 Operating profit................. 9,639 11,341 11,766 13,192 Net earnings..................... 5,412 6,357 6,724 7,385 Basic earnings per share......... 0.22 0.25 0.27 0.30 Diluted earnings per share....... $ 0.22 $ 0.25 $ 0.27 $ 0.29 186 RENTERS CHOICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) F-25
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ----------------- -------------------- 1996 1997 1997 1998 ------- ------- ------- ---------- (IN THOUSANDS OF DOLLARS) Rental merchandise, net............ $ -- $ -- $ -- $ 339,741 Intangible assets, net............. 4,513 3,485 4,208 568,188 Total assets....................... 12,149 11,866 10,002 1,161,026 Total debt......................... -- -- -- 802,009 Total liabilities.................. 6,554 2,747 7,141 1,078,864 Total revenues..................... 28,322 42,036 26,985 179,537 Direct store expenses.............. -- -- -- 123,155 Franchise operating expense........ 28,062 36,301 22,929 27,317 Net earnings....................... 1,477 2,018 1,413 3,065 187 REPORT OF INDEPENDENT AUDITORS The Board of Directors THORN Americas, Inc. We have audited the accompanying consolidated balance sheets of THORN Americas, Inc. and subsidiaries as of March 31, 1997 and 1998, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended March 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of THORN Americas, Inc. and subsidiaries at March 31, 1997 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP April 24, 1998 except for Note 14, as to which the date is June 25, 1998 Wichita, Kansas F-26 188 THORN AMERICAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS See accompanying notes. F-27
MARCH 31 ----------------------- JUNE 30 1997 1998 1998 ---------- ---------- ----------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Cash....................................... $ 26,077 $ 23,755 $ 27,486 Accounts receivable -- other............... 10,339 26,937 22,322 Accounts receivable -- affiliated companies, net........................... 62,101 15,024 702 Prepaid expenses........................... 9,169 8,114 8,555 Deferred income taxes...................... 21,209 21,113 21,113 Merchandise and auto inventory............. 38,231 39,443 43,068 Rental merchandise, at cost................ 509,183 521,482 539,539 Less accumulated depreciation.............. 233,171 228,517 235,857 ---------- ---------- ---------- Net rental merchandise........... 276,012 292,965 303,682 Property and equipment, at cost Land and building........................ 19,810 22,855 22,971 Furniture and equipment.................. 84,083 95,594 98,189 Transportation and equipment............. 86,140 87,494 87,851 Leasehold improvements................... 59,206 63,593 73,616 ---------- ---------- ---------- 249,239 269,536 282,627 Less accumulated depreciation and amortization.......................... 130,736 146,016 152,475 ---------- ---------- ---------- Net property and equipment....... 118,503 123,520 130,152 Goodwill, less accumulated amortization.......................... 499,471 479,636 479,517 Other assets, less accumulated amortization............................. 47,168 48,602 49,199 ---------- ---------- ---------- $1,108,280 $1,079,109 $1,085,796 ========== ========== ========== 189 See accompanying notes. F-28
MARCH 31 ----------------------- JUNE 30 1997 1998 1998 ---------- ---------- ----------- (UNAUDITED) Liabilities and Stockholder's Equity Accounts payable........................... $ 62,222 $ 31,717 $ 41,334 Accrued expenses: Salaries, wages and fringe benefits...... 31,523 32,492 31,305 Other.................................... 18,948 9,047 9,495 Other liabilities.......................... 40,776 52,986 47,383 Accrued incentives......................... 1,550 2,161 1,853 Long term loans from affiliates............ 714,235 714,223 714,663 ---------- ---------- ---------- Total liabilities................ 869,254 842,626 846,033 ---------- ---------- ---------- Stockholder's equity: Common stock of $1 par value; 1,000 shares authorized, issued and outstanding........................... 1 1 1 Additional paid-in capital............... 334,681 334,681 334,681 Retained deficit......................... (95,656) (98,199) (94,919) ---------- ---------- ---------- Total stockholder's equity....... 239,026 236,483 239,763 ---------- ---------- ---------- $1,108,280 $1,079,109 $1,085,796 ========== ========== ========== 190 THORN AMERICAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS See accompanying notes. F-29
THREE MONTHS YEARS ENDED MARCH 31 ENDED JUNE 30 ------------------------------ ------------------- 1996 1997 1998 1997 1998 -------- -------- -------- -------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS) Revenues: Rental revenues and fees.................. $819,452 $850,773 $819,949 $208,444 $214,514 Sale of merchandise and autos................. 64,628 60,249 62,712 12,611 15,141 Franchise income......... 5,364 2,366 2,266 582 560 Other income............. 8,483 13,483 19,077 4,004 5,206 -------- -------- -------- -------- -------- Total revenues... 897,927 926,871 904,004 225,641 235,421 -------- -------- -------- -------- -------- Costs and operating expenses: Cost of sales............ 43,345 39,793 45,574 8,524 12,503 Depreciation and amortization: Rental merchandise.... 257,383 260,433 244,572 62,852 62,886 Goodwill.............. 19,097 23,164 24,044 6,014 5,884 Other................. 33,139 35,921 32,825 8,584 8,648 Salaries, wages and fringe benefits....... 255,768 272,242 279,796 68,488 72,960 Advertising.............. 33,895 30,284 30,320 8,059 8,188 Property costs........... 52,393 59,244 61,643 15,054 14,886 Other operating expenses.............. 116,289 143,487 117,597 27,541 29,579 Restructuring charges.... 12,600 -- 12,292 -- -- -------- -------- -------- -------- -------- Total costs and operating expenses...... 823,909 864,568 848,663 205,116 215,534 -------- -------- -------- -------- -------- Operating income........ 74,018 62,303 55,341 20,525 19,887 -------- -------- -------- -------- -------- Other (income) expense: Interest: Related parties, net................. 79,692 53,078 45,961 10,888 11,271 Other interest, net... 515 (427) 223 (63) (80) Other.................... 101 (254) (88) (81) 72 -------- -------- -------- -------- -------- 80,308 52,397 46,096 10,744 11,263 -------- -------- -------- -------- -------- Income (loss) before income taxes......... (6,290) 9,906 9,245 9,781 8,624 Income taxes............. 6,771 13,880 7,760 5,950 5,344 -------- -------- -------- -------- -------- Net income (loss)........ $(13,061) $ (3,974) $ 1,485 $ 3,831 $ 3,280 ======== ======== ======== ======== ======== 191 THORN AMERICAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998 See accompanying notes to consolidated financial statements. F-30
TOTAL ADDITIONAL PAID-IN RETAINED STOCKHOLDER'S COMMON STOCK CAPITAL DEFICIT EQUITY ------------ ------------------ -------- ------------- (DOLLARS IN THOUSANDS) Balance at March 31, 1995 As previously reported............. $1 $180,210 $(75,636) $104,575 Adjustment for reorganization/ demerger............. -- -- (2,985) (2,985) -- -------- -------- -------- Adjusted balance........ 1 180,210 (78,621) 101,590 Net loss................ -- -- (13,061) (13,061) -- -------- -------- -------- Balance at March 31, 1996.................... 1 180,210 (91,682) 88,529 Net loss................ -- -- (3,974) (3,974) Capital contributed by Parent............... -- 154,471 -- 154,471 -- -------- -------- -------- Balance at March 31, 1997.................... 1 334,681 (95,656) 239,026 Net income.............. -- -- 1,485 1,485 Advance to unconsolidated New Zealand division..... -- -- (4,028) (4,028) -- -------- -------- -------- Balance at March 31, 1998.................... 1 334,681 (98,199) 236,483 Net income (unaudited).......... -- -- 3,280 3,280 -- -------- -------- -------- Balance at June 30, 1998 (unaudited)............. $1 $334,681 $(94,919) $239,763 == ======== ======== ======== 192 THORN AMERICAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Continued on following page. F-31
THREE MONTHS YEARS ENDED MARCH 31 ENDED JUNE 30 --------------------------------- ------------------- 1996 1997 1998 1997 1998 --------- --------- --------- -------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income (loss)....................... $ (13,061) $ (3,974) $ 1,485 $ 3,831 $ 3,280 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Rental merchandise losses............. 9,463 11,152 10,126 1,054 2,656 Depreciation and amortization......... 309,619 319,518 301,441 77,450 77,418 Interest added to principal balance, loan from affiliates................ 88,891 34,468 -- -- -- Deferred income taxes................. (5,341) (10,277) 96 -- -- Restructuring charges................. 7,814 -- 6,851 -- -- Changes in operating assets and liabilities net of effects from business combinations: Accounts receivable -- other........ (407) (3,930) (16,598) 8,297 4,615 Accounts receivable -- affiliated companies......................... 21,826 480 (480) -- -- Prepaid expenses.................... (3,697) 1,604 1,055 316 (441) Merchandise and auto inventory...... (6,622) (9,443) (1,212) 7,682 (3,625) Accounts payable.................... 12,748 11,112 (30,505) (22,860) 9,617 Accrued expenses, other liabilities and accrued incentives............ 4,968 32,954 (3,100) (3,059) (6,650) --------- --------- --------- -------- -------- Net cash provided by operating activities...................... 426,201 383,664 269,159 72,711 86,870 Cash flows from investing activities: Proceeds from sale of rental merchandise........................... 43,858 50,998 39,474 9,441 8,040 Net funds received from affiliated company............................... 17,427 141,672 47,557 914 14,322 Advance to unconsolidated New Zealand division.............................. -- -- (4,028) -- -- Acquisition of rental merchandise....... (299,704) (289,483) (306,792) (64,506) (83,320) Acquisition of property and equipment... (44,642) (32,306) (38,077) (5,630) (15,454) Acquisition of rental companies, net of cash acquired......................... (124,577) (21,073) (7,626) (1,448) (4,040) Decrease in undistributed IRB funds..... 2,250 -- -- -- -- Purchase of Minority Interest............. -- -- -- -- (3,000) Other................................... (10,330) (10,658) (1,977) (752) (127) --------- --------- --------- -------- -------- Net cash used by investing activities...................... $(415,718) $(160,850) $(271,469) $(61,981) $(83,579) 193 THORN AMERICAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED Supplemental schedule of noncash financing activities During fiscal 1997, as part of the demerger transaction, the Company received a capital contribution of $154,471 related to a reduction of affiliated indebtedness. Disclosure of accounting policies For purposes of the statement of cash flows, the Company considers cash and cash equivalents to include currency on hand, demand deposits and short-term investments with a maturity of three months or less with banks or other financial institutions. F-32
THREE MONTHS YEARS ENDED MARCH 31, ENDED JUNE 30, ----------------------------- ----------------- 1996 1997 1998 1997 1998 ------- --------- ------- ------- ------- (UNAUDITED) (DOLLARS IN THOUSANDS) Cash flows from financing activities: Advances from parent............ $ -- $ -- $ -- $ 592 $ 440 Repayment of bond obligations... (1,740) (7,322) -- -- -- Repayments of loan from parent....................... -- (208,640) (12) -- -- ------- --------- ------- ------- ------- Net cash used by financing activities............ (1,740) (215,962) (12) 592 440 ------- --------- ------- ------- ------- Net increase (decrease) in cash... 8,743 6,852 (2,322) 11,322 3,731 Cash at beginning of year......... 10,482 19,225 26,077 26,077 23,755 ------- --------- ------- ------- ------- Cash at end of year............... $19,225 $ 26,077 $23,755 $37,399 $27,486 ======= ========= ======= ======= ======= Supplemental disclosure of cash flow information Cash paid during the year for: Interest........................ $ 4,862 $ 30,431 $48,709 $11,476 $11,502 Income taxes.................... 4,295 17,102 23,991 9,265 252 194 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) MARCH 31, 1996, 1997 AND 1998 (INFORMATION AS OF JUNE 30, 1998 AND FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Principles of Consolidated Financial Statements Prior to April 1996, THORN Americas, Inc. (TA) was a wholly-owned subsidiary of THORN EMI North America Holdings, Inc. (TEMINAH) and TEMINAH was an indirectly wholly-owned subsidiary of THORN EMI plc., a United Kingdom limited liability company. Effective August 19, 1996, the demerger and reorganization of the THORN EMI group was completed and the rental, rental-purchase and related businesses of THORN EMI group were transferred to THORN plc. (THORN), a newly formed United Kingdom limited liability company. As a result of this demerger and reorganization, TA became a wholly owned subsidiary of THORN International BV, (hereinafter referred to as the "Parent"). The Parent is an indirectly wholly-owned subsidiary of THORN. The consolidated financial statements include the accounts of THORN Americas, Inc. and its wholly-owned subsidiaries, except for the net assets and operations of its New Zealand division, which had net assets at March 31, 1997 and 1998 of $7,608 and $10,242, respectively, hereinafter referred to collectively as the Company. All significant intercompany balances and transactions have been eliminated in consolidation. THORN Americas, Inc., dba Rent-A-Center, Remco America, Inc. (Remco), U-Can Rent, and THORN Services International (TSI) operate approximately 1,400 rent-to-own stores throughout the United States. Rent-A-Center, Remco and U-Can Rent principally rent consumer electronics, appliances and furniture on a short or long term basis. Ownership of the merchandise may be transferred to the consumer when rented on a long term basis, usually 6 to 30 months. TSI services the rental merchandise and provides warehouse and merchandise distribution services to the Rent-A-Center, Remco and U-Can Rent stores. During fiscal 1998, the Company began testing a used auto sales business, under the tradename AdvantEDGE Quality Cars. This proposition offers a retail transaction on the sale of used autos with installment financing available through the Company. Certain reclassifications have been made in the 1996 and 1997 consolidated financial statements to conform with the 1998 format. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-33 195 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Merchandise and Auto Inventory Merchandise inventory consists primarily of rental merchandise which is temporarily stored in distribution centers awaiting assignment to a store. Rental merchandise inventory is stated at average cost. In fiscal 1998, merchandise and auto inventory also includes inventory associated with the Company's auto business. Auto inventory is stated at actual cost. Rental Merchandise, Related Rental Revenues and Depreciation Rental merchandise is rented to customers pursuant to rental agreements which generally provide for either weekly or monthly rental terms, with rental payments collected in advance. The rental agreements may be terminated at any time by the customers, and if terminated, the rental merchandise is returned to the Company. Rental revenue is recognized as collected. This approximates, in all material respects, the revenue that would be reflected if rental revenue was recognized over the term of the agreements. Merchandise rented to customers or available for rent is classified in the consolidated balance sheets as rental merchandise and is being depreciated on a straight-line basis over various periods ranging from 6 to 30 months (a majority of rental merchandise is depreciated over 18 to 24 month periods), and assumes a salvage value on each item of approximately one month of depreciation. Depreciation and Amortization Depreciation of furniture and equipment, transportation equipment and buildings is computed on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the term of the related leases. Goodwill Goodwill represents the excess of cost over the fair value of the net assets of businesses acquired and is amortized on the straight-line method over periods ranging from 2 to 40 years. Accumulated amortization of goodwill was $149,210 and $173,254 at March 31, 1997 and 1998, respectively. Other Assets Other assets consist of territory rights, covenants not to compete, deferred software costs, and other tangible and intangible amounts. Other assets, which are amortizable, are amortized using the straight-line method over periods ranging from 3 to 25 years. Accumulated amortization of these assets was $14,797 and $17,091 at March 31, 1997 and 1998, respectively. F-34 196 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Sale of Merchandise and Autos Sale of merchandise and autos consists primarily of sales of used rental merchandise, including proceeds from early payoffs of rental purchase contracts, and automobile sales in connection with the Company's auto business which opened in fiscal 1998. Accounting for Impairment of Long-Lived Assets The Company evaluates all long-lived assets, including all intangible and other assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment is recognized when the carrying amounts of such assets cannot be recovered by the undiscounted future net cash flows likely to be generated. Impairment is measured as the amount by which the carrying value of the asset exceeds the fair value. Fair value is based on management's knowledge of current market conditions or the present value of estimated expected future cash flows. Advertising Costs Costs incurred for communicating and producing advertising are expensed the first time the advertising occurs. During fiscal 1996, 1997 and 1998, advertising expense was $33,895, $30,284 and $30,320, respectively. Stock-based Compensation The Company participates in stock option and share rights plans sponsored by THORN that provide for the granting of stock options (Thorn Share Option Plan) to exempt level employees and share rights (Share Appreciation Rights Plan) to certain key executives of the Company. The stock options and share rights, which are associated with THORN stock, are typically issued annually and vest over a three year period, subject to certain performance criteria. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company applies APB Opinion 25 "Accounting for Stock Issued to Employees" in accounting for stock options. Concentration of Credit Risk The Company's financial instruments that were exposed to concentrations of credit risk consist primarily of cash. The Company places its funds into high credit quality financial institutions and, at times, such funds may be in excess of the Federal Depository insurance limit. F-35 197 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Unaudited Interim Financial Data The interim financial data at June 30, 1998, and for the three-month periods ended June 30, 1997 and 1998, included herein, are unaudited and, in the opinion of management, reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of financial position and the results of operations and cash flows for such interim periods. 2. ACQUISITIONS AND MERGERS The Company maintains an ongoing program to acquire selected rental operations. During fiscal 1998, the Company acquired in purchase transactions eight rental operations for an aggregate $7,626 net of cash acquired, of which $4,209 was accounted for as goodwill. During fiscal 1997, the Company acquired in purchase transactions twelve rental operations for an aggregate $21,073 net of cash acquired, of which $15,292 was accounted for as goodwill. During fiscal 1996, the Company acquired in purchase transactions seven rental operations for an aggregate $124,577 net of cash acquired, of which $85,363 was accounted for as goodwill. The operations of the stores are included in the Company's consolidated financial statements beginning on the date of acquisition. The Company is continuing to consider the acquisition of additional rental operations. On August 19, 1996 the demerger of the THORN EMI group was completed and the rental, rental-purchase and related businesses of the THORN EMI group were transferred to THORN plc. This resulted in, among other things, the Company acquiring 100 percent of the common stock of Remco Americas, Inc. in exchange for the Company's twelve percent investment interest in the common stock of an affiliated company, Thorn EMI North America, Inc. (TENA). The Company's investment in TENA was accounted for under the cost method of accounting and had a net book carrying value of $50,000. The affiliates from which this common stock and these net assets were purchased were under the common control of the Company's indirect parent at the time of the transaction and accordingly, the assets and liabilities were recorded at their historical cost in a manner similar to that of a pooling of interest. The accompanying financial statements include the accounts and operations of these affiliates as if they were a part of the Company at the beginning of fiscal 1996. 3. LOANS FROM AFFILIATES Prior to the demerger, the Company had entered into a loan agreement with TEMINAH which required the Company to pay to TEMINAH $2,129,280 on July 2, 2004. This amount consisted of principal plus interest compounded at ten percent (10%) per year. As a part of the demerger transaction the Company and an affiliated company, Thorn Finance, plc. (TFP), refinanced the loan agreement, requiring the Company to pay TFP $710,818 together with all accrued and unpaid interest on the unpaid balance on July 2, 2010. In connection with this refinancing the Company paid $200,000 on the original note. In F-36 198 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 3. LOANS FROM AFFILIATES -- (CONTINUED) addition, $50,000 of this note was forgiven by TEMINAH and recorded as a contribution of capital in the accompanying statement of stockholders' equity. During fiscal 1998, interest accrues at a variable rate equal to 120% of the "Applicable Federal Rate" (AFR), designated as "Compounding Monthly," for debt instruments with a maturity of less than three years (6.3% at March 31, 1998). During fiscal 1997, the interest rate was equal to fifty (50) basis points above the AFR (6.18% at March 31, 1997). The terms of the agreement allow the Company to prepay the note in part or in full, without premium or penalty. The balance on the note payable to TFP, at March 31, 1997 and 1998 was $714,235 and $714,223, respectively. 4. ACCOUNTS RECEIVABLE -- AFFILIATED COMPANIES Accounts receivable from affiliated companies includes income taxes payable to Parent of $480 at March 31, 1997 (see Note 9). These balances are not subject to interest. The Company has short term loans receivable outstanding from TFP totaling $65,000 and $15,000 as of March 31, 1997 and 1998, respectively. Other intercompany receivables/ (payables) with affiliated companies totaled $(2,419) and $24 as of March 31, 1997 and 1998, respectively. The year-end net receivable balances are not subject to specified settlement terms. Prior to the demerger transaction, advances to or from affiliated companies were made as working capital was available or needed. The Company received interest at 125% of the monthly applicable federal rate on the deposited funds. After the demerger transaction the Company continues to earn interest on its excess cash invested with THORN at rates commensurate with short term interest rates available in major U.S. banking markets. 5. COMMITMENTS The Company leases its store and distribution facilities. Management expects, in the normal course of business, that leases which expire will be renewed or replaced by other leases. At March 31, 1998, the approximate future annual minimum rental payments required under these noncancelable operating leases were as follows: F-37
1999................................................. $39,886 2000................................................. 28,625 2001................................................. 14,344 2002................................................. 6,114 2003................................................. 2,475 Thereafter........................................... 2,327 ------- Total minimum payments required............ $93,771 ======= 199 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 5. COMMITMENTS -- (CONTINUED) Rent expense under noncancelable operating leases for fiscal 1996, 1997, and 1998 was approximately $41,197, $45,973 and $47,590, respectively. 6. INCENTIVE PLANS The Company has long-term incentive plans for key executives. Payments are contingent upon the Company meeting long-term financial objectives based upon three-year operating cycles. Expense associated with such plans during fiscal 1996, 1997 and 1998 totaled $440, $797 and $1,072, respectively. The expected obligations under these plans at March 31, 1997 and 1998 were $1,550 and $2,161, respectively. 7. SAVINGS PLANS The Company has a trusteed savings plan for the benefit of eligible employees. The plan provides for the participants to make voluntary contributions to the plan ranging from 1% to 20% of their gross compensation which is matched by the Company at a rate each year as determined by the Company's Board of Directors. The Company may, at its sole discretion, match 100% of the amount contributed by the participant up to 4% of the employee's annual gross compensation. Effective January 1, 1998, the Company offered a nonqualified saving plan (NSP) for certain designated employees who are within a select group of key management or highly compensated employees. Employees eligible to participate in the NSP may elect to defer up to a maximum of 80% of their salary and up to a maximum of 100% of incentive bonuses. The Company will make a matching deferred contribution of up to 15% of the employee's contribution, not to exceed $15 per employee per plan year. During fiscal 1996, 1997, and 1998 the expense related to these plans, net of forfeitures, amounted to $3,554, $3,359 and $3,295, respectively. 8. STOCK-BASED COMPENSATION PLANS In fiscal 1997, the Company adopted the disclosure-only provisions of SFAS 123. SFAS 123 encourages entities to adopt a fair value-based method of accounting for employee stock compensation plans, but allows companies to continue to account for those plans using the accounting proscribed by APB 25. The Company has elected to account for stock based compensation using APB 25, while making the required pro forma disclosures of net earnings as if the fair value-based method had been applied. Accordingly, no compensation expense has been recorded for the stock option or share rights plans. Had the compensation cost for stock based compensation plans been determined using the fair value method of accounting consistent with SFAS 123, there would have been no significant effect on the Company's net income. The Black-Scholes option-pricing model was used to determine the fair value on the date of grant for the F-38 200 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 8. STOCK-BASED COMPENSATION PLANS -- (CONTINUED) stock options and share rights. As of March 31, 1998 there were awards for 9,961,904 shares outstanding. SFAS 123 requires certain disclosures to be made about the pricing model assumptions used, exercisable options, option activity, weighted average price per option and option exercise price range for each income statement period. Since the stock option and share rights activity relates only to THORN's stockholders' equity, this information is not presented for the Company. 9. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the provision for income taxes attributable to continuing operations are as follows: Prior to the demerger, the Company filed a consolidated federal tax return with TEMINAH and calculated its tax provision in accordance with TEMINAH's tax allocation policy, which provides for calculations on a stand-alone basis with any tax liability or benefit recorded as a payable to or receivable from TEMINAH. Post-demerger, the Company files a consolidated federal tax return with its U.S. subsidiaries and calculates its tax liability based upon income for the applicable periods. During fiscal 1997 in connection with the demerger, TEMINAH forgave $8,721 in tax liability owed to them from the Company. This reduction in liability was treated as a capital contribution by TEMINAH and recorded as an increase in paid-in capital by the Company. F-39
1996 1997 1998 ------- -------- ------ Current: Federal.................................... $ 8,576 $ 17,487 $7,050 State...................................... 3,536 6,670 614 ------- -------- ------ Total current.................... 12,112 24,157 7,664 ------- -------- ------ Deferred: Federal.................................... (4,384) (7,998) (532) State...................................... (957) (2,279) 628 ------- -------- ------ Total deferred................... (5,341) (10,277) 96 ------- -------- ------ $ 6,771 $ 13,880 $7,760 ======= ======== ====== 201 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 9. INCOME TAXES -- (CONTINUED) The income tax provision differed from the amount computed by applying the U.S. federal income tax rate of 35% for fiscal 1997 and 1998 to income before income taxes as a result of the following: Significant components of the Company's deferred tax assets and liabilities are as follows:
1996 1997 1998 ------- ------- ------- Computed "expected" tax expense............ $(2,202) $ 3,466 $ 3,236 Increase (reduction) in income taxes resulting from: Amortization of non-deductible goodwill.... 5,336 6,149 6,123 State and local income tax, net of federal income tax benefit....................... 2,298 4,336 807 Reduction of valuation allowance........... -- -- (1,400) Other, net................................. 1,339 (71) (1,006) ------- ------- ------- $ 6,771 $13,880 $ 7,760 ======= ======= ======= The alternative minimum tax credit carryforward has no expiration date. 10. CONTINGENCIES The Company is a defendant in a number of class or alleged class action cases relating to Rent-A-Center's rental-purchase or rent-to-rent agreements as detailed below. Each claim is being adjudicated in the context of the relevant state law which is different in each F-40
1997 1998 ------- ------- Deferred tax assets: Reserves for contingencies and restructuring.......... $10,836 $19,704 Reserves for self-insurance and accrued liabilities... 9,997 11,378 Alternative minimum tax credit carryforward........... -- 6,674 Property and equipment................................ 5,146 10,377 Other................................................. 4,324 5,520 ------- ------- Total deferred tax assets..................... 30,303 53,653 Deferred tax liabilities: Rental assets......................................... $ 4,875 $26,811 Other................................................. 4,219 5,729 ------- ------- Total deferred tax liabilities................ 9,094 32,540 ------- ------- Net deferred tax assets....................... $21,209 $21,113 ======= ======= 202 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 10. CONTINGENCIES -- (CONTINUED) state. The first five cases referred to below, which seek to recharacterize the transaction from a lease to a credit sale, were filed prior to 1995. Of the remaining four cases, two, filed in late 1997 and early 1998, seek to challenge compliance with the relevant rental-purchase statutes. The remaining two cases, filed in early 1998, seek to challenge the reinstatement fee and in addition, one of the cases alleges that the Liability Damage Waiver (LDW) charge is excessive. The Company is a defendant in a class action alleging that Rent-A-Center's rental-purchase agreements are credit sales and do not comply with the requirements of the Minnesota Consumer Protection Statutes and Usury Law. Summary judgment was entered as to liability and was affirmed by the U.S. Eighth Circuit Court of Appeals. The District Court found that the remedy available to the class members would be full recovery of all amounts paid for customers who returned their property and recovery of only the alleged interest for those customers who did not return their property. Final Judgment as to damages was issued April 15, 1998, in the amount of $29,898 plus interest, although the court is considering the plaintiffs' request for an additional $1,630. The Company will appeal such award of damages and will be required to post a bond in connection therewith. The Company no longer offers its rental-purchase transaction in this state. The Company and five of its present or former officers are defendants in a Pennsylvania alleged class action resulting from the consolidation of two existing proposed class actions. A third class action lawsuit in Pennsylvania has been stayed pending the outcome of the consolidated action and is incorporated into the settlement relating to that consolidated action. The consolidated action alleges that Rent-A-Center's rental agreements violate the Pennsylvania Goods and Services Installment Sales Act and the federal Racketeer Influenced and Corrupt Organization Act (RICO). A motion for a nationwide class certification has been denied by the court with the provision that plaintiffs may attempt to amend their complaint. A settlement in the amount of $9,350 has been reached with the plaintiffs. A final hearing to obtain the Court's approval was held June 17, 1998, and the Court approved the settlement July 8, 1998. The class action filed in 1994 in Federal Court in Wisconsin was dismissed for lack of jurisdiction on October 20, 1997. The plaintiffs have re-filed the case in a Wisconsin state court. The new complaint alleges that Rent-A-Center's rental purchase agreements should be deemed consumer credit sales under the Wisconsin Consumer Act, violated Wisconsin's Usury law and violated the Wisconsin Deceptive Practices Act. The Court entered an order July 7, 1998 granting the plaintiff's motion for class certification and denying the Company's M>s motion for partial summary judgment. A pre-trial conference is scheduled August 26, 1998. The Company will defend the new claim vigorously. The Company is a defendant in a class action alleging that Rent-A-Center's rental-purchase agreements are credit sales and do not comply with the requirements of F-41 203 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 10. CONTINGENCIES -- (CONTINUED) the New Jersey Retail Installment Sales Act and violate the New Jersey Consumer Fraud Act and Usury law. In January 1997, summary judgment was granted in favor of the plaintiffs in this case as to violation of the Retail Installment Sales Act and the Consumer Fraud Act; the Court denied the plaintiff's motion on the usury count. However, in September 1997, the Court granted the plaintiff's motion for summary judgment on damages for breach of the Retail Installment Sales Act and the Consumer Fraud Act, adopting the plaintiff's formula of 40% of all rental payments, being the time differential interest equivalent, plus reinstatement fees. This amount was trebled pursuant to the Consumer Fraud Act. Judgment has now been entered for an amount of $100,000 subject to further accounting. Initially, a bond was posted for this amount, and pursuant to further accounting was increased by $63,000 to cover potential damages through April, 1999. The injunction to prevent Rent-A-Center from continuing to trade has been stayed pending the appeal. The Company is appealing this decision to the New Jersey Court of Appeals and intends to pursue all further legal proceedings as appropriate. The Company is a defendant in a class action alleging that Rent-A-Center violated the Texas Usury Law, the Texas Insurance Law and the Texas Deceptive and Unfair Trade Practices Act. Texas law presently provides that rental purchase agreements are not credit sales. There have been no developments in this case since 1994 and damages are unspecified. The following information relates to those claims not seeking recharacterization: The Company is a defendant in an alleged class action in New York. The case has been removed to Federal Court. The complaint alleges that Rent-A-Center engaged in deceptive or unfair acts in contravention of the New York Personal Property Law (the Rent-to-Own Program Law), as well as provisions of the General Business Law relating to consumer protection for deceptive acts and practices and false advertising. The plaintiffs seek both compensatory and punitive damages. The Company is a defendant in an alleged class action filed in Massachusetts. This claim alleges that Rent-A-Center's transactions and advertising failed to comply with the Massachusetts rental purchase statute and are deceptive under the Massachusetts Consumer Protection Act. The plaintiffs seek both compensatory and punitive damages. The Company is a defendant in two alleged class actions filed in the State of Alabama which were filed in January and March, 1998. These claims allege that Rent-A-Center's reinstatement fee constitutes an illegal penalty and that charging such fee constitutes breach of contract. A second claim was added to the second class action alleging the LDW charge is excessive. The plaintiffs seek compensatory damages only. The claims described above, where not concluded, are being vigorously defended. However, management believes that a loss will be incurred in some of the cases and although a specific amount cannot be estimated due to an inability to reasonably estimate potential losses and potential appellate decisions reversing in whole or in part outstanding lower F-42 204 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 10. CONTINGENCIES -- (CONTINUED) court judgments, the Company has accrued $34,500 in the accompanying financial statements. If the courts in these actions were to hold that the Company's rental or rental-purchase transactions constitute credit sales, the Company would seek to adapt its agreements, where this has not already occurred, so that they would not be so treated under relevant state laws. Management believes that a final unfavorable outcome in any one of these actions, except for that in Texas, would not have a material adverse effect on the Company's ongoing business. There can be no assurance, however, that final unfavorable outcomes in any of these actions would not have a material effect on the Company's financial condition or results of operations in the year of final adjudication. The Company is a defendant in an action filed in the Federal District Court in Missouri alleging a policy of racial discrimination against a nationwide class of African-Americans who applied for employment, are currently employed or were formerly employed. The Company denies the allegations and will vigorously oppose certification of a nationwide class. Attempts to certify a nationwide class in a racial discrimination case filed in the Federal District Court in Kansas were dismissed last year. The Company's management is not aware of any additional legal or arbitration proceedings pending or threatened against the Company which may have any liability significantly in excess of provisions in the accounts. 11. FAIR VALUES OF FINANCIAL INSTRUMENTS The fair values of the Company's financial instruments at March 31, 1998 are as follows: Loans from affiliated company: It was not practicable to estimate the fair value of the Company's loans from its affiliates because no quoted market prices exist for these unique instruments and there is no intent by management to retire the debts. 12. OFF-BALANCE SHEET RISK Letters of credit are issued by the Company during the ordinary course of business through banks as required by certain vendor contracts. As of March 31, 1997 and 1998, the Company had outstanding irrevocable stand-by letters of credit for $27,336 and $66,842, respectively. Subsequent to March 31, 1998, the Company secured a bond in the amount of $32,786 and canceled its previously outstanding stand-by letter of credit in the amount of $4,000, in connection with a class action lawsuit in Minnesota (see Note 10). The Company and THORN are both guarantors of the bond. The Company has secured a bond in the amount of $100,000 in connection with a class action lawsuit in New Jersey (See Note 10). The Company and THORN are both guarantors of the bond. F-43 205 THORN AMERICAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 12. OFF-BALANCE SHEET RISK -- (CONTINUED) The Company has a $20,000 unused line of credit with a financial institution. 13. RESTRUCTURING CHARGES During fiscal 1998, the Company discontinued its new concept tests related to its credit retail and check-cashing businesses, closed certain nonperforming rental purchase stores and reorganized certain administrative support functions resulting in a charge to operating income of $12,292. Such restructuring charges include asset valuation reductions of approximately $3,750, future rent obligations of approximately $2,250, employee severance costs of approximately $5,250 and other costs of approximately $1,042. As of March 31, 1998, $6,851 of total restructuring charges remained in accrued liabilities. During 1996, the Company recorded restructuring charges of $12,600 related to consolidation of offices and reductions in the number of employees. These charges were primarily made up of the expected costs of employee separations. There was no remaining liability at March 31, 1998. 14. MERGER TRANSACTION On June 17, 1998 THORN announced that it has entered into an agreement to sell the Company to Renters Choice, Inc., a publicly held rent-to-own company for approximately $900,000 subject to shareholder and Federal Trade Commission approval. A closing date for the transaction has not yet been determined. 15. SUBSEQUENT EVENT (UNAUDITED) In August 1998, subsequent to its change of control, the Company reached a tentative settlement with the plaintiffs in Wisconsin, in the amount of $16.25 million. Such amount is not accrued in the June 30, 1998 financial statements. F-44 206 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors of Central Rents, Inc. We have audited the accompanying balance sheets of Central Rents, Inc. (a Delaware corporation) as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years ended December 31, 1997, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Central Rents, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years ended December 31, 1997, 1996 and 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California March 19, 1998 F-45 207 CENTRAL RENTS, INC. BALANCE SHEETS DECEMBER 31, 1996, 1997 AND MARCH 31, 1998 (UNAUDITED) The accompanying notes are an integral part of these financial statements. F-46
DECEMBER 31, ------------------- MARCH 31, 1996 1997 1998 -------- -------- ----------- (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) ASSETS Cash and Cash Equivalents................................... $ 12,808 $ 5,739 $ 11,526 Receivables and Prepaid Expenses............................ 2,348 2,396 2,016 Due from Related Parties.................................... -- 115 -- Income Tax Receivable -- Related Party...................... 1,871 -- -- Rental Merchandise, at cost................................. 66,289 68,205 63,344 Less -- Accumulated depreciation.......................... (31,908) (31,461) (31,621) -------- -------- -------- 34,381 36,744 31,723 Property and Equipment, at cost Leasehold improvements.................................... 3,355 4,905 5,880 Furniture and equipment................................... 2,037 2,981 4,256 Vehicles.................................................. 134 73 57 -------- -------- -------- 5,526 7,959 10,193 Less -- Accumulated depreciation.......................... (2,834) (4,127) (6,622) -------- -------- -------- 2,692 3,832 3,571 Deferred Financing Costs, net............................... 1,957 1,603 1,535 Noncompete Agreement, net................................... 1,275 -- -- Excess of Cost over Net Assets Acquired, net................ 6,861 6,611 6,549 Deferred Income Taxes....................................... 8,156 10,595 11,045 Other Assets................................................ 114 125 131 -------- -------- -------- Total Assets........................................ $ 72,463 $ 67,760 $ 68,096 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Liabilities: Accounts Payable............................................ $ 5,332 $ 4,688 $ 2,715 Accrued Expenses............................................ 5,682 6,058 7,380 Due to Related Parties...................................... 237 -- -- Income Tax Payable -- Related Party......................... -- 434 249 Accrued Interest............................................ 322 322 2,253 Long-term Notes............................................. 58,094 58,368 58,437 -------- -------- -------- Total liabilities................................... 69,667 69,870 71,034 -------- -------- -------- Commitments and Contingencies............................... -- -- -- STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $.01 par value, 100 shares authorized; no shares issued........................................... -- -- -- Common stock, $.01 par value, 2,000,000 shares authorized; 551,045, 617,045 and 617,045 shares issued and outstanding in 1996, 1997 and 1998 (unaudited), respectively............................................ 6 7 7 Additional paid-in capital................................ 22,944 22,944 22,944 Retained deficit.......................................... (20,154) (25,061) (25,889) -------- -------- -------- Total stockholders' equity (deficit)................ 2,796 (2,110) (2,938) -------- -------- -------- Total liabilities and stockholders' equity (deficit)........................................... $ 72,463 $ 67,760 $ 68,096 ======== ======== ======== 208 CENTRAL RENTS, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR THE UNAUDITED PERIODS ENDED MARCH 31, 1997 AND 1998 The accompanying notes are an integral part of these financial statements. F-47
DECEMBER 31, MARCH 31, ----------------------------- ------------------ 1995 1996 1997 1997 1998 -------- -------- ------- -------- ------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Rental revenues............ $112,243 $103,382 $98,582 $ 23,528 $21,935 Sales of merchandise....... 5,736 5,243 4,847 1,146 1,484 Other revenue.............. 65 152 114 2,062 1,782 -------- -------- ------- -------- ------- 118,044 108,777 103,543 26,736 25,201 -------- -------- ------- -------- ------- Costs and Expenses: Selling, general and administrative.......... 61,991 61,475 62,544 15,682 15,196 Cost of merchandise sold... 3,658 3,852 3,520 1,098 1,058 Depreciation and amortization Rental merchandise...... 36,694 32,045 30,407 7,660 7,664 Property and equipment............. 1,541 1,538 1,711 367 517 -------- -------- ------- -------- ------- 103,884 98,910 98,182 24,807 24,435 -------- -------- ------- -------- ------- Income before interest, taxes and amortization of intangibles................ 14,160 9,867 5,361 1,929 766 Amortization of intangibles................ 19,601 5,192 1,545 818 65 -------- -------- ------- -------- ------- Income (loss) from operations................. (5,441) 4,675 3,816 1,111 701 Interest expense, net........ (7,464) (7,555) (7,849) (1,914) (1,979) -------- -------- ------- -------- ------- Loss before income tax benefit.................... (12,905) (2,880) (4,033) (803) (1,278) Income tax benefit........... 3,750 1,040 1,126 289 450 -------- -------- ------- -------- ------- Net loss........... $ (9,155) $ (1,840) $(2,907) $ (514) $ (828) ======== ======== ======= ======== ======= Per share data: Basic net loss per common share...................... $ (16.89) $ (3.34) $ (4.79) $ (0.89) $ (1.34) ======== ======== ======= ======== ======= Diluted net loss per common share...................... $ (16.89) $ (3.34) $ (4.79) $ (0.89) $ (1.34) ======== ======== ======= ======== ======= Weighted average common shares outstanding......... 541,985 551,045 606,557 575,000 617,045 ======== ======== ======= ======== ======= 209 CENTRAL RENTS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR THE PERIOD ENDED MARCH 31, 1998 (UNAUDITED) The accompanying notes are an integral part of these financial statements. F-48
COMMON STOCK ------------------- RETAINED PAID-IN EARNINGS SHARES PAR VALUE CAPITAL (DEFICIT) TOTAL ------- --------- ------- --------- ------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) BALANCE, December 31, 1994.... 534,000 $ 5 $22,195 $ (9,159) $13,041 Issuance of common stock.... 17,045 1 749 -- 750 Net loss for the year ended December 31, 1995........ -- -- -- (9,155) (9,155) ------- --- ------- -------- ------- BALANCE, December 31, 1995........................ 551,045 6 22,944 (18,314) 4,636 Net loss for the year ended December 31, 1996........ -- -- -- (1,840) (1,840) ------- --- ------- -------- ------- BALANCE, December 31, 1996.... 551,045 6 22,944 (20,154) 2,796 ------- --- ------- -------- ------- Dividends paid.............. -- -- (2,000) (2,000) Exercise of stock warrants................. 66,000 1 -- -- 1 Net loss for the year ended December 31, 1997........ -- -- -- (2,907) (2,907) ------- --- ------- -------- ------- BALANCE, December 31, 1997.... 617,045 7 22,944 (25,061) (2,110) ------- --- ------- -------- ------- Net loss for the unaudited period ended March 31, 1998..................... -- -- -- (828) (828) ------- --- ------- -------- ------- BALANCE, March 31, 1998 (unaudited)................. 617,045 $ 7 $22,944 $(25,889) $(2,938) ======= === ======= ======== ======= 210 CENTRAL RENTS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND FOR THE UNAUDITED PERIODS ENDED MARCH 31, 1997 AND 1998 The accompanying notes are an integral part of these financial statements. F-49
DECEMBER 31, MARCH 31, ------------------------------ ----------------- 1995 1996 1997 1997 1998 -------- -------- -------- ------- ------- (UNAUDITED) (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss.................................... $ (9,155) $ (1,840) $ (2,907) $ (514) $ (828) Adjustments to reconcile net loss to net cash (used) provided by operating activities: Depreciation of rental merchandise........ 36,694 32,045 30,407 7,660 7,664 Depreciation of property and equipment.... 1,541 1,538 1,711 367 517 Deferred income tax benefit............... (3,950) (26) (1,286) (289) (450) Amortization of intangibles............... 19,601 5,192 1,545 818 65 Amortization of debt discount............. 274 274 274 68 69 Amortization of deferred financing costs................................... 316 330 163 83 68 Changes in operating assets and liabilities, net of the effect of businesses acquired: Decrease (increase) in receivables, prepaid expenses and other assets.... 742 (354) (59) 608 371 Decrease (increase) in due from related parties.............................. -- -- (115) -- 115 Decrease (increase) in income tax receivable -- related party.......... (1,050) (821) 1,871 (2) -- Increase in rental merchandise, (purchases and retirement), net...... (41,095) (31,561) (32,865) (6,900) (2,643) Decrease in deferred financing costs.... -- -- 191 -- -- Increase (decrease) in accounts payable.............................. 1,677 (4,891) (644) (2,813) (1,973) Increase (decrease) in accrued expenses............................. (856) (494) 377 266 1,322 Increase in accrued interest............ -- -- -- 1,931 1,931 (Decrease) increase in due to related parties.............................. (136) (523) (237) 116 (185) Decrease in income taxes payable -- related party........................ -- -- (715) -- -- Increase in income taxes payable........ -- 419 -- -- -- -------- -------- -------- ------- ------- Net cash (used) provided by operating activities......................... 4,603 (712) (2,289) 1,399 6,043 -------- -------- -------- ------- ------- Cash flows from investing activities: Proceeds from store sales................... 515 -- 95 -- -- Purchase of property and equipment.......... (2,114) (1,032) (2,851) (1,094) (256) Purchase of rental agreements and stores.... (1,110) -- (24) (24) -- Purchase of rent-to-own and WBC, net of cash acquired.................................. (3,669) -- -- -- -- -------- -------- -------- ------- ------- Net cash (used) provided by investing activities......................... (6,378) (1,032) (2,780) (1,118) (256) -------- -------- -------- ------- ------- Cash flows from financing activities: Dividends paid.............................. -- -- (2,000) (2,000) -- Proceeds from issuance of common stock...... 750 -- -- -- -- Debt issuance costs......................... (176) -- -- -- -- -------- -------- -------- ------- ------- Net cash (used) provided by financing activities.................................. 574 -- (2,000) (2,000) -- -------- -------- -------- ------- ------- Net decrease in cash and cash equivalents..... (1,201) (1,744) (7,069) (1,719) 5,787 Cash and cash equivalents, beginning of year........................................ 15,753 14,552 12,808 12,808 5,739 -------- -------- -------- ------- ------- Cash and cash equivalents, end of year........ $ 14,552 $ 12,808 $ 5,739 $11,089 $11,526 ======== ======== ======== ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes................................ $ 1,271 $ 1,190 $ 160 $ 22 $ 3 Interest.................................... $ 7,725 $ 7,852 $ 7,784 $ 430 $ 436 211 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS 1. HISTORY AND BUSINESS ACTIVITY Central Rents, Inc. (the "Company") was incorporated in the State of Delaware on March 17, 1994 to acquire RTO Enterprises, Inc. ("RTO") and WBC Holdings, Inc. ("WBC"). The Company is a wholly-owned subsidiary of Central Rents Holding, Inc. which is a wholly-owned subsidiary of Banner Holdings, Inc. ("Banner"), its ultimate parent company. All activity of the Company prior to the acquisition of RTO and WBC ("Acquisition") related to its formation, including an infusion of $20,000,000 of cash equity in exchange for the issuance of 534,000 shares of common stock. On April 28, 1995, RTO and WBC were merged into the Company pursuant to a statutory merger effected in accordance with the provisions of the Delaware General Corporation Laws. The Company's predecessors have been engaged in the rental-purchase industry since 1968. As of December 31, 1997, the Company operated 175 rental-purchase stores in 20 states throughout the United States. The stores rent a broad range of consumer products, including electronics, major appliances, jewelry and furniture. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Rental Merchandise, Depreciation and Revenue Recognition Rental merchandise is rented by customers through rental-purchase agreements providing for weekly or monthly payments. The agreements automatically renew with each payment. Rent is collected in advance at the beginning of each rental period, is nonrefundable and is recognized as revenue when collected. This approximates, in all material respects, the revenue that would be reflected if rental revenue was recognized over the term of the agreements. Ownership of the rental items passes to the customer when the customer makes the requisite number of rental payments stipulated by the agreement, generally 12 to 30 monthly payments. In the accompanying statements of operations, sales of merchandise primarily includes cash received for outright sales of previously rented merchandise and final rental payments immediately preceding the passage of title to the respective customers. Cost of merchandise sold represents the undepreciated cost of merchandise on the date of sale. Rental merchandise is recorded at cost. The Company has determined that the estimated useful lives of its rental merchandise averaged approximately 22 months, with no salvage value, and such period is used for depreciation purposes. Property and Equipment Property and equipment, including leasehold improvements, are recorded at cost. Additions, improvements and renewals which significantly add to the asset value or extend the life of the asset are capitalized. Expenditures for maintenance and repairs are expensed as such costs are incurred. F-50 212 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) The Company uses the straight-line method for recording depreciation. The estimated useful lives used in computing depreciation for financial reporting purposes are as follows: Deferred Financing Costs Deferred financing costs represent debt issuance costs and are amortized using the interest method over the term of the long-term notes. As of December 31, 1996 and 1997 and as of the unaudited period ending March 31, 1998, accumulated amortization amounted to $817,000, $980,000 and $1,047,000, respectively. Advertising The Company generally expenses production cost of print and television advertisements as of the first date the advertisements takes place unless they are expected to benefit future periods. Advertising expenses included in selling, general and administrative expenses were $5,394,000 in 1995, $5,822,000 in 1996, $6,668,000 in 1997, and $1,570,000 and $1,204,000 for unaudited periods ending March 31, 1997 and 1998, respectively. Noncompete Agreement In connection with the Acquisition, one of the sellers entered into a noncompete agreement with the Company. The noncompete agreement was amortized over its contractual life of 3 years. Amortization of the noncompete agreement was 50% in year one, 35% in year two and 15% in year three. As of December 31, 1996 and 1997, and as of the unaudited period ending March 31, 1998, accumulated amortization amounted to $18,725,000, $20,000,000 and $20,000,000, respectively. The agreement was fully amortized at June 30, 1997. Accounting for Impairment of Long-Lived Assets The Company evaluates all long-lived assets, including all intangible and other assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment is recognized when the carrying amounts of such assets cannot be recovered by the undiscounted future net cash flows likely to be generated. Impairment is measured as the amount by which the carrying value of the asset exceeds the fair value. Fair value is based on management's knowledge of current market conditions or the present value of estimated expected future cash flows. F-51
Leasehold improvements............................... Life of lease Furniture and equipment.............................. 3-7 years Vehicles............................................. 3 years 213 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Excess of Cost Over Net Assets Acquired The excess of cost over net assets acquired, which relates to the acquisition of rent-to-own and WBC and other stores in 1995, is being amortized on a straight-line basis over a period of 30 years. The purchase price is subject to change upon the resolution of certain issues with the seller. The Company periodically reviews the excess of cost over net assets acquired to assess recoverability. Impairment would be recognized in operating results if a permanent diminution in value were to occur. At year end, 1995, the Company specifically reviewed the excess of cost over net assets acquired related to its California operations. The Company undertook such a review in light of much lower operating results experienced by these operations, due in a large part to the new California legislation regulating rental-purchase transactions which became effective on January 1, 1995 (the "California Legislation"). The California Legislation limited the Company's ability to collect certain types of fees. Based upon the then current economic environment and future outlook, the Company determined that approximately $3.0 million of excess of cost over net assets acquired related to its California operations had been impaired and therefore such amount was charged-off as of December 31, 1995. As of December 31, 1996 and 1997 and as of the unaudited period ending March 31, 1998, accumulated amortization amounted to $3,712,000, $3,960,000 and $4,022,000, respectively. Cash and Cash Equivalents The Company invests excess cash from operations in short-term investment grade commercial paper and repurchase agreements. The Company considers all highly liquid debt instruments purchased with an original maturity date of three months or less to be cash equivalents. Concentration of Credit Risk The Company places its temporary cash and cash investments with high quality financial institutions. Management monitors the financial creditworthiness of these financial institutions. At times, such investments may be in excess of insured limits. Long-term Notes The fair value of the Company's long-term notes is estimated as required by Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments". The fair value is based on the quoted market prices for the same or similar issues. Management believes that the fair value of its long-term notes approximates the carrying value as of December 31, 1996 and 1997 and as of the unaudited period ending March 31, 1998. F-52 214 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the use of the liability method of accounting for income taxes. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect. The Company and Banner have entered into a tax sharing agreement which provides, among other things, for the sharing of federal consolidated and state combined income tax liabilities and refunds. Under the tax sharing agreement, payments and refunds will be calculated by the Company on a separate company basis. The Company will repay Banner $434,000 due to limitations that apply to loss carryovers on a separate company basis due to a change in the method used in allocating the tax liabilities in the prior years. The Company recorded an income tax benefit in 1995, 1996 and 1997 of $3,750,000, $1,040,000 and $1,126,000, respectively, and income taxes receivable from Banner of $1,871,000 at December 31, 1996 and income taxes payable to Banner of $434,000 at December 31, 1997. Earnings Per Share Earnings per common share is computed using the weighted average number of shares outstanding and dilutive common stock equivalents (options and warrants). No common stock equivalents were used in the computation as the impact would be anti-dilutive. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of Enterprise and Related Information" ("SFAS 131") in fiscal year 1997. The Company adopted SFAS 128 in 1997 and will adopt SFAS 130 and 131 in 1998. The Company does not expect that the adoption of SFAS 130 and SFAS 131 will have a material effect on its financial position or its results of operations for the year ended December 31, 1998. F-53 215 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) As described above, the Company reports earnings per share according to the provisions of SFAS 128. The following table presents a reconciliation of basic earnings per share and diluted earnings per share. The denominator of diluted earnings per share includes the effect of dilutive common stock equivalents. There were no potentially dilutive securities that were outstanding at December 31, 1997 and as of the unaudited period ended March 31, 1998. F-54
BASIC EARNINGS DILUTED EARNINGS PER SHARE PER SHARE --------------- ----------------- (DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) For the Year Ended December 31, 1995 Numerator -- net loss................... $ (9,155) $ (9,155) Denominator -- weighted average shares outstanding.......................... 541,985 541,985 Loss per share.......................... $ (16.89) $ (16.89) For the Year Ended December 31, 1996 Numerator -- net loss................... $ (1,840) $ (1,840) Denominator -- weighted average shares outstanding.......................... 551,045 551,045 Loss per share.......................... $ (3.34) $ (3.34) For the Year Ended December 31, 1997 Numerator -- net loss................... $ (2,907) $ (2,907) Denominator -- weighted average shares outstanding.......................... 606,557 606,557 Loss per share.......................... $ (4.79) $ (4.79) For the Period Ended March 31, 1997 (Unaudited) Numerator -- net loss................... $ (514) $ (514) Denominator -- weighted average shares outstanding.......................... 575,000 575,000 Loss per share.......................... $ (0.89) $ (0.89) For the Period Ended March 31, 1998 (Unaudited) Numerator -- net loss................... $ (828) $ (828) Denominator -- weighted average shares outstanding.......................... 617,045 617,045 Loss per share.......................... $ (1.34) $ (1.34) 216 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Balance Sheet Presentation The Company's balance sheet is presented on a non-classified basis consistent with industry practice. Use of Estimates The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts, generally not by material amounts. Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of the Company's financial position and results of operations. Included in the accompanying balance sheet is a deferred tax asset of $10.6 million as of December 31, 1997 and $11.1 million as of the unaudited period ended March 31,1998. Management believes it is more likely than not that it will realize the net deferred tax assets. The Company expects to realize this recorded deferred tax asset through the potential disposition of all or a part of the assets of the Company some time in the future, or through taking the Company public providing for additional capital for growth and expansion. Reclassifications Certain reclassifications have been made to previously reported amounts to conform to the current year presentation. 3. LONG-TERM NOTES The Company funded the purchase price for the stock and notes of RTO and WBC from the proceeds of an offering of Units (the "Offering"), consisting of $60,000,000 principal amount of Senior Notes and Warrants to purchase 60,000 shares of common stock of the Company. The long-term notes were issued at a price equal to 96.3% of the aggregate principal amount. Of the total proceeds, $57,389,000 was allocated to Notes and $2,200,000 was allocated to the issuance of Warrants. On or before February 28, 1997, all Warrant holders exercised their option to convert the Warrants into the Company's common stock. On September 28, 1994, the Company's Registration Statement under the Securities Act relating to the issuance by the Company of $60,000,000 principal amount of 12 7/8% Series B Senior Notes due 2003 (the "New Notes") in exchange for the outstanding Notes (the "Exchange Offer") was declared effective by the Securities and Exchange Commission. Upon its effectiveness, the Company commenced the Exchange Offer, pursuant to which all of the outstanding Notes were tendered and exchanged on or prior to F-55 217 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. LONG-TERM NOTES -- (CONTINUED) October 28, 1994. The terms of the New Notes and the Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Notes. The New Notes bear interest at the rate of 12 7/8% per annum payable semi-annually on December 15 and June 15, commencing December 15, 1994. On or after June 15, 1999, the New Notes will be redeemable at the option of the Company, in whole or in part, at the redemption prices as defined plus accrued and unpaid interest to the date of redemption. In connection with the issuance of the Notes, the Company executed an indenture dated June 3, 1994 (the "Indenture"). The Indenture contains certain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional Indebtedness (as defined), pay dividends in excess of $2.0 million or make certain other Restricted Payments (as defined), enter into certain transactions with affiliates, sell assets or enter into certain mergers and consolidations. In addition, under certain circumstances, the Company is required to offer to purchase the long-term notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase, with proceeds from certain asset sales (as defined). Interest expense on the New Notes amounted to $7,725,000 in 1995, 1996 and 1997 and $2,067,000 for the unaudited period ended March 31, 1997 and 1998. On May 10, 1997, the Company canceled a revolving line of credit agreement with Wells Fargo Bank (the "Line of Credit") which was entered into on May 9, 1995. The Line of Credit was subject to an annual commitment fee payable to the bank on a quarterly basis of 0.5% of the unused borrowings. 4. COMMITMENTS AND CONTINGENCIES Leases The Company has various operating leases, which generally have an initial lease term of 18 to 60 months. The operating leases are for office facilities, store locations, rental of vehicles, office equipment and various other assets. Generally leases for store locations contain renewal options for periods up to six years. Rental expenses related to these leases during 1995, 1996 and 1997 and for the unaudited periods ending March 31, 1997 and 1998 amounted to $7,667,000, $6,755,000, $7,545,000, $1,809,000 and $2,174,000, F-56 218 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) respectively. The future minimum annual rental commitments under operating leases which have initial noncancelable lease terms in excess of one year are as follows: Litigation The Company is a party to legal proceedings arising in the normal course of business. Based on consultation with legal counsel and on the facts currently available, it is management's opinion that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. Letters of Credit The Company utilizes standby letters of credit to satisfy property and vehicle insurance security deposit requirements. These letters of credit are irrevocable and have one-year renewable terms. Outstanding standby letters of credit as of December 31, 1996 and 1997 were $200,000 and $862,000, respectively, and $1,162,000 as of the unaudited period ended March 31, 1998. F-57
YEAR ENDING DECEMBER 31, VEHICLES REAL ESTATE TOTAL - --------------------------------- ---------- ----------- ----------- 1998............................. $2,236,000 $ 5,911,000 $ 8,147,000 1999............................. 1,604,000 3,969,000 5,573,000 2000............................. 1,208,000 3,047,000 4,255,000 2001............................. 313,000 1,595,000 1,908,000 2002............................. 1,000 1,046,000 1,047,000 Thereafter....................... -- 360,000 360,000 ---------- ----------- ----------- $5,362,000 $15,928,000 $21,290,000 ========== =========== =========== 219 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES The benefit for income taxes is comprised of the following: The benefit for income taxes differs from the amount obtained by applying the federal statutory income tax rate to the loss before income taxes as follows:
1995 1996 1997 ----------- ----------- ----------- Current: Federal....................... $ 36,000 $(1,061,000) $ -- State and local............... 164,000 47,000 160,000 ----------- ----------- ----------- 200,000 (1,014,000) 160,000 ----------- ----------- ----------- Deferred: Federal....................... (3,150,000) (20,000) (660,000) State and local............... (800,000) (6,000) (626,000) ----------- ----------- ----------- (3,950,000) (26,000) (1,286,000) ----------- ----------- ----------- Total tax benefit..... $(3,750,000) $(1,040,000) $(1,126,000) =========== =========== =========== F-58
1995 1996 1997 ----- ----- ----- Expected provision (benefit) for federal income taxes........................................ (35.0)% (35.0)% (35.0)% State taxes -- net of federal deduction........ (.1) (5.2) (7.8) Nondeductible and other items.................. 6.1 4.1 14.9 ----- ----- ----- (29.0)% (36.1)% (27.9)% ===== ===== ===== 220 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES -- (CONTINUED) The primary components of temporary differences which give rise to deferred taxes at December 31, 1997 and 1996 are: The Internal Revenue Service ("IRS") has examined certain of the Company's former subsidiaries. In connection with the Acquisition, the sellers entered into an agreement to indemnify the Company for income tax liabilities of RTO and WBC attributable to pre-acquisition tax periods. The results of these audits did not have a material adverse effect on the financial position of the Company. The IRS published a revenue ruling in July 1995 providing that the Modified Accelerated Cost Recovery System ("MACRS") is the appropriate depreciation method for rental purchase merchandise. The Company has used the income forecast method of depreciation for tax accounting, and management believes that this method has been widely used throughout the rental-purchase industry prior to the publication of this revenue ruling. The Company received permission from the IRS and converted to the MACRS method of depreciation for tax accounting purposes only, effective January 1, 1996. This change in tax accounting method will require the Company to increase taxable income in future years in order to recapture depreciation deductions previously claimed on the Company's tax returns taken under the income forecast method of depreciation in advance of the time at which such deductions may have been allowable under the MACRS depreciation method. Management believes that the adoption of MACRS will not significantly impact the Company's financial position and results of operations. The Company provides taxes on a separate company basis pursuant to its tax sharing agreement. Management believes it is more likely than not that it will realize the net deferred tax assets and accordingly no valuation allowance has been provided. This conclusion is based on the expectation of future taxable income relating to the potential F-59
1996 1997 ---------- ----------- Deferred Tax Assets: Depreciation of fixed assets................ $1,331,000 $ 1,082,000 Reserves and other accrued expenses......... 1,585,000 1,542,000 Noncompete agreement amortization........... 6,200,000 6,411,000 Operating loss carry forward................ -- 3,901,000 Other....................................... 304,000 573,000 ---------- ----------- Total deferred tax assets........... 9,420,000 13,509,000 Deferred Tax Liabilities: Rental merchandise.......................... (601,000) (648,000) State income tax............................ (474,000) (755,000) Other....................................... (189,000) (1,511,000) ---------- ----------- Net deferred tax assets............. $8,156,000 $10,595,000 ========== =========== 221 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES -- (CONTINUED) disposition of all or a part of the assets of the Company or through taking the Company public providing for additional capital for growth and expansion. If the Company is unable to generate sufficient taxable income through operating results or dispositions and alternative strategies are not viable, then the establishment of a valuation allowance may be necessary. The Company has federal net operating loss carryforwards of approximately $10,400,000 of which $1,288,000 expires in 2010, $2,295,000 expires in 2011 and $6,817,000 expires in 2012. At December 31, 1997, the Company has state net operating loss carryforwards of approximately $4,070,000 which expire at various times and various amounts through the year 2012. 6. RELATED PARTY TRANSACTIONS The Company has entered into an Administrative Services Agreement (the "Administrative Services Agreement") with Banner pursuant to which Banner or one of the other Banner subsidiaries, other than the Company, provides purchasing, advertising, accounting, insurance, health and other benefits, real estate, management information systems, and other services to the Company. The Company is required to reimburse Banner for its allocable share of direct and overhead costs determined on the basis of the Company's percentage utilization of the applicable services contemplated by the Administrative Services Agreement. The Administrative Services Agreement had an initial term of two years beginning June 3, 1994 and will be automatically extended for up to eight successive one-year terms after the end of the initial term unless the Company gives at least 30 days prior notice at the end of the then current term that the Administrative Services Agreement will terminate. As long as Banner or any other Banner subsidiary beneficially owns more than 50% of the voting stock of the Company, the Administrative Services Agreement shall not be terminable by Banner or any other Banner subsidiary as a result of any breach of the Administrative Services Agreement by the Company. During 1995, 1996 and 1997, and during the unaudited periods ending March 31, 1997 and 1998, the Company purchased $1,927,000, $640,000, $883,000, $0 and $201,000, respectively, of merchandise from Banner's Central Electric, a wholly owned subsidiary of Banner. The Company has not incurred any material common costs or expenses to be allocated during 1995, 1996 and 1997 and during the unaudited periods ending March 31, 1997 and 1998 in connection with the Administrative Services Agreement. F-60 222 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. RELATED PARTY TRANSACTIONS -- (CONTINUED) The receivable from (payable to) related parties as of December 31, 1996 and 1997 and for the unaudited period ended March 31, 1998 are as follows: The Company and G. M. Cypres & Co., a related party through common ownership, entered into an agreement (the "Consulting Agreement") pursuant to which G. M. Cypres & Co. or its designee provides consulting, investment banking or similar services to the Company in consideration for the payment of certain fees and expenses, including an annual management fee (the "Management Fee"). Under the terms of the Indenture, the fees and expenses payable under the Consulting Agreement must be reasonable and customary, and the Management Fee shall not exceed $375,000 per year. Management Fees charged under the terms of the Consulting Agreement totaled $375,000 for the years ended December 31, 1995, 1996 and 1997 and $93,750 for the unaudited periods ending March 31, 1997 and 1998. Effective January 1, 1995, the Company entered into a triple net lease agreement with BCE Properties II, Inc., a related party of the Company through common ownership, for office space at the Company's corporate headquarters. The lease provides, among other things, for monthly rent of $10,000 through December 31, 2005. Rent expense under the terms of the lease totaled $120,000 for the years ended December 31, 1995, 1996 and 1997 and $30,000 for the unaudited periods ending March 31, 1997 and 1998. Management believes that all related party transactions were consummated on terms comparable to terms that could have been negotiated with third parties. 7. RETIREMENT SAVINGS PLAN As of December 31, 1995 the Company terminated a 401(k) defined contribution plan covering substantially all employees of one of the Company's subsidiaries. The Company matched the first 6% of eligible compensation contributed by the participants at a rate of 25%. During 1995, the Company contributed $49,000 to the plan. The Company established a new 401(k) defined contribution plan in October 1997. The Company did not match employee contributions and had no other expenses related to the plan. F-61
DECEMBER 31, ---------------------- MARCH 31, 1996 1997 1998 ---------- --------- ----------- (UNAUDITED) Banner Holdings.......................... $2,371,000 $(434,000) $(200,000) Banner Central Electric.................. (656,000) 178,000 14,000 G. M. Cypres & Co. ...................... (61,000) (63,000) (63,000) Banner Central Electric Properties....... (20,000) -- -- ---------- --------- --------- $1,634,000 $(319,000) $(249,000) ========== ========= ========= 223 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. STORE SALES AND CLOSINGS During 1995, the Company purchased rental agreements from two competitors and transferred the agreements to existing stores, purchased two stores, closed one store and sold six stores that were not located within the Company's targeted geographic markets. During 1996, the Company opened one new store and closed three stores and transferred the agreements of the closed stores into other operating stores in the area. During 1997, the Company opened 13 new stores, sold the assets of one store, closed two stores and transferred their agreements into other operating stores in the area. During the unaudited period ending March 31, 1998, the Company opened one new store. 9. STOCK TRANSACTIONS Issuance of Common Stock On July 14, 1995 an outside institutional investor purchased 17,045 shares of common stock of the Company at a price of $44.00 per share for an aggregate purchase price of $750,000. The shares were issued pursuant to the terms of a letter agreement which places certain restrictions on the purchaser's ability to transfer the issued shares of stock. As of February 28, 1997 all Warrant holders exercised their option to convert the Warrants into the Company's common stock. 66,000 shares of stock were issued for the Warrants at an exercise price of $.01 per share; 60,000 relating to the initial offering and an additional 6,000 issued to the initial purchaser of the Notes. Stock Options In 1994 the Board of Directors adopted a Stock Option Plan (the "1994 Plan"), to grant to certain key employees of the Company options to purchase shares of the common stock of the Company at fair market value. A percentage of the options vest on each year provided that the Company meets or exceeds certain financial performance standards during such year. If those standards are not attained in such year, that portion of the option that would have vested may vest in the year the Company does meet those standards. Management believes that those standards will be attained in future years, before the options expire in the year 2004, and therefore there is a potential that the options will be exercisable. The stock options granted pursuant to the 1994 Plan cannot exceed 15% of the fully diluted shares of common stock of the Company. As of December 31, 1996 and 1997 and for the unaudited period ending March 31, 1998, there were 90,000 shares of common stock reserved for the 1994 Plan. F-62 224 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. STOCK TRANSACTIONS -- (CONTINUED) The following table summarizes stock option activity: In October 1995, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 defines a fair value based method of accounting for employee stock compensation plans, but allows for the continuation of the intrinsic value based method of accounting to measure compensation cost prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). For companies electing not to change their accounting, SFAS 123 requires pro-forma disclosures of earnings and earnings per share as if the change in accounting provision of SFAS 123 has been adopted. The Company has elected to continue to utilize the accounting method prescribed by APB 25, under which no compensation cost has been recognized, and adopt the disclosure requirements of SFAS 123. As a result, SFAS 123 has no effect on the financial condition or results of operations of the Company at December 31, 1996 and 1997 and for the unaudited period ending March 31, 1998. F-63
EXERCISE PRICE STOCK PER OPTIONS SHARE ------- -------- Outstanding at December 31, 1995..................... 24,000 $37.45 Granted............................................ 17,000 37.45 Expired or canceled................................ (11,000) 37.45 Exercised.......................................... -- ------- Outstanding at December 31, 1996..................... 30,000 37.45 Granted............................................ -- 37.45 Expired or canceled................................ (18,000) 37.45 Exercised.......................................... -- ------- Outstanding at December 31, 1997 and for the unaudited period ending March 31, 1998............. 12,000 37.45 ======= Options exercisable at December 31, 1997 and for the unaudited period ending March 31, 1998............. -- ======= 225 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. STOCK TRANSACTIONS -- (CONTINUED) Had compensation cost for this plan been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the following pro-forma amounts. The fair value of each option grant is estimated on the date of grant using an option pricing model with the following weighted-average assumptions used for grants: dividend yield of 0.0%, volatility of 0.0%, risk-free interest rate of 6.5% and expected lives of 5 years. On January 7, 1997 the Company declared a cash dividend on its common stock to be paid to the holders of record of the Company's common stock as of February 28, 1997 payable on March 5, 1997. Dividends On March 5, 1997, the Company paid a total cash dividend of $2.0 million to the holders of its common stock at $3.24 per share. 10. QUARTERLY FINANCIAL DATA (UNAUDITED):
DECEMBER 31, MARCH 31, --------------------------------------- --------------------- 1995 1996 1997 1997 1998 ----------- ----------- ----------- --------- --------- (UNAUDITED) Net loss............. As Reported $(9,155,000) $(1,840,000) $(2,907,000) $(514,000) $(828,000) Pro Forma $(9,198,000) $(1,889,000) $(2,929,000) $(536,000) $(850,000) Basic EPS............ As Reported $ (16.89) $ (3.34) $ (4.79) $ (0.89) $ (1.34) Pro Forma $ (16.97) $ (3.43) $ (4.83) $ (0.93) $ (1.38) Diluted EPS.......... As Reported $ (16.89) $ (3.34) $ (4.79) $ (0.89) $ (1.34) Pro Forma $ (16.97) $ (3.43) $ (4.83) $ (0.93) $ (1.38) F-64
INCOME BASIC DILUTED TOTAL FROM NET NET LOSS NET LOSS REVENUES OPERATIONS LOSS PER SHARE PER SHARE -------- ---------- ------- --------- --------- December 31, 1996........... $26,142 $ 924 $ (533) $ (.97) $ (.97) September 30, 1996.......... $26,468 $1,418 $ (320) $ (.58) $ (.58) June 30, 1996............... $27,767 $1,331 $ (369) $ (.67) $ (.67) March 31, 1996.............. $28,400 $1,002 $ (618) $(1.12) $(1.12) December 31, 1996........... $25,029 $1,113 $ (826) $(1.36) $(1.36) September 30, 1997.......... $25,409 $ 170 $(1,191) $(1.93) $(1.93) June 30, 1997............... $26,394 $1,422 $ (376) $ (.61) $ (.61) March 31, 1997.............. $26,736 $1,111 $ (514) $ (.89) $ (.89) March 31, 1998.............. $25,201 $ 701 $ (828) $(1.34) $(1.34) 226 CENTRAL RENTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 11. SUBSEQUENT EVENT The Company entered into an Asset Purchase Agreement dated May 1, 1998 with Renters Choice, Inc. ("Renters"), Central Rents Holding, Inc. and Banner pursuant to which substantially all of the assets of the Company will be sold to Renters for approximately $102,400,000. Completion of the transaction occurred on May 28, 1998 after obtaining necessary regulatory approvals and certain third party approvals and various other closing conditions. F-65 227 ------------------------------------------------------ ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY RENTERS CHOICE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF RENTERS CHOICE SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------- TABLE OF CONTENTS ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ RENTERS CHOICE, INC. RENT-A-CENTER, INC. COLORTYME, INC. OFFER TO EXCHANGE 11% SENIOR SUBORDINATED NOTES DUE 2008 FOR ALL OUTSTANDING 11% SENIOR SUBORDINATED NOTES DUE 2008 --------------------------------- PROSPECTUS --------------------------------- , 1998 ------------------------------------------------------ ------------------------------------------------------
PAGE ---- Prospectus Summary................... 3 Where Can You Find More Information........................ 20 Forward-Looking Statements........... 20 Risk Factors......................... 21 Use of Proceeds of the Exchange Notes.............................. 27 Capitalization....................... 28 The Exchange Offer................... 29 Unaudited Pro Forma Combined Financial Information.............. 39 Renters Choice, Inc. Selected Historical Financial Data.......... 54 Rent-A-Center, Inc. Selected Historical Financial Data.......... 57 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 60 Business............................. 77 Management........................... 96 Security Ownership of Certain Beneficial Owners and Management... 105 Certain Transactions of Renters Choice............................. 106 Description of Capital Stock......... 107 Description of Other Indebtedness.... 112 Description of the Notes and Guarantees......................... 113 Old Notes Exchange and Registration Rights Agreement................... 156 Certain U.S. Federal Income Tax Consequences....................... 159 Plan of Distribution................. 160 Experts.............................. 161 Legal Matters........................ 161 Index to Financial Statements........ F-1 228 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Delaware General Corporation Law Section 145(a) of the DGCL provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 145(b) of the DGCL provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145(c) of the DGCL provides that to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 145(d) of the DGCL provides that any indemnification under subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of Section 145. Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if II-1 229 such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Section 145(e) of the DGCL provides that expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in Section 145. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. AMENDED AND RESTATED CERTIFICATE OF INCORPORATION The Amended and Restated Certificate of Incorporation of the Company provides that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the company or its stockholders, (ii) for acts or occasions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock purchases or redemptions or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Company, in addition to the limitation on personal liability provided in the Amended and Restated Certificate of incorporation, will be limited to the fullest extent permitted by the DGCL, as amended. Further, any repeal or modification of such provision of the Amended and restated Certificate of Incorporation by the stockholders of the Company will be prospective only, and will not adversely affect any limitation on the personal liability of a director of the Company arising from an act or omission occurring prior to the time of such repeal or modification. AMENDED AND RESTATED BYLAWS The Amended and Restated Bylaws of the Company provide that each person who at any time is or was a director of the Company, and is threatened to be or is made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (a "Proceeding"), by reason of the fact that such person is or was a director of the company, or is or was serving at the request of the Company as a director, officer, partner, venturer, proprietor, member, employee, trustee, agent or similar functionary of another domestic or foreign corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other for-profit or non-profit enterprise, whether the basis of a Proceeding is alleged action in such person's official capacity or in another capacity while holding such office, shall be indemnified and held harmless by the Company to the fullest extent authorized by the DGCL or any other applicable law as may from time to time be in effect (but, in the case of any such amendment or enactment, only to the extent that such amendment or statute permits the Company to provide broader indemnification rights than such law prior to such amendment II-2 230 or enactment permitted the Company to provide), against all expense, liability and loss (including, without limitation, court costs and attorneys' fees, judgments, fines, excise taxes or penalties, and amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such person in connection with a Proceeding, so long as a majority of a quorum of disinterested directors, the stockholders or legal counsel through a written opinion determines that such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and in the case of a criminal Proceeding, such person had no reasonable cause to believe his conduct was unlawful. Such indemnification shall continue as to a person who has ceased to serve in the capacity which initially entitled such person to indemnity thereunder and shall inure to the benefit of his or her heirs, executors and administrators. The Amended and Restated Bylaws also contain certain provisions designed to facilitate receipt of such benefits by any such persons, including the prepayment of any such benefit. Indemnification Agreements The Company has also entered into Indemnification Agreements pursuant to which it has agreed to indemnify certain of its directors and officers against judgments, claims, damages, losses and expenses incurred as a result of the fact that any director or officer, in his capacity as such, is made or threatened to be made a party to any suit or proceeding. Such persons will be indemnified to the fullest extent now or hereafter permitted by the DGCL. The Indemnification Agreements also provide for the advancement of certain expenses to such directors and officers in connection with any such suit or proceeding. Insurance The Company has obtained a directors' and officers' liability insurance policy insuring its directors and officers against losses resulting from wrongful acts committed by them in their capacities as directors and officers of the company, including liabilities arising under the Securities Act. II-3 231 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits II-4
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 1.1* -- Purchase Agreement, dated August 13, 1998, by and among Renters Choice, Inc., Chase Securities Inc., Bear, Stearns & Co. Inc., Credit Suisse First Boston Corporation and NationsBank Montgomery Securities LLC 2.1(1) -- Agreement and Plan of Reorganization dated May 15, 1996, among Renters Choice, Inc., ColorTyme, Inc., and CT Acquisition Corporation (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, Renters Choice will supplementally supply such schedules and exhibits to the Commission.) 2.2(2) -- Asset Purchase Agreement, dated May 1, 1998, by and among Renters Choice, Inc., Central Rents, Inc., Central Rents Holding, Inc. and Banner Holdings, Inc. (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, Renters Choice will supplementally supply such schedules and exhibits to the Commission.) 2.3(3) -- Letter Agreement, dated as of May 26, 1998, by and among Renters Choice, Inc., Central Rents, Inc., Central Rents Holding, Inc. and Banner Holdings, Inc. (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, Renters Choice will supplementally supply such schedules and exhibits to the Commission.) 2.4(4) -- Stock Purchase Agreement, dated as of June 16, 1998, among Renters Choice, Inc., Thorn International BV and Thorn plc (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, the Company will supplementally supply such schedules and exhibits to the Commission.) 3.1(5) -- Amended and Restated Certificate of Incorporation of Renters Choice 3.2(6) -- Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Renters Choice 3.3(7) -- Amended and Restated Bylaws of Renters Choice 3.4(8) -- Amendment to the Amended and Restated Bylaws of Renters Choice 3.5*** -- Certificate of Incorporation of Rent-A-Center, Inc. 3.6*** -- Articles of Incorporation of ColorTyme, Inc. 3.7*** -- Bylaws of Rent-A-Center, Inc. 3.8*** -- Bylaws of ColorTyme, Inc. 4.1(9) -- Form of Certificate evidencing Common Stock232 II-5
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 4.2(10) -- Certificate of Designations, Preferences and Relative Rights and Limitations of Series A Preferred Stock of Renters Choice, Inc. 4.3(11) -- Certificate of Designations, Preferences and Relative Rights and Limitations of Series B Preferred Stock of Renters Choice, Inc. 4.4* -- Indenture, dated as of August 18, 1998, by and among Renters Choice, Inc., as Issuer, ColorTyme, Inc. and Rent-A-Center, Inc., as Subsidiary Guarantors, and IBJ Schroder Bank & Trust Company, as Trustee 4.5*** -- Form of Certificate evidencing Series A Preferred Stock 5.1*** -- Opinion of Winstead Sechrest & Minick P.C. regarding legality of the securities offered. 10.1(12) -- Amended and Restated 1994 Renters Choice, Inc. Long-Term Incentive Plan 10.2(13) -- Revolving Credit Agreement dated as of November 27, 1996 between Comerica Bank, as agent, Renters Choice, Inc. and certain other lenders 10.3(14) -- Portfolio Acquisition Agreement dated May 15, 1996, by and among Renters Choice, Inc., ColorTyme Financial Services, Inc., and STI Credit Corporation 10.4(15) -- Employment Agreement, dated March 28, 1997, by and between Renters Choice, Inc. and Danny Z. Wilbanks 10.5(16) -- Stock Option Agreement, dated April 1, 1997, by and between Renters Choice, Inc. and Danny Z. Wilbanks 10.6(17) -- Credit Agreement, dated August 5, 1998, among Renters Choice, Inc., Comerica Bank, as Documentation Agent, NationsBank N.A., as Syndication Agent, and The Chase Manhattan Bank, as Administrative Agent, and certain other lenders 10.7(18) -- Guarantee and Collateral Agreement, dated August 5, 1998, made by Renters Choice, Inc., and certain of its Subsidiaries in favor of the Chase Manhattan Bank, as Administrative Agent 10.8(19) -- $175,000,000 Senior Subordinated Credit Agreement, dated as of August 5, 1998, among Renters Choice, Inc., certain other lenders and the Chase Manhattan Bank 10.9(20) -- Stockholders Agreement, dated as of August 5, 1998, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P., J. Ernest Talley, Mark E. Speese, Renters Choice, Inc., and certain other persons 10.10(21) -- Registration Rights Agreement, dated August 5, 1998, by and between Renters Choice, Inc., Apollo Investment Fund IV, L.P., and Apollo Overseas Partners IV, L.P., related to the Series A Convertible Preferred Stock 10.11(22) -- Registration Rights Agreement, dated August 5, 1998, by and between Renters Choice, Inc., Apollo Investment Fund IV, L.P., and Apollo Overseas Partners IV, L.P., related to the Series B Convertible Preferred Stock233 - ------------------------- * Previously filed. ** Filed herewith. *** To be filed by amendment. (1) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K dated May 15, 1996 (2) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K dated May 28, 1998 (3) Incorporated herein by reference to Exhibit 2.2 to the registrant's Current Report on Form 8-K dated May 15, 1996 (4) Incorporated herein by reference to Exhibit 2.9 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (5) 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 (6) Incorporated herein by reference to Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (7) 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 (8) Incorporated herein by reference to Exhibit 3.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (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 4.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 II-6
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 10.13(23) -- Stock Purchase Agreement, dated August 5, 1998, among Renters Choice, Inc., Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. 10.14* -- Exchange and Registration Rights Agreement, dated August 18, 1998, by and among Renters Choice, Inc. and Chase Securities Inc., Bear, Stearns & Co. Inc., NationsBank Montgomery Securities LLC and Credit Suisse First Boston Corporation 21.1* -- Subsidiaries of Registrant 23.1** -- Consent of Grant Thornton LLP 23.2** -- Consent of Ernst & Young LLP 23.3** -- Consent of Arthur Andersen LLP 23.4* -- Consent of Winstead Sechrest & Minick P.C. (included as part of its opinion filed as Exhibits 5.1 and 8.1) 24.1* -- Power of Attorney (included on signature page of this S-4) 25.1** -- Statement of eligibility of IBJ Schroder Bank & Trust Company to act as Trustee 99.1** -- Form of Letter of Transmittal234 (11) Incorporated herein by reference to Exhibit 4.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (12) Incorporated herein by reference to Exhibit 99.1 to the registrant's Registration Statement on Form S-8 (File No. 333- 53471) (13) Incorporated herein by reference to Exhibit 10.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (14) Incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated May 15, 1996 (15) Incorporated herein by reference to Exhibit 10.16 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (16) Incorporated herein by reference to Exhibit 10.16 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (17) Incorporated herein by reference to Exhibit 10.18 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (18) Incorporated herein by reference to Exhibit 10.19 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (19) Incorporated herein by reference to Exhibit 10.20 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (20) Incorporated herein by reference to Exhibit 10.21 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (21) Incorporated herein by reference to Exhibit 10.22 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (22) Incorporated herein by reference to Exhibit 10.23 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (23) Incorporated herein by reference to Exhibit 2.10 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 II-7 235 ITEM 22. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes that insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim of indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the SEC by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration II-8 236 statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) If the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by Rule 3-19 of this chapter at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided, that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the SEC by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference on the Form F-3. (c) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (d) The undersigned registrant hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the SEC under Section 305(b)(2) of the Act. (e) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-9 237 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-4 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on December 11, 1998. RENTERS CHOICE, INC. By: /s/ MARK E. SPEESE ----------------------------------- Mark E. Speese President and Chief Operating Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-10
SIGNATURE TITLE DATE --------- ----- ---- * Chairman of the Board December 11, 1998 - ------------------------------------------ and Chief Executive J. Ernest Talley Officer (Principal Executive Officer) /s/ MARK E. SPEESE President, Chief December 11, 1998 - ------------------------------------------ Operating Officer and Mark E. Speese Director * Senior Vice December 11, 1998 - ------------------------------------------ President -- Finance Danny Z. Wilbanks and Chief Financial Officer (Principal Financial and Accounting Officer) * Director December 11, 1998 - ------------------------------------------ J.V. Lentell * Director December 11, 1998 - ------------------------------------------ Joseph V. Mariner * Director December 11, 1998 - ------------------------------------------ Rex W. Thompson * Director December 11, 1998 - ------------------------------------------ Laurence M. Berg * Director December 11, 1998 - ------------------------------------------ Peter P. Copses *By: /s/ MARK E. SPEESE -------------------------------------- Mark E. Speese Attorney-in-fact 238 SUBSIDIARY GUARANTORS: SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-4 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on December 11, 1998. RENT-A-CENTER, INC. By: /s/ MARK E. SPEESE ----------------------------------- Mark E. Speese Vice President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-11
SIGNATURE TITLE DATE --------- ----- ---- * President (Principal December 11, 1998 - ------------------------------------------ Executive Officer) and J. Ernest Talley Director /s/ MARK E. SPEESE Vice President and December 11, 1998 - ------------------------------------------ Director Mark E. Speese * Vice President, December 11, 1998 - ------------------------------------------ Secretary, Treasurer Danny Z. Wilbanks (Principal Financial and Accounting Officer) and Director *By: /s/ MARK E. SPEESE -------------------------------------- Mark E. Speese Attorney-in-fact 239 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-4 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on December 11, 1998. COLORTYME, INC. By: /s/ MARK E. SPEESE ----------------------------------- Mark E. Speese Vice President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. II-12
SIGNATURE TITLE DATE --------- ----- ---- * President and Chief December 11, 1998 - ------------------------------------------ Executive Officer Mitchell E. Fadel (Principal Executive Officer) * Director December 11, 1998 - ------------------------------------------ J. Ernest Talley /s/ MARK E. SPEESE Vice President and December 11, 1998 - ------------------------------------------ Director Mark E. Speese * Secretary (Principal December 11, 1998 - ------------------------------------------ Financial and Danny Z. Wilbanks Accounting Officer) *By: /s/ MARK E. SPEESE -------------------------------------- Mark E. Speese Attorney-in-fact 240 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 1.1* -- Purchase Agreement, dated August 13, 1998, by and among Renters Choice, Inc., Chase Securities Inc., Bear, Stearns & Co. Inc., Credit Suisse First Boston Corporation and NationsBank Montgomery Securities LLC 2.1(1) -- Agreement and Plan of Reorganization dated May 15, 1996, among Renters Choice, Inc., ColorTyme, Inc., and CT Acquisition Corporation (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, Renters Choice will supplementally supply such schedules and exhibits to the Commission.) 2.2(2) -- Asset Purchase Agreement, dated May 1, 1998, by and among Renters Choice, Inc., Central Rents, Inc., Central Rents Holding, Inc. and Banner Holdings, Inc. (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, Renters Choice will supplementally supply such schedules and exhibits to the Commission.) 2.3(3) -- Letter Agreement, dated as of May 26, 1998, by and among Renters Choice, Inc., Central Rents, Inc., Central Rents Holding, Inc. and Banner Holdings, Inc. (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, Renters Choice will supplementally supply such schedules and exhibits to the Commission.) 2.4(4) -- Stock Purchase Agreement, dated as of June 16, 1998, among Renters Choice, Inc., Thorn International BV and Thorn plc (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, the Company will supplementally supply such schedules and exhibits to the Commission.) 3.1(5) -- Amended and Restated Certificate of Incorporation of Renters Choice 3.2(6) -- Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Renters Choice 3.3(7) -- Amended and Restated Bylaws of Renters Choice 3.4(8) -- Amendment to the Amended and Restated Bylaws of Renters Choice 3.5*** -- Certificate of Incorporation of Rent-A-Center, Inc. 3.6*** -- Articles of Incorporation of ColorTyme, Inc. 3.7*** -- Bylaws of Rent-A-Center, Inc. 3.8*** -- Bylaws of ColorTyme, Inc. 4.1(9) -- Form of Certificate evidencing Common Stock241
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 4.2(10) -- Certificate of Designations, Preferences and Relative Rights and Limitations of Series A Preferred Stock of Renters Choice, Inc. 4.3(11) -- Certificate of Designations, Preferences and Relative Rights and Limitations of Series B Preferred Stock of Renters Choice, Inc. 4.4* -- Indenture, dated as of August 18, 1998, by and among Renters Choice, Inc., as Issuer, ColorTyme, Inc. and Rent-A-Center, Inc., as Subsidiary Guarantors, and IBJ Schroder Bank & Trust Company, as Trustee 4.5*** -- Form of Certificate evidencing Series A Preferred Stock 5.1*** -- Opinion of Winstead Sechrest & Minick P.C. regarding legality of the securities offered. 10.1(12) -- Amended and Restated 1994 Renters Choice, Inc. Long-Term Incentive Plan 10.2(13) -- Revolving Credit Agreement dated as of November 27, 1996 between Comerica Bank, as agent, Renters Choice, Inc. and certain other lenders 10.3(14) -- Portfolio Acquisition Agreement dated May 15, 1996, by and among Renters Choice, Inc., ColorTyme Financial Services, Inc., and STI Credit Corporation 10.4(15) -- Employment Agreement, dated March 28, 1997, by and between Renters Choice, Inc. and Danny Z. Wilbanks 10.5(16) -- Stock Option Agreement, dated April 1, 1997, by and between Renters Choice, Inc. and Danny Z. Wilbanks 10.6(17) -- Credit Agreement, dated August 5, 1998, among Renters Choice, Inc., Comerica Bank, as Documentation Agent, NationsBank N.A., as Syndication Agent, and The Chase Manhattan Bank, as Administrative Agent, and certain other lenders 10.7(18) -- Guarantee and Collateral Agreement, dated August 5, 1998, made by Renters Choice, Inc., and certain of its Subsidiaries in favor of the Chase Manhattan Bank, as Administrative Agent 10.8(19) -- $175,000,000 Senior Subordinated Credit Agreement, dated as of August 5, 1998, among Renters Choice, Inc., certain other lenders and the Chase Manhattan Bank 10.9(20) -- Stockholders Agreement, dated as of August 5, 1998, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P., J. Ernest Talley, Mark E. Speese, Renters Choice, Inc., and certain other persons 10.10(21) -- Registration Rights Agreement, dated August 5, 1998, by and between Renters Choice, Inc., Apollo Investment Fund IV, L.P., and Apollo Overseas Partners IV, L.P., related to the Series A Convertible Preferred Stock 10.11(22) -- Registration Rights Agreement, dated August 5, 1998, by and between Renters Choice, Inc., Apollo Investment Fund IV, L.P., and Apollo Overseas Partners IV, L.P., related to the Series B Convertible Preferred Stock242 - ------------------------- * Previously filed. ** Filed herewith. *** To be filed by amendment. (1) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K dated May 15, 1996 (2) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K dated May 28, 1998 (3) Incorporated herein by reference to Exhibit 2.2 to the registrant's Current Report on Form 8-K dated May 15, 1996 (4) Incorporated herein by reference to Exhibit 2.9 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (5) 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 (6) Incorporated herein by reference to Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (7) 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 (8) Incorporated herein by reference to Exhibit 3.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (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 4.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 10.13(23) -- Stock Purchase Agreement, dated August 5, 1998, among Renters Choice, Inc., Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. 10.14* -- Exchange and Registration Rights Agreement, dated August 18, 1998, by and among Renters Choice, Inc. and Chase Securities Inc., Bear, Stearns & Co. Inc., NationsBank Montgomery Securities LLC and Credit Suisse First Boston Corporation 21.1* -- Subsidiaries of Registrant 23.1** -- Consent of Grant Thornton LLP 23.2** -- Consent of Ernst & Young LLP 23.3** -- Consent of Arthur Andersen LLP 23.4* -- Consent of Winstead Sechrest & Minick P.C. (included as part of its opinion filed as Exhibits 5.1 and 8.1) 24.1* -- Power of Attorney (included on signature page of this S-4) 25.1** -- Statement of eligibility of IBJ Schroder Bank & Trust Company to act as Trustee 99.1** -- Form of Letter of Transmittal243 (11) Incorporated herein by reference to Exhibit 4.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (12) Incorporated herein by reference to Exhibit 99.1 to the registrant's Registration Statement on Form S-8 (File No. 333- 53471) (13) Incorporated herein by reference to Exhibit 10.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (14) Incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated May 15, 1996 (15) Incorporated herein by reference to Exhibit 10.16 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (16) Incorporated herein by reference to Exhibit 10.16 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (17) Incorporated herein by reference to Exhibit 10.18 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (18) Incorporated herein by reference to Exhibit 10.19 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (19) Incorporated herein by reference to Exhibit 10.20 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (20) Incorporated herein by reference to Exhibit 10.21 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (21) Incorporated herein by reference to Exhibit 10.22 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (22) Incorporated herein by reference to Exhibit 10.23 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (23) Incorporated herein by reference to Exhibit 2.10 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 12, 1998, accompanying the consolidated financial statements of Renters Choice, Inc. and Subsidiaries contained in the Registration Statement on Form S-4 and Prospectus. We consent to the use of the aforementioned report in this Registration Statement on Form S-4 and Prospectus, and to the use of our name as it appears under the caption "Experts". GRANT THORNTON LLP Dallas, Texas December 11, 1998
1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated April 24, 1998 (except for Note 14, as to which the date is June 25, 1998), with respect to the consolidated financial statements of THORN Americas, Inc. and subsidiaries included in the Registration Statement (Form S-4) and related Prospectus of Renters Choice, Inc. for the registration of $175,000,000, 11% Senior Subordinated Notes due 2008. ERNST & YOUNG LLP Wichita, Kansas December 10, 1998
1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated March 19, 1998 included in this Amendment No. 1 to Form S-4 Registration Statement of Renters Choice, Inc., Rent-A-Center, Inc. and ColorTyme, Inc. and to all references to our Firm included in this registration statement No. 333-65787. ARTHUR ANDERSEN LLP Los Angeles, California December 10, 1998
1 EXHIBIT 25.1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE [ ] CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) --------------------- IBJ SCHRODER BANK & TRUST COMPANY (Exact name of trustee as specified in its charter) LUIS PEREZ, ASSISTANT VICE PRESIDENT IBJ SCHRODER BANK & TRUST COMPANY ONE STATE STREET NEW YORK, NEW YORK 10004 (212) 858-2000 (Name, address and telephone number of agent for service) RENTERS CHOICE, INC. RENT-A-CENTER, INC. COLORTYME, INC. (Exact names of obligor as specified in its charter)
NEW YORK 13-6022258 (Jurisdiction of incorporation (I.R.S. employer or organization if not a U.S. national bank) identification No.) ONE STATE STREET, NEW YORK, NEW YORK 10004 (Address of principal executive offices) (Zip code) 11% SENIOR SUBORDINATED NOTES DUE 2008 (Title of indenture securities) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
DELAWARE 48-1024367 DELAWARE 48-0959188 TEXAS 75-2651408 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) RENTERS CHOICE, INC. 13800 MONTFORT DRIVE, SUITE 300 DALLAS, TEXAS 75240 RENT-A-CENTER, INC. 8200 EAST THORN DRIVE WICHITA, KANSAS 67226 COLORTYME, INC. 1231 GREENWAY DRIVE, SUITE 900 IRVING, TEXAS 75038 (Address of principal executive offices) (Zip code) 2 ITEM 1. GENERAL INFORMATION Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. New York State Banking Department Two Rector Street New York, New York Federal Deposit Insurance Corporation Washington, D.C. Federal Reserve Bank of New York Second District, 33 Liberty Street New York, New York (b) Whether it is authorized to exercise corporate trust powers. Yes ITEM 2. AFFILIATIONS WITH THE OBLIGOR. If the obligor is an affiliate of the trustee, describe each such affiliation. The obligor is not an affiliate of the trustee. ITEM 13. DEFAULTS BY THE OBLIGOR. (a) State whether there is or has been a default with respect to the securities under this indenture. Explain the nature of any such default. None (b) If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligors are outstanding, or is trustee for more than one outstanding series of securities under the indenture, state whether there has been a default under any such indenture or series, identify the indenture or series affected, and explain the nature of any such default. None ITEM 16. LIST OF EXHIBITS. List below all exhibits filed as part of this statement of eligibility. *1. A copy of the Charter of IBJ Schroder Bank & Trust Company as amended to date. (See Exhibit I A to Form T-1, Securities and Exchange Commission File No. 22-18460). 2 3 *2. A copy of the Certificate of Authority of the trustee to Commence Business (Included in Exhibit 1 above). *3. A copy of the Authorization of the trustee to exercise corporate trust powers, as amended to date (See Exhibit 4 to Form T-1, Securities and Exchange Commission File No. 22-19146). *4. A copy of the existing By-Laws of the trustee, as amended to date (See Exhibit 4 to Form T-1, Securities and Exchange Commission File No. 22-19146). 5. Not Applicable 6. The consent of United States institutional trustee required by Section 321(b) of the Act. 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. - ------------------------- * The Exhibits thus designated are incorporated herein by reference as exhibits hereto. Following the description of such Exhibits is a reference to the copy of the Exhibit heretofore filed with the Securities and Exchange Commission, to which there have been no amendments or changes. 3 4 NOTE In answering any item in this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor and its directors or officers, the trustee has relied upon information furnished to it by the obligor. Inasmuch as this Form T-1 is filed prior to the ascertainment by the trustee of all facts on which to base responsive answers to Item 2, the answer to said Item is based on incomplete information. Item 2, may, however, be considered as correct unless amended by an amendment to this Form T-1. Pursuant to General Instruction B, the trustee has responded to Items 1, 2 and 16 of this form since to the best knowledge of the trustee as indicated in Item 13, the obligor is not in default under any indenture under which the applicant is trustee. 4 5 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, IBJ Schroder Bank & Trust Company, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility & qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 3rd day of December, 1998. IBJ SCHRODER BANK & TRUST COMPANY By: /s/ LUIS PEREZ -------------------------------------- Luis Perez Assistant Vice President 5 6 EXHIBIT 6 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the issuance by Renters Choice, Inc., of its 11% Senior Subordinated Notes 2008, we hereby consent that reports of examinations by Federal, State, Territorial, or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. IBJ SCHRODER BANK & TRUST COMPANY By: /s/ LUIS PEREZ -------------------------------------- Luis Perez Assistant Vice President Dated: December 3, 1998 6 7 EXHIBIT 7 CONSOLIDATED REPORT OF CONDITION OF IBJ SCHRODER BANK & TRUST COMPANY OF NEW YORK, NEW YORK AND FOREIGN AND DOMESTIC SUBSIDIARIES REPORT AS OF SEPTEMBER 30,1998 7
DOLLAR AMOUNTS IN THOUSANDS -------------- ASSETS 1. Cash and balance due from depository institutions: a. Non-interest-bearing balances and currency and coin.......... $ 42,702 b. Interest-bearing balances.................................... $ 13,444 2. Securities a. Held-to-maturity securities.................................. $ 191,921 b. Available-for-sale securities................................ $ 118,931 3. Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and of its Edge and Agreement subsidiaries and in IBFs: Federal Funds sold and Securities purchased under agreements to resell............................................................ $ 79,838 4. Loans and lease financing receivables: a. Loans and leases, net of unearned income......... $1,938,005 b. LESS: Allowance for loan and lease losses........ $ 63,361 c. LESS: Allocated transfer risk reserve............ $ -0- d. Loans and leases, net of unearned income, allowance, and reserve...................................................... $1,874,644 5. Trading assets held in trading accounts........................... $ 462 6. Premises and fixed assets (including capitalized leases).......... $ 1,922 7. Other real estate owned........................................... $ 819 8. Investments in unconsolidated subsidiaries and associated companies......................................................... $ -0- 9. Customers' liability to this bank on acceptances outstanding...... $ 371 10. Intangible assets................................................. $ 11,167 11. Other assets...................................................... $ 68,097 12. TOTAL ASSETS...................................................... $2,404,318 8 CONSOLIDATED REPORT OF CONDITION OF IBJ SCHRODER BANK & TRUST COMPANY OF NEW YORK, NEW YORK AND FOREIGN AND DOMESTIC SUBSIDIARIES REPORT AS OF SEPTEMBER 30,1998, CONTINUED 8
DOLLAR AMOUNTS IN THOUSANDS -------------- LIABILITIES 13. Deposits: a. In domestic offices.......................................... $ 682,904 (1) Noninterest-bearing.......................... $ 135,253 (2) Interest-bearing............................. $ 547,651 b. In foreign offices, Edge and Agreement subsidiaries, and IBFs......................................................... $1,154,887 (1) Noninterest-bearing.......................... $ 17,024 (2) Interest-bearing............................. $1,137,863 14. Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: Federal Funds purchased and Securities sold under agreements to repurchase........................................................ $ 91,000 15. a. Demand notes issued to the U.S. Treasury..................... $ 12,693 b. Trading Liabilities.......................................... $ 239 16. Other borrowed money: a. With a remaining maturity of one year or less................ $ 31,002 b. With a remaining maturity of more than one year.............. $ 1,375 c. With a remaining maturity of more than three years........... $ 1,550 17. Not applicable 18. Bank's liability on acceptances executed and outstanding.......... $ 371 19. Subordinated notes and debentures................................. $ 100,000 20. Other liabilities................................................. $ 76,658 21. TOTAL LIABILITIES................................................. $2,152,679 22. Limited-life preferred stock and related surplus.................. $ N/A EQUITY CAPITAL 23. Perpetual preferred stock and related surplus..................... $ -0- 24. Common stock...................................................... $ 29,649 25. Surplus (exclude all surplus related to preferred stock).......... $ 217,008 26. a. Undivided profits and capital reserves....................... $ 4,112 b. Net unrealized gains (losses) on available-for-sale securities................................................... $ 870 27. Cumulative foreign currency translation adjustments............... $ -0- 28. TOTAL EQUITY CAPITAL.............................................. $ 251,639 29. TOTAL LIABILITIES AND EQUITY CAPITAL.............................. $2,404,318
1 EXHIBIT 99.1 LETTER OF TRANSMITTAL TO TENDER 11% SENIOR SUBORDINATED NOTES DUE 2008 OF RENTERS CHOICE, INC. PURSUANT TO THE PROSPECTUS DATED , 1999 BY RENTERS CHOICE, INC. THE OFFER TO EXCHANGE WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED TO A DATE NOT LATER THAN , 1998 (THE "EXPIRATION DATE"). TENDERED NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. TO THE EXCHANGE AGENT: IBJ SCHRODER BANK & TRUST COMPANY Delivery of this instrument to an address other than as set forth above will not constitute a valid delivery. The accompanying instructions should be read carefully before this Letter of Transmittal is completed. The undersigned acknowledges that the undersigned has received and reviewed the Prospectus dated , 1999 (the "Prospectus") of Renters Choice, Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal (the "Letter of Transmittal"), which together constitute the Company's offer to exchange (the "Exchange Offer") $1,000 principal amount of 11% Senior Subordinated Notes due 2008 (the "Exchange Notes") for each $1,000 principal amount of its outstanding 11% Senior Subordinated Notes due 2008 (the "Old Notes") as set forth in the Prospectus. The Old Notes that are not exchanged will remain restricted securities and may be resold only (i) to the Company, (ii) pursuant to Rule 144A or Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), (iii) outside the United States to a foreign person pursuant to the requirements of Rule 904 under the Securities Act, or (iv) pursuant to an effective registration statement under the Securities Act. See "The Exchange Offer -- Consequences of Failure to Exchange" in the Prospectus. Upon the terms and subject to the conditions set forth in the Prospectus and in this Letter of Transmittal, the Company will exchange $1,000 principal amount of the Exchange Notes, registered under the Securities Act pursuant to a registration statement on Form S-4 filed by the Company, for each $1,000 principal amount of its outstanding Old Notes
By Registered or Certified Mail or by Overnight By Hand: Courier: IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company P. O. Box 84 One State Street Bowling Green Station New York, New York 10004 New York, New York 10274-0084 Attn: Securities Processing Window, Attn: Reorganization Operations Dept. Subcellar One, (SC-1) Facsimile Transmission Number: Confirm by Telephone: (212) 858-2611 (212) 858-2103 2 properly delivered by a Holder thereof to IBJ Schroder Bank & Trust Company, as exchange agent (the "Exchange Agent"), and not withdrawn on or prior to the Expiration Date. No Holder may withdraw a tender following the Expiration Date. In order to be entitled to receive the Exchange Notes, a tendering Holder must properly tender the Old Notes to the Exchange Agent, and not withdraw such tender, on or prior to the Expiration Date. If a Holder's Old Notes are not properly tendered by the Expiration Date pursuant to the Exchange Offer, such Holder will not receive Exchange Notes. By executing the Letter of Transmittal, the undersigned represents to the Company that, among other things, (i) the Exchange Notes to be acquired by the Holder of the Old Note in connection with the Exchange Offer are being acquired by the Holder in the ordinary course of business of the Holder, (ii) the Holder has no arrangement or understanding with any person to participate in the distribution of Exchange Notes, (iii) the Holder acknowledges and agrees that any person who is a broker-dealer registered under the Exchange Act or is participating in the Exchange Offer for the purposes of distributing the Exchange Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the Exchange Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in no-action letters (see "The Exchange Offer -- Resale of Exchange Notes"), (iv) the Holder understands that a secondary resale transaction described in clause (iii) above and any resales of Exchange Notes obtained by such Holder in exchange for Old Notes acquired by such Holder directly from the Company should be covered by an effective registration statement containing the selling securityholder information required by Item 507 of Regulation S-K of the Securities and Exchange Commission (the "Commission"), and (v) the Holder is not an "affiliate," as defined in Rule 405 under the Securities Act, of the Company. If the Holder is a broker-dealer that will receive Exchange Notes for its own account in exchange for Old Notes that were acquired as a result of market-making activities or other trading activities, by executing this Letter of Transmittal, the Holder acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Notes. However, by so acknowledging and by delivering a prospectus, the Holder will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. See "The Exchange Offer -- Procedures for Tendering." The Exchange Offer may be extended, terminated, amended or consummated as provided in the Prospectus. During any such extension of the Exchange Offer, all Old Notes previously tendered and not withdrawn pursuant to such Exchange Offer will remain subject to the Exchange Offer and may be accepted thereafter for exchange by the Company. No alternative, conditional or contingent tenders will be accepted. A tendering Holder, by execution of this Letter of Transmittal, or facsimile hereof, waives all rights to receive notice of acceptance of such Holder's Old Notes for exchange. Capitalized terms used but not defined herein have the meanings given to them in the Prospectus. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE CHECKING ANY BOX BELOW This Letter of Transmittal is to be completed by Holders of Old Notes if certificates representing such Old Notes are to be forwarded herewith or if delivery of such certificates are to be made by book-entry transfer to the account maintained by the Exchange Agent at the Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in the Prospectus under the caption "The Exchange Offer -- Procedures for Tendering." Holders whose certificates representing the Old Notes are not immediately available or who cannot deliver certificates and all other required documents to the Exchange Agent or complete the procedure for book-entry transfer on or prior to the Expiration Date may nevertheless tender Old Notes pursuant to the guaranteed delivery procedure set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2 below. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. In order to ensure participation in the Exchange Offer, Old Notes must be properly tendered on or before the Expiration Date. List below the Old Notes that are to be tendered pursuant to this Letter of Transmittal. If the space below is inadequate, list the information requested below on a separate signed schedule and affix the original signed schedule to this Letter of Transmittal. 2 3 (1) Need not be completed by Holders who tender by book-entry. (2) Unless otherwise indicated in this column, any tendering Holder will be deemed to have tendered the entire principal amount represented by the Old Notes indicated in the column labeled "Aggregate Principal Amount Represented by Certificate(s)." See Instruction 5.
- ----------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF NOTES TENDERED - ----------------------------------------------------------------------------------------------------------------------- NAME(S) AND ADDRESS(ES) OF REGISTERED AGGREGATE PRINCIPAL PRINCIPAL HOLDER(S) CERTIFICATE AMOUNT REPRESENTED AMOUNT (PLEASE FILL IN, IF BLANK) NUMBER(S)(1) BY CERTIFICATE(S) TENDERED(2) ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ TOTAL PRINCIPAL AMOUNT TENDERED - ----------------------------------------------------------------------------------------------------------------------- [ ]CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH. [ ]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN A BOOK- ENTRY TRANSFER FACILITY MAY DELIVER NOTES BY BOOK-ENTRY TRANSFER): Name of Tendering Institution: - -------------------------------------------------------------------------------- Account Number: - -------------------------------------------------------------------------------- Transaction Code Number: - -------------------------------------------------------------------------------- [ ]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Holder(s): - -------------------------------------------------------------------------------- Window Ticket Number (if any): - -------------------------------------------------------------------------------- Date of Execution of Notice of Guaranteed Delivery: - ----------------------------------------------------------------- Name of Eligible Institution that guaranteed delivery: - ---------------------------------------------------------------- [ ] Check box if delivered by Book-Entry Transfer Account Number: - -------------------------------------------------------------------------------- Transaction Code Number: - -------------------------------------------------------------------------------- 3
- ----------------------------------------------------------------------------------------------------------------------- 4 NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Only Holders are entitled to tender their Old Notes in the Exchange Offer. Any financial institution that is a participant in the Book-Entry Transfer Facility's system and whose name appears on a security position listing as the record owner of the Old Notes and who wishes to make book-entry delivery of Old Notes as described above must complete and execute a participant's letter (which will be distributed to participants by the Book-Entry Transfer Facility) instructing the Book-Entry Transfer Facility's nominee to complete and sign the power of attorney attached thereto. Persons who are beneficial owners of Old Notes but are not Holders and who seek to tender Old Notes should (i) contact the Holder of such Old Notes and instruct such Holder to tender on his behalf, (ii) obtain and include with this Letter of Transmittal Old Notes properly endorsed for transfer by the Holder, with signatures on the endorsement guaranteed by a firm that is a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of the recognized signature guarantee programs identified in the Letter of Transmittal (each, an "Eligible Institution") or (iii) effect a record transfer of such Old Notes from the Holder to such beneficial owner and comply with the requirements applicable to Holders for tendering Old Notes prior to 5:00 P.M., New York City time, on the Expiration Date. HOLDERS WHO WISH TO RECEIVE THE EXCHANGE NOTES MUST TENDER THEIR OLD NOTES ON OR PRIOR TO THE EXPIRATION DATE. See "The Exchange Offer -- Procedures for Tendering" in the Prospectus. 4 5 To: Renters Choice, Inc. (the "Company") Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company, the Old Notes indicated above. Subject to, and effective upon, acceptance for exchange of the Old Notes tendered herewith, the undersigned hereby sells, assigns and transfers to or upon the order of the Company, all right, title and interest in and to all such Old Notes tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that the Exchange Agent also acts as agent of the Company) with respect to such Old Notes, with full power of substitution and resubstitution (such power of attorney being deemed to be an irrevocable power coupled with an interest) to (a) deliver certificates representing such Old Notes, or transfer ownership of such Old Notes on the account books maintained by the Book-Entry Transfer Facility, together, in each such case, with all accompanying evidences of transfer and authenticity to or upon the order of the Company, (b) present such Old Notes for transfer on the relevant register and (c) receive all benefits or otherwise exercise all rights of beneficial ownership of such Old Notes (except that the Exchange Agent will have no rights to or control, except as agent for the Company, for the Exchange Notes delivered in connection with the Exchange Offer) all in accordance with the terms of the Exchange Offer. THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL POWER AND AUTHORITY TO TENDER, SELL, ASSIGN AND TRANSFER THE OLD NOTES TENDERED HEREBY AND, THAT WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND CLEAR OF ALL SECURITY INTERESTS, LIENS, RESTRICTIONS, CLAIMS, CHARGES, ENCUMBRANCES, CONDITIONAL SALES AGREEMENTS OR OTHER OBLIGATIONS RELATING TO THE SALE OR TRANSFER THEREOF, AND NOT BE SUBJECT TO ANY ADVERSE CLAIM. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS DEEMED BY THE EXCHANGE AGENT OR THE COMPANY TO BE NECESSARY OR DESIRABLE TO COMPLETE THE ASSIGNMENT, TRANSFER AND PURCHASE OF THE OLD NOTES TENDERED HEREBY. THE UNDERSIGNED HAS READ AND AGREES TO ALL OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER. DELIVERY OF ENCLOSED OLD NOTES SHALL BE EFFECTED, AND RISK OF LOSS AND TITLE TO SUCH OLD NOTES SHALL PASS, ONLY UPON PROPER DELIVERY THEREOF TO THE EXCHANGE AGENT. All authority conferred or agreed to be conferred pursuant to this Letter of Transmittal and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy, and personal and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. Old Notes properly tendered may be withdrawn at any time prior to the Expiration Date. Holders will receive the Exchange Notes only if their tenders have been properly delivered on or prior to the Expiration Date and not revoked on or prior to the Expiration Date. Old Notes may not be withdrawn after the Expiration Date unless the Exchange Offer with respect to such Old Notes is terminated without any Old Notes being accepted for exchange thereunder. In the event of such a termination, such Old Notes tendered by the undersigned will be returned to the undersigned as promptly as practicable. The Exchange Offer is subject to a number of conditions, each of which may be waived or modified by the Company, in whole or in part, at any time and from time to time, as described in the Prospectus under the caption "The Exchange Offer -- Certain Conditions to the Exchange Offer." The undersigned recognizes that as a result of such conditions the Company may not be required to accept the Old Notes properly tendered hereby. In such event, the tendered Old Notes not accepted for exchange will be returned to the undersigned without cost to the undersigned as soon as practicable following the earlier to occur of the Expiration Date or the date on which the Exchange Offer with respect to such issue is terminated without any Old Notes being purchased thereunder, at the address shown below the undersigned's signature(s) unless otherwise indicated under "Special Issuance Instructions" below. Unless otherwise indicated under "Special Issuance Instructions" below, the Exchange Agent will issue the Exchange Notes for any Old Notes tendered hereby that are accepted for exchange, and/or return any certificates representing Old Notes not tendered or not accepted for exchange in the name(s) of the Holder(s) appearing under "Description of Securities Tendered." Similarly, unless otherwise indicated under "Special Delivery Instructions," the Exchange Notes, and/or any certificates representing Old Notes not tendered or not accepted for exchange (and accompanying documents, as appropriate) to be returned will be sent to the address(es) of the Holder(s) appearing under "Description of Securities Tendered." In the event that both the Special Issuance Instructions and the Special Delivery Instructions are completed, the Exchange Notes will be issued, if applicable, and the certificates representing any Old 5 6 Notes not tendered or not accepted for exchange (and any accompanying documents, as appropriate) will be returned in the name of, and delivered to, the person or persons so indicated. Unless otherwise indicated under "Special Issuance Instructions," in the case of a book-entry delivery of Old Notes, the account maintained at the Book-Entry Transfer Facility indicated above will be credited with any Old Notes not tendered or not accepted for exchange. The undersigned recognizes that neither the Exchange Agent nor the Company, has any obligation pursuant to the Special Issuance Instructions to transfer any Old Notes from the name of the Holder thereof if the Company does not accept for exchange any of the Old Notes so tendered. 6 7 SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if the certificates representing the Exchange Notes and/or certificates representing Old Notes not accepted for exchange are to be issued in the name of someone other than the undersigned, or if Old Notes delivered by book-entry transfer not accepted for exchange are to be returned by credit to an account maintained at a Book-Entry Transfer Facility other than the account indicated above. Issue Certificate(s) to: Name: - ---------------------------------------------- (Please Print) Address: - -------------------------------------------- - ------------------------------------------------------ - ------------------------------------------------------ (Including Zip Code) - ------------------------------------------------------ (Taxpayer Identification or Social Security Number) [ ] Credit unaccepted Old Notes delivered by book-entry transfer to the Book-Entry Transfer Facility account set forth below: - ------------------------------------------------------ (Account Number) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if the Exchange Notes and/or certificates representing Old Notes not accepted for exchange are to be sent to someone other than the undersigned or to the undersigned at an address other than that shown above. Mail Certificate(s) to: Name: - ---------------------------------------------- (Please Print) Address: - -------------------------------------------- - ------------------------------------------------------ - ------------------------------------------------------ (Including Zip Code) - ------------------------------------------------------ (Taxpayer Identification or Social Security Number) 7 8 SIGNATURES HOLDERS OF OLD NOTES SIGN HERE IMPORTANT: COMPLETE AND SIGN THE SUBSTITUTE FORM W-9 IN THIS LETTER OF TRANSMITTAL - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Signature(s) of Holder(s) of Notes) Date: - ------------------------------------, 1997 (Must be signed by the Holder(s) exactly as name(s) appear(s) on certificate(s) representing the Old Notes or on a security position listing or by person(s) authorized to become Holder(s) by certificates and documents transmitted herewith. If signature is by attorney-in-fact, executor, administrator, trustee, guardian, officer of a corporation or other person acting in a fiduciary or representative capacity, please provide the following information and see Instruction 6.) Capacity (Full Title): - -------------------------------------------------------------------------------- Name(s): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please Type or Print) Address: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Include Zip Code) Area Code and Telephone Number - -------------------------------------------------------------------------------- Tax Identification or Social Security No. - --------------------------------------------------------------------------- GUARANTEE OF SIGNATURE(S) (IF REQUIRED -- SEE INSTRUCTIONS 1 AND 6) - -------------------------------------------------------------------------------- (Authorized Signature) Name: - -------------------------------------------------------------------------------- (Please Type or Print) - -------------------------------------------------------------------------------- (Title) - -------------------------------------------------------------------------------- (Name of Firm) - -------------------------------------------------------------------------------- (Address -- Include Zip Code) - -------------------------------------------------------------------------------- (Area Code and Telephone Number) Date: - ------------------------------------ 8 9 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. GUARANTEE OF SIGNATURES. Signatures on this Letter of Transmittal need not be guaranteed if the Old Notes tendered hereby are tendered (a) by the registered Holder(s) (which term, for purposes of this document, shall include any participant in the Book-Entry Transfer Facility's system and whose name appears on a security position listing as the record owner of the Old Notes) thereof, unless such Holder has completed either the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" on the preceding page, or (b) for the account of a firm that is a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of the recognized signature guarantee programs identified in the Letter of Transmittal (each, an "Eligible Institution"). In all other cases, all signatures on this Letter of Transmittal must be guaranteed by an Eligible Institution. Persons who are beneficial owners of Old Notes but are not Holders and who seek to tender Old Notes should (i) contact the Holder of such Old Notes and instruct such Holder to tender on his behalf, (ii) obtain and include with this Letter of Transmittal, Old Notes properly endorsed for transfer by the Holder, with signatures on the endorsement guaranteed by an Eligible Institution or (iii) effect a record transfer of such Old Notes from the Holder to such beneficial owner and comply with the requirements applicable to Holders for tendering Old Notes on or prior to the Expiration Date. See Instruction 6. 2. REQUIREMENTS OF TENDER. This Letter of Transmittal is to be completed by Holders either if certificates are to be forwarded herewith or if delivery of Old Notes is to be made pursuant to the procedures for book-entry transfer set forth in the Prospectus under the caption "The Exchange Offer -- Procedures for Tendering." For a Holder to properly tender Old Notes pursuant to the Exchange Offer, a properly completed and duly executed Letter of Transmittal (or a facsimile thereof), together with any signature guarantees and any other documents required by these Instructions, must be received by the Exchange Agent at one of the addresses set forth herein on or prior to the Expiration Date and either (i) certificates representing such Old Notes must be received by the Exchange Agent at such address or (ii) such Old Notes must be transferred pursuant to the procedures for book-entry transfer described in the Prospectus under the caption "The Exchange Offer -- Procedures for Tendering" and a Book-Entry Confirmation must be received by the Exchange Agent, in each case, on or prior to the Expiration Date. A Holder who desires to tender Old Notes and who cannot comply with procedures set forth herein for tender on a timely basis or whose Old Notes are not immediately available must comply with the guaranteed delivery procedures described below. Holders whose certificates representing Old Notes are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent or complete the procedures for book-entry transfer prior to the Expiration Date may tender their Old Notes by properly completing and duly executing the Notice of Guaranteed Delivery pursuant to the guaranteed delivery procedure set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." Pursuant to such procedures, (a) the tender must be made by or through an Eligible Institution; (b) a Notice of Guaranteed Delivery, substantially in the form provided herewith, properly completed and duly executed, must be received by the Exchange Agent as provided below on or prior to the Expiration Date; and (c) the certificates representing all tendered Old Notes, or a Book-Entry Confirmation with respect to all tendered Old Notes, together with this Letter of Transmittal, properly completed and duly executed, and any required signature guarantees and all other documents required by the Letter of Transmittal, must be received by the Exchange Agent within three New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery. THE METHOD OF DELIVERY OF CERTIFICATES REPRESENTING OLD NOTES, THIS LETTER OF TRANSMITTAL, REQUIRED SIGNATURE GUARANTEES AND ANY OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING HOLDER AND DELIVERY WILL BE DEEMED MADE WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. All tendering Holders, by execution of this Letter of Transmittal waive any right to any notice of the acceptance of their Old Notes for exchange. 9 10 3. WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS. Tenders of Old Notes may be withdrawn at any time until the Expiration Date. Tendered Old Notes may not be withdrawn on or after the Expiration Date, unless the Exchange Offer is terminated without any Old Notes being accepted for exchange thereunder. In the event of such termination, such Old Notes will be returned to the tendering Holder as promptly as practicable. Any Holder of Old Notes who has tendered Old Notes or who succeeds to the record ownership of Old Notes in respect of which such tenders have previously been given may withdraw such Old Notes on or prior to the Expiration Date by delivery of a written notice of withdrawal subject to the limitations described herein. To be effective, a written or facsimile transmission notice of withdrawal of a tender must (i) be received by the Exchange Agent, at the addresses specified on the back cover of this Letter of Transmittal on or before the Expiration Date, (ii) specify the name of the Holder of the Old Notes to be withdrawn, (iii) contain the description of the Old Notes to be withdrawn, the certificate numbers shown on the particular certificates representing such Old Notes and the aggregate principal amount represented by such Old Notes and (iv) be signed by the Holder of such Old Notes in the same manner as the original signature on the Letter of Transmittal (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee register the transfer of relevant Old Notes into the name of the person withdrawing such Old Notes. The signature(s) on the notice of withdrawal of any tendered Old Notes must be guaranteed by an Eligible Institution unless the relevant Old Notes have been tendered for the account of an Eligible Institution. If the Old Notes to be withdrawn have been delivered or otherwise identified to the Exchange Agent, a signed notice of withdrawal is effective immediately upon receipt by the Exchange Agent of written or facsimile transmission of the notice of withdrawal even if physical release is not yet effected. A withdrawal of Notes can only be accomplished in accordance with the foregoing procedures. No Holder may withdraw Old Notes following the Expiration Date. All questions as to the validity, form and eligibility (including the time of receipt) of notices of withdrawal will be determined by the Company, whose determination will be final and binding on all parties. A purported notice of withdrawal that is not received by the Exchange Agent in a timely fashion will not be effective to withdraw tendered Old Notes. Any Old Notes that have been tendered but that are not accepted for exchange will be returned to the Holder thereof without cost to such Holder as soon as practicable following the Expiration Date. A withdrawal of a tender of Old Notes may not be rescinded and any Old Notes properly withdrawn will not be deemed to be validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto. However, withdrawn Old Notes may be retendered by repeating one of the procedures described in Instruction 2 above at any time on or prior to the Expiration Date. 4. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY BOOK-ENTRY TRANSFER). If less than the entire principal amount of any Old Notes evidenced by a submitted certificate is tendered, the tendering holder should fill in the applicable principal amount of the Old Notes that are to be tendered in the box entitled "Description of Old Notes Tendered." The entire principal amount represented by the certificates for all Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If the entire principal amount of all Old Notes is not tendered or not accepted for payment, new certificate(s) representing the remainder of the principal amount of the Old Notes that were evidenced by the old certificate(s) will be sent to the Holder, unless otherwise provided in the boxes entitled "Special Payment Instructions" or "Special Delivery Instructions" above, as soon as practicable after the expiration of the Exchange Offer. 5. SIGNATURES ON THIS LETTER OF TRANSMITTAL; ENDORSEMENTS. If this Letter of Transmittal is signed by the Holder(s) of the Old Notes tendered hereby, the signature(s) must correspond exactly with the name(s) as written on the face of the certificate(s) without alteration, enlargement or any change whatsoever. If any of the Old Notes tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any tendered Old Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are names in which certificates are held. If this Letter of Transmittal or any certificates are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate 10 11 when signing, and proper evidence satisfactory to the Company of their authority so to act must be submitted, unless waived by the Company. If this Letter of Transmittal is signed by the Holder(s) of the Old Notes listed and transmitted hereby, no endorsements of certificates are required unless payment is to be made to, or certificates for Old Notes not tendered or not accepted for purchase are to be issued to, a person other than the Holder(s). Signatures on such certificates must be guaranteed by an Eligible Institution (unless signed by an Eligible Institution). If this Letter of Transmittal is signed by a person other than the Holder(s) of the Old Notes listed, the certificates representing such Notes must be properly endorsed for transfer by the Holder, together with a properly completed irrevocable proxy that authorizes such person to consent to the Proposed Amendments on behalf of such Holder, with signatures on the endorsement guaranteed by an Eligible Institution. 6. TRANSFER TAXES. The Company will pay or cause to be paid any transfer taxes with respect to the transfer and sale of Old Notes to it or its order pursuant to the Exchange Offer. If, however, the Exchange Notes are to be registered in the name of any person other than the Holder(s), or if tendered certificates are registered in the name of any person other than the person(s) signing this Letter of Transmittal, the amount of any transfer taxes (whether imposed on the Holder(s) or such other person) payable on account of the transfer to such person will be deducted from the interest paid on the Exchange offer unless satisfactory evidence of the payment of such taxes or exemption therefrom is submitted. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the certificates listed in this Letter of Transmittal. 7. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If Exchange Notes are to be issued in the name of, and/or certificates representing Old Notes not accepted for exchange are to be returned to, a person other than the person(s) signing this Letter of Transmittal or if Exchange Notes are to be sent and/or such certificates are to be returned to a person other than the person(s) signing this Letter of Transmittal or to an address other than that shown above, the appropriate boxes on this Letter of Transmittal should be completed. Holders delivering Old Notes by book-entry transfer may request that Old Notes not accepted for payment be credited to such account maintained at a Book-Entry Transfer Facility as such Holder(s) may designate hereon. If no such instructions are given, such Old Notes not accepted for payment will be returned by crediting the account at the Book-Entry Transfer Facility designated above. 8. WAIVER OF CONDITIONS. To the extent permitted by applicable law, the Company reserves the right to waive any and all conditions to the Exchange Offer and accept for exchange any Old Notes tendered. 9. TAX IDENTIFICATION NUMBER AND BACKUP WITHHOLDING. Federal income tax law generally requires that a Holder whose tendered Old Notes are accepted for exchange, or such Holder's assignee (in either case, the "Payee"), provide the Company (the "Payor"), with the Holder's correct Taxpayer Identification Number ("TIN"), which, in the case of a Payee who is an individual, is his or her social security number. If the Payor is not provided with the correct TIN or an adequate basis for an exemption, such Payee may be subject to a $50 penalty imposed by the Internal Revenue Service and backup withholding in an amount equal to [31%] of the interest paid on the Exchange Offer. If withholding results in an overpayment of taxes, a refund may be obtained. To prevent backup withholding, each Payee must provide his correct TIN by completing the "Substitute Form W-9" set forth herein, certifying that the TIN provided is correct (or that such Payee is awaiting a TIN) and that (i) the Payee is exempt from backup withholding, (ii) the Payee has not been notified by the Internal Revenue Service that he is subject to backup withholding as a result of a failure to report all interest or dividends, or (iii) the Internal Revenue Service has notified the Payee that he is no longer subject to backup withholding. If the Payee does not have a TIN, such Payee should consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for instructions on applying for a TIN, write "Applied For" in the space for the TIN in Part I of the Substitute Form W-9, and sign and date the Substitute Form W-9 and the Certificate of Awaiting Taxpayer Identification Number set forth herein. Note: Writing "Applied For" on the form means that the Payee has already applied for a TIN or that such Payee intends to apply for one in the near future. 11 12 If the Old Notes are held in more than one name or are not in the name of the actual owner, consult the W-9 Guidelines for information on which TIN to report. Exempt Payees (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. To prevent possible erroneous backup withholding, an exempt Payee should write "Exempt" in Part 2 of Substitute Form W-9. See the W-9 Guidelines for additional instructions. In order for a nonresident alien or foreign entity to qualify as exempt, such person must submit a completed Form W-8, "Certificate of Foreign Status." 10. MUTILATED, LOST, STOLEN OR DESTROYED SECURITIES. Any Holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at one of the addresses indicated above for further instructions. 11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance may be directed to the Dealer Manager at its address set forth below or from the tendering Holder's broker, dealer, commercial bank or trust company. Additional copies of the Prospectus, this Letter of Transmittal, the Notice of Guaranteed Delivery, and the Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 may be obtained from the Exchange Agent. IMPORTANT: THIS LETTER OF TRANSMITTAL, TOGETHER WITH CERTIFICATES FOR, OR CONFIRMATION OF BOOK-ENTRY TRANSFER WITH RESPECT TO, ANY TENDERED OLD NOTES, WITH ANY REQUIRED SIGNATURE GUARANTEES AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT, OR THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT, PRIOR TO THE EXPIRATION DATE. 12 13 TO BE COMPLETED BY ALL PAYEES (SEE INSTRUCTION 9) You must Cross out Part 2 above if you have been notified by the IRS that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU WROTE "APPLIED FOR" IN PART 1 OF THE SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and that I have mailed or delivered an application to receive a taxpayer identification number of the appropriate Internal Revenue Service Center or Social Security Administration Office (or I intend to mail or deliver an application in the near future). I understand that if I do not provide a taxpayer identification number to the Payor, the Payor is required to withhold 31 percent of all cash payments made to me until I provide a number. SIGNATURE - ------------------------------------------------------------- DATE - --------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31 PERCENT OF ANY CASH PAYMENTS. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM 2-9 FOR ADDITIONAL DETAILS. 13
- -------------------------------------------------------------------------------------------------------------------------------- PAYOR'S NAME: IBJ SCHRODER BANK & TRUST COMPANY - -------------------------------------------------------------------------------------------------------------------------------- SUBSTITUTE Name: ----------------------------------------------------------------------------------- FORM W-9 Address:--------------------------------------------------------------------------------- DEPARTMENT OF THE TREASURY (Number and Street) INTERNAL REVENUE SERVICE ------------------------------------------------------------------------------------------- (City) (State) (Zip Code) --------------------------------------------------------------------------------------------- PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT PAYOR'S REQUEST FOR RIGHT AND CERTIFY BY SIGNING AND DATING BELOW TIN ------------------------------ TAXPAYER IDENTIFICATION (Social Security Number or NUMBER (TIN) AND Employer Identification Number) CERTIFICATION --------------------------------------------------------------------------------------------- PART 2 -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING PLEASE WRITE "EXEMPT" HERE (SEE INSTRUCTIONS) ------------------------------------------------------------- --------------------------------------------------------------------------------------------- PART 3 -- CERTIFICATION UNDER PENALTIES OF PERJURY. I CERTIFY THAT (1) The number shown on this form is my correct TIN (or I am waiting for a number to be issued to me), and (2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding. SIGNATURE -------------------------------------- DATE---------------------------- - -------------------------------------------------------------------------------------------------------------------------------- 14 THE EXCHANGE AGENT IS: IBJ SCHRODER BANK & TRUST COMPANY 14
By Registered or Certified Mail or by Overnight By Hand: Courier: IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company P. O. Box 84 One State Street Bowling Green Station New York, New York 10004 New York, New York 10274-0084 Attn: Securities Processing Window, Attn: Reorganization Operations Dept. Subcellar One, (SC-1) Facsimile Transmission Number: Confirm by Telephone: (212) 858-2611 (212) 858-2103